Betting on the Chinese Communist Party, and why that could make us poorer.

China’s economy is showing signs of failure, but people keep betting on it.

For example, last week an index of Chinese manufacturing output showed its fifth consecutive month of falls, and China-linked assets shot up.

The reason? 

Financial markets believe the Chinese government will come to the party with extra spending and extra stimulus.

Are they right? The question we are asking here is not merely academic. If we bet on China and lose, the following are likely to fall:

  • The Australian dollar.
  • Australian economic growth.
  • Australian share market.
  • Australian house prices.

The Chinese government obviously wants the economy to keep growing. The continued existence of the Communist Party is tied to the performance of the Chinese economy. They have to keep it ticking over. Their motivation is clear and pure and strong. But motivation is not always enough.

Shanghai skyline
Can we distinguish warnings signs from red flags?

Consider this. The only reason markets need to trust the Chinese government to add more stimulus is that previous rounds of stimulus haven’t done enough. Financial markets are betting the guys that got the market into this pickle can safely navigate out again.

“We expect Beijing to launch a series of policy measures to stabilize growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower,” said Hongbin Qu, chief China economist at HSBC.

A few iterations is enough for the human brain to learn a pattern. We’ve seen the Chinese government come to the party during the GFC and during the European debt crisis that followed, keeping China’s growth rate up over 7 per cent, rain hail or shine.

No wonder traders and hedge fund gurus trust their guts on whether the dragon will roar again. But a well established patten hurts the most when it breaks.

This time the problems in China seem to be inside China. They are not dips in demand caused by a failing USA or Europe. 

China recently experienced its first debt default and its first bank run. Corporate debt is being reined in.

The big pile of flammable material at the heart of China’s economy is house prices that are too high. China’s property market issues are unique. Everyone agrees prices are in bubble territory and will have to fall. Even the Asia editor of the Economist, who is otherwise totally excited by more China growth.

You can bet these weird Grotto apartments in Shanghai sell at a premium.

The question is what will happen when Chinese house prices fall. It’s easy to imagine that it will happen in a controlled way, or simply not be too important. That’s what Ben Bernanke imagined pre-GFC too.

China is enormous and its government freer to act than most, due to the absence of democracy. I suspect any crash would be over sooner than some expect. But even a short dip would be a big problem.

The value of China’s growth has been that it is consistent. It can be counted on. Having to risk-weight China’s future growth will take a lot of shine off Australian asset prices.  House prices would be under attack from all quarters, with receding Chinese purchases, a falling share-market, and a weakening Australian economy. Bank shares, which account for a quarter of our stock market, tend to follow house prices. The Chinese government’s ability to manage its economy has become, it seems, one of the biggest risks to our wealth and well-being.

It’s our head inside the lion’s mouth.

Story-telling, the exchange rate and Kurt Vonnegut

The Australian dollar has gone up! The only clear effect of that is that headline writers are in desperate need of a simple story to tell.


I wrote currencies for two years and there is always someone telling you that if only the dollar would fall below Parity / US90c / US80c / US70c, Australian industry will suddenly be in a bed of roses. 

Of course the young reporter will include such a statement in a story, because – finally – they have something to say about the currency that could garner a few clicks.

But of course the reporter knows it is not true. There is no magic level for the dollar.

Every little fall in our dollar increases the benefit of exporting. A certain firm may have a break-even level, but an industry will find its exporting grows easier gradually, not step-like, as the dollar falls.

The effect on “industry” is in fact, even more complex than this. Firms don’t just sell. They have to pay employees and import material and equipment. That’s easier with a high dollar.

The simple story is high dollar = bad. But with a really high dollar in the last few years, the Australian economy grew fast, and Australians enjoyed a high quality of life. We bought overseas holidays, flat-screen TVs, overseas apparel, smartphones and Apple Mac computers at an incredible rate.

With a low dollar, such consumption is harder. But businesses should be better off. There will be less competition from imports, and it should be easier to export. But of course the equipment and materials they need to import as an input will rise in price.

It’s almost as if every time the dollar moves, someone benefits and someone loses! The whole thing brings to mind, for me, Kurt Vonnegut’s famous graphing of stories. 

Image credit:

The industry wants you to believe that a rising dollar is a bad to worse story. The journalist writing the story is not going to fall for this – they want a better story arc than that.

They position it somewhere along the arc of the first two graphs: Industry had it good for ages, now it is bad. Or, for ages industry had it bad, now it is looking good. But such arcs are only ever true for a sub-section of the economy. Overall, we seem to be able to thrive whether the dollar is low or high. 

Here’s the truth: Any move in the dollar is an ambiguous and mysterious development. It takes with one hand and gives with the other. If you’re worse off at work, you may be better off at home. If you lose your job making exports, you may get a job delivering imports, etc.

The ineffable nebulousness of any story about the currency is of course a headache to headline writers. $A Crash Causes Yet More Ambiguity is a headline for a post-modern prose poem, not a news story. It will not fly. It will not get clicks. Do not even try to talk to the subeditor about the way really, uncertainty is the marrow of life

Vonnegut, of course, turns nebulousness into celebrated works of literature. But currency writers are no Vonnegut.

You can expect the inherent uncertainty that should be the backbone of currency stories to remained concealed. 

Why the public transport election promise is bad policy, but good news.

A super bold plan has come out of the Victorian Government. They pledge to make public transport free in the city centre, and to abolish Zone 2, the higher-fare zone in the outer suburbs.

The idea is clearly a vote winner – a small group of people benefits at the expense of taxpayers everywhere. The Labor party adapted the policy faster than you could say “Harold Hotelling.”

It is a flashy announcement, like putting Protective Services Officers on every station, that reveals its proponents don’t really use public transport and want to believe something – anything! – other than really expensive infrastructure improvements are key determinants of service quality.


This blog has advocated for free public transport in the past [Myki vs Free PT] but in this case the best I can say is that I don’t hate these ideas.

Let’s have a look at what will really change under this plan:

Free public transport within the city.

Upside: No need to deploy those rude and aggressive ticket police. Accept that the amount of crowding means the service is scarcely worth charging for anyway. Simpler for tourists.

Downside: Amount of crowding is likely to increase as we enter a tragedy of the commons situation. Public transport policy is not tourism policy – using transport policy for other ends is partly why it is not up to scratch. Less revenue to improve the system.

The end of Zone 2.

Upside: Simplicity in the public transport system is good –  people expend physical and mental energy trying to beat the Zone 2 boundary. The people who live in Zone 2 are most likely to need the discount, so there is an equity effect.

Downside: We are not at a stage where we need to encourage patronage on the system – it’s busy enough as it is.  Public transport policy is not social welfare – using it for non-transport policy ends is partly why it is not up to scratch. Less revenue to improve the system. Likely rising fares in Zone 1 over time to recoup lost revenue. 

Essentially, this is a policy with some benefits, but they do not strike at the heart of what our system needs – more services more often to more places. In fact, by reducing the amount of revenue – the Budget will estimate of how big a reduction – it may undermine that true goal.


What this whole surprise announcement says to me is that the Government recognises Public Transport is its big weakness. And that recognition could make for a big turning point.

This government sailed into power on the failure of Labor to do PT properly, and by promising better PT – to Doncaster, Rowville and the Airport. But it has made a giant road tunnel into its signature reform. Now it is scrabbling to catch up.

The reality is that the Liberal party will probably lose the November election. They have a one-seat majority thanks to the support of corrupt independent Geoff Shaw. They have a premier we never voted for after the previous one was kicked out. They are a shambles. A poll taken in early March has the government behind 47-53. But ex-post, the big narrative to explain the election result will likely be public transport. 


After the 2010 election, the Frankston line was identified as a crucial issue that lost key seats for Labor. If public transport is once again seen as a swing factor in 2014, the narrative will be established in political operatives’ minds. In Victorian elections, good public transport policy could come to be seen like a pledge not to increase GST, or a stern approach to boat people – an absolute must have for any party to succeed. 

Imagine if the top minister in the government was dedicated to the public transport portfolio. Imagine if that minister actually rode the trams and trains at times when the cameras were not directed at them.

It’s just possible that a golden era of public transport policy is around the corner.

Latterday Knight Fever: the economics of prestige

The Abbott government has announced it bringing back Knightoods and Damehoods to Australia. Each year, four people will arise with the title of Dame or Sir.

Of course, the whole thing is a retrograde step taken by a man with, by George, a madness for kings. Knighthoods were first axed by Whitlam in 1975, reintroduced by Fraser in 1976 then axed again by Hawke in 1983.

In one way, I like it. The old honours system which topped out with ACs and AOs was both sterile and opaque. The Sir and Dame system is one that people can grasp. From Sir Lancelot to Dame Judi Dench, people see and understand. If a comprehensible public honour is not the point of an honour system, I don’t know what is.

(One also can’t deny it’s a political football that you kick up into the sky when you want to distract attention from something else, in this case the fact the Assistant Treasurer is featuring in a very unflattering way in a corruption inquiry.)

But the real question for an economist is why would people value a knighthood. It doesn’t come with a free horse and castle. It doesn’t get you a discount at the shops. In some ways it’s less useful than a seniors card.

While the income bump from winning an Oscar has been comprehensively studied, old-school conventional economics has little to say on the matter of awards for public service. Luckily our friends in the fields of behavioural economics have tuned their antennae more closely toward the workings of the human mind.

These Knighthoods and Damehoods are the ultimate in positional goods. A positional good is one whose value comes from the fact that others can’t consume it too. Being the richest person in the world, or gold medallist in swimming, having the best address in the best neighbourhood or a degree from the most elite university. The values of these goods “depend not only on the amount the individual consumes but also the amount others consume.” 

At my old employer, Fairfax, the publication of the BRW rich list was an event that carried huge importance. As if the money was not reward enough, certain business people would contact BRW to make sure their assets were sufficiently valued that they would feature prominently in the list. Being on the list did not increase the value of their money in a consumption sense, but it strongly increased its positionality.

Positional goods are theorised to create negative externalities for the many while benefiting the few (See paper from Brookings Institute.) And the giving of medals, etc. is not without negative externalities. Here is Churchill acknowledging that fact:

“A medal glitters, but it also casts a shadow. The task of drawing up regulations for such awards is one which does not  admit of a perfect solution. It is not possible to satisfy everybody without running the risk of satisfying nobody. All that is possible is to give the greatest satisfaction to the greatest number and to hurt the feelings of the fewest.”

In the case of Australia’s newest old-fashioned honour, just four will be handed out per year. Something so rare will indeed have cachet to spare.

The honours are apparently designed for public service, so the tabloids obsession with a Sir Shane Warne may never materialise: “My intention is that this new award will go to those who have accepted public office rather than sought it and who can never, by virtue of that office, ever entirely return to private life,” Mr Abbott said.

Such prizes may be efficient. In a world where tax dollars are not exactly overflowing from Treasury coffers, the government can use prizes as compensation for jobs that would otherwise command a lot of pay.

As Bruno Frey notes in his paper Knight Fever (which title I happily stole for this post) “The material costs of awards may be very low, or even nil, for the donor, but the value to the recipient may be very high.”

Where you can pay someone with a reward that costs you nothing, it would be economically unwise not to do so.

Phaleristics is the study of awards. There is a strong economic literature on the merits or using awards as motivation. From the merits of prizes in furthering science to prizes for poetry and independent film. 

Awards litter most fields. They are especially prominent in fields where the best make a lot more money than the rest, such as acting, and in fields where the government pays the players (the military). These may be fields where contracts are especially hard to specify ex-ante.

Awards like sportsperson of the year carry less weight than Best Actor awards, because it is far easier to identify success in sport, so an award adds little marginal value. (Roger Federer does not always show up to accept the Swiss Sportsperson of the Year award.) Similarly in fields where a free market determines the pay of participants, such as the private practice of law and business, awards are less visible and carry less prestige.

But the award benefits not only the recipient. Mr Abbott emphasises the reciprocal nature of these awards. They are intended in his mind not just as reward for service, but are in fact a payment for keeping mum:

“If you’ve been the Governor-General or a Governor, there are certain things that you can never really do again. You can never really be as free with your opinion as might otherwise be the case. There are certain jobs that you could never really do again because of the position that you’ve occupied. Ditto for a Chief Justice. There is lots of legal work, for instance, that a former Chief Justice could never really do. If you’re a former Chief of the Defence Force or a former Chief of Army, there are lots of issues upon which you can never really comment by virtue of the position that you’ve held. I think when someone does accept a position of such importance and gravity in our system, it is perfectly fitting to honour them in this way.”

When it comes to creating new awards, there may be motivation on the part of the giver, too:

“The institution (or person) bestowing an award can be taken to be a principal who maximises his utility by inducing the agents, as the recipients of the awards, to behave in his interests,” Professor Bruno Frey argues. He continues:

“The whole area of awards is very vague. The semantic is unclear and the various types of awards are not well defined. There is, for example, no clear distinction between orders,  decorations or medals, and they can go with or without titles and money. It will be argued in this paper that these unclear distinctions are no accident, but an important feature of awards. The suppliers of awards have an incentive to differentiate awards at many different levels and to continually create new awards.”

Managing to keep Australian knighthoods and damehoods to just four a year may prove very challenging. And if it can be done, might such an exemplary public adminstrator not be rewarded with the creation of a still higher honour? Time will tell.

Thoughts on the economics of honours and awards? Further reading you’d like to suggest? Put your thoughts in the comments section below!

Cash makes street crime. Does Bitcoin make e-crime?

From the United States National Bureau of Economic Research, an excellent new paper.

Richard Wright et al exploit a terrific natural experiment, wherein some counties of Missouri moved to paying benefits by debit card (Electronic Benefits Transfer or EBT) prior to others, leading to a decrease in circulating cash in those communities.

“Our results indicate that the EBT program had a negative and significant effect on the overall crime
rate as well as burglary, assault, and larceny. According to our point estimates, the overall crime rate
decreased by 9.8 percent in response to the EBT program.”

Wright et al show that the cycle of crime is thereby reduced, with fewer subsequent crimes in retaliation. They posit that part of the significant decline in crime in the United States over the last fifty years is due to the decline in the use of cash. Cash is now used in only 50 per cent of transactions in the US, down from 80 per cent 50 years ago.

It's all about the Platypi, baby.
It’s all about the Platypi, baby.

The data is sound, the methodology makes sense and the conclusions are appealing. So what are the lessons?

Like many of us, I am a fan of PayPass. I have a Mastercard I sling for every transaction I can these days, because PayPass means no need to bother my fingers with signing or PINs. It’s terrific. I use it for the piddliest little transactions, like a cup of coffee, and I go to the ATM perhaps once a month.

But that electronic transaction is anonymous. Anyone who has my Mastercard could use it. I strongly doubt any vendor would attempt to match my name to the identity of the person using the card. That card is only good for transactions up to $100, but a swift criminal could probably rush up to the card limit before I managed to cancel it, especially if they took the card surreptitiously rather than by force.

So I worry that the rise of PayPass and the Visa equivalent could reinstate some of the street crime that has been ebbing away.

But an even bigger lesson is there to be learned, online.

As recently as a year ago, there was no real cash on the internet. For online transactions you used credit cards or you provided proof of cash transfers made in the banking system. Both of these were intermediated by financial institutions who take the blame for fraud. Sure, you could steal a credit card number online, just as you could offline. But that was tightly policed and internet commerce was relatively safe.

Now there are 12 million Bitcoins in circulation, worth $573 each. That’s $6.9 billion of cash. The hermetic and pure world of the internet, which was once all about cat videos and enthusiastic editing of Wikipedia articles has been sullied by cash and the crime wave that has followed.

Is anyone surprised the news has been rife with stories about Bitcoin theft in the last few months?

Flexcoin had $620,000 worth stolen.

Poloniex lost 12.3 per cent of its coins.

And of course the big one. Mt Gox lost 650,000 Bitcoins, worth several hundred million dollars.

Crime does pay, and the way Bitcoins are designed to be anonymous means that it pays without great risk.

Hacking will continue so long as Bitcoins are kept on the internet. It remains inconvenient for Bitcoins to be kept offline, if they are to be used as an actual currency. Even if they are only kept as investments, they still need to be brought to market for trade, and that offers up opportunities for hacking.

The introduction of Bitcoins to the internet has transformed the internet into a place that traffics not just ideas and new shoes, but also drugs and murder. In other words, it is now just like the real world.Image

At the moment, the online cash economy has a frontier element, with big audacious thefts, akin to the bushrangers of early Australia. That will die down.

The way I perceive the hacking risk being diminished in future is if the big companies that have experience in protecting online transactions get involved.

I can imagine having a Bitcoin account attached to my Commonwealth Bank account, and/or attached to my Mastercard. It would undo a lot of the supposed advantages of the electronic currency, such as anonymity, but introduce convenience and trust.

“True” Bitcoiners will moan about the way the point of Bitcoin is lost, while everyone else just appreciates the fact that their currency is now secure and functional. I suspect people’s enthusiasm for perfect anonymity pales in comparison to their desire not to lose the money they put on the internet.

Of course, Bitcoin transactions outside, say, the “CitiBank Bitcoin Protection Protocol” would still be available, just like the way I can pay for a car with a big wad of cash.

But the people engaging in these transactions place themselves at greater risk. Who is most likely to trade anonymity for risk? The same kind of people who currently use cash.

Might it be that Wright et al can write another paper in 20 years about Bitcoin and security that shows less Bitcoin being traded online correlates with less online criminal activity?

The hidden TV lesson from True Detective

I watched True Detective Season 1. 

Rarely do acting, writing and production values come together in such a package. It was gripping. Two detectives, played by Woody Harrelson and Matthew McConaughey, hunt down a serial killer in rural Louisiana, while the scenery drips with evil portent and minor characters utter veiled references to the Robert W. Chambers story the King In Yellow.

When Woody and Matt encounter the bad guy in episode eight, the big revelation was not the identity of the creep in his catacomb. It was that this great run of TV was now done for good.

Harrelson and McConaughey agreed to something odd – a one season run. There will be a second season of True Detective, but characters, locations, etc will all be different.

The absence of more makes what we got so special.

Economics has an explanation for this. Scarcity drives value.

That’s why caviar costs $4000 a kilo even though it is not that nice to eat, but bread costs as little as $1 a loaf even though it is amazing.

TV has for 50 years ignored this fact.

TV networks have tried to wring every last drop out of anything good. There are many examples; 41 years of the Young and the Restless,  30 years of Neighbours, 17 years of South Park.

That has been the measure of success in TV. Being renewed.

To me, The Simpsons is the epitome of the idea. It’s a widely respected show. For 25 years, the family from Springfield have skateboarded, sucked, saxophoned, slacked and supported through an episode a week. The Simpsons has at times been a brilliant show. But once it turns into a permanent fixture, it becomes about as compelling as the wallpaper.

Ubiquity diminishes anything.

Films have been the pre-eminent form of cultural expression in the west for almost a century. The reason? The release of a film is an event that happens only once. (Except for those movies that spawn sequel after sequel until it is time for prequels. George Lucas, I am looking at you.)

The scarcity of film and audience’s awareness of its finite nature is no doubt part of what has given it cachet, driven the best actors into its arms, and allowed payouts that peak at almost $100 million per film.

Despite the cachet of film, it is not without problems. Film is limited to three hours at most. That’s not enough to tell the kind of epic story humans love. TV can be the better medium and recent shows have proven that, with an arc of quality stretching from the Sopranos to House of Cards.

Now actors that graced the silver screen are appearing on the small screen. From Rob Lowe and Martin Sheen in The West Wing, to Harrelson and McConaughey in True Detective.

True Detective got those actors by promising a short run, but attracting top talent is not the only practical reason for a nice short run.

When a network makes the decision to commission a second season, the writers must immediately start hoarding ideas, making the characters do new things, lifting the role of minor characters or introducing long-lost children/siblings/partners.They also write the second season with an eye to the third season. By then viewers are often attached enough to the characters to put up with it all, but it dilutes the quality of the show.

Short runs permit writers to do story arcs that hit satisfying conclusions rather than just situational drama or comedy, or story arcs that linger on ridiculously.

The success of season 1 of True Detective could go two ways.

It could mean lots of shows opt for short sharp seasons, or it could mean HBO commissions 22-episodes for season two, with an option to renew. It should be no surprise by now that I would rather the former.


I am on holiday (in Japan) and will not be able to post daily for the rest of this week and or next week.


I shall try to make a post or two when I can, but in the meantime, please feel free to browse the archives, starting with the “best of” section to the right hand side ->


Economics of Murder in Mississippi

I got the new non-fiction book by John Safran for Christmas. Murder in Mississippi. It was a quick read and a good one.

The premise: Safran knows a white supremacist in Mississippi – when the guy gets murdered he heads over to write a true crime book. The story only gets better from there.


Perhaps I’ve been overs-sensitised to costs by working for the Australian Financial Review (“BYO phone”, “travel by bus”, “we’ve run out of pens”). But throughout the book, Safran incurs big expenses that left me wondering if he, or Penguin, were going to actually make money on the book.

Let’s have a look:

Expense 1. Travel. Jackson is halfway between Dallas and Atlanta, or if you like, halfway between Miami and Denver. Today, the cheapest flights Melbourne – Mississippi are $1642.

Expense 2. Living. When he moves into the Sleep Inn and Suites in Jackson Mississippi, they are brand new and the carpet, which he says “feels like minigolf astroturf,” squeaks. Its advertised price is now $79/night.

Safran writes that he stayed in Jackson from winter to summer. Penguin claims “Over six months, Safran got deeper and deeper into the South.” During that time, Safran also went off to other parts of America to make some TV.

He also stayed at the Ashford Place apartments (circa $1000/month.)  If we assume he spent 6 weeks in the first motel and 10 weeks in the second one, that’s around $6000 on accommodation. I’m budgeting $50 a day for food and drink, for four months. That’s $6000 on food.

[Running total $1642 + 6000 + $6000 = $13642]

Expense 3. Car hire. Unavoidable. Jackson’s public transport situation is the sort of unholy tangle that would make Jarrett “Human Transit” Walker apoplectic. Four months of the cheapest Hertz car on monthly booking adds up to $4000. Plus, say another $1000 for gas? (Mississippi gas prices are almost the lowest in the US, equivalent to $A0.897/L)

[Running total $1642 + $6000 + $6000 + $4000 + $1000 = $18642]

Expense 4. Bribing the incarcerated.

This is the one that really caught my eye. The book includes a series of trips to Walmart where Safran buys phone cards for the murderer. He also delivers some other goods on his behalf. I won’t spoil the book by telling you what they are.

At one point the murderer asks for $2500 and Safran says “I can’t give you $2500. I don’t have much money left.”

Click here to see the murderer’s facebook profile (friends include one J.Safran!).

Assuming the items mentioned in the book are everything, that’s around $2650.

[Running total $1642 + $6000 + $6000 + $4000 + $1000 +$2650 = $21292] 

So. Twenty-Two Thousand Dollars. Quite the bill.

It is probably more than he budgeted. The book reveals he didn’t expect to spend so long in Jackson. He’s barely been in the place a few weeks when the expected trial is delayed.

murder in M

Safran is a big name as these things go, and I guess he was spending an advance he got from Penguin.

Instagram reveals that around the time the book was launched, Safran visited a whole heap of bookstores and posed for photographs with the proprietors. He did shows in Melbourne and Sydney to promote the thing.

Penguin is working hard to sell the book. There’s even been posters up around the place, as though his book was a rock act coming to town.

As author Ian Irvine explains here: “The promotional budget for your book is, generally, directly related to the size of the advance.”

Advances vary a great deal.

Melbourne internet publishing impresario Mel Campbell got $5000 for her book Out of Shape. Flinders University student Hannah Kent got over $1,000,000 for a two book deal, after writing one about an execution in Iceland. (!)

Safran is probably in the middle. I’d guess his advance is around $60,000. It is his first book and he’s got no form as a writer. On the other hand he is a publicity machine, especially among those who would buy non-fiction.

If I am right, that means he made $38,000. He could make more if and when the royalties cover the cost of the advance.

But he had to take time off from his radio show. Even if he got a $100,000 advance, and pocketed a large chunk of it, missed wages are a major cost of the book.

(Money would be scant compensation for hanging out in Jackson, which seems like the worst of what’s bad about America.When I dragged and dropped the orange Street View man onto a random corner of inner-city Jackson, I found myself on a huge roundabout with multi-lane roads in all directions, and no buildings in sight except a church.)

Quantification and snark aside, the book is pretty terrific, and I am insanely jealous. You have to invest to make something like that happen.

As his friend Lally Katz says to him in an email at the start of the book:  “What an exciting thing to do. You’d have such a great and sometimes dangerous adventure.”

Here’s the real economics of it all. A true adventure like that is scarce and therefore valuable. Of course it is worth it. Getting paid to adventure is every man’s dream. Speaking of which, The Economics of a Great and Sometimes Dangerous Adventure sounds like a book people would read. Any publishers reading who feel like commissioning that title?

People before what kind of profit?

Profit may be the most emotive and most disagreed-on word in the modern political lexicon.

Screen Shot 2014-01-25 at 3.09.41 pm

For some people, it conjures up a deep positive energy. It’s the lacquer of success that tells you your life has not been in vain, a thank you message from the universe.

For others, it’s a totem of greed. It’s the fuel barbarians pour onto the  bodies of the civilised before they burn them all, throw back their heads and howl as the smoke covers the moon.

Both can be right.

Whether you drive a Rolls Royce or a 1990 Subaru with a bumper sticker that says People Before Profit, you need to know this.

There’s two types of profit.

Economic profit (bad), and accounting profit (fine).

(for more: 1 2 3 )

Let me explain.

Accounting profit is what a business makes after it has paid all its staff, all its bills, but before it pays the people who put the money into the business. People who funded the business to start up need a little bit of sugar to keep their money in there instead of putting it in the bank.

Imagine a small business person who delivers things you buy on the internet. She buys a van, putting $30,000 into the business. If that money was put in the bank and got 5 per cent return it would make $1500. So the small business needs to make at least $1500 in accounting profit, on top of paying wages and bills, to compensate the person who funded the business.

That accounting profit is necessary for the business to run. If there’s no accounting profit, the delivery business will shut down, as the delivery woman realises she should sell the van, put the money in the bank, and work for someone else.

(In reality she should be looking for slightly more than $1500 in accounting profit, to help compensate her for the risk of running a business, which is much higher than plonking your cash in a government-guaranteed deposit.)

So, accounting profit is necessary for businesses to exist. The alternative is the business shutting down.

When you see Woolworths Limited reporting a before-tax profit of $3.4 billion on sales of $58.5 billion, some of that is the accounting profit necessary for the share to be worth anything at all.

But some of it might be economic profit. Let’s go back a step.

Us economists think accountants are simpletons. We like to think about opportunity cost.  We think that you should measure your ‘profits’ against the next best use of your money. So economic profit is not the little bit extra you need to pay back the person who funded the business. Economic profit is extra on top of that. If you make a lot of economic profit, something has gone wrong.

Some businesses make enough money that their owners don’t just get a nice 5 per cent return on their investment. They make enough that it rains cash. That’s often economic profit, and it’s a bad sign.

Unfortunately, it’s not always clear if a company’s profit is simple accounting profit or the extra economic profit.  When an company reports profit, it includes some that is necessary to cover the cost of capital, and the gravy.


Here’s the thing: under the assumption of perfectly competitive markets, there should be no economic profit in the long run. Businesses should make enough to cover their cost of capital and not any more.

It’s only during deviations from perfect competition, or when market failures creep in that economic profit can occur. Sometimes firms can create economic profit for themselves by behaving in an anti-competitive way. They have an incentive to do that, which is why we have to have competition law.

The most obvious market failure is market power. If a company is part of an oligopoly, or worse a duopoly (Hi Woolworths), or worst of all, a monopoly, then economic profit can be expected to ensue.

CBAThis is why we can be fairly sure the profits of Australia’s big four banks are not simple accounting profits. They operate in a protected space under the four pillars policy.

Australians think there is far more bank competition than there really is.

Of course banks should make enough to compensate the people that own the capital that allows the bank run. But should they make more?

Commonwealth Bank, Australia’s biggest, made $7.7 billion in profit last year.

The value of the Commonwealth Bank is $120 billion at time of writing. It was, at least until recently, in the top ten biggest banks in the world by value, even though it is not in the top ten by assets.

Any industry where all the competitors are making  extra profit on less assets should ring alarm bells. There is almsot certainly economic profit being made, and it is being made at the expense of the customers.


I’m glad you asked.

A tax design idea is floating around – currently out of favour – called allowance for corporate equity. It is gentle to accounting profits, and starts to snarl and salivate when economic profits are made. As the name implies, it would allow profits to cover the cost of equity [that’s the money the owner put in, or the $30,000 van in the example above]. After that, taxes rise.

Another way of putting that same idea is to say ‘take the mining super-profit tax and apply it across all industries.’

Here’s an excerpt from the Fairfax press, quoting one of my old lecturers, John Freebairn.

“At the tax summit, Melbourne University’s John Freebairn, a former research director of the Business Council, said Australia’s super-profits tax rate might be ”more towards 40 or 50 per cent”. It would only be paid by companies earning ”monopolistic-type rent”. ”And let’s rub it into the banks,” he added. ”They seem to make much higher returns than anyone else.””

But that would not be popular. It’s one reason Wayne Swan ran from the Allowance for corporate equity idea when it had a brief resurgence a few years ago.

But recognising the difference between the types of profit is crucial for anyone who wants to make a difference to society. Tax policy makers know better than anyone else that companies making a super profit are probably managing it at the expense of the consumer. We should not stint from hitting them with extra tax.

How this blog is going

This blog is going gangbusters!

Here’s a chart of readership the first time I launched the blog, in 2009 vs this time around.

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You can see that with improved social media reach, improved writing skills and a more focused set of topics, I’m now doing a better job.

I’ve obliterated my record for most hits in one day twice (when the Guardian printed my story during January, sending waves of traffic in; then again when I wrote this wildly popular story about Bunnings ) . As 2014 picks up, I’m hopeful blog traffic will continue to surge.

Compared to the Fin Review, I’m pretty sure my least-read stories are getting more attention, although the best-read ones are still probably falling short of the impact I used to have in a national newspaper.

My only complaint so far is a notable decline in the number of comments per visitor compared to 2009/10. There’s thousands of you – please comment more! Plenty of the feedback comes via facebook, twitter, etc, but I’d really like this to be more of a forum.


People sometimes ask me how much money I make from this blog. To which I answer: “The blog is an absolute delight. I love it.”

It is possible to host ads on websites. I am aware of that. Wordpress has an opt-in program called WordAds that I could share the upside of.

Is it worth it? Here’s a quote from their blog.

“We now have more than 10 thousand sites running WordAds with around 1 billion ad impressions per month, and we will be paying out around $1 million to WordAds publishers in 2013.

There’s enough information to make the upside clear:

When a billion ad impressions earn bloggers a million dollars, each ad impression is worth one-thousandth of a cent, on average. WordPress is not as generous as Blogspot.

When ten thousand sites get a million dollars between them, the average blog gets $100 a year. And the distribution will be a classic long tail scenario.

I read about a site that got 30,000 views in three weeks and made $2.39. Let’s just say I’m still building up to getting 30,000 views in three weeks.

So that’s why this blog has no ads – it’s not worth annoying you, dear reader! And you are important to me.

That’s all I wanted to say. Thanks a lot for reading. I intend to keep writing, every day. If you can do one thing for me, it’s to tell your friends about this blog!

Politicians – peddlers of pain. Why not make it plain?

Change that doesn’t involve pain is not political. It is administrative change.

Politics without pain is not politics at all. Change without pain requires no hard choices, no leadership, and no leaders.

Dress up administration as leadership, people will disrespect you. Pretend reform produces only winners and you’ll be unable to be true to your word. Say “this won’t hurt a bit” and people will soon learn to not trust you.

Politicians who aspire to be more than mere administrators must not flinch in the face of pain. They must be conversant in it. They must know that being a leader means being a dealer of pain.

Does the surgeon tremble when he picks up the scalpel? Does the coach worry that the players must be tired? Does the kindergarten teacher flinch at using the naughty corner?

Not if they know their job. So politicians too must be prepared to make scars, see sweat, deal with temper-tantrums.

Perceptions of injustice, angry placards, people weeping for a way of life lost and letters to the editor. These are the products of good leadership.

And I’m not talking about hurting foreigners. Asylum seekers and would-have-been aid recipients. That’s fish in a barrel stuff. Rookie stuff. Leadership means a willingness to rile your own.

Being willing to deal in political pain requires seeing over the horizon even when the voters can’t. Lead well enough for long enough, and the balance will show through.

Here are some examples of politicians being afraid to dish out hurt – beneficial hurt – to their constituents and stakeholders.

  • The absence of congestion charges and user-charges on the road system.
  • The lack of GST on education and health.
  • The failure to increase the tax on the abundant profits of the mining sector as ore prices rose.
  • The loopholes in the taxation system that allow trusts to operate and remove billions from within the ATO’s reach.
  • Urban planning rules that preserve certain suburbs in sepia tone.

Politicians need to step back and understand their job. Rather than trying to make changes that don’t hurt, or making changes that do hurt but pretending they don’t, they ought to make pain their friend. They are pain-makers.

When you lie about the way reform hurts, you undermine the case for reform. A simple headline that says “pensioners to be worse off” can end your reform.  But if you introduce a reform by emphasising that it hurts, that headline doesn’t have the same effect.

I’m not advocating pain for pain’s sake. I just want good policy to be able to be discussed openly. Pain and all.

If we know politicians are pain-makers, we will be more respectful and careful in selecting them. Fewer flighty weirdos. More hard-thinking, fair-minded squares.

Because a good politician, like a good coach, is one that makes us want pain. A communicator that fills each billowing twinge with the reason for it.

In other fields of endeavour we love and respect hard-liners who remind us nothing good comes cheaply. Why do we elect politicians that pledge to coddle?

Politics is ripe for cracking open, ripe for genuine innovation. The homogeny of ideas and approaches is stifling. The acceptance of the limits placed on politicians is stifling. But this stifling period in democracy will end.

When it does, it could be via a politician that does not shy from pain. I’d like the next Prime Minister to also adopt the title Minister for Pain. PM-MP. Put the issue front and centre. Make it clear that this is a government that won’t lie about the connection between hurt and improvement.

The canine financier’s terrible faux pas.

Let me tell you about the time I met a pet lender in a public van. It’s a story about a public transport ride, but it’s also a story about rich and poor, and the amazing eye-opening effect of travel.

The pet lender was white, well-dressed, fit-looking, perhaps in his mid-40s. He was happy and exceedingly confident, wherein lay his downfall. He owned a company that offered loans so people that can’t afford a pet can get a pet. 

It was in a van, but I mentioned that already. And it was in America. Of course.

I was in Vail, Colorado. I did it on the cheap. A crappy apartment far from the glitz and glamour of the centre of town, plus free lift tickets I swindled from the resort. Vail was charming and delightful and really I loved it. But some of the people you met there were as different from at home as the people in any far-flung corner of the world

The story I want to tell comes when we are leaving Vail. We needed to get from the town to the airport and we booked a van called Colorado Mountain Express.

We get in the huge American vehicle and there’s your typical mountain town shuttle van driver – addled and with a dream-catcher hanging rom the rear-view mirror. She natters with us as we drive to our next pick-up.

At some nice-looking condominiums far from where we had stayed, a single man gets on board and engages my companion and me in conversation. 

He immediately strikes me as prototypically USA. Perhaps a scion of a great dynasty, or perhaps born outside Belgrade. Either way, his warm greeting, perfect teeth, intense eye contact and open-ness with information tells us we are in the presence of the American Dream . 

“I make loans on lots of things.” he tells us. “For example pets,”


“If people want to buy a pure-bred dog, that can cost up to $3000, you know. We make finance available.”

We are incredulous. The mountain landscapes speed past, but for sheer American-ness, everything pales in comparison to hearing about this man’s company and its contribution to the American Economy.

The man reveals, when pressed, that the loans generally have an interest rate of 40 per cent, and maximum three-year terms. But many of them are not repaid.

“Obviously we don’t repossess the dogs in that case,” he says.

Having recently come into possession of a dog, I am quite aware that the main cost of canine acquisition and care comes on the care side. They are not free to run. The fact that people who couldn’t afford dogs would buy dogs strikes me as quite shocking. I put that to the man.

“I know,” he says. “It’s a really bad financial decision.” He seems to show a moment of genuine care for these people. But in retrospect, interest payments on pomeranians, pugs and poodles were funding his powder skiing, so any concern was a mere surface appearance.

The market for pet loans was only part of his business that also loaned for furniture and some complicated scheme with real-estate agents who would get an advance on settlement of homes they had sold.

Somewhere along the way our van-driver pulls over for another passenger to climb on board. She is blonde and immaculately coiffed, emerges from a lodging still more glamorous than the last one and takes the only available seat, next to the pet financier.

“I am tired,” she announces by way of introduction.

“You can lay your head in my lap,” says the pet financier with a smile.

In retrospect, that was it. You can’t say that to someone you’ve just met. It’s wildly inappropriate. So inappropriate that noone acknowledges it and she just moves on to another topic.

Anyway, over the next several hours of van travel, the garrulous pet financier gives up on chatting to the Aussies, and instead focuses his laser-like attention on the supposedly weary ice queen.

We listened intently as they chatted lifestyles of the rich and famous. Names were dropped.

“I’m flying out next week on my buddy’s private jet,” pet financier says. Twice. He is fairly subtle about it though, especially compared to his initial foray. He really does seem to have her rapt attention. They have plenty in common.

I begin to wonder if she perhaps hadn’t heard his initial lap comment. Perhaps I had misheard it? Or perhaps such a statement was de rigueur among the one percent?

Eventually, though, we near our destination. Pet man needs to close the deal.

“So I’m in town here for a few more days,” he says. “Are you?”

“Yes, I am,” she replies.

“it would be fun to catch up.” He pauses, but she’s apparently going to make him say it.

“Can you give me your phone number and we can organise a night to perhaps see each other?”

Literally 60cm away, in the back of this van, my companion and I are holding our breaths. It’s like a Bold and the Beautiful cliff-hanger come to life. What will happen next?

“No, I don’t think that would be appropriate,” she says.

We cheer silently. Hurrah!

“Okay, fine. I understand,” says the pet financier, head held high. He affects a mighty confident tone of voice in the face of crushing public rejection and my respect for him goes straight back up.

We had to get out of the van and carry on with our lives.

There’s no epilogue where we find out what happened to these two characters, whether perhaps she finds him hit by a bus on a street corner a few days later, nurses him back to health and they go on to devote their lives to ending world hunger. 

But it is a story that has stuck with me, not just because the rich are lending to the poor to buy dogs they can’t afford, but because of the way travel can open your eyes, and how it is always the people you meet, no matter how normal they seem, that will give you the memories that last.

Guest Post: Sabrina Lau Texier on making transportation policy in an environment of public distrust

Sabrina Lau Texier is a transportation planner who has worked in Toronto, New York City and Vancouver. She attended the University of Melbourne in 2003. The opinions expressed here are those of the author and do not necessarily represent the opinions of TransLink. 

Vancouver City
Source: City of Vancouver, 31 Jan 2014

I moved from New York City to Vancouver a year and a half ago. I landed a job in a great organization that is admired from afar for its proactive approach to linking land use planning and provision of transportation, including public transit, major roads, bridges and cycling. But I’ve learned the hard way just to tell people my occupation and not name my employer. If I say the dreaded T-word (okay, it’s TransLink) I get an earful from the surprisingly strong anti-transit crowd in this town.(1) However, TransLink’s damaged brand is not just tough for me, it’s tough for making good policy.

Making policy is not quite the same as advocating for it. I’ve found it easier to advocate (or denigrate) from a distance, often with an air of righteous indignation; however, bearing the weight of public dissatisfaction has been a different beast.

We are, in the words of a former premier, the city “that mostly got it right”. In my metropolitan area, as in many others, we have reached a tipping point on traffic congestion. Millennials defer getting a driver’s license (2,3) transit access is a new requisite for commercial real estate (4) and the installation of complete streets for all modes of travel is becoming (already is?) the new normal (5,6) With growing demand for improved transportation options, agencies everywhere are struggling to come up with funds to maintain and expand services.

Vancouver rapid transit map

Partly in response to a persistent public perception of gross mismanagement, my agency has been through two government audits in 2012 alone, and both have found that the system has the best funding formula in Canada, and that “the organization is well run and manages its costs”(7). However, implementation of all suggested efficiencies (including cutting low-performing routes) will not be enough to meet the future transit expansion needs of Metro Vancouver. The provincial government has called for a referendum on this issue by Spring 2015.

“The line between democracy by plebiscites and mob rule is very thin.” – Anne Golden(8), speaking about the upcoming transportation referendum, Jan 2014

The referendum question has yet to be set, but how do you create the message on an issue as complex, multi-faceted and far-reaching as future transportation funding? How do you reach a population that is so disillusioned with your organization, that they prefer to view the referendum as a vote on the agency itself, rather than the larger issues (9). Failure to pass this referendum has its own opportunity costs (10), but the importance of funding transportation expansion is lost as public attention is directed to how much money is spent on office coffee. The province has taken the politically-safe approach of asking taxpayers to decide if they would like further taxes to pay for transit. They have not asked taxpayers if they agree with funding recent road and bridge expansion, oil pipelines, or a coal terminal.

We are entering into this referendum woefully unequipped to succeed. At the best of times, making an argument for transit/cycling/walking is going against a 50-yr+ status quo attitude of “the car is king”. However, investments in transit infrastructure benefit more than the riders themselves. The regional economy, goods movement, personal mobility, job opportunities, and healthy communities require planning and funding of alternate transportation options. We can make many sound scholarly arguments, but it is often preaching to the converted.

“When trust is broken between the government and the governed, it’s almost impossible to generate support for public policy changes even when the proposals are right.” – Anne Golden, Jan 2014

The public has very little trust in my organization, and the media caters to this. Transit decisions, big and small, are routinely lambasted and misrepresented, with major omissions that compromise balanced reporting. There is scant awareness that the agency is also responsible for roads, bridges, goods movement, air care testing for vehicles, and pedestrian and cycling infrastructure. It is an easy news story to cater to the strong public appetite for taking potshots at the region’s punching bag. There is the sense that merely having a transit pass is the equivalent of an advanced degree in transit planning, and everyone feels they could have made a better decision.

It would be easy to put my head down, hide amongst the thousands of employees at my organization, and tell individuals in social settings that I wasn’t responsible for their particular grievance. Yet I am proud of the work that my city, my region, and my transportation authority have accomplished. I want it to succeed in the future. I worked in NYC for 5 of its most formative years in the transformation of its streets from auto-dominated through-routes to celebrations of public spaces, and I know how good news stories are borne of years of blood, sweat and tears. When one looks up from the battle, and takes a step back, it is possible to be reminded of what the fight is really for.

“I know the RBA sets interest rates but I’m embarrassed to ask why.” An explainer

“I know the RBA sets interest rates but I’m embarrassed to ask why.”

Someone said this to me at a party recently. In trying to explain interest rate policy by shouting over Daft Punk I achieved simultaneous pedagogical and social failure.

This setting, I hope, is a more appropriate place to provide the answer.

The Really Simple Version:

Interest rates are the brakes on inflation (price rises). When the RBA changes interest rates, they are trying to control inflation.

Higher interest rates slow inflation down.

If you notice the price of a sandwich keeps going up, the Reserve Bank is probably getting worried about high inflation. The RBA watches price rises by looking at the consumer price inflation data. If inflation is getting too high they will raise interest rates.

Lower interest rates speed inflation up.

On the other hand, if shops are having big sales that suggests prices are falling. The RBA is probably worried about low inflation. It might cut interest rates.

The RBA’s job is to keep consumer price inflation between 2 per cent and 3 per cent, annually. If price rises are above 3 per cent, they will raise interest rates. If price rises are below 2 per cent they will cut interest rates.

How does that work?

High interest rates slow down spending.

  • For people: If interest rates go up, it makes sense to put more money in the bank, not spend it.
  • For companies: If interest rates go up, you won’t borrow money to build a new factory. You’ll try to pay back your loans.

Low interest rates do the opposite.

  • For people: If interest rates go down, it makes sense to take your deposits out of the bank and spend them.
  • For companies: If interest rates go down, you can borrow to build a new factory.

Spending matters because the rate of spending affects the way companies set prices. If items are not selling, companies will put them on discount. If they are selling out, they may even put up prices.

This is the basic lesson. The RBA is controlling interest rates, to affect spending, to affect inflation.

The fairly simple reason we care about inflation:

Too much inflation can be bad – it means the money you have saved buys less and less.

But we don’t aim for no more price rises ever – because price rises can be good.  Inflation can be good because it CAUSES spending. I know we just said spending causes inflation. But it works both ways. Think about this:

If inflation is high, your money is losing value, so it makes sense to spend it. If $100,000 will buy you a Mercedes today, but it will cost $105,000 next year, it makes sense to spend the money now. That spending will pump up the economy.

If inflation is low, however, it makes more sense to save your money. Of course, if everyone saves, the economy suffers.

i.e. The way people react to inflation (spending/saving) is important to economic growth.

The RBA tries to balance the speed of the economy so we get the right amount of spending and saving to keep the economy growing. Inflation is kept between 2 and 3 per cent, because we’ve decided that is a good range to keep spending and saving in balance.

Why do we care about growth? Growth affects unemployment, and thereby people’s health and happiness. That’s why the newspapers pay so much attention to it.

Advanced class: How does the RBA control interest rates?

The RBA doesn’t set your bank account interest. And it doesn’t set your home loan rate. So what is it controlling?

The one market that rules them all.

The overnight cash market is the shortest-term loan in the market. Big banks borrow in there for just a few hours.

Because you can make a year-long loan out of 365 overnight loans, targeting the overnight loan market affects all other loan markets.

So the RBA gets in there and plays. It literally buys and sells money in that market so that the interest rate does not deviate from the publicly announced official cash rate (at present 2.5 per cent).

(Interest rates are the price of a loan, so increasing supply of money in that market lowers interest rates, decreasing supply raises interest rates).

The RBA is damn good at getting the overnight cash rate to match the target rate.


PhD level: Does the RBA have to balance unemployment against interest rates?

In the United States, their Reserve Bank (the Fed) has what they call a dual mandate:

“maximum employment, stable prices”

In Australia, the RBA technically has a triple mandate.

The Reserve Bank Act 1959 says it must act to ensure:

  1. the stability of the currency of Australia;
  2. the maintenance of full employment in Australia; and
  3. the economic prosperity and welfare of the people of Australia.

But that has basically been waived. A statement is agreed between the Treasurer and the Governor of the RBA after each election, agreeing that the bank should focus most on inflation when setting monetary policy:

“…allow the Reserve Bank Board to focus on price (currency) stability, which is a crucial precondition for long-term economic growth and employment, while taking account of the implications of monetary policy for activity and levels of employment in the short term.”

Why not focus on employment too?

Back in the day, economists thought  you could have low unemployment if you were willing to pump up the economy enough to have high inflation. Now we know this is not true.

You get a short term bump in employment under high inflation because the wages are not actually worth as much as the workers thought they would be. Workers aren’t dumb though, so once they re-calibrate their inflation expectations, they stop being willing to work for those crappy wages.

That means solely focusing on inflation is the surest way to promote low unemployment.

That’s the end of the lesson on interest rates! I hope it was helpful. Now you can nod wisely when Alan Kohler does the finance news.

Why won’t Americans suck it up and fly to Australia?

Americans, the hypocrites, will not stop complaining about the flight to Australia.

“I want to go to Australia, but I can’t stomach the thought of the year long flight….ugggh.” (source)


“I really want to go to australia but at the same time the flight is just soooo long, and everything there is poisonous” (source)


“Flying to Australia is a long arduous experience” (source)

And yet they consider driving across their vast, lumpy and obese country a simple jaunt! A petit amusement! A mere caper!

This graph shows that lots of people who can easily afford to fly will still happily ride the Interstate for hour after arduous hour. Among people earning over 100 grand, twenty per cent of trips of 2000 miles are done by car! 20 per cent!!

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Just for reference for our Australian readers, an example of a round trip of 2000 miles would be from Melbourne to Byron Bay, AND BACK.

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There should be millions of Americans trampling all over our fine brown land all the time.

The proportion of Americans with passports has risen from 3 per cent in 1989 to over 33 per cent now.

And yet growth in American tourism to Australia has been stunted, showing no growth at all in a decade, until a welcome recent blip. The cheap airfares that have had Aussies hitting up the States in record numbers apparently leave our American confreres ice cold.


What Is Happening, America? Why You No Come Here?

Are they wholly xenophobic? Can we blame Lara “where the bloody hell are you” Bingle? Or is it our famous racism? Or are they more concerned about our drop bears, redbacks and large, fast-moving and highly venomous snakes?

Perceptions of safety can scarcely be the issue. It turns out the favourite destination of Americans in selecting their overseas travel is Mexico, with a 33 per cent share.

Oceania (presumably including those hobbit-botherers across the ditch, plus Tahiti, Fiji, etc) gets just 0.9 per cent. [source]

Canada gets 20 per cent and Europe is next with 19 per cent. Europe! What have they got that we don’t? Europe is at least 7 hours flight, NY-London, and as much as 14 hours if you try to go from LA to Helsinki.

Screen Shot 2014-02-22 at 5.48.27 pm

The American excuse that it is *just too far* is clearly made up. Which leaves us in an unhappy place. A place where we need to face a discomforting possibility.

Perhaps they just don’t like us.

Can we handle the rejection?