Sunday, December 31, 2006

New Year’s Eve

It was rather depressing to read the summary of the main events of 2006 in The Age today. Quite a bit of the coverage related to show business, the antics of talentless actors and TV personalities as well as the usual tedious politics and sports hero-worship.

As much as I love Shane Warne I am tiring of his adulation and of hearing how great the Australian cricket team is. Australia won a good game where you hit a ball with a chunk of wood and its time to now just shut-up. Paris Hilton’s shopping sprees in Sydney and Melbourne have got detailed coverage in all the national media so maybe I am a bit sensitive to the ‘celebrities’ issue – she seems to me to the essence of the forgettable, dumb, chick.

As we all marked one more year in the step towards permanent oblivion - on boot hill - there was surely more to 2006 at the macro level than that. Wasn’t there?

For some, there were more serious things to contend with as 2006 closed:
I was touched by the words of despair and the look of utter despair on ex-NSW Premier John Fahey’s face as he attended his youngest daughter’s funeral – it is every parent’s nightmare and I empathized with him. My sympathies go out to him and his wife for what will be a difficult New Year. John has had a difficult time recently involving a struggle with cancer and this is a terrible blow.

John Fahey is a moral, decent man. At the other end of the spectrum – but equally tragic in its own right – the evil thug Saddam was hanged. Indeed, a reader sent in a video recording of his death (the video of the killing of Saddam) with the instruction ‘enjoy’. However I can’t enjoy this at all. We should all watch it however – it is wrong for this barbarous behavior to be hidden and sanitized as an ‘execution’. A New
Year’s bad.
On the brighter side, even though it looks like raining tonight, I have arranged a good perch for viewing the early and late fireworks displays in Melbourne with good wine – the Wendouree 1990 shiraz. (An outstanding, massive red that is just moving into late adolescence – it will be good drinking through to 2025 at least and, yes, I have more than enough tucked away to see me through). Two of my kids are out of own tonight with their friends so a diminished family will welcome in the New Year.

My New Year’s resolutions for 2007? To get fit by exercising and watching my solid and (more important) liquid diet. Modest objectives that as a matter of course I set every year and fail to keep. But I’ll try once again. I also want to get back into academic life after 3 years of being primarily an administrator.

Best wishes for a great New Year to my readers. Thanks for contributing to my blog in its inaugural year.

The gains disappoint

Over at my misleadingly-labelled, much neglected and generally ignored Moneybags blog I summarise my investment performance on a notional portfolio over the previous 9 months.

The overall gross return was 8.7% - an annual return of about 10.9% - which wasn’t that wonderful given the 19% growth in the ASX over the full year 2006. I did exceptionally well on a few stocks but dud specs dragged back returns. David Hazelhurst, at The Bulletin, recorded a 186% gain for the full year – he doesn’t have to fear for his job from me. He enjoyed these gains partly because he took much greater risks than I ever would- more than half my investments were in bluechips.

As I always told my mum and dad when I got 'Harry could do better' reports at school my pleadge is to try harder next year. And I will, promise.

I’ve tabulated a new nominal portfolio for 2007 and will see if I can do better. It is based on the presumption that the mining boom will contiinue through 2007 and that the price of gold will remain strong because of unwarranted fears over the US economy - warranted fears would, of course, upset things. I believe interest rates and inflation in Australia will ease during 2007 which should help.

The dud specs that hurt me in 2006 I have retained on the fairly unconvincing grounds that they look cheap.

Your comments/criticisms very welcome.

Saturday, December 30, 2006

Saddam hanged

Saddam Hussein was hanged last night. Why am I not cheering? A thuggish strongman who caused so much misery but who could have done so much good. I wonder if his killing will improve things in Iraq. Somehow I doubt that the justice of the victors will prove much - I hope it does.

Update: This NYT article carries both possible responses to whether or not the death will improve things - Sunni who see vengence as the response and Shia who see a diffusing of the power of the Sunni militia.

Hamilton on immigration

Clive Hamilton has a piece on congestion in Sydney and its implications for immigration policy. Responses came from Jason Soon at Catallaxy and Phil at LP.

I agree with Hamilton that Australia should be seeking quality immigrants with good moral character and not riff-raff who don’t share our values. I also agree that congestion is a serious cost to our society – although it is a cost that tends to be exaggerated – figures for Melbourne of up to $3 billion annually are bandied around by groups, such as the Productivity Commission, when the correct figure is closer to $700 million. But I disagree with Hamilton’s conclusion that we necessarily cannot have more migrants without reducing our living standards because of congestion effects – we can if we price the congestion away. This is a simple proposition that I propounded with Kwang Ng from Monash University more than 10 years ago (Harry Clarke & Yew-Kwang Ng, "Population Growth and the Benefits From Optimally Priced Externalities", Australian Economic Papers, June 1995, pp. 113-119).

We are better off with efficient pricing of un-priced resources such as roads (with or without immigration) provided transaction costs of pricing are not excessive - and with some qualifications they probably are not. We also get welfare gains from immigration provided all resources subject to external costs are priced. Indeed efficient pricing amplifies the benefits we get from migration.

But immigration which increases congestion costs enough because the congestion is un-priced will not make preexisting people better-off – they will necessarily be worse-off. In this case Hamilton is correct. Moreover he is correct more generally that we will lose with immigration if natural resources (such as water) are under-priced enough.

The inferences by Jason Soon and moral guardian Skepticlawyer in their comments that Hamilton’s observations are borderline racist are offensive and I tire of this type of attempt to muzzle the immigration debate. The argument suggests that if, as an Australian, one seeks any limitation on migration to Australia – the country comprising the citizens of Australia – you are a 'racist' who should be excluded from any civilized debate. That piece of dodgy logic has seen better days - particularly here when Hamilton made no reference to ethnicity.

To be clear. Hamilton’s views are correct if road pricing is ruled out and this is not a bizarre position. No city in the world, other than Singapore, has ever introduced comprehensive road pricing and many countries under-price water and other natural resources. Moreover, it is not racist to say that we prefer immigrants with good moral character who share our values – most Australians do.

Phil gets the main point about pricing correct (to be fair Jason recognizes this) and it is certainly true that cities much larger than Sydney have much appeal. But some commentators to Phil’s post are effectively asserting that Australia has no right to determine who we admit as migrants at all. As I say this seems to me such a ridiculous claim that I would not bother responding to it except that it gets raised so frequently in immigration debates. As Australians we have every right to decide who comes here – open door immigration policies, no way – most Australians want active policies to guide our immigration program and ideologues on the left or libertarian right of politics won’t change this.

Labor rudderless in the uranium debate

I agree with The Weekend Australian’s Steve Lewis – the Labor Party’s Kevin Rudd has enjoyed an early electoral honeymoon but is gradually showing himself to be a lazy populist. My guess is that the Australian electorate will sense that he lacks ticker and that Rudd will not be our next Prime Minister.

Rudd has reaffirmed Labor’s total opposition to nuclear fuels in the face of Ziggy Switowski’s report which presents a sensible (and very conditional) case for considering the nuclear option. Key findings of the report:

1. Downstream steps of uranium conversion, enrichment and fuel fabrication could add $1.8 billion of value annually if all Australian uranium was processed domestically. Commercial and technology barriers could make market entry difficult and current legal and regulatory impediments would need to be removed. Even then there may be low opportunity for Australian companies to extend profitably into these areas.

2. Nuclear power is between 20-50% more costly to produce than power from a new coal-fired plant at current fossil fuel prices. This gap may close but nuclear power, and renewable energy sources are only likely to become competitive if costs of greenhouse gas emissions are recognised. Even then, private investment in the first nuclear reactors may require some form of government support or directive.

3. The earliest that nuclear electricity could be delivered is 10 years with 15 years more probable. Deployment of nuclear power starting in 2020 could see 25 reactors producing 1/3 of our electricity by 2050.

4. New reactor designs are safer and more efficient with lower volumes of radioactive waste. The future holds the promise of significant further innovation.

4. The greenhouse gas emission reductions from nuclear power could be 8-17% of national emissions in 2050.

5. Many countries have implemented straightforward solutions for disposal of low-level radioactive waste. Disposal of high-level waste including spent nuclear fuel can be achieved by deep (500–1200 metres underground) repositories. Australia has areas suitable for such repositories, which would not be needed until around 2050 should nuclear power be introduced.

In all 30 countries already use nuclear power to provide 15% of the world’s energy needs. Australia has 40% of the world’s uranium reserves but Rudd has affirmed that Australia should not be allowed to value-add to this resource. The claim is that nuclear fuels are too ‘dangerous and expensive’. Both of these issues are addressed in the Switowski review. Safety issues seem not to be a concern and yes there are problems with the economics of nuclear if we do not accept carbon pricing. But these emissions should be priced.

Rudd can look to the opinion polls which will give short-run support to his lazy line. According to The Weekend Australian only 35% of Australians support a nuclear option, 50% are against it and 11% are uncommitted - women and Labor voters dominate the opposition. But these figures will change and an old-fashioned fear campaign (Rudd and Australia’s worst state premier Beattie have already demanded to know ‘where will the reactors be located’ – there will be none at Noosa apparently!) is inconsistent with the facts on nuclear power and is easy to respond to. Indeed, even though Rudd opposes the stupid 3-mines uranium policy (the ‘clean’ and ‘dirty’ uranium policy) he will not force the Labor states to allow uranium mining – a blow for Western Australians in particular - they will love Rudd come election time. John Howard will be smart enough to exploit inconsistencies between a Labor Party committed to dealing with global warming and with promoting Australian manufacturing but unwilling to even consider the nuclear option. Howard has already begun to attack both the Labor ban on uranium mining as well as the opposition to clean nuclear power.

Rudd is proving to be a bland, populist and protectionist clone of Beazley. He won’t budge on either industrial relations or on uranium mining – the key foolish policies of Labor that mark it as a party of the past. Howard knows that Rudd won’t win with this stance and will throw inept Labor nuclear (and other) policies back at Rudd.

Friday, December 29, 2006

Memories are made of this da-da da-da-da-da

The Xmas edition of The Economist has a survey of neuroscience. It is a useful overview which gets you to the frontiers of the area quickly. I was particularly taken by the discussion of memory. Like many (of my vintage) I worry about the strength of my own memory.

The part of the brain that is concerned with memory is the hippocampus. With Alzheimer's disease, the hippocampus is one of the first regions of the brain to suffer damage - memory problems and disorientation are among the first symptoms.

But my currently imprecise memory (of names? faces?) might best be viewed as an adaptation to my vast knowledge rather than an age-induced defect. To start off, understand that there are two types of memory - autobiographical memory which provides a record of particular past episodes and semantic memory which generalises from these experiences. While autobiographical memory is stored in the hippocampus, semantic memory is consolidated in the cerebral cortex - that foldy-foldy piece of 'grey matter' that regulates thinking.

Dr Matthew Wilson of the Picower Institute for Memory and Learning argues that as people age memory becomes more semantic and less autobiographical. Thus old guys, like me, are notorious for being able to remember every detail of our childhoods but often forget what they did last week. This inability to remember detail is often seen as a failure whereas eidetic (or photographic) memory - of the type enjoyed by Wolfgand Amadeus Mozart or John von Neuman - is regarded as an ideal.

But Dr Wilson thinks this might all be wrong. An ideal memory would be able to generalise from experience without recalling specific events. My vast experience means that I do not need to add extra episodic junk to my valuable and limited information storage levels to improve my survival prospects. If I don't remember the specifics of your name or face please be aware that this is a sign of evolutionary adaptation that results from my vast experience. I am not heading downhill! I am just exercising my intelligence. Its a hopeful thought as we zoom towards 2007 and I continue the (so far) long march of life towards boot hill.

Thursday, December 28, 2006


I am interested in the idea of placebos and of specific social beliefs – such as religion – which operate as placebos. But the most interesting modern placebos are associated with medicine. Despite the obvious huge advances of modern medicine, like most people, I am skeptical of its claimed powers. So too is psychiatrist Patrick Lemoine.

He claims that 35-40% of prescriptions are impure placebos – placebos with a tiny amount of some active ingredient that is insufficient to have any clinical effect. Use of impure placebos is what remains of the witchdoctor’s craft. And good witchdoctors need to sell a patient on a placebo cure – a white coat and a mysterious unintelligible script handed to a pharmacist (also wearing a white coat) can help.

You must know the idea - magnesium for nervousness, antibiotics for viruses and so on. It often seems impossible for a general practitioner to send a patient away without a prescription – and dangerous to prescribe such drugs as antidepressants for mild depressions because of their side-effects – a placebo does less harm and may help.

Of course we should be rational enough to understand that there are various paths for healing. Sport or romance might be more helpful than pills and potions. Or going to Holy Communion and doing the cannibal bit.

Wednesday, December 27, 2006

Winning the war on illicit drugs

The United Nations, 2006 World Drug Report is the most comprehensive qualitative and quantitative analysis of the global illicit drug situation. It is a 2-volume report with the first volume analyzing problems and the second providing an impressive global data base.

The general message is optimistic. Over recent years humanity has reversed a quarter-century-long rise in illicit drug consumption. There are now much lower levels of drug consumption and production than 100 years ago. A global drug pandemic has been averted. Despite the claims of skeptics coherent drug control strategies have worked to reduce illicit drug usage.

Specifically the area of land cultivated for coca and opium cultivation is lower than a few years ago and dramatically lower than 100 years ago. Specifically opium production is 80% less in a world that is more than 3-times bigger in terms of population. The number of addicts worldwide has stabilized over the past few years and is declined dramatically over the past 100 years.

On the positive side the infamous Golden Triangle could become opium-free within a few years and Andean coca cultivation has fallen by one quarter in recent years. After years of strong increases the market for amphetamine-type stimulants is stabilizing. On the negative side the reductions in opiate production in Afghanistan could easily be reversed, cocaine demand is growing strongly in Europe and the cannabis consumption problem is worsening just about everywhere. Cannabis is the world’s most abused illicit drug.

Of course too the abuse of licit drugs such as tobacco remains serious – about 28% of the world’s adult population use tobacco which greatly exceeds levels of illicit drug use (4% for cannabis, 1% for opiates, cannabis and amphetamine-type stimulants combined).

The main policy messages are that attention needs to focus particularly on demands for cannabis and amphetamine-type stimulants. Treatments appropriate to these types of drugs need to be made more widespread. There is the urgent need to continue focusing on the spread of HIV/AIDS by injecting drug users.

The report is available online and I commend it.

Tuesday, December 26, 2006

Killing Angel Nieves

The ghastly practice of killing human beings for claimed crimes is something I have always opposed. Apart from the probability that innocent people (however innocence is defined) may be put to death, killing people for serious crimes, such as murder, simply repeats the crime. Capital punishment damages societies that carry it out by cheapening the value of life.

1,052 US prisoners have been given a reprieve from the lethal needle after the grotesque death of Angel Nieves recently: The 3-drug cocktail supposed to sedate Nieves and kill him painlessly and quickly instead left the inmate conscious, grimacing in pain and struggling for breath. It took half an hour and a second round of injections before the spectacle ended.

But what is really obscene here is the idea that there is a technically humane way for the state to execute people. The reason for the reprieves is that the killing of Nieves was untidy – if the death had been quick and neat, the claim seems to be - there would be no problem.

But it is capital punishment itself which is ghastly and unnecessary. It should be abolished everywhere. I am a strong supporter of Amnesty International on this one.

Monday, December 25, 2006

Penalising drunks who kill

More interesting analysis from the law and economics, Becker-Posner blog. This time B-P address drink driving penalties. I like this blog so much because it addresses significant issues of social importance using the sort of economics any well educated person can understand.

Gary Becker estimates that the cost per drunk driver arrested of drunk driving in the US is about $10,000. This is the order of magnitude he asserts should be levied as ex ante fines on drunk driving – or the ‘equivalent’ in license suspension costs or imprisonment. He argues that such hefty penalties would reduce the scale of alcohol-induced deaths on US roads to the levels of European countries where very heavy penalties are standard.

Richard Posner responds that the Becker ex ante penalties makes sense only if the theoretically more sound proposal of penalizing ex post those drivers who do kill an innocent by the cost of the innocent’s life fails to deter drink-driving deaths. He estimates the value of a statistical life at $7 million so, if 10% of drink driving offenders fail to be convicted, he argues that any driver convicted of killing an innocent should be penalized $7/0.9 = $7.8 million.

The case for ex post penalties is hardly convincing to me. Although it is true that most drink driving does not involve the death of an innocent party, motorists exaggerate the extent to which they can manage risk-less driving when drunk. The general point of each author’s analysis however is that the external costs of drink driving are huge.

It would be a simple matter – and I might do it myself as a 2007 New Year’s resolution – to compute the optimal scale of penalties in Australia (from ex post and ex ante perspectives) for drink driving. Penalties here are currently higher than the US. Compared to the US where 40% of road accident fatalities involve drunkenness the figure in Australia is ‘only’ 31%. But still the Australian courts are increasingly reluctant to imprison even repeat drink-driving offenders and sentences for killing innocents on the road are often pathetically small.

Making money on Xmas day

As Santa departs this evening for the North Pole this evening my thoughts turn to repaying the credit card debt that was necessarily incurred to keep those near and far relatives of mine in good cheer over Xmas. So money raises its ugly head here on Xmas morn – though I have been collecting information for this post over the last week or so.

The significant mineral supply increases that are starting to occur in Australia should take some of the sharp edge of the commodities price boom. But still that part of the stock market that looks likely to do best over the next 12 months is the mineral sector. At the speculative end of this market segment Helena Keers (AFR, subscription only, December 16-17) listed 15 mining hopefuls that I will be keeping an eye on in 2007. All are speculative and most have increased dramatically in price already – when the ‘pass the parcel’ game ends you would want to be clear that you are holding onto something at the solid end of the spectrum – better still of course you would like to be holding cash but that is a pipedream isn’t it. Did you hear that little bell that rang yesterday warning you of a turn in sentiment that pre-announced the end of the market boom?

With these caveats these are the mining juniors Ms. Keers mentions the following:
Bannerman Resources, Capitalised at $108 million it grew in market capitalization 21-fold in 2006. Uranium - a Perth based ASX listed nickel exploration company that has acquired the majority rights to a major uranium exploration portfolio situated in the Southern African nation of Namibia and three prospecting licenses in Botswana. Price $1-63 at December 16.
Fox Resources. Capitalised at $206 million it grew 7-fold in 2006. Diversified - mining and exploration for copper, nickel and base metals. Price $1-85.

Albidon Capitalised at $250 million it grew 150 % in 2006. Diversified - Albidon is a nickel exploration and development company with a focus on East Africa . The Company has spent the past six years building a large portfolio of nickel sulphide projects ranging from development stage to grass roots exploration. Currently positioned to make the transition from explorer to miner. Price $1-67.

Felix Resources. Capitalised at $777 million and selling on a prospective PE of 17.9 it grew 112% in 2006. A Queensland-based coal producer, explorer and developer. Price $3-96.

Tamaya Resources. Capitalised at $202 million and selling on a prospective PE of 5.3 it grew 99% in 2006. Gold and copper with an interesting South American (Chile) prospect. Price 19.5 cents.

Arrow Energy. Capitalised at $528 million and selling on a prospective PE of 23.5 it grew by 74% in 2006. Energy. Interesting focus on coal seam gas. Price $1-25.

Incremental Petroleum. Capitalised at $88 million it grew by 43.2% in 2006. Oil and gas – based in Turkey and claimed to be a cheapie. Price $1-36.

Havilah Resources. Capitalised at $84 million it grew 28% in 2006. Highly diversified explorer. Price $1-14.

Petsec Energy. Capitalised at $343 million and selling on a prospective PE of 5 it grew 25% in 2005. Oil with focus on Gulf of Mexico. Price $2-33.

Roc Oil. Large geographically diversified producer and explorer for oil and gas. Capitalised at $914 million and selling on a prospective PE of 7.7 it grew 24% in 2006. Price $3-18.

Northwest Resources. Capitalised at $13 million it grew 19.2% in 2006. Gold. Picked by D J Carmichael analyst Paul Adams to have Australia’s richest gold mine – in the Pilbera - within 3 years. Price 33 cents.

Medusa. Capitalised at $73 million it has grown 16.9% in 2006. Gold – based in the Phillipines. Price 78 cents.

Kingsgate Consolidated. Capitalised at $362 million and selling on a prospective PE of 6 it grew 5% in 2006. Gold – based in Thailand. Price $4-09.

Agincourt Resources. Capitalised at $293 million and selling on a prospective PE of 42 it grew by 4% in 2006. Gold and other minerals. Price $1-35.

Amadeus Energy is capitalized at $181 million and fell in value by 12% in 2006. Oil amd gas – favoured recently by the Bulletin’s Speculator, David Hazlehurst. Price $1-00.

The following are speculative mining stocks that I have invested in:

Gindalbie Metals. Capitalised at around $500 million and more than doubled in price in 2006. Has a huge potential West Australian iron ore deposit. Price 67 cents.

Renison Consolidated. Capitalised low but has halved in price during 2006 due to two share issues of convertible notes. Mainly Gold. Price 15.5 cents.

I’ll update information in this post as it comes to hand. I’ll also post on other opportunities as I see them.

Sunday, December 24, 2006

Trans fats

Over at the Becker-Posner blog, Richard Posner posts on the New York City ban on trans fats (TFs). This is a possible policy for Australia (the prohibition has been introduced in some Scandinavian countries) and is of interest.

Posner generally supports the ban while Gary Becker, in a separate post, opposes it. This divergence in views has general relevance in thinking about claimed ‘nanny state’ interventions to protect the public against itself.

TFs are synthetic fats used in fried and baked goods. NTC’s Board of Health will ban TFs in restaurants from mid-2008. There is evidence TFs are significant contributors to heart disease (increasing heart disease by up to 6%). About half of NYC's 20,000 restaurants use TFs and a third of the caloric intake of New Yorkers comes from restaurant meals.

A libertarian analysis sees the ban as inefficient. The restaurant industry in NYC is competitive so, if consumers will pay more for meals without TFs, the industry will oblige. To force a ban is unnecessary and forces people to pay higher prices even if they would prefer to pay less and experience increased risk. Some consumers would rarely eat in restaurants and avoid TFs when they cook at home, so their health risks are small. Others would be people who disbelieve the medical opinion or think that TFs improve the taste of food. Finally, enforcing the ban will increase costs of government.

Posner. Posner argues that what is missing in this analysis is the absorption cost of information. The direct cost of informing consumers about TFs is trivial - a restaurant would tell its customers whether or not it used TFs and if it lied would invite class action suits for fraud. But there is a difference between disseminating information and absorbing it. Many people have never even heard of TFs and don't know they are probably harmful to health or by how much. They do not know what a dangerous level of TFs is, what their own consumption of TFs is and how much restaurant-going increases risks. Therefore even those who distrust government regulation of the economy should be open to the possibility that the ban on TFs would produce higher welfare.
Cost-benefit analysis suggests that the ban will reduce annual heart attack deaths in NYC by 500. Then using a value of life of $7 million gives a benefit of $3.5 billion. Cost side effects are not large - half the restaurants in NYC have already phased out TFs, without a big jump in prices. The only advantage of TFs is that they increase the shelf life of foods somewhat – an important but not critical issue.

The NYC restaurant industry has annual sales of $9.5 billion. Assume, conservatively, that restaurants that use TFs account for $6 billion of the $9.5 billion. Suppose the ban increases costs by 1% or $60 million . A $3.5 billion benefit is much greater than this.

Becker. Sees the ban as ‘nanny statism’ with government wrongly presuming consumers are too ignorant to make decisions in their own interests regarding health.
Posner’s main concern is the difficulty consumers have in ‘absorbing’ information about TFs. Specifically, consumers do not absorb the alleged fact that expected benefits of cutting TFs far exceed their costs. Becker agrees the evidence is strong that TFs contribute to heart disease, but the degree of harm from different levels of consumption is doubtful. See e.g. ‘Trans Fatty Acids and Cardiovascular Disease’, New England Journal of Medicine, April 2006. These authors find estimated mean effects of common levels of TFs on cardiovascular disease are large, but in one of the best data sets that they analyze cannot reject (at the 95% confidence) that there is either no effect.

Evidence cannot disprove Posner's claim about consumer ignorance of information about TFs. But half of all NYC restaurants did not use TFs even prior to this ban, many foods sold in ordinary supermarkets have become TFs free in a short time period, we do not know much about whether consumers who eat high TF foods in restaurants eat little of these fats at home, young persons are the primary consumers of heavy TF diets, and other unknowns should make us skeptical of the ignorance argument. It is remarkable how the food industry and restaurants have responded to the greater evidence that TF in sufficient quantities contribute to heart disease. There is evidence elsewhere that consumers respond quickly to health news - studies have documented the rapid reduction in salt intake in response to evidence in the 1980's - now considered exaggerated - that high salt levels have been an important source of high blood pressure.

The prominence of young persons among the big consumers of TFs may be due to an unarticulated awareness that when they reach older ages where heart disease and other diseases are more common, drugs are likely to have been developed that offset the negative consequences of what appears now to be unhealthy diets.

Posner's estimate of the benefits from eliminating TFs is $3.5 billion and he takes $60 million as an estimate of the cost to restaurants from becoming TF free. Then the cost of TF consumption would exceed the expected benefits from lower prices in restaurants with TFs, even for quite but not completely ignorant consumers who attach no more than a 2% chance to the likelihood that these fats have serious consequences for health (0.02 x $6.5 billion > $100 million). These largely ignorant consumers too would only go to restaurants that are TF free so other restaurants would adjust or go out of business.

Posner also gives a kind of lower bound estimate of the benefits as $100 million, and also suggests a much lower cost to restaurants of becoming TF free - take this as $30 million. With a small ‘taste benefit’ from TFs - the New England Medicine Journal article admits positive effect on ‘palatability’- the total cost of the ban would equal or exceed total benefits. For example, suppose 1 million persons on average eat 200 meals per year in NYC restaurants with TFs. If they value tastes of TFs by only 35 cents per meal, the taste cost to consumers of the ban would be $70 million per year. Then total cost would equal benefits.

Becker therefore asks whether one really wants to go down the road of a ban on TFs when the net gains to consumers are dubious, and probably negative and when reversing directions is politically difficult. Hence governments should continue to help provide the best information available about TFs on health but market forces of supply and demand should determine fats consumed. Otherwise, we encourage further attempts to legislate fat and calorie content of permissible foods not only in restaurants but also in the home. There are just too many opportunities for ill-considered attempts to override, on limited evidence, individual judgments about what people want to consume.

Summing up. In my view (largely based on the nutritional claims of Robert Atkins that I have followed for many years) TFs are probably dangerous from the viewpoint of heart health. But doubts about their costs suggest that public bans on such fats are an overreaction. KFC and McDonalds – firms that in the past have produced a lot of TF-rich food have agreed to voluntarily cease using them anyway – these are market forces at work. There are not huge amounts of TFs in the average Australian diet anyway. Nevertheless, publicity on the possible costs is worth providing particularly and consumers are entitled to know TF content of foods they eat, particularly since the main foods in which TFs are used – biscuits, fried fast food and that disgusting replacement for healthy butter, margarine, are rubbish foods that are best avoided anyway.

Saturday, December 23, 2006

Equity premia and the debt-junkies from Macquarie

Are the private equity moves so much discussed in the press of late – the proposed $11 billion takeover of Qantas is an instance – a consequence of equity premium issues?

In short, if equity is relatively expensive way of financing firms – that relies on excessively risk-averse investors - does this mean there is a market opportunity to substitute debt for equity? The case for this type of substitution is bolstered by the fact that, as with negative gearing, interest costs are tax deductible which reduces some of the pressure to meet debt repayments. It is further encouraged by the huge fees merchant banks enjoy from raising the debt for private entrepreneurs, from arranging 'asset-stripping' sales and from eventually re-floating privatized firms as public companies. Many of these fees are payable even if debts are not eventually repaid – in the case of the Qantas sale some analysts believe Macquarie could earn up to $500 million in total fees from this deal.

It seems to me extremely dangerous, in a macroeconomic sense, for firms to be acquiring extra debt as a way of gearing up to avoid moves by private equity to gain control. This is so because I believe the equity premium is not a sign of irrational investor behavior but, rather, is a consequence of the notion that in real markets returns are distributed with very long tails – disasters and stock market slumps such as the 1987 slump do occur and investors are right to be cautious about them. With this in mind, when such slumps do occur, the costs of the leveraged buyouts will fall on the shareholders of the banks that are providing the vast amounts of credit necessary to fund them. Moreover, attempts by the RBA to offset such risks by trying to dampen down credit markets through higher interest rates will leave us all worse-off.

I am not a finance expert but retain enough knowledge to retain an interest in these issues. I note that better informed monetary authorities such as the RBA do likewise.

On the specific Qantas deal, methinks, Qantas CEO Geoff Dixon should extract the digit and, if he can, continue working on the job of building a growing national carrier – a job that his shareholders have paid him (and Margaret Jackson) large amounts to do. Given Australia’s geography Australia needs (and can sustain) a strong vigorous national carrier – not a protection-reliant monopoly run by a bunch of financial engineers. Opportunities to build a strong, growing business are not improved by turning Qantas into a highly geared flunkey of the financial cowboys at Macquarie who don't produce anything. In addition, Dixon’s claims to preserve for its future owners the monopolized privileges that Qantas has enjoyed for decades are disgraceful.

The real failings in the Australian markets are not in our capital markets but in the market for executive skills. Qantas has self-evidently had poor executives without imagination and with the inability to do anything for Australia’s national airline than to propose flogging it off to a bunch of debt-reliant financial spivs.

Monday, December 18, 2006

Summer sloth grabs me by the throat

William S. Burroughs, the author, once formulated a 'don't have to do exercise' aimed at breaking down old associations and habits of thought - he saw it as a 'path to liberation'. I am very much in favour of breaking out of disciplined work habits. On holidays it normally takes me a week or so to achieve this state of sloth but achieve it I have. Moreover, the transactions costs of writing posts at the local public library here in Ulladulla add to my incentives to be slothful.

This means posts on Kalimna will be irregular through to Xmas when I retreat to Sydney to join my family there. I wish all my readers and Kevin Rudd the compliments of the season.

Please use this post as a site for voicing any concerns you have about the world or to say hullo. What are going to be the big issues of 2007?

Friday, December 15, 2006

Recruiting labour for the ADF

PM Howard has just announced a series of financial moves to boost recruitment into the Australian military from a total of 51,000 to 57,000.These include retention bonuses, possible recruitment bonuses, allowing introductory ‘gap year’ programs of 1 year service in the ADF, reducing service entry requirements and reducing the time taken to achieve entry. As yet there are no proposals for simply increasing salaries offered – the immediately most effective way of improving the attractiveness of serving in the military.

It is interesting to consider the long-term labour recruitment issues facing the military in Australia, the United States and in other countries – particularly those poorer countries supporting international terrorism. The threats of terrorism, and unconventional or asymmetric warfare, clearly indicate that technology alone is not enough to resolve future military conflicts – terrorists will fight on their terms not ours. In addition, Australia’s ADF have recently had substantial police-military roles in East Timor, the Solomon Islands as well as their partly peacekeeping roles in Afghanistan and Iraq. All of these activities are labour not technology intensive.

Australia, like the US, is a high income country with good future social and economic prospects and relatively low, though increasing, fertility. Women have substantial gender equality and over 60 per cent are in the paid workforce – this increases the opportunity cost of having children and helps create low fertility. A family’s children have high human capital and consequently, the cost of a death of one of them in terms of foregone human capital, is high to the individual concerned and to their family. In wealthy societies, apart from high living standards, young men and women enjoy a variety of recreations, healthy sex lives and normal male-female relationships. Australia is a society with few strong internal conflicts, few direct external military threats, moderate religious views and moderated libidos and an eminently sensible national contempt for religious and ideological fanaticism. It is predictably difficult to motivate young men to risk their lives for political or religious objectives given the possible opportunity value of benefits foregone.

The countries that support terrorism and religious fanaticism have almost none of these characteristics in common with Australia. For the most part they are low income countries with failed social and economic development programs and joyless, repressive social mores. All are undemocratic dictatorships, failed states or have subversive, militant, undemocratic groups within their fledgling democracies. In almost all, fertility rates are among the highest anywhere, in part because the only role for women is to raise children - they have low levels of education and low levels of workforce participation. A family’s sons have low human capital, poor economic and social prospects – unemployment prospects are, for example, very high. Young men and young women have sexless, joyless lives that trigger male aggression/fanaticisms and female fatalism. The cost of death is relatively low to individuals and to their family particularly if the death can be rationalized in terms of martyrdom or other religious myths. The joyless, low-living-standard societies containing such families are wracked with internal conflict, external military threats and religious fanaticism. In such settings it is much easier to motivate people to risk their lives for bizarre religious or political objectives than it could ever be in countries such as Australia or the United States. Those serving in the military have less to lose and the prospect of a good life in the hereafter makes sense to those whose current lives are worth little to themselves.

In David and Goliath conflicts between rich societies with advanced technologies and poorer societies without either technology or future prospects, terrorism is an equilibrium strategy for those without technology in dealing with international conflict.

Then labour rather than capital-intensive military responses to terrorist threats are called for by wealthy countries particularly if, as has become standard, the poorer societies use their local populations as hostage to technologically-based military responses. Civilian casualties matter relatively little to societies who value their own live children at relatively low levels whereas, those in wealthy countries, feel pain at seeing even their enemy’s civilian populations being subject to attack, even if they are clearly being used as hostages. The winging of left-leaning Australian intellectuals over Israel’s aerial bombardment of southern Beirut, even while Hezbollah was launching almost continuous daily missile attacks on non-military targets in Israel, was a recent instance of the hypocrisy of the left.

Australia and the United States need to meet their military human resource needs by taking advantage of their wealth by paying incomes to service-people that compensate them for the substantial economic and social benefits they put themselves at risk of losing by joining the military. Wealthy societies have the financial capacity to provide such benefits and do not need to rely on such things as conscription. The Australian military has an excellent reputation for being well-trained and effective – they need to continue to be intensively-trained to retain their military edge.

Thursday, December 14, 2006

Qantas, Macquarie Bank & open skies

Qantas looks likely to pass into the hands of Macquarie Bank and its backers for about $11 billion or about 25 times current earnings. On the face of it the price looks very good and I am curious about the source of value – which I am fairly sure will be there – for the scrounging, superhero debt creators at Macquarie and its backers – and of course, tidbits for senior executives in Qantas who cooperate and who continue to have a role in the 'new' Qantas.

It’s the usual sort of financial engineering deal – if control shifts to Macquarie debt levels of Qantas will more than double – unhelpful longer-term if Qantas seeks to expand or if things turn out to be difficult in the industry. You can’t help thinking that the long-discussed possible partnership with Singapore Airlines or one of the quality, efficient Asian carriers might have made better sense both for Australia and for Qantas’ long-suffering shareholders.

As I discussed the other day a consequence of Qantas’ privileged position in the Australian aviation industry is the opportunity to earn monopoly rents visa restrictive Air Service Agreements on key routes such as the Australia-Japan and Australia-US routes. The difficulty for Macquarie and its US backers in this deal is that there will be little incentive for Australian governments to continue to protect Qantas from competition if Macquarie and the US-owned Texas Pacific and Onex end up owning something like half of Qantas. Its hard to see the national interest in protection even without an ownership change, as I argued earlier, but if ownership does change the protected environment that Qantas has operated in will end.

Moreover, it is difficult to see how Macquarie et al can protect themselves from such deregulatory risks and consequent deregulatory costs. Perhaps they could scream with financial pain if their debt servicing costs became too onerous - 'need to protect the national carrier' etc. But I doubt it.

As with any takeover however implicit contracts within the target firm are certainly likely to change. Unprofitable regional routes are likely to be closed, offshoring of aircraft maintenance is likely and the budget operation JetStar expanded. The intractable problems CEO Geoff Dixon has had in reducing staffing costs on Qantas flights might be more easily dealt with by the new owners. I would refer to all of these gains to Qantas as x-inefficiency cost reductions where I use the term x-inefficiency to describe the managerial losses stemming from managerial or organisational inefficiencies associated with having monopoly power.

My guess is that to Macquarie and its backers the deregulatory costs from placing Qantas in a more competitive environment must be much smaller than the x-inefficiency cost reductions that can be secured with a change of ownership – hence the sense of this deal to the non-financial cowboys. But x-inefficiency losses can be addressed by a revitalized management team - a takeover which leaves Qantas highly geared seems unnecessary. However this deal will almost certainly go through on the basis of a myopic assessment of short-term gains to current shareholders.

It’s a pity that a key national asset can only have its value enhanced through the intervention of the financial engineering cowboys at Macquarie. The management and Qantas Board should have been able to do a better deal for their shareholders.

Don’t forget Europe

The strong decline of the US dollar against the euro – it has fallen to a 20 month low – has put renewed focus on problems facing the US economy.

The unsustainability of US consumptions funded by enormous current account deficits, the slowing of housing demands, continued low savings and hence the likelihood of future US interest rate cuts in 2007 are among the factors widely – and correctly – cited as explanations of the weakness of the US dollar. A plausible story is that emerging economies are becoming reluctant to fund high levels of US consumption by purchasing US debt. The implication is that the US economy will have to go through a sustained period of lower growth – a non-catastrophic event provided the dollar does not undergo a sharp plunge.

But there is a second side to any exchange rate story since an exchange rate says something about the relative performance of economies. A widespread perception is that the US economy has outperformed the world’s other rich economies – notably Europe - in recent years because of much higher productivity growth. But as The Economist December 2-8 (subscription required) has pointed out recently, once real GDP growth rates are computed in real per capita terms, productivity growth in the euro area is about the same as in the US over the past decade.
Moreover Europe has not been forced to rely on huge public sector deficits to ‘steroid pump’ its economies – nor have its domestic savings rates collapsed. Europe is hobbled with inflexible product and labour markets but that, if anything, indicates potential for future one-off gains from liberalization. Some European economies are beginning to contemplate reform and investors spotting this are likely to assume the euro is a better long-term bet. Strengthening this view, while the US Federal Reserve has not raised interest rates for 5 months, strong recent growth in the European economies suggests more interest rate hikes. Europe’s biggest economic force – the German economy – for many years a poor performer – is starting to look stronger.

Australians when looking at their global economic environment tend to look at Asia and at the direct implications of US economic problems and their indirect implications via effects on Asian economies. It is important not to ignore developments in Europe and not to take a stereotyped view of the failures of Europe as an overregulated set of economies which have ceased to be significant drivers of global demand.

Tuesday, December 12, 2006

Citizenship test & affirmation of values

Prime Minister Howard’s citizenship test requiring those seeking citizenship to demonstrate an understanding of English and to pass a test on Australian history, culture and values is a sensible way of promoting integration and of signaling to those electing to become Australians that our society is not an empty slate – a cultural void without history – that is always enriched by having greater cultural diversity. It isn’t – some forms of diversity and some cultural values we should not accept.

Australia is a remarkable country with high living standards, a soundly-functioning democracy, high levels of gender equality and low levels of religious and political conflict. These are not negligible achievements and need to be appreciated by migrants coming from cultures without such achievements. Moreover, Australia does have a history of white settlement that has played an important role in conditioning the national character. Australia’s aboriginal history, extending back 40,000 years or more, is one of the oldest on earth and needs to be appreciated by all those who live here.

Likewise the need to confirm a signed agreement to adhere to the Australian way of life and to Australian values is a useful way of signaling to migrants that Australian residents do place value on our cultural successes. People who come from cultures that are thousands of years old but who still see women as pieces of meat and those who see it as reasonable to kill women seeking to gain an education or to kill those who seek to practice their own religion are not welcome here whatever the cultural ‘enrichment’ they can transfer. Nor do we want migrants in Australia who are prepared to use violence to thwart Australian government policies, including our foreign policies.

Labor’s immigration spokesperson, Tony Bourke, almost predictably described the proposed test (without having seen it) as a ‘trivia night’ test. Like other Labor politicians (and those on the left) he apparently sees Australian history and culture as a blank slate and hence as ‘trivia’.

The citizenship test and the signed affirmation can be criticized – it will not screen out the religious nuts and fanatics who can deceive their way around the test and affirmation - but it will signal to them the Australian intent to affirm certain values.

There is the legitimate claim that some useful people will not seek citizenship because of the test. This is partly true because citizenship in many cases – for example with respect to British citizens living in Australia - does not increase advantage over simple residency. This is another policy failure that needs to be addressed. But the citizenship test and the affirmation fill an important gap in our citizenship procedures.

Monday, December 11, 2006

Fires, climate change & biodiversity conservation

I have been following, with concern, the devastating fires over a huge area of central Victorian state forest. About 220,000 hectares of bush-land have been burnt out so far. Fortunately there have so far been no losses of human life and only limited private property damage – two homes have been destroyed. Last Thursday as we were driving to the South Coast of NSW from Melbourne the sky was dark with smoke from around Sale to the Victorian-NSW border. It didn’t surprise me today to read that Melbourne, over the weekend, has had the dirtiest air on record in terms of particulate content from the fires.

At a time of such crisis it is natural that primary attention should go towards the efforts of the 3,000 firefighters to control the fires, to divert the burning away from private property and to use meteorological forecasts to guess the future course of the fire in order to better manage it. The weather has not been kind with Melbourne having its hottest December day for 53 years yesterday. The strong wind conditions that were expected to prevail however were less severe than expected which provided some relief.

But my primary concerns at this stage are that concerns about the limited private property damage that has occurred shifts the focus away from the enormous damage to publicly-owned biodiversity assets in the state parks. These assets are being substantially damaged by these types of broad front, intense forest fires. Indeed the extent to which firefighting efforts can effectively control mass fires from the perspective of conserving biodiversity needs to be questioned.

With increasingly regular summer dry periods and an increasing prevalence of bushfire risks – this, in part, as a consequence of climate change - it does seem important to consider the increased use of controlled winter burning to reduce the spread and ferocity of bushfires. It is not true that all Australian bush-land benefits from burning off – mallee habitats, for example, do not. Moreover, the bush-land that does benefit from periodic burns derives most benefits from moderate fires rather than raging infernos that consume everything across a wide front and deny the survival of local populations of flora and fauna.

The prospect of uncontrolled fires across a broad front turns so-called State conservation zones into little more than death camps. Biodiversity in such areas will be eliminated with probability one without controlled burning that reduces the intensity and scale of future bushfires and without corridor escape routes that permit species to escape and to recolonise.

We know that isolated conservation zones are poor defenders of biodiversity values in the face of fire risks for ‘island bio-geographic’ reasons. Such isolated areas also provide poor defense also against regional climatic changes as a consequence of climate change. This is the reason that our conservation areas need to be so large.

But fires operating on a broad front and such factors as regional climatic change can attack even geographically large conservation zones. Given the need for species migrations towards areas of more moderate climate and given fire risks we need to think about an integrated strategy of developing fire-protected corridors of nature conservation that provide native fauna with escape and recolonisation routes. This will be much more cost- and conservation effective than controlled breeding programs although the latter might provide much-needed insurance for severely threatened species and for our flora.

We also need to think more broadly about introducing conservation ethics throughout the community. The idea of relying on a ‘lock it up and leave it’ conservation reserve system will not allow us to effectively maintain public biodiversity assets. Whatever fantasies the Productivity Commission and other right-wing groups have for the possibilities of private sector involvement in conservation for protecting cute and cuddly mammals - these types of private endeavors are clearly worthless for purposes of devising and managing corridors of conservation protection that involve coordination responsibilities that markets will not deliver.

Those concerned with denialism in relation to the fact of climate change need to address the same denialism in relation to the conservation of our biodiversity in the face of huge person-induced threats such as fire risks. They also need to focus their attention towards the climate change threat of a species holocaust that will have both utilitarian economic and intrinsic costs.

Coastal development?

The coastal town I am staying in - Ulladulla NSW – is facing conservation dilemmas. My guess is that these dilemmas arise in every coastal town on the eastern seaboard – and perhaps every area of scenic beauty in Australia (and perhaps the developed world!). Rising standards of affluence and increasing numbers of retirees mean that citizens do not need to live in highly urbanized settings. They have the alternative of ‘Sea-Changing’ to currently quieter, more scenic living.

The problem is that huge numbers of people want to do exactly that. The market-response is to drive-up the cost of housing in such scenic towns. The ordinary suburban home opposite to the house we are staying in is on the market for $1.3 million and there is a great deal of real estate around here much more expensive than that. Renting a house down the road over the summer will cost you $3,000 weekly.

Ulladulla has just agreed to allow a 6 storey block of apartments to be built above its harbor area – more than double the height of any building in town. This is a natural market response to high demands to live in the town. Some locals are happy about the development which they see as progress which will drive up their own property values. Others focus on the traffic and congestion that such development will bring that might reduce their amenity values and perhaps their property values as well. (Of course greenies who seek to enforce maximum height regulations also put pressure on land prices and encourage resort-sprawl!)

Some of these developments can be dealt with via appropriate local government management policies. Reducing traffic flows in town could be achieved by diverting ‘through’ traffic around the town – the costs of doing this might be levied as a tax on the proposed unit developers who generate the external costs although, in practice, it won’t be. Efficient pricing of congestion externalities is a big enough call in large cities where specialized economic advice can be provided – it is an unrealistic dream in small town Australia. Alternative more practical policies might include increased parking levies in the streets affected by the development, traffic bans and so on. The general idea is to internalize the external costs induced by the development. If this is done then a deal leaving established and new residents each better-off on average can be achieved. My guess is that even these more down-to-earth policies are likely to be rejected by local pressure groups – parking charges, for example, are likely to be opposed by retailers and small business in the town centre.

There are numerous effects not captured by standard economic models. Allowing the constructing opens the floodgates for a stream of similar developments fostered by local landowners seeking to have their land transformed into higher value uses. Each of these developments imposes amenity costs on the broader community while obstructing such developments promotes the interests of those already living here at the expense of those who would like to. A win-win solution seems impossible without some way of internalizing external costs and compensating pre-existing residents although this seems rather academic and unrealistic.

I am uncertain where to turn on this one. The east coast of Australia is fast turning into a ribbon of urban development and much of its natural beauty is being destroyed. This is not occurring as a consequence of malice but because people – such as myself – like to visit and live here. Regulatory and planning remedies often have an elitist flavor that no libertarian would find appealing. But areas of natural beauty are being spoiled and, from any reasonable perspective, over-developed. What is sensible and attractive for an individual home unit vendor and purchaser involve substantial external costs for the rest of the community and yet it seems impractical to recoup these costs.

The planning issues here are not straightforward. The interests of newcomers need to be balanced against those of preexisting residents in much the same way that we think of devising plans for admitting external migrants into Australia. Having more people coming to Australia (to a local town) provides economic benefits in terms of improved gains-from-trade but, at the same time it creates external costs. The best guarantee for a win-win plan is to require all people to pay the external costs they generate and for the newcomers to compensate preexisting people for the extra costs for the charges they impose on them. It is coming up with practical proxies for this theoretically precise procedure that involves real problems.

Friday, December 08, 2006

Open skies

In the cover page of the AFR today (subscription required) there are renewed calls by foreign carriers for a liberalisation of Australia's 'air service agreements' (ASAs) particularly on the lucrative trans-Pacific routes. Over the years I have followed the same issue on the Australia-Japan link.

The call by Singapore Airlines (and other Qantas competitors) is for 'open skies', the air-travel market equivalent of free competition. Currently ASAs in Australia are split 50:50 with the foreign carrier in a destination country with the remaining 50% going to the local carrier, Qantas.

These ASAs are often restrictive in terms of total capacity enabling Qantas (and the foreign carrier) to extract rents from air travellers. On a route such as the Australian-Japan route, where most of the traffic is bound for Australia, the high prices charged could be considered equivalent to a strategic export tax that enables Australia to derive extra benefits from inbound travellers. Indeed this has been the historical argument used by Qantas to justify such restricted capacities - Qantas is restricting capacity to generate increased Australian net national advantage. This is equivalent to often abused 'optimal tariff' or 'optimal export taxes' beloved by interventionist leftists and, to be fair, by a long history of conservative Federal Governments. Sometimes the argument is sneakily dressed up into a claim we are pursuing a value-based rather than 'bums-on-seats' tourism policy - we get fewer tourist arrivals but they are wealthier and spend more. On occasion, to my undying embarrassment, I admit to having endorsed these questionable claims myself. But now, though more wrinkled, I am wiser.

The reason I question them is that while rents are generated by restrictive ASAs they are necessarily split 50:50 with foreign carriers. In addition, our local travellers who do travel overseas face higher fares and lose consumer surplus as a consequence - these are losses that need to be deducted from gains claimed to accrue to Australia via the increased rents to Qantas. The cost of an Australian journey to the US these days is very expensive - I am paying over $3200 for a flight to Chicago in early January. In addition like all monopolists, part of the rents to Qantas leak into or create x-inefficiencies in terms of poor servicing and over-staffing. The service is fairly ordinary on Qantas - you have just about got to beg the hostesses to interrupt their chats for a gin-and-tonic late into a flight. Finally, while rents are gained from restrictive air service agreements in aviation there are downstream losses to other sections of the tourism industry suchy as hotels and restaurants. In simple terms they get less business since fewer travellers come here.

My guess is that the net gains to Australia from restrictive air service agreements are small or even negative. For this reason I am happy to endorse the call of the foreign air carriers in their support for open skies. Australia would gain from more competition or else would lose so little it isn't worthwhile pursuing.

Thursday, December 07, 2006

Beaconsfield, Allstate and Macquarie Bank

I posted on the mining disaster faced by Allstate Explorations at Beaconsfield Tasmania earlier this year.

As a sideline recall that I pointed out that the smarties at Macquarie Bank had previously acquired $77.5 million dollars worth of Allstate Explorations receivables for $300,000. The sort of deal that gives the Macquarie boys healthy Xmas bonuses (as well as effective control of the Beaconsfield operations) but doesn't bring much cheer to Allstate Explorations shareholders. A court has just found that the latter may have the right to sue Macquarie. Good.

A book length treatment of this whole saga - including an explanation why the mine at Beaconsfield continued operating even though the local community believed it to be unsafe - should be written. Its the sort of episode that makes me think badly of the economic system - capitalism - I so frequently defend.

Summer holls

Today travelling to the south coast of NSW – to Ulladulla - to do some bird-watching, swimming (I used to say, go surfing) and generally to enjoy life. I’ve got a couple of bottles of 1990 Wendouree cabernet to ease the burden of my transport discomfits. Also have some trashy sex-violence-crime novels for the more serious moments. Blog posts might be a bit intermittent over the next few days or they might get serious if enough cobwebs get washed away.

Other things are changing too. I now effectively cease being a Departmental Head at my university and will go back to ‘normal’ academic life. I am taking Sabbatical Leave for all of 2007 to work on my Australian Research Council project. Yippeeee!

In the meantime feel free to post here on anything that interests you or that you think are good blogging topics over the summer months – I’ll read and respond to comments that stir my soul or evoke below-the-belt glee. It is the holiday season.

Tuesday, December 05, 2006

That second cricket test

The final day's cricket in Adelaide saw Australia go to a 2-0 lead in the Ashes series. A historic victory and an Ashes miracle.

England, after declaring at 550 for 6 in their first innings and having had 4 strong days of cricket, were demolished on the final day by an amazing bowling performance, based largely on an outstanding effort by the greatest bowler of modern times Shane Warne who got 4 for 49 off 32 overs. He helped to bowl England out for a total of 129.

Then a riveting batting performance by Ricky Ponting and Michael Hussey got the required 168 runs off less than the required 36 overs. Ponting is the most elegant, effortless batsman I can recall and Hussey, along with Gilchrist, among the most innovative. All are a joy to watch.

This was a historic game of cricket. Amazing! Summer! Beer! Swimming! Cricket!

Laboring on Rudd

Kevin Rudd has obvious intellect and ability – he is a decent family man, works hard and is well-educated. His presence as Labor Party leader helps to make Federal politics in Australia competitive again particularly if Peter Costello takes over and if ‘ideas people’ in the Labor Party gain decent shadow portfolios.

But despite Rudd’s claim that he will ‘run the show’ the early signs are not good that this will happen. He has, for example, indicated that he will continue with Beazley’s hard-line approach to industrial relations including the abolition of AWBs. He also indicated a strange belief (strange, for a self-professed free trader) in activist (read ‘protectionist’) industry* policy. He also supports an increased Federal role in schools and education using the High Court decision on WorkChoices as a basis for overruling the states.

This sounds a lot like old Labor talking.

I am unconvinced the electorate will take to Rudd. Once the excitement of having a new leader dies down it might end up Laboring-on as always. Rudd is inexperienced at running a fairly dysfunctional political party (who other than a hack could?). He might try to buck the system Latham-style or be a hack. There isn’t a third alternative without him exercising great political skills.

Update: Over at Crikey, Richard Farmer has some interesting observations on Rudd's preference for a protectionist industry policy.

Simon Crean might be down but that he is certainly not out was shown yesterday when new Labor Leader Kevin Rudd singled out revitalising Australian manufacturing industry as an example of how things would be different under an administration run by him.

Saving a manufacturing base has been a Crean crusade for a decade and he now has a leader listening to him. Whereas Kim Beazley merely talked the talk with plans for a wishy-washy body called Enterprise Connect, Rudd can be expected to tackle economic rationalism head on with some good old-fashioned protectionism.

Not that the Opposition Leader will be calling his subsidies and incentives protectionism. The "new policy agenda for the nation" he spoke of at his first press conference after winning will tackle the question "will Australia in the future be a manufacturing country, will we still make things or is that all gone?" His answer was yes but not in not the old-fashioned style that depended on protective tariffs and quotas.

What the new style will consist of will be spelled out in the months ahead but the Rudd way with words will surely find a fork in the road inside his babushka doll that describes rent seeking as a meaningful industry policy.

Where Crean knows there is fertile ground is in the statistics showing that since 1996, the government of John Howard has overseen the loss of 145,000 Australian manufacturing jobs with 60,000 of them occurring since the Government’s re-election in 2004. According to a study commissioned by the Australian Manufacturing Workers Union there could be another 200,000 job losses by 2020 if current policy settings continue.

Kim Beazley tried to raise manufacturing policy as an issue with an innovation blueprint but failed to arouse much interest. Nor did the Enterprise Connect centres dedicated to advanced manufacturing stir the interest of leadership obsessed journalists. It will now be up to the new style with sleeves rolled up to try again.

By the way what a terrible exit for Kim Beazley yesterday. KB was always ‘the’ very decent guy – in the lead-up to the ballot this was almost made out to be a sin or a sign of weakness. But KB was a long-serving politician and was committed to his role in achieving a Labor victory. To have this snatched away for him and then to be confronted with the personal tragedy of his younger brother’s death is one of life’s tough twists. His parting words that ‘family is everything’ were heart-felt and intelligent and KB’s apology for showing obvious emotion was unnecessary. I think everyone empathised with him.

Monday, December 04, 2006

Victoria's ratbag teacher union claims

The Victorian branch of the Australian Education Union today announced its demands on the recently-elected Bracks Government.

This is one of the rewards Victorians gain from having re-elected Labor a week ago. The AEU (of course) strongly endorsed Labor in the recent State election - although they now say the State Government 'exploits them'. With demands like the following it is not hard to see why they feel agrieved. They want:

  • A 30% pay increase over 3 years to all teachers.
  • An increase in superannuation from 9 to 12%.
  • Maximum class siuze to be set at 20 students.
  • Reduced use of contract labour in schools which is in excess of 17% in some schools.
And of course they express their total:

  • Opposition to merit or performance-based pay
on the delightful grounds that the current system allows 'quicker progression through the pay scales'. With this sought salary increase a Graduate teacher would start on $59,965 while a top-of-the-range Leading Teacher would earn $102,278.

Even by the standards of meat-head, trade unionists these are foolish, ambit claims.

Velvet Underground & Nico

The original studio recording of this famous album (the one that was originally sold with an Andy Warhol banana - with removable skin - on the cover) is being sold on Ebay - the current bid is $57,057US - not sure how long this link will last. It is a bit scratched but who cares about that when you are buying history.

I've got an early commercially-released version of the same album - which is also a bit scratched - and I am happy to flog it for $100. I am a big fan of VI and of the seductive, gravel-voiced Nico but the re-released CD version of this same album does me! I remember the late Lillian Roxon's early assessment of this music in her Rock Encyclopedia - 'not for the kiddies'. Of course, as a pimple-faced ex-adolescent struggling to achieve recognition as a newly-emerged adult, I went straight out and bought it.

Update: By 8-45am this morning the bid price had escalated to $100,100US.

Thanks David Prentice.

Sunday, December 03, 2006

Urban recreational wetlands

The Yarra River that runs north-east from Melbourne has conservation-oriented parkland adjacent to it even in areas quite close to the city. The area provideas a continuous green link to vast reserve areas in the Yarra Ranges north of Melbourne. This afternoon I visited the Banyule billabong, a wetland conservation zone, in the midst of an concentrated urban setting.

It was a sunny Melbourne afternoon. Bike-riders and joggers carried out their masochistic rituals along the Yarra Trail while I got a Leica telescope and my son William and sedately looked at the water-birds at the billabong. I’ve done this so many hundreds of times before it scarcely deserves a mention but 3 things occurred to me.

1. These wetlands are socially useful purely through their role in reducing the nitrogen load in our waterways – in Melbourne, in particular, in Port Phillip Bay. Melbourne Water is encouraging their development throughout the Melbourne area. Even ignoring conservation values of the type I hold, conserving these wetlands, in highly-valued urban lands, make a lot of utilitarian environmental sense even if their opportunity value in terms of foregone urban and commercial development is high. They improve urban water quality and provide urban environmental services to residents proximate to them including many people who demand their services.

2. Numbers visiting and using these conservation areas are non-negligible – using economics jargon there is substantial ‘willingness-to-pay’ for such zones. It is somewhat unscientific but, in the single hour I was there, I encountered 2 people photographing birds in the vicinity of the wetland – they were photographing yellow-tailed back cockatoos in the eucalypts behind the wetlands as we arrived; also two people with fieldguide books in hand were trying to identify bird and plant species around the billabong plus there was a local with binoculars who joined my son and I scanning for birdlike in the billabong. We ‘bird-nerds’ and ‘greenie conservationalist types’ are no longer such an eccentric ‘weirdo group’. A PhD student in economics could do a ‘contingent-valuation’ study but my casual empiricism suggests the demand for conservation outputs is high.

3. The birdlife we saw on the billabong this afternoon was astounding for an inner urban area. I counted a dozen migratory Latham’s snipe on the mud-banks on the far side of the billabong, 2 Buff-banded rail, a Black-fronted dotterel, 2 Black-winged stilts etc etc. I was delighted that son William picked out a Mistletoe bird in the trees behind us at the wetland. Long-term I hope he will inherit my interests, conservationist ethics and pleasure in enjoying the natural environment.

The Banyule Council is one of the most environmentally enlightened in Melbourne. It has provided a fantastic conservation resource for its rate-payers. The scheme could be replicated in most parts of Australia where some undeveloped land exists.

Provision of such wetlands in valuable urban setttings makes good sense from the viewpoint of reflecting community demands for conserved environments and also from the purely utilitarian perspective of fostering general community environmental health.

Labor elects a new leader Monday?

The contest between Kim Beazley and Kevin Rudd tomorrow might determine who will be Australia’s next Prime Minister but my guess is that it won’t.

I think the Coalition will retain power federally in 2007 given the advantages of incumbency, the strong economy, the likelihood of a winding back of our tiny Iraq commitment and just the fact of a strong Howard team. Moreover, that there is a fight now helps the Coalition – Labor will have real problems if Beazley narrowly retains his position.

I think that the Coalition team would outperform any Labor team but I have long had much respect for Kim Beazley. I have to admit too that Kevin Rudd, in his chip-monkish way, has more ideas than most Federal politicians. Some see the contest as going Rudd’s way because incumbency, in this situation, is seen as a disadvantage. The Age this morning plugs Rudd on its opening page and in its editorial.

I think Julia Gillard would be an improvement over the slothful Jenny Macklin – I have a parochial interest as Macklin is my local member. Her career has progressed from being an uninspired civil servant to an idea-free hack for the Labor Left. Gillard however impresses.

If Rudd wins the contest the Labor Party will move further to the right which suits me. Losing the election would be a better outcome for Australia if it forces the ALP to take seriously its faction-driven internal problems which derive from its refusal to place the trade union base of the party in its proper, minor role.

We need two social democratic parties competing for votes federally on the basis of who can best manage our mixed economy. Who can best provide a prosperous growing economy while also accounting for the needs of disadvantaged and for the environment? The trade union movement is a dinosaur that should not be exerting a dominant influence on one side of the policy debates that occur.

Saturday, December 02, 2006

Why rising agricultural land prices?

Why do rural land prices continue to grow strongly given the current drought, the secular decline in food prices and the evident difficulties posed by the prospects of global warming?

An interesting article in today’s Australian Financial Review (subscription only) by Brian Toohey sets out some tentative explanations but none fully resolve the issue.

Agricultural outputs relative to input costs have more than halved since 1962. ABARE shows that, since the mid-1970s, broadacre farms have made an average loss of $2000 while the return on capital invested has been only 0.88 per cent.

But since 1980 large grazing properties have increased in price by 7.7% annual going from a median price of $16 per hectare to about $353 in 2006. Capital appreciation has been strongest in the Northern Territory and north and central Queensland.

Part of the explanation lies in increased concentration of ownership. Firms like the Australian Agricultural Company (in my Moneybags share portfolio) own 24 cattle stations in areas unaffected by the drought – AAC own nearly 8 million hectares or about 1.1% of Australia. For most part the prices AAC receive depend on export markets and so are unaffected by local drought conditions – in the past they have trucked cattle from one station to another to deal with regional drought issues. Indeed I noticed in a company statement the other day that AAC is taking advantage of the drought to build up its herd sizes.

Another explanation is that Australian farming is driven by intergenerational issues where wealth accumulation is calibrated purely in terms of agricultural assets. In short families borrow to expand their holdings and do not substitute away towards equities or other forms of wealth. There might be some truth in this. Farmers have told me that they would be better-off selling their farms and using the income to invest in BHP-Billiton. It would be nice to find some way of testing this hypothesis.

If this type of reasoning is rejected and asset substittuability is assumed then it must be the case that farmers see much stronger commodity prices in the future - perhaps driven by development booms in China, India and other parts of the developing world.

The implications of global warming for farm values is only now starting to be analysed. In a CSIRO report Benjamin Preston and Roger Jones see mixed effects from global warming:

Australian crop agriculture and forestry may experience transient benefits from longer growing seasons and a warmer climate, yet such benefits are unlikely to be sustained under the more extreme projections of global warming. Furthermore, changes in precipitation and, subsequently water management, are particularly critical factors affecting the future productivity of the Australian landscape. The declines in precipitation projected over much of Australia will exacerbate existing challenges to water availability and quality for agriculture as well as for commercial and residential uses.

Generally agricultural property should diminish in value with climate change. According to Preston/Jones there will be significant reductions in milk production with even a 1 degree C increase in average temperatures.

Flatulent sheep and cattle account for 12% of Australia’s greenhouse gas emissions – the third biggest after coal-fired power stations and transport fuels. Such emissions would presumably be accounted for in a carbon trading regime and would therefore reduce farm value.

So it remains an intriguing puzzle – indeed a good PhD thesis topic – why do agricultural land values continue to rise so rapidly in Australia.

Tunnel under Melbourne

A tunnel is again being discussed linking CityLink with Melbourne’s Eastern Freeway. The project estimated to cost $10 billion would link the Eastern Freeway in the east of the city to the Tullamarine Freeway, CityLink and Melbourne’s west. An inquiry will be headed by Sir Rod Eddington who runs Victoria’s Major Events Association. The inquiry starts next year.

I’ll wait and see but I’ll be surprised if this project will ever proceed. The tunnel would have to be tolled and would also need a hefty input from taxpayers. As The Age article points out, the 2003 inquiry into the same project found that 90% of the traffic exiting the Eastern Freeway was bound for the city so the volume of cross town traffic is not currently large. Moreover, some of this traffic will be handled by current proposals such as improving the West Gate/CityLink/Monash corridor. Finally, the geology facing the tunnel is difficult because drilling must proceed through hard basalt.

But mostly I think Steve Bracks is the sort of conservative politician who might not like the risks of this sort of enterprise. Blasting at basalt under the ‘ornate terraces’ of Carlton is unlikely to be popular (Carlton's last liberal might go on the attack) and the Green-leaning strong Labor Seats of Melbourne, Richmond and Brunswick might not be happy with the plan.

My response is predictably to suggest road pricing as a means of cutting into congestion with an accompanying boost to public transport. Interestingly Sir Rod apparently agrees. But supply measures should not be ruled out without thinking carefully about future demand levels even with appropriate charges. I’ll watch this one for a while and follow the Eddington inquiry with interest.

Friday, December 01, 2006

Climate change & species extinctions

A severe environmental consequence of climate change is likely to be an ensuing wave of species extinctions and the consequent destruction of biodiversity value.

Plants and animals face difficulties in migrating away from changed climatic conditions, even with gradual global warming, because of human fragmentation of vulnerable ecosystems. If the change is abrupt – for example over a period of around 50-100 years – then effects will be much more severe. In Australia the Climate Change Network identify at least 90 Australian species at risk from climate change.

Consider for example:

1. A species such as the Mountain pigmy possum which lives in the Australian Alps. This exists in a narrow ‘temperature envelope’ - Brereton et al. (1995) show it disappears with an increased temperature of 1 degree C.

2. A habitat such as Southwest Western Australia (Australia’s key biological ‘hotspot’) which accommodates many of the 92 unique Dryandra plant species. These could again be seriously threatened by a temperature rise of as little as 1 degree C. See Pouliquen-Young and Newman (2000). The best of the Australian banksias is endemic to this region (B. coccinea) – my favourite Australian wildflower!

At the global level there are still more pessimistic forecasts. Thomas et al. in a letter to Nature (and here) forecast that between 13-37% of all species will be wiped out by climate change by 2050 without comprehensive measures to address global warming. A comprehensive review, by Camille Parmesan, of relevant scientific literature reaches similar conclusions (here).

I recently came across a 2004 report from the Australian Department of Environment and Heritage which addresses biodiversity conservation concerns for Australia from the perspective of designing policies that will ameliorate the effects of climate change. The presumption is the very reasonable one that climate change is already occurring. The objective is to devise an ‘action plan’ for addressing it. This action plan will:

  • Identify research areas to better understand impacts.
  • Adapt existing conservation strategies.
  • Improve communication between researchers and biodiversity managers.
  • Increase community awareness of the issues.

The policy mix includes reducing climate change impacts, promoting natural adaptation to change by facilitating ecological connectivity to aid migration and dispersal of species, protecting refugees and creating specific management zones around important habitats. A 3-year plan was proposed for 2004-2007 with a revised plan to be drawn up in 2007.

What is our climatic future? Most of Australia will warm from 1-6 degrees C over the next 100 years with annual rainfall likely to fall in the south and east – where evaporation will also increase. Some eastern and coastal areas will have moister summers. Extreme rainfall and tropical cyclones could become more intense. A detailed picture is here.

The implication for certain species is severe since many can survive only in limited climatic ranges and will be threatened if they cannot migrate because of clearing or environmental differences.

Areas of concern include the Australian Alps, the wet tropics, the coral reefs, arid and semi-arid habitats, freshwater wetlands and riverine environments. See Howden et al (2003) and Hughes (2003).

The effects of climate change will include a reduction in the geographic range of many species, changes to their reproductive lifecycles, changes in their population dynamics and survival with higher extinction probabilities for species already threatened. Many species will seek to move either south or towards higher elevations. There will also be increased pressure from invasive species such as weeds and pest species as native communities are exposed to stress. There will also be increased fire risks. Finally, there will be specific problems for coastal and estuarine habitats (mangroves, coastal wetlands, seagrass) due to rising sea levels.

Many components of the program involve conservation biology – improve capacities to respond to climate change, minimising climate impacts on key terrestrial and marine ecosystems, minimising invasive species impacts and so on.

But a crucial objective of the action plan is to improve understanding of climate change impacts and here there is a key role for economics is to identify the potential economic costs and benefits of climate change impacts on biodiversity, ecosystem processes, functions and services. This includes undertaking social cost/benefit analyses of possible biodiversity adaptation processes including doing nothing – tasks that were to be initiated in 2006.

There is also the task of incorporating climate change impacts into natural resource and land-use planning and the rationale for this is primarily economic. Adapting existing programs is likely to be the most cost effective way of dealing with climate change since these programs already have infrastructure and are in place. These existing programs can be undermined by climate change – for example through the increasing spread of invasive species. Thus a review of existing programs is called for particularly with respect to the conservation of protected areas.

The economic questions that occur to me are:

1. What is the assumption about the policy response to global warming.

2. If we take a pessimistic assessment of the likely success of climate change measures what insurance policies can be adopt to prevent extinctions. The report simply assumes that captive breeding and other strategies will be relatively expensive compared to adapting current conservation policies. They may however make sense as insurance options.

3. How can the national reserve systems be linked to provide corridors for species migrations in the face of warming? How can such measures be linked to agricultural land reclamation programs? What are the cost and benefit implications of such programs?

4. What, if anything, are the twists to species conservation economics that are posed by climate change issues?


R. Brereton, S. Bennett & I. Mansergh, ‘Enhanced Greenhouse Climate Change and its Potential Effect on Selected Fauna of South-Eastern Australia: A Trend Analysis’, Biological Conservation, 72, 1995, 39-354.

L. Hughes, Climate Change in Australia: Trends, Projections and Impacts, Australian Ecology, 28, 2003, 423-443.

O. Pouliquen-Young & P. Newman, The Implications of Climate Change for Land-Based Nature Conservation Strategies, Final Report 96/1306. Australian Greenhouse Office, 2000.