Thursday, May 31, 2007

Labor skidmarks

Kevin Rudd’s resolve to rid the Labor Party of the thuggish Dean Mighell and to retain the building industry regulator, the Australian Business and Construction Commission, are sensible
first steps.

The greatest difficulty facing Australia with a Rudd Labor election victory is that imposed by trade union control of Labor Party IR policies. The more effort Rudd puts into separating his party from the union thugs the lower are the changes of the types of trade union actions Mighell favours taking hold. A major fear is that pattern bargaining would take hold again with high pay deals in highly productive sectors being transferred to less productive sectors generating unemployment, loss of productive efficiency and inflation.

Some of Mighell’s recent comments are cited in the Age today. Describing:

… John Howard as a "skid mark on the bedsheet of Australian politics" and then describing employers as "greedy pricks" has done nothing to calm the fears of many voters with memories of the Whitlam years of the faceless men of the union movement deciding policy and of a return to the old days of class warfare, mindless industrial disputes and wildcat strikes.

In a recording of a union rally last November disclosed this week, he suggested how a threat of a strike would make employers cough up "millions".

At a recent ALP conference, he said a Labor government would give unions power to coerce employers into agreements restoring conditions, and it was "going to be fun" in relation to a return of a form of pattern bargaining.

He also was reported to have said: "Now we have kept that 4 per cent agreement across our industry and I'd like to know how many millions of dollars they've paid workers that we've racked up through that little bullshit stunt."

Most Australian’s don’t want people like Mighell driving IR policies. That these comments are made gives the impression that the Rudd leadership is weak and that unions, representing 20% of the total workforce, anticipate a field day if Labor is elected. Industry-wide agreements being the norm, pattern bargaining, extortion, secondary boycotts…….

The achievement of high economic growth coupled with historically low levels of unemployment and low levels of inflation is a major achievement of the Australian economy. Partisan debates have focused on the extent to which these outcomes were due to more flexible workplace arrangements. I find it difficult to believe they did not play a part in both reducing unemployment and in preventing high wage growth in productive sectors from spilling over into cost-push inflation throughout the economy.

Australia’s progress in increasing incomes and in retaining social equity by enhancing family payments over the past decade has been strong. It would be irresponsible to put these very considerable gains at risk. As the Australian’s editorial suggests this morning it is not being ideological to stress these IR issues. The left-wing unions in Victoria who provided the political support necessary for the Rudd-Gillard ticket represent the past not the future for Labor and for Australia. In getting rid of Mighell (and in retaining the ABCC) Rudd has hopefully taken a preliminary step towards recognising this.

Still the Labor Party is primarily funded by the unions and still seems intent on abolishing Australian Workplace Agreements.

It was a step in the right direction – here's hoping Rudd’s move is not purely cosmetic.

Wednesday, May 30, 2007

High petrol prices & worsening congestion increase use of public transport

Critics of public transport pricing claim in The Age that public transport fares in Melbourne are ‘too high’ compared to other States – the State-by-State fare comparisons are here.

Indeed this claim at might be true in a comparative sense and from the viewpoint of efficiently pricing such services at social marginal cost - the latter suggests quite low prices. But despite these apparently high prices there has been a surge in Melbourne’s use of train services – about an 18% growth over the past two years.

This is interesting and reflects higher traffic congestion and petrol costs.

These factors force motorists to seek alternative modes of transport. Transport economists from other States have suggested to me that the same broad conclusions hold elsewhere. Indeed in Melbourne there is now heavy peak hour congestion in use of train services as commuters switch from driving their car to taking the train.

The conventional wisdom is that cross price elasticities* of demand for public transport are low. For example the text by K.J. Button, Transport Economics, 1993 suggests very low effects of increased petrol price on car use. This, in turn, suggests cross price elasticities of train demand in response to petrol price changes are also low since not many passengers will divert to public transport when the cost of using their car rises. The direct effects of increased congestion costs on car usage are also often seen as low so, it is usually argued, road charges to internalise congestion costs need to be high.

I’ve taught these types of ‘stylised facts’ in courses on public policy and transport economics for 20 years. But the recent Melbourne experience makes me rethink. Maybe these conclusions change when petrol costs are so high that they impact significantly on household budgets and when motorists have to drive in heavily congested conditions.

I have long advocated a case for congestion pricing in Melbourne. But this case improves when petrol prices are also high and people are upset by having to spend long periods on congested roads. Then slapping on a congestion charge – even a low one – might have very strong effects in further encouraging motorists to use public transport. Only low use road charges are then needed to tip the balance back in favour of public transport because these low charges ride on the back of other costs associated with motoring which is already increasing.

(An alternative interpretation is that with high petrol prices and long travel times the congestion problem will sort itself out. This seems fanciful to me given the steadily worsening road traffic situation in Melbourne. As some motorists leave the road because of high costs latent demands to use roads are released so public transport use can increase without congestion changing much)

Low road use prices are likely to be much more politically acceptable than high ones so it seems to me that the advent of high petrol prices improves the political case for road pricing. Of course there is an accompanying need to expand the stock of public transport infrastructure – a task the Bracks Government has in Victoria has already started on.

Thus there are indeed a few very indirect benefits from high petrol charges. Of course there are far greater economic costs since individuals driving in uncongested areas also get slugged with the higher petrol prices. This is the reason that taxes on petrol cannot generally be used as a surrogate for congestion pricing.

*A cross price elasticity of demand for train services with respect to a petrol or congestion cost measures the percentage change in train demand from a percentage change in the respective cost. It measures how sensitive rail use demands are to these cost changes.

Update: As Sinclair Davison (and colleague Rob Waschik) point out the post above neglects to mention the substantial ($800) parking charges that the Bracks Government has introduced in Melbourne. These compound effects promoting train travel.

Monday, May 28, 2007

Does the country change when the government changes?

Tim Dunlop has asked me to be part of a blogging ‘conversation’ experiment he is co-ordinating from his Blogocracy blog. Each person in a group of commentators, posts a question in turn. Each member of the group then responds to the question on their own blog and links to the responses of the others. So I will respond today and get a chance to post a question for the others at some time in the future.

Tim’s initial question is:

My first question is picking up on something said by both John Howard and Paul Keating, namely, that when the government changes, so does the country. Both made the comment at a time when it looked to them like they might be about to lose power and so there was, of course, a sense of warning in their observation. So that’s my question: Does the country really change when the government changes?

My response.

This question seems to in part pose the tweedledum-tweedledee issue. Despite the different way they portray themselves, are the two major political groupings in Australia so similar that they can be expected to provide essentially the same policies?

If so then a change in government will not provide much of a change in the country.

The question is a very general one and clearly does not admit a simple ‘yes’ or ‘no’ answer. To answer it precisely one would need to relate the history of the major political groups in Australia to the history of Australia. There would be a significant random element in effecting this linkage reflecting the role of general global changes, the role of other levels of government, the unions, Reserve Bank, public sector and the Treasury. Perhaps, too, social attitudes drive history and to some extent politicians just play catch-up.

Thanks Tim it’s a tough question.

Let me give a narrow economic perspective of the question based on some specific cases that I know something about:

1. In the very long-term some major policies seem to be determined by events rather than the party-political identity of politicians.

One of my academic interests is the very long-term history of labour and capital migrations to Australia. My judgment is that most of these outcomes reflected events in the international economy, and the ups and downs of the Australian economy, rather than party political policy decisions in Australia.

Up until the 1920s, capital and labour moved freely and in great quantities into the Australian economy. The main determinant of intakes had nothing to do with Australian policy at all – they were primarily determined by the size of US capital and labour inflows which left countries like Canada and Australia sharing the residual. After the 1920s a period of restrictions emerged that lasted up until the Second World War. This was then followed by an increasingly Liberal phase. Hiccups occurred during the banking collapses and droughts towards the end of the nineteenth century but these, again, had nothing to do with political identity.

It is difficult to tie these broad immigration phases to particular political developments in Australia since the other countries of high immigration (Canada and the US) followed exactly the same chronology. You would have to be naïve to see this as mere coincidence.

Even particular events such as the abolition of racially discriminatory immigration policies in 1973 were accompanied by similarly-timed changes in other countries. Big reforms based on changing morals or a common response to the same international factors? I’ll bet the latter.

These days I remain surprised, more generally, by the extent to which economic progress in Australia is driven by the international economy alone. The driver now is China and Japan rather than Europe and the United States. The main task for policy-makers is to not stand in the way of inevitable changes.

2. Over the past 40 years the outstanding events in Australia’s economic history were the 1975 tariff cut by Gough Whitlam and the move by the Hawke-Keating Government in December 1983 to float the exchange rate and liberalize foreign exchange controls. These moves cemented Australia’s modern role in the world economy. They were moves that one might have expected a conservative government to implement.

Most conservative supporters saw the years of Mr. Fraser’s Prime Ministership as years of inaction and wasted opportunity in relation to liberalizing the Australian economy - although the conservatives in opposition did support the subsequent liberalizing moves by Labor they were bound by interest-group politics and their conservatism not to bring these changes on themselves.

Moreover, the international community, as a whole moved, towards greater flexibility in exchange rates and to less reliance on foreign exchange controls so it is not clear how much specific Labor input there was in the decision. I don’t think that much though Labor drove the specific timing.

I think Labor can be identified with changes that altered significantly the way Australia related to the world but I am unsure how much of the change was endogenously determined by events. I don’t worry too much about the attribution of such changes - they were unambiguously welcome.

The Howard conservative Government has presided over what is perhaps the longest boom in Australian history for the past 100 years. The key remaining item on the reform agenda is to rid the economy of destructive workplace practices which reduce our freedoms and our prosperity. I think Howard has taken a small step in this direction but his basic virtue has been to not stuff things up. A Labor Government might well introduce urgently-needed, simple labour market reforms eventually. It would not surprise me.

3. The present. Would a Rudd victory change Australia?

In the short-term a Rudd victory will restore the failing fortunes of Australia’s trade unions but this is unlikely to have much medium term impact. The decline in the role of the unions reflects changes in the way work is carried out in Australia and is only marginally a function of anti-union activities by the conservatives. That Mr. Rudd’s wife chooses common law individual contracts for her firm rather than relying on collective agreements is telling as Terry McCrann points out.

The current IR stance of the ALP will fade in the face of economic realities and its Therese Rein-style contradictions. The unions and collective bargaining will die over the next few years to become a perceptible force only in the public sector.

Mr. Rudd’s indicated withdrawal of troops from Iraq will weaken the Australian-American Alliance but not in a major way. The war is as unpopular in the US as it is in Australia. In addition, the latent anti-Americanism in the ranks of Labor’s left will be squashed by policy realists who understand the overwhelming importance of the Alliance. The most significant impact of the proposed Australian withdrawal will be to signal (in a minor way) to the terrorists that the propaganda tricks and manipulations they have played on the West have won.

The West will live with the consequences of this victory for decades – it is my major current political concern.

The other distinctive parts of Mr. Rudd’s agenda such as reinstituting an ‘industry policy’ which favors manufacturing will likewise, in my view, fade. Much damage can be done here but it will only be temporary. The factors that limit growth in, for example, the Australian automotive assembly industry have much less to do with whether we have 5, 10 or 15% tariff protection than the existence of China which will be the largest automobile market on earth by 2020. We will still sell and service vehicles in Australia then but we probably won’t produce many. Avoiding this would require protection of 60% and that is not on.

In my view Rudd is a right-wing bureaucrat who will seek to operate Australia much as it operates now. He is a fairly able guy (not in the order of JWH) but has really poor quality people to draw on as ministers and a hopeless backbench. If Rudd secures power there is a high chance of monumental policy stuff-ups but there is little chance of long-term damage.

Conclusion: The notes above probably doesn’t answer Tim’s question adequately but I think I have shown why it is a demanding question anyway.

Political parties provide us with ways of adapting to the inevitable and are only partial creators of our social evolution. The world changes and we will too.

My response to the other commentators.

Joshua seems to see the rise of more liberal economic policies in the 1980s in Australia as leadership-driven. I would ask why this liberalization was then and after such a global phenomenon in Western countries. With respect to immigration policy at the time countries such as Canada had much higher intakes than we did. Joshua’s comments on immigration policy under Howard seem off the mark – Howard increased intakes considerably over those in the Hawke-Keating years – easier now of course since we have much lower unemployment.

Tim and I seem to have similar views on the issue even though we would draw different political conclusions; I agree with him that politicians have incentives to exaggerate their role. I liked his discussion of the role of ‘inevitability’ arguments.

I also thought Ken and I had similar thinking – WorkChoices continues reforms begun under Hawke/Keating – I agree.

Tigtog and I are apart in terms of politics and I think that her emphasis on the relation between parties and views in the electorate is only part of the story. We are also impacted on by the world as I argue in my post.

Kim’s arguments I find really difficult. Her claim is that leaders should lead and when they don’t lead the ‘people perish’. I think this is a boring old lefty illusion – we don’t need a ‘prophet’ (to Kim Keating was a prophet!!!!!) to go forward and if we don’t we will not necessarily stagnate. Indeed she regards JWH as anything but a prophet but he has delivered good outcomes. Basically I don’t want any political visionary ‘leading me’. It is ‘clear that prophecy and prophets are what give sustenance to the people’. What you are saying here Kim is close to being fascist and an unhappy conclusion in what should be a free society. Moreover it is inaccurate – as a number of us have argued many of the political changes at this time were replicated elsewhere with local politicians understating the extent to which they just reacted to events.

Robert M is one of the interesting bloggers on the left and on this question is sensible enough to see that things won’t change drastically if a Rudd government is elected. As I have stated (and I think Ken agrees) the current IR reforms continue a set of historical developments that ultimately will not be reversed. Ken might regret that but I don’t. I think Robert is astute in recognizing the lack of leadership the coalition has displayed on climate change. It’s a justifiable gripe but the facts of climate change will drive Coalition policy even if they do so with a lag.

Andrew, as a politician, is in the thick of it and despite his qualifications I think he (almost naturally) overestimates the autonomy of politicians. Like Tigtog he emphasizes constraints imposed by the electorate. I think these are important but that constraints imposed by the world (Greenhouse, China, India, US policy) are as important. I liked Andrews’s comment about Al Gore. Particularly on the climate change issue the world would have been better-off had Gore been elected instead of Bush. This exception establishes (if you really needed to prove such an obvious point) that one cannot ignore totally the issue of political identity.

A good discussion which I enjoyed. I welcome comments on this draft and will add changes in perspective as updates.

Other commentators are: Joshua Gans, Tim Dunlop, Ken Parish, Kim, Robert Merkel, Andrew Bartlett and Tigtog.

My response: I enjoyed this discussion and my responses to the various participants are at the bottom of the page over the leaf.

Rudd clan's hypocrisy on IR

I thought the Labor Party preached that collective workplace agreements worked better than individual contracts. Collective agreements, it is claimed, are fairer and provide higher productivity.

Not so for Party leader Kevin Rudd’s wife, Therese Rein who has all of the 800 Australian workers in her own business on individual contracts. They traded their penalty rates and other conditions for 45 cents per hour. Therese’s firm also provided jobs to job seekers to be employed under Australian Workforce Agreements – the individual contracting arrangement Labor has promised to abolish.

Rein has now indicated she will sell off her business before the election in order to eliminate the prospect of ‘conflicts of interest’ with the government – she derives almost all her income from the public trough. But this is a diversion – the ‘conflicts of interest’ could have been handled. The deceitful hypocritical Labor Party industrial relations policy is the difficulty here. It must go.

Rudd has attacked the retailer Spotlight’s deal for stripping workers of conditions while Gillard has attacked, in a cowardly way, the operator of a motel in Goulburn for doing what Therese Rudd has done.

I assume Rein will say she was not involved in any unseemly attempt to cut wages – the individual contracts she imposed were ‘common law’ agreements and the 45 cents fully compensated workers for their lost conditions. Gulp; can she say that with a straight face? If you believe that you will believe anything.

Rein was behaving like an intelligent employer and doing intelligent deals with her workforce. Deals that worker and employer agree to and which provide advantage to both parties. The guilty party here is not Therese for 'driving down wages' but her husband’s daft political party with its foolish, backward-looking industrial relations policy that is essentially designed to revive the fading fortunes of the trade unions.

That objective will fail and job opportunities, flexibility and productivity will diminish if such policies are introduced.

Sunday, May 27, 2007

Fame conveys authority in Labor’s ranks

I enjoyed The Age article by Theodore Dalrymple on a world that has become trivialized by the ‘cult of authority’. Bono has the authority, if not the knowledge, to ‘save’ Africa and we listen to him because he is a celebrity. The philanthropic millionaire with his IPOD and his rose-tinted sunglasses is determined to save those kids from AIDS. It is better than his singing.

Spoilt brat Diana Princess of Wales never said anything in her life that was not banal and saccharine. She was taken seriously because she was a ‘Queen of Hearts’, ‘People’s Princess’ celebrity who incidentally provided moral leadership – a recent rock concert in her memory sold out in 20 minutes. Although she was always a bit of a lightweight she had authority because she was a celebrity dill.

Some of this analysis applies to recent trends in Australian Labor politics. Australia has its own logie-level, proletarian, celebrity aristocracy that is being recruited to stand as Labor candidates.

Maxine McKew is cute and smiles a lot but has distinguished herself in the lead-up to the next Federal election by saying nothing beyond the utterly trite and obvious, ‘it will be an uphill battle’ etc etc. She has been pitted against one of Australia’s most experienced and wily politicians, JWH. Yes she can ask good questions in an interview but don’t politicians also have to be able to answer questions?

The ABCs weatherman Mike Bailey will challenge Joe Hockey. Apart from being a recognized person on ABC news what skills does he bring? Why a weatherman who reads simple prompts from an autocue? He might be better than Mary Delahunty but not by much.

Nicole Cornes is the wife of a celebrity. (Yes celebrity status can be transferred by marriage). Nicole is attractive but doesn’t know what a tax cut means and would not have a clue about global warming. She is a Labor candidate in an Adelaide electorate.

Labor doesn’t have a Bono but does have Peter Garrett who is just as
pretentious and just as lacking in political (and musical) ability.

As I have said before: Why not Aunty Jack, Kath, Kim or Mr Squiggle if the ALP wants celebrities? Or as I have suggested before, recruit Bindi Irwin for the Rudd job.

Even without taking things to such extremes isn’t it almost ludicrous to trivialize politics in this way? Was there ever a time when Australians took politics seriously? A time when engine drivers, teachers, doctors, farmers and fish and chip shop operators were selected as Labor candidates. The Parliamentary Labor Party is replacing a few of its union drones and party political hacks with celebrity nothings. Are there not alternatives?

Why can’t Labor and why cannot Australia do better? Is Labor recruiting celebrities because it sees this as one step up on the party hacks and trade union dummies that it would otherwise choose? Are there no better alternatives? What happened to people with substance - the likes of Peter Walsh, Barry Jones and the sensationally able John Button? Decent men had ability who were anything but celebrities.

Pointers on monitors

How does the pointer on your monitor work when you move the mouse? Haven't you wondered? Through the miracle of high technology, we can see how it is done. With the aid of a screen magnifying lens (supplied online), the mechanism becomes apparent.

Click on the link below and you'll find out. The image may take a minute or two to download and, when it appears, slowly move your mouse over the light grey circle and you will see how things work.

Follow this link and find out the truth.

Thanks Bernd…I think

Saturday, May 26, 2007

1991 St Huberts Cabernet

Occasionally I think we all forget how good aged Australian cabernet can be. Shiraz is so often promoted as the Australian red wine with cellaring potential. Most of the red wine in my cellar is shiraz.

The exceptions are the wonderful Wynns cabernets, the Penfolds Bin 707s, which often disappoint me, and a collection of odds and sods I have put together over the past 20 years without ever being at all systematic. Since the late 1980s I have cellared a few of the Yarra Valley cabernets – it is not a variety that has much prestige in that part of the world. I sampled the St Huberts 1991 cabernet today. St Huberts vineyard was first established 120 years ago and is one of the oldest vineyards in Victoria – its a very pretty place.

I was expected something pretty good but this was wine was really something.

After decantering I allowed the wine to breathe for 90 minutes. The wine evolved into an explosive mix of taste and aroma in the glass – an explosion that left a residue of greatness in the unhappy empty glass an hour after the last drop had regrettably been drained.

While drinking: Gentle fruit flavors with a bright acid finish, brilliantly intense color and super-intense bouquet of sweet violets and spices. Good strong fruit coming through – my recollection is that on purchase the wine was tannic, ‘oaky’ and essentially designed to clean the tartar from your teeth. Now a gorgeous fruit-driven and highly perfumed beauty. It is one of those surprise cellaring outcomes that makes the economically irrational pursuit of maintaining a cellar less irrational. Jackpot! Bingo!

This was wine-buff DavidLOle’s more-expert view of this great St Huberts. He graded it 94/100 comparable to a top French Second Growth.

If you could get it at auction my guess would sell for between $40-$50. But if I see it first you would find it sold out.

Groundwater & Australia’s rivers

I posted a week ago on the controversy surrounding the possible double counting on water supplies by ignoring the role groundwater plays in generating stream flow. I have just come across a report by hydrologist, Dr Richard Evans, which sets out the issues accurately in clear, non-technical language with easy-to-follow diagrams. He sets out what we know, what we need to know and why integrated management of stream water and groundwater is essential. The report is here. Land and Water Australia’s research portfolio on groundwater and groundwater recharge (which includes this report) is here.

A troubling issue is that extensive use of groundwater of the type forced by the recent drought can make it very difficult for stream flow to regenerate – stream flow might in the main be diverted into groundwater supplies. Moreover these types of effects can often only be observed with a lag. The figures I cited in the previous post seem to just be approximations or guesses but they do suggest the severity of what seems to be a critically serious situation.

This Summary of Dr Evan’s report on interactions between groundwater and stream flow should be read by anyone seeking to appreciate the extent of Australia’s current water supply crisis. It is a crisis and a thoroughgoing change in our attitude to agricultural water uses is called for in Australia. From the Summary:

Groundwater and surface water resources are often closely linked. This has particular implications for Australia and how we manage our water. As a result of this connectivity it is possible to allocate the same resource twice, to surface water users and to groundwater users. This double allocation of the same water has reduced the flow in our rivers and streams.

There has never been a nationwide review of surface water and groundwater interaction in Australia and consequently the extent of double allocation is unknown. There is also no national approach to managing our groundwater, nor an agreed method for assessing its links to surface water.

The lack of understanding of the links between groundwater and surface water has contributed to the nation’s present water shortage. This has been exacerbated by dry conditions over the last decade and by rising demands for water.

It is suggested that tackling the impacts of surface water and groundwater interaction requires a national approach on three fronts - technical, managerial and educational.

Several approaches are proposed for assessing and managing our groundwater resources, and recommendations made for their adoption.

It is also argued that remedying the over-allocation of surface water and groundwater should be borne equitably by all users, with cuts and restrictions applied generally rather than to groundwater users alone.

Thursday, May 24, 2007

State Government funding of 'special events'

Billionaire Bernie Ecclestone threatens to take the Formula 1 Grand Prix away from Melbourne unless it runs the races at night. This is apparently because Ecclestone wants to see the live TV coverage in Europe. The current contract runs out in 2010.

It has never been made clear what Victorian taxpayers contribute to Ecclestone to stage the Grand Prix here in Melbourne – the size of the fee is private information although for the life of me, as a taxpayer, I cannot understand why any government should agree to this. Currently Ecclestone is negotiating with Valencia, Spain to run a single annual event there and this gives some idea of the transfers being made to Ecclestone:

Valencia's Partido Popular has agreed to pay €26 million ($42.2 million) a year for the rights to hold a F1 event, which might give a good indication of what Melbourne
will have to fork over.

Gulp. One does not know the size of the public component of this transfer although the overall public subsidy for the Grand Prix was $21 million last year. It is forecast to be close to $30 million this year We also know that $66 million is allocated in the 07/08 Victoria budget towards tourism promotion. A further $34.2 million is allocated to Special Events promotion in the State over the next 4 years. The Victorian Auditor General has called for more analysis and less spin in assessing benefits from these events.

Mr Bracks seems unwilling to give Mr Egglestone what he wants. Opposition Leader Ted Baillieu wants the Grand Prix retained on terms which accord with Mr Ecclestone’s desires. Excuse me but, as a supporter of the conservatives, I feel ill. If you are making a loss on a dumb deal and the party making the gain threatens to take the loss away from you, well....

A report was tabled yesterday in the Victorian State Parliament that examines benefits from the 2005 Grand Prix event. It claims that overall Victoria made a loss from the Grand Prix and that the Government had overstated benefits frtom the event by more than $100 million. It also claimed that that the methods used by the National Institute of Economic and Industry Research to assess the economic impacts of the report were questionable.

‘Key to the differences between the Auditor-General's figures and those of the National Institute of Economic and Industry Research are projections of full-time employment created by the grand prix.

The institute estimated these at 3600, while the Auditor-General’s report suiggested the event would create between 400 and 600 jobs. Tourism revenue from the event was $9.1 million according to the institute, but the Auditor-General found it was of uncertain value’.
Disclosure: I provided input to the Victorian Auditor-General’s Report. I think the Auditor General's report is a fair one and a valuable input.

Farmers kill endangered species & destroy wetlands of international significance

Two firms producing almonds and two almond plantation workers were charged over the shooting of more than 40 rare Regent parrots in Victoria's northwest late last year. The birds were shot near Robinvale, on the Murray River 470km northwest of Melbourne. The regent parrot is a nationally-threatened species. The Eastern subspecies killed by these workers is endangered. Only about 2400 are left in the wild. The birds are protected under Victoria's Wildlife Act.

The maximum penalty for killing a single bird protected under the legislation is a $5350 fine and six months' jail, with additional fines for each subsequent bird killed. Yesterday the workers were fined a total of $740 each. This works out at $37 per bird killed. The case against the firms involved has been adjourned until next month.

As a fine this is a total joke and shows the courts are not serious about conserving endangered species. Maybe the workers were acting on the instructions of the firms. Even so the fines seem absurdly low. I’ll watch to see what happens when the firms go to Court – if they directed the workers to carry out the killings they should be slugged with heavy fines and penalties and forced to contribute to restoration of the species in the wild.

Meanwhile a NSW farmer has cleared 750 hectares (about 750 football fields) of the Gwydir wetlands in what is regarded as one of the worst examples of illegal land clearing in Australian. It was a wetland of international significance and was Ramsar-listed – it is now a ruin which will take decades to regenerate. The site had thousands of birds nesting there.

The farmer faces a $1 million fine although the NSW’s Government’s record of prosecuting such incidents is woeful. In my view, again, a $1 million fine is woefully inadequate for this scale of destruction! The law should again target massive fines and seek the fullest possible farmer-funded environmental restoration.

Many farmers are ardent conservationists who have an affinity for the environment. Some are socially irresponsible vandals who destroy Australia’s valuable biodiversity heritage.

Wednesday, May 23, 2007

A bigot on private education

Catherine Deveny is more than usually prejudiced in today’s Age. Her claim: It is wrong for government to provide any funding for private schools . Parents wanting to give their children a private education should pay for it 100% themselves. Moreover, Deveny claims it should be compulsory for politicians to send their children to public schools and to only use public health care.

Would the latter be enforced by law?

The rants of this foolish woman would increase per capita education costs in the public system since private school contributions by parents substantially cross-subsidize such costs and large numbers of private school students would join the public schools with such a policy. On the basis of providing a better quality public education system with given public resources, there is a case for a public contribution to the private schools.

There is also the view that parents might not wish to have the educational choices they make for their children entirely determined by governments. Deveny takes the opposite view - 'one size suits all' for education and that size should be entirely publicly-produced. It is not only a foolish view given its economic implications, it has dubious moral implications as well.

There is so much stupidity in the Age these days that I usually just ignore it. Deveny's piece was so foolish I felt I had to respond.

Tuesday, May 22, 2007

E. coli conservatives

Paul Krugman blames Milton Friedman for promulgating the foolish libertarian precept that nothing should be regulated - not even the quality of the foods we eat. Why regulate food quality asked Friedman - firms will have sufficient incentives based on self-interest not to poison their customers.

That is generally a false claim - the incentives may be inadequate. Food providers may be ignorant rather than maliciously and myopically greedy.

Failure to regulate means that consumers are dependent on the quality protection services of foreign governments which might be asking quite a lot.

Some recent food imports into the US from China have made a lot of people very sick. The gains-from-trade in this case have taken the form of profits to the vendors and food poisoning of the unfortunate customers.
The Washington Post, reviewing F.D.A. documents, found that last month the
agency detained shipments from China that included dried apples treated with
carcinogenic chemicals and seafood “coated with putrefying bacteria.
The same has occurred recently with toothpaste and pet food exports from China, some of which ended up in Australia.

Of course there should be careful monitoring and regulation of the food trade.

We should also carefully monitor the views of libertarian fanatics who see the free operation of markets as the answer to everything. They are not. Information problems, ignorance, externalities and public good issues provide a host of reasons for intervening in real economies.

Conservative ideologues who advance arguments for minimal government are a deluded lot who have done much damage to contemporary America. They are catching on in Australia.

Monday, May 21, 2007

Advertising booze to kids today discusses industry self-regulation of restrictions on advertising alcohol to kids. They claim this self-regulation is a farce – a proposition I agree with.
‘You need look no further than this ad for Tooheys New to see why Australia has a nasty drinking problem. The ad features a street party with giant inflatable figures in happy bright colours and could easily be mistaken for a toy promotion - until the beer truck arrives'.

The industry’s self-regulatory Alcoholic Beverages Advertising Code – is a joke. A recent study published in Drug and Alcohol Review in January searched 93 magazines popular with youth, two-thirds of which contained at least one alcohol ad or promotion (including one featuring skateboards). 51% of these items appeared to contravene at least one section of the code.

Voluntary regulation won’t work if firms have an intrinsic motivation to not enforce it. The industry emphasises flogging their drugs to kids because sustained growth in the alcoholic drinks market requires growing numbers of youth develop a taste for booze. Across age groups Australians are not drinking more. Moreover, youth are being successfully targeted by industry so their growth objective is being achieved through sweet-tasting alcopops and so forth that help youngsters graduate from soft-drinks to alcohol.

There are good theoretical foundations and abundant evidence that marketing booze to kids is very effective – US research suggests a complete ban on advertising booze could reduce teenage drinking by 25% and binge drinking by 42%. Moreover, there is evidence alcohol causes specific brain damage in youth. A blanket ban on advertising to youth is justified and industry self-regulation will not work.

Governments must intervene. Real leadership from Mr Howard and Mr Rudd (or a cooperative agreement!) would see them both agree to take on the liquor industry to reduce hazardous levels of drinking among youth.

State governments act foolishly on climate change

The NSW Government’s deal with BlueScope Steel undermines Australia’s ability to come up with a carbon tax which significantly cuts into CO2 emissions. Premier Iemma’s deal exempts BlueScope from any future carbon tax for 25 years.

According to the Greens the Premier has been conned by the promise of creating 6000 jobs at Port Kembla. Moreover, other firms will use the BlueScope deal as a precedent to pick up similar favoured treatment.

BlueScope is the largest greenhouse gas emitter on the S&P/ASX100 sharemarket index. The scale of their non-greenhouse gas emissions can be seen at their website.

Indeed the AFR today (subscription requires) suggests the NSW Government will consider exempting some of the country’s largest firms from any emissions tax in exchange for obtaining major investments. As in the BlueScope case, the State Government will be left with a huge and growing liability for the tax because it will compensate the firm for the tax.

The tax would give BlueScope a comparative advantage if other firms in their industry were subject to a tax. Also giving out exemptions from a tax in advance reduces the future ability of governments to control CO2 emissions. It increases the scale of the tax that would need to be imposed on non-exempt firms to meet given emission targets. It is poor policy.

The claim by NSW Environment - Climate Change Minister Koperberg that firms need a lead time to prepare for a tax implies, if anything, an initial case for being moderate in taxing all firms not for exempting the privileged few – it is a case for gradually scaling up the size of the tax. The claim that a carbon tax is something unexpected is ludicrous since this tax has been discussed for over a decade. Koperberg originally seemed to be an attractive appointment but now seems to be a hypocrite.

The Victorian Government has apparently discussed similar offers with Alcoa for a proposed $600 million expansion of the Portland aluminium smelter. One can imagine in the future a competition between the states for awarding greenhouse gas emitters to their states – a competition where the winner’s prize would, as usual, be paid by the state’s taxpayers.

Saturday, May 19, 2007

Greed drives disaster?

Matthew Denholm in The Australian this morning records claims, from trapped miners and others, that the Beaconsfield mining disaster was driven by the goldminer’s rush to repay its debts to Macquarie Bank. Recall that Allstate Explorations, in administration, owned 55% of the mine but, in a 2002 deal, Macquarie Bank bought the $77 million debt of Allstate for $300,000. Macquarie has already reaped more than $27 million from the mine.

I posted on the nature of the Macquarie deal a year ago.

I maintain my view that a book-length treatment of this whole saga should be written. Maybe, it could be used as a case study in our business schools – how a merchant bank adds social value. Maybe, too, other lessons can be learned.

Of course, I hope that chief value-adder Allan Moss doesn’t choke on his recent $33 million annual reward from Macquarie. I assume that the deal Macquarie did with Allstate illustrates the financial expertise necessary to gain such rewards.

A Tasmanian inquiry into the tragedy is reporting in a few weeks. Let's hope those responsible pay.

Thursday, May 17, 2007

Accounting for groundwater use

According to Bill Heffernan about 40% of the inflow into the Murray-Darling Basin comes from groundwater. Therefore accounting for groundwater and stream flows separately will overstate the availability of water supplies in the MDB by 40%. Indeed, in some river valleys, up to 90% of the river comes from groundwater. If the groundwater is pumped out then, ignoring recharge, there just isn’t much net contribution to the river left. But, as caps have been placed on licences to use river water, farmers have increasingly turned to harvesting groundwater.

Heffernan’s 40% figure seems to be a stab in the dark based on experience in the southern part of the basin and Malcolm Turnbull rejects the figure as being far too high. Indeed, the issue of determining the degree of connectivity between groundwater and stream flow supplies is complex. However there does seem to be an issue of concern here.

According to the AFR today (subscription required) hydrologist Richard Evans states that ‘if (groundwater) extractions continue to grow, by 2050 the loss to the River Murray will be around 711 gigalitres’. Such a loss is equivalent to half the water that needs to be put back in the River Murray to restore its health.

Recognising the link between groundwater and stream flows (something Malcolm Turnbull emphasises with his advocacy of the need to better map groundwater supplies) suggests the Federal Government’s buyback of water rights might need to be significantly increased from its current level of $3 billion. Predictably (though irrationally) the National Party oppose any further buybacks of groundwater licences. They will continue to claim that increased water supplies can be achieved by improved efficiencies in returning water to the environment - with these efficiencies funded in the main through publicd handouts.

The National Water Commission have found unsustainable extractions of water in Western NSW while the problem in Victoria and Queensland is less clearly known.

It is worth noting that water diverted from river tributaries and stored in farm dams also significantly depletes overall water supplies in the MBD. Farmers can build levies and dams to capture water flows without restriction in western NSW. Moreover, there are hundreds of thousands of such dams which divert water from rivers. A major part of the PM’s water initiative is to better calibrate such water uses via metering schemes.

A descriptive picture of the use of groundwater in the Murray-Darling is here. Of course, the use of groundwater not only depletes stream flow supplies but also increases the salinity of such supplies through rising groundwater tables.

Meeting the Dalai Lama

The hypocritical Mr Rudd as well as Mr Howard should both meet with the Dalai Lama. The DL is the spiritual leader of the Tibetan people regardless of what the Chinese invaders of Tibet say. The DL is also a decent person who receives and deserves respect.

Howard has met the DL but Rudd has not despite criticising Alexander Downer in the past for not doing so. Rudd is fearful of cantankerous, Chinese paranoia in relation to the DL. They fear the respect the people of Tibet – and people around the world – feel for this remarkable man. Rudd is a cowardly hypocrite who only changed his views once Howard declared he would try to meet the DL.

I agree that in international affairs cost-benefit analysis should be applied. But the costs of meeting the DL do not only include the costs of offending China. They also include the cost of accepting the implications of the Chinese invasion of Tibet and, as an occupying force, of subsequent Chinese attempts to repopulate Tibet with Chinese and to destroy Tibetan culture.

The latter is also very costly in terms of establishing precedents. Moreover, the benefits from cordially greeting this leader include the respect that most Australians feel for the DL. For once I agree with Bob Brown – Rudd is out of touch with the views of most Australians.

Questions also need to be raised about Rudd's foreign policy reliability.

Wednesday, May 16, 2007

Restoration ecology & the 'field of dreams'

Several restoration ecologists I have met recently have referred to the ‘Field of Dreams’ hypothesis* in relation to biodiversity conservation.

This is the notion that you can rebuild or reestablish a natural ecosystem replanting trees and so on whence the natural system will reestablish itself as organisms naturally re-colonize leading to ‘normal’ community structure and biological function. The ecologists counter that habitats will not reestablish because crucial ingredients are omitted from the reestablished mix so that key features of an ecosystem are irreversibly lost.

We value many things for their authenticity or genuineness. Most of us prefer a real diamond to a zirconium imitation, we prefer the original of a great painting to even a masterly prepared print. The same ethic runs through biodiversity conservation – those of us with a green bent have a strong preference for original, pristine habitats such as old growth forests rather than restored habitats.

Three comments are in order:

(i) There are some claims that many environmental systems can reestablished themselves. For example, NewScientist this week comments on destroyed tropical forest landscapes. Many of these that have been destroyed by forestry can be expected to regenerate with most species returning.

(ii) It is difficult to define what we mean by 'authentic' or 'pristine'. Environmental history suggests such terms are ambiguous since almost all habitats have been affected by human activities and it is difficult to decide how far we should look back.

By studying changing attitudes to nature and nature conservation over history we gain a better ability to appreciate how attitudes in the future might be unstable and change. In addition, understanding the history of the environment helps us to focus on the crucial issue of what aspects of the current natural environment we might wish to conserve. For example:
“When we talk about conservation of the Australian environment what are we really talking about? Do we mean conserving the environment as it was in 1788 –an environment which was created as a result of interaction with aboriginal people –or do we mean conserving the environment as it develops in the absence of regular, routine, low intensity burning; or do we mean conserving it in the absence of the dingo; or in the absence of foxes or feral cats; or in the absence of the rabbit, the goat, the pig, the camel and the donkey; or do we mean conserving it without any human impact whatsoever –by excluding people altogether from national parks?” (Kohen (1997, p. 128))
(iii) Generally we should seek ‘fields of dreams’ but not be disappointed should we fail. The issue is not whether authenticity can be achieved but whether at least some positive conservation outcomes can be achieved. We should be ‘satisfisers’ if restorations are inevitably inauthentic. The gloom of writers such as Stephen Meyer ('The End of the Wild') should be rejected as pointless defeatism.

(*) The notion of a Field of Dreams comes from the interesting 1989 movie of the same title starring Kevin Costner which I hadn’t watched but which I viewed this evening. ‘If you build it he will come’ is the central myth which gives rise to the key restoration hypothesis.

Indigenous involvement in crime

Via Andrew Leigh I got a link to this useful data base on ATSI involvement in crime. It is old (2002, why?) but as up-to-date as anything else available. It is a grim picture.

A quarter of ATSI had been subject to violent attack in the past 12 months. There are high rates of imprisonment and arrest also. These are closely linked to drug and alcohol abuse.

On the characteristics of those incarcerated:
  • In 2002, 7% of ATSI aged 15 years and over reported having been incarcerated in the 5 years prior to the survey (11% of males and 3% of females).
  • ATSI who had been incarcerated were more likely than those who had not been incarcerated to be unemployed (32% compared with 12%).
  • Among ATSI who had been incarcerated, 30% reported risky/high risk levels of long-term alcohol consumption in the 12 months prior to the survey, compared with 14% of those who had not been incarcerated.
  • In non-remote areas, 56% of ATSI who had been incarcerated reported using an illicit substance in the 12 months prior to the survey compared with 21% of those who had not been incarcerated.
In my view Don Weatherburn and Noel Pearson are right. It is not only that drug abuse is a symptom of social disadvantage – it is a substantial source as well. Isolated local ATSI communities should be helped to enforce 'dry areas' with blanket illicit drug and alcohol bans but these are impractical measures in urban areas.

More drivers test for drugs than for alcohol

Testing for drink driving has helped slash the number of fatal accidents involving alcohol from 40% of the total to 19%. The road toll has fallen overall also. But in an interesting twist of 1600 drivers tested in NSW one in 46 was found to have consumed illicit drugs – amphetamines, ecstasy and cannabis are popular. Random breath testing suggests only one driver in 130 will be over the legal drinking limit.

While random breath testing for alcohol consumption is widely applied there are negligible levels of testing for illicit drugs in NSW though higher levels of testing in Victoria. Moreover, the claim is that consumption of cannabis and amphetamines causes the same impairment to driving skills as exceeding the 0.05 alcohol consumption standard. Some evidence is here.

Rigorously policing the consumption of alcohol consumption among drivers but not penalising the consumption of illicit drugs creates incentives for drivers to strategically choose to consume the latter. Current arrangements represent a misallocation of detection efforts.

Incidentally the swab test used to detect illicit drug consumption only targets the 3 illicit drugs mentioned (and we know that injecting heroin users often drive, see also here) and it does not test for consumption of legally-prescribed drugs that may also impact on driving ability.

Monday, May 14, 2007

Big business flogs addictive opiates

Almost all painkillers can be abused and all opiate-based pain killers can be addictive. And markets are, yes, wonderful institutions – try to prohibit use of something which kills and damages people and, yes, markets will deliver an alternative. Profits will be earned, junkies will get the dope they want and a beloved 'welfare triangle' of gains will result for society.

But the positive consumer outcomes here require truthfulness. In a remarkable judgment PurduePharma, the manufacturer of the legally prescribed painkiller OxyContin, has been filled US$600 million for lying about this drug's potential to be abused and to be addictive. Three executives have been fined $34.5 million for 'misbranding' the product. The lies included spreading the message than the drug was less addictive than morphine and that it would not generate euphoria.

While drugs such as heroin and morphine remain illegal large pharmaceutical producers provide a variety of substitute products (e.g. methadone, buprenorphine) which are just as addictive. These producers skillfully exploit the market for legal addictive painkillers. Drugs such as OxyContin can also be used as substitutes for illegal narcotics. Demand for all of these products is often demand over a lifetime – they tend to be used indefinitely rather than as means to mend an addiction, demand is highly price inelastic because of their addictive character and a ready supply of addicts is provided from the ranks of addicted illegal opiate users.

Methadone is produced by Eli Lilly while buprenorphine is produced by Reckitt and Coleman.

Many of these drugs are rationalized by their pharmaceutical promoters as harm-minimization alternatives to drugs such as heroin. Maybe they are better alternatives but certainly they are far from being safe. Moreover their commercial promoters should not be allowed to lie about their properties and to conceal their dangers.

Soma-style solutions are always second-best outcomes. Humans have better ways of dealing with life’s problems than being doped to the eyeballs.

And doctors who suggest that a solution to drug problems can involve substituting one addictive drug, that kills, for another, that also can kill, should be cooked down into decorticated canine preparations.

Sunday, May 13, 2007

Open thread

I am taking a few days off to talk to travel and to people with interests in biodiversity, water and land use management in the Murray-Darling Basin. My main interest is in thinking about water and land management policies with joint biodiversity and agricultural benefits. Eventually I will post on these issues.

Please take advantage of this open thread to raise anything that interests you about the world.

I will be interested to read the new electoral opinion polls on Monday. My tip is a small preference shift to the Coalition - one that will disappoint Coalition supporters but one that will give some comfort to Coalition supporters.

Taking of comfort one’s heart must go out to Mr. Rudd this morning for the unfortunate remarks of his foreign affairs spokesman, Robert McClelland. He argues publicly that we should not get too close to the US given the emerging power of China. Nor should we sign a defense treaty with Japan or enter into joint talks with allies such as India for the same reason. China might be offended by the notion we are trying to encircle it.

This is one of the clowns Labor wants the Australian people to trust with foreign affairs and the security of our nation.

Even the pro-Labor Age told him to shut-up on this one – in the world of diplomacy it is often best to say nothing.

But I suppose even McClelland’s stupidity must have caused Rudd less heartache than his strategist Rod Cameron telling him that he must indeed get tough with the unrepresentative union bosses.

Saturday, May 12, 2007

Smoking censorship in movies

We know why persistent smokers smoke – they are addicted to nicotine – but why do adolescents start smoking? If you are not a smoker the taste of a cigarette is something unpleasant and seemingly something to avoid rather than repeat. So why do it?

Adolescents smoke for psychosocial reasons and because they seek peer approval. Deglamorising smoking and helping adolescents to achieve the status they seek without smoking is an important task. Advertising is particularly effective in promoting youth smoking and we know that unpaid advertising, through smoking by role models in the media such as the movies, also exerts a powerful influence.

I am pleased therefore that the Motion Picture Association of America is moving to R-rate movies which glamorize smoking. This is not a nanny-state intervention but a move that denies no-one freedom of choice but which prevents false images from influencing youth. It won't change things that much since, surprisingly to me, most movies that feature smoking are R-rated for reasons of sex and violence content anyway.

Humphrey Bogart looked so sophisticated blowing those smoke rings in Casablanca but he died of cancer of the esophagus.

Friday, May 11, 2007

I'll vote for Labor if they replace Rudd with Bindi

One of the more interesting features of the emergence of Kevin Rudd onto the national political scene is the rise of his popularity given that he has articulated few policies. The substantive policy difference from the government was the IR policy where he was reasonably specific but got a hostile reaction - everything else was non-specific. Last night’s ‘budget speech reply’ made past Labor Party ‘small target’ strategies seem like action-packed agenda.

The only way I can understand Rudd’s popularity is to accept that the Howard Government is in fact very unpopular - I don't like this but maybe it is a fact. It is difficult for me to understand given the strength of the economy.

Tim Blair did a beautiful job of summarising Rudd’s clichés in his budget reply speech.
This was a good Friday afternoon laugh after a complicated general equilibrium seminar on economics. Providing this speech (in leaflet format) could help the Australian economy economise on limited supplies of mogadon.
Mr Rudd said:

'I am an optimist when it comes to our country’s future.
Tonight I want to outline our plan for our country’s future.
We are truly blessed to be Australians.
We live in a stable democracy, when many in the world do not.
There is nothing to hold us back as a nation and as a people – except a lack of long-term vision.
We are part of a world that is changing faster than ever before.
Big changes are coming.
Big challenges are waiting around the corner.
They will dramatically influence almost every aspect of our lives – some for the better, others for the worse.
And some will be upon us in the blink of an eye.
We can either seize the great opportunities that have been presented to us. Or we can squander them.
The truth is the sun is shining right now on Australia.
We must seize the day and get our house in order.
Productivity is the measure of how efficiently we produce goods and services.
The better trained we are, the greater our productivity.
The better our use of technology in the workplace, the greater our productivity.
The better our management in the workplace, the greater our productivity.
Productivity is a bit like getting the best performance out of your engine for the least amount of fuel.
Sometimes the wind changes direction and there can be lots of turbulence. And the only way to get home is with powerful engines that can do the hard yards in any conditions.
The time for action is now.
The earlier you invest in a child’s educational opportunities, the better the result.
Good for the child.
Good for the country.
For business it is a tough and highly competitive world out there.
Our intention is to enable Australian businesses to take on the world and win.
We want to unite Australia, not see it divided'.

Yawn. A commentator on Tim’s blog suggested the, yawn, speech had been written and delivered by, yawn, Bindi Irwin! She'd be a good Labor recruit - and possibly a better choice than young Kevvie as she would help restore the genfder balance.
Andrew Bolt summarised the, ‘yawn’, press reaction to young Kevvie's speech.

Electronic fags

Smokeless tobaacos (snuff, nicotine replacemrent therapies) impose much lower health costs than tobacco smoking. But inhalents, which simulate the effects of a cigarette, have not become popular - they supply the nicotine and mimic the behavioural addiction smokers acquire. Maybe this electronic cigarette will do the trick.

The market is working to create safer alternatives to the deadly habit of smoking cigarettes.

Hedonic impacts are more muted than we think

New Scientist last week published an attractive article by Kate Douglas and Dan Jones on how to make good decisions. I liked the whole article but one point stood out for me. As decision-makers we routinely overstate the impact of decision outcomes and life events, both good and bad. If we understand this bias we can make better decisions.

We believe that winning the lottery or making love to a Hollywood star will make us happier than it actually will. Conversely we believe life would be completely unbearable if we were to lose our jobs, lose the use of our legs, our sight and so on. Thus we imagine it might be catastrophic if we choose the wrong career, the wrong restaurant or the wrong model car. No it wouldn’t.

The New Scientist authors quote psychologist Daniel Gilbert* from Harvard:

"The hedonic consequences of most events are less intense and briefer than most
people imagine."

For example, most people are loss-averse. Psychologist Daniel Kahneman describes this as the belief that a loss will hurt more than a corresponding gain will please. He showed, for example, that most people are unwilling to accept a 50:50 bet unless the amount they could win is roughly twice the amount they might lose. So most people would only gamble $5 on the flip of a coin if they could win more than $10. They fear losses.

However a recent paper has shown that while loss aversion affects people's choices, when they did lose they found it much less painful than they had anticipated. Quoting the paper's abstract:

“Loss aversion occurs because people expect losses to have greater hedonic impact than gains of equal magnitude. In two studies, people predicted that losses in a gambling task would have greater hedonic impact than would gains of equal magnitude, but when people actually gambled, losses did not have as much of an emotional impact as they predicted. People overestimated the hedonic impact of losses because they underestimated their tendency to rationalize losses and overestimated their tendency to dwell on losses. The asymmetrical impact of losses and gains was thus more a property of affective forecasts than a property of affective experience.”

The authors put down the lack of impact of a gambling loss to our unsung psychological resilience and our ability to rationalise almost any situation. By failing to account for this we make poor affective forecasts.

If you are so afflicted and therefore a poor affective forecaster and need to take an important decision that bears on your well-being a safer strategy is to try to find someone who has made the same decision or choice, and see how they felt with the consequences rather than look inwards and imagine how a given outcome might make you feel. Whatever the future holds, it will probably hurt or please you less than you imagine. So cool it!

This reduces incentives to always try to play it safe. The worst might never happen and, if it does, you have more psychological resilience to cope that you believe.

*Daniel Gilbert has written a best-seller ‘Stumbling on Happiness’ and has an associated blog.

Thursday, May 10, 2007

Light on the hill

A few days post-budget, Sportsbet payouts suggest the Coalition is more likely than Labor to win the forthcoming federal election. Other betting firms are not indicating support for the Coalition - it is close to an even money bet. But as as Tim Blair shows, they all suggest the budget has improved the Coalition's election chances.

A sting in the tail for university business faculties

A useful piece by Catherine Armitage in The Australian yesterday discussed the $1.7 billion extra being paid to universities from the budget on top of the $5 billion endowment fund for capital works. The capital works endowment fund is worth annually the interest cost foregone on this allocation or around $250-$300 million. The $1.7 billion figure comprises the more crucial increase in publicly-funded university benefits.

Of this increase $557 million will go in higher funding per student place over 4 years. This almost meets the AVCC's call for an increase of $500 million per student place over 3 years.

The biggest increases go to mathematics and statistics and clinical psychology ($2729), followed by allied health ($1889) and medicine, dentistry and veterinary science ($1081).

The losing discipline group is my area of business (accounting, administration, economics and commerce) which loses $1030 per place. It now receives $1674, equal to law. With levels of per capita support of only $1674 annually universities teaching these discipline areas have been partly privatised.

Education Minister Bishop is quoted as saving “the change reflected the higher salaries that graduates in those disciplines received over a lifetime. Universities were free to decide whether they would raise the fees for these disciplines”.

These per capita funding levels therefore seemed to be based on equity considerations with respect to future salaries. The theory is that if these future salaries are judged to be high then students can take on more HECS debt to fund their programs.

Economics units increase in cost by $1030 annually while the costs of possibly substitute areas decrease by up to $2729 annually. Assuming these changes are translated into offsetting moves in HECS fees – there is every indication they will - disciplines like economics, that have been doing well but not that well with their enrollments Australia-wide, face a hefty, relative price increase for their programs.

For particular universities such as my own which recruit among their students many with low family incomes this change can be expected to have significant effects on enrollments.

Moreover, the change seems to be equity not efficiency-driven. High salaries for graduates from the business areas reflect skill shortages that are not experienced in some of the other areas receiving much higher per capita funding. In some of these latter areas enrollments are currently declining. In economics it is now extremely difficult to recruit research ot teaching staff. In areas such as finance it is becoming almost impossible to recruit local postgraduate students. Employers from the public and private sectors are desperate for graduate students in economics and accounting.

The current per capita funding moves will thwart the market-driven processes that are acting to increase numbers of students studying in these areas. The moves will reduce the net economic benefits generated by universities for the community.

Business graduates generate over 3 times the economic benefits from an undergraduate degree than are generated by tertiary undergraduates overall. Moreover, student/staff ratios in business areas are often among the highest in a university.

I am not opposed to areas such as mathematics and statistics achieving increased funding and generally receiving subsidy support. I do think however that this support should be additional to pre-existing levels of support to other areas. This would alter relative prices between business and non-business degrees but by less than has occurred with the present policy.

Wednesday, May 09, 2007

The budget

This budget is a political budget that delivers deserved rewards to many Australians and to the Government that helped provide the economic conditions creating its possibility. It is a budget that reflects the tremendous economic strength of the Australian economy - low inflation, dramatically low unemployment, dramatically high rates of private investment, fiscal surpluses and an expectation of continued strong economic growth at around 3.74%.

The $31 billion tax cuts target the low and middle income end of the income tax scale and are intended to both provide tax relief and address labour supply-side issues. The education moves – incentives for apprenticeships, vouchers for remedial education and bonuses for schools which improve literacy as well as a $5 billion fund for funding capital works (with a planned further $5 billion in the next budget) in universities – will also eventually contribute to the supply side. Boosting childcare payments will have the same positive supply-side effects. It is a sensible orientation for an economy operating at close to full employment. Costello claims that the combination of tax cuts and child care support should boost the labour supply by 45,000 while the 8,800 increase in the immigration intake will increase immigrants to 152,000.

I think overall it is an outstandingly good budget which will reduce the chance of a risky change in government later this year. The Coalition’s position will steadily improve in the polls as a consequence of it but the Coalition still has a long way to go. The budget steals the ground from Mr Rudd’s productivity-based education program and offers a more reliable, experienced management team.

The budget is good politics and good sense too.

I wondered how government critics might respond to the budget. The normal ‘wasted chance’, ‘not enough’ and perhaps even ‘finally’ verdicts were expected although I found mainly muted criticism. John Quiggin described the budget as ‘clever’, an interesting word with both positive and pejorative connotations. But he says the budget lacks ‘big ideas’ (the $5 billion education fund?). John thinks some of the remaining huge surplus will be spent as the election campaign progresses, which is obviously true. Larvatus Prodeo seems to want to find something critical to say but has problems collecting the intelligence. Polemica gives grudging approval to the budget because it makes things hard for Labor and Tim Dunlop follows suit.

On the detail I was pleased with the attempt to partially automate the submission of income tax returns for PAYE salary earners. It is a task I dread each year – Andrew Leigh has championed such reforms and comments on this here.

Tuesday, May 08, 2007

Biodiversity adaptation policies to climate change without probability information

I have been thinking about policies for dealing with the biodiversity consequences of climate change when, as seems realistic, a policy-maker has poor (or non-existent) probability information.

One approach is to use some classical decision theory which eschews use of probability information.

Suppose one is thinking about a potential biodiversity conservation problem that may be associated with climate change and one seeks some anticipatory adaptation response to possibly limit the damage. There are three policy-relevant states of the world:

S1 = when a disaster occurs as a consequence of climate change which is successfully dealt with by policy,
S2 = when no disaster occurs
S3 = when a disaster occurs even though policy actions have been taken.

If the cost of the disaster is L and the cost of dealing with it is C then the minimax payoff matrix can be constructed for the two policy options (i) Take action, (ii) Don't take action. According to the minimax criterion of trying to eliminate the worst possible eventuality it is best in this situation to take no policy action because, with S3 a possible state of the world, this avoids the chance of incurring cost C and at the same time the loss L. The payoff matrix (where taking action and dealing with the problem successfully is given base utility 0) is illustrated.

Another possibility is to use the minimax regret policy criterion - now one seeks to minimise the regrets future generations will experience through the current generation not taking action. The minimax regret payoff matrix is illustrated above. This gives the more sensible result that one seeks to minimise the regret experienced one will take action to avoid the threat if L-C > C or if L > 2C.

Thus, sensibly, one must weigh up the climate induced losses against the cost of policy. In particular, take action if - as seems sensible - C is small relative to L. This will be the case if the policy choosen is a 'no regrets', 'all weather' policy that yields some return even if the climate change disaster does not occur or if it does occur when the policy proves useless in offsetting it.

For example, biodiversity conservation policies in the face of climate change that involve tree planting or limiting clearing will reduce salinity problems. This is an 'all-weather' policy that might be advanced to improve the resiliance of biodiversity conservation but which also has spin-off benefits to agriculture.

Moreover, one can intuit arguments for policy promptness by thinking about 'no regrets' policies in a 'real options' framework. Here there are traditionally two 'irreversibility' forces that drag a policymaker in opposite directions with respect to the timing and intensity of greenhouse gas adaptation policy. Sunk-cost effects make one want to delay action (and to reduce the intensity of initial actions when taken) because the policy-maker can learn about the future. Other irreversibilities (such as species extinctions) make the policy-maker want to bring actions forward (and increase the initial intensity of actions). The net effect of these opposing forces on the timing an intensity of policy is an indeterminate mess.

But 'no regrets' options reduce the sunk cost effects here - they reduce sunk costs because they offer a payoff irrespective of the state of the world that eventuates. Hence they lead to more weight being placed on those irreversibilities that involve a case for prompt action. This overturns the bias others have deduced for waiting and motivates a prompt response.

One extension would be to allow different types of 'all weather' policies. Another would be to explicitly model agricultural sector benefits B(C) as a spillover consequence of spending C in addrtessing climate change. Then, I think, the minimax case for not taking action is weakened to B(C) less than C while the minimax regret argument for taking policy action is strengthened to L less than 2C -B.

Further extensions would allow for biodiversity and protection against climate change to be joint stochastic outputs contingent on investment in adaptation. This might suggest something about the desired overall scale of the adaptation intervention. I'll pursue these arguments in future posts.

Copyright H. Clarke.


I watched the Four Corners show Final Call last night. It concerned the euthanasia debate and the right of elderly citizens to suicide when they feel their lives are not worth living.

The elderly people interviewed impressed me with the care of their planned exits and with their resolve to achieve this final act of self-determination. They seemed highly intelligent people who had thought through the consequences for their families and for themselves of suicide. For the most part they wanted to die peacefully by taking a dose of Nembutal. They were not depressed, they were enjoying life now to the fullest and were not making their plans on the basis of short-term discomfit or pain or because of concerns they might be a burden on others.

The strength of their convictions was illustrated by their journeys to Mexico to secure illegal supplies of Nembutal and by their organization into groups to home-produce the drug. When the interviewer asked one chirpy 96 year old whether he was worried about being sent to jail for being involved in illegal activities his response was simple ‘they won’t be able to keep me there long’. It was a great reply.

The views of the medical profession and the ethicists on the show were unconvincing and shallow to me. They were essentially trying to impose their values (and in the case of the medical profession to secure a valuable market) on sensible, independent people who seem to have a perfect right to choose – it is their life.

Denying the right of such people to painlessly die forces citizens to unnecessarily experience pain and suffering. It is asserting the value of extending life as an absolute ideal irrespective of the views of the person whose life is being extended.

I am in favor of developing a pill, such as Nembutal, that provides a painless death to well-informed adults who seek to die. A concern is that the pill might come to be abused by adolescents and others who experience transitional emotional or other difficulties. Such deaths are unnecessary and impose enormous costs on others. I am absolutely not in favor of an open access regime to death pills for all. The difficulty of avoiding suicides by irrational youth or those needing urgent transitional care can be dealt with by prescribing the pill only to those people who are judged by a knowledgeable councilor to be well-informed and not acting irrationally on the basis of short-term problems.

It seems to me perfectly reasonable to suppose that elderly people make a rational judgment that their life is not worth living. It is their ‘Final Call’ and I cannot think of good reasons why their choice should not be respected. Of course those who choose to live their lives to the end even in the face of pain and suffering also deserve to have their views respected.

I am interested in the views of readers on this long-standing debate. I must acknowledge that I have not searched hard for counterarguments to the pro-euthanasia position and I would be interested in thinking about such arguments.

Monday, May 07, 2007

Political motive fallacies

An introductory book on logic I keep returning to is Jamie White’s, Crimes Against Logic. I have already discussed its demolition of the ‘everyone is entitled to their own opinion’ fallacy. Another fallacy he disposes of is the ‘Motives Fallacy’. This is a special case of the ad hominem circumstantial fallacy – it resonates with me because I see it everywhere. The fallacy involves believing that exposing the motives behind an expressed opinion shows that the opinion is false.

In assessing testimony in a court of law motives are important. Elsewhere they are less so and yet they pervasively affect our attitudes. As White notes: ‘The Motive Fallacy is so common in politics that serious policy debate is almost nonexistent.’

Some examples.

Opinion 1: George Bush was morally justified in invading Iraq.

Motive Fallacy: George Bush invaded Iraq because he wanted Iraqi oil; because he wanted to do the work of the Jews; because he wanted to finish the work of his father; because he is a bloodthirsty militarist.

Analysis: All these claims about George Bush’s motives for invading Iraq might be true but still he may have been morally justified in invading Iraq.

Opinion 2: The WorkChoices legislation will improve labour market outcomes for Australian workers.

Motive Fallacy: John Howard is ‘just’ trying to destroy the trade unions, John Howard introduced WorkChoices because he wanted to do the work of the BCA, John Howard hates low income workers. (The word ‘just’ here is seen by White as a giveaway for spotting the Motive Fallacy. He is ‘just’ trying to destroy the trade unions so his claim that WorkChoices will increase worker welfare must be false. But ‘just’ is only a word – it does not help us to refute anything).

Analysis: All of these claims about Howard may be true but WorkChoices may still improve the labour market outcomes of Australian workers.

The problem with falling prey to the Motives Fallacy in a political debate is that attention is turned away from the analysis of policy consequences. Policies just become part of a political game that seeks to establish who might win or lose. The specific effects of policies remain unanalyzed by the person who says ‘X is only just saying that because of Y’ where Y has nothing to do with the effects of the policy.

This is an exaggeration but not much of one. I recently commented on the blog response to recent IPCC reports that many commentators discussed the politics of these reports rather than their substance. I had to search hard for commentary on the latter.

Further examples of motive fallacies include.
  • HC tells his pianist daughter who is practicing a piano sonata for a forthcoming competition. ‘You played that piece as well as I have ever heard it played’. Daughter: ‘You are just saying that to give me encouragement, so I am not playing well’.
  • Gillard attacks WorkChoices as unfair to families because she wants to bolster the trade union movement (implied self-criticism here!).
  • Climate change denialist views should be ignored because the denialists are paid by big oil.

These last fallacy here is less straightforward if the premise is true. I am not sure that these statements cannot be construed as testimony so a non-expert evaluator might be rationally interested in motives.