The impending wages explosion

I posted last week on the teachers’ pay decision in Victoria and the dangerous potential for flow on effects that will drive high inflation and create a much larger pool of unemployed. I indicated that I hoped to be wrong on this issue - I lived through the misery of high cost-push inflation and high unemployment during the 1970s and 1980s. It is no joke.

Rudd is trying to suppress release of the Treasury critique of Labor’s foolish IR policies. These will add to inflation and unemployment. But the trade unions can do much more damage than this. They have already made their views clear. The following passage from The Australian is worth studying. Australia faces an impending wages explosion unless Kevin Rudd gets serious about dealing with these trade union fools who evidently seek to damage the interests of labour in Australia:

‘….unions in Victoria vowed to chase annual pay rises of up to 6% for the next 3 years to compensate for the 4.2% inflation rate and suppressed pay under John Howard.

Victorian Trades Hall Council secretary Brian Boyd told The Australian a deal struck by teachers in Victoria endorsing pay rises of up to 15.2% exemplified the catch-up increases unions wanted under the Prime Minister.

"I am quite aware that a number of key private sector unions and groups of workers are arguing for 5% (a year) to get ahead of that 4%" he said.

"There are agreements already being looked at around 15% over three years, and some will even go to 18-19%.

"(It's) not only to compensate for inflation but also to compensate for the restriction on the ability you had for decent wages under the previous government."

The Australian understands the pay push includes unions in the construction, manufacturing, transport, electrical and plumbing sectors. The Victorian teachers' deal has also buoyed public servants across several states - including teachers and nurses - on the verge of pay negotiations.

The wage push came as Brendan Nelson demanded Mr Rudd release Treasury advice prepared in February showing whether his industrial relations reforms would drive up inflation.

….Mr Boyd said the Victorian teachers' deal was a "good case in point" of unions playing catch-up after wages were suppressed under the Howard government.

"There has been a lot of wages curtailed in the last 3 or 4 of the Howard government and people are trying to catch up," he said.

Ordinary working people were not responsible for rising inflation, but were entitled to receive compensation for higher petrol and grocery prices, he said.

"The union movement is an independent voice for trying to find a fair market price for workers they represent in the capitalist market place," he said.

"We have put up with 11 years of IR laws that have been aimed at restricting our ability to find a fair price for labour.

"Just because (John) Howard got elected for a decade doesn't mean we accept that these harsh IR laws were justified in restricting our ability to find a fair price for labour.

"So I have no qualms in saying if we want to play the catch-up game for wages and conditions, we'll do it."

Mr Boyd said he did not accept the wage push would exacerbate game for wages and conditions, we'll do it."

Mr Boyd said he did not accept that the wage push would exacerbate inflationary pressures. "Ordinary working people didn't cause the inflation situation," he said. "Other factors caused that. The oil price internationally is one of them, and grocery prices going up has nothing to do with what workers do.

"They're entitled to get compensation for that. That's why I'm calling it a catch-up process, not a breakout process."

Mr Boyd denied the pay push could lead to a wages breakout. "It's not really a wages explosion, in my view. It's a catch-up that is currently going on because of what happened over the last few years of Howard," he said.

"It's making up lost ground. I think there should be an understanding that a lot of the workforce across the country, not only in Victoria, are viewing their situation in terms of inflation and (consumer price index) rises, in terms of the cost of living, in terms of petrol prices and power prices, and so on".

If Boyd and his crony economic-illiterates can't achieve these objectives then well-and-good. The difficulty is if they can and unions in Australia start playing 'wage catch-up'. Once-and-for-all price hikes will then translate into inflation and eventually the need for a major monetary contraction.

But the key task for Kevin Rudd is not budgetary. It is to talk down the demands for an instant wage nirvana in Australia. It is to put the trade unions in their place and to reinitiate the processes of labour market reform that Rudd has so foolishly quashed.

Spokesbird for the endangered species

Thanks Lena.

Treasury effectively denounced Labor's IR policies

All my long held criticisms of Labor's IR reforms - that they will trigger job losses, worsen inflation and increase interest rates have been supported by the Commonwealth Treasury in its analysis of the plan to abolish WorkChoices. According to The Australian:

"...the secret Treasury advice, the department, under Treasury secretary Ken Henry, concluded that the abolition of AWAs and the return of guaranteed penalty rates would cut jobs, put "upward pressure on prices", create more "flow-on" wage claims from sectors such as mining to less productive sectors and allow unions to "bid wages up above their market level".

"The shift to a more centralised wage system might reduce employment and increase inflation. For example, higher unit costs, either through higher real labour costs, lower productivity, or a combination of both, will place upward pressures on prices, which effectively lowers real disposable incomes, consumer spending and thus employment. The rate of flow-on of wage increases from high-productivity firms and sectors to low-productivity ones may increase. Reinstalling union power will raise the ability of unions to bid wages up above their market level."

In addition abolishing unfair dismissal laws will cut jobs, increase red tape for small business and make it more difficult for people to move from welfare to work.

Treasury said WorkChoices was "expected to allow a more expansionary monetary policy setting and result in higher rates of employment".

Where's Labor's cheer squad on this one?

This document was written before the last election but despite Julia Gillard's denials it is definitely applicable to Labor IR policies. The unemployed of Australia and those facing higher mortgage repayments and higher inflation can attribute part of these problems to inept Labor IR policies and to those sections of the leftwing intelligensia who, against all reason, supported these particularly inept and foolish proposals to reregulate the Labor market.

Pigs can fly - Harry Clarke in agreement with Paul Keating

Paul Keating expresses support for Morris Iemma in NSW. I agreewith Keating's remarks. His comments on the 'natural monopoly' character of the distribution network but the competitive character of the generation network in an integrated eastern seaboard market shows that he understands the main issues. Provided electricity can be sold in a connected, competitive market we don't need a 1930's-style Stalinist state supplying us with power.

Barry O'Farrell, who I knew as a very decent fellow student at the ANU in the 1970s, should be ashamed of his fence sitting. His duty is to NSW - not to scoring a few cheap political points. On this one my old cobber Barry - back Iemma.

Sell cannabis in post offices

The Director of the alcohol and drug service at St Vincent's Hospital Dr Alex Wodak proposes selling cannabis in post offices to cut consumption. He made the proposal for taxed and legalised cannabis at the Mardi Grass festival in Nimbin on Sunday (!), but said he would be happy to express his opinion to the Federal Government.

I wonder what Australia has done to deserve such people. I also wonder why those doctors so concerned with the health problems of managing illicit drug use seek to employ measures that will definitely increase its use.

Cannabis use in Australia is falling as the recent National Drug Survey shows – among youth use has fallen by about 20% from 2004-2007.

This call is appallingly irresponsible. It would substantially reduce the user costs of consuming cannabis and given that the demand for cannabis certainly depends on price would encourage its use substantially Dr Wodak believes that such a move would substantially reduce consumption. How? If prices (inclusive of other costs) were less than illegal market prices then quantities demanded would be greater. If legal prices exceeded prices in illegal markets then there would be two sources of supply - illegal cheap cannabis and more expensive legal cannabis. How will this help reduce demand?

As I have written before, Wodak’s uncritical support for harm-minimisation at the expense of the most basic appreciation of the laws of supply and demand makes no sense.

Are not physicians supposed to ‘do no harm’. How is reducing the cost of a dangerous drug by decriminalising it going to help? Why pretend that current policies seeking to limit the use of cannabis are failing when they manifestly are succeeding.

Update: An updated version of this post is cross-posted at the ABC website.
Update: Here is Miranda Devine's view. Very similar to mine.

Brumby's cave-in to the militant teacher union

Victoria’s 43,000 teachers secure wage increases of up to 15.2% as Premier Brumby caves in. Victoria’s teachers become the highest paid in the country with starting salaries for graduate teachers being $51,184 – an increase of $5000. Mr Brumby declared that the $2 billion budgetary cost would be offset by productivity improvements – teachers will work an extra 10 minutes per day.

I suppose at least he didn't award their ambit claim of 30%!

One teacher a Jason Pietzner said he ‘was still coming to grips with what the deal would mean over time. It says we will be the highest paid teachers but I wonder if that will be the case in three years' time after the other states have struck new deals’.

The Victorian taxpayer clearly has more to look forward to.

Melbourne’s Pravda called the deal a 'win-win' outcome. The teachers get more money and the government will get greater teacher productivity. I agree with the first part of this claim.

Last September the Victorian Government awarded police salary increases of 14%. Public service unions around the country are lined up for their next round of wage negotiations and will undoubtedly insist on parity. Wages have been galloping away for state public servants around Australia in recent years. Sharon Burrow has told workers they are not responsible for inflation and deserve to be compensated for foreign fuel price increases and food cost rises.

Federal Workplace Relations Minister Gillard urged ‘restraint across the economy’. Should I laugh or cry?

My expectations are that, with Labor holding a monopoly on political power in Australia, there will be a dramatic economy-wide surge in wages over the next year or so followed by rapidly rising inflation, huge rises in interest rates followed by a severe contractionary monetary policy needed to get things ‘back on track’ that will lead to hundreds of thousands of low income Australians being unemployed. The Coalition will be returned to power both Federally and at the State level around Australia but another generation of Australians will have their lives devastated by the latest batch of incompetent Labor yahoos.

I really do hope I am wrong on this one.

Don Harding on RBA policy

My colleague Don Harding has a forceful piece on monetary policy in today's Australian. He argues that the RBA has not tightened monetary policy since the real rate of interest has fallen slightly. True Don but those nominal increases in interest rates do impact on consumers faced with assets not appreciating at the rate of inflation so that borrowers can take out loans to cover their higher nominal costs without any real impact.

I agree with Don that the RBA have shown flexibility in not mechanically responding to external price shocks via a Taylor rule. It makes sense not to do so if these shocks are price increases that are not necessarily the start of an inflationary process.

Don argues that the danger with the RBA's 'softly, softly' policy is that inflation may emerge unchecked. I agree but see the problem here mainly as an issue of preventing wage increases to match cost-of-living increases that are exogenously imposed on us. Its the reason I* worry about Labor's political debts to the trade union movement. RBA policy itseklf seems to me quite sound.

Putting your money where your butt is

This paper (that I learned about indirectly by reading an Andrew Leigh post) by Xavier Gine, Dean Karlan & Jonathon Zinman uses short-term incentives to deter people from smoking. It is an intriguing idea:

Abstract: We designed and tested a voluntary commitment product to help smokers quit smoking in the Philippines. Individuals who sign a Committed Action to Reduce and End Smoking (CARES) contract deposit money into a savings account and agree to let the bank forfeit their entire balance to charity if they fail a urine test for nicotine and cotinine six months later. Bank marketers offered the product by approaching smokers in public places. Marketers administered a short survey, provided a standard pamphlet with information on smoking’s harmful effects and how to quit, and then made one of three randomly assigned offers: (i) CARES; (ii) aversive “cues”: graphic, pocket-sized pictures of the deleterious health effects of smoking, modeled on Canada’s cigarette packaging mandate; (iii) no intervention (control group). 11 percent of individuals offered CARES accepted. 6 months after marketing, the bank marketing team returned and administered urine tests to participants from all three groups. Subjects offered CARES were 3.1 percentage points more likely to pass the test than the control group (a 38.8% increase); this intent-to-treat effect rises to 4.3 percentage points for those who reported in the baseline survey that they wanted to quit smoking at some point in their lives. Treatment-on-the treated estimates suggest that those who signed a CARES commitment were 29 and 33 percentage points more likely to pass the test than the control group.

This proposal has advantages over the one I analysed a few weeks ago which simply gave rewards to those who abstained from smoking. This scheme isolates those with specific incentives to quit. It is less open to manipulation.

Trade union bullies threaten NSW government

A few thousand electricity workers threaten to derail the privatisation of the electricity sector in NSW. Morris Iemma will either face a huge fight with this unrepresentative rabble and lose or stick to his guns and change the nature of the Labor Party for the better.

The issue is whether democratically elected politicians should be responsible to the people or to unrepresentative trade union bullies. So far Iemma has shown more guts than I would have given him credit for.

The implications of this momentous struggle are clear – how can Rudd embark on a reform program if fat-cat public sector unions are to rule the roost? How can Treasurer Swan defeat the cost-price hikes that can trigger inflation if unrepresentative trade union idiots in the ACTU argue that price increases must be met with increased wages? Indeed this is exactly the inflationary spiral Swan must at all costs prevent from happening.

The Labor Party should not be owned by unrepresentative trade union swill.

Update: Kim at LP endorses the actions of the trade union thugs. After all why join the Labor Party unless you seek to promote the causes of the unionists. She asks do Labor Party members only seek public office? To Kim there are no issues of democratic principle here - Iemma is only mimicking the anti-union sentiments of the other cside of politics. Daft.

Forgetfulness & neurosoftware

I have used a 4-digit code on my office phone to access stored phone messages at least once a day for the past three years. On Thursday I forgot it. Should I take up brain calisthenics? Where did I put my Nintendo?

I had to use the search function on my blog to recall the name of the singer, you know, what's-his-name, who dealt with the issue of, what was that again, oh yeah, forgetfulness.

......and thinking of Tom Rush and the songs I really liked of his (here) I found a version of "Urge for Going' by Joni Mitchell (she wrote this beautiful song) recorded around 1965 that was even better than Tom's version. How come I remember all this old stuff?

Social interactions & smoking

This paper by David Cutler and Edward Glaeser is worth a look.

Abstract: Are individuals more likely to smoke when they are surrounded by smokers? In this paper, we examine the evidence for peer effects in smoking. We address the endogeneity of peers by looking at the impact of workplace smoking bans on spousal and peer group smoking. Using these bans as an instrument, we find that individuals whose spouses smoke are 40% more likely to smoke themselves. We also find evidence for the existence of a social multiplier in that the impact of smoking bans and individual income becomes stronger at higher levels of aggregation. This social multiplier could explain the large time series drop in smoking among some demographic groups.

The basic idea is that smoking is a social activity – people like to smoke with others. It confirms other work already cited on this blog that eliminating smoking by individuals has positive direct effects and positive indirect effects of stopping others to smoker.

Incidentally I find it strange that the Cutler/Glaeser study does not refer to earlier work published in a widely-respected journal. I have noticed this before among US economists.

US economy shows resilience

The US economy grew by 0.6% in the first quarter of 2008. It was not in recession.

At Intrade the probability that the US has fallen into recession has fallen to 25%. (When I last looked it was 33%, look under Financial/Economic Numbers).

Hat tip: Gregory Mankiw

Update: Even Paul Krugman is cautiously optimistic. The worst of the financial crisis seems to be over.

Palestinian self-inflicted pain

I found this article from Commentary, ‘1948, Israel, and the Palestinians’ of interest. I am always surprised by the vehemence of the left's hatred for Israel.

STDs among indigenous kids decline following the Brough-Howard Federal intervention

Despite the moans of the Howard-hating left and the tedious paid anti-Liberal sections of the indigenous people industry it seems the Federal intervention to reduce the sexual molestation of indigenous children is working. Early days yet but the evidence is positive:

THE federal intervention in the Northern Territory has led to a decline in new notifications of sexually transmitted infections among children.

The Northern Territory Government's latest surveillance update on sexual health and blood-borne viruses revealed that 62 children aged under 14 were diagnosed with sexually transmitted infections in the Territory in the first six months of the intervention. Three of the children diagnosed with chlamydia between July and December last year were under the age of 10. The figures also showed that total diagnoses of chlamydia, gonorrhoea, syphilis and trichomoniasis declined in the second half of last year, compared with the first half, following the intervention.

Come on supporters of’ doing nothing’ think of a good alternative explanation for this good news. Perhaps: The data was collected by Liberal Party flunkies, adults grew smarter at hiding sexually abused children. These stories and many others are a useful way of continuing to live in a world of illusion and denial.

Of course the general STD problem remains massive:

The rate of notification of gonorrhoea among Aboriginal people in the Territory was 51.7 times the national rate.

But Mal Brough and John Howard were on the right track and the brainless apologists for inept NT policies are shown to have put their political biases ahead of real concern for the welfare of indigenous kids.

Seat-sniffing in the west

I would be astonished if Troy Buswell gets a kick out of smelling the seat that a woman has recently sat in. I assume his actions in sniffing the chair seat of a female Liberal Party staffer (in her presence) were a questionable joke that has gone seriously wrong. You wonder about the motives of the woman concerned in making her outrage public and in thereby publicly crucifying Buswell in front of his colleagues and his family. It seems to me these disclosures are marginally more destructive than putting a clip of Kevin Rudd on YouTube chewing his earwax which, in my view, wins the party-political grossness stakes hands down.

Seat-sniffing on the face of it would seem to be a more innocent perversion and indeed derriere and yeast devotion has been the subject of helpful advice from YouTube – ‘prepare an explanation lest you get caught’.

By the way I have a leather chair for sale that I’ve sat in for over 20 years. The leather in the chair is a bit, well, worn, but it does have the wholesome bouquet of a Vitamin B Berocca. There are a few inconspicuous tooth and nostril markings that mysteriously appeared deep in the leatherwork after some left-wing Labor Party types raided my cellar once I had departed my office but the chair is in otherwise excellent condition. All offers considered.

Indigenous smoking yet again

I have been ridiculed at public fora for suggesting that Aboriginal and Torres Strait Island (ATSI) smoking rates are an overwhelmingly important cause of the discrepancy between indigenous and non-indigenous mortality rates. The general response has been: ‘Harry you have a bee in your bonnet about smoking that 'clouds' your judgement’. It is true I do dislike this destructive habit but my claims about aboriginal health and smoking stand – indeed I have posted them explicitly on this blog.

This very helpful report is the most accurate and up-to-date study I have seen on ATSI health issues and read what it says about ATSI smoking:

Tobacco smoking was the leading cause of the burden of disease and injury for Indigenous Australians in 2003, accounting for 12.1% of the total burden and 20% of all deaths....In 2004-05, half (50%) of the adult Indigenous population were current daily (or regular) smokers. While smoking rates have decreased slightly for the total Australian population over the ten years to 2004-05, there has been no significant change in smoking rates for the Indigenous population in this period....

Many of these 2003 findings seem to come from here. The incidence of smoking is just under 3 times that of non-indigenous populations so the significant health effects do not surprise me. Also note that ATSI die on average at around 17 years earlier than non-ATSI populations. Thus, as a rough approximation, aboriginals die in their late 60s rather than their 80s – this is rough since it ignores significant ATSI mortality at much younger ages which will reduce the discrepancy between ages of death at older ages. However the bulk of lung cancer deaths occur in people in their 60s and 70s – for US data see this Table 3. Thus many of the deaths from smoking among ATSI will now not appear because ATSI have generally worse mortality than non-ATSI for various reasons not necessarily related to cigarette smoking.

Thus with a successful attack on ATSI health problems increased effects of smoking on ATSI mortality will become apparent unless such efforts include a clear focus on reducing ATSI smoking levels.

Australian drug use trends

The 2007 National Drug Strategy Household Survey has just been released (here). This is by far the most useful and accurate study of drug use trends in Australia.

Tobacco consumption continues to fall – less than 1 in 5 Australians smoked over the past 12 months. There is a very significant reduction in daily alcohol consumption – from 8.9% in 2004 to 8.1%. The most common illicit drug in Australia is cannabis – 9.1% of those aged 14 years and over had used cannabis during the last 12 months with strong continued decline in use among youth – use from 2004 to 2007 dropped from 11.3% to 9.1%. There is a significant* reduction in use of amphetamines/ice from 3.2% to 2.3% over this same period.

Heroin use remains very low at 0.2% in 2007 compared to 0.8% in 1998. The big supply reductions that occurred during the heroin drought of 2000 as a response to increase police interdictions seem to have permanently and significantly reduced heroin demands.

These are very positive signs which show that the campaigns against dangerous licit and illicit drugs do work. The only negative features are that ecstasy use remains high at around 3.4% of the population and cocaine use has increased significantly* since 2004 from 1% of the Australian population to around 1.6%.

An excellent report that isn’t too long. It is good reading if you wish to be informed about drug issues rather than adopting partisan views in the media and the drug treatment industry.

*Significance here means statistical significance at a 95% confidence level.

Increased tax on alcopops

The Australian Government's decision to increase the excise on so-called alcopops by 70% is excellent news. These sweet flavoured alcoholic concoctions are intended to create another generation of heavy drinkers in the face of a steady state decline in the demand for booze.

The industry is targeting kids who will suffer permanent brain damage from excessive alcohol use. This tax - which will add about $1 to the price of this rubbish - will help combat this.

The liquor industry ranks with the tobacco vendors as one of the most immoral in our society. Anything that damages their profitability and long-term prospects advances the social welfare. It is also useful that shareholders in these nasty businesses wake up to the long-term difficulties that these firms seeking to create alcohol dependencies will experience. You were warned!

Howard Government destroyed our youth with user pays

It will take years - possibly decades - for the wickedness of the Howard Government to loosen its grip on Australian society. And it is our young brightest minds, our ‘future’ who are paying the highest price.

In today’s Sunday Pravda we learn that the La Trobe University women’s football team had to forgo trips to Vietnam and Thailand because they had to pay $700 to go to the Gold Coast in Queensland to play football. Prior to the Howard Government’s abolition of compulsory student union fees they could have got to the Gold Coast for only $300 with the remaining portion of their costs then being cross subsidised by non-sports playing students. At this cost they could afford to go to Queensland and take an overseas trip.

It is worse than this elsewhere – the Deakin University volleyball club has folded.

It just isn’t fair! Hang your head in shame, John Howard. Shame! Shame! Shame!.....

The ugly but understandable face of Chinese nationalism

That 10,000 Chinese citizens were organised by the Chinese embassy in Australia and other groups to go to Canberra on Thursday to overwhelm and attack a much smaller group of pro-Tibetan demonstrators says more about the Communist society origins of the Chinese counter-demonstrators than about the lack of any political morality by the demonstrators.

Tibet was ‘liberated’ by Mao in 1950-51, and a subsequent program of destruction of national culture initiated. There is no question that the overwhelming majority of Tibetans despise their Chinese oppressors and have allegiance to the Dalai Lama not Beijing – indeed they are paying with their lives because of their allegiance. The recent protests in Lhasa and elsewhere confirm the unhappiness of the native Tibetans to the destruction of their culture and to the migration of millions of Han Chinese who increasing dominate the lives of Tibetans.

The reaction of Chinese both in China and in foreign countries such as Australia has been one of outraged nationalism as well as claims that their ‘feelings have been hurt’ by the reaction of the west to the plight of Tibet. That is entirely predictable since for most of their lives this nationalism and the sense of duty to their totalitarian leaders has been sold to them as their daily fodder.

Indeed even if a more enlightened political leadership takes over these ingrained cultural attitudes will persist. The barbarism of the Chinese masses will outlast that of their so-called leadership. Indeed I heard tonight that the Chinese leadership will meet with representatives of the Dalai Lama - an action that will doubtless lead to discomfit and even demonstrations by the narrow mindede Chinese citizenry.

It is therefore irrelevant to these Chinese whether China has a moral right to continue its policies of cultural genocide in Tibet. These are the policies and any objection to these policies is offensive to their totalitarian state and hence a personal affront to Chinese who see their lives defined by this barbarous state machine.

China has murdered more of its own citizens than any nation in world history. It buys and sells women and children on a massive scale, treats non-human life with incredible callousness and the Chinese Government supports the most evil regimes on the planet (Zimbabwe, Sudan, North Korea....). China is not a civilised decent society in terms of Western values.

But attacking these despicable cultural practices only amounts to criticising Chinese people at an individual level if such people freely choose to endorse these practices and are unable on the basis of their conditioning to plead ‘diminished responsibility’. As Chinese society opens up it will start to look more realistically at itself and its appalling political institutions. Until that happens it is difficult to get too upset when brainwashed Chinese youth endorse the evil actions of the murderous Chinese regime.

Oil prices will fall substantially over the next 18 months

I have emphasised before that the effects of increased fuel prices will eventually come to reduce fuel demands and create incentives for new sources of supply - these reflect supply elasticity effects and cross price elasticity effects. In the US - which purchases one third of the world's petroleum - this seems to have already occurred with the first annual reduction in gasoline demand since 1991. Part of the decrease might be recession-related and part to changing demographics but most of it seems to be a direct effect of higher prices on demand.

Moreover, with higher food prices now a global reality one would expect these price effects to be relatively most intense in developing countries such as China and India which provide the bulk of the extra demands putting pressure on oil prices globally.

I'll stick my neck out with a bold forecast. Fuel prices will decline considerably over the next 12-18 months. Crude prices at present are having problems breeching the $120US per barrel level so how far do I think they will fall. Medium term prices of around $75US per barrel make investment in the provision of additional oil supplies attractive. That's where I expect them to settle. They might go lower than this - break even prices for tar sands are around $33 per barrel while oil from the Gulf states has a break even price of around $38.

The laws of gravity will eventually apply to oil markets - all cartels fail eventually but they die quicker when demands are falling and competitive fuel products look like they will gain significant market share.

Radon & lung cancer

This is the first of several posts that I will make on lung cancer. They are related to my work on cigarette smoking.

I am interested in the fact that the incidence of lung cancer was very low prior to cigarette smoking but that, these days, around 10-15% of lung cancers seem to be unrelated to cigarette smoking. What is the source of these new lung cancers*? In part the finding could be related to early non-recognition of lung cancers but other factors seem to bear on the higher incidence of non-smoking related cancers that has emerged recently.

In the US the second largest cause of lung cancer is exposure to the element radon – most usually as it seeps through the floor of the family home. Radon kills 15,000-22,000 people in the US annually and is responsible for 12% of all lung cancer deaths. Services are available for testing and reducing radon levels in the family home . There is concern if radon levels exceed 4 pico Curies per litre (4pCi/L).

Puzzling recent findings suggest that radon at low concentrations in the home is hermetic for lung cancer – at low enough dosage levels radiation might help repair damaged DNA. These claims don’t challenge the 4pCi/L standard but the fact is that most households are below that level in any event.

By the way, radon concentrations in Australian homes are low – for most households they are marginally above concentrations in the atmosphere. There is however evidence of heightened health risks from radon in the Australian uranium mining industry.

*Of course passive smoking, asbestos and air pollution also cause lung cancers but their effects seem less important than radon exposure. Smoking and radon exposure are however probably synergistic in promoting lung cancers.

Clueless kids in Australia & America

As I have remarked before it seems to be overwhelmingly the children of migrants - particularly Asian migrants - in Australia who attend private schools and participate in such things as music performances. Long-term residents place a lower emphasis on the value of education and the value of developing difficult-to-acquire skills such as playing the violin or the piano.

It may be that new migrants face economic and cultural barriers toward employment in top jobs and hence have to invest more in their human capital to achieve what a native-born Australian can achieve with less effort*. But that does not explain the greater interest among migrants in cultural pursuits and the greater emphasis among the native-born for brainless activities involving, for example, sports such as football and for viewing totally moronic TV shows.

It seems to me that many migrant parents just have a greater appreciation of the value of education and generally of making effort to acquire worthwhile skills. They make the effort and get the rewards.

My hypothesis is that living well in a stable, wealthy society introduces an element of complacency in making effort choices in relation to aquiring skills. I don't have evidence that goes beyond casual observation to back up this story but believe there is some element of truth to it.

This NYT article deals with rising ignorance among kids in America. The US is the wealthiest large economy on earth and the largest democracy. Maths skills are increasingly woeful and general knowledge skills are poor among most of its children. The US provides an image of where our socioety will end up if the general attitudes of native born Australians to education do not change.

Australians are often stingy when it comes to many of the important things in life. They want cheap food and cheap wine and that's what is delivered in most Australian restaurants and in the disgusting fast food sector. Native born Australians also want education on the cheap and that is what is increasingly delivered in our schools and universities.

In an increasingly competitive world we will lose out longer-term as a society as a consequence of these attitudes. Of course we lose out right now in terms of being more ignorant and having less access to valuable academic and cultural values. Achieving enjoyment and pleasure from life involves acquiring skills just as does gaining a good job.

* It would be interesting to know if second-generation migrants come to acquire the attitudes of long-term native-born Australians.

Climate-proofing the cities

While I have posted at length on adaptation policies for dealing with climate change impacts on agriculture and biodiversity resources (also here) I have said nothing about the cities where most Australians live. Indeed COAG have recently moved to establish a Climate Change Adaptation Framework which includes in its brief analysis of these issues. Climate change impacts on cities and urban areas are the subject of this informative Age article by Peter Fisher.

Cities and urban areas are subject to (i) potentially huge damage from both long-term impacts of climate change (increased temperatures, water shortages, rising sea levels) that might ‘creep up’ on inhabitants and (ii) from increasing climatic variability that can produce impacts such as severe heat waves, storms, floods, bushfires and high winds that hit with unexpected, sudden fury.

Melbourne was battered by severe winds only a few weeks ago and two people died. The prospect is that these types of catastrophic events may become nmore frequent and more intense.

Governments need to introduce policies that will facilitate adaptation to such problems and to promote adaptive responses by the private sector.

A primary concern is that citizens do not choose unsafe locations to reside. Houses built in low-lying areas that are subject to flood or houses in waterfront locations or locations where exposure to high winds and bushfires is a problem that can be partly addressed by government zoning regulation and partly by private insurance markets. Where services such as fire protection are now borne by the community some attempt should be made to shift extra costs towards those living in vulnerable areas to foster private incentives to more sensibly make residential choices.

Builders should face market and regulatory incentives to protect the residents of homes from climatic extremes such as heat stress (which killed thousands of elderly people in the Paris heat wave of August 2003) and to foster use if materials to protect against things such as large hail damage. In addition incentives for facilitating retrofit programs are needed to guard against heat stress, retain run-off from heavy rain and direct high winds away from high population areas.

Victoria needs to plan for potentially catastrophic events such as the destruction of the Thomson water catchment by bushfire, damage to desalination facilities by sea level changes or even the prospect of being hit by a cyclone. This isn’t science fiction – it is simply recognising that the environment is a variable that will increasingly come to pressure our lives.

I've just started thinking about these issues so these comments are provisional. Comments welcome.

Fake Trojans

My PC had been running normally up until a couple of days ago when it suddenly started giving popup messages suggesting it's operating system was about to collapse because it was infected with trojans and spyware. A very official-looking Windows-type message then urged a full system scan. Clicking on this connected me to an apparently bogus spyware firm's website PC-Anti-Spyware which, you guessed it, offered to get rid of the trojans and spyware at a price. Then every 15 minutes PC Anti-Spyware operated as nagware with repeated popups that led to a new threat/offer: Get rid of what seem to be trojans and spyware and the annoying popups urging purchase, by making the payment. As the trojans seemed to be fake - my computer operated properly despite the claims of impending disaster - the main problem was the apparently unending stream of popup advertisements. Moreover, at $39-99US the anti-spyware software apparently does not even work.

My assumption is that this firm somehow installed or arranged to have installed these messages as a virus attached to a website I had accessed and then used the threat of them and the despicable popup sales messages to try to sell their bogus software. I say this because I have never contacted this firm nor sought any support or help from them in managing my software.

I searched the web for information and came to a website Spyhunter which warned of the PC-Anti-Spyware scam and offered to delete both PC-Anti-Spyware and the false messages. Again I was led through a series of webpages to yes, you guessed it again, a request for payment to actually remove the damaging programs. Again appalling stuff. I have no idea if Spyhunter is an offshoot of PC-Anti-Spyware.

I couldn't get rid of PC-Anti-Spyware using the McAfee package which I routinely run as background anti-virus software or by using old spyware removal favorites such as Lavasoft and Ad-Watch. Finally, I scouted the internet and found a number of favourable articles recommending Malwarebytes-Anti-Malware which I ran gratis. It seems after 24 trouble free hours (touch wood) to have finally got rid of the despicable PC-Anti-Spyware and the despicable popup messages although - being burnt several times in this last episode - I offer no guarantees regarding the use of this (or any) software.

This type of intrusion is socially costly. The cost to me was inconvenience over several days. Other people subject to the same scam would have eventually paid up and still had to endure the effects of the scam. I assume that legal action to prosecute these firms would be difficult to sustain because it might be impossible to prove that a virus had been loaded to provide the basis for a sale. Sometimes I despair of the ragged edges of free-wheeling capitalism and of anything-to-make-a-buck attitudes.

Australia 2020 Show

I waited for my invitation to the "Australia 2020 Summit" but it never came. I think someone spread the malicious rumour that I didn't vote for Labor in the last election and that I think Kevin Rudd is a peanut. And I think I know who started that story.

Anyway the 1002 'brightest minds in Australia' are getting together to help Australia 'think through' its future. I don't think that's a bad idea - it can't do any harm. Politicians definitely don't have a monopoly on knowledge and good ideas may surface.

It certainly has the effect of Labor cultivating an even greater attachment to intellectual elites and posers. That might generate a bit of much-needed internal party destruction among the comrades.

On the lighter side Cate Blanchett will be there in her jodphurs - she was the star at a pre-meeting photo session. Kevin Rudd and Glyn Davis will chair sessions and there will be lots of advertising types both with and without ponytails. Draped in her possum-fur coat Matilda House-Williams has already welcomed delegates on behalf of the traditional aboriginal land-owners. (I am tiring of the latter nonsense - we did it last night at a degree awarding ceremony!)

Anyway I will watch and listen and do my best to dispell cynicism - I don't want to get caught up in what Andrew Leigh calls 'sportsplay journalism'. Be positive (=don't be negative?), say nice things about everyone and smile. If you look hard at my photo logo to the right you can see that my grin has strengthened and in my eyes you can see a more enlightened, tolerant being.

Update. My spirit of tolerance and goodwill has waned.

Star attraction Cate Blanchett has praised the Government for putting creativity to the fore by forging links with the arts. While she stole the limelight her co-star Hugh Jackman made the scene too by urging expatriate artists to come home to be part of the emerging Australian paradise. Aging artists should teach and mentor said Foot-in-his-mouth Garrett to help stimulate Australian kulture. Australian content should be restored in the media, 1% of public funding should be allocated to the arts (oink, oink), a HECS scheme should be created for the emerging class of creative talent and politicians should be forced to attend cultural events declared these elitist porkers.

They might just get their wish list too judging by the sheer insanity of some other proposals – a doctor told the conference that all drugs should be legalised to ‘give drug addicts choices’ and to reduce the prison population.

Like Kevin Rudd himself – Summit 2020 is a show about nothing.

Middle class welfare as a strategy to help poor countries develop

I attended a seminar today given by Michael Carter on ‘Poverty Traps and Social Protection’ that is available in full online. Carter suggests that, because of poverty traps, ‘needs based’ targeting may lead to higher levels of long-term poverty than a modestly regressive targeting of those vulnerable to falling into poverty that is based on critical asset thresholds subject to risk. If they do fall into poverty and a poverty trap arises there may be large irreversible costs. It may be preferable from some standpoints to stop 'at-risk' middle class families from falling into a state of poverty than it is to focus purely on assisting the current poor – particularly those with low skills - for whom aid might be ill-advised for triage reasons. There are tradeoffs between preventing poverty and preventing transfers into it. If programs are purely ‘needs based’ then more immediate poverty may be eliminated at the expense of greater long-term poverty as middle class people fall into poverty traps. Then, over time, this means that today’s poor will be worse off in the sense that dollars to relieve their poverty will need to be spread around more thinly.

Carter is seeking to implement this type of policy in northern Kenya. That surprised me for an argument that is entirely a priori. If I was a policy-maker I wouldn’t buy these specific policy prescriptions at all. Instead, maybe investing in the education of those at the bottom of the skill/wealth scale is an option that should at least be assessed. Presumably providing aid to people who are barely surviving has large social payoffs – don’t we get a kick out of seeing people being saved from starvation? In addition, capital market development that might enable poor but highly skilled people to realise their potential and generally devoting resources to simple institutional reform seems a good way to move.

I am sceptical of ‘poverty trap’ arguments generally – when I went to university as an undergraduate this was the way all developing countries were seen – they were ‘basket cases’ caught up in a poverty trap. Over the past 30 years this was seen to be wrong.

Maybe Carter is right but I found his arguments unconvincing.

William's maths question

I have always enjoyed maths and used to try to solve elementary maths problems as a school kid. I can remember with joy finally solving a simple-to-state problem after hours of thinking about it. Often the solution popped out of my head almost involuntarily after I had spent a lot of time thinking about it* and then almost abandoning the effort. I recalled some history here in an early post that aroused no interest at all.

My son William out of the blue this evening asked me 'are there fewer prime numbers than natural numbers?'. Firstly, I told him that Euclid had proved that the number of primes was infinite in 300BC (a modern proof is here). Then I told him that 'counting' elements in infinite sets was analogous to but an extension of counting elements in finite sets. I then tried to tell him the little I remembered about Cantor's theorem of countable sets which intrigued me as a kid.

I told him if you can put a set into 1 to 1 correspondence with the natural numbers - a bijection - then a set is countable. In this sense there are as many even numbers as natural numbers and, as a consequence of one of Cantor's main theorems, as many rational numbers as natural numbers. There are as many primes as there are natural numbers since the nth prime number can be put into 1:1 correspondence with the number n for n=1,2,3,...... Thus the set of primes is countable.

This I hope answered his question although, to be honest, that a 10 year old asked it was far more interesting than the answer I had to scratch around to recall.

* I think I spent more time trying to think things through then than I do today. My knowledge is greater today but my brain often switches to autopilot mode and I apply knowledge rather than think.

Kevin misses Button funeral

Kevin Rudd couldn't make it to the State funeral of Labor legend John Button yesterday. He was visiting Cate Blanchett and her newborn baby in hospital. Cate will make it to the 'ideas summit' just 6 days after giving birth to her third child even though Rudd told her not to attend if she 'didn't feel up to it'. Kevin loves celebrities.

No sovereign risk in Tabcorp/Tattslotto decision

Sovereign risk refers to the possibility that government can change legislation so that they can seize property without any possibility of adequate compensation.

Tony Harris in today's AFR (subscription required) argues that no issue of sovereign risk arises because Tabcorp and Tattersall's gaming licences were not renewed by the Victorian Government.

Gaming licences have a finite life. Those applying to Tabcorp and Tattersalls expire in 2012. This expiry date is cited in Tabcorp's annual reports.

Non-renewal is not an instance of sovereign risk.

Victoria's gaming law provides that if a new licence is issued the holder of the former licence is entitled to a payment equal to the value of the former licence (Tabcorp claims its licence is worth something less than $600 million) or the premium paid by the new licensee whichever is the lessor. Depending on the new arrangement the compensation might be nothing or a small amount - there is no implication it will be $600 million.

If the companies dislike this ruling they can sue but I don't think their chances are good - a letter from then Treasurer Allan Stockdale in 1995 to the companies states clearly that the companies must expect changes in the way the industry is run. Quote: 'I must, however, make it clear that the statement of principles in this letter does not bind this government or future governments, and, of course that the Victorian Parliament has the power at any time to amend existing legislation or pass new legislation affecting your operations or the terms on which those operations are conducted'.

The market value of Tattersalls and Tabcorp declined by $1.3 billion and $1.8 billion respectively after the government announcement. To quote Harris: 'Shareholders of Tabcorp, and probably Tatts, were mugged by unwarranted expectations, not by sovereign risk or lack of information'.

The view of commentators such as Stephen Bartholomeusz that the government's decision not to award compensation is 'immoral' seem misplaced. On issues of morality I think it is reasonable to ask why Joan Kirner gave such a huge profit entitlement to two private companies in the first place and why Labor politicians and party hacks have been feeding off the gaming industry ever sense. One could also ask why investors in these companies came to adopt the view that the companies were entitled to compensation were licences not renewed.

Four Corners on Labor's crooks & sharpies

The Four Corners show ‘Dirty Sexy Money’ screened tonight showed that the Labor Party includes more than a few schemers who have substituted making capital within their party for decent values and for the normal looney-tunes pursuits of Labor politicians. The show is well worth watching if you missed it –available online here. While mainly concerned with the NSW branch and the particular activities of the party in Wollongong and Newcastle, the fund-raising success of the NSW branch was replicated by imitation of its practices in the recent federal election. Indeed the chief fund-raiser in NSW (Mark Arbib) was awarded the safest senate seat in NSW for his efforts.

The response of the left to these accusations? My guess is they will ignore them or suggest they are ‘small picture’ distractions. Or, the other side of politics does the same sorts of things so its OK for Labor - always a favoured line. Or they might also use the superficially clever line – it has an element of truth - that the Liberals in NSW must be hopeless if they fail to defeat such an incompetent, corrupt and unattractive lot as NSW Labor. But generally the left have failed to take seriously the nasty side of Labor politics. The repeated problems of child-sex abuse that have arisen within the Labor Party are one example. The recurrent problems of corruption that have occurred in NSW, Queensland, Victoria and WA branches are another.

The clichés, deification of Oracle Kev and the pursuit of shallow, symbolist policies will continue for a while. But the Liberal Party should be alert to the rottenness in the party of their political opponents and should not stop reminding the Australian people of the facts. The Brumby decision to revoke the pokie licences of Tabcorp and Tattersall’s might be a move to end possibly incriminating links between Labor and these two socially repugnant businesses. I wouldn’t let Labor dismiss this issue and would continue to pursue what has and what will happen here. A policy backflip engineered by Laborite cronies working for the gambling companies or a huge payout in compensation to the companies is not an impossibility.

Update: one hostile commentor pointed me to this Green's website on the political donations scandal. One element of the left is active in opposing disgraceful behaviour by the Labor Party.

Golf: The Masters at Augusta

I've been couch-potatoeing the last few days for long periods as I watched the US Masters Championship at Augusta on Foxtel. There is little doubt that Tiger Woods is a freakishly capable golfer. At 32 years of age he is still in the early phases of a career that may mark him as one of the greatest golfers in history.

Woods is not only an outstanding golfer but an amazing person as well.

Finally, however Woods lost this tournament to an even younger player, Trevor Immelman, aged 28. An interview with Immelman is here. A worthy winner who some claim has a swing that replicates that of Ben Hogan and again a top person - in the early stages he was considered a 50:1 long shot in gaming markets but the late odds on his winning moved to even money. A little more than a year ago he recovered from a nasty cancer scare - the tumour was benign but the hospitalisation transitionally damaged his golf. He is the second South African to win the Masters after Gary Player - Player has mentored Immelman since he first took up the game at age 5.

The final round is on Foxtel this evening - more hours for me slumped in front of the TV.

Advice from the enemy

I have never been one of Brendon Nelson’s greatest fans and preferred Tony Abbott to lead the Federal Liberal Party when that decision had to be made. Abbott is an intelligent conservative who predictably does not appeal to a mass audience. In addition I thought Nelson was a rather poor Minister for Education who operated in John Dawkins mode and was an indifferent Minister for Defence who approved the dubious Super Hornet deal. But I think Nelson, having been elected leader of the Liberals, should be given a chance and some time. He has the difficult job of leading the party back from defeat and should not be ‘white-anted’ from within. Given that the majority-preferred choice for leader, Peter Costello, will almost certainly resign, Nelson has the unenviable task of trying to restore the fortunes of a party which neither holds government federally or in any state or territory in Australia. He deals with a media hostile to the Liberal Party and under the spell of cliché merchant extraordinaire Kevin Rudd.

The Liberal Party should reject media campaigns to dislodge Nelson. These efforts are not designed to induce selection of a better candidate but are primarily aimed at consolidating Labor power. Today we experienced the manipulative gutter journalism from Melbourne’s Pravda which has maintained a steady campaign of trying to discredit Nelson. In a news story Pravda states that ‘unidentified senior Liberal sources’ have indicated that Nelson won’t last and that Malcolm Turnbull will replace him. It sounds like it might be half-true and that is a probably good enough for Pravda to launch yet another propaganda attack on the Liberals. The Chinese and North Korean communists could learn from this rag’s devotion to writing propaganda as ‘news’*. Quote:

‘It is believed that Peter Costello is preparing to depart politics, while Ms Bishop and Mr Abbott have ruled out challenging, leaving Mr Turnbull as the only genuine contender’. (my bold)

I suppose that on the basis of the ‘unidentified source’ almost anything can be ‘believed’ if it suits your political priors. One of the interesting things about the political left is that they don’t feel the need to cover their preposterous claims with well-thought-out alibis. While Peter Costello, Julie Bishop and Andrew Robb were cited in Pravda’s piece as denying the claims in its article they were (it was implicitly suggested) obviously just covering-up for Nelson and three denials of a made-up claim suggested, of course, that the claim has some substance. That’s presumably why the denials were cited.

But if Nelson is finished as leader this should be the decision of the Liberal Party not a decision of the party’s enemies in the gutter leftwing press, in the Labor Party or among Labor’s uncritical supporters. I agree with Andrew Robb that the Liberal Party should not be put off by ‘newspaper talk or others trying to trip us up’.

Last week John Quiggin offered help to the Liberals to stop them being ‘as irrelevant as they are now’ and ‘to support political competition’. John is one of Australia’s active economists who supports Labor. John’s prescription to the Liberals was simple – the Liberal Party should stop trying to restrict the size of the public sector, reducing costs in health care and so on. I thought these were strange claims for an economist - one who should seek to make best use of scarce resources - to make.

Instead , according to John, the Liberals should adopt the attitudes of the pro-public sector Labor Party. In short, the Liberals should become more like the party which defeated it. By so doing the Liberals will ‘increase ‘political competition’ and apparently perhaps ensure their survival.

One might reasonably question the sincerity of advice offered to a party which John obviously opposes and which, in the main, suggests the party behave like one John supports. My concern is that John might be seeking to encourage a political stance that would ensure the long-term irrelevance of forces hostile to the Labor Party.

John’s advice is based on what seems to be an endorsement of a view of government as a giant wealth creator which can (and should) hand out favors. John mentions Keith Hancock’s ‘caustic’ view of Australian attitudes towards Federal Government as ‘a vast public utility, devoted to the greatest good of the greatest number’ – Hancock was being critical of this obviously suspect view but John seems quite comfortable with it himself. John states unequivocally that Labor shares Hancock’s view (enough from my perspective to condemn Labor eternally) as did John Howard. The problem for the Liberals was that their support was just not deep and sincere enough. Indeed they even dared question the value of public servants and government spending! Good god!

No political party in Australia should endorse this view of government’s role and the Liberal Party should fight it. We do not live in a socialist society where governments should seek to make ‘the greatest number’ happy since governments don’t have that good a grasp of what motivates the citizenry. Indeed, even if this doubtful prescription were the belief of most Australians, then it is subject to a host of practical and philosophical objections that should lead to its rejection. It is clearly wrong. Governments distribute wealth but generally do not create it**. Government interventions should target market failures and modify the extremes of income distribution to favour the most disadvantaged but not the views of politicians and bureaucrats on what will make most of us happy.

Again, in my view the Liberal Party should avoid accepting advice from those who ideological position stands as one of opposition.

The Liberal Party should have continued to support the workplace reforms that helped reduce unemployment to a 34 year low and which gave Australia the strongest sustained period of economic growth for a century. Generally the Coalition provided a superb period of public administration in Australian. The difficulty was that the stability and prosperity delivered created both unwise investment choices and the risky selection of daft political options among the public. Australia became complacent about the risks of giving power to the Labor Party wreakers.

The reforms introduced by the Coalition will make sense as unemployment and inflation steadily worsen (as they will under Labor), as employment markets are re-regulated and debts to the union movement are repaid by disastrously encouraging ‘preservation of the real wage’ as an ethic in the face of oil and food price increases. These foolish policies reflect, in the main, a commitment to populism.

The Liberals should clear the slate and accept their mistakes. They should accept that unseemly handouts were made by them during their last period in office - and make it clearer than ever that the ‘social services for all’ ethic should not be government policy. Instead, emphasis should be on the role of private markets in driving our current wealth with caution being exercised on public spending. They should continue to emphasise the efficiencies that follow from making people responsible for their own lives by taking their own private actions to secure their health and their retirement security. Social security and the welfare state should protect the needy losers not the ‘greatest number’ of winners who are doing well out of free markets.

Most of all, the Liberals should not be defensive about the outcomes from their term in office because of the unparalleled period of prosperity it has induced.

With high probability the inexperienced riff-raff and power-hungry trade union hacks of the Labor Party will damage Australian society and its economy . This will particularly be so given the current short-term credit and oil price shocks impacting on the economy. Labor has never have offered much more than imitative ‘me-too’ politics, cliché and symbolic gesture – so as a political force they are easy targets.

Labor’s policy failures and its corruption and widespread scandals need to be uncovered, documented and publicised. Then, as the predictable public policy disasters unfold under Labor, comparisons need to be drawn between the high quality public administration and sound government under John Howard and that offered by Labor. This is the perspective Brendon Nelson should be pursuing and the party should support him in this. If the party seek to replace him this should be done on the basis of advice from friends not from enemies.

* Suggested masthead for Pravda ‘We don’t report the news. We write it’. (Thanks William S. Burroughs, Nova Express).

** No I don’t believe stories that public firms have a lower cost of capital than private firms and can hence be more cost-efficient. The inefficiency costs of having enterprises run by administrators beholden to pollies who have never done a day's work in their lives, rather than businesspeople responsive to a bottom line conditioned by private sector views, are manifestly too great.

What does Dick Cheney see in fly-fishing?

Hat tip Daniel Finkelstein

Update: Apparently it is his hand on his fly rod . I can guess the humour with that explanation.

Bloggers who cark* it

Overworked and underpaid, yes, but at least I am still alive.

*An Aussi slang term.

Cross price & supply effects of oil price changes

I always try to emphasise to economics students the importance of (a) cross price elasticity effects on demands and (b) the supply effects of price changes. These issues are particularly important for assessing the effects of recent surging primary energy prices which are having impacts throughout the economies of both developed and newly-emerging countries.

Liquid fuel prices have risen massively over recent years. During a recent trip to Asia I learned that fuelwood and charcoal resources in developing countries are again coming under intense pressure because they can provide effective substitutes replacing the use of fuels such as charcoal and kerosene. In Africa these effects are of limited extent because in many countries there charcoal already provides 80% of fuel needs. The difficulty is this potentially renewable resource is being depleted and rising fuel prices can be expected to accelerate this trend. Fuelwood resources in developed countries are coming under increased pressure because of increased prices of competing heating fuels – even sawdust is becoming expensive. Suprisingly too those developed country agricultural lands that were diverted towards biodiversity conservation are being redirected back into agriculture because of fuel-price-induced food price rises that stem from cost effects in energy-intensive agriculture and the diversion of crops into biofuels.

I have posted on the various linkages between increased fuel prices and increased food prices. In developing countries food prices rose 25% over the past year – wheat prices rose 120%. This is bad news for communities which spend 75% or more of the household budget on food. I notice in my own household budget that food costs are playing an increasing role.

Longer-term the effects of high liquid fuel prices will stimulate new technology developments and alternative sources of energy supply. These will eventually come to moderate the effects of higher liquid fuel costs on forestry, the environment and food supplies. But short-term expect quite a lot of economic pain.

Tabcorp- Tattersall monopoly over pokies smashed in Victoria

In a rare, worthwhile decision the Brumby Government in Victoria have got rid of the Tattersall's/Tabcorp poker machine monopoly in Victoria. In 4 years all of Victoria's 27,500 pokies (outside of Crown Casino) will cease being under the control of these duopolists. Individual clubs and pubs will be able to bid for up to 115 machines each.

Mr Brumby said the move will help reduce problem gambling - I don't see how. It will mean that more of the rents from the machines go into the public purse - this is a good thing - but I cannot see how that will reduce problem gambling. To the extent that lower gambling prices are driven by increased competition more gambling will be encouraged. But I guess the government can invest more in restoring the lives of families ruined by gambling.

The decision to get tough with these anti-social corporate nasties is a surprising one since past premier Bracks was a total wimp in taking on the anti-social pro-gambling lobby. This was hardly suprising given the number of ex Labor Party pollies and party hacks working for the gaming industry in Victoria.

I'll update with further information as it comes to hand. I am mainly interested in the terms of the new pokie contracts. Will it be possible to phase these socially destructive bandits out of the community entirely? I understand the new licences will be for 10 rather than 20 years and while Tabcorp/Tattersalls can bid for pokies their share cannot exceed 35% of the market. Tattersals has said it will try to buy up gaming venues which might undermine Brumby's plan.

Update: Brumby has said that he will not compensate Tattersalls and TabCorp for the $600 each claimsa they are owed given that their licenses have not been renewed. the firms claim this is an ambit claim by the Premier and that they will sue if necessary. The shares of nboth companies have been suspended on the sharemarket.

Lending a helping hoof

Thanks Bernd

Ruddite verbosity

Julie Bishop accurately described our PM as a 'walking slogan' - 'when I travel around the country', 'can I say', 'fresh ideas', 'You know something?'. Even Labor-supporter Michelle Grattan says that Rudd speaks like a robot and provides quaint examples of Ruddspeak. But now our ear-wax munching defender of the rights of 'working families' has even annoyed the journos at Melbourne's Pravda because of his cliche-ridden verbosity:

...in full flight in Brussels last week answering a three-part question about Asian security.........

"I'll reverse engineer and start at the third and move back to the first," he began, throwing his questioner into confusion.

"On the question of security in the Asia-Pacific region, I think it's quite clear that if you look at the post-'45 history of East Asia that you see an absence of multilateral security mechanisms.

"What you saw even prior to the end of the Cold War here, of course, was the evolution of a series of confidence and security-building measures coming off the back of CSCE, OSCE and the Helsinki accords.

"This, in my judgement, helped to take some of the sharper edges off some of the harder security policy relationships which existed in this continent at that time."

On climate change:

"When it comes to making a carbon market work, when it comes to making an emissions trading scheme work, you must have a long-term target, you must have a medium-term target, hence why we are going through the Garnaut process, and it must be anchored into a system which is a capping trade system, which is globally compatible, and able to be rolled out as a global carbon market."

I am sure he wanted to add that it must address the needs of 'working families' but I assume that disappeared into the stream of Rudd's pretentiousness.

Rudd cracks silly jokes and salutes the US president but is 'only human' says Julia Gillard. I am comforted that his loyal deputy discounts the possibility that he is the reincarnation of something divine.

Cockies cranky about not receiving all benefits from inept publicly-funded investments in leak plugging

An article Bush Bites Back in Saturday’s Age provides a perspective on the Brumby Government’s daft ‘Food Bowl Modernisation Project’ which will cost $2 billion ($1 billion from recent Rudd Government generosity) to plug leaks and evaporation losses in irrigation canals in order to increase suppliers of water for all – for local farmers and for city dwellers alike – the latter getting their water from Sugarloaf Reservoir that feeds Melbourne’s population with water. Water resource economists have suggested that the scheme is a near total dud and that net savings after accounting for seepage that would anyway have found its way back into the river system will be much less than the 225 gigalitres sought annually.

The farmers seem upset because they sense they will have to share the phoney loss reductions with those in the city. The Age takes its usual cry-baby stance with respect to the plight of the charity-seeking farmers.

The best solution for Melbourne and the bush is to connect Melbourne's water supply to that of the bush and to sell the water into its highest-value use.

Update: the Victorian Auditor General slams both the foolish 'Food Bowl Project' specifically targeting the exaggerated claimed water savings and the other key component of the Brumbey Governments 'Water Plan' the foolish proposed desalination plant. $4.1 billion in public money at risk.

Some economics of golf

As a keen though not highly-skilled golfer who has just joined a better than average private golf club I am interested in The Age’s discussion of what amounts to golf economics today. Golf courses are finding it difficult to compete with other physical recreations. There are several issues here.

Playing a round of 18 holes of golf is relatively time-intensive. On today’s crowded courses it probably takes you 4.5 hours to actually play a round. That’s excluding preparation and warm-up time, travel time to and from the club and a few drinks in the clubhouse afterwards – on a hot day enjoying the latter might be close to essential!

This time can be reduced by switching to playing 9 hole rounds – not the format of most modern competitions - but the advantage of doing this is offset by fixed costs of getting prepared and travelling to the course. Once I have played 9 holes I want to play at least another 9 given these fixed costs - an instance of the non-irrelevance of fixed costs from a psychic viewpoint.

In addition the modern technology of golf – the probably futile attempts to turn nthe game into a science – means the game has slowed down. Repeated practise swings, multiple views of slopes on greens and careful alignment of golf balls on greens on the basis of pre-drawn ball markings slows things down for other players – an external cost* for them. There have been numerous attempts to speed up the game – adding strokes for slow play for example – but none of these schemes work if you are playing a slow round because the group in front of you are slow.
Many of the costs of running a golf club are fixed costs that reflect land values. One course I know of in Melbourne has recently been the subject of a $100 million buyout offer on the basis of its residential real estate values. There are also considerable labour-intensive costs of golf course maintenance that requires a steady income stream to fund them. Well-run golf courses in convenient locations will inevitably be expensive operations.

It is worth noting that many golf courses provide visual and environmental externalities for the community as a whole which might justify local government restrictions on rezoning them for commercial development.

On the equipment side as I have previously posted, the reduction in golf equipment costs and improvements in golf equipment technology should to some extent boost the appeal of the sport.
Golf clubs are traditionally regarded as instances of what economists call club goods. These are goods which are excludable – you can charge a price that limits the number of participants – only those who pay get to play. But consumption of such goods is also seen as non-rival. Thus in theory once you have joined the club your participation in the sport does not inhibit the participation of other members – in short, there is supposed to be no congestion on a course. Then the conventional way of pricing such services (assuming the club is a non-profit) is to charge an entry fee and perhaps a fixed annual fee for entry to the club to cover the club’s costs but to levy no fee for actually playing a game – to levy a zero ‘green fee’.

This prescription is only valid if the course is not congested by having too many players. If there is congestion then economic theory suggests charging a lower membership and annual fee but some fee each time you play a round.

As an economist I am interested in the fact that many commercially-oriented golf course operations are discarding the whole idea of a membership structure entirely and continuing to be ‘public courses’- Melbourne’s Growling Frog course is an example. Instead of requiring membership any player can play on these courses provided they are willing to pay the ‘green fee’ which seems expensive but which, naturally, has to cover the loss of membership and annual fees. This is a complete abandonment of the club good model – golf is turned into a private good and sold at its market-clearing price.

The advantage of this pricing scheme is that congestion costs can be managed directly by charging a high enough fee. In addition players can vary their choice of club without incurring new membership costs. The disadvantage is that etiquette issues tend to be ignored outside of a club setting. Anti-social behaviour by ignorant or careless players can ruin the enjoyment of the game by others – it can even be physically dangerous if balls are carelessly hit in the direction of other players.

I think of these issues as I had an enjoyable game of golf at a very good regional golf course on Friday that essentially operates as a private course and off to hit a few balls with son William at my local private course today**. I’ll post again on the economics of golf. Wouldn’t it be wonderful if I could pick up a lucrative consultancy in this area that involved some on course inspections!

There is at least one book on this topic (here) while this provides information on the contribution of golf to the overall US economy.

* It is an externality since individual investments of time optimise individual benefits without accounting for costs to others. This is so even if all players choose to play with the same degree of care.

** Update: On the basis of this round the opening description of myself as a 'not highly-skilled golfer' should be modified to 'unskilled golfer'. A disgraceful effort on my part.

US presidential candidates: Win votes by getting tough on smoking

This article in the NYT urges candidates in the current US presidential campaign to move with pace to adopt the urgings of the FDA with respect to tobacco regulation. Specifically they urge that nicotine be registered as an addictive drug and be regulated by the FDA on this basis.

I strongly concur. For 50 years the tobacco companies have understood ciogarettes to be a vehicle for delivering the addictive drug nicotine. It is tiome that public policy makers came to the same realisation which is in accord with the facts.

I have already stated my own preferences with respect to the design of a prohibitive regulatory regime that would end ciogarette consumption in one generation. The surge in lung cancer deaths in the twentieth century would come to be viewed as a historical mistake that sensible legislators acted to prevent continuing.

BTW: I am making my views known tomorrow for a class of students at La Trobe University's Wodonga campus. in some seminars on public health economics. I'll try to put the Powerpoints online.

Policies for conserving biodiversity when we are ignorant of likely effects of climate change

The website of the Department of the Environment, Water, Heritage and the Arts has interesting postings on the implications of climate change for the National Reserve System (NRS) for conserving biodiversity. Jennifer Marohasy’s blog has a scornful critique of the Rudd Government’s proposal*to expand the reserve system apparently seeing solutions lying in private sector activity. It seems to be a strange comment given that almost none of the externalities associated with climate change and biodiversity have been priced – private sector incentives are unlikely to work here. In addition private reserves are in the NRS.

The CSIRO report on adaptations to climate change by expanding the reserve system is a thoughtful document that deserves a more intensive read than I can give it at the moment.

It makes points that I have made in my own work – that making nature reserves more connected will facilitate the movement of species but can have undesirable effects including spreading fire and unwanted pest species. But it takes this point to its logical conclusion – we should also protect isolated reserves for the same reason. This is a strong argument in my view and supports the national action plan's emphasis on strengthening existing reserves as well as promoting greater connectedness.

The report also argues that the key objectives of conservation will shift toward species loss minimisation by both facilitating natural relocations and strengthening existing conservation efforts.

Much of the report is taken up with thinking about how we should manage our ignorance and deal with the unexpected. It shows a good deal of intelligence in doing this and in warning of the dangers of relying on narrow modelling and conceptualisations.

* Peter Garrett has stated the government will give $180 million to expand the system.

Healthy small doses of poison & filth

I have long been interested in the phenomenon of hormesis and teach this topic to environmental economics students. This idea – developed by toxicologists – suggests that low concentrations of certain apparently dangerous substances (gamma rays, dioxins, even pesticides), may be good for your health. The health damage function is therefore J or U-shaped in levels of the toxin. Damages are high at zero concentrations of certain compounds and high (indeed higher) at high concentrations. But at small enough concentrations the damages are lower so that it is best from a health perspective if you are exposed to some of the compounds.

My intuitive reasons for being interested in this link is that kids seem increasingly vulnerable to allergies and asthma even though mum washes them and everything around them to be as spotlessly clean as Kevin Rudd's ear canals.

After a recent class where I talked about hormesis one of my students put me onto the related idea in a recent issue of New Scientist of ‘Fighting Cancer with Filth’. The gist of the article is that ‘researchers are starting to wonder whether the higher incidence of certain cancers in affluent populations - including breast cancer, lymphoma and melanoma - might also have something to do with sanitised, infection-free living’ so that ‘If we can understand exactly what it is about some germs that has a protective effect, we should be able to reduce people's risk of developing certain tumours later in life by exposing them to harmless microbes.’ ‘The simplest explanation is that exposure to viruses and bacteria - through infections, vaccinations or proteins such as endotoxin - stimulates the immune system and boosts its anticancer activity’. ‘As long ago as the 1970s it was noticed that workers in cotton factories have surprisingly low rates of lung and some other cancers. One explanation is that they owe the favour to cotton dust. This contains lots of endotoxin, a lipopolysaccharide found in the cell walls of many bacteria, which might keep the immune system on high alert.’ ‘The simplest explanation is that exposure to viruses and bacteria - through infections, vaccinations or proteins such as endotoxin - stimulates the immune system and boosts its anticancer activity. This makes sense, since we now know the immune system plays a bigger role in battling cancer than previously thought, destroying many tumours at an early stage or keeping them in check’.

There is even evidence that dairy workers who breathe in dried cow dung dust have a lower incidence of long cancer. There are even suggestions that injecting certain bacteria and viruses might cure cancer or even treat depression.

Hormesis arguments are hypotheses about behaviour but interesting ones. The implication of these ideas for the management of risk in relation to exposure to toxic substances, however, is huge. The dose-response relationship may need to be rethought in connection with the management of both dirt and toxins.

In addition the scorn conventional medicine has toward homeopathy may need to be rethought.