Jocks not nerds: Why dumb politicians may be better.

The era of the warrior king was awe-inspiring. The leader that rode his troops into battle, survived arrow puncture wounds and chopped off a dozen enemy heads really earned the right to sit on that throne.

Richard iii shortly before his reign ended, at the Battle of Bosworth
Richard III – shortly before his reign ended – at the Battle of Bosworth

But over time, it became clear that the two skill-sets – sagacious governing and vigorous neck-hacking – were rarely found in the same individual.

We saw specialisation and gains from trade.

Kings paid knights to do their warring for them while Knights benefited from having a bookish type on the throne – someone inclined to spend hours contemplating the merits of the laws, rather than lifting heavy rocks.

So we come to modern politicians. There’s a lot of complaints that these people are  “too dumb”.

But is that fair? Since when did we expect the parliament to do the heavy thinking to come up with new policies?

That’s why we have the public service, the think tanks, the vast commentariat. There is no shortage of good ideas in Australian politics. Take today’s call for the end of negative gearing, for example. That idea doesn’t need to be invented, just implemented.

What we need in parliament is people who can make parliament work.

We need coalition-builders. We need people other people are happy to follow. We need people who can bolt together a coalition of interested parties to make something happen. We need leaders.

If your community is chock-full of bookish types, then they may be delighted to be led by a former university professor.

But will that inspire and delight the community at large?

PUPS

Recent evidence says no.

I’m not saying the level should be brought down that low, mind you. The politicians still need to be able to tell a good idea from a bad one.

The Dunning Kruger effect, wherein a person may be too stupid to tell they are stupid, is an ever-present risk among candidates for parliament. Many of them self-select, thinking they are the first person who ever wanted to take “common sense to Canberra”.

The structure of the political system also influences who you should vote for. If one person will rule, you want a sensible centrist. But where there’s lots of negotiation, you’re better off sending a hardline crazy person. (This may explain the Senate.)

There’s a roughly translated quote from Plato:

“Those who are too smart to engage in politics are punished by being governed by those who are dumber.”

That may have been true once. But these days we are barely governed at all. Years pass without any real reform, while reams of sensible but bold recommendations printed on glossy A4 blow emptily round the inner-city streets of Canberra.

So don’t be afraid to vote for a Jock. Someone who seems smiley and friendly and very popular, if a little bit dim. Someone whose electoral success is not explained by a dazzling academic CV. They might be the the exact politician we need.

The Australian dollar has just tumbled. How should that make us feel?

The Australian dollar has just tumbled. How should that make us feel?

Well for starters, you should feel poorer. If you have any positive number Australian dollars, they are now worth less in international markets.

AUD SEpt
Source: RBA

That’s a 6.2 per cent fall against the USD and a 4.5 per cent fall against the trade-weighted index during the month. That makes imports more expensive

If electricity prices or taxes went up that much, we’d have hyperventilating shock-jocks all up in our front pages. But when the dollar moves that much, the silence is tangible.

That’s actually crazy. We spend far more of our money on imports than we do on electricity. We spend a similar amount on imports as on taxes.

share of wallet

If there is no locally made equivalent for what you like to buy (e.g. a laptop computer, quality coffee, petrol, most clothing) you’re just stuck paying more for what you love. But before your weeping becomes unconsolable read on: a lower dollar could actually do some good, eventually.

The benefit to the Australian economy works in two ways:

1. Australian exports start to look cheaper, and they sell more.

The upside will be extra apparent to you if the company you work for does exporting. Exporting is rarer than you might think. Just 2 per cent of Australian firms export (although obviously they tend to be bigger firms with more employees).

If you work for BHP Billiton, CSL or a school that teaches English to international students, your employer should find sales lifting without any extra effort, and you should find that the payrises start flowing a little more easily. Beauty, mate!

2. Consumers start buying Aussie products, not the imported equivalent.

If the product your company makes competes with foreign imports (including overseas travel), the fall in the dollar will help. Maybe your company is in food production or owns hotels on the Gold Coast. If so, plan for better times ahead. But don’t get overexcited.

The time it takes for a lower dollar to flow through to higher-priced imports can be long. While some things like petrol are traded frequently on world markets, most imports have their prices locked in well in advance.

So, on balance, how should you feel about the lower dollar? It depends.

  • If you’re a big fan of buying Australian made and you think foreigners should be too, happy days are ahead.
  • If you’re a connoisseur of foreign made products or a fan of international travel, then it’s more gloom and doom.
  • If you work in the Australian economy, then you can (gradually) start to whoop it up.
  • If you’re retired and you mainly consume the output of the Australian economy, then things look less rosy.

This is at once the blessing and the curse of writing about economics. It’s the Kurt Vonnegut effect: there’s no simple story – no absolute doom and gloom.

Every change in price that hurts someone helps someone else. Even if this seems like a windfall to you, the polite thing to do is re-arrange your face into a neutral position and carry on with your day.

The new, smaller Coke can is momentous: the End of Cola is Nigh.

In Australia, Coke is launching a 250mL coke can with a big hullaballoo. Spin it all you want, but this is an admission the industry is in giant trouble.

The normal procedure for shrinking portion sizes is to be damn sneaky about it. Toilet paper companies shrink the number of squares per roll, chocolate bar companies shrink the grams per Snickers, detergent companies shrink the bottles and put the words “ultra concentrate” on the front.

But Coke is upfront.

““The 250ml pack size provides Australians with a perfect serve of their favourite beverage from the COCA-COLA range. Priced at a maximum of $2, the 250ml can is expected to be popular with consumers,” said Antoinette Tyrrell, Marketing Manager COCA-COLA South Pacific.

After decades of watching Pepsi stalking them, Coca Cola got hit by a different sort of market change. Functional drinks have slashed the market share of soft drink. Energy drinks, sports drinks, juices, water etc. are all in the space. Coke has bought and built these brands up when it could, but when consumers are not choosing cola, Coke can’t ever hope to control the market like it did once.

Coke brands

The rise of functional drinks means people are thinking about what their drinks will do to them. That can never help Coke.

Aware of the perception that Coke is not that good for you, Coke manages it by giving you less!

They don’t even pretend to hope people will buy more of the smaller cans. They just hope people will buy them at all.

The last great marketing campaign Coke had was “share a coke with“. Now that was brilliant, completely. But its link with the underlying product is very weak, and it can’t overcome the long-run trend.

The global soft drink market is growing far more slowly than global economic growth (2 per cent vs 5 per cent) Coca Cola’s reported net revenues are down 3 per cent in the year to date, and Australia’s Coca Cola Amatil is a shambles. The share price has fallen from $15 to $9.

The end of Cola is a good thing. Much of Coca Cola’s revenue growth now come from the poorer parts of the world. But the model is there for them to follow – when they grow rich they will likely also no longer “Enjoy” Coke.

The Sydney Harbour Bridge was a bad mistake.

There are lessons in Australia’s history we can learn from. One of them is the screw-up that is Sydney.

sydney

Sydney was well-placed to become the London of Australia. A prime location, settled first, the early seat of power. It had it all. But while London remains by far the wealthiest and biggest city in the UK, Sydney is on-track to be overtaken by Melbourne in population.

Source:
Source: SMH

If Melbourne overtakes Sydney, it won’t be the first time. Sydney had a 40-year headstart and yet lost its lead in the 19th century. At that stage the reason was the Gold Rush. Sydney got its lead back when a financial crisis hit in the 1890s.

Sources: various, but consider this a rough approximation.
Sources: various, but consider this a rough approximation.

If Sydney is overtaken by Melbourne in population, you can’t blame the Sydney-siders. They work hard, but they’re behind the eight-ball. The problem is the harbour.

If you think of it as public space, it’s lovely to look at and nice to use. But if you think of it as distance, is it smart to put so much of it right in the middle of your city? Do you really want so much distance between inner-city suburbs? Wouldn’t it be better to have a network of streets?

I contend that the harbour creates a massive problem in the middle of Sydney. The CBD is unable to connect properly into adjacent suburbs because they are a ferry-ride away.

That explains articles like this: “Why is Sydney’s CBD growing slower than Melbourne’s?”

There is plenty of evidence to suggest that connectivity is absolutely crucial to how cities work. It is no coincidence that the areas best connected to lots of other productive areas are also the most productive and expensive real estate.

Source Grattan INstitute
Source: Grattan Institute

Sydney has more than one major business cluster. The city competes with North Sydney and Parramatta.

But I’d argue that’s a sign of weakness, not of strength. Of course every city has suburban centres, but powerhouses like New York and London aren’t confused about where might be the centre of power, or the best spot to locate a business. Sydney’s situation whispers: this city is too big to really be one functional city. But globally-speaking, Sydney is not even that big, population wise.

So, the harbour in the middle could be part of the problem. But the harbour became the centre of Sydney only when a bridge was built that made the north shore more accessible. You can see the population develop in this video and the north only really takes off after 1932, when the final rivet was painted.

The smart move would have been to densely fill in the area to the south, intensively, before building to the north.

We’ve all played computer games where you have to build certain things in a certain order. If you build too many of the wrong thing too early, you get out of whack, run out of gold and you can’t beat the game. I’d argue that’s what Sydney did.

The Bridge was built using  £6.25 million of public money. That represented about 2 per cent of NSW’s GDP at the time. For comparison, 2 per cent of GDP now would be about $10 billion. (sources: 1, 2)

Despite using tolls to pay it off, the debt lingered until 1988.

The opportunity cost? Not just the proper development of contiguous land areas, but also what that money might have bought if spent differently. When the rest of the world was building world class public transport systems, Sydney let theirs go.

There is a common trope that argues the Sydney Harbour Bridge would not have passed any sort of cost-benefit analysis. This is generally used as part of an argument against cost-benefit analysis, with the assumption being that the Sydney Harbour Bridge is good. Of course it has a lot of value now, in tourism terms. But in 1932, when it opened, tourism was a rather minor part of the economy. (It’s worth noting that the Bridge was built against the advice of the government’s infrastructure adviser, which recommended a cheaper tunnel.)

If Sydney didn’t build the bridge, the city might have simply left the harbour as a boundary on the north. Of course some people would have chosen to live there still, but probably fewer. There’s plenty of space to the south that could have become very desirable had the economic centre of the city not been shifted north by the “coat-hanger”.

sydney map

But building the bridge was not the end of Sydney’s attempts to link north and south. With booming northern suburbs and an incipient northern CBD, it threw good money after bad with years of very expensive ferries and then the construction of a tunnel opened in 1992. The Bridge may soon need to be replaced, due to rust.

But forget the money. I’m arguing that the bridge moved the harbour from the north to the middle of Sydney, and that hurt.

This whole argument rests on the idea – coming back into fashion – that infrastructure is “city-shaping.”  That means you oughtn’t merely provide for existing demand, you should understand what you provide will shape future demand.

Bodies of water are city-shaping. They are often part of cities because of the history of water transport, but now hurt urban connectivity. For example, Oakland remains the very poor cousin of San Francisco.

Even rivers seem to have an impact.

London has lots of bridges but the wealth and the productivity is overwhelmingly on one side of the Thames. It required Manhattan house prices to reach many millions before Brooklyn got any buzz, and Shanghai only developed the far side of the Huangpu in the last 20 years.

By this logic, curvy rivers would be especially bad because they divide the city more. In that respect, Tokyo is better off than Brisbane, because the Sumida River flies like an arrow compared to the meandering Brisbane River. (There is evidence that a single bridge built in Brisbane recently has had a big influence on where people live.)

I’d be very interested to see a meta-analysis of whether, in the last 50 years, the value of having a river has turned from positive to negative in terms of a city’s economic growth. The impediments a big river would create to city connectivity are likely to be significant, especially where bridges are in short supply.

All this is very interesting, but we can’t go back and unbuild the Sydney Harbour Bridge. So what’s the point?

The point is we can learn a valuable lesson. Don’t spend valuable taxpayer resources providing infrastructure that will “shape” your city in the wrong way.

Infrastructure is extremely durable. Every mis-spent dollar will spend centuries choking your city. If it accidentally facilitates growth in hard-to-access places, or encourages inefficient kinds of transport use, infrastructure spending can be the enemy of a good city.

Listen up, Melbourne
Listen up, Melbourne.

 

RBA calls it: Australia’s housing market has gone horribly wrong.

“Unbalanced” and “out of proportion” are the words they use in a brand new report out today.

“Recent housing price growth seems to have encouraged further investor activity. As a result, the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock. “

Do not get the impression the RBA thinks this will be a minor:

“In the first instance, the risks associated with this lending behaviour are likely to be macroeconomic in nature rather than direct risks to the stability of financial institutions.”

nb. “In the first instance…”

Who knows what sort of calamity could follow a macroeconomic event associated with a big house price fall? And if you think not owning a house makes you safe then you are wrong.

“…a broader risk remains that additional speculative demand can amplify the property price cycle and increase the potential for prices to fall later, with associated effects on household wealth and spending. These dynamics can affect households more widely than just those that are currently taking out loans: the households most affected by the declines in wealth need not necessarily be those that contributed to heightened activity”

This chart got the RBA concerned:

 

house price expectations

“… expectations of future housing prices seem to be influenced by the recent past (Graph  3.4). This tendency was stronger than average in New South Wales and Victoria at the end of last year. The risks associated with this behaviour are likely to be macroeconomic in nature if households were to react to declines in their wealth and any repayment difficulties by cutting back their spending. “

The recent rise in interest-only loans (yellow line below) also has the RBA worried about whether speculation is rife.

Interest only loans

They are so worried about house prices they are cracking open the weapons safe and rustling around for some ammo to try to scare off packs of hungry investors.

“The Bank is discussing with APRA, and other members of the Council of Financial Regulators, additional steps that might be taken to reinforce sound lending practices, particularly for lending to investors. “

The most likely step is not to mimic NZ and try to control Loan-to-Value ratios (as you can see in the above graph, LVRs seem to be under control). It is to make banks add a bigger buffer to their lending criteria. Currently they add 2 per cent to the existing interest rate. That might rise.

The last warning the RBA delivers may be important for anyone considering buying a small apartment in central Melbourne:

“A speculative upswing in demand can also be damaging if it brings forth an increase in construction on a scale that leads to a future overhang of supply. This risk is more likely to arise in particular local markets than at the national level.”

CAVEAT: The RBA points out that housing market dynamics are most skewed in Melbourne and Sydney. I’ve noted myself that buying in Brisbane looks like a pretty clever move.

FULL DISCLOSURE: The author is not invested in property.

There’s another way Australia’s ageing population will ruin our economy that nobody is thinking about

Out of the US National Bureau of Economic research comes a brand new paper by researchers from Stanford University and Beijing University. It’s a triumph of scholarship and it is full of bad news.

The researchers look into entrepreneurship to see the demographic impact. It turns out to be bad news for those countries whose workforce is ageing.

The reason the researchers hypothesise is that younger people don’t get the experience they need to make a business fly. Their inherent capacity to think about problems in a new way is not matched with business skills. The reason for that is that old people are hogging all the senior positions.

“Workers may begin with raw talent and inherent creativity, but the acquisition of skills at work is essential to their founding a business. It is for that reason that the young are not the ones most likely to start businesses, even if they are the most creative. They must have time to obtain the skills on the job that will allow business that they found to succeed.”

Stuck at the bottom of the corporate ladder, it's raining, and the economy is being ruined. This is your life.
Stuck at the bottom of the corporate ladder, it’s raining, and the economy is being ruined. This is your life.

The data support this model of thinking about entrepreneurship:

“The estimates imply that a median age that is one standard deviation lower is associated with a 2.5 percentage point higher country rate of entrepreneurship, which is about 40% of the mean rate. This effect is significant both statistically and economically, and is robust across different specifications, alternative measures of entrepreneurship, and among OECD and non-OECD countries.”

But older people have more business skills and experience. Does that help? Not at all, apparently.

“Within every age group, the entrepreneurship rate is lower in countries that are older.”

Japan is the sine qua non of this theory, with its fertility rate declining towards 1.0 and massive conglomerate companies full of ageing workers.

“[I]n Japan, none of the top 10 high-tech companies were founded in the last 40 years. New firm entry
rate dropped from the 6 to 7% range in the 1960s and 1970s to 3% in the 1990s (Acht, Thunik, and Verheut, 2004), which amounts to less than 1/3 of that in the U.S. and trails all the other OECD countries. “

Potato Drink? Japan, you've stopped even trying.
Potato Drink? Japan, you’ve stopped even trying.

The researchers emphasise the importance of entrepreneurship to economic vitality. New companies tend to do things old ones just can’t.

“Existing companies can modernize and update their products and techniques of production, but the major innovations tend to be associated with entrepreneurship and the formation of new companies.
Many significant inventions of the last 150 years illustrate the point. Thomas Edison invented the light bulb and founded General Electric. The inventor of the automobile was Karl Friedrich Benz, followed closely by Gottlieb Wilhelm Daimler. Daimler-Benz is the product of their inventions. Alexander Graham Bell invented the telephone and founded AT&T. Guglielmo Marconi, the inventor of radio, was a founder of Wireless Telegraph & Signal in Britain. The Wright Brothers founded The Wright Company, which later became Curtiss-Wright. Steven Wosniak, who invented the personal computer, teamed up with Steve Jobs to form Apple. The list goes on.

In Australia, you might cite Kogan and Cochlear, A2 milk and Atlassian.

But to produce a handful of companies that are both new and extremely exciting, you need a steady stream of companies that are new.

And Australia has been performing worse and worse on that measure.

Decline of business entries

 

There could be many reasons this has happened. But the data doesn’t refute the theory that demographics should take the blame.

decline of under 40

Everyone already knows the ageing of Australia’s population will create a major labour force shortfall. We’ve all heard that there will be fewer and fewer workers in the economy for every retiree (This article says the ratio will decline from 15:1 in 1909 to 2.6:1 by 2050). Everyone is aware of the fiscal imperatives around ageing. But the possibility that it is crushing the spirit of our economy is not something I’ve heard discussed.

But there is one shining light in the darkness. Not all the variation in entrepeneurship can be explained by ageing. In fact, the most entrepreneurial state in Australia is also one of its oldest: Victoria. The high rates of international migration, high levels of education and the density of the population may all be part of the reason.

If policy-makers want to keep Australia’s economy sharp and firing even as it greys, they should keep a close eye on the state south of the Murray.

New competition report tries to go hard on transport reform, but is naive.

The draft of the government’s big competition policy review is out today, and transport reform is one of the biggest priorities.

Roads come in for close scrutiny and harsh words.:

“Roads are the least reformed of all infrastructure sectors, with institutional arrangements around funding and provision remaining much the same as they were 20 years ago.”

The competition policy review is listening to, and amplifying, the right sort of complaints

“Lack of proper road pricing also contributes to urban congestion, which is a growing problem in Australia’s capital cities. With road users facing little incentive to shift demand from peak to off-peak periods, greater road capacity is needed. As IPART notes: ‘During peak periods of demand, roads are allocated through queuing which imposes a far greater cost to road users and the economy than would an effective pricing mechanism.'”

“Lack of proper road pricing distorts choices among transport modes: for example, between roads and
rail in relation to freight and roads and public transport for passenger transport”

Having different subsidies for different types of travel makes as much sense as having different rail gauges across Australia. The point of competition law is to put options on the same footing for consumers (after taking into account market failures). But here, the rail gauge analogy is a good one, because it shows that coordinating what should be an obvious win for efficiency is actually going to be very difficult.

In competition policy, even an ungainly solution like dual-gauge track is not available
In competition policy, an ungainly solution like dual-gauge track is not available.  Photo Source: Wikipedia

The report hangs its hat on transponders. This technical advancement will allow a new era of road-charging, the report argues.

“Technologies are available that allow greater use of cost-reflective pricing, which in turn could be  linked to the provision of road infrastructure. This could make roads more like other sectors, where road authorities charge directly for their use and use the revenues raised for road construction and maintenance.”

But the report is chicken. It deals with the neat, obvious and simple issues of economic efficiency of road pricing. Do you really need a professor and a QC to tell you there are efficiency gains from pricing things in the economy?

What it doesn’t do is try to figure out a way to make road pricing happen. Except for this piece of wanton wobbliness:

“To avoid imposing higher overall charges on road users, there should be a cross-jurisdictional approach to road pricing. Indirect charges and taxes on road users should be reduced as direct pricing is introduced. Revenue implications for different levels of government should be managed by adjusting Commonwealth grants to the States and Territories.”

This is an injudicious turn of phrase. In setting expectations that avoiding imposing higher charges on “road users” should be the goal, it knots its own noose. Obviously, some people need to pay more. The word “overall” is poor choice since some people’s savings in fuel taxes, etc, will be less than their tolls. Perhaps the word “average” (which has a nice clear meaning) should have been deployed instead.

This paragraph is a nod to the idea that the issue needs selling. But as a political strategy goes, it is awfully weak.

The big impediment to road charging is not a lack of understanding of the benefits among those who read wonkish .pdfs. It’s a lack of desire for them . Road charging is actually completely different to the rail gauge problem, because 99 per cent of people couldn’t explain its upside. (Probably they’d mention politicians lining their pockets.)

The terms of reference for this review do not insist that the review panel stick to an economics 101 approach to looking at the issues. The terms of reference actually focus on making change happen:

“The Review Panel should also consider and make recommendations where appropriate, aimed at ensuring Australia’s competition regulation, policy, and regulatory agencies are effective in protecting and facilitating competition, provide incentives for innovation and creativity in business, and meet world’s best practice.”

This report is a welcome reminder that the issue of road pricing is still alive. It underlines that – through a process of elimination – road pricing is becoming one of our most pressing economic reform issues. But road pricing is a long way from having an effective support base, and is a million (untolled) miles away from being widely introduced. This draft report does little to change that.

More on this topic:

Trevors in Traffic: a PR strategy for congestion charging.

Selling the street: A land use hypothetical…