January 2014 – Thomas the Think Engine

Lessons for the first female Fed Chair from a first female Prime Ministership

Janet Yellen and Julia Gillard should get together. Ms Gillard, who served as Prime Minister of Australia from 2010 to 2013, would have timely advice for Dr Yellen, who will take over as the head of the US Federal Reserve next week.

Gillard was subject to a campaign of unrelenting gender-related criticism and attacks from a large swathe of the media. She handled it, but she is a career politician. Dr Yellen is not a career politician, but she is about to step into a role that is intensely politicised [1, 2, 3]. The chair of the Federal Reserve is the object of non-stop scrutiny, the subject of countless opinion pieces.

Yellen has already been called “the most powerful woman in the world,” and “the most powerful woman in US history.” The role of Federal Reserve Chair creates winners and losers – meaning it creates friends and enemies.

Her tenure will not be smooth sailing. Her confirmation by the senate was relatively narrow at 56-26:

The stage is set for a battle that will, one way or another, involve gender. And the most vocal stakeholders in the Fed’s decisions are the wolves of Wall Street. Not people used to having a woman for a boss.

According to the 2013 Catalyst Census: Fortune 500 Women Executive Officers and Top Earners, which counts the number of women in upper management in Fortune 500 companies, women are 17.6% of executive officers in the finance and insurance industries. Source.

Wall Street’s preferred candidate for Fed chair was Larry Summers, a former Treasury Chair who has argued women are genetically inferior at science. He missed out on the top job in favour of the lady.

Yellen’s job is going to be difficult and controversial. She will not only have to answer for her own mistakes, she will have to answer for those of Bernanke too, since she backed his policies. It is difficult not to make mistakes as Fed Chair. Bernanke and Greenspan both made screw-ups in relation to easy money, house prices and the GFC.

The stage is set for a great big gender battle. So, what can Gillard tell Yellen?

1. Being qualified won’t save you from criticism

Gillard was perfectly technically qualified to take the role. She had been a very capable Minister in the Education portfolio, and also a stand-out performer in Parliament.

Similarly, Yellen – with experience as the head of the Reserve Bank of San Francisco and academic roles – is considered the most qualified candidate ever for the role of Fed chair. [Hardly a coincidence – McKinsey has found “women are often evaluated for promotions primarily on performance, while men are often promoted on potential.”]

2. Expect attention on extraneous details.

Julia Gillard’s glasses. Julia Gillard’s bum. Julia Gilard’s absent handbags. Julia Gillard’s jackets. Julia Gillard’s house. Julia Gillard’s earlobes. Julia Gillard’s fruitbowl.

Dr Yellen will find many aspects of her life are now public property.

In fact, she has already found this. From an article in The Scotsman:

“The 67-year-old was dressed in the same black suit she wore a month earlier when President Barack Obama announced her nomination, enough for her to be targeted by bloggers Warren Rojas of Roll Call and Patrick Tutwiler of FishbowlDC.

“Good thing the Fed Chairman is only the most powerful position in the world, and not a walk down the red carpet,” Tutwiler wrote. “Otherwise we’d be worried.”

Rojas said it had yet to be seen whether Yellen was the “financial genius our sputtering economy so desperately needs”, but “at least we know her mind won’t be preoccupied with haute couture”.”

It’s not just clothes, partners matter too. While Gillard’s partner was a former hairdresser, Yellen’s partner is a former Nobel Prize winning economist. Nevertheless, Time Magazine is apparently obsessd with Dr Yellen’s homelife. The fact that these women’s partners matter suggests something is different about their tenure. Who even knows what Mrs Bernanke does?

3. Expect the unexpected.

When Australia’s first female Prime Minister was criticised for having a “big arse,” it came from trailblazing feminist icon Germaine Greer.

Australia’s first female Prime Minister was also the only one to enjoy, while still in office, a satirical comedy about her homelife, including bedroom scenes, featuring left-leaning comedians and run on the national broadcaster. Dr Yellen can probably count herself lucky if she only shows up on SNL.

4. Stand ready to be accused of playing the gender card when you defend yourself.

Gillard was filled with “murderous rage” over the sexism she faced. When she complained, she was accused of starting a “clumsy and manipulative gender war.”

An ugly gender war could easily happen even though WSJ and Bloomberg will be sure not to print anything directly criticising Dr Yellen over her gender.

That sort of criticism of Yellen will start in the blogs. Yellen will be asked about it. Her reaction will be immaterial. The mainstream media will feud over what the correct reaction is. Is she getting distracted? Is she missing a chance to make social change? Is she giving the issue air to try to draw attention from her failings? Is she refusing to make a comment that would put the argument to rest, to try to draw attention from her failings?

5. Blaze a trail, take the heat, and leave a better world behind.

Julia Gillard’ prime ministership taught millions of Australians the meaning of the word misogyny, put gender issues on the front page week after week, and lifted awareness of the many insidious ways in which discrimination can occur.

But the process is not a happy one. It is bitter.

In Australia, Ms Gillard was replaced by Tony Abbott, whose views on gender are, shall we say, unreformed.

And the damage of a rolling multi-year debate about the role of gender in American business and public life could even be enough cruel the chances of one Hillary Clinton. The better world may take some time to come about.

The story of McCafe: when competing on price can fail

US McCafe is failing, according to an article in Bloomberg today that quotes McDonald’s executives conceding Starbucks has them on the ropes. It also cites market analysts who say the attempt to move into coffee is hurting their burger business.

This is despite a McDonalds latte costing only around $2.50, compared to around $3.50 for a Starbucks latte. But that price is hurting them – McCafe in the USA is seen as too cheap, too nasty.

From that Bloomberg article:

“Pushing coffee is “probably a good idea if they can get their customer to buy more of it,” said Peter Saleh, a New York-based analyst at Telsey Advisory Group. “I don’t think they’re going to be attracting the Starbucks customer to go there — I really don’t.””

Why is McCafe unpopular? For the same reason people won’t buy a suit at KMart – because coffee is a social signifier.

Coffee is not just a drink over there. It is redolent of sophistication. And Starbucks is Louis Vuitton. It would be shocking if a celebrity was papped without at least one mermaid-emblazoned frappuccino.

If you think that there’s no prestige in something produced by a global chain, look in your cellar. See any Moet? Look in your wardrobe. See any Nikes? Just because in Australia we think we value independent coffee does not mean we can sneer at “masstige“.

But this is not just an American story or a business story. It’s a personal story. Melbourne is a coffee town. When McDonalds launched the McCafe in 1993, they launched it in Melbourne.

I remember when they opened a McCafe near my school. I drank their $1 cappuccinos, and it was good. There may not be a lot of quality there, but there was a lot of value. I have a soft spot for McCafe that I will never have for Starbucks.

And McCafe Australia is thriving.

Wait! What? Why is McCafe succeeding here but not America? I thought we were the sophisticated ones!

Pradoxically, the success of McCafe in Australia is because of our well-developed market.

I bought this McCafe latte today in the interest of research. At $3.55, it was too hot and overpriced. The longer I sat the better the coffee tasted – the beans were fine. But sitting in McDonalds – with the TV blaring and the bland-on-bland decor – palled fast.

Latte-sipper was an insult once, a signifier of being a toff or a snob or a Vaucluse doctor’s wife. Now baristas are taking complaints that their latte ‘had shit mouthfeel’ from blokes with prison tattoos.

This is not despite, but because we have a more developed coffee culture.

They call it product life cycle. Something new starts off as being for just the few. A mobile phone, for example was once a sign you were or aspired to be Gordon Gekko. But if that product is good it will spread to all comers. They call that maturity, or saturation. The reason Australia can support both Seven Seeds (“carefully sourced single origins” $4+) and 7-Eleven (“freshly ground beans: $1) is that the market for coffee is … everyone.

Melbourne has had espresso for fifty years, since the first espresso machine was installed in Lygon St, at the venerable University Cafe.

Maccas has strived to keep themselves just out of the reputational gutter. In 2011 they issued a public apology for their coffee and pledged to train up baristas.

That depth of history means there is a strong bottom end as well as a strong top end in Melbourne’s espresso market. (But no room for a brand that peddles a unique combination of expensive and ordinary. In 2008 Starbucks announced it would close three-quarters of its 80 stores and it is still waiting to make an official profit.)

Not like America, where Starbucks is expanding into tea (and also expanding people’s body sizes. Starbucks offers a drink that, at 30.9 ounces, is larger than the human stomach.)

What American McDonalds needs to do is this:

Stick at it.

Eventually US coffee culture will mature. Espresso drinks will become a staple not a luxury. Then their years of offering McCafe will pay off.

As for me, after visiting a McCafe today in the name of research, I pledge to stick with Melbourne’s independent scene for the rest of my life.

Paid Parental Leave – worth cutting eligibility to $100,000?

Tony Abbott’s paid parental leave policy is one of the most expensive pieces of social policy Australia has been offered recently. It is a $5.5 billion scheme funded by a 1.5 per cent levy on big business. It proposes full replacement salary to new mothers, for six months, up to a maximum of $150,000.

But nobody thinks the PPL scheme is well-designed or good value for money.

The jaw-dropping part of the scheme is the $150,000 salary cap, which works out at a maximum rate of pay of $600 per weekday. That’s wildly expensive childcare – even in Sweden, people taking parental leave get only €105/day.

If this policy had been proposed by the Motoring Enthusiasts, the Greens, or the Palmer United Party, everybody from Janet Albrechtsen to Ross Gittins would be arguing they had no concept of how the economy works and were demonstrably unfit to govern. Arguably, Albrechtsen, Gittins et al would be right.

But would cutting the generosity of the scheme deliver a big saving? The Coalition thinks not. This quote is from an article by Phil Coorey, of the Australian Financial Review.

“The difference between a $100,000 and $150,000 salary cap is not seen as a major impediment to reaching a deal because about 90 per cent of women of child-bearing age earn under $100,000.

The Coalition has been looking at ways to make its policy more affordable and dropping the salary cap to $100,000 was not deemed worth it in terms of savings.”

The truth is that while plenty of Australians make over $100,000 – over 837,000 people, statistics say – only 18 per cent of them are women. And of course, earning power tends to increase with age.

Screen Shot 2014-01-29 at 10.53.24 am — Number of women earning over $104,000, sorted by age and state. (Incidentally, in WA and QLD, women aged 15-24 are more likely to make the big bucks than those over 65. One guess why.)

Women’s earning peak happens after their fertility peak. Earnings peak around age 40, while the most common age to give birth is 32.

That means only 5,400 women earning over $104,000 would be eligible for the payment each year, according to my calculations. [Don’t thank me for making the data category end at $104,000, thank the ABS.]

Births, categorised by state of residence and age of mothers

[This link will take you to a big google drive spreadsheet where you can check my calculations and see some interesting graphs.]

The Greens are proposing a similar policy to the Coalition, but with a $100,000 eligibility cut off.

So what would be the saving of cutting eligibility to $100,000?

Assume the average claimed salary is $130,000. The net cost of 6 months extra pay is $15,000. 5,400 births @ $15,000 =

Just $81.2 million, or 1.48 per cent of the total cost of the $5.5 billion scheme. (Likely a conservative estimate, given some assumptions I had to make.)

That’s a rounding error in the Australian Government’s social policy budget. Do we just blink and move on?

I say no. The Commission of Audit is currently moving through the Government’s books, trying to find savings everywhere. They are likely to have a very fine-tooth comb. An $80 million saving is one they would pocket with delight. The government also has a social welfare review running, looking at Newstart and the Disability Support Pension.

Politically, $80 million seems like a small price to pay to garner headlines and combat a “women problem.” But from a policy perspective it makes sense to cut the rate. If you frame the question as “how can the Australian people best spend a spare $80 million,” the answer is never “funnel it via the government to the very rich.”

Realistically, Paid Parental Leave is unlikely to be introduced in the same format it was sold to the Australian people.

If I was advising the government, I’d say: pledge to introduce it slowly. Start off paying up to a salary cap of $60,000 and say you intend to ramp it up by 10 per cent a year.

Then wait. Something will come up for which there is great public support. It might be rebuilding after a flood. It might be sending troops off to the South Pacific to help restore stability somewhere. It might be a surge of support for pre-K education. Then you can raid the PPL cookie jar to fund that.

Farewell, America?

Aussies love the United States.

Ezekiel — *Sure, go on and eat that atheistic All Bran. Enjoy being regular in HELL.*

I’ve been three times in the last four years. And I’m not alone.

Part of the attraction is flights that are suddenly very very cheap. When the Qantas/United duopoly on the Sydney-LA route was broken in 2008, the price of flights halved.

home of the brave — Life, Liberty and the Pursuit of Horned Things.

When V Australia entered the market in 2008, their killer price offering was $1899, 16 percent below the existing lowest price. I’ve since seen return flights below $1000.

You can still buy a flight Sydney-LA for just a little over $1300 if you are bold and foolish enough to trust your travel to United. [My last trip to the States involved an unscheduled night in Sydney when someone crashed a luggage cart into our United Jet. Their initial compensation offer was accommodation in Woolongong and a flight 3 days later…]

California is... different — California is… different

At $1300, the appeal of a trip to the US is strong. The politics may be stuffed, but much like China, that doesn’t ruin it as a place to visit. I have been there more than any other country, without feeling like I’m running out of towns or states I want to go to.

mericuh — Where freedom is just a bail bond away!

But, sadly, the best time to visit America is now past. The weird period in global financial markets is over, and US quantitative easing is heading (slowly) for the exit. Our dollar might be lucky enough to get back over US90c, but the word parity can now safely be taken by currency writers and put in the top cupboard, along with “gold standard” and “the great moderation“.

Late last week, the Aussie dollar dipped to a its lowest level since 2010: US86.5c.

The effect of the falling Aussie dollar is already showing up in the ABS inflation statistics. There is likely to be a lag too, so that might not be the end of it.

So, it’s farewell America.

America, the wind beneath my wings — You were the wind beneath my wings. *sniff*

So what are our alternatives?

New Zealand is also going to feel more expensive than it has in years.

Screen Shot 2014-01-28 at 11.56.22 am — AUD v NZD

Europe is just as bad.

Screen Shot 2014-01-28 at 11.59.02 am — AUD v EUR

But luckily, the second-top holiday destination for Australians has a currency that’s even less popular than ours. In November 2013, Indonesia pipped the US as our second-top travel destination. I predict that by November 2014, there will be daylight between them.

Screen Shot 2014-01-28 at 12.03.33 pm — AUD v IDR

Or, I suppose, if things got desperate, you could always take a holiday in the place where the exchange rate is always 1:1.

I hear it can be quite nice.

Debrief – failed prediction

In a post I wrote ten days ago, I made an attempt to predict the future.

“I went to the website of a certain sportsbetting company and put $100 on Daft Punk to win this year’s Hottest 100 with the song Get Lucky,” I revealed.

I can now report I lost that $100 backing my own judgment. The song in question came 3rd in the Hottest 100. I had never even heard the winning song before.

Hopefully I have traded that $100 for some useful perspective and humility.

That is going to be an important theme this year as I play my part in the Good Judgment Project. I’ve been assigned to a team and just finished my training.

The training emphasised the importance of putting time and effort into exploring both “inside” and “outside” views of a prediction.

In the case of the 2013 Hottest 100, I over-emphasised the “inside” view. I was so sure Get Lucky was the best track I had heard all year, that I didn’t go and run any real analysis of what sort of tracks won the Hottest 100.

If I had done that “outside” analysis, I would have found a dearth of French disco tracks and a preponderance of acoustic / folk tracks, such as Mumford and Sons’ Little Lion Man, which topped the poll in 2009.

I may also have noticed a lot of Australian tracks, like Gotye’s Somebody That I Used to Know (#1, 2011) And of course, the killer combo, acoustic/folk tracks by local artists like Angus and Julia Stone’s Big Jet Plane (#1, 2010).

With that sort of analysis to hand, Vance Joy’s win with Riptide is not so surprising.

It ticks all the boxes… except actually having an emotional reaction to it. It doesn’t tick that box.

So, anyway, my forecasting record is reduced to ashes. But, like the legend of the phoenix, all ends with beginnings. One is not going to make progress without making a few mistakes. The important thing is to shine a light on them and try to improve.

China Series Part 5: Is democracy over-rated?

This is the fifth in a five-part series on China. You can see the preceding parts here One, Two, Three, Four.

The achievements of China in the last two decades are incredible.

The share of China’s population living in poverty has fallen from 84 per cent to 13 per cent since 1980.

A nation with an average income of $205 in 1980 now has average income of $6000.

If the world’s aid programs had lifted 400 million people out of poverty, aid policy makers would barely be able to get out of bed for the pile of OBEs, Pulitzers, Nobels, Honorary doctorates, emmys, grammys and groupies littering their house.

These crucial policy changes in China have come while “leading” democracies have spent billions of dollars on wars of whimsy in the middle east, blown up their financial systems, had great big shouting matches over threats to shoot themselves in the leg (i.e. government shutdowns), and put the greatest policy development efforts into “stopping the boats”.

When governments make policy with the “assistance” of the editor of the Daily Telegraph, the appeal of technocratism is huge.

That’s one reason why Australia’s biggest policy success of recent times has been monetary policy. It is set by an independent body, the RBA.

That’s also why Infrastructure Australia was set up, to try to wrest control of important billion-dollar investments out of the hands of here-today, gone-tomorrow MPs.

Just yesterday I read this story at the Federalist about the death of expertise, by Tom Nichols, a professor of National Security Affairs in the US.

“People in political debates no longer distinguish the phrase “you’re wrong” from the phrase “you’re stupid.” To disagree is to insult. To correct another is to be a hater.”

He cites the Dunning Kruger effect, which Wikipedia describes thus:

“unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than is accurate. This bias is attributed to a metacognitive inability of the unskilled to recognize their ineptitude”

Are we too stupid and arrogant to be allowed to manage our own government? They say you get the government you deserve, and when I look at Australian governments at federal and state level, I conclude we must have been very bad indeed.

So. Should we look into benevolent dictatorship? The argument is an easy one to make when you are browsing World Bank statistics.

But one morning in late October, as I was about to pass under the Gate of Heavenly Peace in a cloud of smog, we saw a big bunch of protestors being dragged off to one side by Chinese police and secret police. I’d lived in China in 2003 and never seen this sort of thing before.

Then, minutes later, while we were inside the Forbidden City, a car blew up where we had been standing just before, killing five and sending dozens to hospital.

That was frightening. The Chinese government blames the East Turkestan Islamic movement, based out in the majority-Uyghur west of China. They seek independence for a sliver of China near Russia. The Chinese goverment’s behaviour out there has been described by Amnesty as “years of attempted erosion of the ethnic identity of the Uighur people of the region by the ruling Han majority.”

You can’t as easily get away with that in a country with a free press and representative democracy.

Perhaps the most enduring image of Tiananmen square, for me, is these fire extinguishers, which are dotted around. When I saw them, I thought “What for? This square is made one-hundred per cent of stone. There is nothing flammable here.”

Then I looked around. Realised what the flammable material was. And I started to feel a bit sick.

China Series Part 4: City-shaping

This is Part 4 in this week’s China Series. You can see the previous parts here: Part 1 Part 2 Part 3

China has learned many valuable lessons from its growth. Among the biggest: you can’t just respond to demand for a certain kind of transport.

beijign traffic sunset — Too much of a good thing

Beijing built a series of ring roads between the 1980s and today. There are six in the city.

Loads of new tarmac coincided with a boom in wealth. That meant an explosion in car ownership and traffic that got out of control.

China has tried to respond with rules to limit traffic and car ownership, such as quotas. But they have not always worked.

But that does not mean Beijing has given up. When I was in Beijing in 2003, there were just three subway lines. Now there are a dozen.

New stations are popping up everywhere like a game of whack-a-mole. On our holiday in 2013, we picked up a subway map (actually it said subwang) at our accommodation, and it was already out of date.

This is something Australia could learn from. When you build a road to solve a traffic jam, that road will likely last until the collapse of the civilisation it supports.

Sydney’s George St is now over 200 years old. There are just a handful of examples of freeway removal worldwide. A road lasts longer than a building, longer than the technology that uses it, longer by far than the average road engineer.

What you are doing – in the long run – is not “solving a traffic jam” but shaping your city.

People like to talk about induced traffic from new roads – “if you build it they will use it.” I don’t doubt this is partly true, but I think the long-run effect of a new road is far greater than whether or not you get your traffic jam back within 18 months.

This is why I am so excited about the prospects of improvements to rail networks. They can also last a very long time, and have long-run positive effects, not least of which is discouraging the building of more roads.

But while Beijing’s improvements are underway (see right), Melbourne’s are just on paper.

The city-shaping effects of an efficient metro system in Melbourne would be huge. But a great deal of political change will have to happen for it to get built.

China Series Part 3: If You Are The One

This is part 3 in a five part series on China. Part 1 is here, part 2 is here

Last night “tea guy” came on the show and talked non-stop about tea. He may have been on the autistic spectrum – couldn’t listen, kept talking on top of the hosts and other contestants. No wonder he got kicked off.

Oh you didn’t see that episode? I’m talking about If You Are The One, the Chinese dating show that is currently storming the world.

Last night, on twitter, the hashtag #ifyouaretheone was trending higher than the hashtag for the tennis #ausopen.

The format of If You Are The One is elaborate:

24 accomplished and attractive women are arrayed behind podiums. A man comes down in an elevator with music blaring. From the minute his shoes appear, the women can start “turning off their lights.” The man has to answer a bunch of questions from the girls and the three hosts, and he shows videos about himself. If any of the girls leave their lights on until the end, he gets a date. You can watch an episode here.

What makes the show so fascinating is that within a few minutes of his arrival, the male contestant’s score – shown on a big screen – is generally down to about 4/24. It is nail-biting. Then he says one dumb thing and it’s down to 0/24. Then he has to leave. With the demographic imbalance in China, the women are harsh.

It’s like an episode of the Bachelor where all the ladies walk out in the first few minutes and we watch the Bachelor’s bottom lip tremble as he struggles to hold it together.

“Tea guy” who I mentioned earlier, bombed slower than most, because it was like watching a car crash in slow motion.

For the failures, they put up an email address on screen at the end, which interested parties can email in search of love.

All this is a breakthrough for China – the first TV show that has proved to be a successful export. That has the capacity to dramatically change the way we see China.

Soft Power has long been the key to American hegemony. The US is the creative crucible of the world, from Mary Tyler Moore to John Stewart, from Ella Fitzgerald to Skrillex.

China didn’t have that. Monolitihic state-run media strangled the life out of the creative sectors.

And that means people believe things about China that are not true – Chinese people are all the same; Chinese people just love to work; Chinese people are not funny. It’s this last one that gets me the most.

Sure, Chinese people aren’t always funny in their second language. That requires a lot of fluency. But over there, there is a huge premium on being a joke-teller. A night out with Chinese people involves lots of raucous laughter. And there’s an extremely popular kind of stand-up comedy, unique to China, called cross-talk.

China does have cultural exports. It’s just that at the moment, most Chinese icons are from a previous era – the great wall or the forbidden city.

There’s not much out of contemporary China to love. Top Chinese brands are Hai’er, which makes white goods, and Lenovo, which makes computers. They lack the cachet of Miele and Mac.

But “Made in China” is losing its shame. We know Chinese-made products will be of good quality. That can extend to cultural products, not just physical products.

What If You Are The One shows, is that a Chinese PSY (gangnam style), is not too far away. A breakthrough cultural product that reveals modern China to be more than just smog and factories.

On my most recent trip to China I visited the 798 Art precinct in the north of Beijing, a former industrial zone packed with more galleries, studios, craft shops and street art than you could see in a day. (as this blog calls it, the hipster district.) It was amazing. Chinese creativity is there and it is just about to break out of its cage.

The work of Sui JianGuo

China series part 2: The coming crash

This is the second in a five part series on China. You can see part one here. Part three is here.

Chinese growth is steaming along.

But the thing about growth is it seems to lead to imbalances. There’s always something funny building up in the economy and/or financial system.

In 2008, it was US subprime loans that proved the spark for a big global recession.

The 1990s “recession we had to have” was also driven by an asset price bubble following the long boom of the 1980s.

In China, I’m worried about property prices.

China’s property prices have grown incredibly fast. Here’s an article reporting 20 per cent growth just last December.

If you think you can sell property at high prices, you build a lot of it. The world’s media has gone crazy for the side-effect of this: ghost cities. Vast towns where there are buildings but not enough people to live in them.

On my recent trip I was gobsmacked by the number of buildings going up in China.

Economists are trained to be cautious around their intuitions and gut feelings. The best bits of economics are, after all, counter-intuitive.

But I couldn’t help wondering what would become of all this building. A lot of old buildings are being knocked down, sure, but if the replacements for two storey courtyard houses are 20 storey apartment blocks, and there is no population boom afoot, the risk of over-building is real.

If China’s property boom turns out to be a bubble, and Chinese growth slows or reverses, the effect on Australia will be nothing short of a calamity. The mining industry and the housing market will do a simultaneous nose-dive. The biggest companies in our stock exchange will lose a lot of their value. Wealth will be crushed, spending will stop, bankruptcy will be rife, firings and downsizing will follow. In short, a recession.

(And if we have Tony Abbott and Joe Hockey in charge at the time, we are unlikely to get an adequately Keynesian response)

One closely watched canary in the coal mine is the interest rate between Chinese banks.

It spiked in June, December, and again this week. The precise meaning of that is uncertain. But it certainly looks like the central government trying to discourage cheap capital flows. So far, each spike has been short-lived.

Here’s a quote from a guy who claims not to be worried, Hermes Fund Managers Gary Greenberg.

“Yes, the property market has overheated in certain areas and yes, perhaps property prices will come down, but it won’t necessarily have a major detrimental effect on the banking system, primarily because the banking system hasn’t been the main funder of property prices.”

The thing about the Chinese financial system is that because the banks are so regulated, people lend money through the “shadow banking” system. That name sounds a little spooky, and so it should.

The Alibaba group offers a savings product that pays 6.7 per cent, compared to the official banking rate of 3 per cent. Managed funds like this have reportedly doubled inside 6 months.

That reminds me of the Pyramid Building Society, which went broke in the 80s. Crazy high rates can genuinely prove too good to be true. If Alibaba is raising capital at a high rate, and lending to property investors, it is worth asking if it could end up insolvent when property prices fall. And it is worth asking if that might spread.

Here’s Ben Bernanke earlier this month reflecting on his big mistake – being sanguine on property prices.

“[O]ur expectations about the possible macroeconomic effects of house price declines were shaped by the apparent analogy to the bursting of the dot-com bubble a few years earlier. That earlier bust also involved a large reduction in paper wealth but was followed by only a mild recession. In the event, of course, the bursting of the housing bubble helped trigger the most severe financial crisis since the Great Depression. It did so because, unlike the earlier decline in equity prices, it interacted with critical vulnerabilities in the financial system and in government regulation that allowed what were initially moderate aggregate losses to subprime mortgage holders to cascade through the financial system. In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, deficiencies in risk measurement and management, and the use of exotic financial instruments that redistributed risk in nontransparent ways.”

China’s shadow banking system has helped propel the country’s debt-to-GDP ratio over 200 per cent. The biggest burst of economic growth in history stretches back to 1975. It will end one day. Probably not in 2014. But it will be worth being prepared when it happens.

China Series Part 1: Beijing’s terrible tourist tram

Since Chinese New Year is approaching, this week will feature a series of posts on the biggest fish in the economic pond. Click through for Part 2, and Part 3

I recently went back to a town I used to live in. Beijing.

They say: “You can’t step in the same river twice,”

Nowhere could this statement be more relevant. Since I arrived on a snowy afternoon in 2003, until late 2013, Beijing has experienced average annual economic growth of 10.4 per cent and changed presidents twice.

To return to Beijing is to find yourself in a very easy game of spot the difference.

When I emerged from the subway on my way into town from the airport, I was sure I could navigate to the hotel. But before long my companion saw my confident stride slow, my mouth hang open, my head swivel side to side as I searched for familiar landmarks.

Beijing Dazhalan Hutong — McDonalds DaZhaLan

Right in the middle of Beijing, in a place I knew inside out, a brand new six-lane road had been built, right through what had once been an area of narrow alleyways and traditional courtyards. And on the corner of that horrible traffic funnel and one of the famous silk-selling streets was now a McDonalds.

I was upset. I raved on and on about it until my companion put earplugs in.

It was only a couple of days later when I discovered why this disruptive and massive road – Meishi Jie – had been built. And I was suddenly willing to forgive it entirely.

There is another road two minutes away called Qianmen Street. It lies on the crucial north-south axis of Beijing. If you followed it north, you’d drive right through Mao ZeDong’s resting place, the monument to the people’s heros, the gate of heavenly peace, the centre of the Forbidden City, etc etc.

Despite its feng shui importance, when I lived in China in 2003/04 it was a traffic-choked abyss of unpleasantness. I avoided walking down it when I could.

But now! Now it was a pedestrianised mall. And not only pedestrianised. I could have just about died of delight when I saw, rolling along among the tourists and touts, a tram.

China’s reputation for traffic problems and air pollution problems is well-deserved. As the traffic status of the old Qianmen Street was a bellwether for the state of China across the following decade, so this new, improved Qianmen Street might be a sign of a smarter, more urbanist future. So I thought.

My eagerness to ride the tram was at boiling point. [nb. I am not now, and never will be, cool.] So imagine my shock, nay abject disgust, when I learned that the thing travels just 840 metres and costs 20 yuan.

At today’s exchange rate that’s $A3.77, or $US3.31. That is not just more than a Melbourne tram ticket ($3.58), it’s ten times the price of the Beijing subway fare (2 yuan).

Even the outrageous San Francisco Cable Car ($5 a ride) is only about 50 per cent more expensive than taking a ride on BART.

In the time I saw the tram rolling up and down, it had at most two passengers. Of course it won’t go broke – it has the might of the PRC behind it.

But the tram is pure symbolism, which has an insidious effect. It undermines people’s views about the true usefulness of that kind of transport. (Incidentally, this is why Canberra should not build a tram. It will run very visibly empty up and down the middle of the city and reinforce perceptions Canberra can’t do PT.)

Thank god China has an undying love affair with trains, or their troubles would be about to multiply very fast indeed.

I can predict the future

I can predict the future, with the following caveat:

Not all the time.

I’m rather chuffed by a couple of predictions I’ve made recently, and after I tell you about them I’m going to describe the surprising results of some recent research that has me abuzz.

The first thing I predicted was the fall in Apple’s share price when it was heading to around $700 and people were excitedly predicting a price of $1000. No, I did not put my money where my mouth was.

The second thing I successfully predicted was the beginning of the end of US monetary easing, in December. No, I did not put my money where my mouth was.

Would this have happened to me if I really could predict the future?

So, is it possible to predict the future better than randomly?

Research suggests the answer is yes. A Research project sponsored by IARPA (the U.S. Intelligence Advanced Research Projects Activity) over the last four years has assembled huge panels of forecasters. It is called the Good Judgment Project. They get asked hundreds of questions on world events, such as what might happen in Syria, will a certain country exit the euro, etc.

The Economist describes the big finding of the project:

“The big surprise has been the support for the unabashedly elitist “super-forecaster” hypothesis. The top 2% of forecasters in Year 1 showed that there is more than luck at play. If it were just luck, the “supers” would regress to the mean: yesterday’s champs would be today’s chumps. But they actually got better. When we randomly assigned “supers” into elite teams, they blew the lid off IARPA’s performance goals. They beat the unweighted average (wisdom-of-overall-crowd) by 65%; beat the best algorithms of four competitor institutions by 35-60%; and beat two prediction markets by 20-35%.”

Aggregated forecasts of the Good Judgment Project are submitted to the IARPA forecasting tournament, which they won last year.

I have applied to join the panel of forecasters in 2014, and have sat a battery of online tests, including some very difficult questions! Such as:

True or False, Cuba helped to organize negotiations between the government of Colombia and FARC (Spanish acronym), the Revolutionary Armed Forces of Colombia

and:

the meaning of DESUETUDE

and complete the pattern games:

trauma tuna flight fit wife __ a __ __ glossy gravity

They did political spectrum testing, put me through an ultimatum game, did lots of spatial, mathematical and verbal IQ stuff, and checked basic general knowledge.

I’m excited to get started. The project provides feedback directly to participants on their forecasting prowess as events transpire or fail to transpire. It should serve as a check on overconfidence.

In the meantime, I have one last forecast that I have publicly made. I went to the website of a certain sportsbetting company and put $100 on Daft Punk to win this year’s Hottest 100 with the song Get Lucky.

I mention this here only in the interests of extreme transparency. While to me it is obvious the song is the best of last year, there may be a certain youth and antipodean bias at triple J. Promotion for the Hottest 100 features the teenage Kiwi heavily:

Will that bias the vote? Will I lose my $100? Will that instil new levels of humility in me? That I can’t predict.

Was it hot enough to fry an egg today in Melbourne?

Yes it was.

Work: nice to have. But not all the time.

Work. It’s a chore, isn’t it? If Australians can get out of it, they will.

The latest unemployment data are out, and they show this : Labour force participation has fallen to its lowest level since April 2006, and male labour force participation has fallen to its lowest level since records began, 71.0 per cent.

Look at this graph:

Participation counts those working and those looking for work. It excludes those studying, retired, backpacking round Europe, unable to work, etc.

In the short run, labour force participation falls because there are not enough jobs. Unemployment has risen to 5.8 per cent, from under 5 per cent in April 2011. But look at the big picture.

What startles me is that since February 1978, the total labour force participation rate has risen only 3 percentage points. Despite massive changes in economic structure, labour laws, flexibility and social pressure to wear neckties, work is almost as distasteful as ever.

Total participation has risen from 61.3 per cent, to just 64.6 per cent. That means male disengagement has matched female engagement engagement practically one-for-one.

That massive surge of female empowerment has been met with a deep sigh as men settle onto the couch.

Why has participation not surged over the long run? Perhaps it is because Australia is rich. We can afford to retire earlier, and even take a few mini-retirements mid-life, such as long stints backpacking, or extended periods of parental leave.

Source: ABS National Accounts, Sept 2013

Stagnant labour force participation is conventionally seen as bad news.

If you are a good Treasury alumnus, like me, your brain is seared with three Ps. Productivity, population and participation. These are the three factors that make sure enough productive activity occurs to keep us all in the lifestyle to which we are accustomed.

But let us be totally frank. While productivity gains are a free kick meaning we do more with less, the other two create trade-offs.

Increasing Australia’s population is a costly way to increase the labour force. We need to build a whole lot of extra infrastructure to accommodate extra people.

And increasing participation also comes with trade-offs. Work is called work for a reason. Unless you are a professional sportsman or a clown, work is not really much like play. If people can avoid it, they often will. That’s what this graph makes abundantly clear.

If you leave your job aged 55 and still have the legs for ten years of golf, or if you take a year off to be with your young child, opting out of the workforce could be as much a contributor to national well-being as GDP is.

Why house prices are going to do what you least expect.

This chart from a Grattan Institute report was used as a hand grenade in a war over house prices on Twitter a couple of days ago. Union economist Matt Cowgill argued house prices may be too high if they are pushing people out of the market.

Another economist, Stephen Koukoulas, argued everything was fine and you should just go and borrow from the bank since interest rates are at record lows.

(Just as a declaration of my interest, I’m 32 years old and do not own property.)

Some people argue house purchase has simply been delayed, just like moving out of home, getting married, and having children

This is a pretty good theory to explain the above. But it doesn’t do such a good job of explaining the declining rate of first home purchase. That has hit a record low of 12.3 per cent in the most recent data.

You have to assume that low – which coincides with recent house price growth – is temporary. So what will give?

Will we observe a quiet tsunami of saving that allows first home buyers to collect together huge deposits, then climb back into the market with heaps of spending power?

Bad news if you are relying on that. Gen Y is not scrooging it up.

Household net worth, where reference person is aged 25-34. source http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/FB162A8CBB41033DCA257BCD001A5725/$File/65540_2011_12.pdf

While young people’s net worth rose around 25 per cent in this period, the price of established homes rose 40 per cent.

The average value of the savings of people aged 25-34 (bank accounts and shares, not including super) has risen from $11,000 to $16,300. It’s not nothing, but it’s not exactly a deposit on a house, either.

So will the 65+ demographic eventually be forced to release their vast real estate holdings onto an anaemic market?

Can we conclude that house prices are going to fall?

Not necessarily.

The x-factor in Australia’s housing market may be off-shore buyers. Chinese wealth is pouring into the market at both ends, propping up the value of both million dollar mansions and cheap apartments.

One real estate agent recently told the ABC that 90 per cent of homes were selling to Chinese investors. Hyperbole, obviously. But even 1 per cent is cause to pay attention.

Economists understand that markets operate at the margin. It doesn’t matter what most people do so long as at the margin there is one bidder with deep pockets.

Foreign investment in Australian real estate rose from $41.5 billion in 2010-11 to $59.1 billion in 2011-12. Fast-growing China was the 3rd biggest source, behind the USA and Singapore.

So long as foreign wealth, and especially Chinese wealth keeps accumulating, domestic dynamics are only part of the picture. I intend to return to this topic soon, because the pace of accumulation of Chinese wealth is now not just a historic record but a gigantic outlier. Whether it can continue is of intense relevance to all of us, and there’s plenty of people who think a crash is coming soon.

I want my MTV (to be a force for positive social outcomes)

In the silent, fluorescent-lit halls of the University of Maryland’s department of economics, someone has been running regression models over the MTV show 16 and pregnant.

Here’s one of the models:

The paper is called Media influences on social outcomes. The impact of MTV’s 16 and Pregnant on teen childbearing.

And here’s a sense of the show. In this episode from season two, 16 year old Ashley from McKinney Texas says things like “My boyfriend Justin and I recently broke up…. It’s funny to think I’ve been pregnant longer than Justin – the baby’s father – and I were even together.”

But here’s the thing. The regression models show a powerful effect. The show actually discouraged teen preganancies

The show led to an increase in google searches for birth control and abortion. which is merely circumstantial evidence, but it helps support the next finding.

Teen births fell 7.5 per cent a year since 2009 – the period in which 16 and Pregnant and its offshoots, the Teen Mom series, were showing in the US. This represent a rapid acceleration of an existing trend that saw teenage motherhood decline. The authors estimate the show is responsible for one-third of the decline, equivalent to 20,000 births in 2010 alone.

They controlled their study for factors such as a greater interest in that show in places where the teen birth rate is rising.

The study is important because a previous research effort found 16 and pregnant could be glamourising teen pregnancy in some cohorts.

In Australia, teen birth rates are lower than in the US, at 16 per 1000 for the 15-19 cohort, compared to 29 per 1000 in the United States.

In 2012, Australian mothers aged 16 bore 887 children and mothers aged 17 bore 2037 children. That equates to fertility rates of 6 per 1000 at age 16 and 14 per 1000 at age 17. [405 children were born to mothers under the age of 16.]

Teen pregnancy is not as significant an issue here as in the US. But we are not without social problems, and if people avoid what they see it is possible reality TV can create great social change:

Will the Great Australian Bake Off prevent thousands of unwanted collapsed sponges?

Could Being Lara Bingle discourage thousands of incipient modelling careers?

Is Big Brother Australia responsible for the rising rate of people living alone?

Might the Biggest Loser be the televisual equivalent of lap-band surgery?

Monstered Trucks: Are food vans history?

I love Melbourne’s food trucks.

In theory.

In reality I went to the Taco Truck one time when it was parked in Fitzroy North, not so far from me. I felt like I was getting ripped off paying $12 for three little tacos and left hungry.

But today, shock! A report suggests the whole food truck movement is coming apart at the seams. Melbourne now boasts 52 food trucks, Good Food claims. Seven are for sale according to the story. (I could only see two, including this coffee van for $179,000.)

The report follows a series of articles in The Age in which they claimed Brunswick Street was a “struggle street”. The same journalist, one Alana Schetzer, wrote that story, scraping together 13 Brunswick street venues that had closed in a four year period. In a street that must have a hundred eating places, that’s actually pretty good going.

This latest story does not suggest the death of the truck. Far from it.

If you look at the statistics for Victoria, they show a healthy scene is driven by fierce natural selection. There were 9100 cafes and restaurants operating at the start of the most recent financial year for which there is data. 1560 closed their doors. 1930 opened up.

Like a phoenix. From the ashes of one hospitality dream rises another.

Victoria also had 6700 take away food shops. 1220 closed and 1210 opened.

What’s happened with food trucks is simply the maturation of the scene. Next, the weakest competitors will be replaced by savvy operators with actual hospitality experience. Jacques Reymond isn’t doing anything, for example. The next food truck could be a Rolls Royce.

Ball Kid Boiling Point: Child Labour Shock Hits Melbourne.

It is 2014.

And yet, in contravention of the guiding principles of the ILO Convention on Child Labour signed 40 years ago, hundreds of youth under the age of 15 are being employed by a major and highly profitable Australian enterprise.

The ILO convention states:

“The minimum age specified in pursuance of paragraph 1 of this Article shall not be less than the age of completion of compulsory schooling and, in any case, shall not be less than 15 years.”

Worse, they are without pay despite doing tough physical work in conditions of searing heat.

Tennis Australia, which earned $1,600,000 in profit in 2012-13, accepts ballkids agd 12-15.

These embattled and un-unionised “volunteers” must complete a multi-month training schedule to secure their unpaid roles:

“Australian Open Ballkids will also be required to participate in tournaments outside of the Australian Open as part of a compulsory training requirement. These events are scheduled to take place between November and December.”

They share the court with line judges (paid around $200 a day) with chair umpires (paid around $400 a day), with overtime.

Or perhaps they will be on court with Novak Djokovic. In 2013 he secured the winners cheque of $2.43 million with 18 hours 16 minutes of court time. Call that $132,800 an hour or $2,213 a minute.

Sure, the kids seem to like it. “I’ve enjoyed it every single year so far,” 15-year old Mitchell Riley told the Herald Sun recently. “It’s great getting up so close to the players.”

But is it really fair? Prior to 2009, the Australian Open handed out $42 a match to ballkids. Someone has made the decision to cut that to nothing.

Surprisingly it is America where there has been most rancour over tennis officials pay. Half the world’s top umpires boycotted the 2011 US Open in protest at the conditions And in 2012 the US Tennis Association was sued over pay and conditions.

Meanwhile the home of the 35-hour week, France has an all-unpaid ballboy force, working up to 11 hours a day, as recorded in this Economist article

Would it be possible to organise a ball-kid strike? I’d love to see the players collecting their own wayward shots and fetching their own towels. Maybe 2015…

Legal Marijuana is coming to you

Imagine all the laws in Australia. Some are obviously very good, like the prohibition on killing other people. Others are defintitely pretty good, like the law against stealing – you may be able to think of some exceptions to the law, but it’s sound. Then there are laws that are distinctly marginal.

Consider driving on the left. it makes no difference compared to driving on the right. We’d be no worse off driving on the right. But there is no push for change. How would you make the case that the benefits overcome the cost of changing?

There’s lots of little rules like this. They are marginal rules that have counter-arguments as strong or stronger than the arguments for them, but they stay the way they are. Like lowering the voting age or changing the retirement age.

You have a lot of policy settings that are stuck the way they are because of what we may term path dependency. Once you make a decision, you are stuck with it. Path dependency is like the slippery slope argument, but inverted – a sticky slope?

But the graph above is not set in stone and path dependency is not forever. It remains definitive only so long as other elements of the environment are the same.

In the United States, a pervasive marijuana culture led to the availability of medical marijuana, and now two states have made sale of recreational marijuana totally legal. Check out this shop in Colorado, the 3D Marijuana dispensary.

Prices are sky-high, and so is demand. It is remniscent of the Netflix argument. People will pay a premium to access something free.

It’s not just Colorado. Some other very influential states have legalised marijuana. Not just Washington State, which will follow Cololrado in allowing retail stores in 2014, but since 1996 also California, where medical marijuana is freely available (certain doctors hand out prescriptions willy-nilly).

New York is also moving to be in line with 19 other US states and make medical marijuana legal.

This is relevant to Australia. We are not about to take the lead of Portugal, where decriminalised drug possesson is hailed as a success. That is practically not even a developed country! But New York, that’s different. That’s the sort of precedent that will make a difference in the Australian debate.

In fact, the Help End Marijuana Prohibition party has already used the American precedent to help get an article published in that pinko rag, The Australian.

The Cancer Council of NSW supports legal medical marijuana. A NSW parliamentary committee recently got multi-party support for medical marijuana too.

Do not forget Professor David Pennington called for the regulated supply of marijuana as long ago as 1996, in a report written for the Liberal government of Victoria. This is not a fringe policy position.

Legally, the status of marijuana is a state issue. Legal supply (whether medical or a free-for-all) could happen in the ACT or the South Australia, where the drug is decriminalised. Once one state does it, the cost for the rest of maintaining prohibition becomes much higher and they will have to question the benefit.

The Alt-Tab Productivity Crisis

There is a puzzle at the heart of our economy. A conundrum profound and deep.

But it is one we can solve, if we are honest with ourselves.

The puzzle goes like this: Computers have made doing things a LOT easier. No more do you have to go to the fax machine and dial someone’s number if you want to send them a document. A million little tasks are now so easy they’re not even tasks.

Check the meaning of a concept? 10 seconds via Google. Invite someone to a meeting? 30 seconds in Outlook. Etc. Etc. You get my point.

So where the &^%! is our productivity boost? You look at data since the dissemination of the personal computer and all the millions spent on IT, and there is nothing special about it. You could be forgiven for thinking we’re still dipping quills in ink-wells.

This is known as the Productivity Paradox. But the answer should be obvious to any economist.

Underpricing will lead to overconsumption. And nothing is more underpriced than content on the internet.

The internet is not a double-edged sword. It’s a giant swirling blade made of blades. And it’s coming right at us.

Every swivel-chair jockey knows about the internet. *Flinches at gross understatement*. I know you know far more than you’d ever let on.

Nobel-prize winning economist Robert Solow said in 1987 “You can see the computer age everywhere but in the productivity statistics.”

No doubt, even that giant of macroeconomics has Alt-Tabbed to watch a few kitten videos on YouTube. Here’s a funny one of a cat and a vaccum cleaner. I bet Solow laughed until tea came out his nose.

In fact, if we look at Em.Prof Solow’s publication record – dormant since ’01 – he may as well have been immersed in LOLcats since he pocketed that Nobel prize in 1987. (Joking. The man is 90.)

The reality is that if you have a computer jobs, there’s a great deal of stuff you have to do on the internet. And there’s a great deal on the internet that looks like something you could justify looking at for work, but really isn’t.

Now, some jobs don’t have this aspect. Surgeons for example, don’t find themselves in a Wikipedia worm hole halfway through a colectomy. Bricklayers neither. But us, the knowledge-economy types, the kind of people who are reading this blog, some of the most highly skilled among us, are essentially free to spend as much of the day as we can get away with puddle-ducking on the internet.

There’s your productivity crisis right there.

Also, the internet has taken our attention spans and tortured them until they broke. The idea of working on one thing for an uninterrupted eight-hour stretch is utterly laughable.

In this vein, I give to you the five biggest enemies of progress

slate.com

reddit.com

play-dune.com [Dune 2, now in your browser!]

theage.com.au

twitter.com

Go ahead, click on them. You’ve earned a break.

One good teacher.

Ask someone the highlight of their school education.

They won’t mention learning cursive writing. They won’t mention timetables. They won’t mention learning cellular respiration, renaissance history or trigonometry.

They’ll say something like this:

“I remember my grade 9 English teacher. She really believed in me.”

This is the sort of memory that has inspired a whole genre of films. From To Sir with Love (1967) to Dead Poet’s society (1989) and Freedom Writers (2007), the one good teacher that can change your life is a truism of modern culture. It’s part of the sales pitch for programs like Teach for America and its local knock-off Teach for Australia.

Now a bunch of economists have done the work to measure the influence one good teacher can have.

They had a sample of one million students and found that the ones randomly assigned to high quality teachers were “more likely to attend college, earn higher salaries, live in higher SES neighborhoods, and have higher savings rates” [link to paper]

These graphs tell the story better than words:

There is a catch. The quality of teachers as measured above is in their ability to contribute to results in standardised tests. (they use the term value-added)

That’s not the sort of thing you can make an Oscar™-winning Picture about…”Starring Sean Penn as Mr Brown, who drills his students on multiple choice questions every day in lieu of teaching life lessons.”

I tend to disagree with the merits of using narrow standardised tests to rank teachers.

The saying “if you can’t measure it, you can’t manage it,” has a flipside. People obsess over the things they can put metrics on. You can’t measure the subjective benefits of a good teacher. Nobody denies the importance of all the non-academic work teachers do, but it can’t be measured so it is not addressed.

Nevertheless there is an important point to make here. Teachers are important. Far more so than society gives them credit for. And teaching is not rocket science, it is harder.

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