BHP-Billiton Merger

On July 14 this year I wrote:

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

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

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

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

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

Debates on macroeconomics hinge on rationality assumptions

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

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

Krugman

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

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

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

Nelson-Schwartz

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

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

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

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

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

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

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

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

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

Final remarks

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

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

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

Predicting debt crises

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

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

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

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

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

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

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

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

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

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

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

How to do this?

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

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

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

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

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

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

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

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

I think a set of nine policies would do this:

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

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

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

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

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

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

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

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

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

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

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

An easy way to cut youth smoking

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

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

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

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

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

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

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

Foreign control of Melbourne's water?

More suspect economics from Jason Dowling The Sunday Age.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Send well-dressed thieves to jail

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

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

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

Hard Labor

Labor liars reveal all:

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

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

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

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

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

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

Becker gets another gong

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

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

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

Australian National Botanical Gardens

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

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

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

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

Urban water pricing

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

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

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

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

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

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

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

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

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

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

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

A well-organised workshop.

Labor policy clowning on climate change

The Coalition has been subject to repeated, venomous attacks from Labor because it refused to sign the Kyoto agreement unless developing countries also came to the party and also made commitments to cut emissions. Developing countries are not required to cut their emissions under the Kyoto agreement until after 2012.

But now Labor has stated that it too will not sign a global climate change agreement after 2012 unless developing countries agree to cut their emissions. Labor has adopted the climate change stance of the Coalition.

Watch for the denials and for the qualifications from the rabid left but this theft of Coalition climate change policy is precisely what has happened.

This development caps off a completely hopeless 24 hours for Labor on climate change issues. After Labor’s ex rock star-cum-environmental spokesman Peter Garrett said that developing countries not signing would not be a ‘deal breaker’ yesterday Labor’s policy was revised to say exactly the opposite today.

Previously the Labor Party criticised the Coalition for not setting firm greenhouse gas cutback targets. Labor went ahead and formulated firm targets – 60% cuts by 2050 – and then selected pro-Labor economics Professor Ross Garnaut to conduct an investigation which would show how large the cutbacks should be. This inversion of commonsense is a bizarre and inept policy move, perhaps designed to derive advantage from the current political situation, but certainly to the disadvantage of Australia. The Coalition are going slower and, sensibly, advocate setting targets once they know the implied adjustment costs.

Labor went on today to set fixed targets for renewable energy production to be 20% of the total by 2020. But where is the analysis and where are the cost estimates? Why not 5% of 15% or indeed 50%. I think the Coalition policy on this one (15% target by 2020) is silly but Labor’s policy is 5% sillier without information on costs and benefits.

Labor policies on climate change are in the hands of populist clowns who don’t have the capacity to think beyond election day.

I have argued that electing the Labor Party will place Australia’s continued economic prosperity at risk. Because Australia has enjoyed 17 years of strong economic performance and currently enjoy high growth, record low unemployment and low inflation some people have come to forget the costs of inept economic management and are pursuing other social objectives. But the Labor buffoons won’t realise these either because they have such transparently inept policy development skills.

There is more to policy than mouthing comfortable clichés about ‘working families’ and there is more to government than just copying the successful rational policies of other parties. Indeed Mr Rudd’s ‘me-tooism’ is a clear endorsement of the value of not voting Labor. The Coalition would not work as policy advisers for a Federal Labor Government so who would design Labor policy?

Flying blind with the Super Hornet

Four Corners tonight raised disturbing questions regarding Dr. Brendon Nelson’s decision to scrap the F111’s (no, the alleged 'wing defects' seem to be a myth) and to purchase 24 Super Hornets for $6.6 billion. The claim is that the Russian-made Sukhoi 30 fighters (bought by India, Indonesia, Malaysia and China) sell for half the price and are much better aircraft.

A case was made that we have wasted billions of dollars, ended up with second-rate fighter aircraft and possibly lost air superiority in the region. More than that, the purchase seems to have been made without careful evaluation of the capabilities of alternative aircraft and largely on the basis of the personal views and convictions of Brendon Nelson.

The Super Hornets have not been purchased by any other country outside the US and are intended to be an interim replacement for 100 Joint Strike Fighters (JSF) due from the US to arrive in 2014 at a cost of $16 billion. Paying $6.6 billion for an interim aircraft seems a lot when the FIII’s seem such a fine fighter. Moreover committing at an early stage to the JSF leaves us vulnerable to US corporate opportunism and 'holdup'.

Defence staff dispute the claims of poor quality of the Super Hornets but the criticisms of procedure, waste of public money and carelessness with respect to our defence priorities need to be assessed. I’ll summarise press links as they come to hand. I welcome comment particularly from those with a defence focus - there does seem to be an problem here.

The full-transcripts and a video of this edition of Four Corners is available at its website.

Supporting working families

I am all for it! Who would not be?

Kevin Rudd will:

Get wealthy families to support the education of poor children in working families.
Supply subsidised laptops to poor children in working families.
Reintroduce tariffs to protect the livelihoods of working families.
Save working families from capitalism and give Australian working families an industry policy.
Subsidise solar panels and rainwater tanks in the schools of working families.
Reduce the price of urban land for working families.
Reduce the price of groceries and petrol for working families.
Set specific carbon cutbacks and then work out how large they should be to benefit working families.
Promote and improve Australian culinary standards - begun in Britain, now in India and the US - an international commitment to working families.
Win friends in China with his approach to politics – more help for working families.

Market pressures that help eliminate cigarette smoking addictions

I am occupied in my work with thinking about government policies for reducing the damages of cigarette smoking. There are also market mechanisms that operate to reduce damages automatically. In most cases these can be given a boost by government policy.

On the demand side that smoking causes disease encourages smokers to pay others to help them quit – this is the opposite to most patterns of consumption – here you pay to stop consuming. Private ‘quit’ clinics can be supported by public subsidies and public information campaigns. There is also a market for smoking substitutes such as nicotine replacement products and smokeless tobaccos. I have discussed such markets many times – they can be given a prod by subsidising such products or providing better information about their availability.

There are supply side effects as well since smokers are an input into the production of outputs and their illnesses impact on firm productivity. Indeed, smoking imposes health costs of around $16,000 on US employers so employers find it reasonable to invest $900 to help smokers quit. Firms are doing the same with respect to other chronic health conditions such as obesity and diabetes. Firm support supplements the role of public inducements to quit cigarette smoking. I suspect it is also an independent confirmation to a smoker of the huge health benefits from quitting. A smoker might with good reason think: If a profit-seeking private firm is prepared to devote resources to encouraging quits maybe there is some substantial damage being done to my health.

The ASH Australia website cited costs to business in Australia on $3.5 million from smoking but I don’t have specific information on programs within firms to cut smoking here. If readers knew of any – or had links to interesting material I’d appreciate hearing about them. Perhaps a group such as the Business Council of Australia might think of taking up this issue.

A ramble: time, golf & death - the last taboo that you cannot postpone with optimism

Another week disappears as 2007 gets devoured – time passes quickly as we age since each year is a smaller fraction of our life so far. Yet our discount rates decline – we become less impulsive. This is the reason that the initiation of destructive drug-taking is concentrated among kiddies and the reason some of us are wise.

The blogosphere goes into partial hibernation each weekend and I feel a bit too disgruntled this morning to make a sensible effort at posting to meet limited reader demands. So this ramble is it.

My golf game yesterday was full of high hopes but disintegrated into a sequence of bad shots. This damaged what was otherwise a promising end to the week. The Zen of a good golf swing - it eludes me!

I am still thinking about death and two websites caught my attention last night:

The Australian Museum has an interesting online discussion of death. One of my favourite web pages at this site is the page on 'corpse fauna'. It is an eexcellent discussion of death.

I also liked this post from ScienceBlogs on whether cancer patients benefit from a positive mental attitude. In short they don't live longer but they do, of course, enjoy a less painful exit.

This is not quite consistent with the advocacy of my earlier post on rational death - I favour realism rather than unthinking optimism but, if you do want to exit with the help of a cognitive error, this is the way to go.

Enjoy your Saturday.

Nurse dispute resolved as teacher union makes its move

I am puzzled by the resolution of the nurses wage as announced today. Health Minister Daniel Andrews said the deal for the state's 29,000 public-sector nurses was consistent with the Government's 3.25% a year public-sector wages policy.

This is difficult to understand since:

• Pay rises range between 3.8-6%
• The state will fund an extra 500 nurses.

The minister said the additional wage rises beyond 3.25% were offset by productivity increases that included treating extra emergency patients, improving hygiene practices and having flu shots to minimise absences.

But while addressing nurses at the rally yesterday, head of the Australian Nursing Federation, Ms Fitzpatrick portrayed the productivity offsets as either motherhood statements or reiterations of current practice.

I don't get it. The government seems to have caved in to demands from the nurses because of staffing bans imposed that put public health at risk.

The outcome of the case is poor for the cause of maintaining a lid on public sector salaries in Victoria. The Victorian Branch of the Education Union will meet today to endorse a strike to be held in Victorian schools during VCE exams. Ms. Blewett, the union's Victorian boss said:

"The (nurses) package of 3.8-6% would not stop the loss of teachers to NSW in particular and other states," she said. "We have to get a package that has the capacity to attract and retain teachers in Victoria and the gap in salary is a very significant one."

The Victorian union is seeking a moderate increase of 30% over 3 years for its 33,000 members. The State Government has caved in to the nurses - I guess they will do the same for the teachers. Like the nurses, the teachers have rejected any move for salary increases based on productivity increase - their high principles mean that they are totally opposed to 'performance pay'. With the suggested increase in salaries a new graduate teacher would start on just under $60,000 per year.

State Government public service costs will gallop away under Labor. Watch it.

Costs of the war on terror

Greg Mankiw's blog provides estimates of the cost of military operations in Irag, Afghanistan and the war on terrorism from the Congressional Budget Office.

The estimated present value of costs from 2001-2017 is between $1.2-$1.7 trillion. This is, of course, a vast amount. But it is quite a bit smaller than the estimates of Linda Bilmes and Joseph Stiglitz (here) which came up with a figure of up to several trillion dollars for the war in Iraq alone. I discussed the BS estimates in an earlier post. The CBO exclude general macroeconomic costs - such as interest rate effects of the war which BS consider but quite a few of the BS estimates just seem too high.

The amount appropriated to the US Department of Defence for these activities in 2007 was $604 billion.

These estimates consider costs alone not benefits. They do however provide a dramatic illustration of the opportunity cost of these activities.

Our economic future under Labor

It seems likely that Kevin Rudd will win the coming Federal election. What will happen if he does? This depends very much on what will happen to the economy over the next few years. It seems almost certain that the specific commodity boom will continue, fostered by continuing high growth in the Asian economies and that the economy-wide investment boom will also remain strong at least for some time.

But there is no question that confidence in macroeconomic management will fall. Poll after poll shows much higher levels of community confidence in the ability of the Coalition to manage the economy. This is not just a matter of perceptions - there is little economic expertise or experience in the Labor team.

Moreover, the success of Coalition policies in driving unemployment to a 34 year low and operating the economy at full pace in itself poses problems for Labor. Currently, despite moderate cost-push inflationary pressures, the underlying rate of increase in the CPI at 3.1% is at the upper range of the RBA’s range of tolerance.

There are 8 trade unionists on Labor’s front bench and the trade union movement has spent $20 million funding the deceitful campaign against the Coalition’s industrial relations reforms. There will necessarily be a need for payback given a Rudd victory whatever Rudd says about ‘governing for all Australians’. Wage demands were likely to increase anyway but will now increase faster as will general cost-push pressures in the economy. That Labor markets will be more regulated with union control of workplaces and pattern bargaining under a Rudd Government will mean that the chances of a wages ‘breakout’ increase.

The prospect of higher tax collections acting as a macroeconomic stabiliser has been reduced by Rudd’s proposal to match the Coalition tax cuts. My guess is that in this tax offer might in fact not be realised but, if it is, there will again be further pressure on interest rates and inflation.
So what are the prospects? My guess is that the economic fundamentals facing the Australian economy will tend to remain sound but that electing a Rudd government will lead to higher wages growth, higher inflation and hence higher interest rates. These factors in conjunction with lower economic confidence suggest higher unemployment and hence lower economic growth.

There are high levels of private sector debt and these will create straightforward solvency issues for business and households were markedly higher interest rates to emerge. Whether this will go as far as triggering a recession I do not know but the unparalleled 17 year period of continuing economic expansion definitely seems under threat.

The Labor Party may win the coming election on the basis of its misrepresentations about WorkChoices and its scurrilous abuse of John Howard but the successful economic management it has delivered has created an explosively growing economy that presents problems for Labor.

The large tax cuts offered by Howard and Costello might be deliverable without harmful macroeconomics implications, by a talented team of fiscal conservatives, but to a union-dominated Labor Party which feels a strong need to implement an expanded social program in heath and education it spells trouble.

I’ll be interested to observe the stock market in the remaining weeks up to the election. The market has closed in the red in 7 of the last 10 trading sessions. Valuations will appear high if firms anticipate markedly higher wage and capital costs. A plunge over the coming weeks may be the first of a series of warnings we will receive about our likely economic life under Labor.

Less hunting => poorer conservation?

I am not a big fan of recreational animal killing (= hunting). But this story from the United States is interesting. It does offer possible policy insights for Australia.

In the US the decline in hunting and the consequent decline in hunting licence fees that fund increasingly costly conservation efforts is creating a threat for US wildlife. How to protect the endangered hunter?

The number of hunters has slid from a peak of 19.1 million in 1975 to 12.5 million last year, while states generated $724 million last year through hunting licenses and fees for wildlife management and conservation; taxes on guns and ammunition added another $267 million, according to the Fish and Wildlife Service.

"Sportsmen pay the bills, especially east of the Mississippi," says Rob Sexton, vice president for government affairs at the U.S. Sportsmen's Alliance, a hunters advocacy group in Columbus, Ohio. "A vast majority of the public land where people go for walks, wildlife viewing or mountain biking, the vast majority is bought by sportsmen."

To stem the loss, states have been altering hunting laws to get people into the woods.
Since 2004, 18 states have changed their laws to loosen restrictions on when children can hunt with parents, and to allow novice adult hunters to try hunting without a license, Sexton says. The effort has shown signs of working, Sexton says: The states have seen an additional 35,000 people apply for hunting licenses since 2004.

The decrease in hunters appears to be a result of modern living, says Nicholas Throckmorton, Fish and Wildlife Service spokesman. He says fewer Americans hunt because they are spending more time on work and organized sports for their children. Most Americans now live farther from wildlife areas than in the past, says Throckmorton, whose agency conducts a national survey of Americans' outdoor activities every five years.

Officials are changing state laws because they are "trying to tear down the barrier for recruitment of new hunters," Throckmorton says.

Mark Damian Duda, executive director of Responsive Management, a research firm focusing on outdoor recreation, says the modest increase in the hunter population has been good news. He says the vanishing hunters are "a long-term concern."

"At some point, there's going to be less dollars if current trends continue," Duda says. "Is it a good thing for fewer and fewer people to be funding all wildlife conservation … protecting national resources enjoyed by 97% of the people?"

Among steps being taken:

•Kentucky allows new hunters to hunt for a year with a legal hunter before taking a hunter-safety course. Since July, 1,159 new permits have been issued.
•Oregon has a Mentored Youth Hunter Program that allows unlicensed children ages 9 to 13 to receive one-on-one hunting experience and training.
•Arizona implemented an online hunter-safety course that can be completed in three hours, instead of the standard 16. Big game, such as deer, are reserved for hunters 10 and up.

More hunters also help states save money on certain expenditures, such as those linked to damage by foragers that are too plentiful, such as the Canada goose and whitetail deer.

"Rather than paying professional hunters to cull the herd, sportsmen would be happy to pay a fee to do it themselves," Sexton says.

Some say the focus on hunter retention is not the way to go.

"The number of people who hunt has declined in recent decades, and the number of people who enjoy wildlife in other ways, like wildlife watching or bird-watching, continues to expand," says Michael Markarian, executive vice president of the Humane Society of the United States.

"Efforts to reverse these trends are futile."

Rachel Brittin, spokeswoman for the Association of Fish & Wildlife Agencies, says hunters are a great source of revenue, but they can't do it alone.

U.S. wildlife is threatened by more issues than ever: increasing urbanization, invasive species, climate change and new diseases. States receive $1.5 billion a year but need an additional $1 billion annually to accomplish goals, Brittin says.

Efforts to raise enough elsewhere have failed, says Dave Chadwick of the Association of Fish and Wildlife Agencies.

Lawmakers came up with a plan to buy land with $350 million a year in offshore oil and gas revenue, he says. Environmental groups squawked about taking money from the oil and gas industry, and property rights advocates balked at the land acquisitions, Chadwick says. The effort died in 2000. (my bold, how incredible!)

Land use planning to resist 'tree changers'?

The Age outdid itself today yesterday in ‘Tree Changers Bring Gloom with Rural Boom’. Who is the journalist ‘Clay Lucas’ who wrote this? The Age website says Clay won a United Nations ‘Media Peace Award’ in 2005 for a study of ‘multicultural Melbourne’, written with Claire Miller. Why does that sound just so, so believable for an Age journo?

I refer jokingly these days to the Age as Melbourne’s Pravda but I doubt it would espouse this type of low-level socialist, muddle-headed nonsense.

Lucas is concerned with the effects of city people wanting to buy country properties. While this increases asset values held by country people - the median house price in 2001 in country Victoria was $121,000 while by 2006, it was $220,375 - it calls for planning because country areas will be ‘swamped’ according to academic town planner Trevor Budge.

‘An influx of ‘tree changers’ to some of Victoria's most beautiful rural towns may cause serious development pressures unless growth is properly managed, planning experts have warned’.

In some areas ‘58% of new residents had never even lived in a rural area’. Well, golly gosh.

‘Many planners were now asking whether Victoria needed to establish a tree change taskforce’, Mr Budge said. (my bold)

‘In some of these places, the locals can't buy a house or the person who wants to work at the local tourist office can't afford to live there.’ Oh no!

In fact, with externalities or distributional considerations giving people the right to trade their properties into the highest-valued use maximises society’s gains from land. You might want to control land acquisitions if externalities were involved but it is difficult to discern that specific externalities will stem from the identity of a purchaser as a former urban or rural dweller.

Nor are distributional issues arise from the identity (uban, rural) of a country land purchaser.

It is just that when something increases in value fewer people will want or be able to buy it.

Finally if zoning restrictions to protect biodiversity are inadequate they should be reformed but this case for reform is, again, independent of the identity of the land purchaser.

Or is this so-called analysis yet an instance of the ancient fallacy (derived from mercantilism?) that being a farmer is a socially-worthwhile activity while other sections of the economy are simply parasitically dependent on agriculture?

Hat tip to Tim Blair.

Australian native plants: Flannel flowers

Where I grew up in a less-than-distinguished part of Sydney’s north shore our house was built on rocky outcrops close to bushland. I remember my father being keen on retaining whatever native plants existed on what was really an otherwise desolate block – one thing he retained for years was a self-seeding clump of flannel flowers (Actinotus helianthi). I have had an interest in them since though I’ve never tried growing them because of (misleading) tales I had heard about difficulties of doing so.

But this year - in Melbourne - I did. I planted a compact variety in a pot containing a fair bit of gravelly sand and a good quality (low phosphorus) native potting mix. The drainage was perfect.

It grew quickly to become a mass of flowers that has lasted weeks.

They liked more water than I had believed - they wilt demonstrably if deprived. Apart from that all I did was cut back the spent blooms after they flowered. They are a beautiful native flower that is easy to grow.

By the way the best flannel flowers I have seen in Melbourne are at the northern end of the Melbourne University’s student union. They are adjacent to one of the best flowering waratahs I have seen in this city.

This whole area features West Australian banksias and dryandras – there is at least one very knowledgeable gardener at the University! The Melbourne campus has some spectacular shrubs and trees – near the Old Geology Building are a pair of male and female Ginkgo Giloba, a source of the widely-used brain food. These trees are also the best I’ve seen in Melbourne.

I should mention that the Melaleuca blog is good on native plants - this are some of Mel's favourite native plants.

1% of Australia for sale: Australian Agricultural Co.

I have a long standing interest in the Australian Agricultural Company (AACo) both as a very small investor and as someone interested in the Australian agricultural sector and its history. AACo is Australia’s second-oldest company – it was founded in 1824 - and our biggest beef producer by a ‘country kilometre’. It runs 630,000 cattle on 8 million hectares – that is about 1% of the Australian landmass. Most of the land is in the north of Australia where rainfall is good. AACo is a great asset.

Elders bought AACo and Elders itself became majority owned by Futuris in 1996. Futuris then floated the AACo in 2002 retaining a 43% stake. Yesterday Futuris put the stake on the market on the grounds that it was an expensive holding and that the share-market was not appropriately capitalising Futuris on the basis of its valuable stake.

As a shareholder I could hardly complain because the share price rose strongly to $2-80 but from an external vantage point I am troubled by this move and the evident lack of patience by Futuris. It seems to me to be a repeated pattern in Australian equity markets that local investors are excessively myopic in their pursuit of gains. The most plausible outcome in this case is that a multi-national from the US, Asia or one of the local groups of smarties like Macquarie Bank will find AACo an easy takeover prospect by swallowing the Futuris holding at a hefty discount to its long-term value. I can’t help thinking of the disgraceful sales of MIM to Xstrata and the initial opportunistic bids for Coles. WMC was sold for an absolute song to BHP-Billiton to the long-term disadvantage of its shareholders.

The drought has perversely depressed cattle prices and consequently the share price of AACo so now does not seem a good time to sell. Returns are low even though the vast scale of AACo makes it relatively drought-proof even though long-term prospects given surging food demands in Asia are excellent.

I’d prefer to hang on as a small investor and hold out for better times that to accept miniscule capital gains now. I'd certainly like to see AACo remain in the hands of those with experience in agriculture rather than being controlled by a bunch of myopic sharpies from Macquarie Bank.

RIP Mr. John Ilhan

Mr John Ilhan was brought up on (what some would describe as) the wrong side of the tracks in Broadmeadows. He was a migrant from Turkey who arrived in Australia at age 3 and was an ex student of La Trobe University. He died today from a suspected heart attack – aged only 42. He left behind a wife, three daughters and an infant son.

He founded the Crazy Johns mobile phone stores in 1991 (their tribute here) – now there are 120 stores. He was one of Australia’s very wealthy, very successful businessmen -ambitious, entrepreneurial and a generous philanthropist to boot.

His is an inspirational rags-to-riches story. His death is a tragedy for his family and friends. Australian business lost a talented man.

Eddie Maguire said about Mr Ilhan.

"He says everything about the migrant success story. Turkish boy, lands in Broadmeadows, has a shopfront in Brunswick, turns it into a multi-million dollar
business.

"But at the same time... he still looked after his parents and looked after the community and put everything he could put back into it."

A new political option – the LDP

Its great to be given additional choices with the Federal election coming up.

Stephen Lloyd points out in a Catallaxy comment stream concerned with the case for voting for the (libertarian) Liberal Democratic Party that one of the LDP’s candidates is Lisa Milat, sister-in-law of convicted multiple killer Ivan Milat.

Lisa is an active target shooter and member of the Sporting Shooters Association of Australia.

The LDP supports the right to own firearms for self-defence, sport and hunting and also stands for lower taxes, small government and individual responsibility. It opposes restrictions on cigarette smoking and supports the decriminalisation of illicit drugs. This is Lisa's website.

Yes the freedom to own guns and kill wildlife. The message is so beautifully persuasive but there is, as yet, something missing. It will eventually come to me.

Pluralist Economics Review

November 2007 issue. This is probably the most interesting collection of economics papers I have seen in years. Absolutely fantastic - the first Akerloff paper alone a classic but there are many, many gems here. You can subscribe free to this new review - go here.

Articles

The Missing Motivation in Macroeconomics, George A. Akerlof
Model Building versus Theorizing: The Paucity of Theory in the Journal of Economic Theory, Daniel B. Klein and Pedro P. Romero
Uncovering the American Dream: Inequality and Mobility in Social Security Earnings Data since 1937, Wojciech Kopczuk, Emmanuel Saez and Jae Song
The American Family and Family Economics, Shelly Lundberg and Robert A. Pollak
Growing Inequality in the Neo-liberal Heartland, George Irvin
The Macroeconomist as Scientist and Engineer, N. Gregory Mankiw
The U.S. Economy: What’s Next?, Wynne Godley, Dimitri B. Papadimitriou, and Gennaro Zezza How Well Off Are America’s Elderly? A New Perspective, Edward N. Wolff and Ajit Zacharias
The Causes and Consequences of Wal-Mart’s Growth, Emek Basker
Hedge Funds: Past, Present and Future, René M. Stulz
Introducing Incentives in the Market for Live and Cadaveric Organ Donations, Gary S. Becker and Julio Jorge Elíasb
Learning From Schelling's 'Strategy Of Conflict’, Roger B. Myerson
On the Fundamental Theorems of General Equilibrium, Eric S. Maskin and Kevin W. S. Roberts

Shorter Articles

Science, ideology and development: Is there a ‘Sustainability Economics’?, Peter Söderbaum
Ten Principles of Feminist Economics: A Modestly Proposed Antidote, Geoff Schneider and Jean Shackelford
An orientation for a green economics?, Tony Lawson
What Industries Does Multiple-Equilibrium Trade Theory Recommend?, Ian Fletcher

Articles You May Have Missed

Let There Be Markets: The evangelical roots of economics , Gordon Bigelow
Small is dangerous? Schumacher, science, and social development, Cowan Coventry
The Social Science Citation Index: A Black Box—with an Ideological Bias?, Daniel B. Klein with Eric Chiang
What Has Happened to the Theory of Games?, Leonid Hurwicz

The Economy

The U.S. Economy: What’s Next?, Wynne Godley, Dimitri B. Papadimitriou, and Gennaro Zezza
Will There Be a Dollar Crisis?, Paul Krugman
The Bubble Economy, Rober Kuttner
The financial crisis: burst bubble, frayed model, Robert Wade

Economics in the News

The New Bipartisan Capitalism, Daniel Morris, The Nation
Hip Heterodoxy:, Thomas Palley, Julie Nelson, James Galbraith, Brad DeLong and others, TPM Café Debate
In Economics Departments, a Growing Will to Debate Fundamental Assumptions, Patricia Cohen, NYT
Who You Calling Heterodox?, Andy Guess, Inside Higher Ed
Solidarity No More?, Elizabeth Redden, Inside Higher Ed
American trio wins 2007 Nobel for economics, Reuters
Excerpts from the citation of the 2007 Sveriges Riksbank Prize in Economic Sciences, Herald Tribune

Viewpoints

One Answer to Global Warming: A New Tax, N. Gregory Mankiw
Prizes, not patents, Joseph E. Stiglitz
How to pay for a free press, André Schiffrin
Growth isn’t working, D. Woodward and A. Simms
Why Not Shift the Burden to Big Spenders?, by Robert Frank
Should We Aspire to a High Score for ‘Economic Freedom’? Margaret Legum
The Entertainment Industry Police Crackdown, Dean Baker

Reviews

Creative Destruction vs. the New Industrial State, Deirdre McCloskey
Is Economics Really All It Claims To Be?, CFED
Reintroducing Macroeconomics: A Critical Approach, reviewed by Ryan A Dodd

Obituaries

Galbraith’s lessons in death, Evan Jones
Milton Friedman, Financial Times
Milton Friedman, Workers Online

Selling high nicotine smokes to addicts & low nicotine smokes to new smokers

The key addictive agent (perhaps not the only one) in cigarettes is nicotine. This has led to proposals to cut the nicotine content of cigarettes so that it is more difficult for new smokers to get addicted. The difficulty with this proposal – and the failure of the so-called ‘low tar derby’ that sought to encourage tobacco companies to produce low nicotine cigarettes – is that addicted smokers will need to smoke more to get their levels of nicotine to equilibrium. By smoking more they ingest more tobacco specific carcinogens which is potentially damaging to heath. It is these carcinogens not nicotine that cause most health damage.

In fact, since the late 1970s I have often seen exactly the opposite suggestion made – to increase the nicotine content of cigarettes. The idea is to reduce the number of smokes an addicted smoker needs to light up to get to their equilibrium level of addiction. Of course now the problem is that new smokers get addicted more quickly ultimately leading to increased health damages by a different route.

I’ve played around with schemes to sell two types of cigarettes – one for new smokers (with low nicotine) and one for addicted smokers (with high nicotine) but have never convinced myself that they would work. This proposal from a former US FDA employee however seeks a reform along these lines based on selling two types of cigarettes.

‘When it comes to the health of our children, two cigarettes may be better than one. Young smokers who begin their habit with nicotine-laden cigarettes need a cigarette that will not leave them to later fight the ravages of addiction.

Experts tell us that teenagers often begin smoking to copy their peers and others whom they see smoking. As adults, however, they continue smoking largely because of the addictive qualities of nicotine. (90% of smokers regret having begun smoking and most make efforts to stop.) This means that in the absence of addictive levels of nicotine in their cigarettes, most young smokers would ultimately quit.

A two-cigarette strategy would prohibit young smokers from buying addictive cigarettes. The tobacco industry is capable of producing cigarettes that are virtually free of nicotine, and regulators could develop clear standards for non-addictive cigarettes. (Disclosure: My law firm represents tobacco companies, but I have recused myself from that work.)

The age to purchase addictive cigarettes might be set at 21. Better yet, sales of addictive cigarettes could be restricted to individuals born 19 or more years before the two-cigarette strategy was put into effect. Under this approach, 18-year-olds who start smoking non-addictive cigarettes would be prohibited from switching to addictive cigarettes even after they turned 21. In addition, a higher federal excise tax on addictive cigarettes than on non-addictive cigarettes would create a financial incentive for smokers of all ages, including scofflaw adolescents, to select non-addictive cigarettes’.

Why am I sceptical of this idea? I am not sure whether it can be made to work. The best way to market a cigarette product to kids is to declare it adults only – it’s the ‘forbidden fruit’ idea.

How would you effectively prohibit youth from buying high nicotine cigarettes?

If you could effectively discriminate between type of user I would support this plan and bolster it by increasing the nicotine content of cigarettes sold to addicts so they would smoker less.

Problems with nurses a foretaste of the costs of Labor power

Victorian nurses and hospital managers are negotiating tonight, to try to reach an agreement over pay and conditions. The heroic nurses in their brave 'struggle for wage justice' have imposed work bans for the past 6 days that have closed more than 1200 hospital beds and the cancellation of 500 elective operations.

The union has rejected the government's pay offer of 3.25% per year over 5 years. The Australian Nurses Federation (ANF) wants 6% a year over three years, and a guarantee that nurse-patient ratios would not be abolished – in other words they refuse to consider productivity improvements. The nurses are raiding the public purse and hoping that the threat of spill-over from their actions onto the Federal election prospects of the Labor Party will help secure the delivery of extra public money.

Watch for the surge in such actions by health workers and others who dip into the public purse if Labor has power both Federally and in all the States. Already, state public servants and increasing their take from the public trough faster than the average wage earner.

With 70% of Labor's front bench being ex-union officials and the unions having contributed $20 million towards the anti-WorkChoices campaign that has created irrational support for Rudd you would have to be monumentally naive not to believe a payback will be required. It will be the usual self-defeating Labor story - more strikes because Labor markets are tight, higher inflation and higher unemployment to the detriment of all.

The nurses' union defied an order from the Industrial Relations Commission (IRC) to end the work bans this morning. The Victorian Health Minister, Daniel Andrews, says if bans are not lifted by tomorrow morning, the IRC could issue a fine and hospital management could ask for Federal Court intervention. "You can't have a situation where the decisions that go your way are fine and proper, but the decisions that don't go your way you can thumb your nose at," he said.

But the ANF’s Lisa Fitzpatrick says nurses won't be swayed until an ‘acceptable’ agreement is reached – until their wage demands bolstered by a threat to community health are met.

Ms. Fitzpatrick is outraged that nurses have been threatened with having their pay docked for participating in the bans. In fact the law insists that this be the case. Alec Djoneff, of the Victorian Hospitals Industrial Association, says the Association will ask the Federal Court tomorrow to enforce the orders made by the IRC. The Federal Court can fine each nurse $6600 and the union up to $35,000 for each breach of the order.

Those sanctions pre-date WorkChoices and give the court discretion to seize personal assets if a union member refuses to pay the fine. The Government should enforce vthis law but won’t. The State Government says it is powerless to prevent the enforcement of these fines – they should just enforce them if necessary.

Secret snaps from the Party Congress

Inscrutable lot.

Sunday golf lesson with Kevin Rudd

Almost no politics, no economics for most of yesterday - I’ve been practising my golf. I’ve been watching, then pausing, bits of a clip which shows you how to make the perfect golf swing. It really is pretty good and it is free.

Then my Sunday was disturbed by the big event - the debate at 7-30pm between John Howard and Kevin Rudd. It left me unsettled. JWH looked a bit nervous initially and Rudd was throwing clichés and slogans left, right and centre. A bit like the aimless, somewhat neurotic, character of my golf game. JWH the optimist and Rudd the gabby, baloney merchant espousing the need for an unspecified plan to take Australia out of its currently deprived state. We are all facing imminent peril unless we elect Rudd and pursue his personal ‘vision’ for Australia and its ‘working families’ (repeated 50 times).

Any politician who tells the Australian people to adopt his vision should be turned into Pal.

Rudd is dangerous because he does not understand his vision is based on romantic deceit. Let all the poor kids have laptops. Working families told him so.... He was unconvincing.

It is hardly surprising that I think Rudd would be a calamity as PM. 2050 carbon targets with no idea what they will be in 2020 and criticising JWH for not pursuing this idiocy. How will he cut petrol prices and better the work of endless ACCC inquiries? How will he cut home prices and would you want to? This dill still wants us to accept culpability for damage done 100 years ago to Australia’s aboriginals. How will he enginner an 'education revolution' with a pittance? It is verbiage without policy substance.

Rudd will cut petrol prices and make housing less expensive – no he won’t. It is nonsense.

But Rudd will do well among those who value glibness. The Channel 9 worm endorsed him as did a foolish post at Troppo by James Farrell that I commented upon.

The key issue is whether this debate will disturb my Tuesday golf game?

Probably.