First home buyers are off the market. The current share of 12.6 percent is around the lowest on record.
The 2000s, where first home loans grew really fast and were about as big as other home loans, looks like an outlier period, but so does the current (post-2009) period, where there is little to no growth in first home loan value
What’s happening?
I was surprised to find cutting interest rates is not helping. First home buyer shares have sunk as interest rates have fallen. On average, cutting interest rates by a percentage point cuts the share of first home buyers by three-tenths of a percent.
Rent is a significant factor. But it seems to work in the opposite direction to what I thought. In the long-run, as rents rise, the first home buyer share falls. I found a correlation of -0.39 per cent between rents and first home buyer share
Mean housing costs for mortage holders and renters in NSW, 2011-12 dolalrs
The whole thing looks like something of a mystery. But fortuitously, while I was thinking about this, a clue arrived.
The RBA released a big paper yesterday that said house prices are fairly valued, if you assume that house prices will keep growing at 2.4 per cent a year real (say 4.4 per cent to 5.4 per cent including inflation). That 2.4 per cent is the rate they’ve grown at, on average since 1955.
The paper breaks down some of the reasons for house price growth. At the moment, low rates are propping up growth, rather than expectations of appreciation, which are negative. When rates eventually go up, expectations about appreciation will have to change, or rental yields will have to boom, or house prices will turn downward.
The paper suggests that if you think house prices will grow at the same rate as GDP, you think they are undervalued, but if you think they will grow at the same rate as real household disposable income (HHDY in the chart below), you think they are overvalued.
There’s two more points I want to draw your attention to. The 10-year figure and the 30-year figure. If you are in the market for a first home, you may have focused on house-price growth in the last ten years, and see house prices as about 20 per cent over-valued. Hello first home buyers.
If you’ve focused on them across the last 30 years (Hi Mum and Dad) you might still see houses as 20 per cent undervalued.
This is no doubt an overly neat explanation, but it must go some way to explaining first home buyer reticence at this time of record low interest rates.
Uber must be very confident in its continued growth. Because it has just alienated its early adopter crowd in order to appeal to the mass-market.
Uber functions a bit like AirBnB but matching passengers with cars. It’s an app uses limo drivers and non-professional drivers to increase supply at reasonable prices.
To say it has been successful is an understatement. A recent funding round valued it at $18 billion.
But Uber’s PR strategy has been an unusual one. It has gone out of its way to appeal to economists.
Traditionally, taxis charge the same fare no matter how many people are in the taxi rank. The whole industry is a byzantine mess of regulations. But Uber is much less regulated and has a wholly variable pricing model.
The wildly variable prices should help get cars on the road when they are needed, and make sure people who really need a ride (about to miss a flight, on way to hospital) get a car ahead of those simply heading into town to window shop.
A high-price sort of time.
They also worked as a terrific PR boost. Every economics blogger and every financial newspaper there is has been writing excitedly about Uber for years. (1, 2, 3).
That may have been a side-effect of a revenue maximising strategy, but it worked very effectively. Uber’s aggressive expansion into a whole lot of markets has been welcomed – a lot of regulators, political advisors and decision-makers *are* economists.
But now, surge pricing is done. After a whole lot of complaints, New York City has forced Uber’s hand, and it has got rid of surge pricing during emergencies (e.g a blizzard) across America.
Is this rational?
It might be. Uber’s market is not economics graduates, it’s humans. And humans love what they see as fair. To defend fair, they are not afraid to cut off their nose, seemingly to spite their face.
Surge-pricing was seen as unfair. Killing it is a sign of Uber’s expansion.
It is now in the business of appealing to people whose interactions with markets are shaped by their own feelings, not the things they learned in economics class. It is time to take complaints about surge pricing (“price-gouging”) seriously.
This chart shows a ratio of stock prices to company earnings. It shows that prices sometimes get well out of line with earnings and the market can’t sustain that.
How can this happen?
As anyone who has played monopoly knows, the more times people pass Go, and the more money in the system, the higher the asking prices for trading properties.
The same thing can happen at a much bigger scale. The more cash in the global economy, the higher asset prices are.
Here’s evidence that cash is swilling around in the global economy like burger wrappers in the passenger footwell.
The Greek government can now borrow money at 6 per cent. In 2012 they had to pay over 30 per cent. That’s how much cash is lying around. Even though Greece’s problems remain dramatic (e.g. 27 per cent unemployment), money managers are happy to give €€€€ to the government. Similarly in Spain, where unemployment is 25 per cent, bankers are happy to lend money to the government at the lowest interest rates since 1789. Seventeen. Eighty. Nine.
You can also spy the global economy’s excess cash in the way Facebook is buying things like WhatsApp, for $19 billion, and in the near-record valuation of Apple even as iPhone enthusiasm is being studied by historians.
“Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.”
Australian stocks have rallied hard in the last two years, and here’s a chart of Australian house prices, just to show that our assets are not immune.
Global markets have not got to this point without a reason. The billions pumped into the economy by central banks doing quantitative easing explains the surplus cash.
The United States is now planning to stop its five-year quantitative easing program, this October.
The billions a month it “printed” will cease to arrive at the banks and they will have to go back to more old-fashioned ways of finding capital.
Then, we find out if economic growth can catch up fast enough to make all those high prices make sense, or if everything crashes.
Plummeting asset prices in North America and Europe would hurt us, no doubt. But a fall in China has already begun and that simultaneity would be the worst case scenario.
I’m an educated citizen in a democratic country. I live in an electoral division that could be won by a couple of parties. I have free speech and a twitter account. I’m enfranchised and privileged.
But right now I feel absolutely powerless.
I want to stop cruelty being done in the name of Australia. I want to help people who need help. I want to treat asylum seekers with compassion.
But I feel like I can’t.
I sit here in front of my high definition internet, reading about boats full of desperate people bobbing around in the tropical seas, and I can’t think of a single thing to do. And I am as angry, if not angrier, than I have ever been.
My taxes pay for the drones that go looking for asylum seeker boats to turn back, for the barbed wire that surrounds those that already slipped through, for the immigration officials that make the policy tick, and the elected officials who set the whole thing in motion. I can’t think of anything more infuriating.
Why so cruel?
The idea that we can prevent future asylum seeker boat arrivals through cruelty to asylum seekers who already left was always a grey area. A very dark grey area.
It’s not unlike the medieval idea that you prevent social decay by cutting off hands and stoning people. It seems to be the ends justifying the means – and ignores a strand of enlightened thought that goes back a long way (esp. in western christianity) suggesting we should be merciful to the weak.
But the philosophical objection is not as powerful as the practical. The arrival of two boats recently shows that our regime of deliberate cruelty is not even working.
I went to a protest on Saturday, to say at least something about the current government’s policies. It felt utterly impotent.
There’s a lot of policy in the world I disagree with, but very little – not even public transport policy! – that gets me into such an emotional state as the way my name and tax dollars go to mistreating asylum seekers.
It’s unfair and I feel like there’s nothing more I can do.
Powerless. This is how much of the world feels, I guess.
I went to the Melbourne Institute economics conference yesterday and heard Joe Hockey speak at lunch. He’s not bad on his feet. Even when he’s not across the detail, he bluffs well. He seems likeable and projects passion.
But he said something I couldn’t quite believe.
“Let’s face the reality. Unlike our parents, our generation and the ones that follow will not be able to afford a house in a capital city on just one income.”
This little message came in the middle of a spiel about how the paid parental leave scheme would pay women to raise kids. I wondered if it was a slip-up. But no. He said it again later.
“Try living in any capital city in Australia on just one household income. It’s nigh impossible. But the mortgage still keeps coming in. And the bills still keep coming in.”
While this matched my own experience quite neatly – I don’t own a house and wouldn’t consider buying one without going halves in it – I doubted a Treasurer should accept it as a fact.
But perhaps the problem is too far gone. Here’s a table I made that shows who might be able to afford what.
But perhaps the problem is too far gone? Here’s a table I made that shows who might be able to afford what. (The cheapest house I could find in Melbourne was this one bedroom unit in Noble Park for $160,000.)
The average house (~$550k) is unaffordable on the average wage
When lone-person households are our fastest growing demographic group, making up 24 per cent of Australian households, and single parent households are raising over a million children (961,000 single parent families representing 15 per cent of all families), house prices rises seem less like a boon to the economy and more like a social welfare disaster.
Systems that permit stability of tenure for renters should be introduced as a matter of urgency. Housing affordability is at least partly a policy question. As a starting point, Treasurers should talk about low housing affordability as a problem, not as a fact.
I’m venturing out of the house today, to bring you the blog from the glamorous surrounds of the Grand Hyatt, where the annual Melbourne Institute Economic and Social Outlook conference is taking place.
Say what you will about the state of our nation, but the fact we can gather all these eggheads into such an opulent ballroom to ponder on the distant future suggests that things are not so bad, relatively to many other places and points in history. (I will note that I had to pass a phalanx of police to get inside though.)
The biggest point of interest for me so far today was a comment from renowned contrarian economist Warwick McKibbin.
He was talking about the policy outlook for climate change, and he made a strong case for action. “Even if you don’t believe in climate change, other countries are acting,” he said, citing research done for the Howard Government at the time of the Kyoto Protocol.
“If you look at global effect of the Kyoto Protocol on Australia, 80 per cent of its costs were in what other countries did to our exports.” he said.
“That was ignored,” McKibbin said. “Even if we think this is a myth, other countries are taking action and that will have an impact.”
With the carbon tax all but gone and the Renewable Energy Target at risk, the costs of an approach that see Australia out of step with the rest of the world deserve more attention.
Congestion charging is, I think, an urgent public policy priority. But it is wildly unpopular. This post is going to look at how we can change the way people view congestion charging.
1. The Problem:
Congestion charging makes people very angry. Charging to use a road is widely regarded as “unfair” and it doesn’t seem to matter that society charges for lots of other necessities, including food and water.
“Not only do voters not want to pay congestion fees because they’re now paying for something that was free, they also understand that they’re basically being punished for going to work. What if you make a low wage and already making ends meet, and now, you have to shell out an extra $X a month just to get to work? No, congestion fees won’t work.” – gfish3000
“The politicians, who don’t really care about serving the public, will get extra (congestion fee) $$ for NOT doing their job, namely, providing an infrastructure (roads) for us to go about our business.” – Force Meow
“The other thing is that making use of an automobile more difficult hurts the poor the most. I have a problem with that.” – Tim Johnson
These objections fall into two main categories: 1. congestion charging hurts the poor, and 2. congestion charging lines someone’s pockets.
These arguments may or may not be true, but refuting them isn’t the goal. Changing the dialogue is.
Here’s one comment I quite liked:
“soccer mom making me late for dinner so she can take snowflake to ballet practice can foot the bill” – Bob Dobalina
There’s some feeling there. Some hatred. Something we can use.
The reason congestion pricing is so unpopular is people imagine it applying to themselves. It’s only if you imagine it applying to others that you see benefits.
A PR campaign for congestion pricing would show the real reasons for a traffic jam, like this:
This would help drive home the point that a lot of trips are low value, and so even a small congestion charge would be effective in deterring them. Survey data on whether peak hour trips could easily be delayed would underpin such a campaign.
I can imagine a TV ad where a stressed driver is stuck in traffic. A counter clicks up the congestion charge from $0 to $1 in 10¢ increments and the cars around gradually disappear, leaving our busy mum to get home from work speedily.
Promoting the understanding of congestion charging is complex. People need to grasp the reasons for it. When they think about annoying traffic, it is probably easiest to call to mind times when they really must get to their destination, as on a trip to work. We assume everyone is equally frustrated. But commuting does not even account for half of trips.
“Commuting to work constitutes approximately 16% of all person trips and 19% of all person miles of travel. For roadway travel, commuting constitutes 28% of household vehicle miles of travel and, for transit systems, 39% of all transit passenger miles of travel.” (US DATA)
The case for congestion charging needs to be built from the very beginning. That means seeding the (true) idea that the road is full of people that needn’t be on it.
Much like the terrific 1980s behaviour change advertisements featuring Wallies with Water, we could have Trevors in Traffic – people who drive across town at peak hour to go to their beach house, or to listen to some drive-time radio, who get in the way of everyone else.
I remember reading about a behaviour change campaign to get kids to wash their hands. Rather than starting with facts about soap, they started with an ad that dramatised germ transfer. Everything the main character touched after leaving the bathroom turned green. Understanding the problem (even in a stylised way) came first.
If you can make people believe that a share of traffic doesn’t deserve to be on the road, they will be more open to hearing about a solution.
Building more roads will not solve congestion. It only moves congestion around. A scheme that targets the actual problem is an urgent priority before we waste more time and effort building bridges and tunnels.
As of today, there are 10 teams left in the World Cup, and Brazil is favourite. Never mind that they have won just two of four games so far (in regulation time, not including the match they won on penalties), and conceded goals in three matches (including an embarassing own goal.)
In fact, Brazil’s two wins, one draw, and one win on penalties is equivalent to Costa Rica’s performance. But nobody thinks the Ticos will win.
Here are the odds as presented by Sportsbet.
Germany, who have won all four of their matches, surely look to have better form than Brazil. France too.
Colombia, who have won four matches, scored 11 goals, conceding only two, would appear to be in even better form. The team ranked eight in global soccer at the start of the tournament doesn’t seem to be high on anyone’s list.
So why is everyone backing Brazil?
I propose that a cognitive bias is affecting prediction markets: The availability heuristic. The heuristic is that if people can imagine something clearly they believe it is more likely. The most famous proof for the availability heuristic goes like this:
“In one experiment that occurred before the 1976 U.S. Presidential election, some participants were asked to imagine Gerald Ford winning, while others did the same for a Jimmy Carter victory. Each group subsequently viewed their allocated candidate as significantly more likely to win.”
What’s available to our minds when we think about Brazilian football is scenes like this, from 2002:
And what comes to mind when we think of Brazil hosting an event is scenes like this:
Carnivale!
Rio is synonymous with celebration. Can you really call to mind a picture of Rio de Janeiro full of glum Brazilians moping? Neither can I.
The availability heuristic probably means teams like Brazil are over-rated (the same to a lesser extent is likely true of recent World Cup finalists France, Germany and the Netherlands.) So should we let that affect our betting? Probably not.
But there is one exception.
We must acknowledge that referees play an important role in deciding the outcome of Soccer matches. Dodgy penalties come at crucial moments, like the one awarded to the Netherlands to effect their defeat of Mexico.
So if, with scores tied, a Brazilian player sprawls on the turf inside the penalty area in the 90th minute of the World Cup final, the incredible surge of noise inside the Maracana could well blend with the availability bias inside the referees head, and encourage him to point to the penalty spot.
If that happens, the team in green and gold will get to hold the trophy aloft, and all this lofty pontification about controlling predictions for cognitive biases will have been a waste.
When I started studying economics I was 17. Young enough to be arrogantly skeptical of everything I heard. One of the many questions and concerns I had as I chomped through the stale bread of first-year economics was why we would believe that firms in competitive markets would put all their efforts into producing at lowest cost, when they could instead put their efforts into deterring competitors.
What was assumed away in the basic competitive market theory we were learning was that firms will fight hard to protect their space. Few firms operate in the unrestrained markets where they live and die red in tooth and claw. Far more operate in spaces where competitors are kept at bay, by owning a key resource (Telstra, Rio Tinto) or by making sure regulations operate in their favour (Woolworths, Commonwealth Bank). Their operations are run with an eye on costs, sure, but also with an eye on the competition.
Competition matters. Western countries run relatively unfettered capitalism because the prediction of competitive market theory is that capitalism will deliver more happiness, more efficiently. But competition is a key input to that theory. If competition falls short, we must question whether relatively unfettered markets are serving us best.
Some new research from the United States shines an important light on competition.
How America Became Uncompetitive and Unequal is a Washington Post op-ed that summarises a great body of work from non-partisan think tank the New America Foundation. It outlines how mergers and market power see prices pushed up and looks at how firms use their power to suppress workers’ wages.
“While dwindling competition hurts the vast majority of Americans, for the well-off it often proves a path to huge payoffs. Indeed, it has even become a basic formula for successful investing. Goldman Sachs in February published a research memo advising investors to seek out “oligopolistic market structure[s]” in which “a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.” Goldman went on to highlight a few markets, including beer, where dramatic consolidation over the past decade has enabled dominant companies to use their market power to extract more from suppliers and consumers — and thereby enrich investors.”
“The lack of competition in America inhibits dynamism and risk taking. A New America Foundation study shows that the number of job-creating businesses that Americans start every year fell by 53 percent between 1977 and 2010, when measured as a proportion of the U.S. working-age population.”
I’ve dived into the ABS figures to see what Australia looks like on the same issue. We don’t have as much historical data as America, but the numbers are just as striking. While Australia is home to ever more businesses, the number of businesses per person has fallen from nearly ten to closer to nine.
The explanation for this is in the willingness of Australians to open businesses. A decade ago, 900 new businesses were registered every day. Now it is under 700.
Bu
This is not necessarily a bad thing. If people can have employment without risking their house on a business idea, then perhaps that’s a good thing. Perhaps something has changed in the economies of scale that mean our economy runs on fewer bigger businesses now.
But the coincidence of rising inequality(1, 2) and higher market concentration makes the application of vigorous competition a huge priority for Australia. If rising inequality is explained by markets becoming more cosy than competitive, that is something we should act on as a matter of urgency.
Competition is something both left and right should be able to get behind. The only people who support market power are plutocrats who grow fat on the cream churned up by insufficiently competitive systems.
Apple’s chance of first-mover advantage is zero. The smart watch market is already quite busy. Samsung and Google have products out. So do others.
smash misses.
None is making much of a splash.
We have a vision of tech breakthroughs as being radical new inventions. But really they stand on the shoulders of others.
Here’s a little extract from an email I got in April 2005, when facebook was still mainly for ivy league students and working on attracting early stage investors.
“I actually don’t know what this Bebo service does, but it looks like some of you are ‘existing members’ so I’m assuming it’s a good thing I need to get on the band wagon with.”
I joined Bebo. I can’t remember if I joined Hi5. I definitely didn’t join MySpace. But I thought about all of them and dismissed their usefulness long before I …
Apple is betting that its smartwatch will be like facebook. That it will enter a market that has been a graveyard for competitors and make them look foolish. You wouldn’t bet on any company that wasn’t Apple being successful. And the Apple of 2009 might have been able to make a smartwatch into a runaway smash hit. But is 2014 Apple equally savvy?
There are clues that the magic began to evaporate when Steve Jobs passed away:
Investors are betting that the combination of fitness monitors and mini-notifications in the smartwatch will be just right. That it will click with the zeitgeist and zoom away until tehre are two types of people. Those who have an iWatch, and those planning to get one.
But when a product already exists in the market, you have to really nail your version to capture the market. That’s an art, not a science, it requires judgment in the 99th percentile, not the 98th. There is evidence a company like Apple can continue to be good for a long time. But can it be very very good? I doubt it.
The iWatch may not turn out not to be a facebook. It could be a hoverboard.
Something from science fiction that is possible to produce, but turns out to have severe limitations.
Not like this.
If that turns out to be the case, the iWatch will be a niche product and eager investors will lose a lot of money on Apple stock.
The World Cup has dozens of sponsors. Companies like McDonalds, Sony and Budwesier, with a combined value of trillions of dollars. Are they wasting their money?
The biggest PR win of the World Cup so far has been by headphone company Beats by Dre.
They got stacks of press when players were banned from wearing their products in the arenas, with FIFA citing Sony’s sponsorship as the reason. (Press examples: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10...)
Here’s the lead from the original Reuters story:
“Neymar likes them Brazil-green. England’s Wayne Rooney, white. Luis Suarez, blue.
Banned from the pitch by FIFA for licensing reasons, the bulky Beats headphones are a favorite for many of the world’s top players, making the World Cup a huge unofficial ad for the company acquired by Apple Inc last month.”
The message is clear: players that are idols to kids around the world really want to wear Beats Headphones – if only the powers that be would get off their back! Somewhere, a PR agent is looking at a payslip with the biggest bonus they have ever seen.
“The company gave hundreds of young women skimpy orange Bavaria-branded dresses before a match between the Netherlands and Denmark. When the women were ejected and a number were arrested under South Africa’s Contravention of Merchandise Marks Act — an anti-ambush marketing law passed in advance of the country’s World Cup — the reaction sparked an international backlash that brought the company loads of free media attention.”
McDonalds is a major sponsor of the World Cup, but appears to be trying to run an ambush marketing campaign anyway, by making tie-in products with names they could have used even without buying a sponsorship.
Wasteful?
Coke and Pepsi are also battling it out for pre-eminence. Pepsi’s Rio-based ad shows that no matter how much you fence off a sponsorship, you can’t own the concept of football, the town where a tournament is based, or the personalities that bring it to life.
Formal association with the tournament means dealing with FIFA – nothing to be proud of. Meanwhile, being associated with Lionel Messi is unambiguously good marketing.
If I were a shareholder in McDonalds or Coca-Cola, I’d understand. These are massive legacy brands that don’t want to yield an inch to competitors. But for the likes of Sony, Hyundai and Adidas, the decision to sponsor reeks of timidity and a lack of creativity. If they can’t think of a better way to spend their marketing dollar they should probably save it instead.
Melbourne’s weather is poor. It rains often. The city is huge – 100 km from edge to edge – and vast swathes of it are covered in the kind of densely packed contour lines that make cyclists legs tremble.
In winter, Melbourne’s cycling community shrinks by over a third.
On days like today I suspect the number of cyclists is far smaller.
In short, Melbourne will never be the sort of city where 50 per cent of trips are possible by bike. Cycling (and walking) will never ever do the “heavy lifting” in our transport mix. That role will always be split between public transport and private motorised transport.
At the moment, the mode share split between these three is:
Source: 2011 census
And the trends are these:
Cycling is growing fast, more than doubling in eight years.:
The data is tough to aggregate, but one estimate is that roads get four times the investment of public transport.
All the modes are growing. How do we decide what the data means? And why not let the market decide what modes live or die?
The answer to the second question is that transport is going to be a centrally planned space until we can charge users per kilometre.
Public roads built to accommodate cars push the whole investment process into the world of “second-best.” If subsidising roads is a given, subsidising public transport can be efficient. Subsidising public transport makes policy makers wonder if there are other, cheaper ways to move people around, like bikes.
So if we’re going to be centrally planning our transport mix, we must ask: do we like the current 78/17/5 mix?
I’d argue we should not. I’d argue we should be aiming to grow the share of modes that have fewer negative externalities and greater returns to scale.
I’d hazard a guess that for Melbourne, 10 per cent share evenly split between walking and bike, 30 per cent for public transport, and 60 per cent for cars would be optimal.
Does that mean we should start spending 10 per cent of infrastructure funding on active modes, 30 per cent on public transport and 60 per cent on cars?
Only if we want to move very very slowly.
Infrastructure lasts a long time. That means the stock of existing infrastructure is the single biggest determinant of infrastructure in five years time. Marginal changes in expenditure rates affect outcomes only very gently. If we want to effect change, we need to tip the scales massively in favour of the modes we want to grow, in the short term.
In the short term, we could probably usefully spend 60 per cent of the transport infrastructure budget on public transport and 15 per cent on active modes. If we did that for a few years, we would move swiftly towards the outcomes we want, before returning to a “maintenance” split, where expenditure is based on usage.
Spending even $500 million a year on bicycle infrastructure might seem like a lot when the recent budget has been around $30 million. But when you look at what passes for “bicycle infrastructure” and imagine replacing it with global quality bicycle infrastructure, it would be a drop in the ocean.
“Bike boxes” were the sine qua non of Melbourne bicycle infrastructure innovation just a few years ago.
I don’t imagine gold-plated bicycle infrastructure should go everywhere. Far from it. Cycling infrastructure should be optimised in the areas where cycling can thrive, likely to be areas that already see some bicycle traffic. Fixing missing links, creating Copenhagen lanes on major on-road routes, plus widening and lighting off-street bicycle paths would be the top three priorities.
If we want to increase the share of some modes, we need to be bold about throwing money at them, and not be afraid to acknowledge that such a move comes at the expense of other modes.
The Australian coin system is all wrong. The weight and bulk of our coins is disproportionately high, to the extent that some are worth over half as much as raw metal.
The 5-cent, 10-cent and 20-cent coins, which have a value of just $17.70 a kilo, are the worst offenders.
The economic damage wrought by Australia’s hefty loose change situation is serious, and I offer as exhibit A my old wallet, which had to be held together by electrical tape after the coin section busted its stitching.
But it’s not just purses, wallets, and pockets being busted by heavy coins. Think of the petrol cost as armoured vans deliver tonnes of change around the city, especially to big coin users like supermarkets, pokie venues and public transport ticket machines.
Even the Royal Australian Mint is at risk if copper prices rise. Copper represents 75 percent of our silver coins and 92 percent of our gold coins. The profit (seigniorage) that the mint makes on selling coins to the RBA was a not-insignificant $96 million in 2012-13. It would be crazy to put that upside at risk for the sake of big fat coins.
During 2011, it looked like our coins might soon be worth melting down.
The solution to these problems is obvious. Smaller coins. We have the answer in front of our noses, in the shape of our $2 coin, whose outstanding value-to-weight ratio makes it the Bradman of coins.
The $2 coin is the only one you’re actually pleased to find in your wallet. Introduced in place of the two dollar note in 1988, it’s worth keeping around. You never take a handful of them and dump them into a jar.
The second best way to carry around two dollars in coins is nearly three times heavier
The Canadians call their $2 coin a Toonie, yet for some reason, this nickname-mad nation has yet to come up with a diminutive for our Mighty Two.
If we want to try to make our coins a bit more like the Mighty Two, we need not look far afield for a model. In 2005 New Zealand got rid of 5¢ coins and changed its 10¢, 20¢ and 50¢ coins from copper and nickel to plated steel. Their new coins are much smaller and much lighter than ours.
Extinct kiwi specimens.
Businesses who have to heft big bags of change back from the banks would welcome the change – you might imagine only the vending machine industry would object. But even they are increasingly moving towards electronic payments, because the industry wants to cut costs by diminishing the frequency with which it collects coins from its machines.
The argument for smaller coins is a simpler one than the argument for getting rid of the smallest denomination.
If you try to get rid of the 5-cent piece, everyone gets up in arms about supermarkets rounding up the price of things to the nearest ten. Never mind that this argument doesn’t hold water. It’s what keeps the pennies circulating in the US, and 5-cent pieces in Australia. The case for smaller coins is much simpler.
I remember third-year economics. The lecturer played some sort of Wheel of Fortune game where he had students answer questions correctly for the chance to guess a letter. It was around the time we were learning about how markets would reach general equilibrium if left alone. The eventual phrase spelled out “Don’t screw with our markets.”
“It’s beautiful,” said the lecturer as he delivered the mathematical proof.
“Why can’t the arts students just see this!” exclaimed the girl in the row in front of me.
Classical Economics has some beautiful theories.
John “beauty is truth” Keats may well have been a free-marketeer. But beautiful theories are a trap.
The human brain has a wide range of biases, the most risky of which is a conclusion bias. We are inclined to latch on to an answer as soon as possible, which then goes on to frame our subsequent information gathering and processing.
Of course, a beautiful unifying theory will be very tempting for us. Succumbing to that temptation explains a lot, from biblical literalists, to libertarians and communists.
But the real world is very messy, and the project of the entire enlightenment is to get us engaged with that complexity and put aside our tendency to simplify.
Some of the most intuitively appealing theories in history (e.g. from each according to his abilities, to each according to his needs) have proved unworkable.
The point I’m driving at is well encapsulated by the parable of the fox and the hedgehog. An ancient Greek Poem turned into an essay by Isaiah Berlin, the Fox vs Hedgehog debate has been given a new life by statistical guru and seer Nate Silver.
It classifies people into two groups, foxes – who rely on lots of little scraps of knowledge, and hedgehogs, who know one big thing. Nate Silver shows that in making predictions, having one big belief can be a block to seeing the future well, and being a fox is the better approach.
(Of course, that itself is a simplification, and a truly foxy approach will accept there are times when a big simple truth is just that: big, simple and true.)
I raise this issue now because I see two big examples where a simple, hedgehoggy application of economics seems to be taking sway.
1. Our federal government. A political fox willing to try anything to get into power, Tony Abbott turned into a policy hedgehog after occupying the Prime Minister’s Office. His latest budget is the repetition of one simple trick: apply market forces. From higher education to GP visits, via cuts to social security payments, the Budget tries to fix Australia by allowing the power of markets to seep in.
It’s not nuanced but it is no doubt deeply satisfying to those elements of the base for whom the solution to the world’s problems is obvious.
2.Piketty. A French economist working on inequality, Mr Piketty has made an enormous splash in 2014. His very long book entitled Capital in the 21st Century considers a lot of evidence and distills it to one simple equation: r>g. That posits that the growth in inequality is due to a mathematical problem – the return on capital (r) is higher than the rate of growth (g). Existing stocks of wealth grow more than the paycheques of workers and so the world grows more unequal.
I do not claim to be smart enough to prove that r<g, or that applying market forces to government services will always undermine them. But I hope to be smart enough to watch the debates unfold while remembering that a simple answer pleases a simple mind.
Even though a similar property in Melbourne would cost probably seven times as much, a multi-million dollar saving is apparently not enough to actually tempt people to live in Hobart.
Demographic data out today show the Apple Isle circling the plug hole. Its population growth rate is not far from zero, and people continue to leave in large numbers.
In the 36 years since 1981, Tasmania has managed to actually lose people to interstate migration, despite the Australian population more than doubling. They’ve been saved from extinction by overseas migration and the birth rate. But will that continue?
The entire state has managed just 700 babies in the last six months, an amazing new low.
The Tasmanian fecundity shortfall looks especially stark when you compare it to other states. WA has had 9800 babies in the last six months.
The reason for Tassie’s child shortfall is not unguessable: Too few mums and dads, and too many grandmas and grandpas.
How does Tasmania break out of this cycle? If mainland house price growth continues, there should eventually be push factors. Once the price of new housing in country Victoria and outer Melbourne starts to be much higher than the price of new housing in Tasmania, people might start moving there.
Also if climate change picks up, Tasmania will offer the last temperate zone in Australia.
Essentially, the lesson of migration everywhere is that most people (except retirees) will move for jobs. That’s something Tasmania has too little of.
How to fix? There are glimmers of hope in the data above. Australia’s next big boom will be looking after the aged. If Tasmania can turn itself into Australia’s Florida (the place to move when you retire), there should be lots of jobs in aged care.
It just needs to convince the mainland-dwelling elderly that if they don’t want to work all the way to Tony Abbott’s new pension age, they should downsize to a much cheaper house on the other side of Bass Strait.
That would bring an influx of wealth to the island, and provide for a lot of jobs. The aged care industry is already showing a lot of growth.
Can the Apple Isle fill those creaky old Hobart mansions with happy retirees? The key to Florida’s success has been “Weather, effective marketing, low taxes and a herd mentality.” Tasmania can match two of those already (good marketing and a retiree flow). Lower stamp duty for over-55s buying a new property might be a good policy move.
As for the weather? It can’t do much more than it’s doing already, by logging those virgin forests and exacerbating climate change.
The state government is prepared to make big investments to make train travel easier and faster. So they should. They are contemplating a $9 billion tunnel that will make journeys faster and more reliable.
But what if I told you there was a much much cheaper way to improve travel times of the rail system, while making people’s journeys to work more comfortable?
The solution requires thinking outside the box. This is not about putting faster motors on the trains. Not about improving signalling or driver training or anything to do with the train system itself. It’s about cutting walking times to the station.
Let’s look at my local station, Clifton Hill.
Yellow dots mark the entrances
There are just three entrances, all clustered up the northern end of the station.
Placing the entrance at the northern end means passengers walking from the south have to walk an additional 120 metres to get on the platform. (I reckon 2 minutes is an overestimate by our friends at Google Maps.)
This is not a passenger-centric design, but an operator-centric design.
I’ve made a model for the benefits at Clifton Hill station. Clifton Hill Station got 3,009 boardings per weekday in the 2011-12.
I model it like this: 25 per cent of the users who walk to the station live in line with the platform, so moving entrances to the end is of no benefit, while 75 per cent of users currently walk past the end of the platform to get to the entrance. An amazing isochrone map app I found shows that my model is probably conservative, because of the local geography.
Those inside the yellow circle and not between the red lines can be assumed to benefit from new platform entrances.12-minute walking map. Source: Cartoo
There are 90 car parks at Clifton Hill Station, and it is served by buses. There are trams not so far away. I estimate two-thirds of people walk to the station. (2000 users a day.) Let’s say 1500 of them could potentially access the station via the new gates I propose.
But smart public transport users know not all carriages are equally useful. Depending on what station you get off at, and where you’re headed, your train exit may be speeded up most by being at the front, back, or middle of the train.
If you come to Clifton Hill Station from the south, but you want to board the southbound train’s last carriages (and you’re not running late) it provides you no advantage to have an extra gate at the south end of the station.
But if you’re coming from the south and you want to be in the front carriages of that southbound train, you need to walk that distance twice. Once along the street outside the station, and then back again along the platform.
Putting an entrance at each end of the platform, replacing a northern-end entrance
–
WALKING DISTANCE SAVED (m)
–
Southerners
Middlers
Northerners
front carriage riders
150
0
0
mid train riders
75
0
0
last carriage riders
0
0
0
12 per cent of the 2000 walkers will save a conservatively estimated 150 metres, or 90 seconds. 12 per cent of them will save an estimated 75 metres, or 45 seconds. That adds up to 563 minutes on access to the station. That makes 9.4 hours. If the same effect is present when they return home, it’s worth 18.8 hours.
The model does not assign any benefit to all the trains that may now *just* be caught when before they were just missed.
Assuming a value of time of $30 an hour, the value of the additional exits would be $146,000 a year, just measuring weekday trips. For a gap in the fence, a bit of concrete paving and some extra Myki machines, which I estimate to cost perhaps $500,000, it would pay itself off within a few years, yielding a positive rate of return.
You may think a minute here or there is not important, but there is no single change that can cut a train journey’s duration in half. If we want improvements to service we need the operators to accumulate small easy changes like this across the network.
Clifton Hill Station is not even the worst offender. Camberwell station has the entrance to two of its three platforms about 100 metres away from the main road it serves.
Camberwell station served 6,571 passengers each weekday in 2011-12.
Why haven’t they thought of these fixes already?
There will be a perceived trade-off with safety. I don’t doubt the ex-post rationalisers are currently saying “but having one entrance allows for surveillance!” But a single entrance also funnels station users past a single choke point. In the same way a narrow alley feels dangerous at night, so can a single station entrance with no alternatives.
In fact, more exits and entrances should mean fewer people spending time at stations, increasing the visibility of anyone loitering with malicious intent and decreasing their opportunities.
I contend the reason this sort of station design is not widespread is institutional. The Public Transport Victoria guidelines for station design seem to support this kind of solution:
“Many aspects of the local context and surrounding urban design will influence the station entry configuration. A thorough study of the station catchment area is required to determine the most appropriate placement of the entry or entries in order to attract patronage by:
a) Encouraging the use of the station by simplifying connections with existing and future urban design;
b) Providing accessibility, convenience, clarity and quality of arrival to and from the station;
c) Providing safe and attractive public spaces that contribute positively to the local identity;”
But in fact, station access runs second to concerns over train boarding patterns. PTV tries to alternate whether station entrances are at one end of the train or the other, to prevent any one carriage getting too full. Their conception of their job focuses on the trains, not the passengers.
But building more station entrances should be a priority. It won’t help just walkers. At the margin, making walking distances to train stations shorter will encourage more people to walk, and free up scarce car parking spots for people who live even further away.
As well as institutional bias from the departments, there is a ribbon-cutting bias in public transport investment. Politicians want grand visions. The Premier can’t imagine himself showing up to the construction of a new station entrance, so he doesn’t push for it to get done. But that doesn’t mean it’s not the best idea.
Doubling the amount of time poor kids in Chicago spent studying algebra in grade nine led to an 8 per cent increase in their high school graduation rate, and an 11 per cent increase in college enrolment.
Given that US high school dropouts die earlier than graduates by 3-5 years and make up 7 out of 10 prisoners in the US, it is fair to argue that for thousands of these kids, algebra has saved their life.
The paper exploits a natural experiment whereby students in the Chicago Public School System were placed into double dose algebra classes (largely replacing music or art classes) if they scored below the national median on an eighth-grade math test. The researchers compare kids just above and below the cut-off.
The numbers of students in the algebra courses is substantial, because maths skills are thin on the ground in the 73 public high schools studied. In the US, just 20 per cent of hispanic students, 13 percent of black students, and 17 per cent of students poor enough to qualify for free lunches are rated proficient in maths. In the Chicago Public School System 90 percent of students are black or Hispanic.
“In the Chicago Public Schools (CPS), the focus of this study, roughly half of high school freshmen fail at least one course, with the highest failure rates in math courses”
Schools assigned weak students to a back-to-back lesson in Algebra with the regular algebra teacher, and gave the teachers professional development, permitting them to use different instruction methods, including working in small groups, solving problems verbally, and having students set problems for each other.
The impact on test scores was modest. But the impact on the students lives was not.
“…the test score impacts of this policy dramatically understate its long-run benefits as measured by educational attainment.”
The effect of double dosing in the first year of high school remained over time. Students who were in the program were 9.3 per cent more likely to pass algebra in that year. But they are also 7 per cent more likely to still be in school in the fourth and final year of high school.
The students who got the most out of the instruction were ones with poor reading skills. They end up passing three more subjects in high school on average, after taking the double dose, creating a 13 per cent increase in the number of poor readers who complete enough subjects to pass high school. The researchers suggest that the focus on using verbal methods to solve maths problems may explain this result.
Black students who got the double dose also saw a dramatic effect, with a 15 per cent increase in college enrolment. For the double-dose population at large, the increase was 11 per cent. The effect can be seen in this chart:
For some of these student, the impact of these classes – which their 14 and 15 year old selves no doubt dreaded – will be dramatic over their life times.
Australians are living with their parents longer and longer, and prospective empty-nesters might be pulling their hair out if they saw the latest data.
Just 48.2 per cent of people aged 18-24 in 2001 moved out of their parents home by 2011. And what’s more, 8 per cent of those aged 25-29 in 2001 had moved back in with their parents by 2011.
The data come from HILDA, an absolutely amazing study by the good folks at the University of Melbourne. It follows thousands of people through their life, to deliver data that are richer than the regular snapshots from the ABS.
The trend is global and its causes are probably economic. The ratio of minimum wage to rent suggests moving out of home is hard.
I would have done the above graph for house prices too, but the line would go down so fast you’d have to scroll a long way to see it all, and I don’t want my readers getting RSI in their scrolling fingers.
Anecdotally, high house prices pin kids to the parental home in another way too. To buy a house you need a deposit. The best way to save for a deposit is to stay at home for a long time (or return home – this generation is called the boomerang generation for a reason).
That’s not all. While trying to save, kids are also worried about student debts. The cost of university has also doubled in the last ten years, far exceeding the rate of inflation.
Incidentally, the price of beer has shot up too, and given how much of my student budget went on that, I’m glad I attended university over a decade ago.
For wealthy people from wealthy families, living at home is a simple matter of balancing material comfort against mild embarrassment. Kids who choose to live at home are a grand source of humour and pensive Guardian opinion pieces.
But really, the option is a blessing for those of us whose parents have stable housing situations. Not everybody is so fortunate.
Its share price has doubled in the last twelve months, taking its market value to $25 billion, as its cars are voted Car of the Year, Best Car Ever Tested, etc.
By pricing electric cars in the $100,000 – $200,000 range, Tesla have made them highly desirable. (Performance may also be helping. The Tesla Roadster reaches 100km/h in 3.9 seconds.)
Tesla has an eye for good PR. But this is more than that. It’s an attack on the whole patent system.
“When I started out with my first company, Zip2, I thought patents were a good thing and worked hard to obtain them. And maybe they were good long ago, but too often these days they serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors. After Zip2, when I realized that receiving a patent really just meant that you bought a lottery ticket to a lawsuit, I avoided them whenever possible.” – Elon Musk, June 2014.
Musk has tapped into something vital. Patents (like copyright and trademarks) have long since broken their moorings to the island of usefulness and drifted off into an ocean of fantasy, where piratical lawyers rule the waves.
It’s not just inventions that can be patented, but “business processes.”
For example, Amazon patented “one-click shopping.” That means every other online store has to make sure you click twice to buy online, license the “process” or risk a patent lawsuit from the internet commerce giant.
Patents are private property though, so this should be fair enough, right? Wrong. From society’s perspective, possession of patents is very different to possession of something physical.
Owning an idea is a contrivance invented for the sole purpose of encouraging ideas. But ideas work best when they spread. A patent is therefore of most value when it balances encouraging new ideas and spreading existing ideas. Exclusive, indefinite use of a patent is arguably worse than never having a patent at all.
Some industries thrive without patents. Australia’s restaurant industry, for example, is electric with innovation. But you never see a chef hiring a patent attorney to show that a pumpkin and fennel soup on a menu across town is similar enough to warrant the paying of royalties.
A patent for a process for turning warm bean juice into a big deal by the application of hipsters? I may have just made a fortune with this idea.
The Australian government’s current review of competition policy has patent law under the microscope. The issues paper (released April 2014) appears to show willingness to move Australia even further from the clutches of the patent trolls.
“…[P]roviding too much protection for IP can deter competition and limit choice for consumers… Are there restrictions arising from IP laws that have an unduly adverse impact on competition? Can the objectives of these IP laws be achieved in a manner more conducive to competition?”
That could see patents renewable where a new use can be found for an existing product, and copyright protections lasting up to 70 years beyond the life of the author.
“Australians could pay more for drugs and medicines, movies, computer games and software, and be placed under surveillance as part of a US-led crackdown on internet piracy…” according to an article in the Sydney Morning Herald.
In Australia at present, copyright is a bigger issue than patents.
Consider the copyright over the tune “Kookaburra Sits in the Old Gum Tree.” That classic children’s tune was composed in 1932. But when, in 2008, a faint similarity was heard with the Men At Work song Land Down Under (itself released in 1981) the record label that owned copyright to Kookaburra pursued the songwriters. Some months later Men at Work’s Greg Ham – who played the riff deemed to be plagiarised – was dead by his own hand.
The courts required five per cent of royalties from the hit song to be paid to the owner of the copyright, and in 2011, the Federal Court refused to hear an appeal.
(The Song Happy Birthday is also copyrighted. It is owned by Warner/Chappell Music, which collects a reported $2 million a year in royalties.)
I’d be willing to sell off every childhood song we have, from Twinkle Twinkle to the Incy Wincy Spider, if it spurred more innovation in childhood songs. Similarly, I’d be happy for patents to establish a chokehold on the technology industry, if they clearly generated better products for consumers.
And that’s what inspired this surprising move by Tesla. Let’s hope many more follow them.
“Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world’s most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.” – Elon Musk
Thomas the Think Engine 