Using quarantine as a barrier to trade

I have been meaning to write about using quarantine as a barrier to trade since Queensland’s banana crop was destroyed by cyclone Yasi last summer and prices at the supermarket shelf hit $14/kilo and more. It seems that leading economist Saul Eslake, and economist turned politician Andrew Leigh, have done the job of deciphering genuine concerns over importing disease, and rent seeking by protected producers.

Let us start with what Andrew had to say.

In fact, just about every trade barrier can be rewritten as a quarantine rule or a consumer protection law. Suppose Californian wine producers are complaining about competition from French Bordeaux. Left unchecked, US authorities could simply raise health concerns about Phylloxera, and ban French wines on quarantine grounds. Or imagine that British carmakers are struggling to compete with Malaysian hatchbacks. Without any international guidelines, there would be nothing to stop the UK from banning Malaysian small cars for reasons of safety.

To prevent competition laws and environmental rules from being used as backdoor protectionism, the WTO has two new treaties that require health, consumer and environmental regulations to be scientifically based. National regulations cannot discriminate against particular countries, and must not impede trade any more than necessary.

If a WTO member thinks that another country is breaking the global trade rules, it can take a case to the dispute panel. Australia has complained to the WTO on seven occasions (against the European Union, Hungary, India, Korea, and the United States). We’ve won five of these cases, including decisions in favour of our beef exporters to Korea and our lamb exporters to the US.

On the flipside, we’ve had ten cases brought against us (by Canada, the EU, New Zealand, the Philippines, Switzerland, and the US). We’ve lost three of these cases, including the New Zealand apples decision (the other two losses related to imports of salmon and automotive leather).

Andrew makes the solid points that quarantine and consumer protection is ‘back-door’ protectionism, and gives a good overview of the international legal framework around trade.

Saul Eslake takes different approach by discussing the price impacts on domestic consumers from this type of protection. He also highlighted that in the wake of cyclone Yasi, high banana prices were only helping banana growers whose crops weren’t destroyed, not those who actually lost their crops from the cyclone.

On the matter of importing diseases, he makes a point I have argued to many people in the past. How would diseases go from boxed-up fruit and vegetables arriving in city ports out to farms? How high is that risk? In Eslake’s words-

If bananas and other fruit or vegetables are imported into southern ports, such as Melbourne, Adelaide or Sydney, and are subject upon arrival to appropriate inspections, they are no more likely to spread diseases damaging to Australia's banana industry than the importation of cooked and packaged Canadian salmon has done to Tasmania's salmon industry (another example of protectionism masquerading as ''biosecurity'' where, unusually, commonsense and the interests of consumers ultimately prevailed).

To me the irony of the situation is that most of the crops now requiring protection from foreign pests are imported themselves, and could arguably be classified by an environmentalist as a foreign pest.

The other irony is that the countries that do have these diseases are also exporters and can produce the crop much cheaper than us.

The logical person would ask whether the potential costs from the pest or disease are greater than the benefits derived by consumers from cheaper food? If yes, then we should keep the quarantine restrictions. If no, we should drop them.

I am not trying to say here that all quarantine rules necessarily have greater benefits than there costs. But we have lost 3 out of ten cases brought against us by other WTO member, so if 30% of the quarantine rules can be dropped because their costs outweigh the benefits, that would be good for everyone in the long run.

Not so random links, comments and quotes

 

Law of demand holds
Bust fares go up, patronage goes down. A lesson for policy makers about defining their outcomes better – do they want cost recovery for transport (higher fares, lower usage), or are they willing to subsidise public transport to save costs of maintaining the road system?

Algorithms rule our lives
The algorithms of Wall Street may be the cyber-equivalent of the 80s yuppie...
The question for the economist is not whether there are downsides to this infiltration, but whether the costs outweigh the benefits. I am pretty sure that is not the case yet – after all, algorithms are written by humans, redesigned by humans, and often ignored by humans.

Culture -
The Misconception:  You celebrate diversity and respect others’ points of view.
The Truth: You are driven to create and form groups and then believe others are wrong just because they are others.

If patents over software are a bad idea, why not all patents?
This article argues that companies find it more attractive to make money suing each other for infringement than actually making things.

The question for society is whether innovations would occur at close to the same level without patents? My personal view is that they would, and that a possible first mover advantage would be reward enough. A short, but very useful, free online textbook on the economics of patents and copyright is here.

Apple iPad patent fiasco

Free trade in apples, finally?
As I said before with food import restrictions, if prices are set by global markets, domestic buyers cannot buy at prices below the export market price - although they could perhaps be higher.

Essentially, by protecting our producers from import competition we are paying HIGHER prices for Australian food than foreigners are paying for Australian food.

Of course apple growers will whinge, but they will adjust over time, and in reality, their incomes have been protected for a long time anyway.

Warren Buffet supporters in France - the rich want to be taxed more

Quotes -  
Graveyard market - buyers don't want in, sellers can't get out (ht: doomsday_trader)

After all, statistics are like bikinis. What they reveal is interesting, but what they conceal is more important (ht: John Booth)

If an Axe is being ground, cluelessness will follow naturally. I used to be an ideologue and as I think back on my unreflective self, I remember that I just chose to devote all my mental energy to what I wanted to believe and none to what I didn't want to believe and the result was I appeared clueless, sometimes intentionally clueless (ht: anon)

The lesson of Alaska is never give away land, even when it is seemingly worthless (ht: M)

Electric v petrol scooter

I've been reading some great posts recently at Chris Eastwood's blog in my view... . Below is a full post comparing the merits of electric and petrol scooters in a detail rarely seen.

But first a few quotes from Chris that might get you interested in some of the ideas floating around on his blog.

By having an increasingly itinerant population is it any wonder that no one gives a rats arse that your home is being degraded? (here)

I recall a conversation with 2 educators on Fraser Island ... that the last thing you want to do is encourage more people to come to national parks, even if it does somehow liberate more funding from the government it won't pay for the extra damage caused by the extra bogans. (here)

The full electric scooter post is below, and the original link here. Chris finds that the electric scooter produces more greenhouse gas emissions than the petrol version. Please keep in mind the rebound effect, since the electric scooter is so much more expensive (the owner can’t spend that money on other goods).

Over to Chris.

Friday thoughts

Democracy

In a democracy, we put political power into the hands of some and try to limit the damage they will do as much as we can by putting all the obstacles we can think of in their way while giving them the authority to do what needs to be done. (from here) 

Warren Buffet says tax me more. 

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. 

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. 

...Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

...Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.

...I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

...I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

But he can make a voluntary contribution of taxes the US government at any time. So why doesn’t he?  As a friend recently suggested, he is trying to leverage his good will by forcing others to come for the ride.  But he also states that his fellow mega-rich friends are "very decent people" and "give most of their wealth to philanthropy" and "wouldn't mind being told to pay more in taxes".  My questions are

Why isn't a greater tax contribution part of their philanthropy? 

What is stopping them? 

Do they feel that giving privately to charity offers more social gains on a per dollar basis? 

If they were taxed more, would they give less to these charities?

Chart of the day: Shares v houses in the US

A fellow blogger has pointed out a comparable chart to yesterday's share price v house price chart for Australia since 2003 from the Federal Reserve Bank of St Louis.

Just because housing investors (in some Australian cities) have made relatively good returns over the past four years, that shouldn't be interpreted as an indication of future outcomes.  There are precedents for large sustained falls in home values which will be extremely financially painful for the leveraged investor.

Comments on the London riots

I have a mind that continually seeks answers, and have therefore had an interesting time looking for answers to the London riots. The question is - why are people rioting?

Clearly there was a legitimate protest last week about police violence and the shooting of a man. But why would that lead to people completely unrelated to the event participating in social media facilitated rioting and looting?

Last night’s 7.30 report had a good interview with a former UK police advisor who pinpointed a growing pool of disengaged citizens, perhaps from families with generational unemployment and council housing – a pool of people with nothing to lose who are attracted to the excitement of the riots and the opportunity to be part of something, since they have never themselves felt like part of society.  This seems a reasonable explanation to me, but doesn't really help explain what type of actions government might want to take in the future to help avoid the situation.

Tyler Cowen links to some academic studies on the economics of riots, noting the importance of opportunity cost, chance of punishment, ethnic and cultural diversity, but not of poverty.

Here are some reader comments from Bristol West’s Liberal Democrat MP Stephen Williams’ blog that I found had some interesting angles. (ht:Chris M)

• The main thing to come out of this for me is how out of touch with today’s youth, and particularly the ‘lost’ youth, the government is. It’s not only the greed that caused this. It has as much to do with fun. These people were visibly enjoying themselves, it’s like heaven for them. Violence, hate and destruction are an intrinsic part of their lives. They love it, and the inability of anyone in power to understand why is why the problem will never go away.
  
• It’s the way this round of civil unrest has a weird consumerist spirit that seems genuinely unusual. Reports of looters standing around deciding what shops to kick in based on what stuff they want; of kids trying on different pairs of trainers in a kicked-in JD Sports before picking which ones to take. Even while burning buildings, smashing cars and attacking police, the looters retain a well-disciplined sense of their need to make ‘wise’ consumer decisions, and remain obedient to market-based desires.
  
• As usual an MP with no regard for considering who might be at the root of this unrest ie the bankers, politicians and big businesses who dont pay their taxes and make us all look like fools while they live in their Surrey mansions. How about, just for once, coming up with some policies that help people to make a contribution to their comminities instead of slashing jobs and services to pay for the failing of the banks. These people are angry,frustrated and have had enough of being told what to do by people whose only interest is serving themselves.
  
• They are only out clashing with police and looting shops because they have nothing else to do, and nowhere else to go. The riots are caused by ruthless austerity measures that mean their voices are drowned out. It is hypocritical for you to blame them for starting these riots when it was really your coalition government. You say we “need to have a good hard look at the direction in which our society is heading.” Damn right we do. The way your government is going, this cry for help from the deprived may become a lot more common.
  
• “A riot is the language of the unheard.” —Martin Luther King, Jr.
  
• so 30 years of boardroom pay rises of 60-80% per annum, funded by “efficiency savings” i.e. sacking much of the work force, along with no wage rises for those at the bottom of the corporate structure “lucky” enough to still have their jobs – would have absolutely nothing to do with all this at all? i guess the sight of wealthy bankers ruining the economy and causing people to lose their jobs and homes being repossessed while they retire at 50 (sir fred goodwin) with £1million+ per year pensions is setting the right example? if the system is seen to be corrupt, greedy & there is no hope even given to those at the bottom, while they are constantly taunted by glamorous billboards advertising the latest “must haves” in a consumerist society, things they can never afford, who can be surprised when the first opportunity is taken, and any excuse will do, to just say sod it, and take what you can. god helps those who help themselves – just ask any burglar. and burglars are pretty much what the boardroom giants and bankers are. does sir philip green and other wealthy people even pay tax? i think not.

Quick links and curious thoughts

Housing bubble – my favourite quote ““No one can produce an explanation as to how fundamental factors can lead to a run-up in home sale prices, but not rents” (originally from here)

ACCC says milk war is actually what competition is all about

Dumbed down debate -  
In 1860, in New York Abraham Lincoln began his campaign for the presidency with a very complex speech about slavery at the Cooper Union, 7500 words long, complex and nuanced. All four New York newspapers published the full text, which was sent by telegraph across the nation, widely read and discussed. In 1860 the technology was primitive but the ideas were profound and sophisticated. In 2011 technology is sophisticated but the ideas uttered by presidential aspirants are embarrassing in their banality, ignorance and naivety.

Dog whistle politics -   
JASON REIFLER: Well we're certainly susceptible to misinformation in that once we believe something that is wrong then it's really difficult to correct people.

ELEANOR HALL: So we know that our ignorance about certain issues makes it easy for us to be misled but your research shows that we don't necessarily change our minds even when we have the facts. 

I wonder about the geographical boundaries used for the capital city price indices. For example, the Brisbane City Council area would not include many homes that are in ‘greater Brisbane’, but not in the local government area. These areas include Moreton Bay Regional Council, Redlands and Ipswich (where a large portion of the new housing supply is located).  Different data providers using different areas would explain some of the inconsistencies in price movements detected. I would happy to hear some detail about this from the data providers.

(ht: okakesan)

An explanation of equality concerns about progressive tax systems (ht: Chris Boulis)
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100...
If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7..
The eighth would pay $12..
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

"I only got a dollar out of the $20 saving," declared the sixth man. He pointed to the tenth man,"but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more benefit than me!"

"That's true!" shouted the seventh man. "Why should he get $10 back, when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

Economic images

Sometimes I stumble across humourous images and quotes in which I instantly find a deeper meaning. Here are a few recent ones, and my accompanying thoughts.

The first I stumbled across at Bryan Kavanagh's blog (which is worth a read).

What makes it funny is that it is so close to the truth. To me, the deeper meaning is that we have lost an understanding with what real productivity actually is.

The next image can be found all over the web now, but to me provides insights into exactly how new technology integrates into society. 

While we can laugh that the publicly run enterprise is stuck with 1960s technology, to me it says much more. It shows that aggregating many new technologies (computing, flight control, materials etc) into one much larger and more ambitious technology (the space shuttle) takes a long time. Also, it shows me that there are lock-in effects. The car has not changed much at all. This is partly because roads and associated infrastructure are still much the same, and drivers are trained to use the same controls in the car itself. This limits scope for macro improvements in car transport. The same applies to the space shuttle.

I also stumbled across this quote -

As Douglas Adams wrote in 1999, "Anything that gets invented after you're thirty is against the natural order of things and the beginning of the end of civilisation as we know it until it's been around for about ten years when it gradually turns out to be alright really." Yes, the world is different now. Do try to keep up 

This is an important one to keep in the back of our minds when we imagine seeing society deteriorate before our eyes.  I recall that the ancient Greeks worried about the proliferation of written texts, because it meant people no longer needed to remember and recite long passages. Only if you could remember a passage word for word did it show you truly understood its meaning. 

Google economic indicators

I have mentioned Google’s real time price index before. Today I want to go ‘around the grounds’ to see how internet prices and search results are being used as economic indicators.

MIT is doing it with their Billion Prices Project. Their index appears to be very similar to Google’s and appears to track the official index in the US well, and a little advanced. That is promising.

The Bank of England is using search term frequency as a complement to survey data to provide a better picture of the labour market. The chart below shows that quite a few search terms provide an indication of conditions in the labour market.

The Economist uses search term frequency to reveal concerns about the fragility of the Chinese economy. For some reason ‘hard landing’ as a search term is rapidly becoming more popular. (Hopefully this is not because of a new rock band by that name, otherwise that would be embarrassing.)

Economist bloggers are also very keen on the possibilities that Google search statistics present. Justin Wolfers tests some search terms over at the Freakonomics blog, while a local economic blogger finds a strong correlation between the unemployment rate and the search term ‘piercing pictures’. Yes, correlation does not imply causation.

And of course yours truly has used Google search terms to investigate whether Australians believe they are in a housing bubble, with reference to the trends in housing prices and Google searches in the US.

Lastly, the academic community is finding that search term frequency a useful tool as a proxy measure for real life frequency of events.

We propose, based on the premise that the occurrence of a phenomenon increases the likelihood that people write about it, that the relative frequency of documents discussing a phenomenon can be used to proxy for the corresponding occurrence-frequency. 

I feel like this is just the tip of the iceberg in terms of the power of the data being collected by Google.  And I hope that this valuable data continues to be provided for free to the general public.

Thought bubbles

No borders?
Imagine there's no countries
It isn't hard to do 
Nothing to kill or die for

In the spirit of John Lennon, what would happen if all countries started a free worker mobility agreement? Where would people leave, and where would their destinations be? Would the world be better off on average? Would it solve many conflicts?

Population arguments
Land is an asset. As the industry would say, they aren’t making any more of it. But shares are also an asset, and most companies aren't make any more shares. So does population growth increase share prices as well? After all, there would be more people competing for the same number of shares?

More support for property – tax deductibility for public servants
Salary packaging mortgage payments seems like just another housing market subsidy available to public servants. A worked example here.

Mere monkeys?
Monkeys trained to use money for transactions (from here)

The essential idea was to give a monkey a dollar and see what it did with it. The currency Chen settled on was a silver disc, one inch in diameter, with a hole in the middle -- ''kind of like Chinese money,'' he says. It took several months of rudimentary repetition to teach the monkeys that these tokens were valuable as a means of exchange for a treat and would be similarly valuable the next day. Having gained that understanding, a capuchin would then be presented with 12 tokens on a tray and have to decide how many to surrender for, say, Jell-O cubes versus grapes. This first step allowed each capuchin to reveal its preferences and to grasp the concept of budgeting.

Then Chen introduced price shocks and wealth shocks. If, for instance, the price of Jell-O fell (two cubes instead of one per token), would the capuchin buy more Jell-O and fewer grapes? The capuchins responded rationally to tests like this -- that is, they responded the way most readers of The Times would respond. In economist-speak, the capuchins adhered to the rules of utility maximization and price theory: when the price of something falls, people tend to buy more of it....

During the chaos in the monkey cage, Chen saw something out of the corner of his eye that he would later try to play down but in his heart of hearts he knew to be true. What he witnessed was probably the first observed exchange of money for sex in the history of monkeykind. (Further proof that the monkeys truly understood money: the monkey who was paid for sex immediately traded the token in for a grape.)

Young property buyers making smart property decisions
Apparently, one in ten home buyers ‘rent to invest’. They choose to rent their principle place of residence, and invest in property elsewhere. This makes perfect sense, and I have commented before why this is always the best way to get financial exposure to the property market – far better than buying to occupy. It is what I’ve always done.

As I said 18 months ago -

What we learn from this exercise is that buying your own home in today's economy is far inferior to buying a home as an investment, or renting and staying out of the property market completely 

Carbon Tax to reduce effective marginal tax rates (must read analysis) 

People are terrible at objectively determining quality
In Washington , DC , at a Metro Station, on a cold January morning in 2007, this man (image above) with a violin played six Bach pieces. During that time, approximately 2,000 people went through the station, most of them on their way to work. After 45 minutes only 6 people had stopped and listened for a short while. About 20 gave money but continued to walk at their normal pace. The man collected a total of $32. When he finished playing no one noticed and no one applauded. There was no recognition at all.

No one knew this, but the violinist was Joshua Bell, one of the greatest musicians in the world. He played one of the most intricate pieces ever written, with a violin worth $3.5 million dollars. Two days before, Joshua Bell sold out a theater in Boston where the seats averaged $100 each to sit and listen to him play the same music.

Cannon's Law

Cannon's Law says that if it will work, then the government won't do it. If regulation would really bite, the regulated parties will work the political system to kill it. (here)

With so many simple effective regulatory reforms that would greatly enhance economic efficiency being constantly overlooked, this spoof law resonates with my experiences. It is particularly relevant to the mining tax, the carbon tax, and other reforms currently being considered (even to the Greek debt situation).

The point is that economists often oversimplify policy matters. They consider government decisions is isolation of the interaction between affected parties and politicians. Remember, most policy changes involve winners and losers, and the relative political clout of each group can determine the actual outcomes.

My version of Cannon’s Law would be a little more subtle and say –

The more effective the regulation in achieving outcomes for the public good, the less likely the regulation will be appropriately implemented due to the increased likelihood of regulatory capture.

For those not familiar with regulatory capture, the following definition might be useful.

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether.[1] 

Regulatory capture refers to when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented.

Regulatory capture does not have to involve intentional ‘ship jumping’ by agencies. The simple fact that you are spending a lot of time talking to the industry you regulate makes you identify with that industry.

For example, the agency who is charged with regulating the amount of water available to be used in each river system would talk with farmers quite a bit. They would begin to think that they are in the ‘water business’ rather than the ‘protect the public interest’ business, thus subtly shifting their subconscious focus.

To be clear, there are two key political realities that economists usually overlook.

1. If a new regulation will be very effective, it is unlikely to see the light of day; and
2. Even if a new regulation is adopted, it is likely to be watered down by vested interests ‘capturing’ the regulatory body.

In the end, perhaps our political leaders are not as powerful as we think. Our democracy appears to have a secondary feedback loop between politicians and interest groups that chugs along behind the main cycle of politicians reporting to the people at the ballot box. The power rests with the people and the alliances we form in business and social practices.

Perhaps the power is distributed unevenly due to the differences in wealth between groups.  And maybe there are simple ways around that, like capping and declaring political donations.  Or maybe this wealth difference is not so important - even big business needs to keep customers happy.

Maybe these thoughts are no surprise to you. But it is nice to lay it all out and ponder our own positions is this social game.

Go back to where you came from - Australia's talking

Last night SBS aired their new three part series Go Back To Where You Came From, where six Aussies take part in a 'reverse refugee' experience.

I think most viewers would agree that it was particularly interesting to watch the participant's reactions to meeting refugees and visiting detention centres.  Participants are from quite different backgrounds, and they have a variety of opinions on refugee policy.

The show apparently has twitter all a buzz, and is generating quite a deal of media commentary.  Much of the reaction focuses on the apparent ignorance of one particular participant to the real situation of refugees - especially in light of their strong opinions on the matter.

My wife suggested that there was a clear pattern in the participant's attitudes - those with broad travel experience seem to have more tolerant views.  It was telling that a couple of participants had never left Australia before the show.

What I found missing from the show, which would have been a nice complement to the emotional dimension, is reference to the actual statistics on refugees, their country of origin, the proportion coming by boat, and the changes in refugee numbers over time.

This is important because the public debate usually overlooks a couple of key points.

1. Boat people are a minority of asylum seekers and a tiny fraction of total immigration (graph below from here)

2. The number of asylum seeker arriving in Australia correlates strongly with global numbers, suggesting that it is not so much the policy of the destination country that influences the number of arrivals, but the situation in the country of origin (see the graph below).

For more detailed analysis of the factors involved in refugee outcomes, read this detailed article. I look forward to the follow up episodes tonight and tomorrow, and recommend the program to anyone even slightly interested in the topic.

The eurozone is saving Germany

Over at Business Spectator, Oliver Marc Hartwich has laid out the reasons Germany is so keen to maintain the currency union even though Greece is effectively living on German welfare. A low value euro gives German exporters a massive advantage, probably more benefit than the cost of supporting Greece.

I recommend going over to BS and reading in full, but below is the crux of the article (with my emphasis in bold).

These figures explain why German politicians fear nothing more than a break-up of the eurozone. Apart from the inevitable repercussions for the global financial system, any scenario in which weaker eurozone countries departed from monetary union – let alone a scenario in which Germany itself pulled out – would inevitably have an impact on Germany’s exchange rate. It would appreciate substantially and thus undermine its export-dependent economy upon which much of Germany’s recent economic performance is built. No wonder then that German politicians still prefer to pay for Greece, Portugal and other struggling countries, however grudgingly.

Unfortunately, the current German strategy to keep the eurozone together at all costs is extremely short-sighted. It leaves countries like Greece and Portugal permanently dependent on German transfer payments while burdening German taxpayers with enormous liabilities and risks. All of that for the dubious benefit of prolonging and amplifying existing trade imbalances within Europe.

When I pointed out to the advisor that the German government’s policies effectively turned Greece into one big welfare recipient, the answer I got was little more than a ‘Yes, that’s true, but we can still afford it’.

The telco confusopoly

The one frustration that started me blogging more than three years ago was the confusing pricing practices of phone and internet service providers. It was quite obvious to me that their 'plans' where meant to be confusing to ensure the consumer could not easily identify the cheapest provider. Today, the Australian Communications and Media Authority (ACMA) has released a report that recommends improving price information for telecommunications contracts to avoid a 'confusopoly' (here).  Amongst other things -

The authority also wants to prohibit what it says are misleading advertising practices, such as the use of the term "cap" on mobile and broadband plans.

"It's not a cap, it's not a maximum, it's a minimum," Mr Chapman said

"We want to prohibit that unless its a genuine hard cap, so that if you exceed your limit the service ends or you get the opportunity to upgrade." (here)

Most recently I have been comparing mobile phone plans. Some of the cheap plans don't allow you to call 13, 1300 and 1800 numbers under the cap, and they all have different call rates, flag fall and penalties for exceeding cap limits. To actually compare providers you need to know your calling needs in advance and have the mathematical skills to run this call profile, and other scenarios, through a model of each available phone plan. Insanity.

As I previously wrote -

By consciously manipulating these two criteria of a free market [low barriers to entry and perfect, or at least good, information], all firms in the market are able to avoid a state of true competition that would produce the most efficient allocation of services, and are able to artificially inflate the value of the commodity, hence producing more profit for each firm in the market.

This is not meant to sound like a conspiracy, because indeed each firm does not need to meet in back rooms with the other firms in the market and all agree to limit customer information and the comparability of their products. They each simply need to aspire to the great marketing ideal of product differentiation, a concept that is fundamentally designed to artificially eliminate direct competition by removing direct comparability.
...

The power of product differentiation, through its ability to remove comparability and create an information gap to distort what could be a perfectly competitive market, can be demonstrated by the case of the term life insurance market in the US in the late 1990s. There was a mysterious and dramatic drop in prices across all firms that did not correlate to price drops in other forms of insurance, which themselves where steadily rising.

According to economist Steven D. Levitt, this can be attributed to the realisation of a perfect market through the power of the internet. Although term life insurance policies had been quite homogeneous before this period of time, the process of shopping around for the cheapest price had been convoluted and time consuming, whereas websites such as Quotesmith.com suddenly made the process almost instantaneous.

In just a few years, the value of the term life insurance market in the US had dropped by USD$1bilion because of the new found ease of comparability. What insurance firm would want this to happen? Even if you were a small player in the market, say a 1% market share, your turnover had just dropped by $10million. It is perhaps one of the great recent examples of the power of perfect competition in allocating resources efficiently, yet possibly one of the greatest blunders by the insurance industry.

I believe that the power of private enterprise is its innovative response to the financial risks it incurs, but with very simple regulation the innovative confusopoly, which comes at a cost to cosumers, can easily be avoided.  Indeed, most of the pushback against the telco confusopoly is from webpages which keep up-to-date tabs on plans from each service provider and enable you to take some rough guesses about future use and compare the cost effectiveness of each offering (eg here)

Latest Econ Theory Keynes v Hayek rap video

If this doesn't blow your mind...

I stumbled across this video on the web.  It's about growing organs... from scratch.  Absolutely amazing! 12 minutes very well spent.

Risk homeostasis, Munich Taxi-cabs and the Nanny State

There is an odd coexistence between two conflicting safety policies that may well be pursued by the same accident prevention agency. The first seeks to improve safety by alleviating the consequences of risky behaviour. It may take the form of seat belt installation and wearing, airbags, crashworthy vehicle design, or forgiving roads (collapsible lamp posts and barriers). This policy offers forgiveness for a moment of inattention or carelessness. The second policy seeks to improve safety by making the consequences of imprudent behaviour more severe and includes things such as speed bumps, narrow street passages, and fines for violations. Here, people are threatened into adopting a safe behaviour; a moment of inattention or carelessness may have a dire outcome. 

While these two policies seem logically contradictory, neither is likely to reduce the injury rate, because people adapt their behaviour to changes in environmental conditions. Both theory and data indicate that safety and lifestyle dependent health is unlikely to improve unless the amount of risk people are willing to take is reduced. (here - my emphasis) 

The above passage points out a common logical absurdity, and contains an important lesson for Australian’s with and overeager obsession of controlling personal choices through ‘nanny state’ regulations. More on the nanny state a little later. 

First, it is important to examine the hypothesis of risk homeostasis to properly understand the implication of the opening quote, since it claims that neither of the two contradictory policies aimed towards improving safety are effective. 

The essential argument of risk homeostasis is that humans have an inbuilt level or risk that they gravitate towards in response to their external environment. If we reduce the risk of an activity, people will compensate by finding other risky activities as a replacement, or undertaking the activity in a more extreme manner. For example, if we ban smoking tobacco, which doesn’t seem like such a remote possibility, do we really expect smokers to replace their habit with fruit snacks and yoga? Or might they compensate by increasing their alcohol consumption or perhaps smoking dope instead. 

Risk homeostasis is not to be confused with risk compensation, which suggests that individuals will behave less cautiously in situations where they feel "safer" or more protected, but that we don’t necessary return to a predetermined risk equilibrium point. 

Improving transport safety is an area where there is strong evidence risk compensation, and indeed of risk homeostasis. 

Health economics –unnecessary treatment and economic costs of illness... and goodbye

This blog has been quiet lately.  The evidence is mounting in support of much of my earlier analysis of Australia’s housing market, while the Government attempts one more manoeuvre to bolster the market.  The supreme risks to the market are no longer a secret, and our chronic supply shortage has been receiving far less airtime.  There is very little for me to add to the current discussions.

One reason for the lack of posts is that I am studying for the GAMSAT test that one needs to pass before commencing a graduate degree in medicine.  Yes, my disillusionment with economics has driven me to seek a more useful profession. And despite my rational nature, I will give up quite a deal of income for it.  At least this economist knows that money doesn’t buy happiness.

In this final sign-off post it may be worthwhile taking a look at economic issues surrounding medicine and health care.  This is a burgeoning field, with demand growing for paper shufflers of this particular specialty, and universities eager to fill the void with a qualification.

My core argument in this field has been that increasing preventative health care, while having the benefits of a healthier and long life, often come at increased total lifetime health costs, rather than decreased costs as is often proposed.  Remember, we all die some day, and any potential cause of death postponed will allow another to take its place, which of course has its own health costs.  Alternatively, a more healthy existence may make us more productive for longer and lead to us contributing more in taxes over our lifetime than the potential increase in health costs which were paid through the tax system for our preventative care.

Governments, and subsequently economists, worry about these things because many health care costs are borne by others though tax revenue, yet the net economic effect is anything but straightforward.

In light of these concerns a cottage industry of economic analysis has developed pandering to the interests of particular interest groups involved in medical research.  Each disease these days seems to have a lobby group, and to ensure funding for further research it is necessary to argue in terms of economic costs and benefits of a cure or treatment. 

Over at Catallaxy Files there is an interesting take on the abuse of economics and shady use of statistics when consulting firms are asked to produce reports on the economic cost and impact of a particular disease. After prodding around the reports from one firm, the author notes that:

Adding up the estimated economic cost of all these conditions begins to exhaust the GDP, which suggests that the estimates of the economic costs are grossly exaggerated for a number of reasons.  This should not come as any surprise of course since the sole purpose of these studies – they have no academic credibility – is to provide RHETORIC  to bolster the case for the RENT SEEKERS who are attempting to prize out additional taxpayer monies to support their particular activities, worthy though they may be.

One of the real problems with these studies is the double/triple/…  counting associated with these studies as many people have multiple pathologies.  Moreover, the projections of the numbers afflicted by these conditions in the future should be treated with a grain of salt (probably box).

These studies also conflict with the findings of the Productivity Commission in their work undertaken in relation to the National Reform Agenda. In large part because most people with chronic conditions manage to continue their working life, the PC’s estimates of the cost of most chronic conditions (including mental illness) are not especially high.

The interesting work of Eric Crampton at the Canterbury University – great paper delivered at the Mont Pelerin Society – also shows that government studies of the economic costs of alcohol use are grossly exaggerated. There are typically  both conceptual and measurement mistakes.

I have a slight problem comparing the sum of a total cost of over time (total economic cost) with a flow of production in a single time period (GDP), but the general practices of double counting, including a potential undiagnosed population, and taking the extreme assumptions of the diseases impact and applying to every candidate, are intentionally misleading.

This is perhaps one reason why proponents of preventative medical treatments overstate the aggregate benefits to the community and subsequently the reduction in health cost borne by the taxpayer. Another reason preventative health care does not always provide net benefits can be explored at an individual level.

Movember have been a huge promotional success, yet at the heart of the charitable event is a desire to raise awareness of prostate cancer and promote early detection and preventative treatment.  However, this particular cancer is possible one case where the cure is worse than the disease at an individual level.

This article argues the case against early screening for prostate cancer.

They know that prostate cancer is overwhelmingly a disease that kills men late in life. The average age of death for prostate cancer in Australia is 79.8 years, while the average age for all male cancers combined other than prostate cancer is 71.5.

The average age of death for an Australian man is 76 so on average, men who die from prostate cancer actually live longer. In 2007, just 2.8 per cent (83 men) who died from the disease were under 60, and 10 (0.1 per cent) were in their 40s.

The author notes that the unnecessary treatment undertaken by many men as a result of early testing often leads to impotence and occasionally incontinence, when there was a very high probability that they would have died from another cause before the cancer severely impacted their health. 

Medical associations and governments try hard to examine these issues prior to funding and promoting preventive health care.  Where current screening techniques return too many false positives the chances of over treatment are severe. One the other hand, a screening technique returning a high number of false negatives may not be such a concern if the disease develops slowly and screening is recommended periodically.

In all, it seems that the health industry is not immune to manipulative economic analysis and rent seeking behaviour.  I am sure there are positive ways economics have been contributing to debates on public health, yet in the haze of spin it gets very little publicity. 

Thanks to all my readers for contributing ideas and thoughts on this blog in the past few years. 

Merry Christmas.

Cameron

Parkinson's Law

Work expands so as to fill the time available for its completion

Some might know Parkinson’s Law as it has been quoted above, yet the implications of this law are rarely acknowledged.  In bureaucracy this is especially the case. I have witnessed it firsthand.  Ironic, since the ever-expanding British bureaucracy was the focus of Parkinson’s original 1955 article.

Parkinson’s work may have been seen as mere parody, yet his insights appear to be consistently proven over time.  This very blog post was achieved under pressure of time, utilising this Law to my advantage.  Had I allowed myself and hour it would have taken an hour.  Since I allowed myself just 30 minutes, with a 3pm deadline, magically, I expect it to take that long.

Parkinson’s explains the theory behind his law starting at a position best summarised by this passage:

Granted that work (and especially paper work) is thus elastic in its demands on time, it is manifest that there need be little or no relationship between the work to be done and the size of the staff to which it may be assigned.

He finishes with this gem of a formula explaining the continuous growth in numbers of bureaucrats.

(Where k is the number of staff seeking promotion through the appointment of subordinates; p represents the difference between the ages of appointment and retirement; m is the number of man-hours devoted to answering minutes within the department; and n is the number of effective units being administered... and where y represents the total original staff)

Parkinson notes that this figure will invariably prove to be between 5.17 per cent and 6.56 per cent, irrespective of any variation in the amount of work (if any) to be done.

The figure for Australian States in the past decade was a measly 3.1% - still significantly faster than the rate of population growth.  Yes, government is outgrowing the country.

A further development of Parkinson’s ideas is his Law of Triviality, which suggests that organisations give disproportionate weight to trivial issues. Parkinson dramatizes his Law of Triviality with a committee's deliberations on a nuclear power plant, contrasting it to deliberation on a bicycle shed. A nuclear reactor is used because it is so vastly expensive and complicated that an average person cannot understand it, so they assume that those working on it understand it. Even those with strong opinions often withhold them for fear of being shown to be insufficiently informed. On the other hand, everyone understands a bicycle shed (or thinks he or she does), so building one can result in endless discussions because everyone involved wants to add his or her touch and show that they have contributed.

The Law of Triviality can be expanded to apply to the state of public debate surrounding important political decisions.  Debate over where to host the local Christmas carols often trumps the debate surrounding reform of the banking sector or our participation in wars in the Middle East.  Perhaps we simply prefer not to think about these big issues for fear of being overwhelmed.  

In all Parkinson's insights seem to be rarely used to our advantage.  

Mid-week links

Using the National Accounts to better estimate changes in well being (PPT link) – from the OECD Measuring Progress Agenda.  Aka - Why I don’t feel like I benefit of changes in GDP.

A better comparison of the cost of living in cities around the world?  Numbeo provides a user generated cost of living index for any city in the world, with prices updated continuously as users add price data. 

One interesting comparison - Consumer Prices in Munich are 14.65% lower than in Brisbane, and

Consumer Prices Including Rent in Munich are 5.13% lower than in Brisbane. 

Who desires a longer commute? Apparently a 7% of people desire an extra 5 minutes commuting time (from here) -

In one of their studies, Mokhtarian and Redmond examined the commute (i.e. the trip to and from work). They conducted a survey in the San Francisco Bay area which asked subjects what duration their ideal commute would be, and whether their current commute is the “right” length or not.

Counterintuitively, very few people expressed a desire for a commute of “zero.” The most frequent response put the ideal commute at 15-19 minutes, and almost a third of the sample actually said their ideal commute was over 20 minutes. Only 1.2 percent answered zero; this surprising result was largely borne out in follow-up focus groups, where subjects were prompted that zero was a permissible answer.

A comparison of respondents’ ideal commutes and their actual commutes revealed that while most (52 percent) wanted their journey to work to be shorter, 42 percent reported their commute was about the right length and seven percent (mostly those with short commutes) actually wished it would take them an additional five minutes or more longer to get to work. On average, people wanted a commute of around 16 minutes.

I suspect there may have been confusion from respondents about what the question was asking – Do you desire to live in a location where the commute is X (longer, shorter, zero etc)? Or, do you want the commute from your existing location to work to be X (longer, shorter, zero etc)? Or, what is the ideal commute time from your current location with current transport systems?

More on the Peltzman Effect - Night clubs are employing emergency medics to monitor the crowd, yet the Australian Medical association has concerns that it gives a false sense of security to revellers. I can just imagine the conversation – “If you want to experiment with new drug X, do it here because they have medical staff!”

Finally, from The Onion, a spoof economics and finance article that might just make it to the front page of an Australian daily newspaper.

WASHINGTON—Some sort of tax cut or earnings or money or something was reported in economic news this week in further evidence that a lot of financial- related things have been going on lately.

According to numerous articles and economics segments from major media outlets, experts on banks and such have become increasingly concerned over a new extension or rates or a proposal or compromise that could signal fewer investments, and dollars, and so on.

The experts confirmed that the stimulus has played a role.

"This is a clear sign of a changing cycle," some top guy at one of the big banks in New York said of purchasing power parity or possibly rate of return during a recent interview on CNN. "Which isn't to say that a sustained drop in wages couldn't still occur, even if the interest paid on reserves is lowered."

"In short, it's possible but not probable that growth could outpace our initial expectations," added the banking guy, who went on to say other money things, too. "It depends on investor sentiment."

The man, who also apparently mentioned the Nasdaq, the Dow, and the Japan one at some point or another, talked for a really long time about credit or reductions or possibly all these figures, which somehow relate to China.

Greece was also involved.