April 2015 – Thomas the Think Engine

Ten typos on The Age website’s front page this morning.

They say people who live in glass houses shouldn’t throw stones. I say, but I’ve amassed a small pile of rocks! What else do you expect me to do with them?

I subscribe to The Age. Mostly I forgive the mistakes that plague the website. But today I decided I’d do a quick count of screw-ups, and found more than I expected. Just scanning the front page, without even clicking on an article, I got to ten. There may be more.

Here they are, from bottom to top.

The sports section was quite clean. Headlines get to be quirky so we will let ‘Mayweather looks to cash‘ slide by. Let’s also assume that Adelaide’s sensation six were touchy-feely, not sensational.

The lifestyle section has also done an okay job. But the headline on the “ghostly” photos story has a redundant apostrophe-s in that’s. This one is especially galling as that is not breaking news. It has been in the fluff section for several days.

The Entertainment section looks to have been partly scrubbed by a sub-editor. I’m guessing the original headline was “Are Block couple our biggest TV winners?”

A vigilant sub-editor has decided couple is a singular entity, changed Are to Is and left winners dangling there. Wrong. I’d permit: “Is block couple our biggest TV winner?”

Also, is it possible the sub-editor is Russian? That might explain why Le Nevez is breaking “the hearts“, not just hearts.

The property section is almost a frenzy of typographical misadventure. “Way in“?? That’s the only one on the whole site I can’t forgive (the expression is weigh in).

Special mention to auctions results (should be auction results), and sets in the sentence ‘Reserves were smashed as renovation show sets a surprise television record.’ (It should be set.)

Let’s ignore the capitalisation of the word eggplant, and focus on the headline that left the Philippines newspapers. It presumably left them looking foolish before an editor changed the second half of the sentence. Now the publication that is “just wrong” is The Age. The best resolution I can see is It was a dramatic headline in Philippines newspapers but it was just wrong.

The best news gets rushed out, and as such the top of the page is where most typos are found.

On the right, might the “Nepal man” be Nepalese? Or is it supposed to be Nepal: Man pulled alive from rubble?

The write-off for the political story is also quite a cliff-hanger. “… with one MP saying.” It raises all sorts of questions, especially who and what?

There are also two full stops on the write-off for the second story.

Does all this matter?

The enlightened reader knows they are at a newspaper to get meaning. Some people are very forgiving of typos, although they tend to be journos themselves! These typos are not so bad that they affect the meaning of the sentences they appear in. Shouldn’t we just accept them as the price we pay for fast cheap news?

The problem for newspapers that have sacked in house sub-editors and outsourced/off-shored sub-editing is that typos still matter to some readers. Research suggests typos erode trust.

This comment on a Crikey story is typical of reader attitudes I encounter. (Although not devoid of mistakes!).

“Apart from typos. and homophone errors, there is also the utter failure to write grammatically correct sentences which often means having to reread something several times – a) what was written, b)what was, possibly/probably meant, c)what the journo. thought they meant and d) asking the budgies if they mind such drek being put into their cage – the cat now refuses to use its tray with SMH liner and goes out to the garden even in the rain.”

This is an economics issue – sometimes an entity needs to invest in costly signalling techniques that don’t directly add value to users but help form their beliefs. It’s like McDonalds cleaning their front windows – it makes you think the kitchen is clean. It’s like showing up to a job interview with shiny shoes. It’s like a lawyer getting a gold-embossed business card.

Investing in these ancillary items all signal that the product in question is of high quality.

So it is not helpful that there is even a whole Twitter account devoted to Fairfax typos.

Dear ~~reeders~~ readers. I know most of you are typo tolerant if you frequent this blog. But do you think major news sites have an obligation to be typo free? Share your thoughts below.

ALSO: $10 bounty if you find a typo in this blog post! I’ve tried my best to be perfect!

Meep meep! How house prices got away from us.

The Governor of the Reserve Bank is a bit like Wile E Coyote.

He keeps buying more ACME house price growth dynamite and it keeps blowing up in his face.

Video link

After months of trying to talk down housing prices, Sydney house price growth has hit a new record pace. Meep meep!

So this week the Governor opened up a new ACME vocabulary pack, applying the word “exuberant” to house prices in Sydney.

At the RBA, this word would have been behind glass, marked “use only in case of emergency”. Exuberance, in financial circles, is a word that goes along with irrational.

Remember, the RBA Governor’s job is to be exceedingly sedate. Markets hang off his utterances. One unforseen word in a statement is enough to cause a front page story, and if he makes a joke, well, there’s trouble.

For him, using the word exuberance is a bit like anybody else going down to an auction in Marrickville and self-immolating as an excitable crowd bids a 2-bedroom flat up to $5.5 million. It means he’s serious.

But at the same time, he keeps cutting interest rates. That’s maybe necessary as the economy is so crappy at the moment.

But it drives up housing prices. There’s a bit of schism in property commentary, with a lot of chat about immigration and land availability, and less about how much people can borrow. We should never forget: the market for housing is as much credit as about land and structures.

While land is hard to get and housing construction has been more expensive during the mining construction boom, credit markets are loose as a goose.

Okay, you could have got a cheaper loan back in 1967. — Last time you could have got a cheaper loan was back in 1967. [RBA data]

Let’s look at how interest rates make a difference.

If you borrow $400,000 at the current standard discounted home loan rate of 4.8 per cent, you must pay back $687,597 to the bank over 25 years, in 300 payments of $2,292. That’s 42 per cent interest, 58 per cent principal.

If you borrow $400,000 at the average standard home loan rate of the last two decades (7.3 per cent) you must pay back $872,013 to the bank over 25 years, in 300 payments of $2,907. That’s 54 per cent interest, 46 per cent principal.

The repayment is 27 per cent bigger if and when rates go back up. You’re going to want to be richer to pay back that 400k loan then.

Do we see wages rising fast enough for that to happen?

Not really. Wages growth is a miserly 2.5 per cent annually, just one per cent above headline inflation.

It’s also worth noting many house purchases are not funded with wages alone, because they are investment properties. If mortgage repayments rise, will landlords be able to raise rents? Not if those renters aren’t also enjoying pay rises.

If investors start selling those homes, it could start a rush.

However, In New Zealand, the Reserve Bank has started raising interest rates, from 2.5 per cent to 3.5 per cent. And house prices are still rocketing in Auckland. So simply starting to raise interest rates won’t be enough to trim house price rises. Rates will need to hit a threshold where they start to sting.

That threshold may be some way away, but it surely exists.

Is $340 million a good price for cancelling a road?

The Victorian government today cancelled the contract for a road, and agreed to pay the winning bidder $340 million for their trouble. Is that a good deal?

Prima facie, $340 million seems a lot.

Despite that the reaction to the deal has been positive, with people describing the deal as a good one.

I remember writing a piece back in September, joking that the compensation could be as much as $500 million!

“I can imagine Lend Lease and the infrastructure minister sitting in a room right now, amending the cancellation provisions. $100 million? Why not $500 million? … We rely on their good citizenship not to do so. A flimsy protection indeed.

At that stage a payout of several hundred million dollars seemed ludicrous. The reason it now doesn’t is due to a psychological effect called framing.

Framing is why restaurants put a $50 steak on their menu, why apartment developers put a $2 million penthouse atop their building, and why TV marketing channels say their $9.99 item is a $20 item at 50 per cent off.

In each case, the context of a higher price makes the smaller sum you are about to pay more palatable. Some excellent work on framing has been done by Nobel winning economist Daniel Kahneman.

The former state government, by including in the contract a kill clause providing for a payout of over $1 billion, made the eventual payout look small.

@jasemurphy I recall some members of (now) opposition shrieking it could cost $1.3b. Turns out their framing has made govt look better.

— Michael Bell (@Xtrackka) April 14, 2015

$340 million could pay for a lot of trams

If we try to analyse the $340 million payout without $1 billion ringing in our ears, how does it seem?

The Sydney metro cost the NSW government $130 million to cancel. But that’s a different kettle of fish. They got further down the track, including buying up property.

Melbourne’s contracts existed for only a month before the government changed and the future of the project was put at risk. If the consortium spent a third of a billion dollars in that month I am impressed at their efficiency. If they spent it after the election, I am shocked at their boldness.

As for bid costs? One failed bidder, Leighton was reimbursed $12 million. In the Sydney Metro, one bidder spent $22 million and described that as “really big.”

So the $340 million dollars is probably not all costs. More likely, most is compensation – probably dressed up as costs plus a “fair markup”.

The reason it is not called compensation is that suits both sides. Labor leader Daniel Andrews looks like a master negotiator, and the companies – at risk of seeming to be blackmailing the state – look reasonable.

bike freeway — The Eastern Freeway running smoothly.

We should be angry at paying so much. The payout goes straight to the consortium’s bottom line. The longer the project ran, the higher the chance that the consortium made a loss. Cutting out early guarantees that won’t happen. Despite the high volume whining, this outcome has its upsides for the consortium – it banks a profit and puts its engineers onto another project.

Is this good bargaining by the state Government? I don’t know. The consortium seemed to have a great legal position. But the state government actually holds a pretty big stick. They could whisper that companies involved in demanding compensation will never win a bid in this state again unless they pull their heads in. Hopefully they bargained hard, but we shall never know.

Emphasising that these public monies have been wasted – ultimately our money that we paid in GST – is not an exercise in blaming the current government.

Their efforts – however imperfect – are absolutely glowing examples of good policy compared to the previous administration’s deliberate sabotaging of the state of Victoria. Including the kill clause is a stain on their legacy that should be remembered for a long time, and they must bear the blame for the size of today’s compensation package.

Should businesses get compensation when policy changes?

Do businesses really think policy never changes?

The way they act when a change is proposed makes you think they never realised democracies worked like that.

The mining industry would have us believe a mining tax on surging profits was impossible to anticipate.

The car lease industry feign they never dreamed the law might remove their favourable tax treatment.

The steel makers pretend charging for carbon was completely inconceivable.

The tunnel-makers insist they couldn’t foresee a world in which their tunnel wasn’t wanted.

Businesses who stand to lose from policy changes kick up a fuss about how they’ve been blind-sided. All too often we are taken in by their sob stories. And we retreat from making policy changes we want.

Is this pretending part of the cut and thrust of political debate? It surely is. And yes, we can still make change over the sounds of protest when we really, really need to. For example, the government reintroducing fuel excise levy indexation.

Furthermore, change is costly. If we changed the rules every five minutes, that would make life hard for everyone. There has to be a balance.

But the pace of change in our society could be too slow if we take every business complaint at face value. Many business models depend on the status quo. This graph is a mock-up of why they might defend that status quo, and why that might be less than ideal for society at large.

costs of change — The horizontal axis shows rate of change. Think of that as bills passing the Senate. The vertical axis shows the payoff.

This graph shows a world in which policy change happens too slowly if we let businesses with an investment in the status quo drive policy.

So how do we bridge this gap? We want businesses to invest based on the current laws. But we also want the freedom to change those laws as soon as they are no longer useful.

I think there is a case for policy change insurance. That way if a law is changed that puts a business in the red, they can be compensated, but the taxpayer doesn’t have to be on the hook for it. If they don’t buy policy change insurance? Well they obviously weren’t too worried about that particular law!

Policy change insurance would be cheap to come by for laws that are rock solid. $0.01 a year would buy insurance against the government appropriating your land.

But if your business depends on something else, like funding for dodgy vocational education courses, then your insurance will be much more expensive.

tax reform constipation — An insurance company’s worst nightmare?

Prices in the insurance market would signal to firms what laws are more likely to change. Insuring against a one percent change in tax rates would be expensive. Insuring against a 20 per cent change would be cheaper.

That price signal should mean much less complaining when dubious programs are axed, and also signal to government which laws business honestly thought were steady. It makes both sides more honest.

The existence of this market should allow society to change its laws more often, if it wanted. In some ways I can’t believe it doesn’t already exist. You can buy Sovereign Risk insurance if you operate in especially heinous jurisdictions, but there seems to be nothing for Australia.

(Perhaps it doesn’t exist because there’s no actual demand? That’d suggest we put even less stock in the bleating of ACCI et al.)

Further savings would come to businesses because they could sack their lobbyists. Of course, the ultimate lobbyists in this new model would be the insurers. They would become the most conservative institutions in history. Every law change would rip money straight from their pockets Strict laws against political donations from insurers would have to be enacted. Laws would also have to ban former MPs from ever working for insurers, etc.

Does this model make sense? Are there any reasons why policy change insurance wouldn’t work? Or reasons why it doesn’t exist already? Is it just simpler for government to pay compensation instead? Is my basic thesis that the pace of change is too low completely wrong? Please share your thoughts below!

Why is Aldi so cheap?

I like Aldi.

It can be very very cheap. Aldi is selling this yoghurt at $6.99 for 18 tubs.

At Woolworths it is $9.25 for 12 tubs. That’s 98 percent more expensive per tub.

Similarly Woolworths is selling lamb rack right now for $44.99/kg.

Aldi is selling it for $19.99/kg.

How can they do it?

Woolies and Coles are famously focused on the cost of goods, pushing their suppliers to sell more and more cheaply. While Aldi has less buying power, it obviously negotiates hard too.

But Aldi is famous because it is extremely tightly focused on costs inside its own business.

aldi method — These numbers made-up to serve as an illustration.

The savings at Aldi come from a lot of things – visible and invisible – they do to keep costs down.

THE CHEAP WAY

One of the most visible examples is making you pay for a trolley. To get one you must insert a gold coin, which is refunded when you return the trolley. That way Aldi doesn’t have to pay young people to hang out in the carparks retrieving scattered trolleys.

That’s just one example of how Aldi makes life a bit more difficult for customers, in order to keep prices down.

You may have also noticed that they make you pay for plastic bags. Aldi has been doing that since before the Greens political movement took off (coincidentally, also in Germany), simply because it saves money.

They have only 900 core products on offer. Every item a supermarket stocks costs them money in managing supplier relationships, in accounting, etc. The small selection means small stores, which means less rent.

Similarly, you may have noticed that Aldi doesn’t have an “8 items or less lane” at the checkout, saving on staff. They also make sure products have multiple barcodes or enormous barcodes, so the check-out person needn’t fumble and fuss to scan the item.

aldi rice crackers — baaaaaaaaaar coooooooooooooode

Aldi often employs only two or three staff at the entire store. The guy with the mop could easily be the assistant manager. (They pay those few staff very well however, with assistants getting $23.40 an hour, and assistant managers $76,000 to $84,000.) The stores are open less than 12 hours a day (8.30am to 8pm), however, so Aldi spends less on labour and lights, etc.

Those are just the things you probably already noticed. There are also less visible things Aldi does differently.

They forced pallet-maker CHEP to invent a “multi purpose beverage tray” that can go from the factory to the truck to the supermarket floor without being unpacked. It can store 1.25L bottles or 2L bottles.

You spend less on shelf stackers if you don’t need to stack shelves.

Aldi also operates on a Just-in-Time system. Storing inventory is a big cost for businesses. Having goods arrive right when the previous batch runs out means Aldi spends less on behind-the-scenes space, and has less money tied up in owning stock.

Aldi also makes sure cereal packets, etc, are full. The trend to sell half-empty packets to convince consumers they are getting a lot when they’re not is incompatible with Aldi’s hyper-efficient supply chain. [source]

One other invisible innovation is especially welcome…

Unlike the major companies’ incredibly annoying jingles, you probably don’t remember seeing an Aldi TV ad.

Only a handful have gone to air in Australia – even having TV ads is pretty radical for this company. In fact, the only public statement company owner Karl Albrecht ever made was this one, in 1953:

“Our advertisement is the cheap price.” [source]

BROTHERS GRIM?

Aldi has been around since Albrecht brothers Karl and Theo took over their father’s store in Essen, Germany, in 1946. The name stands for Albrecht Discount and the thirst for efficiency goes to the very heart of the business. The brothers were famously ruthless, according to this article in German newspaper Der Spiegel.

“High-ranking executives would dig old pencils out of their desk drawers whenever one of the brothers paid them a visit, just to avoid causing any suspicion that they were wasting office supplies.”

Aldi’s maniacal focus on prices has had spill-over effects in Australia. An investigation by the ACCC found that prices at Coles and Woolworths were lower when an Aldi store was nearby.

Sounds good! But Aldi’s effect has been more complex than that. The lower prices at Coles and Woolies have caused problems with suppliers. And the deluge of home-brands those big supermarkets now own can be traced back to Aldi’s entrance into the market.

This clip from the excellent Mad as Hell shows just how the home brand revolution is working out:

Aldi must bear some responsibility for that. But it never had real brands, so it can’t be found guilty directly.

Reports suggest Aldi treats suppliers better than the big two. Could it be that having stable, simple supplier relationships is more cost-effective? Unlike the big two supermarkets, Aldi refuses to charge suppliers for shelf space and boasts it has very simple terms with suppliers, unlike Coles and Woolies.

PROFIT MOTIVE

Aldi claims it wants “to suck the profitability out of the [supermarket] industry in favour of the consumer.”

That’s pretty radical for a business in the current era. Most businesses are ultimately about shareholder value, not consumer value. It is likely Aldi’s claim is marketing spin. Likely. But not certain. Aldi is not a publicly-owned business, and if it wants to pursue goals other than pure profit maximisation, it absolutely can. Giving up on profits would certainly help explain the low prices!

The brothers who founded Aldi were famous for being billionaires – the richest in Germany. Perhaps their views on the merits of such wealth changed after one was kidnapped and forced to pay a ransom in 1971? It seems unlikely given the drive with which Aldi has expanded across Europe, the USA and Australia. And with the passing of the last brother in 2014, Aldi is free from their direct influence.

If Aldi changes, or makes a mis-step, it need not be the end of German discount retailing in Australia.

Lidl is ready to open stores in this country. Lidl is even older than Aldi and has reportedly opened an office in Australia and registered its business name. In the UK it has proved even more popular than Aldi, with a business model very similar to the Aldi model.

Under the pressure of a bit of direct competition, Aldi might become even cheaper.

Shoppers like me will rejoice. But whether that is a good thing will continue to be debated. Can supermarkets be run with even fewer staff? Will rumours of widespread unpaid overtime intensify? Might Aldi be forced to tighten the screws on suppliers just as Coles and Woolies have? Is there a point where your yoghurt and lamb is too cheap? Or is that idea a middle-class affectation?

Confession: I listen to the ‘golden oldie’ stations.

Confession time: I’ve started listening to the oldies stations more.

And Gold 104 is not the worst of it. I’m ashamed to admit Smooth 91.5 is pre-programmed in the car. I’ve even strayed onto the AM dial and enjoyed a few hours of Magic 1278, where the ads are for dentures and funeral insurance!

Is that smart and wise? Or a sign that I’m a total dork, with any remaining dregs of cool banished completely from my existence? Hmm… This seems like a question I can answer with analysis!

Is the optimal strategy to listen to new music, or to dredge the archives? We can break the question down by looking at a couple of models.

MODEL ONE

Let’s start by assuming music quality has only one cause – genius.

Genius is only going to come along at random.

And even geniuses are only at the height of their powers for a brief period.

Screen Shot 2015-04-10 at 10.57.03 am

In summary, music made with genius is uncommon.

It would be easy to have a year in which very little music is released that meets the standard of being genius. For example, 1986.

1986 songs

If you listen to stations (or listen to Spotify playlists, or whatever) that focus on brand new music, you get the cream of this month’s output brought to you.

But this could be a colossal waste of your time. While you’re fussing over Kendrick Lamar’s new album, To Pimp a Butterfly, you’re missing the opportunity to listen to works already validated as true works of genius, like Public Enemy’s It Takes a Nation of Millions to Hold Us Back.

Mr Lamar’s work stands out, sure. But only against the background of a light couple of months of releases.

Chet Faker’s song that topped the Hottest 100 last year is undeniably good. But is it better than any of the nine tracks on Prince’s Purple Rain?

There are 500 albums selected by Rolling Stone on their best albums of all time. Listening to each one just once would require listening full time for 25 days. Appreciating them would be a lifetime’s work.

As I read through the top 100, I see not just albums but even bands I’ve never heard of. As a music fan, it strikes me as a matter of urgency to take these recommendations on.

Looking at music in this way, it would seem crazy to listen to new music. And it would be crazy to even start a band.

boss — So, you’re planning on competing with The Boss? Let us know how that goes…

The longer history goes on, the more the stock of geniuses accumulates. The more the pile of amazing tracks and albums grows. And the chance of making a piece of music that compares well shrinks to nothingness.

–

This is the only outcome if we make the assumption that the only factor in music is genius. But that seems to lead to a stale and conservative outcome where new creativity is increasingly pointless.

MODEL TWO.

Let’s assume something different for a moment. Let’s assume the only thing that matters in music is learning. Each musician listens to the bands that go before them. They hear what works. They see what doesn’t work. They gather information and skills.

In this model, music is more like technology:

Pink Floyd are like a payphone, and Alt-J is your smartphone. The latter has absorbed the ideas in the former, and expanded on them.

You’d be silly to listen to the old stuff, because it’s all there – reflected, distilled, improved – in the new stuff. When you do go back to the old music, it seems like a pale imitation. Stevie Nicks sounds like an also-ran version of Lana del Rey that didn’t quite have the right stuff. Neil Young sounds like a shadow of Ryan Adams, etc.

–

To be honest, there are times when I have felt this – sometimes a band accused of being derivative is actually an improvement on the original. Sometimes technology is making possible music that would never have been heard before. But far more often, the new stuff is being hyped by the industry because it can make money.

CONCLUSION AND CAVEAT

So which of these models is Truth?

Once you break it down, the answer is the same one you’ve been learning since childhood. The same message carried by Goldilocks, the Buddhists and the Food Pyramid. You need a balance. Old and New. Listen to a bit of both!

Music is part genius, part accumulation and learning. And seeing the links between the old and new is fun. The best way to decide which venerated hero to explore next is by hearing your favourite new artist cite them as an influence. The best way to catch onto a new act is to see them supporting your favourite old band.

So I don’t just listen to Golden Oldies. I flick through community radio and Triple J in order to stop getting too crusty and stale. I particularly like Double J, which plays a mix of old and new (recently, AC/DC, Alabama Shakes, Sonic Youth, St Vincent.)

This is sometimes not easy – the risk as you age is in wanting to just hear music that makes you feel comfortable.

But if there is one thing that should tip the balance against bunkering down and getting settled with your record collection, it is this: If you want to go to live shows, you need to be across the new acts.

The Mowgli's — The Mowgli’s, as seen in Austin Texas in March.

Getting the most out of a live act normally means knowing a few of the songs in advance. If everything you like is from your youth (or before), shows will come round annually at best, be at arenas, and cost over $100.

Great moments in music come with a great act at a small venue. That act could top the greatest 100 list published in a decade’s time. And this is your chance to hear them first! That’s one reason at least to embrace something new.

Whether you start with Courtney Barnett or Taylor Swift, YouTube does a pretty good job these days of taking you on a tour of songs you wouldn’t otherwise have heard. Enjoy.

A way to expand the GST and make it less regressive.

A fair way to broaden the GST, collect more revenue, and avoid increasing the burden of the less advantaged would be to extend it to education.

Education spending shows more of an association with income than even alcohol, clothing, vehicles or holiday accommodation.

Screen Shot 2014-10-06 at 1.09.29 pm — Alcohol

Screen Shot 2014-10-06 at 1.19.07 pm — Clothing

Taxing education has the potential to make Australia’s GST fairer. Perceptions that it is unfair are a major impediment to reforming the GST.

The GST is regressive. (nb. I had to figure this out the old-fashioned way after being unable to find a single publication that contained this data.) Lower income households pay more of their (equivalised disposable household) income in GST than higher income households, according to my calculations.

GST current burden — Calculated using ABS 6530.0 Household Expenditure Survey, Australia: Detailed Expenditure Items, 2009-10; ATO GST rulings; 6523.0 Household Income and Income Distribution, Australia, 2009-10

Lowest income households pay 11.5 per cent of their income in GST (higher than 10 per cent because some spend more than they earn). Highest income households pay 8.7 per cent.

In absolute terms, this means the highest income households pay four times as much GST ($148/week) as the lowest income households ($36/week). They can do so because they have 5.5 times the disposable income ($1704 vs $314).

This is not quite as regressive a tax as I had assumed. The exemptions agreed by the Democrats and the Coalition in 1999 make a difference. Without exemptions, the GST would be even more regressive.The definition of a progressive tax is one where the rich pay more as a percentage of their income. Levying GST on education will not turn the GST into a progressive tax. But it moves it in the right direction.

Screen Shot 2015-04-09 at 3.32.33 pm — Those are percentage points on the vertical axis.

You can see the comparison a different way in this next graph.

The estimated revenue gain of taxing primary, secondary and tertiary school fees would be around $1.2 billion.

Two caveats remain.

One is pure politics. Education is seen as A Good Thing. Even though Australia would continue to provide free and universal school education, a decision to tax education expenditure would cause confusion and dismay. I wrote just yesterday about how insufficiently distinguishing sin taxes and revenue taxes causes trouble, and this would fall right into that trap. This government would also face the problem that its supporter base are more inclined to be patrons of private education. (I should note here that I am not biased against private schools, having attended one myself.)

The second comes to the exact question of fairness that prompted my investigation into how GST could simultaneously be extended and made less regressive.

The association between education expenditure and household earnings is not simply a matter of wealthy people sending their children to private schools. The period of peak earnings in a person’s life is also commonly in their 40s – the period where they have children in secondary school. In other words, the statistics insistence that education spending is a luxury good could be more of a life-cycle artefact.

Nevertheless, the same is true of many types of expenditure, and an opportunity to plug a hole in the GST – and do so fairly – is rare enough to be worth grasping.

Land Tax is having its annual meek and ineffectual resurgence. Can we give it some oomph?

Land tax is a great tax.

Just today, Treasury released a report that shows how much more efficient Land Tax is than all the alternatives.

I’ve previously argued that to promote land tax, we should emphasise that it is unavoidable. But I’ve gone cold on that idea.

It is true, but not a great argument when the government is going soft on tax dodgers. It simply encourages people to say we should enforce our existing taxes. [They’re right, we should. But we should have land tax too.]

Today the SMH economics guru Jess Irvine wrote a long and very welcome piece about land tax. But it conflated the hard-to-grasp concept of a low distortion tax with the easier-to-grasp concept of a tax that’s hard to “dodge.”

“Land tax is one of the most efficient taxes for precisely the reason it is unpopular: it is hard to dodge. They know where you live. You can hire as many accountants as you want, but it is difficult to hide that mansion in Point Piper.”

I found myself wondering why land tax is not on the agenda. And I think I’ve figured out why. The conceptual framework you need to grasp its benefits is not commonly shared. And you can see that by flicking to the hundreds of comments that followed the article.

The comments on the article were almost exclusively focused on fairness. Fairness is just one of the keys to good tax policy. Efficiency is the other. And there is a gulf of understanding between economists and the general public on tax efficiency, with economists to blame.

To get land tax out there you need to teach people why distortion is bad.

Economics students learn about a model of the economy like this: Trade is mutually beneficial. Taxes prevent trade. Therefore taxes prevent that mutual benefit. The amount of prevention (aka the distortion) is called deadweight loss.

The distorting effect of taxes is one of the great insights of microeconomics. It is counter-intuitive and hard to see, because deadweight loss is always a counter-factual. But can we transmit this flash of inspiration and insight from economics to the general public without messing around drawing supply and demand curves, or measuring utility?

A stumbling block is that the purpose of current taxation is so muddled.

We use taxes on “good things” to raise revenue. And we use taxes on “bad things” to change behaviour.

From observing the tax system, it may be unclear why smoking and working are both taxed. Does the government hate work?

The progressivity of the tax system – which I emphasise I support – doubtless contributes to this confusion. Being a low-wage worker, buying healthy fresh food and education attracts lower rates of tax. Being rich, buying luxury cars, eating at restaurants and making capital gains in shares attracts higher rates of tax.

It would be easy for some to see the tax system as a kind of moral agent, punishing bad behaviour and rewarding good. In this scenario, land tax makes no sense.

Explaining that taxes distort behaviour – but we want to minimise that! – is going to be a hard sell when the public sees we use taxes to distort behaviour all the time.

We tax all these things, and you want me to believe that’s because you want to stop some of these things, but you don’t want to stop others?

Fixing this will be hard. The terminology is a good place to start.

It cannot be helpful to use one word – “tax” – for both imposts on activities we actually want to encourage, like work, buying goods and services, making profits and owning land; and for things we actually want to discourage.

I’ll accept suggestions for how we could rename these taxes – Maybe they could be divided into Detrimental but Oh Well, it’s Necessary Taxes and Useful Pricing Taxes (DOWN and UP)?

This distinction would help plant the seed that some – but not all – taxes should be designed in a way that minimises distortion.

The journey to give land tax a fighting chance will be a very long one. The first steps in that journey will be to help give people the capacity to grasp why land tax might be desirable.

Melbourne: We should build apartment blocks on our green space.

Melbourne has too much parkland and we should build apartments where there are currently trees.

I am serious. But I am also going to add nuance to that statement…

People who care about cities agree surface carparks are bad. They are dead empty spaces that reduce density. They ruin walkability and limit the agglomeration effects you can get when businesses locate in close proximity.

Many of these same people gush about parks and would chain themselves to trees if I were put in charge.

But there are parks that operate just like carparks. They’re eerie, bleak and deserted. They add to walking distances between destinations. They’re antithetical to the basic function of a city, which is to put humans into contact with each other.

Not all parks are like this. Some are popular destinations in their own right. They are busy and valuable. But others are black holes in the universe of our city.

The biggest example of such a bad park sits right at the centre of Melbourne. Royal Park. It is clearly too big and as a result, it is largely empty.

When we compare the scale of Royal Park to another very large, famous inner city park, we can see that it is around 50 per cent wider.

Screen Shot 2015-04-07 at 10.03.13 am — Royal Park: 1.4km across.

Screen Shot 2015-04-07 at 10.02.54 am — Central Park, NYC. 0.6 miles or 960 metres across.

Royal Park and would take 17 minutes to cross on foot. It would take 8.5 minutes just to walk to the middle of the park, assuming you start from the very edge. If you lived 3 minutes from the park and planned to walk into the middle of the park, then home again, that will require at least 23 minutes of solid walking.

While we’re talking about New York City, it is probably worth quoting history’s most famous urbanist, New York’s Jane Jacobs. (Economics readers who haven’t heard of her can think of her as a sort of Adam Smith of urbanism.)

“In orthodox city planning, neighborhood open spaces are venerated in an amazingly uncritical fashion, much as savages venerate magical fetishes. Ask a houser how his planned neighborhood improves on the old city and he will cite, as a self-evident virtue, More Open Space. Ask a zoner about the improvements in progressive codes and he will cite, again as a self-evident virtue, their incentives toward leaving More Open Space. Walk with a planner through a dispirited neighborhood and though it be already scabby with deserted parks and tired landscaping festooned with an old Kleenex, he will envision a future of More Open Space.

“More Open Space for what? For muggings? For bleak vacuums between buildings? Or for ordinary people to use and enjoy? But people do not use city open space just because it is there and because city planners wish they would.”

Parks are an asset to a city. We can appreciate them by looking out on them. We can appreciate them by simply knowing they are there. But mainly we appreciate them by being in them. That’s their primary function.

An empty park is a failed park. These are not like National Parks, designed to preserve an eco-system for eternity. Royal Park is described by its defenders as bushland, but I’ve been to the bush and it isn’t. The modest scattering of trees were probably planted to hide how empty the place is. But it just makes the park more vacant seeming and less useful.

Central city parks should function for people. Design is part of that. Lighting is important. So is seating.

But the most significant determinant of how people use parks is proximity. Central Park has literally millions of people within walking distance. The shape of the park optimises the amount of people nearby – it is long and thin.

By contrast, Royal Park is almost round.

Furthermore, Royal Park is surrounded by other parks! (I’ve marked them in red).

A good park – a necessary park – is surrounded by people who crave access to parkland. Royal Park fails on this criteria.

The only times I’ve ever gone to Royal Park by foot, for reasons other than organised sport, has been in the company of people living in that small, highly-desirable sliver of Parkville on Royal Park’s east. By contrast, I’ve spent many many hours running, barbecuing, football kicking and frisbee throwing in Princes Park, which is basically across the road.

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#anzacday #kicktokick #melbourne #princespark #straya

A post shared by Jason Murphy (@jasemurphy) on Apr 24, 2014 at 10:26pm PDT

Why would the residents of the dense areas east of Princes Park cross it to visit Royal Park? They wouldn’t and they don’t. That starts a virtuous circle where Princes Park is lively and desirable. Meanwhile Royal Park’s grass grows long and few people notice.

I love parks and I think I have a feeling for what works best. Too small, and they are no fun. I lived in West Melbourne at one stage, and they only have those little pocket parks, built on old vacant blocks. They’re not very desirable to sit in, too small to kick a ball, and not big enough for a dog to run round in.

Screen Shot 2015-04-07 at 10.25.21 am — This park is about 600metres north-south, 500 metres across, and it is ALWAYS busy.

A good example of a successful park is North Fitzroy’s Edinburgh Gardens. Big enough to have a couple of football ovals in it, and surrounded by medium density housing.

So. With these ideas in hand, how would I fix Royal Park? I present below a fairly modest proposal to split the park along its north-south axis by building high density housing along the tram line.

With these red areas full of homes, Royal Park might finally have a critical mass of potential users. I’ve cut the supply of park only modestly – the vast majority of Royal Park is protected. But by simultaneously increasing the potential demand for this park, it might start attracting a lot more people to appreciate its very real charms.

royal park sunset — Sunset from Royal Park. It’s genuinely very nice.

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