Wednesday, May 31, 2006

Where is Yossarian?

On the Becker-Posner blog.

Posner establishes a sound role for the privatisation of military force in Iraq but worries this might be used for political purposes to understate the death toll. He also believes private soldiers might be more inclined to run amok because there is less authority over them than members of the regular publicly-supplied army.

Becker - yeah you can almost guess it, sees Posner's view as fine but claims that Posner overstates the problems of a private military because competition among firms for a role in Iraq will help guarantee employment of private soldiers who will not be inclined to run amok.

And profit-seeking, self-interested behaviour will again drive the social advantage.

Was there a Holocaust?

Iranian President Mahmoud Ahmadinejad reveals himself to be a total fruitcake in a revealling interview with Der Spiegel (courtesy of Salon). The German interviewer is full of painful regret. Did Mahmoud learn anything from the obvious pain? A scary interview.

Spiegel: Are you still saying that the Holocaust is just 'a myth'?
Ahmadinejad: I will only accept something as truth if I am actually convinced of it.

Resource rich, resource poor Australian states

It is with an almost instinctual fear of ridicule that I applaud the NSW and Victorian State Governments for overcoming their debt phobia to embark on an infrastructure spending spree. Ignoring the specifics of what is to be done – the phobic attitude towards public debt has clearly gone too far in Australia. The timing of the debt expansion might not have been so great – coming after a 16 year national expansion corresponding to one of the most prosperous periods in Australian history – but, at least, two State Governments have overcome their phobias. And in one foul swoop they have resupplied a starved market for fresh, newly-created public Australian debt. The Australian online even features a video of this dramatic event.

The spending plans themselves are discussed capably in the press. I am far more interested in the Tale of Two Cities line of the Victorian Treasury suggesting that the resource poor states (Victoria and NSW) have suffered under the impact of the commodities boom which has kept the Aussie dollar high, dampening demand for manufactured exports in NSW and Victoria and resulting in lower economic growth in these states. Hence, a claim goes, the need for a fiscal expansion which addresses the disadvantage.

The disadvantage isn’t that great – about half a percentage point with aggregate Victorian growth still forecast by Treasury to be 3.25-3.5% for 2006/07 which is healthy enough but nowhere near Western Australia’s anticipated 5.25%. The Australian’s editorial today somewhat dramatically describes the split of our country into two sub-economies:

‘ AUSTRALIA is officially a two-speed economy. The resources boom is driving massive growth in states such as Western Australia, South Australia and Queensland, while the traditional leaders of the Australian economy – Victoria and NSW – are comparative laggards. Western Australia's economy is expected to grow by 5.25 per cent in 2006-07, compared with a forecast national growth rate of between 2.5 and 3.25 per cent. Its residents will soon enjoy the nation's highest per capita household incomes. Rents for offices in Brisbane's CBD now surpass Melbourne's and are starting to achieve parity with those in Sydney, an indicator of the Sunshine State's commercial vigor’.
It’s a dramatic development but hardly, in itself, a reason for an expansionary public sector budget deficit in resource-poor states. But we should be grateful they have overcome their debt phobias.

The road to nowhere

I found the recent Four Corners documentary on the aboriginal settlement Imanpa deeply troubling. The show itself isn't available on the web - the transcript is here and background information here - but you did need to watch as well as listen to pick up the dimensions of this situation of hopeless despair. Imanpa is a small isolated aboriginal community of 150 people plagued with chronic violence, substance abuse and a hopeless health, schooling and job situation. But, a Northern Territory aboriginal Minister says, Imanpa is typical of 1/3 of settlements in the NT.

Imanpa is collapsing. To quote the Four Corners website 'Its main income stream, the work for the dole scheme, has been cut off. Someone has been ripping off community funds. The only store in town is broke. Most of the people have drifted to Alice; those who stay live in fear of rampaging petrol sniffers and drunks. The youth worker left after being attacked – but it’s 'not a big deal', says a female community leader. The nearest police station is 150 kilometres away. Few children go to school'.

Various policies - including 'tough love', 'self-determination' and 'shared responsibility' have all failed. So too has 'easy welfare'. It is a story of policy failure, mismanagement and squabbling. The ideological divide is irrelevant since every approach has been tried and has failed.

'No jobs, no anything, nothing' says one young man.

Is there a future for Imanpa? These settlements were set up to get aborigines out of 'big towns', away from the booze but booze and substance abuse issues persist. Doors are smashed, toilets destroyed, people live in poverty and fear and wealk around town like zombies.

These types of settlements are dissolving as aboriginees move back to 'large' towns to 'steal' as one young man states. John Quiggin is looking at these issues and will report - he regards such small settlements as unsustainable market failures and I agree. Beyond that I have no idea. Some problems in mathematics have no solution. Maybe it is true in the world at large.

US as a failed state?

An excerpt from Noam Chomsky’s new book Failed States is available at The Independent Online. Not surprisingly I don't agree with this analysis.

Chomsky has three main criticisms of the US as a ‘failed state’:

1. It fails to protect its own citizens. US failures are contributing to the likelihood of nuclear war and environmental disaster by not committing to the abandonment on nuclear weapons and not signing the Kyoto accord.

2. It acts like a terrorist state in believing it is above the law. In particular, in its mission to bring conditional democracy that accords with US interests to a ‘suffering world’ – as an example Iraq must be ‘sovereign and democratic, but within limits’. It should therefore accept the jurisdiction of the International Criminal Court and the World Court and let the UN take the lead in international crises;

3. It is failing as a democracy. The US suffers from a serious ‘democratic deficit’ that deprives formal democratic institutions of real substance. The claim is that most ordinary US citizens oppose the policies cited in 1. and 2. While this may not be so ‘we cannot be very confident about the state of public opinion on such matters because of another feature of the democratic deficit: the topics scarcely enter into public discussion and the basic facts are little known’.

None of these points make much sense to me. US democracy is now working efficiently in pressuring US leaders on both Iraq and in dealing with greenhouse gas issues. I would not want the US to unilaterally abandon its holdings of nuclear weapons when other regimes (Pakistan, India, China, North Korea) won’t do so.

The US have acted unwisely in Iraq – its leader and Prime Minister Blair agree this is so – but it has not acted illegally and its motives were sound in seeking the removal of a hideous regime. Is the UN is the most effective agency in the world today to deal with international terrorism? Did the US not attempt sanctions via the UN against Iraq and has it not attempted – successfully it seems - to deal with current issues involving Iran through the UN?

US citizens have the right to throw out leaders that they don’t want and on the basis of current opinion polls look like doing just that – it is hard to buy the 'democracy deficit' viewpoint.

Municipal waste - I just love it

My affection for waste disposal economics stems from my interests in the environment rather than any bizarre fetishism. I have already discussed Productivity Commission proposals to abandon plans to eliminate plastic bags by 2008 and, in an earlier post, analysed the remarkable economics of sewage disposal at the Western Treatment plant.

According to the Draft Productivity Commission Report, Australians in 2002-03 produced 32.4 million tons of solid waste or about 1.7 tons per capita. Of this about one-third was municipal waste – the waste citizens dispose of in their rubbish bins and the main concern of this post. Australians throw only a little bit less than Americans and Australian waste generation has been growing over time – in Victoria, over the past decade, by 4% per year.

Australian households throw out a lot of organic wastes (food and garden products) that can be safely stored as landfill. They also dispose of many recyclables and, overall, 30% of municipal waste is recycled.

By the way, two facts about non-municipal waste interested me (i) That a higher fraction of it is recycled and (ii) That a significant fraction of recycled non-municipal wastes are exported to Asia – in 2004/05 $260 million worth of steel scrap and waste and $301 million worth of aluminium.

Returning to municipal waste. Municipal authorities rely overwhelmingly on landfill to accommodate wastes (2002/03 about 70%). Uses of landfill facilities face a gate fee (in Sydney around $50 per tonne) and a landfill levy imposed by state governments. Data on landfill disposal is poor but it seems to have been declining in use partly due to recycling which, in turn, is motivated by increasing levies.

There are costs of lost amenity in working or living near a landfill but these amount to only about 1 cent per tonne of waste. Overall externalities from modern, well-run landfills are low – probably around $5 per ton – and much lower than Alternative Waste Treatment (AWT) facilities which chemically treat wastes and which then recover biogas for electricity generation.

From a cost perspective landfill seems best.

Indeed, further tightening of regulations governing landfill should be carefully considered to avoid excessive charges on a cost-efficient treatment technology. Attention should however be directed towards better enforcement of existing landfill licensing regulations (p. 157-165).

There are 3 main policy reforms proposed by the PC on municipal waste disposal:

1. Correct pricing of access to landfill. Most Australian jurisdictions impose a levy on waste disposal to landfill in addition to gate fees. Many of these levies are designed as revenue sources or to divert waste from landfill irrespective of the costs of achieving this objective. Hence they are often much too high. Moreover such levies are often administered in a blunt way and do not distinguish between type of facility, location and type of waste. From an environmental perspective the correct charge on disposal should reflect externality costs not such issues. Excessive levies impose unnecessary costs on business and may encourage illegal dumping.

Indeed one paradoxical effect on setting high landfill levies may be to discourage recycling – such levies are a tax on the residual from recycling and hence may discourage it.

2. Regional administration of waste disposal to achieve scale economies. In large urban centres such centres should not be run by local government. Fewer larger facilities are required and the scale economies involved in waste treatment make regional provision of services (as occurs with water, sewage and electricity) more efficient. In addition, State and Territory Governments should ensure that local government operated landfills that do continue to operate comply with licence conditions and charge users the full costs of waste disposal.

3. Full cost pricing of waste services to households. The PC seek direct pricing of waste to households at the full social marginal cost of providing this service rather than an indirect annual charge to the local council in 'rates'. With direct full-cost pricing households who dispose more would pay more - an idea now partially captured by local government charging more for larger-sized rubbish bins.

Even more sophisticated 'pay as you throw' (PAYT) approaches could be adopted if costs of such things as weighing garbage fall. PAYT schemes could involve varying frequency of rubbish collection, bin volume, use of different sized garbage bag or even variable weight pricing (p. 188).

Such PAYT charging will reduce waste volumes – the figures the PC cite suggest by between 26-46% (p. 189). But such sophisticated schemes would involve considerably higher administrative costs.

I found this the PAYT idea the least satisfactory proposal in this report. The main difficulty with such pricing, even ignoring higher administrative costs, lies in the incentives it provides to illegally dump rubbish, as the PC itself notes (p. 188-192). PAYT pricing of legal disposal might induce illegal disposal of waste in areas, such as bushland, where it imposes costs that are perhaps more significant than the efficiency losses resulting from underpricing of legal-disposed waste. Indeed the PC's report suggests that littering and illegal dumping of waste are very significant issues in Australia (p. 32, p.74).

Evidence on illegal disposal is scant – data from the Netherlands suggests that PAYT led to a 4% increase in illegal disposal in a country where opportunities to illegally dispose of wastes are presumably much lower than in Australia (p. 192). Evidence in the US suggests a 5% diversion of waste to surrounding municipalities without PAYT. With volume-based PAYT there are also incentives to compactify waste although this is less socially-harmful.

In formulating its final report the PC need to seek better evidence on the effects of PAYT on illegal disposal and on the costs of such disposal. In bushland areas around Melbourne and Sydney one sees evidence of such waste everywhere and it is certainly inaesthetic. One would want to consider upgrading the scale of penalties and the costs of increased monitoring of illegal disposal - were PAYT to be seriously considered. A comprehensive cost-benefit case for PAYT should account for this.

There are many other interesting ideas in this report – for example the role of container deposit legislation (CDL) to improve recycling and to reduce littering of such things as soft drink and other beverage containers. These schemes are effective but often much more costly than curb-side recycling (p. 201-203) which the PC sees as a more effective alternative.

But this is the subject for another post - I recommend the PC Reprt itself if you have an interest in practically important Australian environmental issues. Its a particulartly good read if you are interested in environmental economics or are looking for a thesis topic.

Tuesday, May 30, 2006

Videos for economics 101

Truck and Barter provides a useful list of web-based video resources for introductory economics units here. On top of their list are Video Economics and Brad De long’s Morning Coffee Videocasts.

According to T&B the University of Munich have video lectures including a debate between James Buchanan and Richard Musgrave.

The World Bank and IMF have webcasts; their book presentations and special lectures like the Global Seminar Series are good.

Places like Cato and AEI are good - a sample is Undercover Economist, Moral Consequences of Economic Growth, How Economics Can Help Courts Devise Legal Standards for Dismissing Claims and Summary Judgment, Myths, Lies and Downright Stupidity.

Monday, May 29, 2006

Random blogwalk

John Quiggin makes a sensible re-post on the nuclear power debate and on connections with global warming denialism that I found sharp. It gives a good general perspective. The New York Times discusses issues of carbon capture in coal-fired plants – the most plausible alternative to nuclear but a technology which is not catching on in the US. Finally, The View from Benambra has a couple of interesting posts on nuclear power including a suggestion to compensate those living close to a plant to offset NIMBY sensitivities.

Some top posts at Truck and Barter. Mainly economics - but other things as well. There are numerous good posts. The post on Russian demography reflected something I was vaguely aware of – but this makes it precise. I am a big fan of Daniel Barenboim so these broadcasts (cited by T&B) interest me. More excellent stuff at New Economist on the ‘resource curse’ and a good reference to Economist’s Views on the positive role of blogging in economics. Jason Soon makes a nice post on Nietzsche’s views on complementarities between pleasure and displeasure and I liked his subsequent post on the political attitudes of economists – we are a lovable, broadminded lot as I argue in the ensuing comments section.

Ken Parish makes sensible remarks on remote aboriginal settlements at Troppo that help put the issue in context. James Farrell subsequently wrote a nice post on the same topic but I can’t link to it since Troppo went troppo. The Four Corners show tonight on the aboriginal settlement Imanpa said a lot in terms of the hopelessness of the aboriginal situation. Political failures in a small, partly corrupt, generally incompetent community that has terrible financial problems and which sniffs petrol. I found this one of the most confronting Four Corners shows. No good ideas, no smart theories, I have no idea. This is tough.

Tim Blair provides a good example of the standard debauched leftwing thinking on Iraq.

Via Andrew Leigh I got useful links for graduate students in economics from Greg Mankiw which if you teach economics you should stick on a noticeboard – I will. Mankiw also has a nice piece on how to avoid wasting time. Joshua Gans has spawned a sub-blog on the game-theoretic consequences of spawning that creates some nostalgic memories. He also links up with Andrew Leigh on a joint post on queuing in supermarkets. I liked this as it is fun and reflects a weekly decision problem for me as I do the weekly shopping. Their theorem is that when working out which checkout queue to select you make a choice and stick to it. I often do this but don’t always select the shortest queue – I always position myself closest to a large set of non-operating queue lines on the off chance they will open them – this often happens. Also if there is a good enough looking ‘checkout chick’ I’ll pick her queue irrespective of queue length. Finally, I sometimes do switch from one queue to another even though there are switching costs. Most switching costs are sunk and should not influence your current checkout choice – particularly if the nubile checkout operator you select, while superficially attractive, turns out to have pimples. There are niche habitat selection issues here that also might drive a switch – one niche looks good but then you find (on closer inspection) it is not so good and hence switch.

Larvatus Prodeo is becoming a drivel blog – the Women’s Weekly blog of Australia’s political left. And Tim Dunlop seems confused – he can’t work out why the Australian Labor Party wants to avoid electoral irrelevance. He continues with an awful, vulgar post expressing his hatred for John Howard. Tim Lambert is on about being ‘wrong and foolish’ on global warming at Deltoid – he has focus I’ll give him that – it is just unrelenting. Crooked Timber has abundant words but low content – this piece cited is about buying cheap collections of DVDs and then forcing yourself to watch them – ‘snarking-out’ it is called – but just silly – the author follows up with a piece recommending cheap graphic novels - comics. Currency Lad makes good points on the mess in East Timor but has a narky anti-left political aspect.

And that was my somewhat random walk around the blogosphere this evening.


Sarsaparilla is a new, visually-attractive literary blogsite, which already has good posts. I thought Wendy's post on the demise of the novel was provocative. This mainly concerns a claimed decline in the quality of the modern novel and the terrible fact that modern writers need not be poor.

I am also interested (as an economist) in the demand for reading novels. There are many competitive electronic media out there and the value of people's time has risen. Is there any data on book sales and reading habits that tells us about the impact of television, the internet and magazines on the demand for the novel?

Taxing booze again

I have previously argued the case for volumetric rather than value-based taxes on booze. If external costs are identified with alcohol consumption then it makes sense to tax alcohol content not the value of alcoholic products. To some extent this is already done through lower taxes on light beers.

This issue can be directly connected to currently-discussed health and crime issues facing aboriginal Australians. According to an unpublished report discussed in today's Australian, large increases in alcohol sales has fueled a dramatic rise in violence, deaths and hospital admissions among aborigines. A major component of this growth has been in sales of cheap cask and fortified wines. Sales of fortified wines have fallen over the last few years but still remain at very high levels. Moreover, such falling sales are offset, more than four-fold, by increases in bottled and cask wine sales.

Of course one can argue that alcohol consumption is a matter of personal choice and that no externalities are involved. Even though alcohol is a neuro-toxin and has numerous other health effects - and few demonstrable benefits for health - it can be argued that the decision to destroy your brain and liver is rationally taken after a fully-internalised computation of costs and benefits. I think if you believe this you are gullible given the evident scale of the self-control issues involved as evidenced by the existence of groups such as AA.

But even if you dispute the existence of such self-control problems Australia does have a publicly-funded universal-cover national health scheme. Australians also fund police and social services in aboriginal communities where violence and health problems are spiraling out of control. So long as we retain such schemes there are social as well as private costs from excessive intake of alcohol and a standard efficiency-improving argument for taxing heavily to internalise social costs.

Afterthought (1/6): An issue in taxing low-value high-alcohol fortified wines and cask wines might be the incentives to switch towards drinking of metholated spirits, petrol sniffing and perhaps other drugs. I am certain that this types of substitutions will occur but uncertain of the extent. This could limit the case for volumetric taxes - empirical evidence on cross price elasticities is required.

Sunday, May 28, 2006


The Australian firm Multiplex Constructions (MC) (part of the Multiplex Group) bills itself on its website as offering construction services and a 'highly successful track record of delivering large, complex projects on budget and often ahead of schedule’ If I was MC I would rewrite this part of their website description – it just looks odd given the disastrous outcome of their involvement in the Wembley Stadium project.

Wembley Stadium, the old home of English football, was demolished in 2003 and Wembley National Stadium Limited planned a new stadium. It sought tenders for the construction by first indicating a maximum amount it was prepared to pay and then renegotiating a little. MC was the only firm that actually submitted a bid. It did so for a fixed price contract of ₤445 million with a tight completion timetable. Many now believe that the reason no other firms bid was that the maximum set by WNS was too low. If this is so then MC, by successfully tendering for the project, suffered a winner’s curse.

Indeed one wonders why MC was not suspicious about the absence of other bids from established European construction firms. These competing firms might reasonably suppose, given their good local knowledge, that they could compete with MC.

Many industry commentators believe MC was keen to do the project, perhaps for an expected low return, to get their ‘foot in the door’ with a major, visible UK project – a loss-leader that would lead to greater future business there. Dreams of a triumphant entry into the UK market however have turned into a nightmare. MC’s reputation in the UK has been shattered by cost blowouts of at least ₤200 million and by late completion of the project by at least a year. It is the biggest loss on a construction job in British history.

What went wrong? Apart from apparently under-pricing the project two difficulties seem to have developed: (i) problems MC faced in dealing with subcontractors in a business environment very different from Australia and (ii) underestimating the technical complexity of the project. The latter problem became somewhat acute because Multiplex had only limited experience in building sports stadiums and nothing on the scale of Wembley. The Wembley design was technologically complex partly because of the 133 metre high arch - the centerpiece of the stadium – from which will be suspended a retractable roof.

The whole episode sounds strange. Tendering for a highly visible, though technologically complex, project in a new market where, because of a lack of a local production base, there would inevitably be extensive reliance on sub-contracting with firms that would be new to MC – relational contracts and mutual understanding were likely to be minimal

Critically, Cleveland Bridge UK was hired for ₤60 million as the project’s main steel contractor and was, among other things, charged with steel work in the arch structure. But by the second quarter of 2003 MC and CB were in dispute.

By that time CB claimed there would be ‘substantial cost increases and delays and disruptions’ to the steel works because of late and incomplete design changes. MC admitted there were cost increases and delays time but it disagreed with CB's estimates of their size and effect. In December 2003 CB told MC that the steel works face significant cost increases and a delay of 50.5 weeks. MC wrote back to CB rejecting the claim. In June 2004 the arch was erected and MC (unsuccessfully) sought damages from CB by reneging on a due payment. In August 2004 CB wrote to MC saying it would not perform any further work on the project and would remove its workforce that day. CB then instituted proceedings against MC seeking ₤20 million damages while MC in return sued CB for at least ₤30 million.

MC claimed that CB was incompetent and attempting to ‘holdup’ MC (by asking for upfront payments for work done) while CB claimed that MC had more than 800 design changes in the steel contract which meant that the work they were asked to do was unrecognizable from that for which they successfully tendered. CB stood up to Multiplex in ways that subcontractors in Australia were unlikely to do. Moreover, as it has since emerged, CB’s actions occurred only weeks before CB went bust!

CB have now left the project and been replaced by the Dutch firm Hollandia on a cost-plus contract to complete the steel work. According to the Australian Financial Review (May 20-21) (subscription required) Hollandia’s estimated costs are ₤125 million on top of the ₤60 million already paid by MC to CB. The steel contract is thus 3 times over-budget and now, to further complicate matters, disputes have now developed between Hollandia and MC.

Business students here will recognize a host of standard issues of incomplete contracting – indeed someone will hopefully write this up as a business school case study. Apart from being intrinsically interesting as drama it illustrates many important themes in modern microeconomics – bidding issues, market entry problems, outsourcing and holdup issues, corporate culture issues and bankruptcy theory for just a start. What is a misery for the shareholders of Multiplex will priovide grim pleasures for academics teaching in business school.

The final outcome of the legal actions will be determined in the courts by Justice Robert Jackson on June 5 or 6. I’ll report back.

Final Remark: Much of the information for these notes comes from Geoff Kitney & David Rogers, 'The Stadium Built for Losers', Weekend Australian Financial Review, (Subscription required) May 20-21, p22-23. Additional useful information is at the ABC Four Corners website but this whole strory deserves a book or a PhD thesis at least. IO am scounting for information on the Multiplex episode and would appreciate any good references.

Saturday, May 27, 2006

Bad uranium economics

Brian Toohey in the Weekend Australian Financial Review (subscription required) states that:

'Nuclear energy is more financially viable in countries without Australia's low cost coal and natural gas reserves'.

This argument seems fallacious. As Australia sells coal and gas in international markets they - as with the U3O8 they export - have an opportunity cost that equals their value in these markets less transport costs incurred exporting them.

The same fallacy arises when people say that Iran has no economic reasons to develop nuclear power because of its abundant oil reserves. Again the proximity of such reserves has nothing to do with the case for or against nuclear power since Iran is a major oil exporter.

There are non-economic reasons for me opposing Iran's shift to nuclear technologies that I have discussed on this blog. There are also reasons that I think Australia should keep an open mind about the nuclear option (here and here). But these are independent of the fallacious reasoning adopted by Toohey.

Toohey's also opposes nuclear power on grounds that:

'If advances in 'clean' coal technology for removing the problem of greenhouse gas emissions prove cost effective - which seems likely - there will be no compelling commercial or environmental reason to switch to nuclear'.

This argument is not supported with evidence but it is at least helpful in clarifying the debate. We need to try to understand whether such technologies will become commercially viable. This debate has a long way to run.

Overfishing catastrophes

A 2004 Government report showed that most of Australia’s ocean fisheries are either over-fished or have uncertain status - there is not enough information to determine their status. Of 74 species, 14 were over-fished, 40 were uncertain and 17 were not over-fished. Last year the Australian Government set aside $220 million to help downsize the nation’s fishing effort.

Preventing the collapse of fisheries to extinction levels or to levels which remain low for very long periods is difficult because controlling catch levels can be difficult because of property right and open access issues. It is not true that a stable catch means that a fishery is stable and sustainable because the factors driving the natural regrowth of a fish population vary randomly – for example a change in seasonal wind patterns has been claimed to cause a collapse in the Australian gemfish fishery. The minimum scale of a fishery that permits the continued existence of a fishery – the critical depensation level – may therefore vary randomly. If stocks go below this level then the stock will not regenerate.

These issues are examined in a global context in a paper by Christian Mullon, Pierre Fréon and Phillippe Cury which examines the reasons for collapse of a fishery resource. An edited version of the abstract of their paper summarises the issues well:

The fear of a rapid depletion of world fish stocks because of over-exploitation is increasing. Analysis of 1519 main series of the FAO world fisheries catch database over the last 50 years reveals that 366 fisheries’ collapses occurred, that is nearly one fishery in four. The number of collapses has been stable through time since 1950s indicating no improvement in overall fisheries management. Three typical patterns emerge from the analysis of catch series during the period preceding the collapses:

(i) 33% of collapses are smooth with catch numbers declining regularly over a long period,
(ii) 45% of collapses are erratic with wild fluctuations in catches prior to eventual collapse,
(iii) 21% are plateau collapses where numbers drop abruptly after long, stable, high level of catches.

Using a simple model the authors relate the plateau-shaped collapses (these are the most difficult to predict) to surreptitiously increasing exploitation and a depensatory mechanism at low population levels. Thus, a stable catch over several years is shown to conceal the risk of a sudden collapse. This jeopardizes the common assumption that considers the stability of catch as a goal for fisheries sustainability.

This is important research. Fish are an important source of protein around the world – but particularly in developing countries. The current state of the world’s fisheries – and of the Australian fisheries in particular – is not good. Fish are a renewable resource that can help feed the world. But stocks of fish can be more stressed than current rates of yield suggest and fishery collapses can result in irreversible losses.

Thanks to Greg Price in The Weekend Australian Financial Review (subscription required) provided two of the three references cited above plus valuable discussion.

Bachelor of Business

A significant development in undergraduate business education around the world over the last decade or so has been the growth of Bachelor of Business (B.Bus) Degrees. These degrees have the stated (and laudable) intention of giving students a broad-based education in business skills.

While this intention is admirable there is controversy about whether commercially-oriented motives to build-up student numbers have in fact led universities to teaching dumbed-down generic curricula that provide few immediately relevant vocational skills and no general analytical skills that will help managers solve business and other problems when they do encounter them. Cheerleaders for these programs often use the word ‘breadth’ a lot. Cynics often see this as their euphemistic way of indicating a preference for low analytical content programs that teach people a very little about a lot. Detractors specifically criticize B.Bus programs for failing to teach analytical skills and the ability to think abstractly about complex problems so that they can be simplified and dealt with tractably.

In particular there are difficulties in teaching courses in management to students with little or no business experience. The management units taught, it is sometimes claimed, can degenerate into gobbledygook and psychobabble.

Is this all changing? An Business Week article suggests that, in the US, the B.Bus degree is acquiring new prestige and even stealing market share from conventional MBA programs. The article itself is worthy of study as is the whole Business Week approach to analyzing the teaching of undergraduate and MBA style business degrees. One quote from the article about the various programs stood out:
‘There are those, including many at or near the top of the list, that are following a rigorously academic model, with a heavy emphasis on economics, statistics, finance, and accounting. Programs like Wharton's fall into this group, which generally do not require - or give credit for - internships, even though many students get them on their own. They also use MBA teaching methods such as case studies, simulations, and team projects.

But at the great majority of business programs, students are exposed to less business theory - too little, in the view of some experts - and a heavy dose of practical training. A quarter century ago, virtually every business program in America followed the latter model. At top schools that's no longer the case. ‘What
you're seeing is a polarization’, says Barbara E. Kahn, director of Wharton's undergraduate business division. ‘This is different from what it was 25 years ago. It wasn't the academic experience it is today’.’

This is a positive sign to me. If B.Bus programs can come to emphasise the teaching of core skills in economics, statistics, finance and accounting in a rigorous academic setting they will certainly provide a real service. Emphasising purely vocational training in universities misrepresents the core competencies of universities and misunderstands the nature of the market for business managers.

This does not mean that business case studies should not be used. To the contrary such studies are a valuable way of teaching and illustrating theory. But the core theoretical content needs to be there in the first place. A single course in microeconomics and a few weeks of game theory are not enough to provide undergraduates with an intelligent appreciation of the role of the decision sciences in business.

One useful way for Australian B.Bus programs to up their game would be to study the characteristics and curricula of the top-ranking US undergraduate schools.

I got some extra research money recently so I’ll try to get a survey of some sort done. I’ll report back here when I do.

Friday, May 26, 2006


I've got a good collection of recorded music - about 500 music CDs and a large number of audio tapes (I like the tape sound) plus several hundred record albums.

Living in Melbourne over the last decade I have enjoyed live classical music at the Melbourne Arts Centre (Melbourne Symphony, the youthfully, magnificent Australian Chamber Orchestra and Musica Viva). I mainly listen to classical music these days (all the standard stuff but with a particular fetish for the weirdly grandiose Anton Bruckner and, at the opposite end of the spectrum, for Arnold Schoenberg) but I also like the contemporary music I enjoyed in my youth in the 1970s (Dylan, The Doors, Grateful Dead, Quicksilver Messenger Service, Country Joe and the Fish, Rolling Stones, Leo Kottke and the really errant perversities of this era Nico and the Velvet Underground).

Its a weird mix of musical tastes that has, as far as I can see, no sensible rationale at all. On a typical evening of listening to music, I might follow up what I regard as Bruckner's greatest work, his 9th symphony (an astounding piece of music dedicated to Bruckner's beloved God) with Dark Star by Jerry Garcia and the Grateful Dead and then revert to a stunningly complex string quartet performance by Beethoven or Bela Bartok.

I cannot make sense of these diverse tastes to myself, other than to say that, with respect to music, my tastes are decidely convex - I like diversity. In other words I cannot explain my own preferences at all. Richard Wagner gets my blood up (lets all go on a military march) while Donovan makes me nostalgic for youthful days surfing on NSW's beautiful north coast.

Anyway, to get somewhat towards the non-point of this meandering post, I today purchased a 320 gigabyte external hard drive on which I intend to record (in MP3 format) my entire music collection over the coming months. I am stunned at the cost of this storage device - at $450 I can store nearly 10X the data stored on my home PC and over 300X the data I could store on my office computer a decade ago. It is a buzz - technology has delivered unbelievable power, pleasure and convenience in the pleasure as well as work-oriented aspects of our lives.

Losers or victors?

Tony Blair and George Bush are in terminal decline are they not because of the Iraq war? A typically spot-on piece by Frank Devine in The Australian suggests perhaps not.

Max Boot, a senior fellow at the Council for Foreign Relations, writes:
'President Bush has not made the most crucial mistake: he has not lost his nerve in difficult times. Thanks to the President's fortitude, the Iraqi people's resilience and the skill and bravery of the coalition armed forces, victory is still the most likely outcome'.
And will those who trumpet every setback to the cause of the Coalition express regret for their efforts to thwart this effort? Or will they then move onto their next misconception and fashionable cause?


Crikey today gave us some entertaining and accurate examples of doublespeak.

"Close personal friend" – lover
"Assisting police with inquiries" – guilty
"Sources close to Michael Kroger" – Michael Kroger
"Kerry Packer's friend" – Kerry Packer's mistress
"Colourful character" – a crook.
"Flamboyant" – gay
"Tired and emotional" – drunk
"I've decided to spend more time with the kids" – sacked
"The CEO has full support of the board" – about to be sacked.

Its true. And these translations show the way we read the news. How for example do you read this?

Wednesday, May 24, 2006

Mid-week review

The limitations of the Blogger software I use are becoming apparent with time and I am thinking of a switch to WordPress. The latter is 'geekish' which worries me as I am not a computer geek. Blogger, while simple to use initially, can be awkward in simple ways. For example, the list of posts you can edit is capped at 300 posts and as this is my 298th I will soon have only limited direct access to earliest posts via the search function - I will record an index file that I will keep online so I can search. But ultimately I will need to switch to better software.
There is a transfer function copying the Blogger log into Wordpress. Does anyone know if it works? Whether it is reversible if formatting gets corrupted etc? If anyone knows about this their views are welcome (here or by email).

I am working on the new site in Wordpress but progress is slow as I am at present mega-busy earning a living. Isn't it a pain?

Your views, as usual, are welcome here on blogging or any other issues.

John Winston Howard’s moral complacency

Robert Manne discusses John Howard’s lack of anguish for the consequences of the war in Iraq. According to RM John Howard does not understand the gravity of the allied actions in Iraq.

RM is upset that JH is not agonising over the difficulties the allies are encountering. The war he claims, is unjust and immoral and based on false claims. But, to RM's annoyance, JH is relaxed, has enjoyed reasonably good opinion polls and has been dined in Washington with black-tie dinners and 19-gun salutes. To RM this is awful:

'Even if Howard continued to defend his actions strenuously, if he at least was anxious or agitated about this state of affairs, I would be able to feel for him some respect. What unnerves me is the calmness of his demeanour, the apparent near-entire absence in him of a troubled conscience or the kind of self-scrutiny that might lead him eventually to remorse. Howard is one of the most nimble but also one of the most morally complacent politicians I have ever observed.
…Does he, do we, feel nothing for the families of the tens of thousands of Iraqis whose lives have been lost in the killings and the murders that have occurred since the invasion of Iraq?’
The last bit of this quote is a cheap shot from a distinguished public intellectual. JH (even more than RM) will have a keen sense of the value of life. Even his critics will agree, JH is a realist.

But JH rightly sees the deaths in Iraq as caused by those who seek to delay the worthwhile ideal of setting up a reasonably pro-Western regime in Iraq that does not torture or gas its citizens. And it is these terrorists that the US and its allies are attempting to displace and who, the morally complacent 'left' in Australia and elsewhere, are supporting by calling on the allies to abandon Iraq to its 'fate'.

But the first part of the RM quote reflects exactly why most Australians like John Howard – he is miles ahead of Beazley in the polls with sound approval ratings. Howard probably has doubts but it is not his approach to publicly present them. He is a consummate politician who deals with the reality of situations not with his personal regrets. If he is morally complacent that only reflects his conviction, sense and strength.

Tuesday, May 23, 2006

Waste, trash, garbage

What attracts me to garbage? That invites a potentially impolite response but it has been a long-standing fascination. The Productivity Commission released its draft Waste Generation and Resource Efficiency report today and it promises to be a good read – it’s a long document so it will take environmental analysts time to get their head around the whole thing. Note the PC is again embarking on an environmental mission - it is running out of other industries to reform!

One immediate fun conclusion, already taken up by The Age, this morning is that the long-discussed campaign to scrap the use of plastic bags might not be worth the effort. Generally recycling options need not make much sense. Quote:

‘….while more Australians are recycling than ever before, it can be a costly and ineffective method of reducing waste….

Presiding commissioner Philip Weickhardt said the reduction in plastic shopping bags had simply resulted in more Australians buying large rubbish bin bags. ‘Before you ban them, you need to think carefully about whether there are cheaper options,’ he said. ‘This appears to be a heavy-handed approach’.’
Basically most bags are used to package household garbage and end up being disposed of without significant environmental harm. My friends in the green movement will dispute it but economic logic not greenie romanticism again reveals itself to be the key decision-making discipline in the environmental area.

Monday, May 22, 2006

Aboriginal men attacking aboriginal women & children

The cartoon isn't funny at all. But it does make a sad point that people tend to treat the terrible violence described in the press recently against aboriginal women and children as an 'aboriginal problem' that can be excused in cultural terms. It isn't - it is a human problem and a problem in white as well as black society - misogyny (in particular) is pervasive. Indeed there is something intensely racist about dismissing the current situation as an 'aboriginal problem'.

ALP President Mr Warren Mundine made sensible statements yesterday on the issue of sexual violence against women and children perpetrated by aboriginal men. Mr Mundine rejected as ‘a total load of nonsense’ the defence that this physical abuse was ‘customary law’ or ‘secret men's business’.

‘When you're talking about sexual abuse of children, you're talking about sexual abuse of women, you're talking about domestic violence, these are criminal changes and they need to be treated with that full length of the law’.

Mr Mundine also rated yesterday as ‘not a bad idea’ suggestions that the army should become involved in building infrastructure in run-down communities.

Women or children at risk from abuse should be separated from that risk - it is their welfare that is paramount. There are at least two ways of doing this. If the perpetrator is a family member that person should be removed from the household and their crime addressed . For those facing more general community risks where women or children cannot be protected there is the need either for more effective policing or – in the limit – for removing at-risk parties from the risk. Safe houses provide a solution and I am sure there are others. But it is wrong for people to dismiss this as an intractable 'aboriginal problem'.

Public housing for aborigines

Looking at this photo of an aboriginal kitchen from The Australian one might ask where’s the Spray & Wipe? Apart from the dirt, the dog and the food scraps lying around it is not a bad looking kitchen. There is a modern stove and what looks like a freezer. The kitchen itself is not faulty but the care taken of it is appalling. Building new public housing for this house's occupants might not help to improve their living standard - at least in the longer-term - as much as one might think.

The story with the photo sees the housing as simply sub-standard. The house is 40 years old and, the story claims, should be demolished. On this basis my own home should be demolished since it was built in 1923. Its not right. A basic issue is that those living in the public housing illustrated either don’t know how to look after their home or don't have incentives to do so. It may be an instance of ‘traditional tribal societies colliding with the 21st century’ but the lack of care stands out. This means that measures to help aborigines by providing public housing are both expensive and ineffective.

The article argues that health problems and sexual abuse of children are related to overcrowding - I will post on that separately although one can see from the photo that health concerns here will not only be related to crowding. The picture suggests that aborigines need basic education on issues of house care and maintenance - buying expensive capital assets and throwing dollars at their occupants won't in itself resolve aboriginal problems.

Sunday, May 21, 2006

Conserving biodiversity in suburbia: Waterways Estate

I support maintaining biodiversity conservation zones close to the centers of large cities despite the fact that such land has a high opportunity value in urban or industrial uses.

There are two reasons for my preference:

(i) Costs of accessing such resources are low for city-dwellers so that, in simple terms, their existence yields lots of consumer benefits – they have very high amenity values due to the low costs of accessing them.

(ii) Such resources can have genuine conservation effectiveness – as an example take the Melbourne Wildlife Sanctuary at my own workplace, La Trobe University, which has recorded over 300 species of native wildlife including, in recent years, comparatively rare species such as the little bittern - I have seen this rare bird species there myself twice.

Such conservation reserves do not preclude the coexistence of nearby urban and even industrial settlements. In the La Trobe University case the little bittern has been seen in a wetland immediately adjacent to a newly-established housing estate.

The Waterways Estate in Melbourne’s south-east is a large-scale attempt to integrate urban development with biodiversity conservation. It comprises a 700-home housing development project with housing covering 40% of the area but including a constructed parkland and wetland covering 60% of the area. It is indeed the largest constructed wetland in Victoria. The land was originally the Carrum Carrum Swamp but this was drained in 1870 and the area subsequently used rather ineffectively for farming.

A 1992 Dandenong Valley Report sought to rehabilitate the wetlands and the new landowner, the Portland House Group, sought to rezone the land. It employed Australian Ecosystems to restore the wetlands. The objective was to provide a commercially-viable housing project that would also provide aesthetic and recreational benefits to residents and the local community and, additionally, provides more general ecological services such as water treatment and habitat for native flora and fauna.

Housing on the estate must achieve a 5-star Sustainable Energy Authority energy ranking and include a 4,500 litre rainwater tank. A ban on cat ownership is enforced as it should be.

This has been a successful project. The project has won various environmental awards – the UDIA Environmental Excellence 2001, Water Sensitive Urban Design Award 2002, National Environmental Award 2002 and many others more recently.

Habitats for native flora and fauna have been created. Monitoring results from 2003 listed over 100 species of birds, 6 species of frogs and 184 species of indigenous plants including 9 species of rare or threatened plants. The wetlands also treat water diverted from the Mordialloc Creek naturally before it enters Port Phillip Bay.

It has also been commercially successful in the sense that properties on the various subdivisions are selling well at prices from $350,000-$950,000. High income house-buyers are prepared to pay well for living in a quality natural environment and, in addition, a sound community environmental outcome has resulted. Aesthetic values and enhanced property values accrue as external benefits in the local region.

In one sense the success of the project is a surprise since many of the public good and environmental values are not marketed. That it has been a success provides a positive case for attempting to encourage such projects in the future. Indeed this is becoming an important form of development around the Melbourne area. For example, in August 2005 an environmentally-friendly housing estate Koolamara Waters was built at Ferntree Gully, Melbourne with wetlands designed to accommodate platypus.

By the way, the Wikipedia has only a stub for an entry on Waterways – someone more knowledgeable than me should think about writing one. If no-one does I will need to have a go myself. This project is an important example of how biodiversity-friendly urban development can proceed.

Saturday, May 20, 2006

Falling global poverty

I have posted before on the dramatic reduction in extreme poverty that has occurred globally since 1980. A comprehensive study of the world distribution of income is provided by Xavier Sala-I-Martin in a recent Quarterly Journal of Economics covering 1970-2000. There has been a spectacular, recent reduction in world poverty.
‘We estimate the World Distribution of Income (WDI) by integrating individual income distributions for 138 countries between 1970 and 2000. Country distributions are constructed by combining national accounts GDP per capita to anchor the mean with survey data to pin down the dispersion. Poverty rates and head counts are reported for four specific poverty lines. Rates in 2000 were
between one-third and one-half of what they were in 1970 for all four lines. There were between 250 and 500 million fewer poor in 2000 than in 1970. We estimate eight indexes of income inequality implied by our WDI. All of them show reductions in global inequality during the 1980s and 1990s’.
The overall reduction hides uneven performance across regions. East and South East Asia account for a large fraction of the success. Poverty rates and numbers have worsened in Africa across the last three decades. Poverty was an Asian problem 30 years ago but is primarily an African problem these days.

The overall improvement is encouraging. One of the UN’s Millenium Project Development Goals was to halve by 2015 the fraction of people in 1990 who lived on less than $1US per day. In 1990 about 10% of the world’s population lived on less than $1US per day. The target will be met when the fraction is 5%. By 2000 the figure was 6.3% so 69% of the target has been met. Africa remains a key problem but wrong to be overly pessimistic – there was pressimism, on prospects of Asian countries 30 years ago. Jeffrey Sach’s believes directed international aid campaigns will work in Africa.

Big gains from cancer cure

In a forthcoming Journal of Political Economy paper (previewed here) Kevin Murphy and Robert Topel (M&T) estimate the value to the US of curing cancer would be $50 trillion. Even reducing overall cancer risks by 1% could be valued at nearly $500 billion. These figures are large but cancer killed 570,000 Americans last year.

According to M&T:

'We distinguish two types of health improvements - those that extend life and those that raise the quality of life'

'As the population grows, as incomes grow, and as the baby-boom generation approaches the primary ages of disease-related death, the social value of improvements in health will continue to rise'.

Many critiques of rising medical expenditures focus on life-extending procedures for persons near death. By breaking down net gains by age and gender, Murphy and Topel show that the value of increased longevity far exceeds rising medical expenditures overall. Gains in life expectancy over the last century were worth about $1.2 million per person to the current population, with the largest gains at birth and young age. Again, according to M&T:
'An analysis of the value of health improvements is a first step toward evaluating the social returns to medical research and health-augmenting innovations'

'Improvements in life expectancy raise willingness to pay for further health improvements by increasing the value of remaining life'.
M&T also chart individual values resulting from the permanent reduction in mortality in several major diseases - including heart disease, cancer, and diabetes. Overall, reductions in mortality from 1970-2000 had an economic value to the US of $3.2 trillion per year.

I have not seen a full preprint but this looks like exciting research.

Friday, May 19, 2006

Return of the brainless hussies.

I quite enjoyed this post on Salon but mainly want to post the image above which brightened my day.

Three interesting links

I enjoyed Laura Miller on Baruch Spinoza, Jason Soon on road pricing & Joshua Gans on R&D.

(i) This nice article on the philosopher’s philosopher Baruch Spinoza. Ideas reviled and rejected but the 'athiest Jew' curiously respected.

(ii) A useful post on the case for road pricing rather than increasing road supplies by Jason Soon at Catallaxy. Many of the discussants focus on the political feasibility of pricing. An interesting related line of enquiry links road supply decisions with efficient pricing so its not really an either/or issue. For example if there are constant returns to investment in road infrastructure, and you are making a profit out of efficiently-priced roads, they should be expanded. This used to once be considered abstract theory but with comprehensive electronic road pricing it might become a practical proposal. Of course if you don’t have efficient pricing you will spend excessively on roads to mop up the congestion.

I am a strong supporter of comprehensive pricing of roads at short-run marginal cost. But I agree with those who recognise the political constraints in doing so. You can improve the acceptability of pricing if you offer people alternatives - for example, the chance to drive in an uncongested priced lane or a congested unpriced lane. Also improve acceptability if tolls are spent on visible public goods relevant to those affected by the tolls. And finally improved acceptability arises if you make it clear that tolls will result in taxes being cut elsewhere so that pricing is revenue neutral.

By the way, charges on roads yield a double dividend - they raise revenue and clean up a congestion externality. They are a better idea than relying on gambling taxes which are highly regressive and which rely on the social evil of problem gambling that destroys the lives of so many working people. Problem gambling is very much supply-determined (no venues, much fewer problems) so a swap from relying on poker machine taxes to congestion charges advances community welfare.

(iii) An intriguing post by Joshua Gans on a disappointingly inconclusive report by the Productivity Commission on the impact of R&D. There is nothing wrong with the report itself – it seems to be an honest piece of econometrics and that is what was sought – but doesn’t seem to involve much creativity in thinking through the basic ideas. Joshua quite rightly emphasizes the important issue of borrowing or leeching technology from overseas.

Australia faces a portfolio problem in allocating effort between various R&D priorities and leeching. We need to do our own R&D in specific Australian areas (agriculture, minerals industry, environmental management) and I suspect that a more general R&D effort helps us to more effectively leech. But apart from that – we are a small open economy and we should be able to leech a lot. Universities and groups such as the CSIRO I hope understand that.

Opinion polls and the war on terrorism

The latest US opinion polls suggest that only 31% of Americans support George Bush. Only 39% now support his decision to intervene in Iraq compared to 47% in January. He has even lost support among conservatives – according to one pollster his approval among gun-owners and evangelicals has fallen to 50% or less. His lax spending and immigration policies are unpopular among even conservatives. A discussion of the issues troubling Americans is here but the standout issue is Iraq – 59% of Americans believe the decision to invade Iraq was a mistake. Bush’s unpopularity limits his ability to manage Congress. Indeed the Republican Party is in trouble.

Internationally too President Bush has few allies. One key ally is our own Prime Minister Howard (who, by my judgment, is doing reasonably well in local opinion polls). Another ally is UK Prime Minister Blair who, however, is facing similar problems to Bush – only 29% of the British population are reasonably confident Blair is taking the right decisions. Blair will quit in July 2007 while President Bush will remain president until January 2009.

The Economist’s editorial remarks on the Bush/Blair partnership and on the triumphant reaction of leftwing critics to their crumbling ‘Axis of Feeble’ are interesting:

‘Critics of the improbable partnership—those who think Mr Bush and Mr Blair overreacted to September 11th, lied their way into Iraq, trampled over law and liberties and inflamed the very clash of religions that Osama bin Laden was so keen to ignite—will rejoice. In a world of one superpower, some say, people are safer when its president is too weak for foreign adventures. They are wrong.

That Mr Bush has made big mistakes in foreign policy is not in doubt. He oversold the pre-war intelligence on Iraq, bungled the aftermath, betrayed America's own principles in Guantánamo and Abu Ghraib, ignored Mr Blair's pleas to restart peace diplomacy in Palestine. But America cannot fix any of these mistakes by folding its tents and slinking home to a grumpy isolation. On the contrary. In his belief that America needed to respond resolutely to the dangers of terrorism, tyranny and proliferation, Mr Bush was mainly right. His chief failures stem from incompetent execution.

What is required when Mr Bush's term ends is a president no less committed to the exercise of American power when it is necessary, and no less willing to rise to external threats. Perhaps that will be a John McCain or a Hillary Clinton. But in the meantime, the world won't wait. However weak he is at home, Mr Bush still has duties abroad. He must ensure that America is not bundled out of Iraq before its elected government has a chance to stand on its own feet. He must hold the line against a nuclear Iran. He needs to push harder for an independent Palestine, continue the fight against al-Qaeda, resist Russia's bullying of its neighbours and help America come to terms with a rising China. If he is wise, he will work harder than before to enlist allies for these aims, even if America must sometimes still act alone. But it will be harder and lonelier without a confident Tony Blair at his side’. (my emphasis).

I agree. President Bush’s opposition to terrorism is sound but the terrorists, by killing innocents and conducting a blood-based propaganda war designed to wear down US public opinion are winning. The political left who delight in a naïve anti-Americanism, and those on the right who confuse a difficult military experience ex post with poor judgement ex ante, are not helping the legitimate fight against terrorism. The point is to separate legitimate criticisms of the Bush administration (and there are many) from falling victim to terrorist propaganda tactics.

Thursday, May 18, 2006

Sun, surf & birth of new economic model

Interesting views on the ‘Australian Model’ from the Financial Times . (Via Truck and Barter and Economist’s View).

‘It is a developed country that enjoyed faster economic growth than the US over the past decade. Yet it also offers universal healthcare and other social welfare benefits that the US does not. Unemployment is similar to America’s, but without the glaring income disparities that characterise US growth. It is a country that seems to have achieved a sweet spot, combining the vigour of American capitalism with the humanity of European welfare, yet suffering the drawbacks of neither. And it manages this while keeping a consistent budget surplus. That country, rolling into its 16th year of uninterrupted growth, is Australia’.

Wednesday, May 17, 2006

Mid-week review

I've been thinking about the major decline in US public support for President Bush and the implications this will have for US foreign policy and the war on terrorism. I am pessimistic on the outlook - the asymmetric warfare theorists in terrorist groups seem to be successfully advancing their objectives. I'd be interested in your views on how you see the future unfolding.

That is a serious request. I'd also be interested in your views on lighter matters. Feel free to comment on anything you like.

Update: The Australian Financial Review's editorial (18/5) (subscription required) sees the weakness of Mr Bush as undesirable from a broader perspective - it is better for the US to be globally engaged than in retreat - but sees the strong personal alliance between Mr Bush and Mr Howard as offering the opportunities to advance Australian interests by, for example, pushing Mr Bush to strengthen US efforts to bring a faltering Doha round on trade liberalisation to a successful conclusion.

Asian student performance

Why do Asian students do so well academically? Nicholas Kristoff asks this for the US and provides answers relevant to Australia.

Kristoff argues:

‘…stellar academic achievement has an Asian face… .Among whites, 2% score 750 or better in either the math or verbal SAT. Among Asian-Americans, 3% beat 750 in verbal, and 8% in math. Frankly, you sometimes feel at an intellectual disadvantage if your great-grandparents weren't peasants in an Asian village.

…..One theory percolating among some geneticists is that in societies that were among the first with occupations that depended on brains, genetic selection may have raised IQ’s slightly — a theory suggesting that maybe Asians are just smarter. But I'm skeptical, partly because so much depends on context’.
A more plausible reasons for strong Asian performance is that immigrant families focus on their kids getting ahead. Also many Asian kids see the sacrifices their families make and both (i) feel obliged to repay their parent’s efforts, and, (ii) seek a better life for themselves. Ethics too – such as Confucianism encourage a reverence for education and for hard work.

Kristoff concludes:

‘…the success of Asian-Americans is mostly about culture, and there's no way to transplant a culture. But there are lessons we can absorb, and maybe the easiest is that respect for education pays dividends. That can come, for example, in the form of higher teacher salaries, or greater public efforts to honor star students. While there are no magic bullets, we would be fools not to try to learn some Asian lessons’. (my emphasis).

I agree – socially and politically non-Asians can learn from this experience.

Moreover although I have been unable to gather comprehensive, race-specific data for Australia (I’d be interested if anyone had some) I think casual observation suggests Asian Australians outperform others academically.

For example, 9 out of 20 of the top all round students in the recent 2005 Victorian VCE are of Asian origin which heavily over-represents their incidence in the Australian population. A similar over-representation of Asian kids occurs at private schools where a large proportion of students have Asian ethnicity and where – more generally – many students are migrants or the children of migrants. This suggests high parental motivation given the hefty fees involved.

Moreover, this bias towards intellectual achievement among Asians is not restricted to vocationally-oriented academic studies. Consider music education, for example – a majority of the students who graduate with advanced Australian Music Examinations Board (AMEB) qualifications in music (for example the Licentiate in Music) are Asian. They are often Chinese.

One can pose the comparative issue raised above in different ways - some of these reflect more directly what is almost an implicit racism in the Kristoff type of question.

  • Why, comparatively, do non-Asian students do badly?
  • Are non-Asian Australians a slothful, complacent, non-ambitious lot or are they making skillful wealth/cultural endowment – effort tradeoffs?
  • Will second-generation Asian students, with Australianised ethics, revert to the average performance?

My guess is that partial but not complete reversion will occur. In the meantime complementarities between skilled and less skilled labour in the workforce – as well as the general externalities associated with having skilled professionals - benefit us all. This is not a winner-takes-all race and, those who are achieving success, deserve an acknowledgement for the advantages they provide us all.

Smoking, drinking & public health campaigns

Contrary to industry claims the marketing messages people receive about alcohol (as well as effects of price and taxes) strongly condition drinking behaviour.

For example, Saffer and Dave, in an NBER report, based on an extensive longitudinal study of high school students find that:
‘… a compete ban on all alcohol advertising could reduce adolescent monthly alcohol participation by about 24% and binge participation [5 or more drinks in a session] by about 42%. The past month price-participation elasticity was estimated at about -0.28 and the price-binge participation elasticity was estimated at about -0.51. Both advertising and price policies are shown to have the potential to substantially reduce adolescent alcohol consumption’.
What about cigarette smoking? Here advertising is widely restricted but still there are differences in smoking rates. To what extent can differences in public health campaigns warning of the dangers of smoking explain these differences?

One interesting comparison can be drawn between Americans and Europeans. Cutler and Glaeser in a recent NBER study note that while cigarette prices and anti-smoking regulations are both much higher in Europe than the US, Europeans smoke much more than do Americans. Only 19.1% of adult Americans smoke compared to 34% of Germans. (By the way, Australian smoking levels seem lower than the US with the AIHW Drug Use Survey suggesting only about 18.6% of Australians smoke on a daily basis).

In the 1960s Americans smoked per capita more than any Western European country so the difference in smoking intensities cannot be explained by history.

One source of the difference lies in the higher incomes Americans enjoy – at high enough income levels smoking is an inferior good. This can account for about one fifth of the difference between smoking rates. But the main source of difference vis that Europeans are less likely to think that smoking harms health – this difference in belief accounts for about half the difference between smoking rates.
‘The U.S. has one of the highest rates of believing that smoking is harmful; 91% of Americans report believing that smoking causes cancer. Given the high proportion of Americans that believe in UFOs and the literal truth of the bible, this must represent one of the most remarkable instances of the penetration of scientific results in the country. Beliefs about the cancer-causing role of cigarettes in some European countries, like Finland, Greece, Norway, and Portugal, are almost identical to those in the U.S., but in other places beliefs are far weaker. For example in Germany only 73% of respondents said that they believed that smoking causes cancer’.

As Andrew Leigh (who posted on this) remarks, similar cross-country differences also exist among non-smokers, suggesting that this isn’t merely cognitive dissonance – with smokers having falsely optimistic views of the consequences of their smoking. Cutler and Glaeser put the differences down to ‘soft paternalism’ by US cancer researchers and the US Government. The health warnings on cigarette packets and warnings by the Surgeon General on the dangers of smoking apparently had a large impact in conditioning the belief that smoking causes cancer.

The US traditionally rejects paternalism and one can ask why paternalistic interventions were effective here. American health groups specifically focused on the cancer and heart disease risks of smoking while European groups were less effective in influencing public opinion.

Tuesday, May 16, 2006

Baby boomers going bust?

Baby boomers born between 1946 and 1964 will retire over the next decade or so. Over recent years these boomers have bought bonds and shares to fund their old age. What are the implications of these demographics on long-term asset prices? What happens when boomers retire and sell their assets? The Economist asks, if there are fewer people around to buy assets as baby boomers retire will savings plunge in value. Are there enough people to absorb the wealth?

Noted long-term stock market bull Jeremy Siegel (Wharton School author of Stocks for the Long Run) has changed his bullish tune and now believes asset prices are likely to plunge by 40-50% in value because of the high prevalence of retired workers and the increasing gap between age of retirement and death. With this decline the standard of living of retiring baby boomers would halve.

Apart from people working about 12 years longer, which Siegel sees as unlikely, a possible – and unlikely - salvation is for the assets to be purchased by younger newly-affluent workers in the developing world. These workers should become rich because of the information revolution and globalisation. Indeed Siegel sees large US current account deficits as a healthy trend that will do exactly that. But, as The Economist remarks:
‘ The biggest danger is that growing protectionism in the rich world will both
slow the rate of growth in the developing world and prevent its demand for
shares being met. Mr Siegel views the recent opposition to purchases of American
firms by companies from China and Dubai as decidedly ominous’.

Michael Milken is more optimistic than Siegel. He believes productivity growth will continue unabated and life expectancy will increase to perhaps 120 years with people working longer and thereby saving the day even without the help of newly-rich developing countries. In fact Milken believes these trends will create a shortage of securities that will drive up prices. He also sees a wealth tranfsfer to developing countries facilitating sustainable wealth accumulation.

This optimistic view of the world is inconsistent with recent trends that link reduced working lives with increased life expectancy. But it is consistent with labor shortages driving up wages encouraging older people to remain in the workforce even if arn't dramatic improvements in life expectancy.

Even if Milken is right and Siegel is wrong all is not lost:
‘there may be an ounce of good news among the bad. If politicians realise that
foreign buyers are needed to prop up the value of America's retirement savings,
they may be less inclined to flirt with protectionism’.

Different aspects of the debate between Siegel and Milken are in Business Week.

Economics an emerging small world

S. Goyal, M. J. van der Leij & J.L. Moraga-Gonzalez have written a short piece Economics: An Emerging Small World, in the Journal of Political Economy. This looks at the collaborative or social distance between economists from 1970-2000.

The academic economists who publish in journals can be viewed as a network of collaboration. Every publishing economist is a node in this network and two nodes are linked if the authors have published a paper together. Two authors have distance 1 if they have published together, have distance 2 if they have not published together but have a common co-author and so on. All economists who are directly or indirectly linked are said to belong to the same component and the largest group of interconnected economists is the giant component. The distance between any two economists is the length of the shortest link between them – this is infinite if there is no link. The average distance of a connected network (with a path between every pair of nodes) is the clustering coefficient which measures the overlap between the links of different economists. The network of economists exhibits small-world properties if it is very large compared to the number of links, integrated in the sense that a giant component exists covering many economists, if average distances between nodes in the giant component is small with high clustering.

Goyal et al. find that while the number of economists has more than doubled over the period that distances between economists, while already small, have declined dramatically. The reason for this is that economics is spanned by a collection of interlinked stars – economists who write with many other economists most of whom have few co-authors who generally do not write with each other. There are many stars in economics - Joseph Stiglitz - is an example. The stars act as connectors and reduce the distance between different highly clustered parts of economics.

Over a 10 year period most economists have no more than two co-authors which is small but the average number of authors – the degree of the network – has increased. The giant component has grown from 15% of all nodes to over 40% and has become significantly smaller in terms of distances. Clustering has remained high. Given these four properties, economics is an emerging small world.

Monday, May 15, 2006

Slow down & save oil

Francis Slakey in the NewScientist this week has a suggestion for resolving the US energy crisis – get people to drive slower by lowering national speed limits to 55 miles per hour.
‘ Every car engine has a sweet spot in terms of efficiency, typically when running at 55 mph. Beyond 60 mph, engine efficiency plummets because of higher temperatures. In addition, three other factors that affect gasoline consumption become more significant at higher speeds: tire resistance, wheel bearing friction and air drag. What all that means is that for the average car, cutting the speed from 75 mph to 55 mph improves fuel efficiency by roughly 25%.
This would save 1 billion barrels of oil per year - more than US imports from the Persian Gulf. Former President Carter endorsed a 55 mph limit in the oil crisis of the 1970s but the public kicked him out. Lowering the speed limit did reduce demand and help cut gasoline prices. But there are some arguments for again trying such a policy:

  • Reducing the limit to 55 mph just broadens the sense of public good to include conservation.
  • For most people a reduced limit would not add greatly to travel times and those who it would harm – e.g. long-distance truckers - would spend less money on gasoline - they would save more than 50 cents per gallon at current prices.
  • There would be fewer serious traffic accidents.

A flaw in the plan is that consumers alone pay. President Carter forced US car makers to establish an average fuel efficiency standard - the Corporate Average Fuel Efficiency (CAFE) standard - across their fleet of 27.5 miles per gallon within a decade. This has been fixed since though it too could be tightened to 33 miles per gallon today – higher targets than this have been suggested by the Sierra Club. With this change the US would save a further 2 million barrels of oil a day and there would be incentives too for car manufacturers to improve an engine's sweet spot to make it run more efficiently at 75 mph.

The Slakey plan is worth examining. The cost savings in fuel bills and the reduction in traffic damage accident costs need to be assessed against the value of increased travel time valued at some function of real wages. A good thesis topic for an economics student once the core science is checked out – my reservation is only that fuel economy in vehicles I drive is better on long-distance trips when I drive faster than when I drive around town - due I assume to more stop-and-start driving in urban areas. I have always believed (falsely?) that increased fuel consumption was driven by the need to accelerate a vehicle but that it would be low if one is travelling at a relatively high speed but not accelerating.

Of course, if the argument is correct, one can individually reduce fuel bills by slowing down! The advantage of a law is the macroeconomic effects of induced lower oil prices.