Innovation: the Concept that Couldn’t.

Talk of “innovation” makes me sigh. Next to wars on terror, it may be the most nebulous concept that governments like to throw money at. 

Industry Ministers love to be associated with it. The federal department of industry was rebranded as the Department of Innovation, at one stage. And for what? It got us no new robots, no flying cars.

Innovation is a shifting sand of the economy. Just try to define it. The moment you do, you’ll realise how deep into the dunes we’ve trekked and how badly lost we have become.

Examples of innovation seem easy to come up with: The espresso machine is an especially pertinent example at this time of the morning.

But the ABS definition of innovation is this:

“The development or introduction of new or significantly improved goods, services, processes or methods is generally considered to be innovation.”

Development or introduction. So where does innovation matter most? Is it the invention of the espresso machine? Or is it when I install one in my restaurant? The former allows one person to be lauded and register a patent and collect rents. But the latter is where the masses get the value.

Rustic loaves you have to slice yourself, and cost $9. An innovation?

Rustic loaves you have to slice yourself, and cost $9. An innovation?

An innovation need not be new to the world, just new to the business.

Deciding to replace the chairs in my restaurant with padded ones could be considered the introduction of a significantly improved service that might add a lot of value for my customers. Likewise, installing a simple accounting software at a business might be the best innovation it has seen in years.

What’s more, this sort of innovation requires much less R&D so its benefit to cost ratio is much better.

Suddenly innovation seems less sexy.

You might want to be a purist and focus on inventions? Well okay. But for a small country like Australia, with less than 1 per cent of the world’s population, we can’t expect to invent even a tenth of the innovations we use.

By far the majority of progress in our country will come from introducing concepts and ideas from offshore. Some of them may be recent ideas, but others, like the ways of doing business at H&M or Uniqlo, are well-established and scarcely seem to a mid-ranking federal minister like “innovation” at all .

ユニクロ

ユニクロ. NEW!!

Any change that lifts business performance should be classified as innovation. Nevertheless we have the sandstorm of innovation clouding our vision so we focus on the brightly shining examples of research and development and invention. (Perhaps the latin root’s emphasis on the newness is part of the problem?)

As part of this invention-focused Innovation Agenda, a huge amount of lip-service is paid to the idea of “commercialising” university research.The government frets over low commercialisation rates and universities invest a bunch in commercialisation offices. There are two big problems with this.

1. 99 per cent of new ideas developed in universities are not going to be commercially relevant, or at least not now.

2. The incentive structures of academics are designed so there is no point for them in getting anything commercialised. Patents are pointless when you’re going to get promoted on how many papers you produce. The commercialisation offices hold too few carrots to get anything real done.

The government can continue to produce glossy reports on Australia’s “National Innovation System” but we will continue to be chasing our tails so long as we, as a society and as a group of policy-makers, obsess over the use of this hopeless catch-all word. We should focus on productivity improvements, technology uptake, inventions. But they all need different policy levers.

The ABS counts a business as “innovation active” if it introduces or abandons a new idea. I like that. I think one of the best innovations we could introduce in this country would be to abandon the word innovation in order to more clearly focus on the things it is trying (and failing) to convey.

A whisky investment needs a good whate of wheturn.

Whisky investment is the hot topic among my friends. A very nice-looking Tasmanian distillery is offering a great deal.

Nant Distilery, Tasmania

You buy a barrel of whisky now, and they keep it for you. In four years it matures and you get a choice. You can either get your money back, plus a 9.55 per cent per annum return, compounded, – or you can have the barrel bottled and take delivery of a whole lot of bottles of whisky. Or a mix of money and whisky.

This model is well-established in the wine growing regions of France where it is called En Primeur. Top Bordeaux vintages are sold out while the grapes are still green. The concept makes even more sense for a distillery – the time between first harvesting the grains and having a decent, drinkable product is long. The distillery needs capital to cover that period.

The company guarantees the purchase of the Whisky at the end of the four year period. And if you buy the barrels, they send you a gift:

“Valued at over $1,000, each gift box contains a bottle of Nant Single Malt Whisky together with a Crystal Decanter Set.”

whisky gift

They are also busy promoting the Whisky. There are four bars in operation – three in Brisbane and one in Melbourne. They also have Queenslander and Australian cricket legend Matthew Hayden as a sort of brand ambassador. His face is all over the website.

The Nant Distillery Company is registered in Brisbane, and that’s where its CEO Keith Batt seems to be from. His LinkedIn profile gives a sense of his business skills.

Keith Batt skills

This business seems to be run by someone credible. So why not just get a bank loan? Does it make sense for a distillery to pay a whopping 9.55 per cent per annum on its capital?

A residential secured fixed term small business loan goes for 7.1 per cent, according to the RBA. But that is a secured loan. If you go broke the bank gets your house.

The difference here is that the barrel owners will not be “secured” creditors. I’ve been to quite a few creditors meetings in my time as a financial journalist and the difference between being a secured and an unsecured creditor can be the difference between millions and zip.

The investment is only a good one if you think the risk is low. How bad could it be?

In the UK, whisky scams are part of the folklore. In 2004, the Serious Fraud Office nailed a guy who ran a scheme through the 1990s. But there were others too. (and others)

Is this a scam? Keith Batt bought the distillery in 2004, and from what I can see the first mention of Whisky investments was in early 2010, around the time of their first bottlings. I guess those first people should have cashed out their Nant investments by now, but I haven’t found anyone raving about it online.

Let’s assume it’s all above board and look at the gritty details.

The price of the “Great Australian Cask Offer” is $30,000 for two 225L barrels. 450 litres @ $66.66 a litre. You can buy smaller amounts too (225L and 100L), and weirdly they work out slightly cheaper, at $66/L.

That price, for the people playing along at home, is high.

A litre of Johnny Walker Black Label would be $61.21, and that is in a bottle, in a Dan Murphy’s near you. Not down in Tasmania in a barrel you can’t drink for four years.

You also need to take into account GST (which is included in the $30,000 price, and which you can claim back if you have an ABN) and what they call the “angel’s share” – evaporation. Every litre turns into say 900mL over four years. But you’re not exposed to the cost of that shrinkage if you sell them back the barrel.

The Big Question is whether they’ll be able to afford to buy it back.

Nant charges $205 for a bottle of their single malt and apparently it’s worth it. The world’s top whisky critic puts it in the top 50 whiskies in the world. Selling a few choice bottles will be easy. But moving barrels and barrels at that price is going to be an uphill slog…

Here are the two big risks:

1. The company is solvent but the whisky is destroyed. There could be a mudslide, or that pretty antique building could collapse. Termites might get in the barrels or vandals might break down the doors. Do you technically own the asset? Who has to insure it? Is it insured for the amount you paid, the amount you were promised in return, or its market value?

2. The whisky is fine but the company is insolvent. Do liquidators have to give the whisky back to the investors? I doubt it. I suspect they sell them off to pay back secured creditors.

So the whisky investment is a risky investment. That’s why the return is good.

But even risky investments don’t go bad every time. And in fact there are examples of such an investment scheme actually adding value to a company. There’s a burrito bond on offer in the UK, for example, which has raised 1.8 million pounds.

The owner of that Mexican food concern sees it as a marketing coup: “We now have hundreds of extra brand ambassadors,” says Chilango co-founder Eric Partaker.

In a crowded whisky market where the skills to distinguish good whisky from bad are the province of relatively few, having hundreds or thousands of people with a vested interest in believing your whisky is worth every penny might be the smartest marketing ever.

Cheers to that!

EDIT: The prospectus is here: Prospectus for 100L barrel. It talks a lot about volume growth at the top end of the market and the rise of premium and super-premium brands.

Where in Australia should you buy a house?

The RBA kept official interest rates on hold again today at the record low of 2.5 per cent, while actual mortgage rates are low and falling:

Source RBA

So could house prices actually rise from here? One economist whose blog I read has built a buy/sell indicator. It’s currently on buy.

He reckons house prices will keep going up while the mortgage rate is not much more than the rental yield. He also theorises that Sydney prices rise first, and the rest of the country lifts thereafter. This theory holds water for me on an intuitive level. In the short run, a house in Melbourne is not a good subtitute for a house in Sydney, but in the medium term, perhaps it is. In the long-term, perhaps even a house in Adelaide could be a substitute!

But house prices in Melbourne seem a bit high to be making bold acquisitions for speculative purposes.

Luckily, house prices are very different across Australia. Sydney is way out in front. Perth, Melbourne and Canberra are a cluster. Then Brisbane and Adelaide are limping along at the back of the pack. Hobart doesn’t make the graph but it is somewhere back there too. 

House prices across australia

If you wanted to buy a house somewhere cheap, which makes most sense?

You’d want to choose a place with strong growth prospects. In recent times, all three laggards (Brisbane, Adelaide, Tassie) have shown a bit of pluck when it comes to the labour market (focus on the yellow lines).

QLD job adsSA job ads

Tassie job adsBut you want to be careful. Tasmania’s prospects are pretty dire, as discussed in this piece: How long until Tasmania is totally empty?

So which city are people most likely to move to?

Moving to ...

Google Trends says Go North!

The Brisbane connection looks to be the smartest option. Hmm, how much is one of those famous Queenslanders (a wooden house on stilts)?

Turns out you could get one in a great inner-city suburb for $610,000,

Queenslander

(or a perfectly adequate seeming flat in the inner city for $190,000.)

Now, despite its “beautiful one day perfect the next” weather, Brisbane doesn’t rate a mention in the top ten cities ranked by the Economist for liveability.

Melbourne scoops that award every year (Adelaide came 5th this year in results released today). But while we are being open-minded, it’s worth noting that that survey is horribly biased.

If we broaden our horizons we find that Brisbane makes the top 25 list for the much hipper Monocle Magazine quality of life ranking, getting a shout out for its excellent Gallery of Modern Art.

Is that enough to make you want to purchase your own place in the sun? 

To have and to hold (a job). The correlation of marriage and employment is puzzlingly strong.

You’d think getting married is relevant to your home life. You wouldn’t expect it to change your employment outcomes.

I mean, I’ve never done it, but I doubt you get back from your honeymoon buzzing with a desire to read and reply to all those emails.

And yet, the correlation between marriage and labour market outcomes is quite astounding. 

Unemployment

The unemployment rate for unmarried men is nearly four times higher than for married men (11.3% vs 3.1 per cent). For women, the ratio is over two (8.9% vs 4%).

The difference between married and unmarried makes the difference between men and women look small. 

Essentially, if you are a married man, you’re living in a labour market no different from the best parts of the 1970s, with 3 per cent unemployment!

Might this be a statistical artefact? It could come about because the young have poor employment outcomes, and are less to be married. Let’s have a look at an older age bracket.

Unemployment 35-44

The absolute levels of unemployment have fallen, especially for men. But the ratios of unemployment rates between married and unmarried are about the same: 4:1 for men and 2:1 for women.

The above graphs make it look like married people are all hard at work in the office. But the unemployment rate hides a big difference in participation rates.

There are two distinct clumps in this chart. Married men, who participate in the workforce at a rate of 95 per cent. And everyone else, who participate at around 75 per cent.

participation

The 80s were a time of rapid change for women. But since 1990, one of the biggest changes in the employment market has been unmarried men dropping out of the labour force. Their non-participation rate basically doubled from 10 per cent to 20 percent.

Given the unemployment graphs on the previous page, I’d be very surprised if the red line (married women) didn’t tick up over the green line in coming years.

Two mysteries remain.

1. Why is the difference between the married and unmarried so strong, and so consistent over time?

I have a few theories.

Perhaps the unemployed are busy proposing, but are rejected because they are unemployed?

Perhaps there are confounding variables, like good looks or intelligence, which are correlated with both earning power and marriageability.

Perhaps it’s not about the kind of people they are but the incentives they face:

Obviously marriage and children are correlated. Obviously children (who are cruelly forbidden by the law to earn the money to feed themselves) are expensive. Could it simply be the compulsion to put bread on the table that explains why married people are so rarely out of work?

2. Why is the labour force participation rate of unmarried men eroding?

Marriage is increasingly rare, and increasingly for the old.

Can that explain the fall in unmarried men’s attachment to the labour force?

Screen Shot 2014-08-15 at 10.54.35 am

Screen Shot 2014-08-15 at 11.02.39 am(They are also increasingly likely to have a non-religious ceremony, but I’m not sure that’s relevant)

celebrant

 

I’m not sure it does, and this makes me wonder if perhaps the “discouraged worker effect” might be true. All those unmarried men might once have worked in factories. Maybe they’re less able or inclined to take service sector jobs. 

There might also be an echo of higher immigration rates in the data. The overseas born have lower workforce participation rates. (chart source)

immi

 

Which looks like a nice simple story, until you fold it back in on itself and see that immigrants actually get married at a higher rate than their proportion in the population! (Number of marriages is on the vertical axis, so in total, this graph shows that at least 40 per cent of people getting married in Australia are overseas-born.)

marriage of immigrants

 

Would a Public Transport Party do well in Victoria?

The Victorian state election is coming up, and new small parties are registering. Given the rush of minor parties and independents that carried the day in the last federal election, it’s no surprise that Victoria is seeing a lot more parties registered with the Electoral Commission.

Here are four that have recently applied.

  • Rise Up Australia Party
  • Vote 1 Local Jobs
  • Animal Justice Party
  • Australian Cyclists Party

If they’ve filled out the forms properly, collected names and addresses of their members and paid their fee they will join the established parties on your ballot paper:

  • Australian Christians
  • Australian Country Alliance
  • Australian Labor Party
  • Australian Sex Party
  • Democratic Labor Party (DLP) of Australia
  • Family First Party Victoria Inc
  • Liberal Party of Australia
  • National Party of Australia
  • Palmer United Party
  • People Power Victoria – No Smart Meters
  • Socialist Alliance
  • The Australian Greens
  • Voluntary Euthanasia Party

I am surprised when I look at this list, that there is no Public Transport Party. The issue of public transport is hot in Victoria right now, partly due to the increasing concentration of jobs in the CBD, and the resultant increase in crowding.

Google Trends vic

Google Trends shows Victorians are obsessed with the search term “public transport”

Crowding above the acceptable threshold affects nine per cent of passengers in the morning peak, according to the latest data. It’s lower on some lines and up to 26 per cent on the Craigieburn and Werribee lines. 

In 2002 such a party existed. Called Public Transport First, it was founded by the late Paul Mees and fielded a candidate called Tony Morton in the seat of Brunswick. He lost but is now the head of the Public Transport Users Association.

But perhaps 2002 was too soon for a public transport party.

Stories about public transport are hot property in the press and on social media. You’d imagine a Public Transport party would get a decent share of the votes. It may be a less emotive topic than Voluntary Euthanasia, but it affects more people. And it’s a lot more sensible than a party opposed to smart meters.

The Victorian Upper House might be the best chance to get someone elected. But its not a fait accompli. In the last election the Greens got 12 per cent of the first-preference vote and installed three candidates. Family First got 2.86 per cent of first preferences and installed none.

It would be very tough to make an impact in the regions. But there are five metropolitan “seats” in the upper house that each elect five candidates. Three of those elected Greens last time (western, northern, southern). These would have to be possibilities.

upper house regions

But the advantage of a single issue party like this is not necessarily in getting elected. Simply by forming, the threat of drawing votes away from all the other parties can encourage them to shift their policy positions. It’s the famous Hotelling Effect, perhaps my most-loved of all the economic theories.

Nevertheless, the challenges to starting a political party are many. You need 500 members to commit, you need the fees, and you have to pay $350 for each candidate you stand (refundable if you get 4 per cent of the vote.

And you have to be ready to face vitriol. I was kicking this idea around on the internet yesterday and a lot of people told me that it was stupid. But nobody had as much passion as this guy:

reddit cockroach screenshot

 

I imagine that actually becoming a politician would invite even more vitriol than just talking about it. When you look at it like that, I’m surprised there are so many brave people willing to start their own parties. Kudos to them.

I went to an expensive private school. What was the benefit?

I spent six years of my life attending an independent private school – Melbourne Grammar School. It was expensive. I remember fees being around $10,000 a year.

Was it worth it?

There is an article in The Conversation today about private schooling, entitled Private schooling has little long term payoff.

It cites research that shows “after controlling for tertiary entrance score, university students from government schools outperformed students from private schools.”

Which is interesting. There is certainly an argument that private school kids are “spoon fed” and can’t handle university thereafter. (I also seem to remember some research that students who scored less than the cut-off but still got into their course tend to do better in first year, so there could be confounding effort effects.)

The new research looks further along the lives of these students and finds “former independent school students were no more likely to be employed full-time than those who attended a government school after controlling for the effects of level of education, sex and age.”

Which is amazing if true.

The study also finds that graduates of independent schools are not likely to have higher earnings, nor more “prestigious” employment, after controlling for education.

In a comment thread on the topic, a user called Gabrielle calls out the methodological elephant in the room.

“Yep, ‘controlling’ variables everywhere! E.g. controlling for whether or not people attend a Go8 university when they look at occupational prestige, or controlling for field of study when looking at earnings…what the?! I mean sure, that’s interesting, but it totally bypasses questions about whether your schooling or university help you get into high status or high earning careers.”

If a private school helps you get into university (independent school students had an 80 per cent higher chance of graduating from a G8 university, according to the research), and university helps you get a job, then controlling for university when trying to measure the effect of private school is distracting.

I think we can conclude that going to a private school has a real payoff.

But what form does it take?

Second Row, fourth from the left.

Dug this out. I’m second row, fourth from the left.

I’m still close friends with some people I went to school with. But I have other friends who went to other schools, public and private.

As far as networking goes, I’m not aware of any benefit I’ve got from “the old school tie” and quite acutely aware of the benefits that have come from people I’ve met in my professional life. Could seeing my school on my CV have helped me in job applications? It’s not impossible. 

I’ve never worked at Goldman Sachs or a law firm, so maybe it’s different there, but I’ve rarely been aware of the schools my colleagues have gone to. When I have known, they’ve mostly been graduates of government schools. I don’t think my employers have been deeply biased to private schools.

So what was the benefit of my private school education?

You can never know the counter-factual but I think I fit the data perfectly, in that I suspect got a better year 12 result at the school I went to than I would have at another school chosen at random.

Did the teachers “spoon-feed” me? I don’t know. They taught me, definitely. They were (mostly) highly qualified, diligent and happy to answer questions. 

But I also worked my arse off in year 12, despite having been rather disinterested in years 9, 10 and 11. I wanted to beat the other kids by having a better score, and I knew they wanted to beat me. Even then, I was aware that the level of competition was peculiar.

By working hard I think I maximised my potential. I got into a good uni course that eventually helped me get a good job.

Would that competitive aspect have been there at another school? It could have been. It might have been even stronger at another selective entry school. But the skew of high scores at my school suggests that at a Government school without selective entry would not have provided the same level of competitive pressure.

I’m certainly not here to say “I worked hard so I deserve everything I get!”

I’m merely trying to refute the notion that private schooling is not advantageous, and answer the question of where and how that advantage accrues.

I know the world is unfairly skewed toward people who have the privileges I have. I’d like to see the opportunities of really motivating and rewarding educational environments shared really widely. Denying that private schools have benefits seems unhelpful in pursuing that goal.

Does Fairtrade work? And is it worth it? Brand new research.

The evidence is in a new paper from the National Bureau of Economic Research: Fairtrade producers get paid more per kilogram of coffee, have higher incomes, use fewer pesticides and avoid child labour.  The minimum price and the rules the organisation sets actually work.

But there is an interesting question. Does Fairtrade just select for the marketing savvy farmers who would have been smart enough to get those benefits or other ones anyway? Complying with all those rules suggests nous.But Fairtrade seeks out small producers, who you would expect to be less savvy.

The evidence supports the idea that Fairtrade certifies farmers who’d be ill-placed without it.

“Saenz-Segura and Zuniga-Arias (2009) estimate a very strong negative relationship between Fair Trade certification and experience, education, and income within a sample of 103 Costa Rican coffee producers. This finding is echoed in Ruben and Fort’s (2012) study of 360 Peruvian coffee farmers (also see Fort and Ruben (2009)). In their sample, farmers that are less educated and own smaller farms are more likely to become certified.”

Another way to test this is to examine a panel of producers over time.

“In this way, one can examine whether a producer begins to obtain higher prices (for example) just after they become Fair Trade certified

Using such a strategy, Dragusanu and Nunn (2013) examine an annual panel of 262 coffee mills from Costa Rica between 1999 and 2010. They find that Fair Trade certified mills receive 5 cents more per pound for exports than conventional mills. “

A side effect of the selection of less-educated and less-skilled farmers into these schemes, is they may have no idea what is going on.

“Valkila and Nygren (2009) found that Nicaraguan farmers belonging to Fair Trade certified cooperatives had a poor understanding of Fair Trade, including its requirements, and potential benefits. According to the authors, one reason was the multiplicity of certification schemes, quality standards, and rural development projects faced by farmers. They simply were not able to keep track of them all and to distinguish one program from another. Mendez et al. (2010) also found that farmers were often unclear or confused about certifications, particularly about Fair Trade, although farmers did have a better understanding of Organic certification.”

But it turns out the customers may not be that insightful either. The fairtrade label helps us feel better. And the amazing thing? It works even better if it costs more.

“Examining fair labor standards for candles and towels sold in a large retail store in New York City, Hiscox and Smyth (2011) find that the label increased sales by 10 percent, and when combined by a price markup of 10-20 percent, sales rose even more, in the range of 16-33 percent.”

That suggests that really, humans are quite kind-hearted. But such an attribute won’t exist for long before someone takes advantage of it. And so lots of “I can’t believe it’s not Fairtrade” schemes are on the shelves.

The one I can find on lots of Aldi and Nestle products in my house is called UTZ.

utz

 

I’m not saying UTZ is bad. Just that companies will likely choose certifiers with the lowest cost to consumer impact ratio. When one proliferates, it’s worth asking the question of whether it is the real deal.