Bubbling Chinese equities

One of the core truths about every equity market is that eventually prices in it will decline. Indeed, paradoxically, the stronger the apparent basis for the market's positive growth the more certain it is that the decline will be severe. Why? Investors are a greedy lot and cannot resist the temptation of an apparently easy buck, or rimimbi.

The Shanghai market has increased 102% in the year to November 14 based on Chinese macroeconomic growth of 11% annually and massive re-investment of capital gains by individuals and firms into it. Firms have been taking capital profits and reinvesting them and are now, according to Business Week, putting the real Chinese economy at risk because of their dependence on such gains.

'By now every investor on the planet is trying to handicap what happens when China's scorching-hot stock markets finally start to cool off. The conventional wisdom is that China's greenhorn individual investors will take the hit, while corporate China—the companies that make shirts, build ships, and run utilities—won't feel much at all. The real economy these companies operate in is far too strong to be affected by stock wobbles, goes the argument. The price of corporate shares may fall, but underlying earnings will power on. (my bold)

That line of argument, though, is looking suspect for the simple reason that companies big and small are now playing the markets with abandon, using corporate funds to invest in each other's initial public offerings and bolster their bottom lines. ...Morgan Stanley figures 1/3 of reported corporate earnings in China stem from investments outside companies' core businesses—which in almost all cases means plowing money into stocks.

...these gains have no cash basis,' says Ding Yuan, a professor of accounting at China Europe International Business School in Shanghai. 'It's really frightening.'

...If and when stock prices start to fall in earnest, companies will have to report these portfolio losses on their income statements, depressing their earnings. That, in turn, could hurt their own stock prices, pushing the market down both further and faster.

'It's a replay of what happened in Japan during their bubble,' says David Webb, a Hong Kong-based corporate governance expert and non-executive director of Hong Kong Exchanges & Clearing. Japan Inc. gorged on stock and real estate, only to tumble into the red when those markets collapsed.

...In China, few investors possess the ability to comb through financial statements and distinguish a company's operating earnings from its stock plays. "People overestimate Chinese investors' sophistication," says Jerry Lou, head of China research at Morgan Stanley. 'Somebody needs to point out that the emperor has no clothes.'

No one inside China Inc., it seems, wants to think about what happens when the bubble bursts'.

It is a bubble and its self-destruction can damage the Chinese economy and, of course, the economies heavily dependent on trade with China.

Trieste

I am in Trieste (pronounced Tree-est-a) in Italy. Amidst recovering from jetlag I am doing the tourist bit - I spent 30 hours in planes and sitting in airports getting here. My local (Italian) petrol supplier (Eva) in Australia tells me that the residents up here are not ‘real Italians’ – they are ‘snobbish northerners’. But they seem alright to me - glamorous looking, big-busted women with toothsome smiles and men without hairy chests or gold chains. People, generally well-dressed and, from the vantage point of my humble Aussi working class roots, sophisticated. Lots of smiles and animated conversations – the place has a good feel to it.

Trieste is a coastal city of northern Italy near Slovenia. It has beautifully picturesque agricultural surrounds and the city itself is rimmed by steep hills on one side and the ocean on the other. Architecturally it is a bit run-down (I wouldn’t go so far as to say ‘early demolition’) and there is some industrial ugliness but there are elegant (‘European’) buildings and wonderful oldish churches. Travel writers such as Jan Morris write of its ‘faded glories’ even though it was one of their favourite cities. Today I wandered through some museums and a former Jewish ghetto.

Trieste is nothing remarkable – just a good place to be - James Joyce lived here for years and there is a hotel named after him. I can imagine him getting drunk in one of the many little bars. In fact I could have easily replicated his antics last night – a bottle of excellent vino and jetlag did me in completely.

I have to work tomorrow. Pity.

Technological options for limiting problem gambling get a whirl

In an earlier post I discussed the use of technological fixes to limit problem gambling. In The Age a proosal by Victorian Gaming Minister Tony Robinson is advanced to do just that. I’ve been pretty savage with the Victorian ALP’s approach to the gambling issue (here, here) so it is fair that I report positive efforts they are making to address the massive social problems the pokies have led to in this state.

Roughly Robinson’s proposal is that all poker machine players be issued with electronic cards to track their gambling levels and to monitor potential problem gambling issues. I quote:

Electronic access cards to track the movements of poker machine players could be introduced as part of a radical approach to tackle the state's gambling addiction problem.

Thousands of poker players could be required to carry the cards to gain entry to hundreds of clubs patrolled by problem-gambling experts looking for at-risk .....

Mr Robinson said the Government was in discussions with RSL Victoria about a membership swipe card system to be installed at hundreds of RSL venues next year.
Mark Johnson, the RSL's chief operations officer, said the new card system would alert clubs to the presence of players who fitted into the problem gambling category.

The swipe machines would have an interactive screen that could lead people to more information and help to tackle their addiction, he said.

Tattersals and the clubs say they will cooperate with the proposed measures if they are effective. I will believe that if John Howard increases his majority next Saturday by 10 seats.

I believe the best solution to the pokie crisis is to gradually phase them out. This proposed measure looks administratively complex and determined problem gamblers (a large proportion of the total) will find ways around it. One way of improving its application might be to allow users to sue the clubs and hotels for excessive losses – there might be a practical way of doing this.

The State Governments have unleashed a monster which they now need to bring to heel. The monster gives them lots of revenue and lots of high-profile jobs for ex-MPs – it is sometimes difficult to take their sincerity seriously.

Meanwhile in NSW pokie users who gain winnings will be forced to ‘take a break’ by leaving their machine rather than collecting their winnings from an attendant. The idea is that pokie addicts suffer from ‘within session’ behavioural addictions that can be broken if they leave their machines for any reason because they regain their critical faculties. In my view it is a close to worthless policy because its effects can be so easily thwarted and it only applies to winners.

Rudd a leader without policy substance

There is a sensible editorial in The Australian today on the case for voting for Kevin Rudd. Rudd does not have a clear political position, his policies lack substance but he can lead.

'...the proposition on offer from Mr Rudd is to vote for him not on the strength of his policies but on the strength of his leadership in the hope that the single-mindedness and determination he has shown in getting elected can be turned effectively to running the country. It is a pitch for voters to take him on trust'.

Fair comment.

Junkies insist on rights to use public charity to buy their dope

This is cute. A protest from the junkie union (AIVL) objecting to John Howard’s proposal to prevent junkies spending public money on drugs, booze and cigarettes.

The AIVL supports the ‘second theorem of welfare economics’ – that charity transfers should be monetary leaving recipients to determine how they spend their money. Often I do too but not always. The money that supports these deadheads comes from Australian taxpayers. Without the faintest hint of a smile I am prepared to give some of my dollars to these ratbags so that they can enjoy living at my expense but, no, I won’t pay for their drug supplies. People who get themselves addicted to drugs evidently do not have the intellectual capacity to manage their budgets.

These recipients of public charity – as a consequence of their self-inflicted pain - should shut-up and be grateful for public indulgence of their stupidity.

AUSTRALIAN INJECTING & ILLICIT DRUG USERS LEAGUE MEDIA RELEASE

All Australians are equal but some are more equal than others...

The Australian Injecting and Illicit Drug Users League (AIVL), the national organisation representing people who use or have used illicit drugs is shocked and appalled by the unexpected announcement today by Prime Minister Howard that a re-elected Coalition Government would take control of the welfare payments of people convicted of offences involving illicit drugs.

“This is the politics of exclusion” said Ms Louise Grant, AIVL’s President. “All of the candidates in this federal election, including the Government have talked about the importance of creating an inclusive community but this announcement by the Federal Government is the exact opposite of this. It is targeting some of the most vulnerable and marginalised people in our community and seeking to make their lives much harder at the worst possible time”.

Both research evidence and experience show that punitive legal measures have almost no impact when it comes to preventing continued illicit drug use among people convicted of drug related offences. “The announcement by the Prime Minister will not stop people using illicit drugs, it will simply mean that people will be forced to take even more risks than they currently do to obtain money for their drug use” Ms Grant stated.

AIVL is concerned that the quarantining of welfare payments for people convicted of illicit drug offences will result in higher levels of crime and other harms as people search for ways to obtain cash and/or ways to avoid being registered for government benefits. “People will go underground to survive and to maintain control over their lives” claimed Ms Grant.

“This proposal ignores the fact that people who receive government benefits are Australian citizens who have the right to make their own decisions about how they spend their income, regardless of how that income is derived” stated Ms Grant. (my bold)

AIVL also believes the Prime Minister’s announcement will establish a system of arbitrary additional punishment for people convicted of drug related offences who are in receipt of government benefits. “People who are convicted of drug offences have already been punished by the courts. They should not face additional punishment from outside the recognised judicial system.” If these types of paternalistic and undemocratic measures were imposed on other people in the community there would be outrage but when it is targeting people who use illicit drugs or Aboriginal people it is considered good policy.

As a community we should “just say no” to the politics of exclusion.

For further information please contact Louise Grant on 0424 903 565 or Annie Madden, Executive Officer on (02) 6279 1600 or mobile 0414 628. 136.

Yes these people care ‘vulnerable and marginalised’ but it is because they take illicit drugs. The policy is not binding except on the more stupid members of this group. If they don’t spend their charity handouts on dope, booze and carcinogens they won’t be penalised.

The claim that legal restrictions do not impact on drug buse is wrong given the evident success of increased interdictions in 2001 which markedly reduced heroin use.

It is interesting that the libertarian lot over at Catallaxy (who preach the case for individual responsibility, rational choice etc ad nauseam) also object to John Howards’s outrageous suggestion not to let junkies spend their dollars as they choose.

Efficiency considerations do not justify judicial murder

I am opposed to capital punishment in all situations. Terrorists who kill civilians make me feel close to ambivalent - if Bin Laden or his associates died I would not mourn - but still, on balance, I don't believe the state should kill people. My belief is moral - it is not based on a cost-benefit analysis of the death costs versus deterrance effects. To the contrary I think that potential killers might be deterred by the prospect of judical killings so that capital punishment is probably efficient even if it isn't just.

This New York Times discussion looks at some recent work on the issue.

Private costs of cigarette smoking

From Andrew Leigh I learned of a remarkable new paper by W. Kip Viscusi and Joni Hersch on the private costs of cigarette smoking. Only the summary is available at the link though you can download the whole paper if you have a university email address.

This is important research and first-rate applied economics with huge policy implications.

The private costs of cigarette smoking are the costs a smoker bears themselves as a consumer – mainly here the purchase costs plus the costs of ill-health and increased mortality.

There can be contrasted with the external costs of smoking which society bears as a consequence of smoking – these are mainly the extra health care costs - beyonf those borne by thye individual - that society picks up as a consequence of smoking and the very real costs of passive smoking.

These external costs are significant even if tax yields from excise charges on smoking exceed their implied monetary valuation of the externalities. Try telling a wife that her lung cancer death is offset in value by the extra taxes that her smoker husband contributed to the public purse. Moreover since a Pigovian tax is directed at marginal damages there is no reasohn for supposing that efficiency requires tax bills to equal non-internalised costs.

But in straight numerical terms - adapting a human capital viewpoint - the private costs of smoking are much more significant than these externality costs. It is the reason that I emphasise the role of private costs in my own arguments against smoking. Of course if you follow the libertarian view that people rationally weigh up all the costs of smoking and then smoke as freely-chosen, rational decision you won’t buy an emphasis on private costs at all. But I have never believed that smoking involves acts of rational choice.

A more accurate description would be that smoking is an act of adolescent folly that smokers continue to pay for over the rest of their lives because of the addictive character of nicotine.

I follow Andrew in quoting the abstract of the Viscusi and Hersch paper.

This article estimates the mortality cost of smoking based on the first labor market estimates of the value of statistical life by smoking status. Using these values in conjunction with the increase in the mortality risk over the life cycle due to smoking, the value of statistical life by age and gender, and information on the number of packs smoked over the life cycle, produces an estimate of the private mortality cost of smoking of $222 per pack for men and $94 per pack for women in 2006 dollars, based on a 3% discount rate. At discount rates of 15% or more, the cost decreases to under $25 per pack.

The figures suggest that the single packet of cigarettes purchased for about $12 would end up costing a consumer around $222 in total at reasonable discount rates once health costs are factored in. The estimated cost per packet is about 10 times the cost of earlier estimates by Sloan that have been discussed before on this blog. I’ve always found a cost in the order of $20 per packet to be about right. Ignoring discounting then if, as Sloan et al assume, a male loses 4.4 years of life as a smoker compared to a comparable person who does not smoke and this life is valued at $100,000 per year then the total cost is $440,000. If one smokes a packet of cigarettes per day over 40 years then 14,600 packets are consumed altogether which works out at about $30 per pack.

The much higher figures of Viscusi and Hersch arise because they account for the fact that smoking doesn't just kill people at the end of their statistical lives. Significant numbers of younger people die too as a consequence of smoking – this recognition accounts for about half the difference in these costs estimates from much lower earlier estimates.

Viscusi has in the past been criticised by some for minimising the impact of smoking by emphasising the role of external costs of smoking (such as passive smoking) which are small relative to other costs. He argues in 'Smoke Filled Rooms' that smokers know about the consequences of smoking and internalise costs, pay enough cigarette taxes to far more than cover their personal health costs and hence should be left alone. I wonder if he now revises his views. He should - it strains rationality to believe that men are internalising accurately costs of $222 per pack when they buy a packet of fags.

A 'new' bird species for Australia?

Last year on 10th November I had a wonderful day’s bird-watching around Atherton in Queensland. Late in the afternoon we saw a pair of Painted Snipe at Hasties Swamp. In total I saw 107 species that day the final birds being an elegant pair of Jabiru in the swamp next to Cairns airport.

Today, almost exactly a year later, Allen Gillanders this morning has claimed to have spotted a Green sandpiper in the same Hasties Swamp. The GS likes freshwater swamps.

This discovery, if confirmed, is exciting news for bird watchers – a new bird species for Australia. (Correction : Andrewt states in the comments that a first sighting was confirmed in 1998). There will be a mass exodus of twitchers from all over Australia to Cairns if the sighting is confirmed.

The GS is a migratory wader which breeds in Sub-Arctic Europe and Asia and normally does not get further south in its annual migration that the Malay Peninsula. It has been spotted once in Papua.

By the way Salon has an entertaining review of Scott Weidensaul’s history of bird watching in America ‘Of a Feather’. This is similar in some respects to the Australian history. Bird observers in the US - as in Australia - originally confirmed their sightings by shooting the birds they saw. It seemed 'reasonable' because there were so many of them. There aren't now.

Pac-Man defence: Rio to gobble BHP-Billiton?

This is weird – a rumour from the Wall Street Journal suggests that Rio Tinto may turn on its pursuer and attempt to takeover BHP-Billiton. This has intricate implications since Rio Tinto originally rejected BHP-Billiton’s offer to take it out on the grounds that the 3 BHP-Billion share offer for 1 Rio Tinto shares undervalued Rio Tinto. Rio Tinto would have to pay a huge reverse premium over this to get BHP-Billiton itself.

It is likely that both firms are undervalued but this squabble looks like a conflict over exercising control rather than maximising shareholder value.

What it does show is that Rio Tinto is worried the BHP-Billiton bid might win.

Amcor & Visy - more spy-vs. spy intrigues

This conflict gets richer and richer, deeper and deeper. Recall that Visy has just been fined $36 million for colluding with Amcor to restrict competition within the cardboard packaging industry.

Visy’s Richard Pratt has been publicly disgraced but Amcor has not been levied with anti-trust penalties on the grounds that it blew the whistle first on the cartel arrangement. The ACCC chairman, Graeme Samuel argued too that Visy was the prime mover in establishing the cartel.
Initially, it seems, Amcor tried to set prices so high that they were implausible and Visy responded with moves to undercut. Visy’s prices however remained high so Amcor undercut further and got the business. Visy got angry and Amcor squealed to the ACCC.

Richard Pratt claimed that the cartel was a ruse and the intent was to make Amcor relax and to then go behind its back to steal market share. A Federal Court judge, Peter Heerey, described this as the ‘John le Carre defence’.

Now in today’s Australian it is claimed that Amcor’s sacked CEO Russell Jones had told the ACCC that Amcor had initiated the price-fixing deal with Visy because it was frightened of its more dominant competitor. ‘Pratt ran a very aggressive and effective company that had a far better manufacturing footprint than Amcor had, and he would take work from Amcor almost at will…it was quite clear to me there was no other way (than to collude)’.

Does who did what first matter? Probably not a lot. No-one is pretending that Amcor was an angel in this setting. The intent of the ‘first whistleblower’ exemption from prosecution ruling is to exploit instabilities in cartel arrangements so that (i) that tend not to arise or, (ii) they tend to self-destruct quickly should they arise. Visy should not have acted illegally even if they believed Amcor was prepared to do so and future potential colluders will have to keep this sort of vulnerability in mind.

On the other hand it does seem strange that Visy entered into this arrangement with Amcor when they were evidently doing so well. Maybe Pratt really did have a secret plan to steal more of Amcor’s business.

This is a great business case study and deserving of thesis length treatment. I’d be interested in any takers.

Holiday

I am golfing Thursday at Rosanna so taking a break. A favourable poll for the Liberal Party would improve my putting. I am jangly at the prospect of ear-wax munches, rock stars and barren, leftist women running the country. Back Friday.

Thursday afternoon update: My putting was terrible. Curse Kevin Rudd and his popularity. But I did see a King parrot flying over on the 4th hole. Not a rare bird but I've never seen one before in this part of the Yarra River parklands.

Repeated me-tooism (climate change, education) & Labor deceit

As I have argued repeatedly Labor politicians are deceitful clowns.

A few weeks ago Peter Garrett announced that me-too-ism didn’t matter since Labor would tear up its promises once it got into office. He subsequently apologized and agreed he had been a dill.

Now Mike Kelly has announced that Labor will tear up its current education policies once it gets into office and reinstate Latham-style class-based warfare in education – the existing system of funding private schools was ‘a ridiculous approach to looking at the needs of schools, and we'll move away from that and get down eventually to a proper needs-based approach’. He subsequently apologized and agreed he had been a dill.

I think both Garrett and Kelly are being deceitful and that their original statements indicate their true intent.

So too does Andrew Bolt in a sprightly Herald-Sun article today. It is well worth reading and spot on.

‘….the day Rudd wins the election is the day I expect Labor's Left, in particular, to drop its who-me? smiles and start eating its leader alive'.

A great read.

Macquarie Bank's debt?

From The Australian some continued probing about the size of Macquarie Bank’s debt is still not providing answers. Is it as Jim Chanos asserts around $90 billion and is it the case, as I asked a few weeks ago, that Macquarie Bank is a Ponzi scheme destined to collapse?

This would leave its current managers drenched in wealth but its shareholders with nothing. Macquarie yesterday reported a strong financial performance over the past year though things slowed in the second half a bit.

River red gums at risk from cowardly Labor environmental policies

From The Age on the tragic fate of Victorian River red gum forests. 70% of these forests in the Murray-Darling Basin are in decline. I have already posted on the need to boost environmental water flows to these forests – they need a decent drenching every few years - but Victorian Premier Mr Brumby has declined to agree to this. It is hard to deal with farmer support for environmental destruction in the midst of a drought.

Farmers are calling for increased support during the drought when what they should be doing is facing up to is higher water costs.

Heads of private schools ask for more from parents & less from government

From The Age some heads of private schools have lashed out at the proposal by John Howard to allow non-means-tested tax rebates to parents of all students attending school. These heads do not of course pay fees – they receive them.

I hope the councils of the schools concerned will stand up for parent rights and give these principals a well deserved boot in the rear-end. These principals are renowned for taking advantage of a non-competitive environment and extracting every last dollar they can from parents of their students.

Four Corners on Federal Election - worth watching

I missed the Four Corners show, last Monday, on the forthcoming election. I went to the ABC website and saw this very fair interview painting a gloomy prospect for the Coalition from the beautiful Laura Tingle who I read in the AFR. I thought George Megalogenis from The Australian was good too though he is not nearly attractive as Laura. .

The main argument from both is simply that the gap in the increased support for Labor over the Coalition has not diminished. The amazingly high approval ratings of John Howard – particularly on economic issues are a central puzzle. The mortgage belt are frightened about interest rates and WorkChoices. Kevin Rudd is imitating John Howard by looking for consensus on issues that Labor would otherwise lose votes on – notice no arguments on Iraq or border protection. Good economic news and high economic growth rates support Labor – because it makes it is safe to change government.

Oh and what a disasterous bull-artist Kevin Rudd is! A glib, mealy-mouthed, electoral success story. Our next PM - Australians, come to your senses!

It was great journalism and incisive reporting from the Four Corners journalists. The ABC did a great job. The show itself worth looking at in full – again high-quality journalism. Great photography and the ingenious use of a sample of 5 marginal voters – though a small sample – covered the issues beautifully.

Howard me-toos Rudd but gives insufficient support to private schools

Mr Howard’s promise to provide tax deductions for 40% of education expenses up to a maximum of $800 per student matches the promises of the ear-wax muncher but does not significantly help adults sending their children to private schools. Costs of mid-range private schools range between $8,000-$20,000 annually per student and are a crippling cost for those seeking to avoid the public school system. On this issue I am an expert.

It is obvious that since 1996 Australian parents have lost faith in the public school system with their union-ridden closed shop attitudes. Yes, keep the mainly-free public system operating but encourage an alternative.

Making private education costs fully tax deductible would provide a real Australian education revolution driven by private sector incentives. Some of the cost of the proposal would be offset by reduced reliance of private schools on public monies that would leave the dwindling public school system better funded.

ADHD & treatments using drugs

Your children have Attention Deficit Hyperactivity Disorder (ADHD)? In the long-term they will be no better off using dangerous drugs like Ritalin or Concerta than behavioral therapies according to a study of 600 ADHD sufferers in the UK.

ADHD medications are widely prescribed in Australia - for some reason rates of prescription are 5X the average in WA. I agree with Dr. Aitkins - parents whose children have ADHD should monitor their sugar consumption.

Update: This report from today's New York Times suggests that kids with ADHD and other behavioral disorders suffer a lag in their development not a permanent impairment. Give them help but, most of all, give them time.

Supporting the right in the face of leftist barbarism

I am often criticised for supporting John Howard and the Liberal Party. Many people in the blogosphere think that for some reason it is idiosyncratic, and even somewhat perverse, to support a political party which has gained the majority support of the Australian population over four successive Federal elections and whose leader has been overwhelmingly popular in the electorate over that period.

This prejudiced view shows how narrow-minded and out of touch the crazy section of the Australian left has become. It also shows the contempt they feel for Australian public opinion and their need for abuse in dealing with figures such as the Prime Minister. He is a ‘liar’, ‘a rodent’ and so on. He deceives the ignorant masses and tricks his way into power.

Howard is none of these things. He is a decent and widely respected Australian who would never descend to the depths of the leftwing rabble. He has won successive elections because most Australians like him and his policies. Backing Howard and the Liberal Party is backing a consensus view in Australian politics - not an extreme one.

I generally can’t be bothered reading the diatribes on left-wing blogs. These sites do have some excellent writers and some good posts but, in the main, they operate as echo chambers where fanatics reinforce each other’s fantasies.

This sites do contain some really unpleasant posts. Let me pick on just one recent effort by Ken Lovell on Road to Surfdom to illustrate my point. This is a particularly ugly diatribe criticising John Howard’s decision to lay a wreath on Remembrance Day on the grounds that Howard is politicising the occasion. That he has been doing it every year for a decade or more matters little. Nor does it matter that a batch of Labor politicians are doing the same thing. This is the strident voice of one-eyed hypocrisy.

KL sees Howard on this occasion as displaying:

‘ ... creeping opportunism, his cynical expediency, his tawdry instinctive lunge for the cheap immediate party-political point-scoring over any thought of the national interest … along with all that must be reckoned Howard’s destruction of the office of Governor-General’. (my bold)

The sentence shows, more than anything, KL’s preference for exaggerated, derogatory language. In a break from his linguistic barbarism KL solemnly sees Remembrance Day as a day:

‘that above all calls for ceremonies that bring us all together in a solemn spirit of remorse and shame at the youth and the beauty and the joy of living that was sacrificed upon the altar of old men’s pride and avarice’

Note how KL terms a solemn occasion into a populist anti-war rant involving 'old men's pride and avarice'. What a shocking statement to make about our fallen war dead and the reasons for their deaths. KL, moreover, knows who should have carried out this ceremony – it is not our elected PM but the unelected Head of State:

‘Someone of the order of Zelman Cowen or Bill Deane or Roden Cutler who can find the words and the manner to express the better part of what we feel as Australians’

Instead KL sees John Howard involved in the ceremony which disgusts him. This is what KL wrote:

‘Needless to say, he (i.e. JWH) seized the opportunity to wrap himself in the flag and talk a lot about the sacrifice and suffering of those whom he had bravely sent off to fight in the Middle East … thereby subliminally reminding us all of course of the importance of re-electing a Strong Liberal Government who can be relied on to keep fighting the War on Terror.

What a slimy, self-regarding, small, repugnant, grub of a man. Four weeks into an election campaign this worm has the indecency to stand up and pretend to speak for all Australians on the most solemn occasion in our calendar … a few minutes before he throws himself back into the partisan fray of lies and deception and divisiveness’. (my bold)

This is ugly language and largely deceit. JWH didn’t ‘talk a lot’ about those he had ‘bravely’ sent off to fight. Note the twisted, political viewpoint KL pushes here in the midst of his ‘respect’ for this solemn occasion. The language is as ugly as anything I have seen for a while - KL has problems in articulating a sensible view of what happened because of his deep hatred for Howard.

Howard had, in fact, reminded us that two soldiers recently died in Afghanistan. Moreover, to the inevitable response that Kevin Rudd leader of the Labor Party was doing much the same thing at the same time – he laid a wreath at King’s Park in Perth - KL writes:

‘...but in Rudd’s defence I have to say that if he hadn’t, he was certainly risking 48 hours worth of vicious mud-slinging from Howard’s amoral vacuous baying media leeches about his insensitivity to the fallen.

If Howard had any decency at all he would have declined invitations to participate in these ceremonies and urged Kevin Rudd to do likewise. It’s a job ideally suited to state governors and the Governor-General. But there was never any chance of that happening … not when the little shit could get some footage in the nightly news being Father of Our Nation’. (my bold)

Words run away from KL here and Rudd is not acting indecently he is just avoiding criticism. The intemperate language and narky criticisms scarcely suggest KL is well-equipped linguistically to be the left’s Miss Manners but he continues with advice to the incoming PM:

‘The incoming prime minister will have many opportunities to begin to restore this country’s dignity and decency. One will be to appoint a successor to Michael Jeffery who can be an eloquent and inspirational symbol of national unity on those occasions that transcend the grubby pissant politics which obsess the John Howards of this world’. (my bold)

This nonsense gets an award for some of the most tasteless tripe I have seen all year. KL does exactly what he wrongly accuses Howard of doing – politicising a solemn occasion where we honour our dead. Hence KL is a hypocrite - he does exactly what he criticises others of doing. He is also a narky buffoon - he sacrifices a solemn occasion to vent his hatred for John Howard. It is a commentary that displays prejudice, and the foul-mouthed stupidity of the worst of the riff-raff who support this end of politics. The comments made on the post at the Road to Surfdom site are just as stupid and unpleasant – a couple of them bemoan the fact that a majority of Australians have backed Howard! I wonder if they have the intelligence to understand the implications of what they are saying.

In fact, what Howard said at the Remembrance Day memorial service is accurately reported here. What he did refer to was the fact that two Australians have been tragically killed in Afghanistan during the current election campaign. There was no political element in it at all or any appeal to back one side or the other that anyone other than a leftwing grub could pick up.

I am happy to retain my preference for civilised people and civilised discourse on the right. The left convince no-one but themselves with this type of 'analysis'. If Kevin Rudd wins the forthcoming election it will be no thanks to this bunch. Indeed Rudd would retain towards them the same contempt that I do.

Urban population trends

Bernard Salt’s Population Growth Report 2007 for KPMG (I could not yet find an online version) makes interesting reading. Melbourne has joined the ranks of Australia’s fastest growing capital cities with nearly double the growth rate of Sydney and close to the growth rates of boom cities like Perth and Brisbane. But the Queensland coastline still holds the centres with maximum population growth – Cairns in particular is growing at twice the rate of Brisbane.

With current growth rates Melbourne would be the largest city in Australia in 20 years – returning Melbourne to its 19th century status as Australia’s largest and most popular city. Of course these projections presuppose no change in relative housing costs which would be quite unrealistic.

Around Australia the main competition for rapidly growing coastal areas and for 'sea changers' comes from city centres. The trend is strong everywhere but particularly in Melbourne and Brisbane. Young couples are living in apartments close to city centres to minimise their commuting costs.

The standout area is Sydney where some municipalities (Campbelltown, Fairfield) actually lost people as young adults leave older parents to live elsewhere. Indeed Sydney’s centre continues to grow while its periphery is shedding people.

The experience Salt identifies correlates with quite a bit of experience. Melbourne property prices grew strongly last year while Sydney prices did not. Still Sydney property prices remain very high. I was struck by this headline in the Sydney Morning Herald yesterday while visiting - over the past year 570 government grants for first home buyers were given to people buying $1 million plus valued properties – a 44% increase over the previous year. It is a stunning figure.

My subjective feeling (no real evidence) is that Sydney housing on average is of higher quality than Melbourne's - houses in Sydney have often been renovated several times and the physical beauty of Sydney as an urban setting is not arguable. Melbournians gloat about their beautiful gardens but Sydney, with its milder climate, has some of the best urban gardens I have seen anywhere.

My main objection to Sydney as a place to live, apart from housing costs, is the cost of making journeys by road. A visit to the local shopping centre can be a congested nightmare in many suburbs. My impression of the train and bus services in the city are however generally very positive. The exception that has impacted on me is on the far north side areas where public transport is almost non-existent late in the evening. On the other hand if I owned a house at Palm Beach I probably wouldn't ever want to leave and would presumably have enough money that I could afford not to do so!

Happy 90th birthday Alison

I am delighted to be attending my mum, Alison’s, 90th birthday celebration in Sydney tomorrow. It is a total buzz for me. She is a great mum and a wonderful grandmother to her 5 grandchildren.

Being 90 years old is a big deal and is interesting demographically. For someone born in 1917 it is an accomplishment to reach age 90. The expected lifespan for a female born in that year was a smidgeon under 60. For a man it was around 58.

If you go to the AIHW web site, life expectancy for men and women has increased 20 years during the 90 years Alison has lived. Roughly 1 year’s extra life every 5 years.

Are these facts not interesting? Alison was still an infant when the Great War ended in 1918. She was not quite 12 when Wall St crashed in 1929. She was 22 when Hitler invaded Poland and 28 when the Soviet Union invaded Berlin to end the war in Europe. She celebrated her 50th birthday when Ming Menzies ended his second record term as Australian Prime Minister.

I could go on but the point I want to make is that when you are 90 years old you have seen a lot and have acquired a lot of knowledge. Alison has a lot of knowledge and, although she is physically a bit frail, she maintains all of her marbles. She is an astute observer of human nature and a canny stock-market punter whom I always listen to.

I am proud of her.

Defective teaching ethos in university economics

One prominent academic I know dislikes scientific exhibitions in museums (such as ScienceWorks in Melbourne) on the grounds that it makes 'science' seem too easy. The same academic dislikes the fact that I take my environmental economics students on fieldtrips to look at specific environmental problems. He thinks it is all a bit 'down-market'. He prefers Lagrangians to faeces in a pond or to birds nesting on remnant scraps of native vegetation.

These thoughts occur to me because I increasingly notice a trend among teachers of economics and finance in Australian universities towards what I would call educational sadism. It is the idea of deemphasising fact and institutions, accelerating the presentation of material so that the latest theory is used as exposition and generally making academic work as difficult and abstract as possible so that students have to jump really high intellectual hurdles to pass final exams. The secondary motivation these sadists come up with when pressed is that (i) education is a screening device designed to separate out an elite and (ii) that ultra-demanding quantitative courses that include huge volumes of material and vast numbers of concepts are necessary to provide intellectual fodder for doctoral programs. Doctoral graduates, in the main, re-enter academic life and become part of a new generation of educational sadists.

Indeed these new graduates often turn out to be worse than their teachers since they remember most clearly the most recent material they have learned and forget earlier motivational material. Hence they press advanced theory onto neophyte students and skip the motivational material on the grounds that the former is obvious to any ‘fool’ and can easily be omitted. Thus you can teach students about poverty by showing them a Lorenz curve or explain demand theory by solving an optimisation problem with Lagrange multipliers. You can teach students how firms finance themselves by means of counterexamples to the Modigliani-Miller theorem and so on. And if, as an older academic, you question any of this you are given a snappy impatient look that has a ‘take him off to the knackers yard’ feeling to it.

The difficulty with educational sadism is that it leaves out the most important component of a university education – namely learning. Don’t we all want students to understand what they are on about – not just to be able evaluate them? This amounts to asserting that education should impart human capital. It should not just be a screening device.

My view is that a lot of economics graduates from major Australian universities often do not understand much economics. Graduate level theses are often plodding applications of quantitative technique that show very little economics understanding. Graduate students operate often using only very restricted areas of their brain and are a rather frightened about encountering reality and indeed in considering applications of theory. Somehow we have sidelined the issue of thinking. Indeed understanding much about anything these days in a graduate thesis is problematic because understanding typically does not come into it. The result is a cut-and-dried world of lobotomised intelligence involving Lagrangians and Hamiltonians often with very little attempt to understand anything. Markets and market processes are often supressed.

Students who have spent 5 or 6 years studying economics are fearful of an elementary supply and demand argument but have no difficulty at all with a mechanical co-integration argument or an elaborate introspection using game theory. Time series econometrics and game theory have been among the destructive forces in modern economics. Applications of time series analysis in finance have the further distinction of being some of the most boring and thoughtless material you are ever likely to encounter in a university. They neither provide insight or illustrate intelligence.

Am I guilty of teaching sins myself? You bet I am – or at least I was. But I am a reformed character and I do try these days to think about my audience’s capabilities and my main desire is to instil learning. I am also primarily interested in the world – in the meat – not in models per se but in models designed to help us understand the world. My interest is the world. I like models that illuminate things and despise those models that don’t illuminate anything other than narrow, technical prowess.

For my sins - and my loud-mouthed claims on teaching - I have been put in charge of a first year microeconomics unit at my university for 2008 – a challenging assignment. It has made me think hard about what I think students should get from a first unit in microeconomics. I have examined a number of standard textbooks – they are all pretty much clones of the early text by Paul Samuelson - but am stunned with obvious sillyness in more modern approaches.

One of the texts has Powerpoint slides conveniently delivered by the book’s publishers and treats the theory of firm costs involving twenty new concepts in a one hour class with the really critical idea of marginal cost submerged in their somewhere. It is impossible for students to effectively internalise this amount of material in one hour.

I want a less cluttered introduction to microeconomics and will look for one.

The sickness I see in Australian economics instruction is something I will comment on in my blog over the coming months. I think things have gone right off track but I am prepared to listen to contrarty claims and to publish such as posts if there is interest.

One former Department chairman recently told me his honours students are told to pick a ‘paper’ and work on it for their honours dissertation. Why not ‘pick a problem?’ The same department rejected someone I would regard as the best young economics prospect in Australia on the grounds that he was too ‘policy-oriented’. The ideal it seems in these morgue-like departments is dry, uninteresting rubbish.

Our major local economics journal the Economic Record has lost its credibility and rejects anything that has policy relevance almost as a matter of principle. I recently did a literature research on the ‘Record in the 1950s and was stunned with the high quality and interest of the work in these early years. When I remarked on this to one of Australia’s most eminent economists he gave me an embarrassed look and said ’yes it was more interesting then’. And indeed it was. What has gone wrong?

Economics is an exciting discipline. I still believe that, despite my complaints where are attacks at the margin, there is no finer undergraduate university course a student can undertake. Theory, institutional understanding, history, politics, maths and statistics you get it all to at least some degree. A good economics courses should develop in a student the capacity to gaze at the world and to understand. This does involve theoretical understanding but it also involves knowledge of the world and institutions.

While I admire economics as a field that does not mean everything is fine about teaching it or about current research directions. Nor do the good aspects deny me the right to exercise a grizzle at current directions that I particularly dislike in economics teaching. Over the coming months I’ll try to offer some more constructive suggestions to improve things.

BHP-Billiton Merger

On July 14 this year I wrote:

‘There have been some rumors that BHP-Billiton might make a higher bid for Alcan but this seems doubtful to me as the greater synergies lie in Alcan being part of Rio Tinto. But wouldn't it shock the world if BHP-Billiton eventually turned around and took a bite at Rio Tinto. It is not impossible. The combined group would then dwarf by a mile Anglo American in terms of revenues gained’. (my bold)

Of course it happened yesterday. BHP-Billiton made a bid for Rio Tinto worth $US 100 billion that would make it not just the largest mining firm on earth (it already is this but this merger would make it emphatic) but one of the largest business firms on the planet – it would be the third largest company on the Dow Jones. The merged companies would have a combined market capitalization of around $380 billion and combined annual sales of $55 billion. The combined businesses would jointly control 36% of the world’s exported iron ore.

Rio Tinto has rejected the bid but it is early days yet. BHP-Billiton may have to sweeten the deal (currently 3 BHP-Billiton shares for each Rio Tinto share) with some cash. A few weeks ago during a market slide Rio Tinto shares fell back to under $100 – yesterday they closed at $132-42 an increase of 21.7% over the previous day.

The huge sums being contemplated here are a testimony to the strength of both companies and the reconstruction of the Chinese and Indian economies using Australian resources. They are also a testimony to the immense strength of the Australian economy as a whole – we may well end up being the wealthiest nation.

I am almost sure that eventually a deal will be reached between the companies. It makes a fair bit of business sense. Marius Kloppers the CEO of BHP-Billiton is a serious man and, although only being in the job for a few months, has the support of his board – the deal itself was probably envisaged before he even took over. This is not a speculative or exploratory move. It’s a serious bid that should eventually work.

Debates on macroeconomics hinge on rationality assumptions

Paul Krugman’s velvet-gloved attack on Milton Friedman in the New York Times has aroused a reaction. A particularly strong counterattack has come from Edward Nelson and Anna Schwartz.

The debate is interesting because some fundamental, issues of economics and political ideology arise. Both original papers are well-worth reading and fairly short. The following notes are selective interpretations.

Krugman

The counterattack by NS is hardly surprising – Krugman describes Friedman as ‘a great economist and a great man’ but in the same breath he describes him as ‘less than honest’. He sees Friedman as the counter-revolutionary who almost had to emerge to oppose the revolutionary theories of Keynes on the inability of capitalism to self-adjust back to full-employment. Rather than introspecting about the psychology of individual behaviour as Keynes had done, Friedman took the notion of ‘rational economic man’ more seriously and developed a theory of inter-temporal consumption behaviour and of inflation that was rooted in the precepts of rational behaviour. Krugman recognises that all modern thinking about consumption bears the mark of Friedman’s monumentally important work on the permanent income hypothesis - the idea that people's spending is only loosely tied to their current income so that the marginal propensity to consume is low as is the standard Keynesian fiscal multiplier.

But it is Friedman’s monetarism that Krugman finds less satisfactory as a body of theory. Keynes argument was that monetary policy was ineffective during the Great Depression because of a 'liquidity trap’ – a situation where interest rates were so low people assumed they could only rise and hence were reluctant to invest. The only way out for Keynes was fiscal policy involving increased government spending. This view of course has ideological implications that Friedman did not approve of but Friedman also argued it was flawed on the basis of logic and evidence. He argued that Keynes had misdiagnosed the Great Depression and that ‘money did matter’. He saw the failure of the Federal Reserve to prevent a contraction of the money supply as evidence for the supreme potency of monetary policy rather than a sign of its ineffectiveness. To Krugman this is arguable because the Federal Reserve did increase the monetary base (currency held by the public plus bank reserves, an aggregate which the Fed does control) even though the money stock did fall markedly. It fell because banks were failing everywhere and individuals sought to hold onto their cash whilst banks were reluctant to lend.

Krugman claims Friedman was dishonest by turning the proposition around to say the Fed caused the Depression. Krugman also sees evidence of stagnation in the Japanese economy in the 1980s and 1990s, when interest rates were for a time zero, as further evidence of the liquidity trap proposition and of the ineffectiveness of monetary policy.

Nelson-Schwartz

The counterattack by NS is based on a claimed refutation of Krugman’s assessment of Friedman's views on monetary policy.

The success of monetary policy since the 1980s is not taken as a refutation of Friedman's economics to NS since they take the core of Friedman’s views to be the rejection of the case for wage-price controls, a rejection they claim is supported by modern central banking. They claim opposition to price controls was not common ground with Keynesians and they cite statements by Keynesians (such as James Tobin and Paul Samuelson) to buttress their arguments. Moreover, the view that monetary policy can successfully target inflation and that monetary policy is the decisive instrument for addressing inflation, a position many central bankers would agree on, they take as an endorsement of Friedman’s position.

NS take particular exception to Krugman’s views on the liquidity trap. They claim open market purchases of bonds could have offset the money supply collapse during the Depression and that monetary expansion helped the Japanese economy recover after 2001.

To NC what was decisive about Friedman's views was his rejection of Keynesian cost-push and simple Phillips curve views of inflation based on money illusion. Friedman believed inflation depended on monetary policy via aggregate demand. Cost-push pressures could only operate with an accommodating monetary policy. The Phillips curve Friedman believed in involved expected real wages (depending on expected prices) as a function of unemployment. In the long-run this trade-`off would vanish as unemployment gravitated to its natural level. Inflation in the 1970s was then due to excessive monetary ease.

While monetarism is often taken to reflect an overwhelming concern with monetary aggregates, to NS it should instead reflect the view that inflation can and should be addressed via monetary policy. Other contributions by Friedman included his emphasis on the distinction between real and nominal rates of interest, the costs of inflation in terms of bringing about relative price distortions, the problems of long and variable lags in the effects of monetary policy, refutation of the importance of so-called output gaps because of measurement issues, his pioneering work on the benefits of flexible exchange rates and his rejection of the case for qualitative controls on credit availability.

To me this is a novel interpretation of monetarism. My belief was always that monetarists saw the money stock as a well-defined aggregate which should grow smoothly through time at a low rate both to limit inflation and because varying its growth had complex lag effects on the macroeconomy.

My main question to monetarists such as NS however is why the relation between monetary aggregates and economic activity broke down so markedly after about 1980. NS claim that the payment of interest on money has made the identification of monetary aggregates difficulties so that the main contributions of monetarism are in providing insights that do not depend on such measurements. This comes close to rejecting what I always believed was central to monetarism.

I also think NS come close to saying that belief in the efficacy and importance of monetary policy makes one a monetarist. This seems to me much too strong.

The NS response is bitter in a way that I doubt Friedman would have appreciated. NS claim that Krugman sought to denigrate Friedman but I did not see that in the Krugman article at all. I think Friedman did bring back into focus the need for central banks to target inflation. Moreover I think most economists would now agree that wage and price controls can, in some circumstances, be useful if they can deflate inflationary expectations. In addition monetary targeting has been abandoned everywhere - this does seem to me a key part of Friedman’s early thinking.

Final remarks

Friedman made many contributions to monetary macroeconomics and to economics generally - the commentary here is on his contributions to macroeconomics but he also made very important contributions to our understanding of risk.

On the macroeconomic issues it is interesting to me that both sides of the monetarist versus Keynesian debate see evidence on the possibility of liquidity traps during the Great Depression and in Post-war Japan as crucial to their cases.

I am also interested in Friedman’s emphasis on the neoclassical foundations of macroeconomics and his emphasis on the role of rational economic man. Modern theorists such as Akerloff (see ‘The Missing Motivation’....here) re reinterpreting Keynes as a sophisticated psychologist whose insights provided a much more realistic view of the way people act based on what might now be called behavioural economics. Basic ideas in economic theory - how rational are people? - are still driving important macroeconomic policy debates.

Predicting debt crises

A prominent economic forecaster based in Melbourne makes his livelihood predicting the next major economic crisis. He has been doing it for 20 years so eventually he will get one right and be able to say ‘I told you so’. The fact is that capitalism for all its faults is a resilient sort of economic system. Energy crises, global warming for example can be good business.

A couple of features of the current international debt situation however do concern me:

1. Credit card debt. Fortune points out this week that US consumers have a massive $915 billion in credit card debt and this debt is starting to come under strain. Banks last quarter announced their worst results since 2001 with credit card delinquencies impacting on earnings. Citigroup announced a 57% decline in earnings citing higher credit card costs. It has set aside $US2.2 billion to cover defaults.

For the first time cardholders were increasing their balances outstanding and taking cash advances on these cards. American Express is also seeing signs of distress. Credit card debt is a real problem since it is unsecured. Difficulties arise when customers start using credit cards to repay home mortgage debt. In the UK, which is further ahead of the US in a phase of declining house prices, has 6% of its homeowners using credit cards to repay their mortgages – since 2005 delinquencies have risen 50%.

Australia has not yet entered a phase of major decline in house prices – in Melbourne they are rocketing ahead to rival Sydney prices – but when the crunch comes the same difficulties will develop here.

2. The sub-prime mortgage crisis last summer involving about $US 900 billion was not just a flash in the pan. The massive extent of the underlying problems is just starting to unfold. Citigroup has sacked its CEO and announced up to $US11 billion in write-offs to reflect the declining value of its sub-prime mortgage related securities. Merrill Lynch ousted its CEO a few days ago amid huge announced losses on sub-prime securities of $US 7.9 billion amid claims from Deutsche Bank that it might need to write-off another $US 11 billion.

I worry that Australia might be hit hardest precisely because the real estate market - outside of Sydney - has been slow to adjust downward – if you believe the OECD we have the most overvalued real estate on the planet. 1.7 million people in Australia are currently living under housing stress paying more than 30% of their income for housing and the bet is interest rates will rise again today.

Despite the attempts of my macroeconomic colleagues to convince me all is fine I still find it hard to understand how Australians can be in a sound credit position when 16 years into an economic expansion our credit aggregates are growing at 15.9% annually and our money stocks are growing at 15.4%. This is during a phase where inflation looks like peaking at around 3%.

It worries me with an inexperienced Labor Government looking as if it will take the helm.

A program to almost eliminate cigarette consumption in Australia in one generation

I have been thinking about specific policies for substantially reducing the incidence of cigarette smoking in Australia. There are issues of ‘freedom of choice’ but I do not want to put weight on these here. I am certainly not interested at all in arguing the case for restricting smoking – that is self-evident to all sensible people and the case has been made on many occasions anyway. I am solely concerned here with developing a framework for policy that has as its objective the substantial reduction of the health damages associated with smoking in Australia.

How to do this?

Prohibition of smoking is not an option. As far as I know Bhutan is the only country to have banned smoking in public as well as the domestic sale of cigarettes. Bhutan is a poor country with a strong monarchy and only a small fraction of its population, around 1%, smoke. I do not favour such prohibitions in Australia since there are 3.4 million Australians who currently do smoke. These people have rights and would suffer high inconvenience and high adjustment costs from an outright prohibition. On practical grounds they would also vote out and replace any Government who sought to impose such restrictions.

But it seems reasonable to me to suppose that smokers in Australia should be encouraged to see that they are purchasing an addictive, dangerous drug namely nicotine. They should not be able to supply non-smokers with this drug or inflict passive smoking damage on others. There is, I argue, no case for allowing immature, irrational youth to take up smoking. Since almost all decisions to initiate smoking occur among young adolescents, this amounts to arguing that policy should target as a priority the complete elimination of smoking initiations.

Background. Cigarette consumption for most (probably 90%) of smokers involves addiction to nicotine. The most difficult issues associated with smoking are partly this addiction per se but also the fact that that the nicotine ingested is consumed with numerous other toxic products most notably, tobacco specific nitrosamines that cause cancers. Indeed the association between pipe smoking and cancer of the lip and tongue was recognised from the end of the 18th century. Cigarette smoke is acidic and, although much milder than other tobaccos, is efficiently absorbed by the lungs where it the major cause of lung cancer.

Cigarette smoking is not just a risky activity – it is a very risky activity. The average smoker loses 6-10 years of life as a consequence of smoking and one in two smokers die of diseases directly related to their smoking.

Tobacco companies have reluctantly come to publicly confirm what they have secretly known for over 50 years – that the product they sell, when used as intended, kills people. Their response these days is to trumpet the libertarian catchcry that smoking represents a free choice – our local branch of libertarian nitwits echo the exact same claim. That this is nonsense is clear from the fact that almost all smokers want to quit and regret their smoking habit. Quitting offers a strong payoff, in terms of increased average lifespan, even for lifetime smokers.

Australia has perhaps 3 million citizens who smoke daily and who are addicted to nicotine and about another 500,000 whom smoke less than daily and who are probably not addicted to nicotine. It has about 100,000 smokers under age 18 some of whom are dependent smokers and some of whom are casual smokers.

How might cigarette smoking be eliminated in the community in a way that respected the position of the large number of Australians who are addicted to nicotine? An alternative policy that might be considered as an alternative reference point might be a continuation of current policies perhaps with higher taxes and better-focused anti-smoking messages – a more-of-the-same policy. This is not necessarily a poor alternative option given successes in cutting smoking across the board and particularly in reducing youth smoking. But with this alternative there would still remain a huge pool of continuing smokers and a significant number of young people who would start smoking each year.

What policy would do the trick in almost eliminating cigarette smoking in one generation?

I think a set of nine policies would do this:

1. A key policy for dealing with existing addicted smokers lies in isolating them and making this group aware of their addicted status. This might be achieved by registering cigarette smokers who are addicted to nicotine as addicts just as it has been proposed to register heroin addicts. These addicts would then be supplied weekly supplies of the amount of tobacco needed from pharmacies which would be the only place where cigarettes were sold. Cigarettes would be sold in plain packaging (with only brand name, health warning, graphic health image and quit information on package) and out of sight of customers. Sales would only be made on the basis of a prescription from a doctor. Doctors would check cotinine levels in applicants for registration as a nicotine addict before agreeing to registration as a nicotine addict.

2. Cigarettes would be sold along with nicotine replacement therapy (NRT) pharmaceuticals and smokeless tobacco products with lower taxation of these latter products reflecting their lower relative risks. For example NRTs could be sold at marginal cost, smokeless tobaccos at marginal cost plus a tax of 20% and cigarettes at marginal cost on plus a specific tax of around 24 cents per stick. This is around current tax levels which are quite high. The objective is not to impose further financial hardship on smokers but to provide strong incentives to quit and to prevent cigarettes being sold to adolescents.

3. Sales or gifts of cigarettes to those under 21, not registered as nicotine addicts, would be liable to hefty fines that are comparable to those levied on the supply of other addictive drugs. Fines would also be imposed on non-addicted youth purchasers as well as suppliers.

4. All cigarette promotion would cease – including special events promotion such as in the Grand Prix. Indeed there would not be much need for non-defensive advertising since the demand for cigarettes by new smokers would disappear.

5. The provision of duty free cigarette purchases would end at all Australian entry points. Visitors to Australia would receive the right to bring several packets of cigarettes with them into Australia and a temporary right to purchase cigarettes for up to one month. Thereafter they would need to register as nicotine addicts with a doctor to continue their supplies. There would be hefty penalties on the resale of such cigarettes to residents.

6. Smoking would be banned in all workplaces, all public places, including public walkways and in cars with non-smoking passengers. Hefty fines would be levied for violations.

7. A publicity campaign would be launched to discourage smoking within the family home. Children and spouses of smokers could take tort actions against those practising smoking within the home on the basis of cotinine tests. Children and spouses of smokers would be eligible for publicly-funded cotinine testing to check on their passive smoking exposure. Persistently raised cotinine levels would provide grounds for those suffering from smoking-related diseases to take legal action against smokers.

8. Subsidised (and Medibank claimable) access to quit facilities would be offered to all registered smokers.

9. Potential applications for immigrants to Australia would lose entry score points if their urine tested positive for cotinine. It should be part of the normal system of appraisal since smokers imply above-average health costs for other Australians.

Am I serious about this as a policy package? By half I am. The proposal does not limit access to cigarettes by those addicted to them but makes it clear to smokers they are consuming an addictive drug. It limits deadbeat kids from initiating a habitat that they themselves will come to despise in a few years. In price terms it sends out the right signals on relative harms. As existing smokers cough themselves into early graves or, more hopefully, quit the disasterous habit of smoking, cigarettes would largely disappear without great social pain.

I’d be very interested in comments on this proposal but for goodness sake not on the ethics of curtailing smoking. That is not an issue being addressed here.

An easy way to cut youth smoking

Impose hefty fines on retailers who supply to kids. This Queensland retailer was fined $2000 and could have been hit up to $10,000. Why not $10,000 or indeed $100,000?

22% of underage smokers obtain their cigarettes directly from retailers in NSW.

If you really wanted to be tough fine illegal cigarette purchasers as well as illegal vendors.

Rock from the late 1960s: A particular state of mind

On a Sunday night sans psychedelics – the kids are watching 'Kath and Kim' and the closest thing to excitement is a rainy Melbourne evening. Yeah, don't tell me, we need the rain. Nothing much to do, so search for long lost great music on YouTube.

I enjoyed this tribute to Pink Floyd’s Syd Barrett (1946-2006). This put me in the mood for some vintage Jerry Garcia (Death Don't Have No Mercy, He’s Gone), some of Mona in an atonal, frenetic performance by Quicksilver Messenger Service and a visual verdict to Porpoise Mouth by Country Joe and the Fish. Oh yes and Frank Zappa crept in!

Ah, the 1960s (thanks to Mark U for correction) – yes I was there and sorta remember.

Foreign control of Melbourne's water?

More suspect economics from Jason Dowling The Sunday Age.

HUNDREDS of millions of dollars of Victorian water profits will flow overseas because no local companies are capable of building and running Victoria's $3.1 billion desalination plant.
A strong field of international water companies is bidding for the plant, with the winner set to control a third of Melbourne's water needs after 2011....
Water bills will double in Melbourne in the next five years to pay the private firms for building and operating the plant.

If the bidding process for tenders is competitive, and there are no learning externalities that might come in handy for building further plants, then the project should go to the lowest cost tender irrespective of whether it is foreign or local. We should get rid of the ‘buy Australian’ ethic permanently and simply go for the best deal based on the principles of free trade.

This does not mean the desalination plant is a good idea. Indeed the problem with the daft economics expressed is that it deflects attention from issues that are important.

As I discussed last week there are alternative proposals for redirecting water from rural users and from building additional dams that should be considered. Purchasing water from irrigators on the Goulburn River and building a pipeline to pump it to the Sugarloaf dam would cost about ¼ the cost of providing water from a desalination plant (225 cents per kilolitre) and the cost of a new dam on the MacAlistair River would only be a bit more than the cost of irrigation water, according to the IPA. Robert Merkel, in comments, mentioned possible environmental problems in the Gippsland lakes as a consequence of another dam - an issue I am exploring.

As is well-known the most 'low value' water users in the state are rural irrigators:

Irrigated industries account for 77% of water used in Victoria. In 2004/5 the state’s irrigation industries – which take water from the Murray River System - used more than 5 times the volume of water consumed by the 3.5 million residents of Melbourne in the same year.

Moreover, desalination plants have significant environmental impacts on the marine environment. And the energy intensive character of such plants will add to climate change problems.

But these problems have nothing to do with the mercantilist fears being fostered by Dowling.

Trivial Saturday as hc's blog => degenerate diary mode

I planted a couple of prostrate Banksia this afternoon (Banksia Blechnifolia), several Kangaroo paws and the Tasmanian lomandra (by far the best looking of the lot), L. Hystrix, which I had grown from seed. I also planted some of Mrs Clarke’s supply of summer herbs - Flat-leafed parsley, Italian basil, some coriander and a couple of chilli plants.

Tomatoes have already been planted at Clarke Mansions and the pre-pubescent budding outlines of rich red squeezable tomatoes create a strange stirring sensation in my loins as I gaze off into the summer sunset and think of Nabakov. Shuffling items between garden beds and pots took a few hours longer than expected and, as I type this, I am relaxing sore muscles with a dirt cheap, though excellent, Froggie red wine sold in Australia under the label Arrogant Frog – a great drop for under $10.

This morning I took son to violin lesson on other side of Melbourne, wacked 100 golf balls at a practise range at Kingston Links in Rowville then ate the usual Saturday lunch of duck and rice.
I also thought about the prospects of political catastrophe in Australia.

Garrett now says it was all a mistake, humour a stuff-up. Whatever it was Kevin ‘wax-muncher’ Rudd has forgiven Peter Garrett for saying that Labor’s ‘me-tooism’ is a lie and that once Labor gets into power it will change its policies to ones that are different from the Coalition. Me-tooism doesn’t matter because we will change all that when we get into power. Mr Rudd has affirmed affirmatively that he means what he says – ‘it’s our covenant with the Australian people’ . And Peter admits he is a dummy – yep.

I always detested the music of Garrett’s inept rock group Midnight Oil. The lyrics of Garrett’s songs remind me of the sad facts of early leftwing mental retardation. Of course he has grown up quite a bit since those days and adolescence looms.

Earlier in the week Peter Garrett had confirmed the dishonesty and hypocrisy of the Labor Party by conforming (the day after stating the contrary) that Labor would only sign an international agreement on climate change if developing countries did too. Of course this is exactly the reason – much criticised by Labor – the Coalition used for not ratifying the Kyoto protocol.

It is interesting that Labor implicitly accepts the me-tooism. Rudd has essentially said that me-tooism is not a deceitful tactic – they will honour me-tooism.

There are only two minor differences between the Coalition and Labor:

• Labor opposes WorkChoices though current AWAs will be honoured for a period of 5 years – until after the next election. Not a big difference and a lot can happen in 5 years particularly if an inexperienced Labor Government drives Australia into recession.
• Labor will withdraw troops from Iraq. This is a total con since regardless of who wins the election the same number of troops will be doing the same jobs by the middle of next year.

The major difference between the parties is that the Coalition has a good track record and came up with their own policies. The comparison is between sturdy, resilient John Howard plugging on under seemingly daunting odds versus Kevin Rudd smirking in a wax-stained business suit and reeking of hypocrisy and glib cliché.

Send well-dressed thieves to jail

I agree with Graeme Samuel: send well-dressed criminals who steal systematically from the public to jail. As in the US, Canada and Britain those who operate cartels that fix prices and steal hundreds of millions of dollars from the public should go to jail. Visy Industries is the worst example of collusion in Australian history a Federal Court judge said yesterday – yet it got a trifling $36 million fine.

The prospect of a lengthy term in the clink would make the Richard Pratts of this world think twice about engaging in or being tolerant toward collusive behaviour. A $36 million fine, when there are hundreds of millions of dollars in potential gains from flouting the law, does not provide the same disincentive.

Further thoughts: The relatively paltry fine does however offer some encouragement for non-contract customers to pursue their joint $700 million class action claim against both Visy and Amcor. As I pointed out in an earlier post the law here that gave immunity from prosecution under trade practices legislation to Amcor for dobbing in Visy first does not imply an exemption from other civil damage claims. For the legal motivation for the structure of law here see my earlier posts here, here and here.

Hard Labor

Labor liars reveal all:

‘Once we get in we'll just change it all’, Mr Peter Garrett said to high-profile radio announcer Steve Price.

To Labor 'me-tooism' doesn’t matter because once they get in they'll change it all anyway. Copy the experienced, winning side then change it all once the Labor lies secure its power.

Mr Rudd has not commented. Oh, dear. Mr Magoo - he did a 'deep thorkus' on this one - up to his elbows in ear wax, he was.

Tim Blair describes Peter Garrett as ‘seven feet of pure liability’. The shadow minister for health, in my opinion, is a worse disaster.

It really is a bit much when a political party, like the ALP (that harbours child molesters, rapists, criminals and crooks as well as ear wax munchers) gets annoyed when Tony Abbot simply says ‘bullshit’ to ex-legal eagle, union hack Nicola Roxoff because she nagged him unrelentingly and without justification for being late for a TV show. Indeed this cow deserved a pointed remark directed at her (I'll provide suggestions Tony) rather than her nagging.

Don’t apologise to her, Tony and give her a well-deserved kick in the arse if you get a chance.

Becker gets another gong

From Steven Levitt. Gary Becker will receive the 2007 Presidential Medal of Freedom, the nation’s highest civilian award. Becker already has a Nobel Prize, a National Medal of Science, the John Bates Clark Medal, and sixteen honorary doctorates. To quote Levitt:

'No economist of Becker’s generation has had such a profound influence both inside and outside the profession. It is worth noting that when he first began doing some of his seminal research many years ago, on subjects like marriage and racism, he was looked down upon in the profession for straying too far outside the lines of what was considered normal, worthwhile research.' (my bold)

I think this is an accurate summary. See this interesting autobiographical sketch, his wife Guity’s reflections on meeting Gary, and Levitt's own experiences with Becker.

Australian National Botanical Gardens

Damien Eldridge sent me this link to the parlous state of Canberra's Australian National Botanical Gardens. Jobs are being cut - 30% have disappeared over the past 20 years - and solvency is threatened by mounting water bills ($600,000 annually) and increased electricity charges. The claim is that the gardens are being poorly maintained.

These gardens are a unique Australian institution and the largest collection of native Australian plants - about 1/3 of all species - in the world. There is an enormous range of species covering a wide range of habitat types - rainforest gully plants and dry country plants within a short distance of each other. I am surprised at how few academics from the Australian National University use the gardens as it is within walking distance of the campus.

The article suggests that too much use of the gardens is being made for recreational purposes. I don't see that. I am a regular visitor to the gardens when I am in Canberra. Its an obviously important place to look at flora (and avifauna!) but also a pleasant place to meet up with friends to have a coffee. I cannot see much conflict between these roles - investing in garden beds to provide paying customers should be one way of cross-subsidising the important conservation and scientific work the gardens provide.

It would be a national tragedy if this unique national asset was damaged or lost for what seems to be a fairly paltry amount of money.

Urban water pricing

Today I have been at the Wodonga campus of La Trobe University attending an interesting workshop on urban water pricing.

John Quiggin introduced the major ideas of the workshop with an interesting paper presented by teleconferencing from the University of Queensland. The actual teleconferencing worked quite well from our perspective though John could not see us. He looks very different without his trademark beard!

John noted the role of increasing population and what seems to be a longer-term trend of reduced flows into the water catchments of Australia’s major cities in creating an urban water problem. His general perspective is that in the short-run restrictions on water use have strong effects but price changes affect mainly incomes not demand. Longer-term restrictions wear out in usefulness but price changes have a more substantial effect. Hence use restrictions for short-term water supply issues but longer-term rely on price. Using restrictions to address long-term water shortages also reduces the availability of a key policy instrument for addressing short-term crises.

He argued that everyone agrees that prices must rise. The limit to price rises is the backstop cost of recycling water or the use of desalination technology which John valued at about $1-50 per kilolitre. This backstop cost can be much lower if rural water users can sell their water to urban users as they potentially can in, for example, Melbourne.

John’s suggested pricing scheme was a two part pricing scheme that would allow families a 50 kiloliter allowance per family member free coupled with marginal cost pricing at around $1-50 per kilolitre beyond that. This is a demogrant proposal – a lump sum grant made to families on the basis of some demographic characteristic – in this case just the number of family members. The idea is that most people will consumer in excess of 50 kilolitres per year so most families will pay the long-run marginal cost of water use boosted to account for the cost of the free allowance – so the scheme will be self-funding.

The idea is to move to offset the regressive effects of a move toward efficient pricing. The idea is to make the free allowance large enough to give families relief but low enough so households face marginal cost.

Alastair Watson followed with a discussion of the role of pricing concessions in water pricing – around 35% of households receive concessions which seems extraordinarily high. He also argued that the effects of concessions and free allowances will be swamped in Victoria by forthcoming price increases that stem from the flawed move to rely on a costly desalination plant and by the ideological opposition to new dam projects and to trading rural water supplies. The overriding principle should be that water should be supplied from the cheapest source.

This was followed by interesting papers by Geoff Edwards on efficiency issues , by Bethany Cooper who is studying the way water restrictions operate in NSW and Victoria and by conference organisers Sue O’Keefe and Lin Crase on how the demogrant proposal of John’s works out in a sample of Victorian households – it does indeed provide improved equity outcomes.

In a closing discussion attention turned to the case for a uniform price versus a IBT tariff (increasing block tariff) with almost all the economists favouring the uniform charge and some from the water utilities promoting the IBT as a means of encouraging conservation. The economics of this are simple – a uniform price makes sense because one wishes to equate the marginal cost of water use across users to achieve economic efficiency.

The demogrant proposal was criticised more strongly on the grounds that it seemed to be largely a cosmetic proposal designed to facilitate the achievement of uniform pricing rather than the IBT. In terms of addressing social welfare and poverty issues the value of the grant for a family of 4 with a price of water set at $1-50 per kilolitre is $300 or about $1 per day. This would have at best a very marginal effect on distribution. Generally there was opposition towards seeking distributive justice by tinkering with the pricing of goods that did not play a significant part in household budgets. The general tax-transfer mechanism would seem a better way of doing this.

There was also questioning of the implementation costs of the demogrant proposal in terms of the costs of identifying family size. If the redistributive benefits are very small then these might be swamped by transaction costs. It might be better to just go for aq stark uniform charge that was contingent on the current supply situation.

A well-organised workshop.