Royal Melbourne Show

My son William cajoled me into taking him to the Royal Melbourne Show today. He didn’t have to push hard – it was a beautiful sunny day in Melbourne and I felt like going out somewhere rather than stay indoors working on an overdue consultancy report.

Some good ring events (super trucks that smashed up parked cars, spectacular motor bike leaps and a 71 year old father-and-buxom-daughter duo who did scary acrobatics 30 metres above the new performing area silhouetted against the Melbourne skyline), wood chopping, cows that looked like camels, sample bags full of foods-sweets-chilli pastes, monster masks and, of course, a few scary terror rides that my son enjoyed more than I did. Good clean fun!

The kid’s paintings in the Arts and Crafts exhibition were fun and I appreciate the creativity that goes into making prize-winning cakes and cookies. I also appreciate the existence of weird looking chooks, ducks (and an egg-hatching exhibit!) as well as a stall organised by the Australian Poultry Fanciers.

I have had unpleasant days going to the Show in past years. It was clear today that the crowds are what had destroyed it for me. This year we got there early, at around 9-30am, and it was easy to move about the place – it was not so pleasant around 3-30pm so we left around then.

Friends complain to me about the cost of this Show – it is expensive - but kids, the young-at-heart and those of us whose memories have not faded completely, have a enjoyable time at this once-a-year-event. Its great to enjoy some idiot pleasures.

Modern Times

I thought some of the reviews of Modern Times by Bob Dylan were over the top in their praise. But I’ve taken the evening off tonight (with some Cougar Dark Rum - I was a sucker for those busty blonde ads!) and been listening to my recently acquired copy of it. It is the best thing I’ve heard from old Zimmerman since Blood on the Tracks. Like the latter, this album has a rambling, tentative character to it which a few critics found unappealing. I didn't. I found the album powerful listening with great lyrics. One of Dylan’s best. The rum was good too!

What did you think of this one?

Returned from Perth

I am back in Melbourne after a pleasant 6 days in Perth. My visit to this city really made a bigger impression on me than the Australian Conference of Economists. The economy of WA is presently growing faster than China with a growth rate in GDP of 11.7%.

In today's Australian Financial Review it is reported that office rentals in Perth have risen 50% in the past year. Cranes dot the city skyline as luxurious subdivisions pour into the countryside. It also reported that WA, not content with trying to win our football trophy, is also trying to steal our workers for its public sector - many of WA's best are heading off to join mining firms. The WA Government has the second-biggest state budget surplus (after Queensland). There is also a lot of migration heading towards the west - a large community of wealthy ex patriate South African land owners have established a significant presence there.

While in WA I met up with Sam (Yobbo) Ward for a convivial afternoon of food and beer. At the economics conference I thought the best paper I attended was by fellow blogger John Quiggin on water supply policy. Part of John's thoughts are in today's AFR.

Lazy economists?

I was interested in this piece in The Australian’s Higher Education supplement discussing a report by Frank Neri and Joan Rodgers (the full paper here) indicating that in the vast majority of economics departments in Australia – 25 out of 29 - at least half the faculty published nothing in the top 159 economic journals from 1996-2002. Indeed almost half the Departments most academics had not published anything in a much broader group of 600 journals over this period.

The four top publishing Departments were ANU, University of Melbourne, University of Tasmania and University of Western Australia. I am surprised that University of Queensland did not make this list – it has been in my view one of the better performing departments in recent years. On the other hand I was a bit surprised that Tasmania made the list.

The 14 poor publishing universities were Defence Force Academy, Uni Canberra, Edith Cowan, Flinders, James Cook, Macquarie, Monash, Newcastle, QUT, RMIT, USQ, UTS, UWS, and VUT. Some of these universities have very small economics departments with their business teaching having been turned over almost entirely to low level vocational programs in ‘marketing’ and ‘management’. This reflects an ill-considered, short-sighted trend. The so called 'management' programs in particular are often directed to those who have never had much more of a job in their life than working in MacDonalds and which are taught by instructors without management experience. The 'marketing' programs are often little more than babble - how can you teach marketing to students who lack basic microeconomics? Emphasising these programs in a business degree creates neither the basis for teaching or research excellence.

But the inclusion of Monash and my former undergraduate university, Macquarie, in the list of research non-performers requires explanation. Monash is a very large university and should have done better than this.

At the high performance end I am unconvinced of the research virtues of some of the high flier departments. In some their teaching load is 25% of the load at most universities and, on this basis (calculating research productivity as research output/available research time), their comparative performance seems, if anything, poor.

Of course in many cases evidence of poor research contributions is not a signal to punish a department with funding cuts but, on the contrary, might provide a signal to inject funding to build the department up. This injection of funding should go towards teaching and research in sound economics areas - not to administration and not to the pseudo-sciences that are being oversold as business education in most Australian universities.

Inadequate assessment of gains from skilled migration

At the Australian Conference of Economists today I was asked to comment on papers by John Salerian of the Productivity Commission that draws on an immigration model constructed by Monash University’s Centre for Policy Studies. The latter was also presented by Graeme Cuxson and James Giesecke from Monash. I didn’t like the model that was presented for reasons I have set out in an earlier post where I also provided a comprehensive framework for assessing the gains from a skills-oriented program. But now, having heard a detailed exposition of their model, my criticisms are much stronger than they were before.

Cuxson and Giescke in today’s presentation met one of the criticisms I made by providing estimates of the gains to original residents alone of a sustained expansion in the skilled migration program - immigration economics provides explicit guidelines to how this is dedtermined though it is quite non-specific about the effects on per capita incomes of residents plus migrants together.

But the Monash computation revealled a deeper malaise in their work - the difficulty was that they computed these gains to residents, in fact, to be negative relative to trend! Not just small but negative!

This amounts to the following: Proposition. A group of residents are given enhanced trading opportunities with a group of skilled migrants who impose no recognizable external costs on them and yet, while the migrants are better-off, the Australian residents are worse-off.

This is not sensible. How can people who are given an improved opportunity to trade (not an obligation to trade) be worse-off long-term? The result they attribute to terms of trade effects and to foreign investment flows which immiserise (why?) the local Australian economy. The result however is inconsistent with basic 'gains-from-trade' theory.

The result has the foolish policy implication that, from the perspective of residents, we should end our skilled migration program now.

Let’s hope this paper gets revised before Australian immigration policy designers see it and before it does damage by diminishing the valuable emphasis Australia now places on skilled migration . The analysis needs to be redone. The first thing the Monash model builders need to take on board is the forty years of literature on the welfare economics of immigration and basic trade theory. You can’t just plunge in with a very detailed macroeconomic model without paying attention to the basic mechanisms by which gains from migration accrue. Otherwise the detail obscures rather than improves things. If you are analysing a policy issue in a particular area you need to account for basic theory in that area.

From my perspective its got to be back to the drawing board for the boys from Monash. The implications of their model do not make sense and are inconsistent with the basic economics of migration. On the other hand I do understand now why they get such extraordinarily low estimates of the gains from skilled migration.

I’ll write a longer piece setting out the specific problems of the COPS-PC model if I can get time.

Being fat and miserable

Lee Smith pointed out to me that Monash University researchers are investigating the effects of being obese on depression levels. Its not just another 'nobody loves me' type of sob story - some obese people struggle with excess weight all their lives and yet are perceived in society as lazy slobs who cannot exert self-control. The struggle can be pointless if their obesity is genetically driven. It is enough to make anyone depressed! But I cannot help thinking that some people react to depression by eating to excess - the expression 'comfort food' suggests this hypothesis. Kids are often rewarded with a cookie which associates food with a reward unrelated to hunger.

The rise in obesity is linked to the diabetes epidemic and might in turn be linked bidirectionally to a rising incidence of mental illness and depression.

Perth thoughts

I am in Perth for the Australian Conference of Economists. I’ve been talking to businessmen here who describe the local scene as booming and subject to widely-discussed labour supply shortages. I'll meet the academic economists tomorrow.

I’ve visited Perth many times but it does look particularly prosperous now – construction projects everywhere, new cars on the road – generally, evidence of prosperity. Perth certainly is a beautiful city – the urban settlements exploit the attractive Swan River skillfully. I had a stroll down towards East Perth this morning and noticed lots of dense apartment and townhouse developments fronting onto water or parkland. It looks great. Water frontages, in particular, are unbeatable as an attribute for a beautiful city – Perth rivals Sydney in this regard.

This afternoon went to the huge (400 hectare) Kings Park which is adjacent to West Perth. I have driven past it many times but never made the effort to look around. It is a fantastic flora reserve very close to Perth’s centre. Lots of honeyeaters, flowering banksias, dryandras, kangaroo paws, boronias. In my view the West Australian dryandras and banksias make up some of the most spectacular of our native flora –one in particular, banksia coccinea, ranks close to the best native flowers I have ever seen (photo here). I have visited areas where the various Western Australian specialities grow in abundance on past trips – in the south-western corner my favorite locations are around Albany and areas such as Dryandra Woodland and the Stirling Ranges.

But to have some of this flora close to Perth’s centre is a great resource. By the way, I got back from Kings Park on a free public bus. The driver told me that bus travel has been free in Perth’s central areas for 20 years and that train travel is also free close to the city centre. Still he said the CBD gets congested. Perhaps the ‘eastern states’ can learn something from our yokel brothers and sisters in the west. These types of schemes have often been proposed there.

Globalisation is good and will get better

The Economist celebrates the creation of a new world economic order where newly-emerging developing countries dominate. Currently, measured in purchasing power parity, developing countries account for half of world output, use half the world’s energy and have most of the world’s foreign exchange reserves.

Economic power is shifting, in particular towards Asia – the rich countries no longer dominate the world economy. By 2040, according to Goldman Sachs, the world’s 10 biggest economies, at market exchange rates, will include Brazil, Russia, Mexico, India and China. Generally these implications are positive for developed countries because of the greatly expanded markets for exports. Already high rates of developed country growth are being driven by growth in developing countries. Over coming decades there will be the biggest growth in the world economy since the industrial revolution. The difficulties that might thwart this massive promise of global progress are xenophobia and protectionism. There will be real losers in developed countries – returns to capital will grow at the expense of labour - but overall there will be gains if tax and benefit systems are used to redistribute the winnings.

The developing economies are having a good run. Over the past 5 years developing countries GDP per head has grown on average by 5.6% compared to 1.9% in the developed world. In the previous 20 years developing countries grew by an average of only 2.5% - about the same as developed countries. Overall the growth is more evenly spread – even Africa has grown above 5% for the past 3 years.

Workers in developed countries are feeling a fair bit of pain. Income has been redistributed from labour to capital particularly in the US. This has occurred through offshoring, reduced bargaining power by workers because of the option to offshore and increased immigration. Skilled labour has also taken a much larger share of the cake – America’s top earners now receive 16% of all income up from 8% in 1980. In democratic societies where workers constitute a majority there is a threat to globalization unless the benefits from globalization are redistributed to workers. The tax and benefits system needs to adapt to deal with this.

Higher long-term commodity prices and improved environmental standards are the order of the day. Developing countries are moving through a commodity-intensive development phase which has led to skyrocketing commodity prices and huge associated environmental problems – China has 16 of the 20 most polluted cities on the planet. Much higher commodity prices will via market mechanisms tend to deal with these problems.

Finally, competition from developing countries has kept inflation down and rendered useless closed economy models of inflation as markups on wage costs. Interest rates have been kept low because of high savings by Asian and Middle East countries. Some also see excess liquidity driven by high rates of monetary growth around the world as being unable to drive up goods prices because of cheap Chinese goods but instead driving up asset prices hence holding down yields. But the global savings glut will not continue to fund US deficits forever. Indeed the rich world could end up relatively poor if it does not watch its step. In particular the drumbeat of protectionism is growing louder and threatens the benefits developed countries can expect from globalization.

This is a quality survey – much richer than the potted summary above - if the hyperlinks don’t work go out and buy the September 16 Economist. If you are interested in economics you should be subscribing - its an essential part of my reading week!

Arguments for liberalising gambling

Gary Becker and Richard Posner provide a case for liberalising gambling at their joint blog. In particular they advance arguments for accepting online gambling. As one opposed to increasing the extent of gambling I need to be able to counter or address these arguments.

Demand for gambling. Posner sees illegal gambling as an under-enforced, ‘victimless’ crime resulting from a voluntary transaction not from a theft. The law is under-enforced because the risk entertained in gambling is voluntary. Detection is difficult and the public’s willingness to spend to prevent it low. The argument for criminalization is that gambling is an unproductive, addictive activity that drives problem gamblers to bankruptcy. It is of course difficult to understand how legalised gambling, carried out by the state or on the basis of a monopoly concession, does not have these same adverse characteristics.

From an economics viewpoint gambling is a productive leisure-time activity. Its attraction is mysterious because expected monetary payoffs are negative. Only risk lovers should derive net expected utility from gambling. But many gamblers have insurance and therefore demonstrate risk aversion. This can be explained by supposing the gambling activity itself yields rewards. People may enjoy the thrill of risk or the adrenalin rush, of gambling – this provides consumption if not positive expected investment utility. There is also fascination with uncertainty and randomness itself. Indeed these are the dominant factors behind the small gambles people take while playing poker, slot machines and other games. Finally, gambling offers a small probability of winning a lot thereby significantly changing one's economic situation, even with a large probability of losing a little. Economists explain this by assuming the marginal utility of income is rising (not diminishing) over some income intervals.

Some people falsely believe they are ‘lucky’ not realizing that ‘luck’ is only ever observed ex post – no one has an asset called ‘luck’. Others might be so miserable that their marginal utility of money is low, which truncates the downside risk of a gamble. So if you only have $1 left in the world, even if you are risk averse, your sensible move might be to buy a lottery ticket, on the theory that it is costless. This suggests that social insurance encourages gambling by reducing its costs. If marginal utility is increasing in income, the benefit of winning will confer more utility than an equal loss will confer disutility.

Gambling Addiction. Some people become addicted to gambling and go bankrupt. A 2000 study by John Barron, Michael Staten, and Stephanie Wilshusen estimate that abolishing casino gambling would reduce US personal bankruptcies by 1.4% and by 8% in counties near casinos. This percentage going broke as a consequence of casino gambling is small – other forms of gambling might boost it - raising the question whether a harmless activity for many should be curtailed to protect the addicted few.

Making bankruptcy more difficult – making it more difficult to wipe-out your debts - should reduce gambling and gambling-related bankruptcies.

The addiction argument is used by legal gambling firms to support restricting other gambling but all they are doing is trying to prevent their customers from bankrupting themselves so their customers can pay their losses!

Internet gambling. Internet gambling poses a competitive threat to conventional legal gambling. Casinos have high overheads – staffs, equipments - with the exception of lotteries which the states depend on for revenue. Moreover, except for lotteries, legal gambling imposes time costs on gamblers, who have to travel to place a bet. It is because of the overheads and the states' revenue hunger that odds offered the gambler are so bad (they are even worse, when the time cost of the gambler is added). There may also be monopoly rents that worsen the odds.
Internet gambling establishments have low expenses, so they can offer fairer odds as well as flexibility with respect to amounts wagered. Legal casinos oppose fairer odds by claiming that poor odds offer a measure of control over gambling.

Governments are concerned about online gambling because it threatens the revenue and other political advantages they get from taxing and regulating gambling. Internet gambling is hard to regulate and tax because online companies can set remotely and make gambling available to anyone – some are located either on ships at sea, or in small countries that allow them to operate in return for a cut of the profits.

Opponents of online gambling argue it is dangerous because it encourages and strengthens gambling addictions. The fact is, however, that gambling is even less addictive than drinking, and is not nearly as addicted as smoking. Other supporters of a ban on online gambling claim that it is used to launder money. The laundering argument against gambling is less strong since there are many other ways to launder money.

Arguments favouring online gambling include the weak arguments against it, the common human desire to gamble, and also that addictive aspects of gambling are exaggerated. Indeed, it could be argued that it should remain tax free, along with purchases of other services over the internet. Tax-free online gambling would put pressure on governments to reduce taxes and restrictions on gambling which would give individuals cheaper access to ways to satisfy the mainly harmless desire to play games for money, and to bet on sporting and other events, including lotteries.

As with many other laws, restrictions on gambling mainly impact the poor and middle classes since wealthier individuals can and do gamble through equities, derivatives, housing, and in many other ways that are not readily available to families with modest incomes. There are many ways to spend money in ways that others do not approve. Why single out families with modest incomes who enjoy the excitement of gambling, or the dreams gambling provide?

My response. These are sensible libertarian arguments that I have sympathy with but on balance reject. My general response is that much gambling offers little consumer value and does a lot of harm. It offers no happiness at all to a user who is addicted – only relief from the discomfit induced by withdrawing from the behavioural addiction.

Generally I don’t think individual preferences are sacred. People make cognitive errors and bad decisions. Gambling that does not rely on skill exploits such errors by feeding on fantasy and selling empty dreams. If this is true then a major part of gambling policy should be to persuade gamblers that their recreations can do them harm – this is not inconsistent with a liberal gambling policy.

Pokies, in particular, seem to have a hypnotic effect on many who, despite the relatively attractive payout ratios, keep gambling on them until they lose their shirts. Also consistent with a liberal approach to policy is a requirement that all forms of gambling display accurate information on expected losses. Finally, those who do have gambling self-control problems should be able to self-exclude themselves from gambling venues and should have industry-funded access to treatments for gambling problems.

But I do agree with much in this posting. Giving monopoly power to a few service providers might inhibit gambling by reducing availability and by increasing costs of gambling but these policies most hurt the poor and the socially-disadvantaged. Much the same implications hold if other demerit goods such as cigarettes are heftily taxed or if volumetric pricing, based on alcohol content, replaces value-based taxes on alcoholic products. In all three cases (gambling, cigarettes, booze) there is the significant prospect of illegal markets develop which constrains the possibility for restrictive policies. The poor might have less financial knowledge than those who are wealthy which creates a special case to provide such knowledge and to perhaps limit their exposure to certain risks.

Admitting online gambling, in my view, increases access to gambling excessively. This would be a dangerous social experiment. Online gambling might enable huge amounts of money to be lost by credit card or wire transfer – these types of transfers might be less real than using real cash in a casino for example. Monopolists can be preventing from deriving excessive earnings taxes from gambling by setting minimum payout ratios for gambles such as the pokies and by heftily taxing operator earnings.

Generally a good Becker-Posner post. I’ll return to these issues again.

The case for a skilled migration focus.

This is the draft paper on skilled migration I will give at the Australian Conference of Economist Conference in Perth next Monday. Even at this late stage comments are welcome.

1. Introduction. The Productivity Commission’s Position Paper Economic Impacts of Migration and Population Growth considers the effects of recent policy trends that place a greater emphasis on seeking skills in Australia’s migration intakes – about 70% of the intake was skilled in 2005/06 compared to only 29% 10 years ago.

There are enhanced demands for skilled migrants in Australia as a consequence of the Australian economy’s strong macroeconomic performance over the past 16 years and because demands for new skill mixes have emerged in the economy. Given that annual immigration is a small fraction of the workforce, and that migrants are not that different from most native-born Australians, one would not expect large effects from low levels of additional skilled migration and this is what the report finds. Using an economic framework, based on an open economy Swan-Solow growth model, the report finds that, maintaining a 50% higher skilled migration intake over 20 years – this would make total population 2.7% bigger than it would otherwise be – leads to workforce participation rising by 1%, average hours worked rising by 1.3% and per capita incomes rising 0.6% or by about $335.

Overall unemployment initially increases but ultimately falls a little. Apparently surprised by the small size of the gains here, the Department of Immigration and Multicultural Affairs commissioned Econtech (2006) to recompute these effects using their own Migration Modeling Framework. This latter study came up with higher gains – around 1.1 per cent rather than 0.6% in per capita incomes. The larger effect occurs because Econtech allow for positive effects on labour productivity of having skilled migration and for more rapid adjustment to pre-immigrant entry capital-labour ratios as the labour force grows.

There are no microeconomic foundations to either the PC or Econtech studies, a fact that obscures important core issues. The main effect identified in the PC report is the increase in labour force participation with implied effects of (i) capital dilution which reduces capital productivity and (ii) negative effects on the terms of trade that stem from the fact that, with more migration, the country imports more thereby offsetting favorable workforce participation effects. Neither of these effects seems particularly sensible as a way of understanding migration outcomes. The theory used is at best rudimentary and mechanical. There needs to be a focus on the microeconomic effects of having more skilled workers.

Skilled migrant workers provide gains to a destination economy through standard gains-from-trade effects. Berry and Soligo (1969) illustrate the ‘gains-from-trade’ effects in labour markets of labour migrations – a migration is equivalent to a market liberalization which will hence confer efficiency gains. The mechanism by which this occurs is a reduction in the marginal productivity of labour and an associated wage reduction that brings about a proportionately greater increase in returns to non-labour productive inputs. If there is wage stickiness the gains from labour migration will be reduced by increased unemployment of either migrants or residents so that implied unemployment levels are also an issue. Hence the extent to which an economy can access these gains depends on the flexibility and competitiveness of its labour markets.

With skilled migration there are further benefits to a destination country from implied skill externalities. While it is easy to capture these latter effects in a theoretical model I know of no satisfactory way of empirically estimating them. The answer is therefore to rely on sound theory not to conduct empirical exercises which ignore such effects or engage in numerical simulations to forecast effects based on guessed estimates of what are intrinsically hard-to-determine parameters.

The reason for focusing on skill externalities can be clarified by considering the implications of skilled versus unskilled migration in a general equilibrium model of market clearing without externalities. Here, if gains-from-labour-market liberalization are supposed proportional to differences in human capital endowments – so most gains occur from having the very skilled transact with the very unskilled - a premium will be attached to highly unskilled migrants. That this is counterintuitive suggests that the real focus of concern is on situations where highly-skilled workers get paid less than their social marginal product because of the external benefits they convey.

Finally, if we do allow for wage stickiness and resulting unemployment it is natural too to assess intakes in terms of their impact on unemployment in different skill categories. Unemployment tends to be concentrated among the unskilled so on this basis alone it makes sense to target skills.

2. Reformulation. Let me sketch what I think is a more sensible and robust qualitative analysis of the case for pursuing a skilled migration program.Having skilled migrants come to Australia implies a ‘brain gain’ - human capital acquired in other countries becomes available in Australia – this is the widely-discussed brain drain from developing countries: See Centre for Global Development (2005), World Bank (2005). Indeed, from a global viewpoint this gain is a profound ethical argument against skilled migration – the World Bank (2005) find that between 25-50% of college educated citizens of poor countries live abroad in an OECD country. Australia is a developed country which captures much developing country human capital without paying the full investment cost[1].

Ignoring the negative welfare implications of this important issue – as the PC report does – the arrival of skilled migrants would not represent as great a source of net advantage to resident Australians if arrivals were paid their marginal products and thereby captured the labour market gains created, leaving gains to the local economy only from effects on factor returns in other input markets. But skilled migrants do not get paid their marginal products – skills can be copied and ‘leak’ into the community – to take an extreme example, a brilliant scientist or a creative artist is paid less than his or her marginal worth with some value being transferred to owners of assets locally and complementary workers. If these owners and the complementary workers are residents of destination countries then gains are transferred to them. This benefit is augmented by progressive taxes which also transfer wealth on balance to residents.

Other advantages of having skilled migrants include input complementarities, or pecuniary externalities, with unskilled workers - having more skilled workers boosts demands for those less-skilled. Having more imported specialist doctors increases the demand for less skilled occupations such as receptionists, nurses and those in the service sector generally. Having more skilled migrants reduces pressures on the public purse directly because those with skills are less likely to be unemployed and, indirectly, by increasing the demand for those with lower skills who are otherwise exposed to higher unemployment risk.

In addition, selecting migrants with skills that are in short supply will in itself reduce any skill-mismatch component of unemployment. Skill mismatches in part reflect distortions in domestic labour markets that result from restrictions on resident entry into sought-after professions such as medicine and restrictions on labour market mobility through relocation costs such as stamp duty levies on house purchases. The first-best policy is to abolish these restrictions – and this is a more satisfactory policy in the first instance. But, if this cannot be done, directly targeting migrants with particular skills may outperform labour market retraining programs domestically even if migrants are imperfect substitutes for residents with the same skills. Having ‘footloose’ skilled labour migrants can compensate for immobile of skilled labour locally.

Finally, there is an interaction between the need to secure certain skill requirements in the population and population aging. The number of older workers in the economy is increasing while numbers of younger workers are falling or growing slowly. If labour shortages provide a stimulus to technological development and to higher productivity resulting from increases in capital per worker, this is not a problem provided older workers are substitutes for young workers. But in jobs that require the most sophisticated technological skills – what McDonald et al (2006) call complex problem solvers or CPS, older workers are not good substitutes for young workers. Psychology and economics show that complex problem solving skills deteriorate rapidly after age 40 and, consistent with this, in Australia, 80% of CPS are aged less than 40. Migration is a highly effective way of increasing the supply of CPS workers when the migration program is oriented towards highly-skill, younger migrants.

Generally favoring skilled rather than unskilled migrants has both favorable efficiency and equity implications. Having more skills provides an appropriate response to market signals which suggest higher returns to those with skills and this increases overall productivity. But, in addition, effects on the public purse and on the job opportunities for those less skilled, suggest that having a strong skilled immigration component outperforms having migrants with lower skills.Indeed while trade liberalization with low wage countries harms the unskilled by adversely impacting on their wages and working conditions, attracting skilled migrants can help this same group through pecuniary externalities or by at least concentrating unfavorable distributional impacts among those best able to afford it.

Ignoring the beggar-thy-neighbor issues that there is a strong case for pursuing an expanded skilled migration program if this can be done. If implemented correctly there will be low resulting unemployment effects, perhaps even a positive role in reducing unemployment of those less skilled, low adverse distributional effects and we will benefit from above-average gains-from-trade benefits by economizing on training costs and through the skill externalities that augment standard gains-from-trade benefits we get from additional migration. The key issue is: Is such a skills policy feasible?

3. Supply-Side Constraints. With low Australian unemployment skilled migrant entry is a substitute for training domestic workers to fill skilled positions. Large numbers of accountants and IT specialists are, for example, being sought in the subcontinent. These people are sought directly as migrants here or indirectly by encouraging untrained students to enroll in universities here as full-fee paying students who later apply for residency visas on the basis of their skills.

With respect to seeking skilled migrants directly an issue, neglected by the PC report, is whether or not there is a sufficiently elastic supply of sought-after skilled migrants who will fit into current skill niches at going wage rates. The assumption of perfect elasticity has never been particularly realistic (Clarke (1994, p.69-70)) but is less so today than in the past even though employment prospects in Australia are very good. It is not only Australia which offers good employment prospects to skilled workers from the developing world. Australia is competing with many other countries in the Western world (the US, Canada and France, for example) in seeking skilled migrants. All these countries have adopted ‘cherry-picking’ policies that select intakes on the basis of needed skills.

Indeed, because Australia’s migration intakes are a small proportion of total global intakes the supply of skilled migrants to Australia can be understood as partly an endogenously determined residual given the migration policies of other countries. There is nothing new in this perspective – I have argued elsewhere that this has been the sensible way to thing of the Australian migration program for much of the post-1860 period (Clarke (1994)).

It could well be that skilled migrants may assess employment and salary prospects in different countries net of resettlement costs with such costs being negatively related to the size of communities with the same ethnicity, religion or prior nationality already living in Australia. Indeed many of those with skills who migrate to Australia do have family linkages in Australia – a factor that reflects Australia’s competitive advantage in these situations. As levels of family-related migration decrease it is likely that this source of advantage will diminish.

It might be argued that maintaining a skilled-only migration system would eventually make us uncompetitive since we would not then be able to attract the same quality skilled migrant as Canada and the US in particular.An aspect therefore of attracting the best skilled migrant is the extent of culture and diversity in Australia. A skilled Greek (and other) migrant would find moving to Australia very attractive because it has a large Greek population with well-established Greek-oriented social institutions such as churches and schools. These were built by migrants who came here to form resident communities. Thus family and community migration make Australia more competitive in the market for skilled migrants. Family and community migration has been successful in Australia. Greek, Italian and Asian communities are doing well and have enriched our culture.

As an issue of practical policy design the best immigration policy is to have a combination of skilled and family migration. The latter might have a random component that seeks out a portfolio of ethnicities and community types that form a basis for attracting future skilled migrants. This will help us remain competitive in the market for skilled migrants.

4. Unsound claims in the PC Report. There are several features of the PC report which seem conceptually flawed and which limit the ability to discern the effects of augmenting the skill mix.

The claimed capital dilution effects of having migrants here and the effects of increased immigrants on our terms of trade seem erroneous to me. Capital stocks are not ‘diluted’ when immigrants come here because we don’t live in a communist state. You don’t acquire capital assets by walking through the Australian door – you have to acquire them by saving or bring them with you. Having extra skilled migrants here increases the productivity of capital at the margin in Australia which, in a world of mobile capital, will encourage a healthy current account deficit reflecting implied capital inflows. Having migrants here who demand more of our non-internationally traded goods mean expanded markets for Australian producers of these goods which imply welfare gains to residents that are analogous to trade liberalization. If immigrants buy cars and other consumer durables from overseas by spending their income that is in no sense a cost to resident Australians if these same migrants more than proportionately increase our capacity to export. All these effects are, in any event, likely to be very small given the limited annual migration intake.

In the PC report (and to a less extent in that of Econtech) the lagged adjustments in capital stocks to increased skill availability are implausibly slow and stretch even into the decades rather than years. That these sorts of forecasts are entertained seriously at all suggests the need for a rethink of microeconomic foundations. Current account deficits are strongly contemporaneously (and innocuously) linked to labour migrations – I cannot believe that it takes decades to augment sought physical capital stocks to accommodate new migrants.

Nor is the focus in the report on income per head a reasonable way of assessing the economic impact of immigration since this is defined inclusive of newcomers - it can fall with immigration though every group can be better-off as has been argued countless times over the past 20 years: See Clarke (1997) for a ‘recent’ attempt to clarify this elementary issue. The relevant target variable is the effect on incomes of non-immigrants. If this increases then everyone will be better-off (assuming voluntary immigration) even if overall income per head falls.

Moreover it is this misconception that provides the initial result in both studies that in per capita terms Australia will be worse-off short-term from increased migration. In my view this is a misleading implication of the modeling since both residents and migrants will be, on balance, better-off.

4. Other benefits from skilled migration intakes. It seems absurd to try to argue a case for permanent migration based purely on meeting short-term skill mismatches in Australian labour markets. Admitting intelligent, skilled people who are likely to be self-reliant and who will contribute to Australian society in broader terms is likely to be a more compelling basis for permanent migration policy. As residents of a multicultural society we derive social benefits from living in a stimulating cultural mix and having the opportunity to interact socially with people of different backgrounds. Economics is not the only basis – or even the primary basis - for assessing migration policies. But in many cases selecting people with skills on the basis of non-economic criteria might, in any event, advance economic objectives. Consider for example Australia’s environmental objectives.

The PC report does not really talk much about environmental impacts from un-priced congestion and pollution. The costs of these externalities are a problem with or without immigration but are worsened by it. The answer of course is to internalize these externalities using pricing or other policies thereby addressing these issues. It probably does not make a lot of difference between selecting skilled rather than unskilled immigrants to address such issues but, to the extent that equity arguments are used to thwart efficient pricing – it is difficult to congestion price roads because poor workers will be disadvantaged – there is a slight preference for selecting those with skills.

There is a case for accepting temporary skilled migrants for meeting short-term labour market imbalances. While market wage rates should provide clearer signals for desired training programs than do publicly-designed ‘job training programs’, such market processes operate with a lag and the skill-mixes sought may only be in temporarily high demand. In addition, market wages for those being trained are distorted by an unbalanced wage structure. Apprentices, for example, are often diverted into unskilled work with better-pay.

In dealing with fluctuations in demand for certain skills more flexible work and training regimes are sought. Temporary skilled migration programs have strength here in avoiding these constraints and provide greater labour market flexibility in coping with such things as the current resources boom. Government training programs and business programs, such as apprenticeships, come into their own longer-term but short-term temporary skilled labour needs can best be met by employing skilled migrants on a temporary basis. 5. Conclusions and

Final Remarks. Ignoring the brain drain implications of attracting skilled migrants from developing countries there is a strong, selfish case for focusing on skilled migrants in the migration program if this is possible.

Such a focus provides equity and efficiency gains to Australia, and is likely to reduce unemployment. The benefits are the traditional ‘gains-from-trade’ one gets from immigration augmented by skill externalities and favourable effects in job-markets from avoiding skilled mis-match. One also can expect better distributional and employment outcomes with a bias towards skills.

The main limitations in such an argument stem from the feasibility of such a policy. There are not many $50 bills lying on pavements. Unexploited gains from attracting large amounts of human capital without paying for it are low given the high competition in seeking skilled migrants from the US, Canada and large European economies such as France. The best chance of retaining a competitive edge in seeking such migrants is to community build in particular areas of the intake by retaining strong, attractive, family-oriented programs as well as those seeking skills. A diverse portfolio of intakes increases the opportunity to attract future sought5 migrants from many countries.

Although these conclusions above are couched in terms of economic benefits there are social and other benefits from gaining those with skills. Skilled intelligent people contribute to our society in many ways other than economic and the opportunity to interact with them is an unpaid-for benefit of emphasizing the case for skilled migration.

Tying the migration program mainly to acquisition of sought-after skills that provide broad community benefits without significant distributional costs also makes the migration program more politically sustainable. The ethnic vote-buying, predominantly family-based, programs of the Hawke Labor government were not sustainable in an Australian context – as capably discussed in Gruen and Grattan (1993). Debates still continue in Australia concerning the appropriate extent of diversity sought in the migrant intake and whether we do migrants with undemocratic, misogynist values and actively hostile attitudes to the Australian way of life. I don’t. Selecting immigrants who are educated and who have skills limits the need to even consider entry demands from such people.

References

R.A. Berry & R. Soligo, ‘Some Welfare Aspects of International Migration’, Journal of Political Economy, 77, 1969, 778-794.
B. Birrell, V. Rapson & T. F. Smith, Australia's Net Gains from International Skilled Movement, http://www.immi.gov.au/media/publications/pdf/aus_net_gais_int_kills_mnt_2004_05_.pdf, May 2006.

H. Clarke, ‘Labour Migrations and the Pseudoconvergence of National Living Standards’, Economic Record, June 1997, 73, 120-124.

H. Clarke, The Rationale for Forward Planning and Stability in the Migration Program, Bureau of Immigration and Population Research, Melbourne, 1994.
Econtech, The Economic Impacts of Migration: A Comparison of Two Approaches, Report for the Department of Immigration and Multicultural Affairs, Canberra, April 2006.
F. Gruen & M. Grattan, Managing Government – Labor’s Achievements and Failures, Longman Cheshire, 1993.
P. McDonald & J. Temple, Immigration and the Supply of Complex Problem Solvers in the Australian Economy, http://www.immi.gov.au/media/publications/pdf/immigr_supplyof_%20complexproblems_solversCPSDIMA.pdf, 2006.
Productivity Commission, Economic Impacts of Migration and Population Growth, Productivity Commission Position Paper, AGPS, Canberra, January 2006.
World Bank, International Remittances, Migration and the Brain Drain, World Bank, Washington, October 2005.
Centre for Global Development, The Global Migration of Talent: What Does it Mean for Developing Countries?, Centre for Global Development, October 2005

Reference: [1] Bob Birrell et al (2006) provide a detailed verification of the claim that Australia has been a very significant source of ‘brain gain’ up to 2004/05. This is due to the large numbers of skilled migrants arriving in Australia and to the return home of skilled expats.

Thailand coup

I am more than a bit of a fan of the Thais having lived in Bangkok for 8 years and having seemingly permanent Thai connections. So like Salon, I am upset to hear of the coup that has occurred there. The coups in Thailand generally pass without great violence but what is disappointing is that, like many people, I had hoped the military in Thailand would not intervene anymore during a political crisis. It has been 14 years since the last military takeover and the military’s role in Thai affairs has declined. Many of us hoped permanently.

Even so, as recently as last week, amid growing tensions in the wake of an alleged bomb plot against now-ousted and deeply unpopular Prime Minister Thaksin Shinawatra, General Sondhi Boonyaratkalin was busy trying to quash coup leaders. But he has now led a coup – the government, he said, was tainted with corruption and cronyism. Martial law has been declared across the country and the 1997 constitution cancelled. The corruption claims might be true but an election not a military intervention should be the way to sort this out.

There are more important issues for the military to deal with – in particular the Muslim insurgency in the South – an excellent editorial in Thailand’s, The Nation, summarises the difficulties. Sonhi, as a Muslim, is well-placed to help sort these out.

The current coup is the 18th since 1932. Most coups in Thailand are fairly non-violent. On the other hand one can never tell – while many coups are non-violent there have been ugly incidents in the past related to political instability. In 1976, between coups, hundreds of students were killed and wounded at Thammasat University in Bangkok by right-wing and vocational students.

Hopefully His Majesty King Bhumibol can sort this mess out as he did in the 1991/92 coup – he is apparently close to General Sondhi. It is hard for non-Thais to appreciate the extent to which His Majesty is revered in Thailand. He is also politically experienced and understands the world of Thai politics as well as anyone.

On a nostalgic note, I was living in Bangkok when the 1985 coup happened and was most surprised at how unruffled the local population were by it. My housemaid just laughed when I expressed my concern. ‘Oh Mister, This always happen’. So the next day I got the bus from my home on the Superhighway out to my workplace about 40 km north of the city. We got stopped by army officers holding automatic weapons somewhere around the airport. When the officers got on the bus the young Thai girls on the bus giggled at the soldiers loudly. I remember being petrified with fear but the soldiers just got off the bus and we were on our way – the girls still giggling and me remaining very, very quiet. Later I was told that the giggling was an Asian way of handling a tense situation – maybe.

That evening - being now experienced in the ways of coups! - I went down to the bar district on Patpong Rd and had a beer or six. Neither the bar-girls or their farang customers were much interested in the coup. ‘Buy me a drink Mister’ was the refrain.

Thailand, and its beautiful people never ceased to surprise me!

How to be a genius

New Scientist has an interesting piece on how to be a genius. It is an updated version of the 99% perspiration, 1% inspiration story. You need to have strong intelligence to be a genius but also a ‘fire in the belly’ that gives you a sustained ability to focus. Indeed you need to focus for about 10 years, have a mentor as your thinking matures and be good at ‘chunking’ – the ability to group details into easily remembered patterns. In a changing situation you also need to identify which bits of information to store in working memory to be used later.

The story is supposed to be consistent with neuroscience (what story isn’t?) – working emphatically and for a length of time on something apparently builds neural networks of expertise. Maybe.

But I think this general story is right, at least with respect to the highly intelligent, if not genius, academics in universities I have worked in. Many have ordinary intelligence but have achieved great academic distinction through specialization and concentration over decades or more. It is an argument for specialization. And I also meet very high IQ individuals – particularly graduate students - who don’t make it because they lack a sustained focus.

For a while I read biographies of the lives of mathematical geniuses – partly in the forlorn hope that something about their lives might suggest an insight to me. It was probably much less instructive than the ‘work hard’ advice given in New Scientist.

Perhaps the greatest modern mathematical genius was John von Neumann – a great biography is by MacRae. He seemed to have superhuman intelligence and memory. He liked dirty jokes, Chinese history (some said he could have been appointed a professor in this area had he sought it) and of course mathematics, game theory and the rest. One of the great math stories about von Neumann concerns the two approaching trains and the fly – it was one instance where his undoubted genius led him astray. But I remember his wife’s simple remark about von Neumann - ‘he works very hard’.

While not on the scale of von Neumann, I also think of Paul Erdos – the man who loved numbers - one of the most prolific modern mathematicians – he also worked hard his whole life.

While I didn’t improve my genius success skills with these biographies, I did find them enjoyable.

Rape as punishment for attending school

Pack rape in Pakistan can be a punishment for females who attend school. A recent gang rape by local villagers of a girl and her mother occurred because the girl disobeyed the villagers by going to school. Even the local police refused to intervene until the 12th day of the rapes.

This incident brings to mind memories of Mukhtar Mai. Now a heroine not a victim!

In Pakistan a women who is raped faces the prospect of criminal prosecution for having sex outside marriage. And the President of Pakistan, Gen Pervez Musharraf is stalling on changing this obviously senseless law because of opposition from hard-line Islamic parties. The Pakistani military won't take the religious fanatics on.

Is this not one of the basic questions Islam needs to address? Along with honor killings of women who disobey their male 'owners'?

Addiction and inequality

I am in Adelaide attending an NCETA (National Centre on Training and Addiction) Summer School ‘A Fair Go for All? Policy Responses to Alcohol, Drug and Gambling Issues’. The intent is to look at links between social inequality and various addictions.

A lot of the people present have come from the field of population health. Much of their analyses take the form of large numbers of bivariate graphs between a target variable Y (e.g. extent of addiction) and some explanatory variable X (e.g. some index of social inequality). If any type of relationship exists geometrically then the language used suggests that X causes Y.

There is no economic analysis at all. Some type of addiction (e.g. addiction to gambling) is identified as a problem of concern and measures are then discussed to eliminate the problem. No benefits are attached to the activity at all. It is a far more illiberal approach than even I could ever accept.

On the inequality issue the discussion has been very disappointing. Even if it is accepted that activities such as smoking, drinking alcohol and gambling do involve social costs, a difficulty is that measures to deal with such issues – hefty taxes on cigarettes and gambling or restrictions on the supply of gambling outlets will have highly inequitable effects on the socially disadvantaged. This leads to some peculiar arguments – for example that the poor should give up smoking because it is an expensive drain on their budget. That it is expensive because of hefty taxes is not even mentioned.

The population health school needs to learn some statistical technique and some economics.

Have I got value from the discussions? Yes I have. The main benefit for me is that it forces me to reassess my own somewhat illiberal views on the types of demerit goods this conference is on about. You can always learn and if you are honest you should be prepared to adjust your views.

In addition there were two very good papers – descriptive papers by Wayne Hall on alcohol and inequality and by Michael Gossop on nicotine dependence and inequality. I also liked a paper by the ANU’s Richard Eckersley on social determinants on health. He linked addiction problems to findings in happiness research and to individualist ethics in a way I found interesting. (The effort was dulled a bit at the end of the day by a loquacious, Marxist, dope-smoking public health enthusiast who stretched this idea to a ludicrous exaggeration).

The good papers are all apparently available at the NECTA website.

But the best part of my day was a great Italian meal at Parlamento Bistro on North Terrace. The seafood Zuppa soup was close to divine! Despite the great food and the few good papers today I won’t wait around for the first session tomorrow – the value-added is not enough.

Mr Stuart’s Track

My pick of the non-fiction historical writing I have read this year is Mr Stuart's Track by John Bailey . This is a gripping account of the life of perhaps Australia's greatest explorer, John McDouall Stuart, in his efforts to explore some of the most arid and difficult country in Australia – namely our red centre. The first explorer to cross Australia north to south.

Stuart was a diminutive, tough-as-nails Scotsman who had a strong interest in liquor and the Australian outback. A taciturn character who never married, he disliked big cities and polite small talk – he was positively fearful of public speaking. Stuart was most at home in the harshest parts of the Australian outback relying on his wits to survive. He was a resilient 'weed' of a man.

Stuart arrived in Adelaide in 1839 when the settlement was only 2 years old. He quickly found that he enjoyed living in the Australian bush and he became smart in the ways of the bush. Most of all, he learnt self-reliance and the essential ability to find water in a parched landscape by observing birds, the tracks of aboriginals or by looking for gullies and cracks in rocks where water might collect. Water was the key to his survival and his exploration success

Post-1844 Stuart gained his exploration 'work experience' as a surveyor for the much more famous explorer Captain Charles Sturt in their futile search for Australia's inland sea. Indeed, suffering from scurvy they all nearly perished in what is now called Sturt's Stony Desert just south of what is now Birdsville.

In 1853 Stuart was employed as a surveyor with William Finke. They searched for copper and gold for many years in the Northern Flinders Ranges. Stuart was acquiring the reputation as the man who would go anywhere.

In 1858 Stuart searched (again in vain) for the aboriginal paradise, Wingillpin, with its promise of lush grazing lands at the country’s centre. The journey took him to the middle-of-nowhere town William Creek (a great pub stands there today!) and what are now the opal fields of Coober Pedy.

In 1859 Stuart undertook a major expedition to what is now Oodnadatta ,the place with the highest temperature ever recorded in Australia, 50.7 degrees C, and only 160 kilometres from what is now the Northern Territory border. The objective was to search for gold for the entrepreneurial James Chambers. Stuart desperately wanted to be the first to cross the territory line but, having run out of provisions, they had no water and, as the horses’ hooves were ‘weeping blood’ as their horse shoe supply was depleted, he had to turn back.

A few weeks after returning from this expedition Stuart ventured to Lake Eyre, paradoxically about the driest part of the Australian continent, where he suffered from trachoma so bad he could barely see. Eventually, admitting failure on 6 January 1860, he again turned back to Chambers Creek without getting to the centre of Australia.

But at Chambers Creek Stuart reassessed the situation and sent a colleague back for support to immediately launch another expedition directed straight towards Australia’s centre and, eventually, he hoped, to cross the continent. He discovered the Finke River and the McDonnell Ranges and did eventually make it to the geographical centre of Australia, the first white man to have ever done so.

After this Stuart’s group headed west directly into the Tanami Desert one of the most arid and isolated places on this planet. Surface water is almost non-existent and Stuart’s team almost perished. During one of his worst periods Stuart wrote that the muscles of his ‘limbs are changing from yellow-green to black’. He then sought to avoid the Tanami and proceeded more directly north to what is now called Tennant Creek but then, facing difficulties, headed north-west to again place himself in the Tanami. At one stage the horses went for more than 4 days without water during which time they travelled 180 kilometres through this terrible country. They were attacked by aboriginals and forced to retreat. Partly for this reason, and also because both men and horses were walking skeletons, they eventually again decided to admit defeat and to return the 2000 kilometres home to Adelaide.

Stuart had now cast aside all illusions - there was no inland sea and there were no great rich grassy plains. But his main sadness was that he had failed to cross the country.

On his return to Adelaide in 1861 the State Government encouraged Stuart to have another go. The impulse for this was a competing attempt to cross the continent by the ill-fated Burke and Wills expedition that originated in Melbourne. Interstate rivalries mattered even then!

The Burke and Wills story is remarkable in itself for the focus it gives to the Australian love of heroic failure – Gallipoli and all that. All but one person in the B&W expedition that started from Melbourne died due to disastrous miscalculations by Burke who was, in reality, a madman who launched an impossible forced march. They made it to the Gulf but on their return towards Melbourne missed their contacts at Coopers Creek by a few hours – they had waited for them for 3 months. This led to further tragic mistakes and to the deaths of all but one of them, John King, who survived by living with local aboriginals.

Stuart, ‘the diminutive magician’, set off from Adelaide with 11 men in all. Relentlessly focused, Stuart too thought he knew what he was doing. But when his team got to the MacDonnell Ranges, near Australia’s centre, they came across the footprints they had left a year earlier – it had not rained in that time! Then it rained the next day! So the expedition had to push their horses through a gluey bog. They set off into new territory – the Sturt Plains – a fierce, hot waterless plain that really something like a continuation of the Tanami. No water for 2 days and no prospects of any - so a waterless retreat for another 2 days. Then again an alternative route north was attempted through a forest of bullwaddi bush – bushmen describe it as nature’s attempt to grow barbed wire! Again they failed so they headed north-east towards the Gulf where they again hit the waterless Sturt Plains, a forest of low eucalyptus and again failure.

In all Stuart made 11 failed attempts to cross this terrible north coast country and each time was defeated. With a terrible sense of failure Stuart again retreated the several thousand miles through desert back to Adelaide.

Finally in October 1861 Stuart started off again from Adelaide and this time, he did finally walk across the middle of Australia from south to north where he got to place a Union Jack on a northern beach. Their party’s departure was inauspicious – they got so drunk they fell of their horses – one stamping on Stuart’s hand, leaving it a bloody mess. Stuart became seriously ill and, for a time, it was feared his hand might need to be amputated. A month later Stuart led a group of 10 men and 70 horses northwards again.

As with the previous departure they left at the height of the summer heat. The conditions were tough – 8 horses were lost (died or had to be left) in the first 3 weeks and much of the provisions had to be left behind. The party was already on starvation rations. By February 1862 they were in sight of the MacDonnell Ranges – the fifth time Stuart had crossed this territory. By mid-April they had hit the Sturt Plains but this time, remarkably, they did find water. But moving beyond this point again seemed impossible – the same thick-thorned scrub seemed to bar further progress and they could not find water supplies further north. Eventually, after numerous failed attempts, they did find water and indeed, at Daly Waters, were surrounded by it. Once they made it to the Roper River they knew that victory was within their grasp. After more trial-and-error expeditions around the edge of what is now Kakadu National Park, they eventually saw the blue ocean in July. This was the highpoint of Stuart’s life though his physical and psychological health were fading with. He had scurvy and he was nearly blind - he doubted aloud that he would make it home to Adelaide.

After only 48 hours at this northern sea Stuart turned toward the 3,100 kilometre trip home. The horses were terribly weak – so many had died or had to be left behind that before they again entered Sturt Plains. A desperate scramble for water then ensued in the journey back towards the MacDonnell Ranges. Stuart was close to death and was now on a stretcher. But several months later they did make it back into South Australia. In December 1862 they arrived in a train at Adelaide station to a welcoming crowd. Stuart was a South Australian hero.

Stuart himself was close to death – these expeditions and particularly the last had taken a severe toll of him. Upon his return, Stuart began to drink heavily again. After a brief period of hero-worship in Adelaide, he became socially ostracised and deserted. His drunkenness meant Stuart was a poor candidate for a knighthood despite his celebrity. He was even denied the right to manage the £2,000 reward he had been promised for being the first explorer to cross the country. While the Northern Territory was given to South Australia as a dependency, and Stuart became regarded as a hero of mythic proportions, he had no friends and was broke. His health failed and, in 1864 he returned to Scotland where he lived with his sister in Glasgow. He died in 1866 an invalid.

In 1869 the South Australian Government established a settlement in Port Darwin and in 1870 began to establish a telegraph linkage between Darwin and Adelaide. Then came the pastoralist settlers to seize the fertile land from its aboriginal inhabitants. It would take another 130 years before a railway line would connect these cities but the start of a line from Port Augusta was made in 1876. This was extended to Oodnadatta in 1891 and became known as the Ghan because so many of its passengers were Afghans. Up to the end of WW1 camel drivers competed with the train as a form of transportation. In 2004 a rail link across the country was finally established – 141 years since Stuart walked onto a northern beach.

The planned commercial links with the northern province didn’t ever yield much for South Australia and, in 1911, it surrendered the lot to the Commonwealth Government for only £3.9 million.

Several times in the past few years I have travelled through outback South Australia. A few years ago I travelled to Lake Eyre while it was in one of its rare phases of actually being full of water and remember wondering how the early explorers could ever make it through such inhospitable country. It is terrifyingly barren country and the dryness of most of it is its overwhelming physical characteristic. I have some understanding of how one might successfully explore this country after reading this wonderful book! Stuart was a simple man who disliked big cities and small talk but who was at ease in the Australian dry country. He was bush-smart and, more than anything, was able to exercise his judgement to find water where it was hard to imagine any would exist. He also had vast supplies of guts and determination.

John Bailey makes a strong case for the claim that Stuart was Australia’s greatest explorer. This book is great writing too and was a pleasure to read. A standard literary review of Mr Stuart’s Track by Ben Russell is here.

Wealth & neurosis

Paul Krugman asks whether Americans have become better off since 1973. His answer is ambiguous which is the answer. The same is so for Australia - more flat screen TVs, more traffic jams and more worries about....

The demand for environmental quality is probably a luxury good. So too is the demand for neurotic beliefs. Therefore, are the possibilities for living in a prosperous, happy society self-limiting?

Neuroses are a standard liberal consumption good but not for me. Instead I winge about liberals who demand neuroses.

Mr Beazley the demand for labour slopes downward!

Mr Beazley responded to Ms Vanstone’s comments yesterday by saying that he likes lots of migrants but doesn’t want wages to go down.

But if the demand for labour has some elasticity firms will hire more workers only when they are cheaper. So if labour supplies increase the real wage must either fall or, if they are sticky downwards, unemployment will be generated.

Indeed this is one primary means for getting ‘gains-from-trade’ in immigration. If labour markets are competitive and workers are paid close to their marginal product then, as the supply of labour increases, the value of labour at the margin will decline as will its reward. But the value of complementary inputs – capital and land - will be increased at the margin so their marginal values rise.

Since total output rises with the extra immigrant workers but the additional labour only gets a fraction of the extra output as wages it must be the case that the amount of output accruing to non-immigrants will rise. These are the ‘gains-from-trade’ one gets from a labour immigration. They are equivalent to a labour market liberalisation.

What is true is that the functional distribution of income with continued labour migration turns against labour towards owners of property and capital. If this is seen as adverse it might act as a constraint on the pace of immigrant entry or it might suggest levying capital gains taxes and redistributing the proceeds. Such taxes and redistributions are not very plausible but I never lose sleep about this when the migrants, as in the current debate, are skilled. The wage losses will tend to accrue mainly among well-heeled workers and the existence of more skilled workers will augment the demands for those less skilled.

The extent of gains-from-trade depends on the flexibility of local wages. Unless wages can adjust downwards the gains to residents will not occur – if migrants get jobs a pool of unemployed locals will develop. Hence we can be more humanitarian and get more skill gains from labour migration if we have efficient local labour markets. This is one reason for seeking comprehensive labour market reform in Australia – a minor reason compared to other far more direct advantages.

Labor's race credentials

John Quiggin has posted a critical assessment of Senator Amanda Vanstone at his blog. I think, to the contrary, she is quite a good Minister for Immigration which is a tough ministerial portfolio. Inevitably the Minister ends up having to play God with people’s lives. In some cases, issues of life and death are involved. I know Mrs Vanstone is a compassionate person who takes her job seriously.

On a personal level I appreciate her gruff, down-to-earth character.

I am also impressed with the quality of DIMA as a caring and responsible government department.

The Howard Government has done a good job of turning immigration policy from the cynical ethnic vote-buying exercise that it was under the Hawke-Keating Government (for discussion see Fred Gruen’s book with Michele Grattan, Managing Government: Labor's achievements and failures, Longman 1994) to a policy much more oriented to skilled migration. At the same time Australia has maintained a substantial per capita humanitarian and refugee intake. Australia has impressive credentials generally in this area – since WW2 more than 650,000 people have settled in Australia under this program.

And, indeed, over the past couple of years the humanitarian program has been expanded to 13,000 which is much higher than it was during the years of Labor Government. The hypocrisy of many on the Left is to unfairly tarnish the Howard Government with a Hansonite racist brush.

But it is Labor that has traditionally been the party in Australia that plays the race card. Most recently it has been Mr Beazley’s complaints about ‘temporary skilled immigrants’ – those ‘foreign workers’ from Bombay, Beijing and Beirut’ about whom Australian parents ‘are correct when they fear the humiliation of their children as they are dispensed with as apprentices, as foreigners are brought in to this country, prepared to work for virtually nothing’. It is encouraging to see Mrs Vanstone’s vigorous counter-attack in this morning’s The Age.

And her key question to those on the Left who dishonestly attack the Howard Government as racist need to respond to the following query from Vanstone:

‘Just ask yourself what would happen if John Howard came out and questioned workers coming here from Bombay, Beijing and Beirut. The Howard haters would swarm like killer bees. Philip Adams would fall out of his secular pulpit…’

This is fair comment but I’ll bet the Phillip Adams of this world ignore her legitimate point.

Blog news

Andrew Norton has now set out on his own (exiting the Catallaxy blog) with, guess what, Andrew Norton’s blog here. I think there are some technical issues - I could not connect this morning. Andrew will presumably continue to post on happiness research and other topics – but it is in the area of education policy that he has most made his mark.

My colleague Damien Eldridge has established his own economics-oriented blog Economics Geek here with some top posts of how undergraduate macroeconomics should be taught. I think my university now has the maximum number of economists blogging in Australia (namely 2)! A pace-setting ‘new-age’ Department!

An interesting site that I have only just become aware of is Conservation Finance which discusses many things but focuses on providing business models to help conserve biodiversity. I am unsure this is an easy mission but an interesting site.

A post on ‘Planning for Food Health?’ interested me at Russ Degnan’s Knotted Paths. I had started to post on this myself. There have been articles in the press recently suggesting that sprawled-out cities that create car-dependence force people to eat junk food contributing to the obesity problem. Russ dumps on the idea and I think he is right. There is however some evidence that poor planning can lead to more sedentary behaviour and hence obesity – I’ll try post on that eventually.

Finally, my son William has posts on music lessons and animal cruelty at William’s blog. His spelling is almost worse than mine but I think they are good posts. He complains that no-one visits his blog and I really would like to connect him up with other young kids who have blogs – a quick Web search didn’t help me do this. I’d appreciate advice on how to get a group of kids safely blogging.

Youth smoking

I am working on smoking research - hence my obsession with this issue in recent posts - and will post the draft of a longer report on this topic shortly. I have been re-reading W. Kip Viscusi's, Smoke Filled Rooms and checking whether some of his strong conclusions for the US apply here. Its a substantial liberal critique of the 'public health' approach to smoking regulation.

Viscusi emphasises that most people who start smoking do so when young. Adults do not commonly adopt the habit. A paternalistic anti-smoking argument is that young people are not good at making long-term decisions because they have high discount rates and hence are impulsive. Thus there are bans on selling to minors as well as concerted attempts to make young people of the genuinely deadly implications of smoking.

The dramatic decline in youth smoking that has occurred in Victoria in recent years is documented in The Age today and is of interest to me.

Youth smoking rates in Victoria have fallen to their lowest level in more than 20 years. The percentage of 12-to-15-year-olds smoking has fallen from 22% in 1984 to 8% in 2005. Among 16-to-7-year-olds, rates have fallen from more than 30% to around 19%. Rates are almost equal between sexes, debunking the perception that more girls than boys smoke. Overall, 11% of boys aged 12-17 smoke, compared with 12% of girls. The incidence of smoking has decreased and those who do smoke tend to smoke less.

The survey is compiled every 3 years by the Cancer Council Victoria. The survey was carried out in 69 Victorian secondary schools with 4522 participants. Tough laws on selling cigarettes to minors, restricted tobacco advertising and increased bans on smoking in public places have been credited with the declining rates. A more precise analysis of what has brought about this decline is of interest - the Cancer Council seem not as yet to have released their full report.

Meanwhile, I notice that, in South Australia, youth have taken well to bans on smoking in hotels and claim it has reduced their smoking behavior. That's my reaction too but I am a non-smoker - I prefer non-smoking bars because they are just much more pleasant to be in.

Melbourne then & now

The best picture-book I have bought all year is Melbourne, Then and Now by Heather Chapman and Judith Stillman. This is a set of photographs of Melbourne as it was in the horse-and-buggy era and of the same scenes photographed today. A deficiency – the old pictures are not dated – you only know from appended descriptions that the ‘then’ shot was taken quite a while ago.

Some of Melbourne’s architecture has improved with time, some has got worse and a surprisingly large amount is pretty much the same. An obvious question is why we could generally manage to produce such beautifully elegant buildings in 1850 but so many objects of ugliness today. It is not just pursuit of functionality – some modern architects should be cooked down into decorticated canine preparations for their foolishness – their attempts to be ‘contemporary’ leave us too often with Federation Square-type ugliness.

Many beautiful buildings of Melbourne have stood the test of time. It’s a great city to live in and a book like this one forces you to look twice at attractive features of the city you come to take for granted. Certainly the majestic and beautiful Flinders St Station is an instance of this – most train trips into the city end up here. Across the street from it St Paul’s Cathedral is another instance of great architecture – it is currently being renovated. On another corner is the much loved Young and Jackson’s pub with its beautiful Chloe painting. The final corner features – yes – that dog’s breakfast of design, Federation Square – Melbourne’s so-called ‘landmark attraction’!

An outstanding building not far down Flinders Street is the former Customs House – this took 20 years to build after 1850. It is now almost unchanged as the Immigration Museum - one of my favorite Melbourne landmarks. Or the Old Treasury Building which is almost as it was in 1862. Or the Victorian State Parliament – completed in 1882 – it still stands today as an expression of the wealth and optimism of the early Victorian colony – it still has a dungeon used as a cleaner’s tea room!

Despite its presumed functionality the more recent architecture of Melbourne has a lack of elegance that cannot be denied. The AXA Building displaced the magnificent old Western Market Building built in 1841 only 6 years after Melbourne’s settlement. This demolition was presumably inevitable ‘progress’ but it is unattractive. One of Melbourne’s finest old buildings, the Federal Coffee Palace, a ‘temperance hotel’ built in the 1880s, was demolished in 1973 to make way for an anonymous government building. You can get an idea of the attractiveness of these old ‘temperance’ hotels by looking at the modern Windsor Hotel (formerly the Grand and completed in 1888). The Windsor is my favorite hotel in Melbourne – a great place to have a coffee although I have never managed to stay there.

What parts of Melbourne have obviously improved with time? Well definitely the Chinese restaurant area in Little Bourke Street (this hyperlink is interesting!) which didn’t amount to much in the 1850s. The facades on some of the buildings in this street remain the same as in much earlier times though you do have to look hard. The Melbourne Public Library that was completed in 1854 – with its huge domed La Trobe Reading Room that was added in 1913 - looks improved as the trees around it have grown and it has become the State Library of Victoria. Cook’s Cottage, built in 1755 in Yorkshire, and reconstructed in Australia in 1934 in the Fitzroy Gardens, looks better than ever. And St Patrick’s Cathedral which began construction in 1858, and which had spires and so on added to it for 90 years, looks as good as it ever did –a significant cathedral by world standards. Some buildings like the Princess Theatre which opened in 1886 and which was tastelessly renovated in the 1920s have been restored to its former glory in recent years.

There are a dozen more interesting comparisons in this marvelous study but the one I want to single out is Lygon Street Carlton that still has the much of look today that it had in 1900. It was then home to artisans, workmen and small industry and now has the biggest selection of Italian restaurants and cafés in Australia.

The Chapman-Stillman book reminds me of how lucky I am to live in a beautiful, historic city. I’d be interested in looking at a similar type of photographic study of Sydney if one exists.

We should think about 9/11/01 today

Video clips provide a graphic picture of the events September 11, 2001.

3000 were killed but what sticks in my head are the images of office workers jumping out of buildings to their death. And the physical ugliness of the killers. These people have ugly, misogynistic minds that they wear on their skin. This comic (that I took from Catallaxy) summarises the ugliness accurately.

The Bali killer Bashir and his Aussie lunatic supporters spoke glowingly of establishing an Islamic State in Australia – no, ugly men, we won’t. The enemy is a fanatical part of Islam and we all must recognise that clearly. Decent Muslims must reject this fanatical element clearly and not offer daft excuses that justify killing innocents in terms of 'errant' Western foreign policy in Iraq and Afghanistan. I agree with Pamela Bone that the left has driven the debate to the point where we blame John Howard and George Bush for the killings more than the fanatics who perpetrate these crimes.

An outstanding Wikipedia entry on 9/11 is here.

It is a horrible thought but it is almost certain that we will eventually experience a terrorist attack in Australia. Some believe it is most likely in Melbourne.

Experts warn that Australians has become complacent about terrorism – the evidence suggests we have become more fearful. Phillip Adams suggests the whole terrorist thing is a bit of a bore. But I just retain my long-standing view that terrorism is not a bore but he is.

Australian debt

I asked Saul Eslake over at Troppo whether the high rates of monetary growth in the Australian economy in recent years were driving excessive borrowing and an eventual economic collapse with much higher interest rates. Saul, who is Chief Economist at the ANZ, is in a good position to have an informed view of this. He was fairly cautious in his remarks but sanguine – he thought a major household balance sheet correction was not imminent. He suggested this ANZ study of recent debt trends in Australia which I found to be a good read.

The argument is that the debt to GDP ratio has increased secularly in Australia since the 1960s – although growth has been particularly strong over the past decade and, indeed the debt to GDP ratio is now 4th highest in the OECD. This growth has been due in part to lower interest rates, low risks of job loss due to unemployment and to general expectations of improved economic stability which increase the willingness to take on debt. Evidence that debt levels are not excessive is taken to be the low level of loan delinquencies. There are also currently low levels of business debt.

Saul’s general views were backed up by Alan Wood a few days ago in The Australian. I think an earlier study by the AMP also has value.

I have previously posted on the revisionist interpretation of Australian savings rates that is supported by the Reserve Bank of Australia among others. According to this view, if account is taken of superannuation contributions and capital gains on the stock market, Australia’s savings rate at 24% is among the highest in the developed world. It troubles me though that debt obligations are fixed by a contract whereas stock market gains (which also largely underlie most superannuation savings) are not fixed. Could there be a global contraction that might substantially reverse these gains – Jeremy Siegel for example sees demographic trends as potentially driving a collapse when all us baby boomers retire together? I am also impressed by the thesis of Glenn Stevens that because debt levels will increase with an improved macronomic outlook that macroeconomic success can create the conditions for its own undoing.

I am interested in views in these various documents and the general issue of the case for a more active debt management policy for the Australian economy.