Faster train journeys – some low-hanging fruit.

The state government is prepared to make big investments to make train travel easier and faster. So they should. They are contemplating a $9 billion tunnel that will make journeys faster and more reliable.

But what if I told you there was a much much cheaper way to improve travel times of the rail system, while making people’s journeys to work more comfortable?

The solution requires thinking outside the box. This is not about putting faster motors on the trains. Not about improving signalling or driver training or anything to do with the train system itself. It’s about cutting walking times to the station.

Let’s look at my local station, Clifton Hill.

Clifton HIl station entrances and exits.
Yellow dots mark the entrances

There are just three entrances, all clustered up the northern end of the station.

The last 100 metres.
Placing the entrance at the northern end means passengers walking from the south have to walk an additional 120 metres to get on the platform. (I reckon 2 minutes is an overestimate by our friends at Google Maps.)

This is not a passenger-centric design, but an operator-centric design.

Where new station entrances should be
Where new station entrances should be (blue dots)

Walking times are some of the most important parts of a train journey. A meta-analysis of the subject cites research that found ten minutes of walking was equivalent to 20 minutes of riding in the vehicle. In other words, the walking section of the journey is an important place to focus improvements.

I’ve made a model for the benefits at Clifton Hill station. Clifton Hill Station got 3,009 boardings per weekday in the 2011-12.

I model it like this: 25 per cent of the users who walk to the station live in line with the platform, so moving entrances to the end is of no benefit, while 75 per cent of users currently walk past the end of the platform to get to the entrance. An amazing isochrone map app I found shows that my model is probably conservative, because of the local geography.

Those inside the yellow circle and not between the red lines can be assumed to benefit from new platform entrances.
Those inside the yellow circle and not between the red lines can be assumed to benefit from new platform entrances.
How far can you get in 12 minutes?
12-minute walking map. Source: Cartoo

There are 90 car parks at Clifton Hill Station, and it is served by buses. There are trams not so far away. I estimate two-thirds of people walk to the station. (2000 users a day.) Let’s say 1500 of them could potentially access the station via the new gates I propose.

But smart public transport users know not all carriages are equally useful. Depending on what station you get off at, and where you’re headed, your train exit may be speeded up most by being at the front, back, or middle of the train.

If you come to Clifton Hill Station from the south, but you want to board the southbound train’s last carriages (and you’re not running late) it provides you no advantage to have an extra gate at the south end of the station.

But if you’re coming from the south and you want to be in the front carriages of that southbound train, you need to walk that distance twice. Once along the street outside the station, and then back again along the platform.

Putting an entrance at each end of the platform, replacing a northern-end entrance
WALKING DISTANCE SAVED (m)
Southerners Middlers Northerners
front carriage riders 150 0 0
mid train riders 75 0 0
last carriage riders 0 0 0

12 per cent of the 2000 walkers will save a conservatively estimated 150 metres, or 90 seconds. 12 per cent of them will save an estimated 75 metres, or 45 seconds. That adds up to 563 minutes on access to the station. That makes 9.4 hours. If the same effect is present when they return home, it’s worth 18.8 hours.

The model does not assign any benefit to all the trains that may now *just* be caught when before they were just missed.

Assuming a value of time of $30 an hour, the value of the additional exits would be $146,000 a year, just measuring weekday trips. For a gap in the fence, a bit of concrete paving and some extra Myki machines, which I estimate to cost perhaps $500,000, it would pay itself off within a few years, yielding a positive rate of return.

You may think a minute here or there is not important, but there is no single change that can cut a train journey’s duration in half. If we want improvements to service we need the operators to accumulate small easy changes like this across the network.

Clifton Hill Station is not even the worst offender. Camberwell station has the entrance to two of its three platforms about 100 metres away from the main road it serves.

Camberwell station served 6,571 passengers each weekday in 2011-12
Camberwell station served 6,571 passengers each weekday in 2011-12.

Why haven’t they thought of these fixes already?

There will be a perceived trade-off with safety. I don’t doubt the ex-post rationalisers are currently saying “but having one entrance allows for surveillance!” But a single entrance also funnels station users past a single choke point. In the same way a narrow alley feels dangerous at night, so can a single station entrance with no alternatives.

In fact, more exits and entrances should mean fewer people spending time at stations, increasing the visibility of anyone loitering with malicious intent and decreasing their opportunities.

I contend the reason this sort of station design is not widespread is institutional. The Public Transport Victoria guidelines for station design seem to support this kind of solution:

“Many aspects of the local context and surrounding urban design will influence the station entry configuration. A thorough study of the station catchment area is required to determine the most appropriate placement of the entry or entries in order to attract patronage by:
a) Encouraging the use of the station by simplifying connections with existing and future urban design;
b) Providing accessibility, convenience, clarity and quality of arrival to and from the station;
c) Providing safe and attractive public spaces that contribute positively to the local identity;”

But in fact, station access runs second to concerns over train boarding patterns. PTV tries to alternate whether station entrances are at one end of the train or the other, to prevent any one carriage getting too full. Their conception of their job focuses on the trains, not the passengers.

But building more station entrances should be a priority. It won’t help just walkers. At the margin, making walking distances to train stations shorter will encourage more people to walk, and free up scarce car parking spots for people who live even further away.

As well as institutional bias from the departments, there is a ribbon-cutting bias in public transport investment. Politicians want grand visions. The Premier can’t imagine himself showing up to the construction of a new station entrance, so he doesn’t push for it to get done. But that doesn’t mean it’s not the best idea.

a+b=c. Algebra can save a poor black kid’s life.

Doubling the amount of time poor kids in Chicago spent studying algebra in grade nine led to an 8 per cent increase in their high school graduation rate, and an 11 per cent increase in college enrolment.

That’s the finding of a terrific new paper out of the US National Bureau of Economic Research.

Given that US high school dropouts die earlier than graduates by 3-5 years and make up 7 out of 10 prisoners in the US, it is fair to argue that for thousands of these kids, algebra has saved their life.

The paper exploits a natural experiment whereby students in the Chicago Public School System were placed into double dose algebra classes (largely replacing music or art classes) if they scored below the national median on an eighth-grade math test. The researchers compare kids just above and below the cut-off. 

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Barack Obama in Chicago in 1995. Photo By Mark Pokempner

The numbers of students in the algebra courses is substantial, because maths skills are thin on the ground in the 73 public high schools studied. In the US, just 20 per cent of hispanic students, 13 percent of black students, and 17 per cent of students poor enough to qualify for free lunches are rated proficient in maths. In the Chicago Public School System 90 percent of students are black or Hispanic.

“In the Chicago Public Schools (CPS), the focus of this study, roughly half of high school freshmen fail at least one course, with the highest failure rates in math courses”

Schools assigned weak students to a back-to-back lesson in Algebra with the regular algebra teacher, and gave the teachers professional development, permitting them to use different instruction methods, including working in small groups, solving problems verbally, and having students set problems for each other.

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The impact on test scores was modest. But the impact on the students lives was not.

“…the test score impacts of this policy dramatically understate its long-run benefits as measured by educational attainment.”

The effect of double dosing in the first year of high school remained over time. Students who were in the program were 9.3 per cent more likely to pass algebra in that year. But they are also 7 per cent more likely to still be in school in the fourth and final year of high school.

The students who got the most out of the instruction were ones with poor reading skills. They end up passing three more subjects in high school on average, after taking the double dose, creating a 13 per cent increase in the number of poor readers who complete enough subjects to pass high school. The researchers suggest that the focus on using verbal methods to solve maths problems may explain this result.

Black students who got the double dose  also saw a dramatic effect, with a 15 per cent increase in college enrolment. For the double-dose population at large, the increase was 11 per cent. The effect can be seen in this chart:

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For some of these student, the impact of these classes – which their 14 and 15 year old selves no doubt dreaded – will be dramatic over their life times.

Adult kids living at home? Chances are they’ll still be there in ten years time.

Australians are living with their parents longer and longer, and prospective empty-nesters might be pulling their hair out if they saw the latest data.

Just 48.2 per cent of people aged 18-24 in 2001 moved out of their parents home by 2011. And what’s more, 8 per cent of those aged 25-29 in 2001 had moved back in with their parents by 2011. 

The data come from HILDA, an absolutely amazing study by the good folks at the University of Melbourne. It follows thousands of people through their life, to deliver data that are richer than the regular snapshots from the ABS. 

The trend is global and its causes are probably economic. The ratio of minimum wage to rent suggests moving out of home is hard.

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I would have done the above graph for house prices too, but the line would go down so fast you’d have to scroll a long way to see it all, and I don’t want my readers getting RSI in their scrolling fingers. 

Anecdotally, high house prices pin kids to the parental home in another way too. To buy a house you need a deposit. The best way to save for a deposit is to stay at home for a long time (or return home – this generation is called the boomerang generation for a reason). 

That’s not all. While trying to save, kids are also worried about student debts. The cost of university has also doubled in the last ten years, far exceeding the rate of inflation.

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Incidentally, the price of beer has shot up too, and given how much of my student budget went on that, I’m glad I attended university over a decade ago.

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For wealthy people from wealthy families, living at home is a simple matter of balancing material comfort against mild embarrassment. Kids who choose to live at home are a grand source of humour and pensive Guardian opinion pieces.

But really, the option is a blessing for those of us whose parents have stable housing situations. Not everybody is so fortunate.

That’s why policies like the Government’s plan to force under-30s to look for work without the dole is so ignorant. Not everyone has a spare room to go to, with their pictures still hanging on the wall.

Best technology news in weeks: Electric car maker Tesla opens up all its patents.

Tesla, under charismatic CEO and founder Elon Musk, has become “the new Apple.”

Its share price has doubled in the last twelve months, taking its market value to $25 billion, as its cars are voted Car of the Year, Best Car Ever Tested, etc.

By pricing electric cars in the $100,000 – $200,000 range, Tesla have made them highly desirable. (Performance may also be helping. The Tesla Roadster reaches 100km/h in 3.9 seconds.)

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Last night the company did something unprecedented. It has released its patents (In a press release entitled “All our patent are belong to you.” (Don’t understand why they’d use that grammar? Click here.))

Tesla has an eye for good PR. But this is more than that. It’s an attack on the whole patent system.

When I started out with my first company, Zip2, I thought patents were a good thing and worked hard to obtain them. And maybe they were good long ago, but too often these days they serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors. After Zip2, when I realized that receiving a patent really just meant that you bought a lottery ticket to a lawsuit, I avoided them whenever possible.” – Elon Musk, June 2014.

Musk has tapped into something vital. Patents (like copyright and trademarks) have long since broken their moorings to the island of usefulness and drifted off into an ocean of fantasy, where piratical lawyers rule the waves.

It’s not just inventions that can be patented, but “business processes.”

This is the embodiment of “patent trolling.”

Patents are private property though, so this should be fair enough, right? Wrong. From society’s perspective, possession of patents is very different to possession of something physical.

Owning an idea is a contrivance invented for the sole purpose of encouraging ideas. But ideas work best when they spread. A patent is therefore of most value when it balances encouraging new ideas and spreading existing ideas. Exclusive, indefinite use of a patent is arguably worse than never having a patent at all.

Some industries thrive without patents. Australia’s restaurant industry, for example, is electric with innovation. But you never see a chef hiring a patent attorney to show that a pumpkin and fennel soup on a menu across town is similar enough to warrant the paying of royalties.

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A patent for a process for turning warm bean juice into a big deal by the application of hipsters? I may have just made a fortune with this idea.

Unlike the US, Australia is not a rich environment for patent trolling, thanks to our rather more discriminating legal system.

The Australian government’s current review of competition policy has patent law under the microscope. The issues paper (released April 2014) appears to show willingness to move Australia even further from the clutches of the patent trolls.

“…[P]roviding too much protection for IP can deter competition and limit choice for consumers… Are there restrictions arising from IP laws that have an unduly adverse impact on competition? Can the objectives of these IP laws be achieved in a manner more conducive to competition?”

But a risk to this benign environment is on the horizon, in the form of the Trans-Pacific Partnership. Documents obtained by Wikileaks suggest the TPP will require signatories – which Australia is likely to become – to adopt laws as stringent as America’s, or more stringent.

That could see patents renewable where a new use can be found for an existing product, and copyright protections lasting up to 70 years beyond the life of the author.

Australians could pay more for drugs and medicines, movies, computer games and software, and be placed under surveillance as part of a US-led crackdown on internet piracy…” according to an article in the Sydney Morning Herald.

In Australia at present, copyright is a bigger issue than patents.

Consider the copyright over the tune “Kookaburra Sits in the Old Gum Tree.” That classic children’s tune was composed in 1932. But when, in 2008, a faint similarity was heard with the Men At Work song Land Down Under (itself released in 1981) the record label that owned copyright to Kookaburra pursued the songwriters. Some months later Men at Work’s Greg Ham – who played the riff deemed to be plagiarised – was dead by his own hand.

The courts required five per cent of royalties from the hit song to be paid to the owner of the copyright, and in 2011, the Federal Court refused to hear an appeal.

(The Song Happy Birthday is also copyrighted. It is owned by Warner/Chappell Music, which collects a reported $2 million a year in royalties.)

I’d be willing to sell off every childhood song we have, from Twinkle Twinkle to the Incy Wincy Spider, if it spurred more innovation in childhood songs. Similarly, I’d be happy for patents to establish a chokehold on the technology industry, if they clearly generated better products for consumers.

But there’s plenty of evidence patents don’t work, and worse, they make the innovation environment worse.

And that’s what inspired this surprising move by Tesla. Let’s hope many more follow them.

Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world’s most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.” – Elon Musk

Should you do a PhD?

In order to answer this question, I’ve surveyed six people who started PhDs – friends of mine – from the following fields: physics, biology, computer science, chemistry, economics and history.

Five emerged from their programs with a Doctorate, one turned theirs into a Masters. (Given the PhD completion rate in Australia is 60-61 per cent, this sample is biased towards survivors.) One works in academia.

PHD completion rates
PhD completion rates. (Source)

Their answers make a very interesting set. But before I let them speak for themselves, a confession: I was accused of asking leading questions. It may be true, but it’s the zeal of the convert.

As an undergrad, surrounded by lecturers with PhDs, I wanted one too. Then I got a job offer at the end of my degree. Starting that job I met plenty of public servants with doctorates. We were doing the same jobs, making the same pay. I came to see my desire for a PhD as the result of sample bias: Most powerful people in universities have PhDs, but most people with PhDs are not powerful people in universities.

With that noted, let’s hear from the experts!

BENEFITS OF A PHD?

Physics at Australian National University: I’m a researcher/lecturer, which I fundamentally couldn’t do without my PhD of course. I haven’t had any other profession since graduating. On a personal level, I really enjoyed it. I learn’t much more than just the topic of my thesis. I really learnt a lot about problem solving, logic, and life from being in close contact with world class researchers. During my PhD, I had the pleasure of interacting with four Nobel laureates at various times.

Biology at Melbourne University: I became a specialist in a very narrow field of study, possibly even an expert in said field. I also gained valuable generalist skills in experimental design, data analysis, working independently and as part of a team, critical thinking and the effective oral and written presentation of data and ideas. A PhD is also an exercise in persistence and perseverance, not necessarily intelligence, so I consider that most people who have completed aPhD are good at troubleshooting and are quite resourceful.

Computer Science, RMIT:  I (arguably) got my foot in the door of my first job in industry from my PhD, and some of the domain knowledge I acquired there was useful in my job. My written and verbal presentation skills were also improved during my PhD, and I learned to have a healthy disrespect for authority. I also had a lot of fun! I found my PhD years to be quite relaxed (despite the odd moment of stress) and it was actually quite a nice transition between undergraduate spoonfeeding and the “real world” of the workplace.

Chemistry Masters, ANU:  Benefit is a fancier CV. Without a masters I wouldn’t have gotten either my first or second job in consulting. In terms of education I am far more adept at seeing the ulterior motives and ugly manipulative side of people after working for my pitiable (but totally hatable) supervisor.

Economics, Oxford: Time to read and develop deeper / broader domain knowledge. For me, that was Chinese language, China’s economy and history, econometric techniques. Got supervision re: use of econometric analysis and thinking through data, and technical skills. I also played a lot of squash and improved my cooking. Those are the main benefits!

History, Melbourne University: For me, the three years doing it was probably the biggest benefit. I had a scholarship which is a privileged position to be in because it enables you to study something that fascinates you without having to work full time. I had a clear idea of what I needed to achieve each day, and if I got it done more quickly I gave myself the rest of the day off. More recently there have been career benefits I think, but like many people when I finished the thesis I wanted to do something totally different from research. 

graduation day
Graduation day.

DOWNSIDES?

Physics at ANU: More than once I felt like quitting. In hindsight, the pay is tiny compared to what you could be earning, but I didn’t really think about that at the time. You have no guarantee that you will finish. There are people who try as hard as they can for over 4 years and come away with nothing. 

Biology at Melbourne University: The downside is that you are very cheap labour at the bottom of a pyramid scheme. You know that chapter in Freakonomics where drug dealing is compared to a pyramid scheme? Well, I’d change the “drug dealing” to “research” and “academia” and the chapter would still be quite accurate (minus the crack cocaine and guns). Everyone’s ego is complimented when they are asked to do a PhD. What hindsight has taught me is that there is very little money in Australian research and really not enough for most senior researchers (lecturers etc) to hire employees (such as postdocs or research assistants) so there is a huge reliance on the cheap PhD labour that the federal government (or uni) pays for. 

Computer Science, RMIT: I didn’t earn that much money (although I found my stipend to be perfectly adequate) and, obviously, my entry to the workforce was delayed by a few years. In terms of climbing the career ladder it was probably not great bang for buck, but I don’t care too much about that sort of thing so don’t consider that a downside.

Chemistry Masters, ANU: Downside was three years of near-suicide misery and lost opportunity. I could have done a law or engineering degree in that time. I still feel that sense of loss – I am always years older than my peers. 

Economics, Oxford: Long distance relationship. I’m not sure Oxford was the best place for me. 3-4 years out of workforce and foregone income and job experience.

History, Melbourne University: Honestly, the main downside was the public speaking obligations and pressure to publish along the way.

academic job market
The academic job market is tight

WHO SHOULD START A DOCTORATE?

Physics at ANU: I believe that you shouldn’t do a PhD because you want a piece of paper that says “I have a PhD“. The people who I know who were trying to prove something, either to themselves or to others, always had a terrible time. If you have had a taste of research, and still feel like more, then you should consider a PhD. There’s also the question of talent. There are people who love science, yet just aren’t cut out for research. Fundamentally, if you’re not driven by curiosity, and have a hunger for discovery, specifically towards your project, you probably shouldn’t be there. 

Biology at Melbourne University: I actively discourage most people from starting a PhD. For most professions, the experience you gain in the workplace will be better. For anyone wanting to do scientific research, then permanent positions in Unis or CSIRO are few and far between (see pyramid scheme comments above). With this in mind, I know plenty of people who I did my science PhD with who now work outside of academia, in the public service, as patent attorneys, as technical sales reps, and in private biotech/pharma firms and consulting. Someone contemplating a science PhD should realise that these non-academic jobs are actually where they are most likely to end up and then determine whether a PhD is really still necessary. And realise that their PhD supervisor is always going to encourage the singular academic trajectory (ie they are much happier to be a reference for further academic appointments than anything else). 

Computer Science, RMIT: To consider doing a PhD you will need to be convinced you have the necessary skills and temperament to undertake a prolonged exercise in independent research, and at least one of the following should be true:

-You think you will enjoy doing a PhD for its own sake;
-Your chosen profession requires a PhD (e.g. academia);
-You will acquire **specific** skills that will help your career in your chosen profession.
 
These are bad reasons to do a PhD:
 
-You’re not sure what else to do after you finish your undergrad;
-You think it would be cool to get to call yourself “doctor”;
-You expect some ill-specified career advantage from having one;
-Your parents would be proud;
-It’s “prestigious”.

Chemistry Masters, ANU: The only people who should do PhDs are either saintly types who just love their subject and have no expectation of any type of employment related advantage or psychopathic sadists who will enjoy destroying promising young people. 

Economics, Oxford: Almost definitely do one: if you want to become an academic; its paid for; have world leading supervisor who has top track record of placing their students into great academic jobs; at world class research institution, great city, great classmates etc.

Never ever do one: in the opposite scenario: Unsure if academia is the path; not at top ranking place and doing a major where job placements are super tough; where PhDs take 6-7 years; or living in a shit city.

History, Melbourne University: The peers I had that struggled the most were those who set themselves additional challenges such as designing research involving lengthy ethics processes and multiple methods, including undertaking lots of complex interviews and all the responsibilities that come with that. This type of research makes a huge contribution to the evidence base but goes well beyond the three years you sign up for and requires a significant time investment in project management.

PhD?
There’s more than one way to prove you are a big shot.

WHAT PROPORTION OF SMART UNDERGRADUATES SHOULD SERIOUSLY CONSIDER IT?

Physics at ANU: Only those who tick the boxes in the above question. How many PhD grads do we need? Well, that’s a different story. In the Australian employment market, a PhD isn’t really valued. From an employment point of view, the only reason to do a phd is if you want to become a researcher. The number of permanent research positions that open up every year, divided by the number of phd graduates is bugger all squared.

Biology at Melbourne University: A large proportion of smart undergrads will contemplate it, and even be asked by lecturers to do a PhD. As above, I would suggest that only a very few should take it up. There are too many easily available PhD scholarships in this country and not enough investment in other parts of the research infrastructure, hence the pyramid scheme. If they are smart, they can get the benefits I mentioned above from plenty of other roles.

Chemistry Masters, ANU: Maybe 5 per cent of undergraduates? We need to rethink PhD candidature. There are things to be learnt, but should acknowledge that phd students teach each other and are self taught in what can be an educationally nutritious environment – it all depends on the calibre of your fellow students. With ten students to a professor this will always be the way. The idea of charging tuition for a PhD is outrageous. My only hope is this will decimate the ranks of the fools who sign up for one.

I see PhD years as a type of national service, where you accept below minimum wage for contributing to the R&D pie for the nation. We should acknowledge this and stop pretending it is training for an academic or other research career – those jobs don’t exist. Also we should acknowledge that growing the R&D pie is of national importance. Slave student labour will be cheapest.

Also I would like to see universities sued for misleading students regarding their employment prospects. Or scolded for false advertising. A PhD contract (because you sign a contract) should include a disclaimer with real graduate outcome figures. And then you should have a counselling session to determine if you’re likely to kill yourself.

Economics, Oxford: I’m not going to tell anyone they shouldn’t do it if they’re interested. I just think they should be fully aware of the academic labor market conditions and that it is in supervisor’s interests NOT to be fully candid / upfront about this. By this, I mean how tough the market is, especially in humanities, etc.

History, Melbourne University: Lots. It’s important to have a great topic and a good supervisor and that you like to work alone a lot. I worked part time doing something completely different which was a good balance for me.


I feel like we got a great range of answers there, with evangelism from both sides and plenty of middle ground. No matter your pre-existing biases, there is something to grasp onto!

This is a fascinating topic at the moment, with the Budget proposing charging fees for PhDs. If you have other thoughts please leave a comment below!

One budget is not enough to derail a government, normally. But this time could be different.

The 2014 Budget is the most significant in a long time. I have an eager – some would say obsessive – interest in federal budgets, and I cannot remember a Budget that has got as much attention as this one.

Today marks four weeks since the second Tuesday in May, and Budget headlines are still around. For example:

 

I went through the internet archive. It shows the 2014 Budget produced not only a much bigger spike in interest in the Budget, but a much longer tail.  It is not common for budgets to be sparking discussion three weeks after they are released – people normally move on fast and a government only dreams about getting three weeks of “traction”.

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The graph above compiles mentions of the word Budget on the homepages of The Age and The Australian in the month around the Budget. I did an analysis for 2008 too, because the first Budget of the Rudd government would be a good comparison to the first Budget under Abbott. The data is a lot more spotty, but the pattern is the same. In 2008, Budget headlines died out after no more than a week.

Google trends data confirms that this Budget was a whopper as far as public interest goes.  The graph below shows share of searches from within Australia. (Google omits the vertical axis – I guess that’s proprietary data).

The massive spike in search should be a major worry for the government – search is trending away from “intellectual” topics and toward popular topics as the internet “matures” so you could expect successive budgets to show smaller spikes.

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The fact that this Budget has captured the public’s imagination so sharply is a major negative for the government.

 

The polls show how much people like it. Newspoll has tracked the government’s fall from 51-49 on April 6 to 46-54 by June 1.

The Coalition hopes this Budget will be forgotten in 11 months when they bring down the next one, and in 23 months time when they bring down their pre-election Budget, stuffed full of goodies. 

But first impressions count, and the government may actually have counted itself out with this Budget.

Negative interest rates on deposits just got announced in Europe. Here’s how that works.

In Europe, something wild and new and kind of dangerous is happening. They’ve put negative interest rates on deposits.

Imagine putting your money in the bank, and getting a negative interest rate. You’d want to get it out again as soon as possible, right? That’s the point.

Interest rates are used to control activity in the economy. I wrote about this a few months ago: “I know the RBA sets interest rates but I’m embarrassed to ask why. An explainer.

If the interest rate is negative, the central bank is goading you into using your money, not just sitting on it. That should mean more spending. More spending makes more jobs. And like this they hope to get Europe out of the quicksand of high unemployment.

So, if this works, how come it’s never been tried before?

The thing is, interest rates don’t just work on their own. You’ve got to consider inflation. If you get 2 per cent interest on your deposit but inflation is 3 per cent, then really you are losing the purchasing power of your money. (in the business this is called “negative real interest rates” where the word “real” means inflation is taken into account).

You can make “negative real interest rates” by setting the interest rate below inflation. That’s easy. The problem in Europe is there’s so little activity that inflation is very, very low. They have to make the advertised interest rate negative to get the “real” interest rate negative.

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Source: WSJ

Now, it’s worth noting that the negative interest rates don’t apply to the average punter. They are for the deposits that banks have with the central bank. (Millions and billions of euros every night).

The reason for that is simple.  If you or I see that the $11.50 we have in the bank is attracting a negative interest rate (here I am ignoring the “real” interest rate), there’s a simple trick we can use – take it out of the bank and turn it into cash. Cash gets an interest rate of zero, so that’s a lot better than leaving your money in the bank.

But guess what? There’s talk in some economic circles about getting rid of cash so negative interest rates can apply to  normal people too. It’s not coming from freaky fringe dwellers either, but mainstream people with Nobel Prizes and a lot of clout.

If you only have your money in electronic form, there’s no way to avoid keeping it in a bank account. You can’t put 1s and 0s in a shoebox under your bed.

Negative interest rates would not necessarily cause a riot. Bank fees already work in such a way that we’re used to seeing our bank balances retreat when left alone. A cash free future is plausible. People are using cash less and less.

the decline and fall of cash
Cash use falls sharply in all age groups. (Source: RBA)

While the rise of Paypass could end up stranding us in a future where we actually pay banks to hang onto our money instead of the other way around, there are other innovations that make a cashless society with negative interest rates unlikely.

I am talking about Bitcoin. The rise of a kind of cash that is beyond the control of central banks means attempts to control rates on government-issued cash are more futile than in the past.

For now, here’s hoping that rates of -0.1 per cent can help reduce joblessness in Europe, where youth unemployment is a very frightening 23 per cent.