I can barely remember the last time I saw a jogger’s legs. Just about anyone who goes jogging has fancy leggings made of “technical material.”
They can cost as much as a flight to Sydney:
People are prepared to pay a giant amount for goods and services related to sports. Willingness to pay for compression leggings is enormous – never mind that the marathoners at the Olympics don’t wear them, and neither do the 100 metre runners.
The business model of companies like Skins (or Lululemon, Nike, Lorna Jane) is to align yourself with something that is or could be cheap, but which people find highly enjoyable or important.
People can run in cheap clothes, but they love running so much that if expensive and specific clothes seem to be required, the expense is minor compared to the overall enjoyment.
Hanging out with your friends can also be cheap or free. But if a cultural expectation develops that it’s only appropriate to hang out in a bar or a restaurant – not in a park or on a street corner – then people don’t blink to pay.
Businesses that sell expensive bicycles profit because they leverage both these trends. If you want to do that exercise properly, and hang out with your cycling friends, you need to have a bike that won’t embarrass you or leave you lagging behind the bunch. Or so they say.
The business model is this. Find something people love to do. Something that offers them a strong benefit at a relatively low price, and great “consumer surplus.”
Then position your product as an indispensable tool to doing that. It doesn’t matter if your product is truly important – you can capture some of that consumer surplus if you can convince people it is. It might be as simple as making the stitching on your leggings high-contrast to create the impression of science.
My last example for the post is popcorn. If I was to watch a movie sitting on my own couch, I would not plan to eat popcorn. But if I am invited to someone’s home to watch a film, the odds of me buying popcorn rise dramatically. Why do popcorn and movies go together? It’s a social construct – and a way to capture my willingness to pay. (1)
Are there other examples that grate on you? Leave a comment below!
Holidays? No. Dinner out? No. A car? No. Soy flat white to take away? Uh-uh.
Total annual expenses would run to $21,948. Would it be worth it?
Before I made this graph, if you told me it was mathematically possible to save $20,000 a year on a pre-tax income of $50,000 I would have called you crazy. The graph above does not account for any government transfers or the low income tax offset (worth $230/year at income of $50k), either.
Savings advice seems to always centre around giving up takeaway coffee (1, 2, 3). I don’t drink a huge amount of take-away coffee, but when I do, I really enjoy it. And really, five cups a week at $4 each is only $20 a week.
The pie chart above shows there’s more to be gained by trimming down the big recurring expenses. Finding a place that rents out for $20 a week less locks in the saving of $20 a week, without constantly exercising self-control over caffeine urges. Self-control is like a muscle – it tires as you use it. So if you avoid buying coffee in the morning, you are more likely to splurge on pizza on the way home. Any saving plan should rely on locking in low recurrent expenses.
Behavioural economics suggests that humans have “present biases” that prevent them from meeting their own stated preferences about saving. That’s why we have compulsory superannuation. But there are tricks that make people respect their own preferences.
“Soman & Cheema (2011) evaluate an interesting variant of a commitment savings technology in a field experiment targeted at unbanked construction laborers in rural India who are paid cash wages. Individuals earmarked a certain amount of their weekly wages as savings that was then set aside in either one (nonpartitioned) or two (partitioned) sealed envelopes. Realized savings was 39–216% higher for workers whose savings were partitioned into two envelopes rather than put all into one envelope. The authors hypothesize that opening a savings envelope, or violating the partition, induces guilt. Having multiple accounts, or partitions, increases the psychological cost of spending money set aside for a specific purpose and consequently increased the amount saved.”
Even if they could, most people would not live like monks just to save up pennies in their bank account. But the structure of our tax system mean they will do it to pay for a home.
If you take out the rent expense of over $9000, pre-tax income of $50,000 leaves $28,000 spare a year. That’s enough to pay off a $400,000 mortgage.
I hesitated to even publish this graph, because it makes my non-house purchasing ways seem immoderate and wasteful. But there it is, in all its horrible glory. You can – if you set your mind to it -base a life of grim abstinence in a house of grand proportions.
Saving a bit is important to make you happy.
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” – Micawber, Dickens.
The kind of lifestyle I graphed above would be easy to maintain for a fortnight, possible to maintain for six months and hard to do for two years. After five years it’d be hard to do anything else, because your social life would have withered and died. Dickens, remember, also wrote about Ebenezer Scrooge. Like all things, saving is best in moderation.
In a comprehensive new paper disseminated by the US National Bureau of Economics Research, Harvard professor Brigitte Madrian discusses the latest thinking on using behavioural economics to optimise policy design.
There are a few items in there with direct relevance to Australia that are worth a bit of attention:
1. Orwellian language works. Madrian praises the re-branding of the UK’s dole as a “job-seeker allowance” and criticises the use of the term”work for the dole” in Australia. The evidence for the power of framing in the allocation of transfer payments is more significant than I had realised.
“Kooreman (2000) finds that the marginal propensity to consume children’s clothing is 10 times larger out of income designated as a “child benefit” than out of other income sources; in contrast, the marginal propensity to consume adult clothing is highly significant for other income sources but is negligible for income from designated child benefits. The labeling of income as a “child benefit” apparently creates in parents a moral obligation to actually spend that money on their children. Similarly, Benhassine et al. (2013) evaluate the impact on school enrollment of a labeled cash transfer program in Morocco that designated the funds for children’s education, although the funds could be used for other purposes. They find a sizeable increase in elementary school attendance by children in families who received the labeled cash transfer relative to children in control households who received nothing. They also find that a labeled cash transfer is as effective, indeed for some measures is more effective, at promoting school attendance than is a conditional cash transfer in which payments are made only if a child does in fact attend school (and is significantly less expensive to administer than a conditional cash transfer program).”
2. There’s a reason the ATO prefers to over-collect tax and deliver tax refunds each year, and it has to do with both loss aversion, and the way human minds frame problems with reference to arbitrary points.
“A natural reference point for taxpayers at the time of tax filing is whether they owe additional tax (relative to what has already been collected) or expect a refund. Engström et al. (2013) find that in Sweden, taxpayers are more aggressive about claiming deductions when they owe additional tax at the time of filing than when they expect a refund, consistent with the predictions of prospect theory. An obvious policy implication is that a tax collection strategy that relies on overwithholding followed by refunds at the time of tax filing may increase tax compliance and total taxes paid.”
3. Madrian is an economist, so she’s au fait with the merits of financial incentives. But the paper emphasises that public finances are in short supply, so it is important to look for policy tweaks that would work as well as a financial incentive.
“Levitt et al. (2012) examine the effectiveness of several different incentive schemes to motivate student performance on standardized exams. They find that giving students a trophy for meeting performance targets, at a cost of about $3 per student, has roughly the same impact on test scores as a direct financial incentive of either $10 or $20, and in some cases is more effective.”
Thinking about whether there is a behavioural economics solution that would substitute for a subsidy may also provide insight to the real reasons for a policy. For example, the government’s proposed Paid Parental Leave scheme – a subsidy for staying at home and looking after a child.
The PPL scheme is expensive, offering up to $50,000 dollars in wage matching over six months. What behavioural tweaks could make it cheaper?
The question is actually hard to answer. Is PPL designed to lift the birthrate? To keep women at home in the first 6 months of life? To return women to the workforce thereafter? To reduce demand for childcare? To support incomes? The fact that whatever the policy problem is can only be solved by this expensive PPL hints that it is in fact a policy in search of a solution.
People buy Dutch bikes because in the shop, the sitting position seems very important – you seem to be choosing between “hunched over the handlebars” or “sitting up comfortably,” between “sporty” and “relaxed.”
I once went with my mum to buy a bike. She bought a heavy, upright bike and it is almost never used. She still rides though – it is just more likely to be on an old mountain bike.
In the real world, the discomfort of bicycling is – for a healthy person – much less about your body position, and far more about the effort expended.
This is extra relevant if you imagine doing some cycling for transport, not just leisure.
If you are sitting up comfortably on a 20kg bike, you will be going more slowly in almost all circumstances. If riding to work will take 5 minutes longer than the train, it’s unlikely to be your go-to choice when you are stressed in the morning.
You are also exerting yourself for longer. You will be exposed to a higher chance of getting caught in the rain, more tired and more likely to be drenched in sweat when you arrive.
Exertion and time are the real costs of cycling and the real reason bikes get left in the shed while their owners drive. Yet people who imagine themselves as “not sporty” are the most likely to buy heavy, hard-to-ride bikes!
The effect of sitting up straight is to create drag. Drag increases with speed, so a more aerodynamic position is more important when you would like to go fast. Not so important when idling along the shops or a busy off-road bikepath, but relevant on a long straight road, or when other cyclists are going fast.
Melbourne is not Amsterdam. It is undulating, in places downright hilly, and the other cyclists are not meandering along. If you find yourself pushing your bike uphill and getting overtaken, of course you will give up riding it.
If we observe actual women cycling, in the wild, we see what kind of bikes actually get used.
What we (mainly) see is this: flat bars, baskets and aluminium tubing. Bikes that weigh perhaps 12kg, not 20kg. Bikes that won’t make it into a shop’s window display but should be celebrated and promoted.
Other experience goods often have independent quality ratings that provide some sort of indication of what you’re getting. You might look for a Booker Prize shortlisted book, or a wine that has won a lot of medals.
So I’d like to contribute an endorsement for light and practical women’s bikes. What Dutch bikes need is an equal but opposite thing. A big red sticker on them that says: “Warning. Will gather dust.”
It turned out to be mouldy and squalid, and then sold for $370,00. But I would have happily lived in that much space if properly appointed (although not at that price!).
Is there inherently anything undignified about having one room that operates as bedroom, kitchen and lounge room? It is doubtless less comfortable, but I suspect that it is also true of driving a Barina rather than a Range Rover.
In fact, housing should probably be less regulated than cars. You can’t crash a house into someone else.
The fact of the matter is that small homes may suit many people best, for any number of reasons.
People might feel cosier and more secure in a small house. People physically unable or mentally indisposed to do housework may love them. Environmentalists may choose them because they require less energy to light and heat.
Certainly the single-person household is on the rise in a major way – up to 24 per cent of households from less than 20 per cent 15 years ago. So why would we regulate against small homes?
Part of the reason might be the psychology of decision makers.
People who make laws tend to live in large and charming detached houses. They wouldn’t want to live in a tiny little home. So they imagine they are helping the unfortunate by making sure homes are not small.
Politicians do not tend to live in the following: caravans, boarding houses, cars or under bridges. Lawmakers may struggle to empathise with those people, for whom a real home is a lifelong ambition they may never achieve because it is too expensive.
Very small studio apartments help make housing more affordable in two ways.
Not only do they cost less than a one bedroom house – which could be significant on its own – but they also allow for developers to put more homes on the same space, which increases the potential housing supply.
The worst thing you can say about a “too small” apartment is that they will be hard to sell. That the market for them will be small. That is equally true of a 20 bedroom mansion, and the same logic will apply – drop the price.
If in ten years they prove unpopular, that will actually provide relatively cheap homes near the city, for a small group of people who would otherwise be shut out. I could only support such a policy.
Higher interest rates make it harder to do business. If the RBA lifts interest rates now, while unemployment is at its highest level in years, the improvement in the labour market might slow down.
Basically, the RBA is in a pickle. It is an “inflation-targeting” bank. Our entire economy hinges on the idea that lower interest rates create both growth and inflation. If they only create inflation, then we are stuffed.
It nervously awaits the next release of inflation data (in 3 months time) and the next release of unemployment data (on August 7th). We should all be on the edge of our seats.
n.b. the fact that the red line is below the blue line in the graph above means we have negative real official interest rates! The fact that money is losing value should be enough to get people spending it.
There is a lot to be disappointed about in the current conflagration between Israel and Palestine.
The world is getting more peaceful every year, but that little area around the Dead Sea remains a hotbed of conflict and violence. Since long before I was born, there has been conflict there. Is there any way to make it stop?
I’m not a foreign policy expert, I’m not theist in any way, and I’ve never been to the middle east.
But I am trained as an economist and I’ve done a lot of reading on Game Theory. And it suggests to me the response of Israel to Hamas rockets is probably far from optimal.
Rocket attacks are not a brilliant strategic move by Hamas. They are motivated by anger. And the more Israel looks like a bully that willingly kills civilians, the angrier Gazans will get.
Equally, military force deployed by Israel is disproportionate, strategically unsound and seemingly driven by anger.
When the death toll in a “war” stands at over 500 to 20 (Reuters, 21 July), it is clear one side is doing more than the other. It might be imagined that the higher the willingness of Israel to be really aggressive, the faster Hamas learns to stop firing rockets. But that’s not what the theory says.
Another approach backed by Game Theory, is called Graduated Reciprocation in Tension Reduction. It was developed in the 1960s as a way to address the Cold War and is optimised for breaking a stalemate. It involves one side announcing it will make a unilateral move to reduce tension, and then inviting the other side to respond.
“GRIT may have a greater effect on changing the “enemy images” that fuel conflict since it uses unsolicited gestures to signal a willingness to pursue common interests to an adversary who has heretofore seen the conflict in zero-sum terms. Nevertheless, GRIT also has shortcomings that need to be taken into account. In particular, the work of Lee Ross on “reactive devaluation” strongly suggests that the mere act of offering a concession decreases its perceived value in the eyes of the recipient (Ross, 1995; Ross & Ward, 1995).” source
De-escalation by one side is the only way for the conflict to return from boiling to simmering. I place the responsibility for making the first move to stop this “war” at the feet of Israel.
Some might argue that is unfair. But with the kind of moves Israel has made, Hamas lacks the capacity to play tit-for-tat. How could it mount a ground invasion? While Israel is a nuclear armed power, Gaza is not even a state, Hamas fighters are not real soldiers, and who knows how effective the chain of command is. The side that has an international reputation is Israel.
CODA / COUNTER-POINT
Israel may be investing in its reputation for being hard, rather than being irrational.
If a change in global polarity is coming, driven by the rise of China, Israel may perceive a need to be ready.
The US, may have a rival within decades. If China rises and forms an alliance with the oil-producing states that lie a short pipe-line away from its western border, the strategic imperatives for the US of supporting Israel may diminish.
Perhaps, in recognition of that, Israel has decided it will need to form a lasting peace within decades. If so it may be currently investing in a reputation of being mad and dangerous, in order to maximise concessions in that peace.
The last few years I paid an accountant to do my taxes, partly because there was no e-tax for Mac, and partly because I perceived there would be some great benefit of getting a professional involved.
Having now been on both sides it’s time to announce my conclusion.
E-tax is, for me, a million times quicker, easier and cheaper than using an accountant. (Even though last tax year my affairs were more complicated than ever, having an ABN and business income, a redundancy payment, etc to contend with).
All the information the accountant uses is provided by me – why not just enter it into a system myself? My accountant also bothered me with physical pieces of paper (ugh!) that I had to physically sign (so medieval!). Using an accountant also gave me no hard deadline on doing my taxes – unlike e-tax – so I let it hang over my head til the following May.
When I go to e-tax, the suburban accounting industry takes a hit. They used to make a few hundreds bucks a year from me ($451 last year, I think) but now they make nothing. Doubtless, this hurts.
But this is exactly how productivity increases – painfully. When I find a way to do something more cheaply, it means someone loses a revenue stream.
The money I used to send to the accountants, I can now spend in some other way. It might go on travel, a new bicycle or dinner out at a restaurant. Some other industry will see the upside of this efficiency increase.
The story of the accountant being pushed out of work by a computer program is extremely relevant right now.
“Software substitution, whether it’s for drivers or waiters or nurses … it’s progressing. … Technology over time will reduce demand for jobs, particularly at the lower end of skill set. … 20 years from now, labour demand for lots of skill sets will be substantially lower. I don’t think people have that in their mental model.” Bill Gates
In their mental model, the jobs are lost and not replaced. That defies centuries of progress. Could this time be different? I doubt it.
What will happen is that people will specialise in doing things only humans can do, or things where having a human do them adds great value.
We will not cease to be a social species, so there will be lots of instances in which people are prepared to pay a premium to have a human provide for them. You’ll notice the Sushi train has not yet replaced the waiter and the vending machine has not replaced the barkeeper.
What this means as well is that more and more jobs will be fun and challenging, because they are human-facing. There will be fewer book-keepers and widget makers squirrelled away in the back room never seeing another human.
Instead there will be more barbers, life coaches, counsellors, nail artists, masseurs, tailors, troubadors, baristas, chauffeurs, etc. And that’s only the existing jobs. I bet things you never thought a person could or would outsource will turn into huge industries.
I can imagine a cooking coach in people’s homes, to bridge the gap between eating in and out. A financial adviser on call in all manner of situations – perhaps you can set up your credit card so you have to dial them up and justify your purchase every time you try to spend more than $100.
There could be cycling leaders who organise a great ride through the best terrain for the day, and make sure you’re not stranded without a spare tube. Experts that come to you to help you “homebrew” beer or make your own yoghurt. Interior designers that help you custom craft your own furniture. Cleaners that do lots of value add, by say, bringing flowers. Dog trainers, cat groomers, budgie psychologists?
Many of these already exist at small scale. The possibilities are limited only by human ingenuity and the human desire to consume. Don’t bet against those forces.
The chumminess of journos and clubs can be shown in another way too – when the AFL launched its own, in-house news service, it actually compared quite well to the existing reporting.
Compared to the way politicians and companies are treated, much football journalism is as tough as being stroked with a mink mitten.
For example, here’s a story that definitely did not come straight out of an AFL marketing department: Players Back Coach.
Here’s a great quote from that story:
“Mick has remained positive and very supportive of the players,” Yarran said. “Hopefully, he goes on. It is in the best interest of us if he stays. He has been fantastic for me and for the footy club.”
The reason for the sucking-up is access. There are nine Melbourne clubs and far more journos. The clubs offer players and coaches for interviews with favoured news outlets. And the longevity of the clubs is secure.
That may be because a club does not hold all the cards. Three of the 20 teams are relegated out of the Premier League each year. The journalist knows that they can pursue a story about a club that will cause major damage to the club and the club can suffer so much it eventually disappears. It is not unlike the way a political reporter can hound a politician on a really big story that could end that politician’s career.
But in the AFL, if you hound a club on drugs or violence, sexism or a culture of persistent failure, they’ll be there next season, and the one after, and the one after. They are likely to last far longer than a football journo. Unlike politicians or even businesses, you can’t play a club off against another club – their survival does not depend on another’s failure.
About the only topic on which AFL journos will sometimes have a swing is coach performance. Is it any coincidence that coaches are hired and fired in the free market, and sometimes let go mid-season? I say no.
Introducing relegation into AFL would dramatically change the nature of the game, and make the AFL’s job of equalising the league far far harder. I’m a fan of an even competition and I am not seriously suggesting relegation.
Another alternative would be to have sports reporters whose goal is to make it as journos, not just as football journalists.
They would not be afraid to dig dirt on a club if they know they have a two-year tenure as footy journos before they get moved onto state politics, courts reporting, or restaurant reviewing…
Your thoughts? Egregious examples of sycophantic sports reporting? Favourite worst reporters? Please leave a comment below.
We’ve all seen technology proceed like greased lightning.
In my lifetime, we’ve gone from typewriters to internet-enabled laptops. We’ve seen smartphones go berserk and enormous progress in survival rates for cancer. These fields have transformed. It is tempting to predict more exponential change in the field you’re most excited by.
For example, last night I watched a couple of documentaries on stem cell research that were mind-blowingly exciting (1, 2). Want to see a paraplegic stand? Click on that first link.
But caution is needed.
The fields in which we see progress are affected by survival bias. We don’t see the frustrated scientists trying and failing to revolutionise other fields. Look around you and much is as it was 100 years ago. I’m sitting at a wooden chair at a wooden table, wearing woolen socks and leather shoes. The alphabet is the same as it was, and so is my keyboard layout. There’s a clock on the wall telling me the time with two rotating hands. I just got over a common cold. I’m eating brown rice and snowpeas. It could be 1850 – if not for the macbook.
“The benefits are so great that we will force ourselves to accept them, even with a few risks,” I told myself.
But then I started thinking about the development path, and I became significantly cooler on the chances of success.
Autonomous cars will only break through once they are trusted.
Humans set a very high bar for risk in situations where they perceive they are not in control. (This is why people object to tiny risks of living downwind of a polluter and won’t let their kids walk to school, but still eat chips and drive fast.)
Autonomous cars won’t just have to prove they are safer than humans at driving, but much safer – for car occupants, other road users, pedestrians, wildlife and pets.
THE LONG TAIL
Computer operated cars are probably already better than humans at driving in car traffic on freeways and on busy roads. Humans are dreadful at mundane repetitive tasks that require paying attention.
But car crashes can happen in odd moments.
This is where humans excel. We dominate computers at dealing with problems we never saw before.
Humans will remain best at dealing with things like:
A big black garbage bag blows onto the road but we know we needn’t swerve as we can tell it is light by the way it moves.
Kangaroos are on the side of the road so we better slow down because they often jump in front of the car.
It’s Saturday afternoon, there’s just been a football match, some sort of fight is happening on the side of the road, and you know someone could easily step out into traffic as part of the brawl.
Many serious crashes occur in scenarios that are in the long tail of distributions. Machine learning will not cover them all, so there will remain a few scenarios (I predict on the basis of statistics alone) in which autonomous cars continue to perform predictably worse than humans despite the best efforts of programmers.
Other types of software can launch with “beta phases” where failure is embarrassing, but not catastrophic. But the testing that will have to happen before any serious real world traffic experiments involving autonomous cars will be enormous. Google’s experiments driving round California are good, but still limited in scope and scale.
A few high-profile crashes will be enough to set a very high technical and legal bar for autonomous cars. The concept of surrendering ones life to a machine is a staple of science fiction because it irritates a real issue in human psychology – control.
MANY OPPORTUNITIES FOR SETBACK
It is not just technical problems that can hold up autonomous cars indefinitely. Political, road engineering, PR and software challenges will impede getting autonomous cars to the point where people trust them and forgive their mistakes.
There’s a lot of fail points. I suspect – again on the basis of pure statistics – one will resolve into a big sticking point for a long time to come.
SUCCESS WON’T LOOK LIKE SUCCESS
Cars will continue to have more and more sensors and autonomous capabilities. But during this time, non-autonomous cars will continue to be sold.
Traffic will be mixed for at least the next 50 years. Some freeways and highways will perhaps be autonomous-only. But not places where there are pedestrians, bicycles, shops, parking, and of course traffic lights. So the benefits of full autonomy will not be realised for a very long time. Don’t hold your breath.
The upside of the failure of the fields about which we are most excited is that we might get blindsided by a revolution in a field where we didn’t expect any improvement. Nano technology, GM foods, high-speed trains, smell-o-vision: any of these could be the one in which a breakthrough happens that turns out incredibly positive.
When the euro was adopted, cash was still a big thing. Economists hailed the savings in transaction costs that would come from Europe having a single currency.
At that stage, we had not had the GFC. The currency union did not cause the GFC, but it sure made recovering from it tough. When the global economy is foundering, the importance of having an independent currency and an independent monetary policy is suddenly very clear.
Now we see what happens if your economy is screwed but your currency and monetary policies are made far away.
Some countries get a free ride and others suffer.
The problem is especially acute for those under 25.
This is how Europe is poisoning itself. All those young southern europeans – 23 years old and no job – are seeing their human capital withering on the vine. Among them are growing numbers who will vote for extremist parties in a decade’s time, because the promise society made to them has not been kept.
If you don’t get a job early on, you can be stuck without one for a long time, and then channeled into low-value work.
“Unemployment can exact a big personal toll on young people. Failure to find a first job or keep it for long can have damaging long-term consequences on their lives and career prospects. But youth unemployment also has broader social consequences and contributes significantly to growing income inequality in advanced economies.”
Economic problems are worst in Greece, Portugal, Italy and Spain. Luckily these are not the countries with the biggest populations, nor the strongest warring traditions. But they are not without their flash-points.
I’m not predicting a world war. But separatist movements and terrorism are on Europe’s doorstep and remain very possible within its borders.
Terrorism has already struck Spain, in Madrid in 2004. Spain also contends with two separatist regions – Basque and Catalonia.
Greece has Golden Dawn, a party somewhere between far right and neo-nazi, which got 7 per cent of the vote in 2012 elections, putting 18 representatives into Greece’s Parliament. IN 2014 it won 9.4 per cent of the vote in European Parliament elections.
Even Italy has a major political party that wants to split the country in half – Lega Nord.
These movements won’t need much encouragement to blame Germany for their plight while it enjoys rapid growth and very low unemployment.
What the countries of Southern Europe need desperately is the kind of quick shot in the arm that can come from rapid exchange rate devaluation. Then, independent monetary policies that can help them get back to growth in their own time. And they are not going to get that in the Euro.
The national debts of these countries will appreciate as their currencies fall. The inevitable need to restructure that debt is the major sticking point for letting these countries go. But paying the debt down while the countries remain inside the strangling embrace of currency union also seems unlikely. If the issue is left too long, radical politicians may take power for whom debt default is minimo.
For the good of the future of Europe, we need to bring back the Peseta, the Drachma and the Lira.
First home buyers are off the market. The current share of 12.6 percent is around the lowest on record.
The 2000s, where first home loans grew really fast and were about as big as other home loans, looks like an outlier period, but so does the current (post-2009) period, where there is little to no growth in first home loan value
I was surprised to find cutting interest rates is not helping. First home buyer shares have sunk as interest rates have fallen. On average, cutting interest rates by a percentage point cuts the share of first home buyers by three-tenths of a percent.
Rent is a significant factor. But it seems to work in the opposite direction to what I thought. In the long-run, as rents rise, the first home buyer share falls. I found a correlation of -0.39 per cent between rents and first home buyer share
The whole thing looks like something of a mystery. But fortuitously, while I was thinking about this, a clue arrived.
The RBA released a big paper yesterday that said house prices are fairly valued, if you assume that house prices will keep growing at 2.4 per cent a year real (say 4.4 per cent to 5.4 per cent including inflation). That 2.4 per cent is the rate they’ve grown at, on average since 1955.
The paper breaks down some of the reasons for house price growth. At the moment, low rates are propping up growth, rather than expectations of appreciation, which are negative. When rates eventually go up, expectations about appreciation will have to change, or rental yields will have to boom, or house prices will turn downward.
The paper suggests that if you think house prices will grow at the same rate as GDP, you think they are undervalued, but if you think they will grow at the same rate as real household disposable income (HHDY in the chart below), you think they are overvalued.
There’s two more points I want to draw your attention to. The 10-year figure and the 30-year figure. If you are in the market for a first home, you may have focused on house-price growth in the last ten years, and see house prices as about 20 per cent over-valued. Hello first home buyers.
If you’ve focused on them across the last 30 years (Hi Mum and Dad) you might still see houses as 20 per cent undervalued.
This is no doubt an overly neat explanation, but it must go some way to explaining first home buyer reticence at this time of record low interest rates.
Uber must be very confident in its continued growth. Because it has just alienated its early adopter crowd in order to appeal to the mass-market.
Uber functions a bit like AirBnB but matching passengers with cars. It’s an app uses limo drivers and non-professional drivers to increase supply at reasonable prices.
To say it has been successful is an understatement. A recent funding round valued it at $18 billion.
But Uber’s PR strategy has been an unusual one. It has gone out of its way to appeal to economists.
Traditionally, taxis charge the same fare no matter how many people are in the taxi rank. The whole industry is a byzantine mess of regulations. But Uber is much less regulated and has a wholly variable pricing model.
The wildly variable prices should help get cars on the road when they are needed, and make sure people who really need a ride (about to miss a flight, on way to hospital) get a car ahead of those simply heading into town to window shop.
They also worked as a terrific PR boost. Every economics blogger and every financial newspaper there is has been writing excitedly about Uber for years. (1, 2, 3).
That may have been a side-effect of a revenue maximising strategy, but it worked very effectively. Uber’s aggressive expansion into a whole lot of markets has been welcomed – a lot of regulators, political advisors and decision-makers *are* economists.
But now, surge pricing is done. After a whole lot of complaints, New York City has forced Uber’s hand, and it has got rid of surge pricing during emergencies (e.g a blizzard) across America.
Is this rational?
It might be. Uber’s market is not economics graduates, it’s humans. And humans love what they see as fair. To defend fair, they are not afraid to cut off their nose, seemingly to spite their face.
Surge-pricing was seen as unfair. Killing it is a sign of Uber’s expansion.
It is now in the business of appealing to people whose interactions with markets are shaped by their own feelings, not the things they learned in economics class. It is time to take complaints about surge pricing (“price-gouging”) seriously.
There is a lot of evidence that markets are doing that thing they do. Getting out of whack.
It’s hard to believe that this could happen again so soon. In the past, major financial events have been interspersed with decades of good times.
But to count on history repeating would be … brave.
Here’s the symptoms of the problem. Stocks are super high, with the US markets setting records:
That could be a good thing right? Companies get high valuation when they have high earnings. And high earnings mean a healthy economy!
This chart shows a ratio of stock prices to company earnings. It shows that prices sometimes get well out of line with earnings and the market can’t sustain that.
How can this happen?
As anyone who has played monopoly knows, the more times people pass Go, and the more money in the system, the higher the asking prices for trading properties.
The same thing can happen at a much bigger scale. The more cash in the global economy, the higher asset prices are.
Here’s evidence that cash is swilling around in the global economy like burger wrappers in the passenger footwell.
The Greek government can now borrow money at 6 per cent. In 2012 they had to pay over 30 per cent. That’s how much cash is lying around. Even though Greece’s problems remain dramatic (e.g. 27 per cent unemployment), money managers are happy to give €€€€ to the government. Similarly in Spain, where unemployment is 25 per cent, bankers are happy to lend money to the government at the lowest interest rates since 1789. Seventeen. Eighty. Nine.
You can also spy the global economy’s excess cash in the way Facebook is buying things like WhatsApp, for $19 billion, and in the near-record valuation of Apple even as iPhone enthusiasm is being studied by historians.
“Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.”
Australian stocks have rallied hard in the last two years, and here’s a chart of Australian house prices, just to show that our assets are not immune.
Global markets have not got to this point without a reason. The billions pumped into the economy by central banks doing quantitative easing explains the surplus cash.
I’m an educated citizen in a democratic country. I live in an electoral division that could be won by a couple of parties. I have free speech and a twitter account. I’m enfranchised and privileged.
But right now I feel absolutely powerless.
I want to stop cruelty being done in the name of Australia. I want to help people who need help. I want to treat asylum seekers with compassion.
But I feel like I can’t.
I sit here in front of my high definition internet, reading about boats full of desperate people bobbing around in the tropical seas, and I can’t think of a single thing to do. And I am as angry, if not angrier, than I have ever been.
My taxes pay for the drones that go looking for asylum seeker boats to turn back, for the barbed wire that surrounds those that already slipped through, for the immigration officials that make the policy tick, and the elected officials who set the whole thing in motion. I can’t think of anything more infuriating.
Why so cruel?
The idea that we can prevent future asylum seeker boat arrivals through cruelty to asylum seekers who already left was always a grey area. A very dark grey area.
It’s not unlike the medieval idea that you prevent social decay by cutting off hands and stoning people. It seems to be the ends justifying the means – and ignores a strand of enlightened thought that goes back a long way (esp. in western christianity) suggesting we should be merciful to the weak.
But the philosophical objection is not as powerful as the practical. The arrival of two boats recently shows that our regime of deliberate cruelty is not even working.
I went to a protest on Saturday, to say at least something about the current government’s policies. It felt utterly impotent.
There’s a lot of policy in the world I disagree with, but very little – not even public transport policy! – that gets me into such an emotional state as the way my name and tax dollars go to mistreating asylum seekers.
It’s unfair and I feel like there’s nothing more I can do.
Powerless. This is how much of the world feels, I guess.
I went to the Melbourne Institute economics conference yesterday and heard Joe Hockey speak at lunch. He’s not bad on his feet. Even when he’s not across the detail, he bluffs well. He seems likeable and projects passion.
But he said something I couldn’t quite believe.
“Let’s face the reality. Unlike our parents, our generation and the ones that follow will not be able to afford a house in a capital city on just one income.”
This little message came in the middle of a spiel about how the paid parental leave scheme would pay women to raise kids. I wondered if it was a slip-up. But no. He said it again later.
“Try living in any capital city in Australia on just one household income. It’s nigh impossible. But the mortgage still keeps coming in. And the bills still keep coming in.”
While this matched my own experience quite neatly – I don’t own a house and wouldn’t consider buying one without going halves in it – I doubted a Treasurer should accept it as a fact.
But perhaps the problem is too far gone. Here’s a table I made that shows who might be able to afford what.
When lone-person households are our fastest growing demographic group, making up 24 per cent of Australian households, and single parent households are raising over a million children (961,000 single parent families representing 15 per cent of all families), house prices rises seem less like a boon to the economy and more like a social welfare disaster.
Systems that permit stability of tenure for renters should be introduced as a matter of urgency. Housing affordability is at least partly a policy question. As a starting point, Treasurers should talk about low housing affordability as a problem, not as a fact.
I’m venturing out of the house today, to bring you the blog from the glamorous surrounds of the Grand Hyatt, where the annual Melbourne Institute Economic and Social Outlook conference is taking place.
Say what you will about the state of our nation, but the fact we can gather all these eggheads into such an opulent ballroom to ponder on the distant future suggests that things are not so bad, relatively to many other places and points in history. (I will note that I had to pass a phalanx of police to get inside though.)
The biggest point of interest for me so far today was a comment from renowned contrarian economist Warwick McKibbin.
He was talking about the policy outlook for climate change, and he made a strong case for action. “Even if you don’t believe in climate change, other countries are acting,” he said, citing research done for the Howard Government at the time of the Kyoto Protocol.
“If you look at global effect of the Kyoto Protocol on Australia, 80 per cent of its costs were in what other countries did to our exports.” he said.
“That was ignored,” McKibbin said. “Even if we think this is a myth, other countries are taking action and that will have an impact.”
With the carbon tax all but gone and the Renewable Energy Target at risk, the costs of an approach that see Australia out of step with the rest of the world deserve more attention.
Congestion charging is, I think, an urgent public policy priority. But it is wildly unpopular. This post is going to look at how we can change the way people view congestion charging.
1. The Problem:
Congestion charging makes people very angry. Charging to use a road is widely regarded as “unfair” and it doesn’t seem to matter that society charges for lots of other necessities, including food and water.
“Not only do voters not want to pay congestion fees because they’re now paying for something that was free, they also understand that they’re basically being punished for going to work. What if you make a low wage and already making ends meet, and now, you have to shell out an extra $X a month just to get to work? No, congestion fees won’t work.” – gfish3000
“The politicians, who don’t really care about serving the public, will get extra (congestion fee) $$ for NOT doing their job, namely, providing an infrastructure (roads) for us to go about our business.” – Force Meow
“The other thing is that making use of an automobile more difficult hurts the poor the most. I have a problem with that.” – Tim Johnson
These objections fall into two main categories: 1. congestion charging hurts the poor, and 2. congestion charging lines someone’s pockets.
These arguments may or may not be true, but refuting them isn’t the goal. Changing the dialogue is.
Here’s one comment I quite liked:
“soccer mom making me late for dinner so she can take snowflake to ballet practice can foot the bill” – Bob Dobalina
There’s some feeling there. Some hatred. Something we can use.
The reason congestion pricing is so unpopular is people imagine it applying to themselves. It’s only if you imagine it applying to others that you see benefits.
A PR campaign for congestion pricing would show the real reasons for a traffic jam, like this:
This would help drive home the point that a lot of trips are low value, and so even a small congestion charge would be effective in deterring them. Survey data on whether peak hour trips could easily be delayed would underpin such a campaign.
I can imagine a TV ad where a stressed driver is stuck in traffic. A counter clicks up the congestion charge from $0 to $1 in 10¢ increments and the cars around gradually disappear, leaving our busy mum to get home from work speedily.
Promoting the understanding of congestion charging is complex. People need to grasp the reasons for it. When they think about annoying traffic, it is probably easiest to call to mind times when they really must get to their destination, as on a trip to work. We assume everyone is equally frustrated. But commuting does not even account for half of trips.
“Commuting to work constitutes approximately 16% of all person trips and 19% of all person miles of travel. For roadway travel, commuting constitutes 28% of household vehicle miles of travel and, for transit systems, 39% of all transit passenger miles of travel.” (US DATA)
The case for congestion charging needs to be built from the very beginning. That means seeding the (true) idea that the road is full of people that needn’t be on it.
Much like the terrific 1980s behaviour change advertisements featuring Wallies with Water, we could have Trevors in Traffic – people who drive across town at peak hour to go to their beach house, or to listen to some drive-time radio, who get in the way of everyone else.
I remember reading about a behaviour change campaign to get kids to wash their hands. Rather than starting with facts about soap, they started with an ad that dramatised germ transfer. Everything the main character touched after leaving the bathroom turned green. Understanding the problem (even in a stylised way) came first.
If you can make people believe that a share of traffic doesn’t deserve to be on the road, they will be more open to hearing about a solution.
Building more roads will not solve congestion. It only moves congestion around. A scheme that targets the actual problem is an urgent priority before we waste more time and effort building bridges and tunnels.
As of today, there are 10 teams left in the World Cup, and Brazil is favourite. Never mind that they have won just two of four games so far (in regulation time, not including the match they won on penalties), and conceded goals in three matches (including an embarassing own goal.)
In fact, Brazil’s two wins, one draw, and one win on penalties is equivalent to Costa Rica’s performance. But nobody thinks the Ticos will win.
Here are the odds as presented by Sportsbet.
Germany, who have won all four of their matches, surely look to have better form than Brazil. France too.
Colombia, who have won four matches, scored 11 goals, conceding only two, would appear to be in even better form. The team ranked eight in global soccer at the start of the tournament doesn’t seem to be high on anyone’s list.
So why is everyone backing Brazil?
I propose that a cognitive bias is affecting prediction markets: The availability heuristic. The heuristic is that if people can imagine something clearly they believe it is more likely. The most famous proof for the availability heuristic goes like this:
“In one experiment that occurred before the 1976 U.S. Presidential election, some participants were asked to imagine Gerald Ford winning, while others did the same for a Jimmy Carter victory. Each group subsequently viewed their allocated candidate as significantly more likely to win.”
What’s available to our minds when we think about Brazilian football is scenes like this, from 2002:
And what comes to mind when we think of Brazil hosting an event is scenes like this:
Rio is synonymous with celebration. Can you really call to mind a picture of Rio de Janeiro full of glum Brazilians moping? Neither can I.
The availability heuristic probably means teams like Brazil are over-rated (the same to a lesser extent is likely true of recent World Cup finalists France, Germany and the Netherlands.) So should we let that affect our betting? Probably not.
But there is one exception.
We must acknowledge that referees play an important role in deciding the outcome of Soccer matches. Dodgy penalties come at crucial moments, like the one awarded to the Netherlands to effect their defeat of Mexico.
So if, with scores tied, a Brazilian player sprawls on the turf inside the penalty area in the 90th minute of the World Cup final, the incredible surge of noise inside the Maracana could well blend with the availability bias inside the referees head, and encourage him to point to the penalty spot.
If that happens, the team in green and gold will get to hold the trophy aloft, and all this lofty pontification about controlling predictions for cognitive biases will have been a waste.