February 2014 – Thomas the Think Engine

Why Bunnings prices are so damn clever.

Bunnings is more than a gigantic hardware store. Its canyon-esque aisles whisper to you of self-reliance and ruggedness, if not quite suggesting a log cabin of your own construction then at least the sort of Barbecue a man can be proud of.

Once you’re over about 26 it seems to slowly turn into a refuge, a bit like Thoreau and his woods.There’s always a sausage sizzle out the front on weekends and it has become an Australian institution.

Nevermind that it is based on an American big-box retailing model, or that it has only been a national chain since 1994, after it bought out McEwans hardware, closed most of the outlets, then sold itself to mega conglomerate Wesfarmers.

The reason there are now around 280 Bunnings nationwide is that the store is so good. We don’t begrudge the many hours spent lost in its chasms and nooks. It’s like that because it is cheapest. Right?

A tentative Google suggests, um, well, :

There are three big tricks that Bunnings uses to reinforce the widely-held belief they are so cheap.

1. They often choose prices that to the first glance look odd. For example, they sell hammers for $8.45, $37.97, and $62. Apparently the theory is a range of irregular and specific numbers make customers think the price has been ratcheted down as low as it possibly can be.

Rather than having all the prices in the format $X9.99, the prices imply Bunnings takes the trouble to price everything at its minimum.

2. Using people from the stores in the ads. (I thought they might be actors but the internet says no. There are 33,000 staff so I guess some must be able to pass a screen test).

The point is, this is signalling. Bunnings has ads on during high-rating shows – they are not stinting on their marketing budget.

But if they deploy great cinematography and a highly polished vibe, like you might see in a car ad, it creates the impression they are wasting money on ads. Instead the ads look cheap and cheerful. The same motivation is behind The Good Guys using their staff in ads even though they too are a heavy-hitting national chain. (Baker’s Delight use their staff in ads to signal something else – that the bread is made by real people, not a factory.)

The signalling effect even flows through to the way stores are designed. Here’s Cotsco founder Jim Sinegal talking about his store’s budget vibe.

““We try to create an image of a warehouse type of an environment … I once joked it costs a lot of money to make these places look cheap. But we spend a lot of time and energy in trying to create that image.“

3. “Lowest Prices guaranteed” / “Lowest Prices are just the beginning.”

This slogan seems to have moved away from using the word “guarantee” recently. But the claim is still a strong one. The only way Bunnings can get away with it is their price-beat guarantee: “Find a lower advertised price and we’ll beat it by 10 per cent.”

That is an extremely clever business plan. While anyone might think they could mock up an ad that offers something very cheaply and trick Bunnings into giving them a deal, the reality is the store would happily accept being tricked to get the benefits of such an offer. They would probably rather more people took them up on the price-beat guarantee.

Let me explain:

The effect of the price-beating offer is to permit price discrimination. They can sell things at a higher price to people that don’t bother shopping around, and at a lower price to those that care about price. That means they charge different prices to different types of people, just like a hotel or airline does, maximising yield.

But the real killer of a price guarantee is the way it discourages other chains from discounting and promoting. If I run Think Engine Hardware, why would I put an ad in the paper telling everyone Cordless Drills – Now 30 per cent Off!? I know customers can and will still go to Bunnings. Offering to beat advertised prices is very close to being anti-competitive behaviour, as it can cause all firms to raise prices.

From the great knowledge fount:

“While a store with price matching guarantees has no fear of losing customers to rivals’ price cuts, it has every incentive to raise its own price to charge a higher price to its loyal customers. It is an anti-competitive tactic that warns competitors not to attempt to steal market share by undercutting prices.”

So, Bunnings is like any other retail operation, playing clever psychological games to disguise healthy mark-ups.

It had earnings of $900 million on revenue of $7.7 billion last year, and contributed 26 per cent of Wesfarmers earnings before tax, etc. Wesfarmers is currently working on “conversion of the property pipeline into trading locations at a higher rate than historically achieved” in order to help Bunnings contribute even more to its annual profits, which were, last year $2.2 billion.

Time for a Mazdalanche!

In Nauru, half the cars on the roads are Hilux Surfs – a kind of old 4×4 sold in Japan. In New Zealand, half the cars are Nissan Sunny’s – a kind of car sold in Japan. I have driven both and they have been some of the happiest times of my life.

The prices for these cars are terrific. The reason why starts far, far away..

Japan has very strong vehicle quality rules. Cars have to be inspected after the first three years, then every two years, and every year after they are ten years old. The inspections are not cheap, running up to $2500. This means Japanese consumers like to get rid of old cars even though they still run well, to buy new cars. The Japanese government wants to encourage that because Mitsubishi, Nissan, Toyota and Suzuki are all Japanese.

Japan ends up with a lot of used cars and exports them very cheaply.

Japan drives on the left, so there are not too many markets they can sell second-hand cars to. NZ and Nauru – both countries without car manufacturing – snap them up.

But, unlike a bunch of other smart countries, Australia doesn’t permit the import of normal second-hand Japanese cars!

Now we are losing Ford, Holden and Toyota, we no longer need this consumer-hurting import limitation. It is time to take advantage of Japan’s crazy policy.

For comparison. Here’s some options from the Australian website carsales.com.au that are indicative of price range for a 2007 Maxda CX-7

Here are the results from japan-partner.com.

Big savings. Thousands per car. Shipping costs can be very reasonable, in the region of $2000.

As our car industry fades into nothingness, this can be our compensation.

The Productivity Commission’s recent report on the car industry recommended getting rid of the limits on importing Japanese cars, so it’s a possibility it could happen soon.

The only reason to act cool on the issue is that I bet DFAT would like it too as a handy bargaining chip.

The Japanese government would probably be delighted if we started bidding up the prices of this category of export. All those Japanese consumers would find their second hand cars were worth a bit more. Perhaps we could even use it to encourage them to cut out their “scientific” whaling program?

I Love a Services Country; a Land of Sweeping, and Flying Planes

There’s an idea out there, that Australia is built on primary industries and manufacturing. That we are first and foremost a country that “makes things.” And that we should be proud of it.

This view of history must not stand.

This is a country that depends on services. Always has, always will.

People who go on and on about how we are about to turn into a nation of burger-flippers and/or door openers reveal themselves to have bugger-all understanding of the true history of Australia.

Services, mate. Since day dot. Each one building on the last, to make this great nation you see before you:

1. Pre- European Australia.

Story-telling services, decorating services, etc. [no photos available, sorry]

2. Cpt J.Cook

Captain Cook — Exploration and mapping consultant.

3. Arthur Phillip

4. Burke and Wills.

5. Governor Macquarie:

Governor Lachlan Macquarie — Governance consultant with a sideline in financial services innovation.

6. Banjo Patterson

Banjo Paterson — Poetry and myth-making consultant.

7. The Man From Snowy River

8. Ned Kelly

9. Simpson and his Donkey.

10. Royal Flying Doctors Service.

11. Don Bradman.

Sir Donald Bradman — English despair and dismay consultant.

12. John Bradfield.

13. Sidney Myer

14. Dennis Lillee.

15. Road train drivers.

16. Bob Hawke.

17. Professor Peter Doherty

18. Cate Blanchett

This nation is not just about things.

It’s about people and the things they do for one another. If the Colt from Old Regret had got away and the owner went and bought another one, while the Man from Snowy River worked in a factory, it wouldn’t be much of a story, would it?

Next time you hear a politician say they don’t want to live in a country that doesn’t make things, remember that living in a country that didn’t do things would be even worse.

Get rid of the Winter Olympics

The Winter Olympics should be abandoned. Take away its rings and its eternal flame. It is polluting the concept of Olympics – Sport for All. Only 26 of the 200-something countries in the world got on the medal table.

The games are so hopelessly skewed to the richer and/or more snowy bits of the world that most countries cannot compete.

Three African countries were able to send representatives to Sochi. That’s not so bad, you may think, til you dig a bit deeper and find they are “representatives” in name only.

Zimbabwe sent 20 year old Luke Steyn, who was coming 59th in the Slalom after his first run, and it only got worse from there, ending in a DNF. He has lived in Switzerland for the last 18 years.

Morocco sent two Alpine skiers, who performed perfectly credibly.

Kenzo Tazi: “When her family moved from London, England to the French Alps in 2007, she was able to begin skiing competitively.” and

Adam Lamhamedi: “I was born in Quebec and I grew up there, and I went through the Skibec alpine system. I’m just like any other kid from Charlesbourg. But I am lucky enough to have a Moroccan father.”

Togo sent a skier who had long competed for France, Mathilde Amivi PetitJean

“In May 2013 she was contacted by the Togolese Skiing Federation via her Facebook page with an offer to compete for the west African nation. “If I was told I would one day compete at the Olympic Games, I would never have believed it would be in the colours of Togo.”

The second Togo athlete is 18 year old Italian Alessia Afi DiPol. “My father has a factory in Togo that specialises in sports clothes. He has a feeling for the nation, and I have an opportunity to run for Togo, and I am proud of this.”

Yep.

There is not much Africa in the Winter Olympics. A billion people without a medal. Here’s a graph that compares that result with Norway (population 5 million.)

Norway won 26 medals, coming third on the medal tally, behind the hosts, Russia, with 33, and the US, with 28.

Its Scandinavian comrades were not too far behind. Sweden snagged 15. Finland got five.

Here’s another way of looking at how narrowly held Winter Olympic glory is. You could go through those four adjacent countries – that won 27 per cent of the total medals – in one day, stopping for petrol maybe once (and getting caught in some Swedish roadworks apparently).

Now, the Summer Olympics is not fair either. Rich countries win most of the medals. But poor countries at least have a chance. India wins a medal or two. So do Brazil, Iran and Indonesia. And Kenya. Especially Kenya.

In 2012, There were 86 countries that medalled in the summer Olympics, or as I call them, the real Olympics. All continents were represented. That’s a result worthy of the five Olympic rings.

But, but, but… winter?

No.

Countries are on the equator don’t really get a winter. Winter, snow, ice and the Winter Olympics along with them, are geographically specialised concepts in a way the Summer Olympics isn’t. You can run 100 metres at minus 10 degrees or plus 40.

Not to mention the equipment. I bet you ten dong that people in Vietnam look at skis, snowboards and ice-skates with the sort of skepticism I reserve for bobsleds and skeletons. I just googled and there is nowhere in Nigeria, Africa’s most populous country, to buy a snowboard. The Winter Olympics are just a fantasy realm of preposterousness for billions of people.

I feel qualified to say all this because I love winter sports. But I love AFL too, and I’m not campaigning for a special Olympics for sports played inside ovals. I think the Olympics should be about giving as many people as possible a chance.

Sports being excluded from the summer olympics for being insufficiently popular include baseball, with 35 million global participants. They almost cut wrestling out too. Meanwhile, the winter Olympics carries on with Biathlon and four versions of ski racing: Downhill, Super G, Giant Slalom and Slalom.

Amazed? I’ll tell you why we get a winter Olympics despite most of the world’s population living near the equator. Most of the world’s wealth is located far from the equator.

Is that right?

The Olympics is a special thing. An inclusive thing. The Olympic Charter says:

“The goal of Olympism is to place sport at the service of the harmonious development of man, with a view to promoting a peaceful society concerned with the preservation of human dignity.”

It’s a shame the populations of Africa and South America are excluded from that every four years.

We talked about bad brand extensions the other day. The winter Olympics is one. They drag down what the Olympics are supposed to be all about.

I bet Norwegians and Canadians are getting all upset round about now. Don’t worry. I do believe you should still be able to put your tuques on for a big winter sports party every four years. But you should not be allowed to call it the Olympics.

Rapid growth of WhatsApp should actually make Facebook frightened.

Ever since Facebook swapped the GDP of a mid-sized nation for a simple messaging service, the chart below is getting a lot of attention. But I fear its main point is being missed.

Facebook got so excited by this sort of user growth that it spent $US19 billion buying WhatsApp. But it should be cowering.

Facebook’s biggest single virtue now, is that it’s the social network your friends are on. Facebook’s entire $175 billion market value hinges on the idea that this “network effect” is enough to lock you in and make sure you never leave. Is it?

The first person to install WhatsApp had no way to use it. The second person to install it could only contact the first one. The thing had no real value until a decent-sized circle of your contacts was on it. Despite this, despite the presence of other perfectly good options, like email, SMS, Viber, and despite its terrible IT-developer’s-idea-of-a-pun name, the application has grown faster than anything the web has ever seen.

WhatsApp’s growth shows people are now damn comfortable in the app store. Nobody is worried about hitting install, checking something out, and deleting it later. That represents an important – but predictable – change in consumer behaviour. And a major threat to the apps we already have installed.

Facebook perhaps recognises it could be gazumped. It is trying to make our commitment to Facebook a virtue, with, for example, recent videos reflecting our history on Facebook, etc. But if its major selling point is that it stores your old memories, will that be enough? If we all keep our Facebook – like we all keep our old school photos – but use something else for day-to-day use, then Facebook loses.

There’s another even bigger point to make here about the lesson of WhatsApp’s incredible growth.

When I wrote about Facebook’s acquisition of WhatsApp a few days ago I mainly just goggled at the incredible price. $US19 billion in cash and stock, or about $A21 billion. Since then I have had a very constructive argument with someone I respect greatly in the tech space, about what the point of the acquisition is.

I argued you could have lots of customers but no good way to monetise them. Twitter was a really good example, I said. The old-school capital market guys that floated facebook and were currently propping up their shareprice would, I reasoned, have to learn the hard way to not rely on their old-world model that says a successful business is one with lots of customers.

But I got an eye-opener in response.

“Don’t get me wrong, I wouldn’t buy FB shares at the current frothy prices either. Nor would I pay $19 Billion dollars for WhatApp. But the long-term play is a little more interesting than “monetise internet service”. The aim as I read it is to eliminate the existing rent-seeking middlemen (in this case, telcos) by undercutting their service. Then, once you have sufficient user lock-in and network effects, you can *become* the rent-seeking middleman, but at an unprecedented global scale! Not exactly a glorious ambition, but it may just work out that way.”

That made me think about the way I look at the internet.

There is one company that has created “sufficient user lock-in and network effects” to be considered the backbone of the internet. Google. Revenue of $15 billion and profit of $3 billion in one three-month period in 2013. Google is to the internet what the state-owned telecommunications companies were to the early days of the communication by wire. A behemoth.

The question then becomes, is Google a model for the rest of the net? Can Facebook et al do that too? Or is Google an outlier?

The telcos became rent-seeking middlemen by owning a network that could not be replicated. They had physical wires that they controlled. Competitors needed to make huge investments to beat them. There’s an analogy to Google there.

Google’s search results are so good not just because of its smart Page Rank algorithm, but because of its expensive web-crawling. Its competitors, like DuckDuckGo, use third-party results in their search results, because web crawling is expensive to do right:

“While our indexes are getting bigger, we do not expect to be wholly independent from third-parties. Bing and Google each spend hundreds of millions of dollars a year crawling and indexing the deep Web. It costs so much that even big companies like Yahoo and Ask are giving up general crawling and indexing. Therefore, it seems silly to compete on crawling and, besides, we do not have the money to do so. Instead, we’ve focused on building a better search engine by concentrating on what we think are long-term value-adds.”

Google’s core products, search and ads, are protected by both being smarter than the competitors, and expensive to replicate. They look safe.

But its various add-ons, like Maps, Gmail, Youtube and the play store could in theory be beaten. It has happened before. See: 10 Google services that failed and why.

Facebook’s offering is not necessarily expensive to replicate. Open source social networks are out there. Market leaders diaspora and Movim both make privacy a big feature. Who knows what the spark will be that sets them, or something like them, on the path to exponential growth.

Goldman Sachs and JP Morgan take note. The Google model may prove to be a once-off. The internet will continue provide a lot of terrific services, but will not necessarily continue to provide a lot of money. The economic rule that price equals marginal cost of production in the absence of market power has not broken. And marginal costs online are often very close to zero.

Just to emphasise this point, I’d like to finish this piece by introducing you to an app called Telegram. It does everything WhatsApp does, but cheaper. There are no ads. There are no fees. And it is run by a not-for-profit.

Add me when you join. :)

Why I’m not a union member

Is it because I’m disgusted at union corruption and waste?

No?

Is it perhaps because I harbour a distaste for collective action?

No?

Is it a lot simpler than that? Is it simply that being a union member seems awfully expensive?

I was a union member once, but not any more. My last job I made between $70,000 and $80,000. The union fees at the Media Arts and Entertainment Alliance are $12.65 a week, just under 1 per cent of wages, at $658 a year.

If I had to make a list of things I spend more than $658 a year on, it’s a) short and b) full of things that are extremely important to me.

1. rent.

2. food.

3. holidays.

4. charitable pursuits.

5. coffee.

A former colleague at the Fin Review once tried to convince me to join. (Yes, there are union members at the Fin …at least in the Melbourne bureau…). He compared union membership to a gym membership He was trying to make it sound reasonable, but gym membership is exactly the sort of expense I try to avoid.

Value is subjective, and it could be I just don’t understand the merits of membership. But if so the union hasn’t done enough to communicate it to me. And I’m clearly not alone.

Footy clubs have much the same incentives as unions to maximise their memberships, and they are creative about it. You can get all sorts of packages that meet your needs.

Geelong offers a membership for $50 and one for $407, with a swathe of options in between.

Collingwood is even more creative, with pet memberships.

I’m not aware of unions doing the same, even as membership in Australia has collapsed.

I am not ideologically opposed to unions. I was a member of the National Union of Workers while I was a student doing telephone market research at DBM consultants. We had great pay and conditions and I know for sure that was not a coincidence.

I might even join a union in the future. But the value proposition has to be there for me. That means I need to feel good about the price, what I get for my money, and about the union in question.

At the moment news about the amazing places nurses unions fees ended up after they were paid to the Health Services Union makes me wonder if unions are being run as cleanly as they should be. That makes me even more reluctant to part with my hard-earned.

A fair start for unions might be to choose to submit themselves to the full responsibilities of companies. The recent ACTU study into union governance looks, to me, about as fierce as a wet lettuce.

Unions are going to face a lot more bad PR under the current government.

It might be smart for the movement to outflank the criticism, and commit to the highest standard of oversight and probity, before Tony Abbott runs them through with the rusty blade of his Royal Commission into union corruption. If they can prove they are protecting the union dues of existing members at the same time they think about offering value to potential members, they might even win a few new ones.

The value of Whatsapp, in perspective for Australia

WhatsApp will be bought by Facebook for $19 billion. That would make it the 14th most valuable company on the Australian Stock Exchange, more valuable than Fortescue Metals, more than Macquarie Group, two thirds as valuable as Rio Tinto.

The deal puts the $1 billion Facebook paid to buy Instagram firmly in the category of forgotten history.

Whatsapp, for those of you not in the know, is just another way to send text messages.

It has been downloaded over 100 million times, but it is free for the first year, doesn’t sell ads and costs $0.99 a year thereafter. So yes, it is a graveyard for investors capital.

The internet economy is great for consumers. But the expected monetisation of all this time spent is just never going to happen in the way companies seem to believe. Time spent online is not like time spent walking around a mall.

Do Crime and Meth addiction have to rise in Geelong?

Economically, the end of aluminium smelting and car-making in Geelong makes sense.
Both are low-wage, dead-end industries propped up by government subsidies. They subtract from our net welfare, as a nation. That’s the meta view. The view from space.

You don’t need to be a social scientist to know that when industries close down, disadvantage gets concentrated. I wrote about this recently in the context of another Australian city, in this post: Detroitelaide.

Economists cover this issue in the term “transition costs”, but that doesn’t really tease out how painful they are

Bruce Springsteen’s whole career is built on reflecting the suffering of the US rustbelt, where manufacturing’s long decline has hurt generation after generation.

From his 1983 song My Hometown:

“Now main street is whitewashed windows and vacant stores
Seems like there aint nobody wants to come down here no more
They’re closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they aint coming back to
Your hometown, your hometown, your hometown, your hometown”

to his 2012 song “Death to My Hometown”

“Now, no shells ripped the evening sky
No cities burning down
No army stormed the shores for which we’d die
No dictators were crowned.
I awoke on a quiet night, I never heard a sound
The marauders raided in the dark
And brought death to my hometown
They brought death to my hometown
They destroyed our families, factories
And they took our homes
They left our bodies on the plains
The vultures picked our bones”

Bruce’s songs resonate because these stories are real.

I have Springsteen on the brain but you don’t need to look as far as New Jersey to find pockets of suffering due to declining employment.

Victoria’s Latrobe Valley suffered a huge decline in employment in the 1990s when the State Electricity Commission was privatised. Towns out there are still setting records for socio-economic disadvantage:

Methamphetamine is an issue, and crimes against the person are the highest in the state.
Access to the internet was recorded in just 68 per cent of homes at the most recent census.
The Valley has lower educational attainment than the rest of regional Victoria.
20 per cent of the population smoke daily, compared to 16 per cent nationwide.
Unemployment in December was 9.2 per cent in Gippsland compared to 6 per cent in Victoria at large.

So the citizens of Geelong must be worried. To lose Ford in 2017 was going to be hard enough. Will the 800 jobs at Alcoa prove critical? Luckily, Geelong is a much bigger city than any of the towns in the Latrobe Valley.

It has a university, a football team, an airport and a burgeoning market for tourism. The Government is likely to tip in money. There is a Geelong Investment and Innovation fund worth $25 million. Labor is agitating for that to increase to $100 million.

But even with that money Geelong will need to work very very hard or else its major export might end up being suffering. And singer-songwriters playing poignant minor-key rock anthems about it.

Hate the Porsche Cayenne? You’ll feel sick when you hear about the Lamborghini SUV.

Should Moet start selling lemon squash?

It seems like the answer may be yes. Brands that once zealously guarded their integrity are now stretching for brand extensions every which way.

Porsche – which some grey-beards in the audience may know as a sports car company – now sells more big four-wheel drives than speedy two-seaters. The Cayenne SUV shifted 42,000 units last year, compared to 13,000 of the “cheap” Boxster sportscar and 16,000 of the “classic” 911 range.

But how long until the excitement of driving a Porsche wears off? At $220,000, the Porsche Cayenne does not top any category. You can get a real Porsche for less, and you can pay a lot less for a perfectly good Range Rover that has real four-wheel-drive capability.

Porsche Cayennes are such a mid life crisis car. Its like "I like the comfort of my Range Rover, but I want a Porsche"

— Robbie Henry (@RobbieH46) October 25, 2012

Porsche can obviously tell it is in a goldmine, and they have a plan. A new obnoxious Porsche SUV, the Macan, will be released in 2014.

If you’re thinking: “Wow! what a radical redesign!” You probably have never seen a Porsche Cayenne.

It is smaller and even less expensive than the Cayenne, with a base model coming in at $87,000. The motoring press is pretty enthused about it, but when Porsche is competing with the Nissan patrol ($82,000) that sends a message about Porsche to the market.

When you make a brand extension like this, you sacrifice some buyers for others. The hardcore sports car enthusiast views your product more dimly. The middle-of-the-road consumer’s eyes light up. Whether that is a good idea in the short run is a matter of simple mathematics. Do you lose more customers than you gain?

But long-term, there’s a bigger risk. Pierre Cardin was once a luxury clothing brand in the vein of Hermes. Then it went wild.

From the Harvard Business Review.

“Initially, the brand extensions into the perfumes and cosmetics categories were successful because the premium degree of the Pierre Cardin brand transferred undiminished into the new, adjacent categories. The owners of Pierre Cardin, unfortunately, attributed this to the strength of the brand rather than to the brand’s fit with the new product categories.”

I have a Pierre Cardin dressing gown that I believe came from Target. While it is terrific in its way, the brand impression I now have means I would not buy a Pierre Cardin suit.

iSnack2.0 was an example of a bad brand extension. Not because Vegemite is too fancy to go into other products but because iSnack2.0 filled a niche that no customers lived in.

Jack Daniels and cola in a can is a good example of a brand extension. Laphroaig whisky and cola in a can would be a bad brand extension. What matters is not just the quality of the ensuing product, but how important exclusivity and purity was to the brand in the first place.

That’s why the fact that Lamborghini is preparing an SUV for launch is such a shock. Lamborghini is the quintessence of hand-made cars that cost an absolute fortune. Existing Lambo owners who paid around $600,000 to get their hands on the badge may not be too happy about the emergence of a Lamborghini lump costing “just” $200,000.

(In fact, this is not their first brand extension in the field. They made and sold 320 “Rambo-Lambos” between 1986 and 1993, after attempting to build a military vehicle but not finding any buyers. The market for SUVs is admittedly now much much larger.)

But will Kanye want to name-check the Urus like he did with “mercy me, that Murcielago?”

Not unless he is making a kiddies album.

The chief of Lamborghini has hinted the new SUV might not even be the end of the brand extensions. And the people most excited about that can probably be found working at Ferrari. It means one less competitor for the position of top pure sports car maker.

“We will never build an SUV”, said Ferrari in 2013, before going on to claim that “an SUV cannot deliver genuine driving emotion”.

Springsteen-o-nomics.

Last night I saw Bruce Springsteen and the E-Street band play at an arena just a few kilometres from my house. He was supported by another great 80’s band, Hunters and Collectors, and the whole thing was worth many times the ticket price.

Bruce played for 3 hours 48 minutes, just short of his 4 hour 6 minute record. It was quality, not just quantity, but of course my mind still sometimes strayed into thinking about the economics of what I was experiencing.

1. Externalities.

Watching the Boss in a crowd of one would be lonely and weird. You need all those other people to sing along, chant, create energy..

While most people in the crowd provide atmosphere, there’s a certain subset of the crowd that is pure negative externality:

Yeah, you guessed right. I’m not very tall. Still, I think tall people disproportionately enjoy live music and show up in disproportionate numbers. Could you create a simple market for live music that lets the short buy themselves a decent view?

2. Enforcement in the absence of clearly defined property rights.

Before the start, we were about six metres back from the fence in the general admission area. People guarded their space jealously. There were tiny pockets of space into which people from the back would push. The only way they could get away with it was by affecting the face of someone looking for someone, and loudly saying, “he said he was right here,” then looking at their phone. That created enough uncertainty to buy them time.

But if people – especially tall people – just muscled through and stood, it was another matter. There were two guys who looked like US professional wrestlers who stood right in my view, and this guy who looked like a retired orthopaedic surgeon tapped them on the shoulder and gestured violently that they better not stand there. It was beautiful.

3. Complements.

For some people, beer and music go so well together that they are willing to forfeit watching great chunks of an act they have paid $128 to go and see. They’d rather push through a darkened and tightly packed crowd, stand in a beer line and then carry beer back through – a mission of 20 minutes a time. Amazing. Perhaps this is actually a lesson in how some people don’t understand opportunity cost.

4. Diminishing marginal returns.

Bruce and the E-Street band played for over an hour before announcing they would play their 1975 hit album Born to Run from cover to cover. They played it. Then they played for another hour or so. That was when I first saw someone leave. Then the band left the stage, came back to start an encore, played a few songs, announced there was now just twenty minutes left, played a few more songs to use up that 20 minutes, played a super-long version of crowd-pleaser Dancing in the Dark, played traditional ending song Twist and Shout, did a huge finale, bowed and accepted the applause of the crowd. More of the crowd left to beat the rush. The entire E-Street band left the stage and just as Bruce was walking back past the drum kit, a roadie’s hand reached out with an acoustic guitar, he strapped it on and gave us one more song. Parts of the crowd audibly groaned. (Not me.)

The full setlist can be seen here.

5. For some people, a retirement age is a terrible idea.

Bruce is 65. He doesn’t look ready to start drawing down his super.

How to make athletes pay for their training and still bring home Gold! Gold! Gold!

As Aussie athletes make a name for themselves in Sochi, we can look forward to another four years of seeing their smiley faces shilling for products on our TVs. No athlete steps up onto that podium without making their agent’s phone ring off the hook.

That’s why the idea of a HECS system for athletes is very tempting.

(For the international readers, a quick primer: HECS is a TOTALLY AWESOME student loan system. Zero real interest rates and no need to pay any of it back until you earn above $51,309. Meanwhile Australia’s Institute of Sport spends millions training athletes without seeking any recompense.)

The Australian Sports Commission (which funds the Insitute of Sport) spent $310 million last year, and that’s before counting the various state institutes of sport. (The VIS is boasting today about an athlete that finished 61st in cross country skiing).

But there are a few very intriguing twists to this tale that will require policy makers to work hard to stick their landing.

Problem 1. Athletes are So Poor.

We have a sample bias. The athletes we see the most are the athletes that earn the most. Thorpey. Cadel. T-Brizzle (Australia’s favourite Mormon!) Clarkey.

BRW tells us our top athletes are earning over $10 million a year. But the best need the rest to make their performances stand out. Their glory is made out of trampling coulda-beens, duds, ones with questionable work ethic, journeymen and hacks. The ones who make no coin.

Solution 1. The way an athletes HECS scheme works needs to be different to the student system. Most people are not going to pay off. But some will pay off in spades.

It’s not a low-risk low return game like training people in nursing or accountancy. It’s a high risk, high return set-up. That means you need to more than fully recover the cost of training from the few big winners. If Clarkey got $30,000 of support from the Cricket Academy, you need to get $300,000 back from him to cover all the guys who also got $30,000 but made a string of ducks and no cash. The debts should be 10 times the investment, and recovered progressively.

Problem 2. Sports skills are just not useful.

If the AIS trains you to be the best white-water canoeist you can be, in the hope of bringing home Olympic gold, and you don’t, but then years later you go on to found an IT consultancy and you invent a really quite terrific database that makes you a lot money, should the AIS be able to ping you for cash?

It hardly seems fair.

Solution 2. If athletic earnings could be kept separate from non-athletic earnings, that would be ideal, but I fear such a system is ripe for being gamed.

ATO: “Pay up, Clarkey.”

Clarkey: “Sorry ATO, no dice. Swisse Vitamins paid me this money because I’m a good-looking Aussie dude, they didn’t even know I played a spot of cricket!”

ATO: *curses*

A simpler idea might just be a time limit on AIS debt so it expires at about the time any sporting career ends. Ten years for gymnasts. 25 years for long-distance runners, or five years after any career-ending injury.

Problem 3. Some sports are cash cows, some are not.

The AIS supported 1233 athletes in the most recent year. This includes weightlifters. Pole vaulters. Badmintoners. These guys could be reigning nine-times world champion and spokesperson for the globe’s top shuttlecock brand and still need to pull shifts driving a forklift at a logistics company to pay their way.

Solution 3. This one is easy. Set the bar for repayment at $50,000 and the earners in these lesser sports will never trouble the threshold.

The Clifton Hill under 12s have as much profile as the Australian badminton team.

The reality is that sport is luxury. These are frivolous games to play and our national pursuit of Olympic “glory” is also a simple distraction.

When taxpayers lay the groundwork for a handful of golfers, cricketers, basketballers and boxers to own homes in Miami and St Tropez, there is a moral issue at stake. Sports training can fund itself using the above principles, and by god it should!

If there are any other clever features such a program should have, or if you think I’m totally wrong, leave a comment below!

Small Business: Saintly and Ascetic?

In the wake of the Commonwealth government’s decision to not provide $25 million to Coca-Cola Amatil to revamp the SPC canning facility in rural Victoria, a particular sort of argument about small business seems to have gained currency.

“If a small business person runs their business badly, they personally suffer… Coca-Cola wants the taxes of small business people to subsidise their business failure.” Ken Phillips argued in the Australian this week.

On ABC TV’s Q&A, Yolanda Vega said this:

“We seem to keep making the same mistakes. There’s these massive businesses that keep getting bailed out, and yet the small business of Australia which make up 96 per cent – are completely ignored.”

Among the people apparently so busy ignoring small business are Commonwealth Minister for Small Business Bruce Billson, Victorian Minister for Small Business Louise Asher, NSW Minister for Small Business Katrina Hodgkinson, WA Minister for Small Business Joe Francis, SA Minister for Small Business Tom Kenyon, and Queensland Minister for Small Business Jann Stuckey, not to mention an array of shadow ministers and small business commissioners.

The tax on interrogative punctuation hits yet another local enterprise

Governments want to help small businesses so much it hurts, even if they don’t always know how…

Victoria has a small business commissioner, promising help in creating a fair and competitive environment; and another entity called Small Business Victoria. The state puts on a small business festival; small business workshops and seminars; not to mention providing help for small businesses through Regional Development Victoria.

When Yolanda Vega said small businesses were “completely ignored,” she obviously hadn’t seen this recent press release from Victorian Small Business Minister Peter Crisp, where the government committed to buying in consultants for 500 Victorian businesses.

As the source who brought this to my attention says, “What a joke.” This “scattering bread to the pigeons” approach to business welfare is uniquely formulated in terms of its capacity to not be helpful in any strategic sense.

The State government also spent $70,000 recently on a study tour of Europe, designed to figure out the smart ways to support small businesses. (Manchester, London, Amsterdam, Berlin – at least it wasn’t Cannes, Monaco, Sorrento, Santorini).

The federal government doesn’t want to be left behind either. Competition laws are being shaped to give small business a better run, and the government is funding a superannuation clearing house to reduce compliance costs for businesses with less than 20 staff. The ATO has recently launched an app for small businesses too.

I crossed paths with Small Business Minister Bruce Billson at a Real Estate agent in suburban Carnegie late last year. He was eager to cast everything the Abbott Government was doing, including removing the carbon tax, as a response to the needs of small business.

Small business account for ten percent of the tax take, but more than that in terms of votes. The idea they play under the same rules and fight on the exact same terms as big business is untrue.

No business is easy, but no business should be easy. Competitive markets should have business owners – whether they are shareholders in a major miner or baristas at a minor cafe – worried about the medium term future and working hard to secure it.

The help big business gets might be news-worthy and include big dollar figures, but the narrative that only small business represents some sort of Ayn Randian ideal of free enterprise should be quashed.

How Fairfax helped kill car-making.

Toyota is going. And yet the government is barely sweating. They stand at the dockside, waving their hanky, thinking of something else. Not even a crocodile tear in their eye.

This, in an environment of rising unemployment, is politically shocking. How has it happened the populace apparently no longer wants this key industry saved? The answer is not that the Australian people have suddenly swallowed an Economics 101 textbook. It is just in the “national mood.”

And that mood is still shaped by the media…

One could trace the beginning of the end of support for Australian car manufacturing to 2011. The economics editor of the Australian newspaper was a man called Michael Stutchbury. A man with ambition. Fiery and with salt and pepper sideburns, “Stutch” put his hand up for a new job that was going across town.

He wanted to be handed the editorship of the Australian Financial Review – Australia’s only business daily. A paper loved and feared in decision-making circles.

The top echelons of Fairfax considered the CV of the man. He was a man of strong views, sure, but the Fin Review had floundered under middle-of-the-road helmsmanship, so perhaps that was not just desirable, but necessary.

Stutch arrived at the Fin amid a surge of excitement, armed with a two-word slogan: Agenda-Setting.

“I think we can turn it into a growth story by reinvigorating the journalism, concentrating on news breaking, going back to setting the agenda,” he told ABC business reporter Ticky Fullerton at the time of his appointment. The move to agenda-setting came with an advertising campaign too, that made the odd choice of appropriating some classic communist propaganda tropes.

The newspaper proceeded to take a far sterner line in deciding what was and wasn’t news. But it went a step further than that. The paper made some things into big news.

Stutch’s sharp news-sense, formed at the Fin Review but forged in the right-wing foundries of The Australian, combined with his purist views of the government’s role in the economy, meant the car industry was a prime topic. I personally spent hours camped out front of Toyota’s Altona factory getting soundbites from workers, hours trawling through the car statistics to find an Australian manufacturing angle, hours looking into the history of government assistance to the industry.

I even interviewed motor-racing legend Dick Johnson about the possible end of the Falcon, a story idea I was told came from the very top. (Johnson said: “Australians have an affinity with a front-engine, rear-drive car [and] a medium to large body size . . . But it may only be my generation that sees that.” The paper printed the story and a picture.)

Anything with a car industry assistance angle was easy to get past the mid-level editors and into the paper, because they knew Stutch would love it. So he didn’t have to personally demand every single story that the Fin published. The car industry was hot, and everyone knew it.

Not long after Stutch got the job, Tony Abbott announced cuts to car subsidies.

Would the government keep this risky promise? The issue remained firmly on the agenda. I wrote at least ten stories on the topic, (1 2 3 4 5 6 7 8 9 10) and I was perhaps only the fourth reporter in line to write car stories, behind Mark Skulley, Peter Roberts, and Lucille Keen.

(Three of the four reporters listed above no longer work at the Fin.)

But once set, the agenda doesn’t stay inside just one newspaper. If the Fin is in a lather about the car industry, then the Age gets a bit of froth on it too, as do the Sydney Morning Herald, the Herald Sun and the Advertiser. The tone of coverage nationwide took a subtle turn.

Now, newspapers can push barrows without getting anywhere. What gave the AFR barrowload so much momentum was the political gradient. Labor was clearly sliding out by 2013, and the Coalition was ascendent.

Stutch’s steadfast campaign was given legs because it coincided with a Productivity Commission report and a bright new political day (not to mention political capital in the shape of dozens of one-term backbenchers).

Newspaper editors are powerful people. The Abbott Government is emboldened to make the decisions it is making – decisions its predecessors were unwilling or unable to make – because the prevailing climate is one in which they can expect some media support for the decision. Neither national paper is going to crush the government for cutting the funding which kept car manufacturing here.

I can’t help wondering how Stutch feels today, with the end of Australian automotive manufacturing a reality.

Perhaps I am naive but I can’t quite imagine champagne corks popping. I prefer to imagine him slightly frightened. As in, “Jeez, I can’t believe I just did that!” Like the start of a superhero movie. In that context, here’s a quote I think worth remembering for newspapers editors everywhere: “With great power, comes great responsibility.”

Rent, buy, panic? Auckland’s House Prices now Higher than Melbourne

We have got so used to leading New Zealand in all matters (possibly excluding rugby) that the facts of New Zealand’s economy break into our consciousness only slowly.

But here is the truth: New Zealand’s wool industry is a golden fleece and its dairy industry is a cash cow. The Chinese consumer’s taste for consumption is fuelling demand for soft commodities that is making Aotearoa like Perth. They are enjoying a “dining boom” just like our mining boom.

That’s happening at the same time as free-market policies pushed by right-wing Prime Minister John Key, so that New Zealand is coming out of the GFC far richer than it went in.

The rum in the punch at this prosperity party is Auckland property prices, which have risen wildly in the last two years.

If you’re a beneficiary of the great kiwi boom, you might like this “choice as” property offering:

The property price boom is spreading even to the unfavoured areas of Auckland.

Another sign of the booming Kiwi economy is their dollar. We may soon be on the wrong side of parity.

And it’s not just Auckland where house prices are booming. Ordinary homes in out-of-the-way parts of the South Island are also priced oddly high.

The other great explanation for this is low low interest rates. Australia got its official cash rate down to 2.5 per cent just last year. New Zealand has had rates at that level since March 2011.

The rise in house prices has been so marked that the government introduced special laws to try to cap price rises. They have tried to limit the value of loans going to borrowers with low deposits.

So can these high house prices be justified?

New Zealand is still not as rich as Australia, minimum wage there is $13.75, compared to $16.37 in Australia. Average and median earnings are lower too – Kiwis earn 26 per cent less.

It is concerning.

When I think about New Zealand’s housing market, I get the feeling it it is self-evidently frothy. That the bubble will pop. That the end of all this Will. Be. No. Good.

That is almost exactly the same patronising attitude all these flown-in experts have when they talk about the Australian market. Here’s the latest one, printed just hours ago.

So what can we learn here? That an outside perspective on house prices can feel very different from an inside perspective? That rapid growth should ring alarm bells? That the Chinese demand may not be as guaranteed as the Kiwi market seems to believe? Or just that we should have bought in Auckland two years ago?

Fire in the hole! Fire in the coal!

Fires are racing across the state of Victoria, burning the fringe of Melbourne, and immolating the state’s east.

I drove down the Hume Highway yesterday and the thick billowing black and grey smoke was bigger and more threatening than any fire I’d ever seen. The radio told us the Hume was closed – it wasn’t when I drove through – but the fire was uncomfortably close to the road, perhaps 3km, and the wind was very strong. It was stressful. That fire is still burning today.

There is also a fire in the open-cut coal mines in Gippsland. Tonnes of brown coal are burning up that might otherwise be used to power the whole state.

Because of fires, the Hazelwood power station, which provides a huge proportion of Victoria’s power, is at risk of stopping this afternoon.

I went to Hazelwood in 2011, for work. It is a weird thing – not shiny, glossy, or modern. It looks like the sort of facility you might encounter abandoned in a video game, or where Batman has a showdown with his nemesis.

It was strange to look up at the eight big smoke stacks and think that carbon emissions on an enormous scale were happening before my eyes.

The outdated hulk of Hazelwood is the symbol of dirty electricity in Australia. It burns brown coal, the dirtiest kind of coal there is. Brown coal currently accounts for 85-90 per cent of Victoria’s electricity production. But it is easy to oppose brown coal, and I don’t doubt a few environmental campaigners were secretly barracking for the fire yesterday when it briefly threatened the power station itself.

It’s easy to oppose brown coal, that is, until you see how much of it we have.

When you see the amount of brown coal in this state, it’s hard not to say, “Gee, we should find a way to use that.”

[Brown coal, like black coal, is long-dead bio-stuff. But it has had less geological pressure applied and so is less energy dense. Brown coal is just one step up from peat.]

There are 430 billion tonnes of brown coal in Victoria, estimated to be one quarter of the world’s brown coal. It starts around 15 metres below the surface and goes down as much as 250 metres.

Every hour, the Yallourn power station burns 2200 tonnes of brown coal to power 2 million homes, according to their publications. That implies a kilo of brown coal powers a home for an hour.

High moisture, low ash coal. Source: Vic Gvt

The billions of tonnes could keep the lights on in this state for a very very long time. By my estimate we could get to 14,000AD without energy efficiency improvements or solar installation.

It’s good quality too – low in impurities. But the problem is this: Moisture. Our brown coal is very wet, at up to 70 per cent water. That means it can’t be exported, because it is too heavy. That’s why the big electricity generators are out there, right on top of the coal deposits.

The problem with brown coal is that the opportunity cost of leaving it in the ground is so high. If you don’t burn it for electricity or turn it into briquettes, you don’t get anything for it. There are, as yet, no other economically viable uses for brown coal.

If the cost of carbon rises high enough it could become uneconomic to burn brown coal even for electricity. Hazelwood is a leading candidate for shutdown to help Australia meet its carbon-emission targets.

If that happens we don’t have a resource at all. It would be like having a lot of telegraph equipment. Using it will actually leave you behind when better alternatives exist.

Unless of course you can find a new use for it.

The Victorian government is, for this reason, spending money trying to raise the opportunity cost of burning brown coal. To make another use for it, so that burning it for electricity stops being the best idea we have.

There are research programs into drying it, turning it into liquid fuels, etc. From the energy resources website:

“In the future, brown coal may even be refined into a purer form of carbon for use in production of a myriad of carbon products including carbon fibres, carbon anodes, activated carbons, filter aids, pigments, graphite lubricants and conductors and formed carbon materials.”

A company called Brown Coal Innovation Australia is supposedly leading the charge, with state government support. They handed out a few $10,000-a-year PhD scholarships and are currently assessing research funding proposals worth $3.5 million. Is that really enough?

Whatever happens, the best-case scenario is definitely not brown coal burning up due to bushfires. That delivers all the downsides of carbon emission without even any electricity to show for it. And it could be some time before the fire in the hole goes out. A 2006 fire in the Hazelwood mines ran for a week before being extinguished.

Hot Blogs

On the right hand side there are a bunch of links, under the heading Blogroll.

They are the work of a bunch of people I respect. Some I know personally and some I don’t know, but all are blogs I visit and enjoy.

Today I draw your attention to two more economics blogs I am about to add to the list.

Market Failure, run by a political science student at MIT called Alex. He has impressed me in the last week with posts about the Superbowl and opiates.

Messy Matters, a blog run by some ex-Yahoo! scientists. It impressed with an amazing blog about racial preference in dating this week but going further back there is also a great one on using data from those crappy opt-in online polls to forecast important things like elections.

Click on through and check them out!

The decline of economics?

Google trends showed me this.

That graph shows that economics share of total searches is in big decline.

I was worried. Not only was my discipline apparently out of favour, but I was re-launching this blog in a climate where its subject matter was of fading interest!

I pondered. Could the global financial turmoil of previous years set people against the study of markets in a formal way? Was economics unfashionable because of rising inequality in the first world – the rise of the 1 per cent? Was the world turning its back on economics after the roiling controversy of Rogoff and Reinhart making an elementary Microsoft Excel error in a crucial paper?

I was about to set up a multivariate regression to try to nail down the true cause when I had a thought. Perhaps economics wasn’t declining per se, perhaps everything else was on the rise?

Witness the democratisation of the internet, wherein the information tubes are wrested from the sole control of the nerds.

This is why it seems like the internet has been dumbed down. (I’m referring to you, Youtube commenters.)

The internet is increasingly just as smart as the real world, no more, no less. That’s why we have Buzzfeed Australia now, I guess, serving up articles like this one, about people mooning a train. But we shouldn’t forget that we also have things like Reddit’s economics page, where the content is given over, for today, wholly to submissions from economics journals.

The internet is still as good as ever, you just need to know where to look.

Big pokie-filled “Clubs” – A Victorian calls it as it is

This country may be federated, may be full of “common wealth,” but its the things that divide us that catch the eye.

So when I crossed the Murray recently, I was hyper-aware I was in Club land. A fact that left me simultaneously enchanted and repelled.

For those not familiar, a “club” is a multi-tiered pleasure dome, full of salad with viniagrette, taps dispensing Tooheys New, tucked-in shirts, and screens on which are displayed simulacrae of spinning wheels, creating a vortex into which many a fortune has fallen.

Like this:

This blog has been coming to you from a secret bunker in the last week, but secret bunkering can only take up so much of your time, and so it was that last night I was able to visit Tomakin‘s club yesterday evening.

These clubs retain vestigial connections to the like-minded groupings that formed them, once upon a time. There are tennis courts and bowling greens out the front at Tomakin, for example. But those were empty.

These days the clubs, which can be found across NSW, the ACT and Queensland, serve a primarily different function, which is to do house the functions of a good bar, a good restaurant and a good casino in one apricot-hued 1990s construction, while omitting any “goodness.”

The purpose of our trip to Tomaking was to sample its lightly-famed Left Bank Brasserie.

More gauche than rive gauche, the Tomakin Sports and Social Club Brasserie dishes up a mighty cheap lunch, at $6 Monday to Friday. At dinner time you can get a serviceable Chicken Schnitzel Parmagiana for around $17.

The crowd consists entirely of people of anglo-celtic extraction and the carpet features a repeating pattern. One can easily get lost in there.

The dining experience is marked by frequent public announcements, piped at quite audible volume to all parts of the establishment. One is forced to assume the majority of the clientele do not still retain their hearing, but whether Tomakin Sports and Social Club can bear responsibility for that or is merely reacting is not clear. Nevertheless the identity of the raffle winner and the timing of the courtesy bus departures will remain seared forever into my brain.

But the true raison d’etre of a club is to house pokies. They sit in the centre of the club, visible from every food outlet and every bar, encouraging those who ride the courtesy bus home to do so substantially lighter of pocket than on their arrival.

I rue the $3 I invested in this Jumpin’ Jalapenos machine, for nil return.

As a Victorian, my gut reaction is to find the downside of all things New South Welsh: Big bridge may look nice but it creates a terrible traffic choke point, exterior of Opera House is lovely but inside is entirely aria-hostile, warm weather is very pleasant but means a higher hatching and survival rate for bogans, etc, etc.

These clubs are popular. Wildly so. Am I being unfair to them?

I say no. The absence of such clubs in Victoria is telling. The only reason they have spread across the wide plains of Queensland and NSW, like the prickly pear and cane toad before them, is the legal quirk that permits not-for-profit clubs to put pokies on their premises. That has been permitted since 1956 in NSW.

These clubs serve the communities rather than making profit, sure. But such profist are calcualted after paying for the poker machines.

Here’s a telling quote from an article published late last year.

Anti-gambling campaigner Reverend Tim Costello said about 40 per cent of poker machine revenue came from addicts.

“The social costs are high, including relationship breakdown, mental health issues, unemployment, debt, financial hardship, theft and other crime, social isolation and all too often suicide,’’ he said.

Victorian clubs have only been permitted to have pokies since the 1990s. Their spread has not taken them as far as in NSW, nor have they become as deeply embedded in the community. Here’s why that’s a good thing.

“The maximum average loss rate per hour for Australian poker machines in Australian dollars is $720 per hour compared to $156 for New Zealand machines (outside casinos), $130 for the United Kingdom machines, $52 for Japanese machines and $705 for United States machines.”

Clubs Australia, the peak body for little outposts like Tomakin Social Club is powerful enough to defeat comprehensive pokie reform that everyone without a vested interest agrees would be a good idea. The centrality of poker machines to these clubs means they should be renamed pokie clubs. That or try their luck going back to being actual sports and social clubs. Surely communities like Tomakin would get on better if the residents were sitting around a Bridge table or standing round a pool table, instead of lined up in rows feeding the machines?

When job hunting is an endurance sport.

Unemployment in Australia is rising, and economists are relaxed about that generally, because it coincides with the end of the mining boom.

But new data out today show there is a hidden group for whom relaxation is just a dream – the long-term unemployed. The unemployment rate now sits at 5.8 per cent and rising, up from below 5 per cent in 2011. Getting a job is proving harder and harder:

The number of people starting new jobs (in the 12 months before the survey) is falling. It was 1.69 million in 2012, but had fallen to 1.67 million by 2013.

What that means is more and more people whose work skills are atrophying.

The proportion of unemployed people who had been looking for work for over 12 months has risen from 19.2 per cent in 2011 to 20.8 per cent in 2013.

And not all long-term unemployed people will show up in the figures. Some people will give up and disappear from the statistics if they stop seeking work, for example if they move onto the pension.

This is very bad news. Unemployment rates tend to rise sharply and fall slowly:

[It’s possible my entire interest in economics and statistics is because of the spike in the middle of the above graph. My first awareness of anything called the “economy” was the 1990s recession, which was also when I first heard the word “unemployment” and heard job losses discussed in hushed tones. I remember seeing newspaper articles about 11 per cent unemployment. Then my whole secondary schooling and university education coincided with the long, slow reversal of the unemployment caused by that short sharp recession.]

Unemployment is very hard to remove because of a concept called Hysteresis. It basically says that high unemployment is sticky – the economy “gets used to” functioning with more people out of work.

What that means is that a period of high unemployment is not just bad in the here and now. Its effects echo down through time in the shape of higher unemployment rates.

Like the top of the Rialto, jobs can be hard to find

The Australian situation is still the envy of the world. Our unemployment rate is well below that in the US. But that is cold comfort when you are scanning the job ads for the 53rd luckless week in a row.

The data also contain another interesting tidbit:

66 per cent of people look for job ads in the newspaper, but 84 per cent of people look for job ads online.

But young people use the internet more, with 85 per cent of them looking for jobs online. But for the first time even those 45 years and over reported they are now most likely to look for jobs online, with 79 per cent scouring Seek, Monster, etc. (And that’s why the newspaper business is in so much strife)

Myer and DJs – Stop Copying Me

At first glance, the idea of a merger between Myer and David Jones seems utterly natural. The two stores have been struggling in the dying light of the traditional retail industries. Their centuries-old premises in city centres seem like relics of a gaslight era, when the prospect of a lift ride was exciting and shoppers donned their Sunday best.

The department store concept seems somehow nostalgic when eBay and Amazon, Kogan and Net-a-Porter are rampaging across the retail landscape like barbarians, slaying all those that stand before them.

Must these revered icons of Australian retailing continue to fade, as Georges did before them? The message from the internets is: no.

Online, the department store concept has never looked stronger. eBay does not stick to just one line of merchandise. Nor does Amazon. Speciality stores are not a natural reaction to a burgeoning online world.

And in other corners of the retail universe, companies that offer a range of goods seem to be thriving. What is Target, but a department store that happens to be a bit cheaper? Same with KMart.

The biggest and most sucessful retailer in the world offers 100,000 different items in its stores, everything from bling to black beans. I’m talking about Walmart, which made almost $4 billion in profit in a three-month period in 2013.

So there is nothing inherently fail-worthy about trying to sell a lot of lines from one company.

But if you bought $100 worth of Myer shares when it split off from Coles, they would now be worth around $66.

If, that same day, you’d bought $100 of David Jones shares, they’d now be worth about $55.

Why are Myer and DJs failing? It’s not because their death is inevitable. In the UK, a department store called Selfridges is operating the upscale department store model, but doing it a lot better. It is hitting new record profits and expanding its stores.

In a way the problem is the Hotelling model. That suggests that when there are two competitors, they should try to match the other, whether on location or concept. DJs, for example, has a promise of “lower everyday prices” to combat the perception Myer is cheaper

The two stores have matched each other step for step. They have been so frightened to differentiate themselves from each other that they have, while staring the other in the eye, walked into the same tar pit.

But the Hotelling model works best with only two competitors. The world of retail has changed and so the strategies of Myer and DJs need to diverge.

As Myer and David Jones struggle for the same huge swathe of middle-class customers, they are hurting each other. One needs to make a bold break for freedom.

David Jones was traditionally the more fancy of the two – perhaps it could ramp that up to appeal to the increasingly self-assured and aspirational Australian Market. Or perhaps it could move to serve the growing market of elderly – our ageing population has to be good for a few pennies.

The crucial thing is to make a move the other won’t follow. There has to be room for two big department stores in this country, but not two that are perceived as so similar. David Jones has recently announced a plan to set up smaller stores in rich suburbs. That attempt to make a break for freedom might be why it had the confidence to reject Myer’s $3 billion merger offer.

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