Month: August 2014

Talk of “innovation” makes me sigh. Next to wars on terror, it may be the most nebulous concept that governments like to throw money at.

Industry Ministers love to be associated with it. The federal department of industry was rebranded as the Department of Innovation, at one stage. And for what? It got us no new robots, no flying cars.

Innovation is a shifting sand of the economy. Just try to define it. The moment you do, you’ll realise how deep into the dunes we’ve trekked and how badly lost we have become.

Examples of innovation seem easy to come up with: The espresso machine is an especially pertinent example at this time of the morning.

But the ABS definition of innovation is this:

“The development or introduction of new or significantly improved goods, services, processes or methods is generally considered to be innovation.”

Development or introduction. So where does innovation matter most? Is it the invention of the espresso machine? Or is it when I install one in my restaurant? The former allows one person to register a patent and collect rents. But the latter is where the masses get the value. The latter is underappreciated

Under the definition, an innovation need not be new to the world, just new to the business.

Deciding to replace the chairs in my restaurant with padded ones could be considered the introduction of a significantly improved service that might add a lot of value for my customers. Likewise, installing a simple accounting software at a business might be the best innovation it has seen in years.

What’s more, this sort of innovation requires much less R&D so its benefit to cost ratio is much better.

Suddenly innovation seems less sexy.

You might want to be a purist and focus on inventions?  Okay. But for a small country like Australia, with less than 1 per cent of the world’s population, we can’t expect to invent even a tenth of the innovations we use.

By far the majority of progress in our country will come from introducing concepts and ideas from offshore. Some of them may be recent ideas, but others, like the ways of doing business at H&M or Uniqlo, are well-established and scarcely seem to a mid-ranking federal minister like “innovation” at all .

Any change that lifts business performance should be classified as innovation. Nevertheless policy seems to focus on the brightly shining examples of research and development and invention. (Perhaps the latin root’s emphasis on the newness is part of the problem?)

As part of this invention-focused Innovation Agenda, a huge amount of lip-service is paid to the idea of “commercialising” university research.The government frets over low commercialisation rates and universities invest a bunch in commercialisation offices. There are two big problems with this.

1. 99 per cent of new ideas developed in universities are not going to be commercially relevant, or at least not now.

2. The incentive structures of academics are designed so there is no point for them in getting anything commercialised. Patents are pointless when you’re going to get promoted on how many papers you produce. The commercialisation offices hold too few carrots to get anything real done.

The government can continue to produce glossy reports on Australia’s “National Innovation System” but we will continue to be chasing our tails so long as we, as a society and as a group of policy-makers, obsess over the use of this hopeless catch-all word. We should focus on productivity improvements, technology uptake, inventions. But they all need different policy levers.

The ABS counts a business as “innovation active” if it introduces or abandons a new idea. I like that. I think one of the best innovations we could introduce in this country would be to abandon the word innovation in order to more clearly focus on the things it is trying (and failing) to convey.

The Victorian state election is coming up, and new small parties are registering. Given the rush of minor parties and independents that carried the day in the last federal election, it’s no surprise that Victoria is seeing a lot more parties registered with the Electoral Commission.

Here are four that have recently applied.

• Rise Up Australia Party
• Vote 1 Local Jobs
• Animal Justice Party
• Australian Cyclists Party

If they’ve filled out the forms properly, collected names and addresses of their members and paid their fee they will join the established parties on your ballot paper:

• Australian Christians
• Australian Country Alliance
• Australian Labor Party
• Australian Sex Party
• Democratic Labor Party (DLP) of Australia
• Family First Party Victoria Inc
• Liberal Party of Australia
• National Party of Australia
• Palmer United Party
• People Power Victoria – No Smart Meters
• Socialist Alliance
• The Australian Greens
• Voluntary Euthanasia Party

I am surprised when I look at this list, that there is no Public Transport Party. The issue of public transport is hot in Victoria right now, partly due to the increasing concentration of jobs in the CBD, and the resultant increase in crowding.

Crowding above the acceptable threshold affects nine per cent of passengers in the morning peak, according to the latest data. It’s lower on some lines and up to 26 per cent on the Craigieburn and Werribee lines. 

In 2002 such a party existed. Called Public Transport First, it was founded by the late Paul Mees and fielded a candidate called Tony Morton in the seat of Brunswick. He lost but is now the head of the Public Transport Users Association.

But perhaps 2002 was too soon for a public transport party.

Stories about public transport are hot property in the press and on social media. You’d imagine a Public Transport party would get a decent share of the votes. It may be a less emotive topic than Voluntary Euthanasia, but it affects more people. And it’s a lot more sensible than a party opposed to smart meters.

The Victorian Upper House might be the best chance to get someone elected. But its not a fait accompli. In the last election the Greens got 12 per cent of the first-preference vote and installed three candidates. Family First got 2.86 per cent of first preferences and installed none.

It would be very tough to make an impact in the regions. But there are five metropolitan “seats” in the upper house that each elect five candidates. Three of those elected Greens last time (western, northern, southern). These would have to be possibilities.

But the advantage of a single issue party like this is not necessarily in getting elected. Simply by forming, the threat of drawing votes away from all the other parties can encourage them to shift their policy positions. It’s the famous Hotelling Effect, perhaps my most-loved of all the economic theories.

Nevertheless, the challenges to starting a political party are many. You need 500 members to commit, you need the fees, and you have to pay $350 for each candidate you stand (refundable if you get 4 per cent of the vote.

And you have to be ready to face vitriol. I was kicking this idea around on the internet yesterday and a lot of people told me that it was stupid. But nobody had as much passion as this guy:

I imagine that actually becoming a politician would invite even more vitriol than just talking about it. When you look at it like that, I’m surprised there are so many brave people willing to start their own parties. Kudos to them.

The evidence is in a new paper from the National Bureau of Economic Research: Fairtrade producers get paid more per kilogram of coffee, have higher incomes, use fewer pesticides and avoid child labour.  The minimum price and the rules the organisation sets actually work.

But there is an interesting question. Does Fairtrade just select for the marketing savvy farmers who would have been smart enough to get those benefits or other ones anyway? Complying with all those rules suggests nous.But Fairtrade seeks out small producers, who you would expect to be less savvy.

The evidence supports the idea that Fairtrade certifies farmers who’d be ill-placed without it.

“Saenz-Segura and Zuniga-Arias (2009) estimate a very strong negative relationship between Fair Trade certification and experience, education, and income within a sample of 103 Costa Rican coffee producers. This finding is echoed in Ruben and Fort’s (2012) study of 360 Peruvian coffee farmers (also see Fort and Ruben (2009)). In their sample, farmers that are less educated and own smaller farms are more likely to become certified.”

Another way to test this is to examine a panel of producers over time.

“In this way, one can examine whether a producer begins to obtain higher prices (for example) just after they become Fair Trade certified

Using such a strategy, Dragusanu and Nunn (2013) examine an annual panel of 262 coffee mills from Costa Rica between 1999 and 2010. They find that Fair Trade certified mills receive 5 cents more per pound for exports than conventional mills. “

A side effect of the selection of less-educated and less-skilled farmers into these schemes, is they may have no idea what is going on.

“Valkila and Nygren (2009) found that Nicaraguan farmers belonging to Fair Trade certified cooperatives had a poor understanding of Fair Trade, including its requirements, and potential benefits. According to the authors, one reason was the multiplicity of certification schemes, quality standards, and rural development projects faced by farmers. They simply were not able to keep track of them all and to distinguish one program from another. Mendez et al. (2010) also found that farmers were often unclear or confused about certifications, particularly about Fair Trade, although farmers did have a better understanding of Organic certification.”

But it turns out the customers may not be that insightful either. The fairtrade label helps us feel better. And the amazing thing? It works even better if it costs more.

“Examining fair labor standards for candles and towels sold in a large retail store in New York City, Hiscox and Smyth (2011) find that the label increased sales by 10 percent, and when combined by a price markup of 10-20 percent, sales rose even more, in the range of 16-33 percent.”

That suggests that really, humans are quite kind-hearted. But such an attribute won’t exist for long before someone takes advantage of it. And so lots of “I can’t believe it’s not Fairtrade” schemes are on the shelves.

The one I can find on lots of Aldi and Nestle products in my house is called UTZ.

I’m not saying UTZ is bad. Just that companies will likely choose certifiers with the lowest cost to consumer impact ratio. When one proliferates, it’s worth asking the question of whether it is the real deal.

This turned out easier than I thought!

Also available on Vimeo!

Apparently, the Chinese real estate market is in a tailspin and they are desperately seeking alternatives. The press speaks  of “frantic Asian buying.” It’s likely that most real estate  sold offshore went to China last year.

In 2012-13, the Chinese topped the list for Australian real estate investment, according to the Foreign Investment Review Board. The board approved applications for purchases by Chinese worth more than $5.9 billion.

Chinese real estate investment leads to articles like this (fairly reasonable) and spawns comments like this (not so reasonable):

“Why bother invading a country when you can buy it a bit at a time.It’s fucking outrageous that foreigners are allowed to own residential property in Australia.

To the Chinese it’s a safe haven for their money invested where the Chinese government can’t get it’s hands on it, for Australians it’s having the opportunity of owning your own place evaporate. What’s the point if at the end of the day all that’s left is to pay rent so you can buy a house for some foreign investor.” (source)

But are the Chinese really taking over? Let’s look at the history for a moment.

The point of this chart is to emphasise that China is not buying a crazy amount of Australian real estate, in historical terms, and that it is hardly new for foreign citizens to buy our dirt.

Let’s ignore for a moment that not all FIRB applications turn into purchases and put in context the value of real estate applications FIRB approves for sale to foreigners.

But those 1 per cents could add up, you might imagine,and before long it’s Beijing from Bondi to Burke! Actually, no. Growth in value of the housing stock (appreciation + new homes) easily outstrips sales offshore.

All the effort and graphs in this post is really to address the madmen and worry-worts on their own terms. As if they would read it and change their minds because what they are worrying about is not even happening!

But even if the foreign owners increased their share of ownership of our real estate, I think it would make little difference to our daily lives. Who cares whether you pay your rent to an account at Westpac or Bank of China?

And if there is a military advantage to owning a few homes, I’m yet to puzzle it out. It seems more likely to act as a brake on aggression if China is well and truly intertwined with Australia.

The case for letting the shadow cabinet talk to a few public servants during the policy development phase – and not just for costings before the election –  is pretty simple. I  can sum it up like this:

“Protective Services Officers on every station!1!!!”  [see here]

That’s the sort of policy that only gets dreamed up in opposition, when you’ve got no real capacity to figure out the cost of things, or advice on prioritisation.

When you don’t have a Finance Department to run ideas by. When you are incapable of weighing costs against benefits. When the “policy advisors” you employ to kick ideas around are actually most comfortable playing footsies with focus groups.

If governments are changing often – as they seem to be in Victoria – most policy being implemented is an election commitment dreamed up by an opposition.

Some of the ideas oppositions have come up must be the result of eating a great deal of cheese before bed.

How about this: a paid parental scheme that funds people to have kids by matching their incomes for six months, up to $150,000 a year … and wait for it, it’s funded by a levy on a really small number of businesses! That’s a policy maker’s nightmare.

Providing access to the public servants might actually help keep shadow cabinets tethered to earth, and that would be good for all of us.

PROBLEMS AND (some) SOLUTIONS

1. It could cause information flow from one party to another.

If the Premier or Prime Minister wants to know what policies the other side are weighing up, they can just ask the head of the department. Since they decide that person’s tenure, the head of department might be reluctant to keep the opposition’s secrets.

Equally, a government lagging in the polls could see their plans quietly leaked to the opposition, if they are expected to be government soon.

The obvious solution to this is to create autonomous mini units inside each department that work for the opposition. The problem with that is …

2. It could politicise public servants. 

If a public servant’s job involves working for one side, they may become parochial and perhaps consider politics first and policy second.

Impartiality is lost and with it the distinction between ministers’ private offices and the public service. Furthermore if a great policy idea is offered only to one side of politics, the other side could cry foul.

The whole experiment would rest on the perceived integrity of the public servants, but if there is too much high-mindedness the risk is that …

3. Oppositions wouldn’t use it.

Why would a busy opposition want to spend important campaign time dealing with a shiny-suited public servant who will just tell them no? Listening to boffins won’t win votes!

When did the last great idea come out of the public service? Think tanks, newspapers, universities, websites and even blogs are full of policy ideas. The public service doesn’t have a monopoly on advice any more – they mainly renovate and repair bad ideas sourced from elsewhere to save them from destroying the budget (see protective services officers).

Any other problems or any other upsides that should be mentioned? Please use the comments section below to elaborate!

I liked Coles and Woolworths. They seemed like convenient places to buy the things I eat. But sadly, sometimes you can’t trust the market to make sure convenient is fair.

I used to live right near an independent grocery store called Piedimonte’s. It was enormous, but every time you walked out, you had the strong feeling you’d paid too much. The word expensive just keeps popping up in its online reviews. I moved away and the ambiguous feeling of shopping there evaporated.

These days I get my groceries delivered mostly, and Coles is the go-to service. Spending 10 minutes making an order online takes half as long as going through the aisles, and it saves checkout, parking and travel time too. The delivery man will carry the items all the way in to the kitchen bench.

Coles and Woolworth also seemed good because they stock a lot of home brands. My enthusiasm for home brands should not be under-estimated. I love to be frugal and I hate compensating some crappy company for all their marketing.

This taste for the lower-price, equivalent quality good was only strengthened by some TERRIFIC recent research from NBER. It showed experts buy home brand: Chefs are more likely to buy generic flour, while pharmacists are far more likely to buy generic aspirin.

Coles and Woolworths are supposed to be a duopoly. You’d expect them to sneakily raise prices and treat customers with disdain. Instead milk recently fell to $1 a litre. Competition reigns! So imagines the happy economist as he grabs bargains.

But The Big Two are wily. They don’t hurt the voting public, the shoppers. Instead, behind the scenes, where they think they can get away with it, the duopoly are flexing their muscles.

This terrific long article in the Monthly (unlocked and free at time of writing, although I recommend subscribing) was the first time I really engaged with the issue.

It turns out a major case is running in the Federal Court with the ACCC doggedly pursuing Coles.

I knew Coles and Woolworths were tough on their suppliers. But I didn’t realise how much they had in common with Don Fanucci at the start of the Godfather II.

In 2011, Coles demanded from its suppliers a “rebate” for “efficiency improvements”. The Monthly says they were very significant, at up to 1 per cent of total sales.

“At a meeting with Red Bull on 19 August 2011, Coles managers Simon Gillies and Philip Armstrong claimed that they had cut $400,000 from the energy drink company’s supply cost. In return, they sought a $200,000 rebate.

Red Bull’s representatives asked how Coles had arrived at those figures. Gillies and Armstrong did not provide substantiation. Red Bull refused to pay the rebate, having calculated that Red Bull’s total costs in serving Coles did not even come to $400,000.”

The weaker the company’s bargaining position, the bigger the rebate.

“[Coles] refined the supplier designation into three tiers. Tier 3 included 220 smaller suppliers for whom Coles constituted a “very significant” part – at least 30% – of their business. These had the weakest bargaining position. From them, Coles sought an across-the-board 1% rebate, to raise $16 million.

Category managers were trained in “ask” scripts. There would be no negotiation on the rebate amount. The suppliers would be asked to consent within days. There would be no substantiation of the nature of the savings Coles was claiming. Successful category managers would become eligible for “prizes”. If suppliers did not pay, the category managers were authorised to “escalate” the matter to their “business category manager”, who was likewise authorised to escalate it to the general managers Dymond and Pearson, even to Durkan himself. The scripts included “commercial consequences”: an end to supply contracts, a “range review” of current products, an end to data-sharing agreements, or all of the above.”

Here’s a quote from the man who runs the ACCC, Rod Sims.

“These were seriously large demands, put on these companies with threats. If these allegations are proven true, that is not the sort of behaviour you want in Australian business. It’s corrosive, we believe, of the effective working of a market economy.”

So what can you do? Shop at Aldi? They stock even fewer brands and their prices are even lower. I’m not exactly sure that will help.

Aussie Farmers Direct is probably the best choice if you care about suppliers – it seems to have good relationships with farmers. I used to get things delivered from them and the quality was pretty good – I stopped because at the time they only did fresh food.

Another option is to support the MPs who supported this Reducing Supermarket Dominance Bill [Wilkie, Xenophon, Katter]. Demanding the big supermarkets sell half their stores is an ambit claim, but perhaps something can be done. On this issue it should be possible to unite the Nationals in the Coalition and the Cross-benches, you’d hope.

I also learned from the Monthly that at their liquor outlets (Coles: Liquorland, Vintage Cellars and First Choice; Woolworths: Dan Murphy’s and BWS) the big two own a vast number of the brands on sale. Basically, they are fancied-up home brands! You can see the list here: http://whomakesmywine.com.au/thelist.html.

Confession: Just remembered. I own shares in Woolworths. Seems I may be arguing against my own financial interests here!