E-tax: How putting an accountant out of work can make the world a better place

This year, I started using e-tax again.

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.

“We are now in the second machine age where robots take on mental, as well as physical work, which does encroach on a vast number of jobs” – Erik Brynjolfsson, director at MIT Initiative on the Digital Economy.

Big names are sounding out the warning:

“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.

reaper
This guy (and many like him) were replaced by a single tractor

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.

These will mainly be services, but then we have a strong history in services.

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.

Game Theory: Why AFL journos are so chummy with football clubs

The Essendon drugs saga has revealed an awful truth about football journalism. Most sports reporters are sycophants who live in fear of upsetting footy clubs.

One journo revealed herself to be a shining exception, but she is just a speck in the bustling crowd that produces footy news.

Journalists hearing about the sacking of Melbourne coach Mark Neeld. Photo Source: Backpage Lead
Journalists hearing about the sacking of Melbourne coach Mark Neeld. 

[Photo Source: Backpage Lead]

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. 

How would this change if we had relegation?

In the UK, football journalists hold far more cards and have a far more antagonistic relationship with clubs in the Premier League.

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.

Access is a – maybe even the – key resource which a good journo has. Game theory says that in an interaction that will be repeated every week, every season, for years to come, you are best to cooperate. 

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.

Etihad

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.

Stem cells and self-driving cars: Why we look stupid predicting the technology of the future

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 (12). 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.

So not everything is on the brink of revolution. Which is why I have to pull back on my former enthusiasm for autonomous cars.  I admit I was focused on the potential upsides – in traffic, in accidents, in parking, and on the successes Google has had with its autonomous car program. Google is backing the project, appointing the old head of Ford. But even Google fails sometimes, as with Google Wave.

“The benefits are so great that we will force ourselves to accept them, even with a few risks,” I told myself.

ship painting

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.

TRUST

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.

Computers could do this part.
Computers could do this part.

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:

  1. 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.
  2. Kangaroos are on the side of the road so we better slow down because they often jump in front of the car.
  3. 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.

etc, etc.

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.

RISKY LAUNCH

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.

For just one example, the FBI is opposed to driverless cars, according to a brand new report. Solving that will be tricky. And when it is solved another impediment will arise.

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.

What role for motorbikes under this all autonomous future?
What role for motorbikes in this all autonomous future?

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.

The Euro is sowing the seeds for the next European war

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.

Europe unemployment map

 

Some countries get a free ride and others suffer.

The problem is especially acute for those under 25.

youth unemployment graph

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.

Here’s what the IMF says about youth unemployment:

“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.

(For a deeper discussion of debt and the issues of the euro, I recommend reading this post at the blog of Michael Pettis)

Where did all the first home buyers go?

First home buyers are off the market. The current share of 12.6 percent is around the lowest on record.

Screen Shot 2014-07-14 at 10.44.00 am

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

Screen Shot 2014-07-14 at 10.21.36 am

What’s happening?

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.

mortgage interest rates

 

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

rent growth each quarter

rent cost to mortgage cost ratio
Mean housing costs for mortage holders and renters in NSW, 2011-12 dolalrs

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.

 

rba reasons for house price growth

 

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.

over valued or undervalued

 

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.

Ride-share company Uber alienates core demographic: Economists

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.

DSC01149
Taxis are sheltered by regulations

Uber prices go up when demand is high. It charged one customer $82 for a one-mile journey at 1.50am on New Years’ Eve.

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.

uber1
A high-price sort of time.

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.

I’ve written before about how people will hurt themselves to teach other people a lesson. This can explain why people shop around for bargains. Even if we spend more on petrol going to the cheaper shop, it can be satisfying to deny a profiteer our business.

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.

(If you’ve made it this far, you’ll probably love this piece at Noahpinion on how complaining about price gouging is a legitimate strategy for signalling the shape of the demand curve away from the familiar parts that normally form equilibirium.)

It might be time to sell your shares and your house

Another big financial crash could be coming.

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:

DJIA high
Source CNN

That could be a good thing right? Companies get high valuation when they have high earnings. And high earnings mean a healthy economy!

Hmm. 

Price to earnings chart
Source

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.

Greece government bond yields
Source

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. 

Meanwhile Dutch interest rates are at their lowest in 500 years.

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. 

Here’s how the New York Times describes it:

“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. 

House prices
Source

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. 

The Bank of International Settlements has said that this has caused capital “misallocation” on a scale similar to the GFC. 

So what could happen next?

The United States is now planning to stop its five-year quantitative easing program, this October

The billions a month it “printed” will cease to arrive at the banks and they will have to go back to more old-fashioned ways of finding capital.

Then, we find out if economic growth can catch up fast enough to make all those high prices make sense, or if everything crashes. 

Plummeting asset prices in North America and Europe would hurt us, no doubt. But a fall in China has already begun and that simultaneity would be the worst case scenario.

Last time round, China was basically immune from global financial contagion. But this time, everyone agrees China is in an asset bubble that is already ending. 

china property prices
Source: Economist

If asset prices fall fast in China and the West at once, it will be time to move your savings into something very very safe.*

*You know I’m not a financial advisor, right? Right.