November 2014 – Thomas the Think Engine

The most important question in our economy: Why will we invest in housing but not business?

The Australian economy is not growing fast enough. Everyone knows it, but we’re in a sort of paralysis, watching the unemployment rate rise.

Consumer price inflation is under control. Normally the RBA would simply cut interest rates, because they’e not impressed with the economy – not one bit. Here’s what the RBA Governor said last week:

“There are sufficient spare labour resources such that we could probably enjoy a couple of years of non-mining sector growth somewhat above its trend rate before we needed to worry too much about serious inflation pressure.”

Basically he’s saying he sees a lot of slack out there, and capital investment is not quite high enough to tighten it up.

So why don’t they act to cut rates? The answer is that house prices are going gangbusters, especially in Sydney,

“Prices have risen in all capitals, with a fair degree of variation: the smallest increase has been in Canberra, at about 6 per cent, and the largest in Sydney, at 28 per cent… a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”

If they cut interest rates to boost the economy at large, they run the risk of pumping yet more air into the housing market. Because the RBA sets the interest rate but can’t control where investment is made, they are stuck sitting on their hands, hoping something changes. What they really want to see happen is investment (capital spending) in the business sector.

“for accommodative monetary policy to support the economy most effectively overall, it’s helpful if pockets of potential over-exuberance don’t get too carried away.

Turning from housing investment to investment more generally, a more robust picture for capital spending outside mining would be part of a further strengthening of growth over time. Some of the key ingredients for this are in place. To date, there are some promising signs of stronger intentions, but not so much in the way of convincing evidence of actual commitment yet

So while the RBA is in wait and hope mode, we might as well ask why?

Why do Aussies believe buying a flat and holding it for five years will bring us a return, while having grave doubts about the wisdom of opening a panel-beaters, or a cafe, or a farm?

The obvious answer is that we have higher expectations of return from housing than from investing in businesses.

But that is a sort of truism. It doesn’t really give us anything to latch onto and think about. Let’s try to break it down. Here are seven theories of various plausibility on why Aussies might think housing has a better return than investing in business.

1. Pessimism

This topic got quite a bit of air time from a speech just last night by the man seen as the next Governor of the Reserve Bank, Philip Lowe. He talked about the way the community felt uncertain while coming out of the GFC.

“It is important that we guard against the possibility that this uncertainty mutates into chronic pessimism – that is, for it to become normal for us to think that our prospects are limited. If this were to become our normal mindset, then we would be well on the way to finding ourselves in the very world that we feared.”

I’m not too impressed by talking about pessimism, because even if it is 99 per cent of the explanation, it’s not under the control of policy. Better to focus on the 1 per cent you can control.

2. Risk perceptions:

It’s easy to turn a million dollars into zero in business. The survival rate is not that great. Of the businesses extant in 2009, 37 per cent were gone by 2013.

Not so in housing. Houses survive very consistently and you’re far more likely to turn $1 million into $1.1 million.

The quick remedy to this is a catastrophic housing collapse. But the good remedy is much harder and more difficult to engineer – better returns to business.

3. Structural change

The flux in the economy recently has many sources, not least the internet, but also globalisation. That makes investing tricky. How to choose the right sector to invest in? Media, finance, manufacturing and retail all look suspect.

If leading businesspeople have experience in sectors that are dying, you can not expect them to invest. It’s hard to expect all that slack to be taken up by the people with experience in organic foodstuffs, professional service or biomedical industries, because they are starting off a much smaller base.

4. Tax structures

Hello negative gearing. Your moment to be led to the chopping block may be nigh.

Given everything that’s happening, do we need more incentives for investment housing, especially for existing properties?

And what about the other side? Do we need lower taxes on business? Could the next CSL, the next BHP or the next Woolworths currently be a medium sized business with a growth plan in the top drawer? What is preventing the owner from making that growth a reality?

6. Pale pink in tooth and claw?

Australia is a country where it is great to be middle class and where Clive Palmer is a dickhead. Why would you even want to be loaded? Alan Bond, Chris Skase, Gina Rinehart, Nathan Tinkler. I’m struggling to come up with a memorable business person that people might see as a hero. Could that be crimping my generation’s desire to risk it all to top the rich list?

6. FDI

Even if Aussies are pessimistic, why isn’t foreign investment picking up the slack? Do they know something about us?

7. The dollar

The Aussie dollar has been ridiculously high. With the mining boom over, it has gone to tumble-town, and hit a four-year low overnight, around US85c. That could be the spark needed to get the economy going again. The RBA must certainly hope so.

Class and privilege on the 10.15 Hurstbridge train

I was on the train last night at about 10.15pm, heading home from the city.

Ticket inspectors got on. So I reached into my pockets to grab my Myki.

I held it in my hand as the ticket inspectors went up and down the carriage, checking left and right, until they came across the two women sitting opposite. The two women, aged perhaps 25 and 45, had just rushed onto the train at the last minute before it rolled out of Flinders St Station. Other than that little flurry of activity I hadn’t noticed them.

But the ticket inspectors zeroed in. At least one of the ladies did not have a ticket. They remained in remarkably good spirits throughout the encounter, insisting that they normally touched on. “Is he reading me my rights?” the older one joked. “Feels like being at the cop station,” the younger one laughed. And a little bit later she told the ticket inspectors, “I just got out of jail!”

I worried about these two ladies being able to pay the fine. Probably, I imagined, they wouldn’t and would end up in court. Probably, I imagined, the presiding judge would sigh when they saw the long list of priors.

As the inspector wrote out the last few details on the ticket, the older woman got a bit snarky. “Do you get off on this?” she asked, pointedly. “I’m just doing my job,” the inspector said, in a voice that was controlled and milky-mild.

Whether inspectors really enjoyed checking tickets, or were simply doing their job, you’d think they might have checked mine.

Ticket inspectors were milling around everywhere. Three were talking to the women opposite while the rest checked the other passengers. But not me. I sat there with my Myki in my hand, even making eye contact with one ticket inspectors who was leaning against the wall, but it seemed none of them wanted to see if I’d touched on. (I had.)

I was wearing a suit. My partner and I had just been to the art gallery to see an exhibition. We’d been guests of a company that sponsors the gallery. They had served food and drink before letting us loose into an after-hours visit. We were grateful for the night out and we enjoyed the exhibition.

“Aren’t we lucky to get to see this?” we said. But it may be even luckier to have people look at you and assume you’re not guilty.

So what’s the lesson? Life’s easier in both obvious and subtle ways when you’re from a privileged background. It’s worth remembering.

Why are there puppies in toilet paper commercials?

Toilet paper is a consumer brand that has been around for over 100 years. The basic product proposition has evolved very little, and the marketing is a tricky issue. You can’t really depict the product in use, or even go into detail on its performance!

Luckily, marketing often works best when it ignores those issues and uses metaphors to talk to people. By the 1920s, the Scott company had a mascot called Mr Thirsty Fibre. As you can see, he’s a fighter, (tough) but made of loops of paper (soft!).

Fast forward about 90 years and the basics of TP marketing are basically the same. You’re selling the idea of softness and strength. But the metaphor chosen is different. It’s a puppy.

In the 20th century, the whole science of meaning-making blew up, with experts like Chomsky and Lakoff exploring how humans make meaning out of language and symbols.

Keen students of this evolving science were the “Mad Men” – advertising executives. And so it was that advertising gave up on lengthy texts:

In favour of signs and symbols that any semiotician can tell you are just as easy to interpret. Especially if you’ve been subject to a barrage of advertising your whole life.

Puppies are softer than a full-grown dog but still strong. They are not scratchy like a kitten might be – in fact puppies may be the perfect TP metaphor.

Screen Shot 2014-11-24 at 9.24.50 am

While Kleenex chooses a cute yellow puppy, Purex goes for a brown, wrinkly one. Are they trying to convey what I think they’re trying to convey? Best to not think about that too much.

But the toilet paper market stands on the brink of a revolution. Kleenex are trying their best to break the habits of a century and sell us a new product, called Flushable Cleaning Cloths

This is basically moist towelettes for the bathroom. But they’ve given up on metaphor. The marketing message is wordy and long.

If they are keen to convey the need for water to really clean, they needs to use something that is wet and clean as a metaphor. If they don’t want to leave the animal kingdom, I might suggest a dolphin.

Aren’t dolphins more or less the puppy of the sea?

Another thing that seems synonymous with being clean and wet might be a car.

Screen Shot 2014-11-24 at 10.29.18 am

In fact, sn advertising campaign where a smirking guy drives around in a just-washed car while everyone else drives around in a car they’ve tried to wipe with paper might be exactly the marketing message that Kleenex needs.

The ABC should be slashed. But not like that.

The Industry Minister stands up to make his announcement:

The federal government is going to set up a car making company, and give cars away for free!

This would be a highly controversial policy. Consumers would be pretty excited, car-makers would be furious, and economists would probably mutter darkly. It doesn’t seem like a good idea.

But there is another struggling industry where the government supports a competitor that gives away product for free.

Media.

As Fairfax and Crikey and all the rest struggle mightily against falling revenues, the ABC and SBS continue to send reporters to news conferences, run documentaries, and blast pop music across the radio spectrum.

This is also controversial, but mainly among News Limited journalists. They’ve cried wolf on government policy so many times they have lost all credibility. But that obscures the few times they ‘re right, including now.

There are important economic differences between cars and news. Unlike cars, News has positive externalities and economies of scale. Both of these mean that news may be under-delivered by the market.

But notice I say news. I do not argue media in general has positive externalities.

There are heaps of things the ABC does that should stop, immediately. If it continues, it wastes its own money, (i.e. our money) and also hurts the profitability to other media outlets.

When the ABC broadcasts the Socceroos match versus Japan, as it did on Tuesday night, that’s not so different to Channel 7 broadcasting the AFL. There is no market failure here to correct. The ABC ought not touch it.

If we look at this evening’s prime time, we can see that the ABC is pumping out a range of programs, including some for which there is no justification and others for which there is a burning burning need.

If I had to rank the top five programs on the list, that the ABC should be investing more and more in, I’d nominate

7.30. Because democracy demands our society be examined and our politicians be held to account, and the market is more interested in entertainment.
ABC news. Because we need to know what’s going on in the world in order to understand it, and the free-market stations are more about pleasing us than informing us.
Fireman Sam. Developmentally appropriate kids programming without huge commercial tie-ins is always going to be a market shortfall.
Catalyst. Science programming on the free-to-airs consists primarily of cheetahs running down niboks and tearing at their flesh. Nice to have, but not all the time.
Lateline. You need all the opportunities you can get to grill politicians in front of an audience.

If I had to rank the bottom five:

The Tonight Show starring Jimmy Fallon. This show is so excellent. Just yesterday I watched Fallon impersonate Bono. It was incredible. Dude has TALENT. Not a market failure.
Peep show. How funny is David Mitchell? I laugh til my head falls off when I watch this. Not a market failure.
The Drum. Is there a shortage of opinion on TV and radio and the internet? Holy Mother of God, No! Not a market failure.
QI. Is Stephen Fry the most popular man in the world? Probably. Not a market failure.
Upper Middle Bogan. The commercial stations have very little comedy except Hamish and Andy, but the ABC tries to more than make up for it, with The Moodys, Chris Lilley, The Chaser, Micallef, Please Like Me, It’s a Date, and Soulmates. Whew. Probably, they are more than meeting demand.

Is some of this just cheaply bought-filler? Maybe. But ABC 3 shows us there is something cheaper than filler. And that’s closing down for the night. The ABC should consider doing this.

Now, if it is done strategically, buying a popular program to run into something worthy could boost the ratings of the worthy show. For example, Spicks and Specks is hilarious and fun and very popular. But what follows it is not four corners, it’s the Tonight Show with Jimmy Fallon.

The ABC should probably trim down the wildly expansive website and chuck out a bunch of radio stations too. Do we need Double J? It is my favourite station, incidentally, but I don’t ask the government to provide me with the hit songs of my youth. I could get a Pandora or a Spotify account instead. Ditto for Classic FM.

What the ABC should do is slice away all it sports coverage, a lot of its light entertainment, a bunch of music stations and do as much more hard news as it can. It is not important to fill three TV stations, dozens of radio stations and a really enormous website, if you’re filling it with fluff. I

It’s important to turn over the stones that the free market will leave untouched. The NSW ICAC shows there are huge numbers of extremely illegal and controversial things happening every single day. Good reporters could hunt these issues down before it’s too late.

The money that the ABC would save should be spent like this

Give Leigh Sales an hour to fill every night.
Give Lateline another four reporters.
Put Four Corners on two nights a week.
Resource Media Watch properly.

So I’m all for slashing the ABC where it treads on commercial toes unnecessarily, but only in order to build it up where those commercial toes fear to tread.

The best way to fix Australia’s road and rail might be out of left-field.

Australia has a problem with Infrastructure. We keep building the wrong things.

We spend a huge amount of time developing proposals that have benefit cost ratios less than one. Then, for want of alternative proposals, we turn those proposals into reality.

There are many reasons for this – politicians serving certain electorates, powerful lobby groups, bias to action, and inability to fix infrastructure through pricing .

But part of the problem is a lack of options. We build the East-West tunnel in Melbourne because it is the only idea that’s been properly developed and discussed. We put Sydney’s new airport at Badgery’s Creek because it’s the one location that has been kicked around for years. We plan a light rail line up the middle of Canberra, because that concept has been publicly flogged since Burley Griffin.

To find one great infrastructure plan, you need to discard 99 good infrastructure plans. But Australia doesn’t have 99 to throw away.

There’s a lot of talk about developing a “pipeline” of infrastructure ideas. But politicians are very risk averse, and big infrastructure companies don’t want to waste money on business plans. So our pipeline is the diameter of a carpet python, with a couple of big lumps where it has been fed an approved mega-project.

Infrastructure Australia was set up by the Rudd government to try to help develop a pipeline of ideas, and independently test them. But it only has a few staff, and its leader was recently fired by the Abbott Government. Just as that was happening, he took a stand, publicly saying ”Entrenched truculent bureaucracies have impeded progress… It has been heard that some good ideas cannot go ahead because they would set ‘precedents’. Among other things, this implies knowledge of, but unwillingness to address, widespread deficiencies. Such wilful attitudes test the patience of our elected masters, industry, and the public.”

Even with this courageous bureaucrat in charge, the old Infrastructure Australia was unable to renew the infrastructure planning system. With his blood all over the carpet, the new Infrastructure Australia is cowed.

Even if it makes our political leaders uncomfortable, Australia desperately needs a truly independent infrastructure development and analysis capacity. But how?

I think the answer is not a bureaucracy. I think the answer is by using technology. The same technology that has helped humanity create the biggest encyclopaedia in history and a hugely detailed map of the entire world.

A Wiki.

Imagine a website where you can start a page for any infrastructure project you might dream of.

You want to extend a train line by a few kilometres? Start a page with a description and a map.
You want a helicopter pad installed at the local sports ground? Start a page with a project description and a map.
You want to build a very fast train between Melbourne and Brisbane? Start a page with a project description and a map.

Each page would be able to be edited by absolutely anybody. There would be a section for environmental impacts, a section for cost estimates, a section for estimating time for planning and building, a section for land-use changes and implications, a section for creating a cost-benefit analysis.

flinders st w bike Most pages would be the hare-brained schemes of the lone wolves of suburbia. The pages would be underdone and silly. But by asking the community to rate each page, the better ideas would attract contributions from a range of talented people and rise out of the muck.

This could bring unforeseen solutions out of obscurity.

For example, when I was writing about the ridiculousness of the state government’s plan to put a new railway station in South Melbourne, right on top of an existing tram stop and miles from the new development it ostensibly serves, I found in the depths of the internet forums the suggestion that the problem could be solved better with a train line that runs from north-east to south-west.

“Fisherman’s Bend should be on a new line from Merri (Northcote) to Newport (Wydham Vale – Mernda line).”

This idea may have a cost-benefit analysis ten times better than all the existing plans. But how would we know? There is a choke-point for shining light on new ideas, and its name is the Department of Transport. Risk-averse and slow-moving, DoT can only be expected to properly consider a few ideas that it thinks the government is interested in.

Choosing between a big group of well-developed projects that each have a range of intriguing benefits and positive cost-benefit analyses is going to be difficult, politically. But it’s a better problem than the one we have now, which is a small group of infrastructure plans that mainly look like wastes of money. (I refer here to Melbourne’s East-West tunnel and airport rail, but an honourable mention should go to the plan for a very fast train up the east coast)

If you want to find one project with a cost benefit analysis good enough to build, you need to look at 100 or 1000 projects across the country. The current pipeline is starved of proposals, so it is no wonder the infrastructure policy space is so sickly and anaemic.

PROBLEMS:

1. The majority of analyses on the wiki would be defective. But the community should privilege the ideas that have the most potential and these should attract rational people to contribute. I expect projects will be submitted with wild underestimates of their cost, and there will be a push by more rational people to actually use cost estimates that reflect realistic Australian pricing. On the ‘discussion’ pages I imagine there would be fierce argument about why it is we can’t have projects delivered at the prices that apply in China, America, etc. Projects with decent estimated benefits should be most willing to use realistic pricing.

2. Monorails and personal rapid transit. It’s going to be hard to keep really wild ideas out of there, but perhaps that’s the point.

3. Splintering into too many pieces. Every little change in a proposed plan (should this freeway have an exit here or here?) would potentially lead to a new page being created, with a new set of costs, environmental impacts, etc, etc. Conventions and rules may need to be developed to guide when a change is big enough to warrant a whole new entry. But wikis are good at developing cultures and rules that make them effective.

4. The whole thing would be at risk of being ignored if there was no suggestion governments would at least look at it. The project would be a really great thing to seed with some official resources, for example, freely available mapping software for wiki users to use, some models for doing traffic and demand forecasting, recommended ranges for cost per kilometre of roads, bike lanes, tram lines etc. I’d like to see it hosted at infra.wiki.gov.au to give it a sense of official imprimatur and encourage involvement. Perhaps the government could loose a few bureaucrats or pay a few infrastructure experts to play with the wiki to get it started, anonymously having them make edits and bring in a bit of rigour.

So, is this a good idea or a mad one? Is there some aspect of wikis I have overlooked or some problem I’ve not foreseen? Leave a comment below or hit me up on Twitter!

Should we tax and subsidise foods?

I’ve been thinking a lot about diet. A doctor changed my regimen just recently and I won’t go into details, except to say that I may have had my last pasta carbonara. Ever.

farewell to you too, pork belly sandwich.

Along with all the time I’ve spent reading labels in the health-food aisle, I’ve been spending time reading about how food affects the human body.

I’ve always considered myself a pretty well-read and savvy guy. I think about food. But there have really only been two things I thought about.

Eating the right number of calories.
Eating fruit and vegetables.

You can see a little example of what I was eating in 2010 at this link: Lots of fruit, some vegetables, but also lots of chocolate and chips and booze.

tomakin parma — I look at this photo, I see salad.

My diet today is pretty different. One of the things I’ve been reading a lot about is gut bacteria. There is a big link from the bacteria that live in your gut to your overall health. The bacteria do a heap of really important work (like protecting against allergies), and can cause major health problems, not limited to gut problems. They may be involved in a lot of mental illnesses and multiple sclerosis.

The gut bacteria also respond strongly to diet, so you can change the populations in there by eating differently. But that’s not all. They also help change your dietary choices! So you could potentially create a cycle where you start feeding bugs in your gut, instead of feeding your own body.

The big point I’m going to make in this post is that science keeps moving on. It’s amazing how little we understand about nutrition. Some vitamins were discovered within the last century. And the science remains sketchy on whether vitamin supplements help or hurt people.

If I were designing a tax and subsidy scheme for food, and it was 1990, I’d probably have subsidised low-calorie cola, following the principle that fewer calories are better.

But in 2014 science has found evidence that diet coke changes your gut bacteria in a way that induces glucose intolerance. And advice has changed on wine, chocolate, cholesterol, coffee, bread, etc. The history of nutrition advice is a turbulent one.

I increasingly believe that eating better is a good idea. But I’m also aware that trying to fine-tune people’s diets leads to a risk of making a scientific mistake.

And that’s even before you look at the chance of making a policy mistake. Even for foods that are clearly and unambiguously unhealthy, you need to understand why people eat them before you can succesfully make policy that helps people not to choose them.

This great story from the Atlantic The Inconvenience of Salad covers off on a few of the traps that policy makers fall into.

For example, the idea that the problem is availability of healthy foods – the ‘food desert’ concept. That idea did not get support from a study in Philadelphia, where scientists eagerly tracked fruit and vegetable consumption after the opening of a local store. They found it had no impact.

The Inconvenience of Salad is a really nice feature that follows around a young guy who has opened a business putting salads in mason jars, putting the mason jars in vending machines, and putting the vending machines out in public.

The vending machines have to be stocked every single day and I fear the nice young dude who has ploughed his life savings into this venture will be broke soon. In the article he appears to be mortally shocked when someone describes salad like this

“It’s just nasty to me; it doesn’t agree with my taste buds.”

While I was reading the article I kept thinking that the US should subsidise this guy. But then I tried to take a step back. How sure am I the science won’t change? How sure am I the subsidy will make a difference to behaviour?

The answer in both cases is I’m fairly sure. But not certain.

There is a big natural experiment in Australia. We actually do tax (most) processed food but fresh foods are not subject to the GST.

Despite this, I am yet to see a single study showing that the 10 per cent tax difference between the two has led to any change in diet, or in health. Has the study not been done for lack of data? Or because obesity has been rising so fast researchers fear what they might discover? If anyone is aware of such a study, please bring it to my attention!

Does money buy happiness? I say yes and so does the data.

The top article on the Wall Street Journal at the moment is about whether money can buy happiness.

The conclusion is it can, but only if you use it right.

Money makes you happier so long as you resist the urge to buy things with it. The article quotes Psychology professor Ryan Howell:

“”What we find is that there’s this huge misforecast,” he says. “People think that experiences are only going to provide temporary happiness, but they actually provide both more happiness and more lasting value.” And yet we still keep on buying material things, he says, because they’re tangible and we think we can keep on using them.”

Experiences are also more fun to anticipate, according to research, which might explain why my facebook feed is full of people counting down the days to their holiday, not counting down the days until they buy a new TV.

“[W]e also get more pleasure out of anticipating experiences than anticipating the acquisition of material things. People waiting for an event were generally excited, whereas waiting for material things “seemed to have an impatient quality.””

The research also suggests happiness comes from having more time to spare. The article cites work by Associate Professor of psychology Elizabeth Dunn.

She’s currently doing research on how people actually spend the time they save by outsourcing tasks and whether it makes them happier. The preliminary findings, she says, are that most people do become happier by buying time for themselves, but only if they use the time in the right way.

“Our hypothesis is that people will be much more likely to derive an emotional benefit if they think of it as ‘windfall time’ and use it to do something good, rather than just taking it for granted,” she says.

But while buying time is a good idea, putting a dollar value on your time may not be. In another piece of research in progress, Prof. Dunn is finding that when people think of their time as money, it makes them less likely to spend even small amounts of time on things that are not financially compensated. “Seeing time as money may have a number of destructive consequences,” she says.

I find these findings really resonate, because I think I have used the small amount of money I have to maximise my happiness.

I don’t have many material possessions to speak of. I share a 20 year old car with my partner and I have two second-hand bikes. My most valuable possession is probably the laptop I type this blog on.

The point about time is crucial.

People who know me know I work full time only part of the time. Twice I’ve quit very nice jobs and invested my time into this blog instead. Probably, some people wonder how I do that, so I’m going to explain. It’s somewhat gauche to talk about money, I guess, but here goes.

Mostly its good luck (of many different kinds), but partly, it’s because I’m a good saver. I keep an eye on recurrent expenses. For example, between 2005 and 2011, the highest weekly rent I paid was $120. I avoid gym memberships and insurance. I don’t drink much. That means when I have a paycheque, I save a lot of it.

For example, I saved about $15,000 a year while working at Treasury from 2005 to 2008. I started on day one with a $6000 debt on my credit card and finished on the last day with $40,000 in savings. (During that time, I also worked a second job as a ski instructor which mainly prevented me from spending money, rather than actually making me much.)

I don’t take credit for most of my good fortune. My run of luck goes a long way back, to being born in the right country and having the right parents, getting sent to a good school and stumbling into a good university. But also getting the in-kind support that comes with being middle-class (such as living at home during university and for a couple of patches during my 20s; or my sister giving me her car to borrow for a number of years.) I also made a lucky series of investments in the midst of the GFC, blithely following the motto of being greedy when others are fearful. The fact that turned out well was dumb luck, really.

That has meant I have a small buffer that means I can choose to spend my time on things other than full time work (for a little while at least). I really enjoy being the master of my own time.

I do, however, spend money on experiences. I travel overseas a lot. I go to see live music. I eat at restaurants most weeks. These things are amazing and they definitely make me happy. But they sure aren’t free.

There is a trade-off between being master of your time and a big consumer of experiences. This fact will inevitably send me back into the full time workforce at some stage!

You’ll never guess what happens when you give public servants less work to do.

They do a better job on the remaining work.

A giant study from the US has compared the output of state supreme court judges. It finds that when they have a lower workload, judges write longer judgments and the quality of those judgments is higher, as evidenced by them being cited more often in subsequent judgments.

The study looked at what happened after the introduction of an intermediate court which reduced the workflow of the state supreme court judges to find out what would happen. The conclusion is that the judges have intrinsic motivation.

Consistent with other theories of motivation, the research found pay rises increased work performance, but only in those states where the judges choose which cases to hear.

“This suggests the importance of control over the work environment in the operation of intrinsic incentives.”

But the judges were not always at peak performance, with regular dips in output every few years. Those dips were associated with judicial elections.

In the US, judges have to be re-elected, which forces them into distracting process of campaigning. But how often that process comes around is relevant to their performance.

“We find evidence that in the year a judge is up for re-election their performance falls, consistent with the hypothesis that campaigning takes time.”

Less frequent elections turn out to be better for judicial output.

“In our sample, we find that a judge responds to a term length increase with higher-quality judgments and no decline in output as measured by the number of cases or total number of words written.”

The biggest application of this work in Australia may not be to the workaday public servants that we all know and love, but the high-profile public servants we call politicians.

“Explicit performance pay can crowd out intrinsic motivation.”

The fact that judges are intrinsically motivated suggests pay for performance is unnecessary. Perhaps the same thing could work for politcians. If ministerial and leadership positions attracted no more pay than back-bench roles, might they attract primarily people who are intrinsically motivated? And might that not diminish – even if only at the margin – the amount of backstabbing and scheming that goes in to attempting to be leader? That could only be a good thing.

If intrinsic motivation is sapped by the need to be re-elected longer terms in office could increase the total of quality work done by politicians. That may be why our senators seem on average to be better respected than our lower house MPs – their six-year terms make them a bit more inclined to do steady policy work.

The study also suggests that loading up a minister with a bunch of portfolios that they don’t care about is the wrong approach. For example, having George Brandis be Attorney-General and Minister for arts. Instead, farming out individual portfolios to MPs who want them most is likely to get better results.

Canberra’s tram plan looks suss to me.

It was with some excitement that I downloaded the PDF containing the full business case for the new Canberra light rail.

1. I love public transport.

2. I like to see open and honest planning. The Victorian government has given us no such insight into their East-West Link plan.

But my happiness turned to confusion when I saw the way the calculations had been made. This project supposedly has a benefit-cost ratio of 1.2. But when you look into the $1 billion of benefits, you’ll see that they are a castle made of gossamer. The $823 million of costs look altogether more concrete, and the study estimates a 25 per cent chance they will blow out to be higher still.

The most obvious benefit of the tram is time savings.

These have been calculated over 30 years, even though the operating contract for the metro is for 20 years. I am suspicious here. If you assume traffic conditions deteriorate at a given rate per annum, you could get the model to show very bad traffic in 20 years time. Including those final ten years might be a substantial source of the time savings.

And it goes without saying that trying to calculate seconds saved by tram users in 2049 requires making some heroic assumptions about the way we will live then.

The patronage assumptions also look bold. They assume 15,000 passengers a day in 2021. That’s 7500 in each direction, or 416 passenger boardings each hour for 18 hours of operation. If you assume a tram every 10 minutes that’s 69.4 boardings per tram, and if you assume the average passenger goes 6km along the 12km line, you’re guessing the tram will have on average 35 passengers on board. I’ve been on a lot of ACTION buses and that seems like 35 times as many passengers as the average ACTION bus outside peak hour.

Time savings are not even the biggest source of “benefits” in this highly questionable calculation.

The biggest source of benefits is land use.

“Light rail and the anticipated resulting urban renewal will create a more grand entrance to the City befitting its status as the Nation’s Capital”

It is true that the drive into Canberra – down Northbourne Avenue – is grim. I moved to Canberra in 2005, and coming down Northbourne Avenue that fateful day I didn’t realise we were in the heart of the city until it had passed.

But solving that by building a tram is a bit like renovating your kitchen by installing a restaurant in your lounge room. Sure, it provides the impetus, but it’s indirect and probably pretty costly.

If you want to increase density near the centre of Canberra, the big question should be what’s the best way to do this?

If you pose the question that way, using an elaborate system of trams seems less efficient than changing the planning regulations. The business case more or less admits it:

“Land development decisions undertaken by the ACT Government will influence the realisation of benefits by the Capital Metro project”

But it makes no attempt to say whether those “decisions” could be brought in without the tram.

The next biggest source of benefits is wider economic impacts.

Some people say wider economic benefits are the cheat’s way of boosting your benefit-cost ratio. Infrastructure Australia says that:

Wider economic benefits may be negative for some initiatives; and
the availability of Australian specific data needed to calculated wider economic benefits is currently sub-optimal.
Therefore, Infrastructure Australia will treat wider economic benefits separately to the traditional CBA.

It’s true that the ACT government does two calculations of the benefit cost ratio: with the Wider Economic Impacts and without.

But given the project would not go ahead with a ratio of 1.0, the wider economic benefits are obviously key to the calculation.

META PROBLEMS and OPPORTUNITY COSTS

Benefit cost analyses are a GIGO model. You put garbage in and you get garbage out. Even more important than the garbage that goes in is what is excluded. here’s a short list.

There is no price paid for the public land on which the tram will run. The tracks will be 6.6m wide. The line is 12km long. If 11km is on public land, that is 72,600 square metres. At $575 per square metre for undeveloped land, that’s $42 million that should arguably be included as an opportunity cost.
The tram has priority at all intersections. I see no estimate of how much extra waiting that will mean for pedestrians, cars, cyclists and buses that try to cross its path.
Cutting bus services is counted as a benefit, not as a cost.
The cost of the funds is not accounted for. Whether raised by debt or taxes, getting $100 for the government to spend does not cost society $100.

The cost of the tram plan is equal to $830 million. To put that in context, it’s $2,168 per ACT resident. And most of them don’t live near the 12k tram line.

The red line is the tram. The areas in the black circles miss out on any benefit — The red line is the tram. The areas in the black circles miss out

The budget for the entire ACT bus system was $123 million in 2012-13. The reason patronage is low and dissatisfaction is high is clear – low frequencies, badly designed routes and poor service hours. You could double patronage a lot more easily, for a fraction of the cost of the tram, by just improving the buses.

Myki is set to be replaced. Already.

EDIT: Additional details have been drawn to my attention and it seems the proposal is to add the paypass system to the existing Myki system, rather than wholly replace it. That, to me, seems to add even more complexity and cost and the arguments below still stand.

—

I feel like we’ve just got the hang of Myki.

The smartcard system that came in in 2010, finally replacing the extremely functional metcard system in 2012, had a few bad years. But now I see people touching on and off more or less correctly. There’s a lot less waving of cards near the readers and a lot less theatrical sighing.

Nevertheless the coalition government is suggesting they will turf the system if they win power again. Transport Minister Terry Mulder has said that the government will look into using the Visa Paywave / Mastercard Paypass system at the barriers instead.

I quite like the sound of that. But I’ve learned to be wary of things I like the sound of.

Myki was supposed to be the smartcard to end all smartcards. The reason the government spent nearly $1 billion developing it was that it was supposed to be adaptive. The technology was meant to grow with the city, and give us the option to change our ticket system without changing our smartcard system.

Even the savvy were fooled. Here’s PT guru Daniel Bowen being quoted in 2006:

“It will be a vast improvement over the current system. However, some passengers may find having to scan on and off an inconvenience.”

If only the biggest issue was touching on and off!

The reality has been that the Myki system cannot even do what the previous system could do. It can’t manage short-term tickets, it fails often and it struggles terribly on trams, meaning the mantra “remember to touch on, and touch off” became untrue for (most) tram users.

Listen up, Melbourne

But the big lesson is not that Myki is bad. It’s that replacing Myki is going to be expensive. More expensive than people imagine. And the solution will almost certainly deliver less functionality than you hope. This is the lesson of big projects. They run over-budget and deliver under scope.

I’m no great fan of Myki. But let’s not repeat our mistakes by turfing Myki out before we’ve wrung the last drop of value out of it. Let’s not repeat our mistakes by assuming the new ticket system will be both easy to use and flexible. And let’s definitely not repeat our mistakes by replacing it with an elaborate bespoke system.

The temptation for a minister will be to cave to special interests, so “Simply Using Paywave” turns into a giant cluster-cuss of exemptions and special rules in special places, requiring a lot of bespoke software that fails a lot.

PT1

Lastly, let us always remember where our ticket fees go.

A ticket system is very expensive to operate. A big chunk of the cost of every ticket goes to paying for the tickets, the ticket machines, the software, the inspectors, the public servants that administer the ticket system, the inspector system and the fines – not to mention paying for the judges that hear the complaints in court. Only a fraction of your fare goes to actually making the vehicles run on time. There would be plenty of efficiencies from making public transport free, instead of using tickets.

How America failed to improve life expectancy despite driving safer, smoking less

Americans added 1.82 years to their life expectancy between 1960 and 2010, by driving safer, drinking and smoking less.

Hooray!

But at the same time, they scarfed foods, fired weapons, and swallowed pills often enough to subtract 1.77 years from their life expectancy.

Darnit!

All the technical advancements and policy efforts that generated safe cars and better driving, all the efforts of anti-smoking campaigners, and all the social changes that resulted in less bourbon going down the hatch,

“were roughly offset by increased obesity, greater firearm deaths, and increased deaths from poisonous substances, which together reduced quality-adjusted life expectancy by 1.77 years.” [source]

In 1970, Australia and America had almost identical life expectancy. Now Australia is up to 82 years and the Americans are stuck on 78.7.

Americans are amazingly fat. 35 per cent of people are obese or morbidly obese, almost 35 per cent are overweight, and just under 30 per cent are a normal weight.

fatness

So it’s tempting to blame all of the downside in life expectancy on America’s famous food.

america coors

But a big part of the problem is drugs. In recent times, prescription opiates have become a huge source of deaths, at 72 per cent of all pharmaceutical overdoses.

In fact, drug overdose is the fastest moving category in the research.

But overall, the research has a positive message – the incredible fall in smoking and motor vehicle deaths shows that when society puts its shoulder behind a cause, it can effect change.

The future could look very different. madmen

In the same way Mad Men depicts the 1960s brilliantly by showing everyone smoking, there may be a TV drama in 2060 that evokes the first decades of this century by making the cast really really fat and dazed on opiates. Call it the Matthew Perry show, perhaps.

How Exams Maybe Ruined Your Whole Life

Your time starts… Now.

The exam hall fills with an updraft as a thousand students flip over the front page of the exam booklet. Some are nervous. Others feel they are in their element.

I was always in the latter group. The pressure of having two hours to show everything you know is just like the pressure of producing a newspaper story right on deadline. The marks I got on exams were almost always better than the marks I got on assignments.

Whether I studied hard or crammed like a boss didn’t matter. I generally knew the answers or a decent way to bluff, and my biggest problem would be getting cramp in the hand that wrote the essays and coloured in the little circles.

Today is the day of the Victorian Certificate of Education Maths Methods exam – one of the biggest and most important subjects. I remember that exam clearly. I had prepared more for it than any other. I spent hours doing every practice problem in the book so on the day I was the captain of calculus and I nailed an A+.

Many students will not be so calm. Many will be in a state of nervousness that will actually hurt their score.

The bad news is this will ruin their life.

New research out of the US National Bureau of Economic Research argues exam performance has long-term consequences for schooling attainment and labour market outcomes.

The way they ran their test was by finding an external factor that could plausibly disrupt student performance. They settled on air pollution, which has been shown to hurt human productivity on a range of tasks.

Students who did their exams on days with bad pollution went on to have lower scores, reduced years at university, and lower monthly earnings. (The test in question is Israel’s version of the SAT test, which is heavily weighted in university admissions).

To get the data they used air quality testing sites within 2.5 km of the schools where the tests were being run.

An increase in particulates by one standard deviation on testing day reduced test scores by 0.65 of a point (a tenth of one standard deviation), with the result mostly driven by strongly worse performances on strongly polluted days.

When the air clears, the effect on cognition also clears. But the effect of the low score plays out throughout students lives.

An increase in particulates on exam day by just half of one standard deviation reduces monthly adult earnings by $29.

“Our analysis highlights a major drawback of using high-stakes examinations to rank students. If completely random variation in scores can still matter ten years after a student completes high school, this suggests that placing too much weight on high-stakes exams … may not be consistent with meritocratic principles.”

Exams are not good preparation for real life any more. No serious job forces people to solve problems without reference to the internet, conferring with colleagues, or time to think (airline pilots dealing with a nosedive and firefighters maybe excluded).

Exams discriminate in favour of people who can go in there calm, and hurt people who didn’t get a good night’s sleep a good breakfast, who have a headache or a cold, or – for whatever reason – are wigging out.

These are likely to be talented people, who may miss out on the course of their dreams, and a subsequent job that they would have excelled at. Exams seem fair but they are not. It’s not just random bias as described above, but systematic bias too. We should call “pens down” on the whole exam system.

What happens to stolen bikes?

Bike theft now out-strips car theft in a range of inner-city Melbourne suburbs.

The Age has a nice interactive map, here.

In my postcode, 463 cars were reported stolen in the last five years and 394 bikes. But I’m pretty sure the reported statistics aren’t reflective of reality. More bikes would have been taken than cars.

Bike thefts would be unlikely to be reported to the police except when the bike was expensive enough to be insured, or when taken as part of a burglary. Simple theft off the street rarely gets reported, I bet.

Selling a stolen bike can’t be lucrative. But because bike thefts are rarely solved, the risk-return trade-off is good. This is explained beautifully in the graph below, taken from the excellent economics blog Priceonomics.

But where do bikes go?

Sometimes stolen bikes are just sold on the street, as in this convoluted story that involves a man being arrested for not even stealing a bike.

But plenty of people are selling bikes on Gumtree.

Some of them are selling the whole contents of their house. That’s not suspicious.

Some of them are selling just one bike, with a big write-up and lots of pictures.. That’s not suspicious.

Then there are people selling an odd mix of bikes, often at a low price point and with a cursory write-up, like Nico, Mario, Jimbo, Joe and Carlo:

http://www.gumtree.com.au/s-seller/nico/1000852052

http://www.gumtree.com.au/s-seller/Mario/66632785

http://www.gumtree.com.au/s-seller/Jimbo/1005849263

http://www.gumtree.com.au/s-seller/Joe/1003315143

http://www.gumtree.com.au/s-seller/carlo/1000313405/date/1

(To be clear, for anyone interested in libel laws, I totally and fully and absolutely believe all these people are completely law-abiding citizens.)

I imagine a cheap stolen bicycle should sit in a shed for six months or so before being sold. Eager victims might scour the internet for their bike for a month or two. Doing so for more than that would be unusual.

An expensive stolen bicycle might even be thrown in the back of a truck and sold in another state. Swapping out the parts on an unusual bike might make it even harder to identify. And if you’ve got a shed full of bikes you got for free, a bit of mix and match wouldn’t be hard to do.

Apparently the one thing you can do that might change the trade-off depicted in the graph above is engraving your bike. If you put your drivers license number onto the frame somewhere, it can checked if the bike is sold. That might deter thieves. (Although exactly how you would engrave a carbon bicycle, I’m not too sure!)

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