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

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

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

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

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

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

The data support this model of thinking about entrepreneurship:

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

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

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

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

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

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

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

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

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

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

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

Decline of business entries


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

decline of under 40

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

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

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

My HECS debt is finally gone!

In 2004, I attended my last exam at the University of Melbourne – 316-303 Industrial Economics. As the “pens down” call went out, quiet fell. The ratcheting sound of my HECS debt accruing was finally gone.

The day I graduated, that debt was around $30,000.

I went on to add a bunch of credit card debt that final summer of freedom, flitting around the northern hemisphere in the knowledge that I had a job waiting for me in Canberra when I came back.

santa 2004
Christmas 2004. I had to shave when I came back home.

But while that $6000 of credit card debt was paid off within six months of working full time, the $32,000 took 10 years of nibbling to finally destroy.

HECS is a system that allows you to buy education now and pay later. You rack up debt on every subject you study (arts costs less, medicine more). Then you only have to pay it back once your earnings go over a certain level, currently $51,309.

HECS was invented by a kindly gentleman called Bruce. I’ve met him and he seems like a good egg.

The idea is for people who get a big benefit out of their tertiary education to put some money back into the system to help keep it afloat. The genius of HECS is that it – in theory – shouldn’t deter people who come from less wealthy backgrounds, or have lower expectations of their lifetime earnings. If they never earn above the threshold, they never pay it back.

My HECS debt shrank steadily for several years, then picked up again in 2008 when I left the federal government to sample a life of leisure, etc. The knowledge that the HECS debt you worked hard to eliminate is creeping back up does tend to haunt those otherwise blissful idle hours. Perhaps that’s the point. But the good news is it only ever goes up at the rate of inflation.

So long as wage growth outstrips inflation, your HECS debt is getting smaller in practical terms.

Wage growth vs inflation

There were always deals available where you could trade cash now to eliminate your HECS debt with a small bonus. But I never took them, preferring current liquidity and betting that my future wages would make my HECS debt seem small. (After choosing to work in media, I never really reached that point.)

By the end, the impact of HECS on my paycheque was quite annoying. I would much have preferred the few hundred extra in my hand every time. But then, while I wasn’t paying attention, it was gone. Hallelujah!

The lessons of HECS are this:

  • When the government adds a few percent to your fortnightly tax bill, you mostly don’t notice.
  • Income contingent loans seem like a very fair kind of user-pays. We should use them for other things. For example, sports.
  • The zero real interest loans are really nice. If it weren’t for them, I’d be up to my eyeballs in debt still, like some New Zealanders I know. Education Minister Christopher Pyne wants to introduce positive real interest rates. I think that could be justified only if you ignore (or don’t care about) the deterrent effect. Students with less access to economic resources are already far less able to attend university, and the prospect of enormous mounting debts will only make the challenges worse.

Grattan SES uni

A fact you never guessed about our 21st century, hyper-speed labour market.

We live in a new era. A time unprecedented. An age where the economy shifts as fast as you can send ones and noughts along optical fibre, and the job you’ll have in five years time hasn’t even been invented yet. Right?

Not right.

My favourite labour economist is Jeff Borland, and he specialises in truth bombs, which he distributes in his monthly labour market snapshots. I’ve written them up before, for example, here.

He crunched the numbers and found that despite the decline of unions, the march of neo-conservatism, the lingering influence of Peter Reith and the legacy of workchoices, job durations are as long as – or longer than – they were in 1982.

Screen Shot 2014-09-08 at 11.55.04 am Screen Shot 2014-09-08 at 11.54.57 am


“If I had a dollar for every time I have heard that: ‘Young people entering the labour market today are going to have many more jobs during the course of their working lives than older generations’, I might not be rich, but I reckon I would be owed about a thousand dollars.”

For the last dozen years (at least), he’s been a professor of Economics at Melbourne University, so he knows tenure. In that time I’ve had probably ten jobs, so this news is very surprising to me.

What else is interesting is that people feel (and are) relatively safe in their jobs.

Screen Shot 2014-09-08 at 11.59.47 am

I suspect they feel even safer since the Abbott government started polling about as well as the Gillard goverment. The chances of frightening workplace reform coming out before the next election would have to be slim to nil given the reputation of the government right now.

To have and to hold (a job). The correlation of marriage and employment is puzzlingly strong.

You’d think getting married is relevant to your home life. You wouldn’t expect it to change your employment outcomes.

I mean, I’ve never done it, but I doubt you get back from your honeymoon buzzing with a desire to read and reply to all those emails.

And yet, the correlation between marriage and labour market outcomes is quite astounding. 


The unemployment rate for unmarried men is nearly four times higher than for married men (11.3% vs 3.1 per cent). For women, the ratio is over two (8.9% vs 4%).

The difference between married and unmarried makes the difference between men and women look small. 

Essentially, if you are a married man, you’re living in a labour market no different from the best parts of the 1970s, with 3 per cent unemployment!

Might this be a statistical artefact? It could come about because the young have poor employment outcomes, and are less to be married. Let’s have a look at an older age bracket.

Unemployment 35-44

The absolute levels of unemployment have fallen, especially for men. But the ratios of unemployment rates between married and unmarried are about the same: 4:1 for men and 2:1 for women.

The above graphs make it look like married people are all hard at work in the office. But the unemployment rate hides a big difference in participation rates.

There are two distinct clumps in this chart. Married men, who participate in the workforce at a rate of 95 per cent. And everyone else, who participate at around 75 per cent.


The 80s were a time of rapid change for women. But since 1990, one of the biggest changes in the employment market has been unmarried men dropping out of the labour force. Their non-participation rate basically doubled from 10 per cent to 20 percent.

Given the unemployment graphs on the previous page, I’d be very surprised if the red line (married women) didn’t tick up over the green line in coming years.

Two mysteries remain.

1. Why is the difference between the married and unmarried so strong, and so consistent over time?

I have a few theories.

Perhaps the unemployed are busy proposing, but are rejected because they are unemployed?

Perhaps there are confounding variables, like good looks or intelligence, which are correlated with both earning power and marriageability.

Perhaps it’s not about the kind of people they are but the incentives they face:

Obviously marriage and children are correlated. Obviously children (who are cruelly forbidden by the law to earn the money to feed themselves) are expensive. Could it simply be the compulsion to put bread on the table that explains why married people are so rarely out of work?

2. Why is the labour force participation rate of unmarried men eroding?

Marriage is increasingly rare, and increasingly for the old.

Can that explain the fall in unmarried men’s attachment to the labour force?

Screen Shot 2014-08-15 at 10.54.35 am

Screen Shot 2014-08-15 at 11.02.39 am(They are also increasingly likely to have a non-religious ceremony, but I’m not sure that’s relevant)



I’m not sure it does, and this makes me wonder if perhaps the “discouraged worker effect” might be true. All those unmarried men might once have worked in factories. Maybe they’re less able or inclined to take service sector jobs. 

There might also be an echo of higher immigration rates in the data. The overseas born have lower workforce participation rates. (chart source)



Which looks like a nice simple story, until you fold it back in on itself and see that immigrants actually get married at a higher rate than their proportion in the population! (Number of marriages is on the vertical axis, so in total, this graph shows that at least 40 per cent of people getting married in Australia are overseas-born.)

marriage of immigrants


E-tax: How putting an accountant out of work can make the world a better place

This year, I started using e-tax again.

The last few years I paid an accountant to do my taxes, partly because there was no e-tax for Mac, and partly because I perceived  there would be some great benefit of getting a professional involved.

Having now been on both sides it’s time to announce my conclusion.

E-tax is, for me, a million times quicker, easier and cheaper than using an accountant. (Even though last tax year my affairs were more complicated than ever, having an ABN and business income, a redundancy payment, etc to contend with).

All the information the accountant uses is provided by me – why not just enter it into a system myself? My accountant also bothered me with physical pieces of paper (ugh!) that I had to physically sign (so medieval!). Using an accountant also gave me no hard deadline on doing my taxes – unlike e-tax – so I let it hang over my head til the following May.

When I go to e-tax, the suburban accounting industry takes a hit. They used to make a few hundreds bucks a year from me ($451 last year, I think) but now they make nothing. Doubtless, this hurts.

But this is exactly how productivity increases – painfully. When I find a way to do something more cheaply, it means someone loses a revenue stream.

The money I used to send to the accountants, I can now spend in some other way. It might go on travel, a new bicycle or dinner out at a restaurant. Some other industry will see the upside of this efficiency increase.

The story of the accountant being pushed out of work by a computer program is extremely relevant right now.

“We are now in the second machine age where robots take on mental, as well as physical work, which does encroach on a vast number of jobs” – Erik Brynjolfsson, director at MIT Initiative on the Digital Economy.

Big names are sounding out the warning:

“Software substitution, whether it’s for drivers or waiters or nurses … it’s progressing. … Technology over time will reduce demand for jobs, particularly at the lower end of skill set. … 20 years from now, labour demand for lots of skill sets will be substantially lower. I don’t think people have that in their mental model.” Bill Gates

In their mental model, the jobs are lost and not replaced. That defies centuries of progress. Could this time be different? I doubt it.

This guy (and many like him) were replaced by a single tractor

What will happen is that people will specialise in doing things only humans can do, or things where having a human do them adds great value.

These will mainly be services, but then we have a strong history in services.

We will not cease to be a social species, so there will be lots of instances in which people are prepared to pay a premium to have a human provide for them. You’ll notice the Sushi train has not yet replaced the waiter and the vending machine has not replaced the barkeeper.

What this means as well is that more and more jobs will be fun and challenging, because they are human-facing. There will be fewer book-keepers and widget makers squirrelled away in the back room never seeing another human.

Instead there will be more barbers, life coaches, counsellors, nail artists, masseurs, tailors, troubadors, baristas, chauffeurs, etc. And that’s only the existing jobs. I bet things you never thought a person could or would outsource will turn into huge industries.

I can imagine a cooking coach in people’s homes, to bridge the gap between eating in and out.  A financial adviser on call in all manner of situations – perhaps you can set up your credit card so you have to dial them up and justify your purchase every time you try to spend more than $100.

There could be cycling leaders who organise a great ride through the best terrain for the day, and make sure you’re not stranded without a spare tube. Experts that come to you to help you “homebrew” beer or make your own yoghurt. Interior designers that help you custom craft your own furniture. Cleaners that do lots of value add, by say, bringing flowers. Dog trainers, cat groomers, budgie psychologists?

Many of these already exist at small scale. The possibilities are limited only by human ingenuity and the human desire to consume. Don’t bet against those forces.

Where did all the first home buyers go?

First home buyers are off the market. The current share of 12.6 percent is around the lowest on record.

Screen Shot 2014-07-14 at 10.44.00 am

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

Screen Shot 2014-07-14 at 10.21.36 am

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.

mortgage interest rates


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

rent growth each quarter

rent cost to mortgage cost ratio
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.


rba reasons for house price growth


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.

over valued or undervalued


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.

Doubting Thomas: Why skepticism of economics is crucial

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.

I’ve written about this problem before: I Haven’t Decided Yet.

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.

“Hatchbacks on stilts.” Why SUVs are an arms race we must stop

There’s a lot of talk about how Australians are buying smaller cars, and how Australian car makers are stupid for pushing on with big petrol-guzzling cars nobody wants.

But Australians do want big petrol guzzling cars. They just want them to be tall.

The SUV category is going crazy. In April 2004, 12,351 SUVs were sold. By April 2014 monthly sales had doubled to 25350.

Meanwhile, “passenger vehicles” – your classic sedan, sold fewer. April 2004 saw 44,000 sold, but by April 2014 sales shrank to 39,000.

In 2014, even as the car market is having its worst year for a decade, SUV sales are creeping up.


When people buy an SUV, they’re purchasing the ability to go off road. Right?

Not if you look at the details. Companies are pushing out two wheel drive versions of their SUVs and they sell fast.

The AFR’s motoring writer nailed this in a review of the new $90,000 BMW, which is two-wheel drive.

Some surprisingly large SUVs – including the X6 fastback from BMW – feel like hatchbacks on stilts,” he wrote.

Reflecting: a BMW SUV in its element.

And there’s the key.

People want to be high up. It’s game theory. If the car in front of me is small, I can see over it really well from an SUV. If the car in front of me is tall, I want to be in an SUV or I won’t see anything at all.

Externality would be a sweet name for the new Ford SUV. I imagine its prestige to come from being that little bit bigger, heavier and harder to stop than the Explorer, the Excursion and the Expedition.

As someone who drives a car that comes up to armpit height, I can confirm sitting in traffic involves looking at a lot of SUV bumper bars and having no idea what is happening in the traffic up the road.

2048. Thank me later.

An elevated position doesn’t just permit a better view of traffic, but of other people in the traffic. I can’t see what that Range Rover driver is texting from down here, but they can sure see what’s on my phone (at right).

The light commercial category also shows the change. You can’t easily sell a ute you have to step down into these days. The 1.74 metre tall Nissan Navarra tops the category, easily out-selling the 1.5 metre tall Holden ute.

Buying a tall car is what’s called a dominant strategy, if you want to be able to see. It’s also a dominant strategy if you want to crash into another SUV, according to research.

In head-on collisions between passenger cars and SUVs … Drivers of passenger cars were more than four times more likely to die even if the passenger car had a better crash rating than the SUV.”

This is the classic game theory scenario of an arms race.

The arms race analogy is a good one. Like the proliferation of weapons, taller cars are costly and risky. They are heavier, take up more road space, cause more wear and tear to roads and emit more carbon. They may be more likely to roll in a crash. They’re exactly the kind of purchase decision in which a government might try to intervene.

For a long time, SUVS had lower import tariffs than passenger cars. That changed in 2010 when tariffs on cars fell. But by then, the proportion of SUVs sold was already steadily marching upwards.

Changes to the way we tax cars are possible in the next few years. The Henry Review recommends getting rid of the luxury car tax and fuel taxes, replacing them with congestion taxes or user pay systems. It is clear that our current system does little to deter SUV purchase. Could a well-designed licensing and user-pays system be better, or is the only stable game theory equilibrium one where we all drive cars like the Dodge Ram, that can barely fit in a lane?




One term? I wonder

Waleed Aly’s long piece in today’s Fairfax press about Tony Abbott is thoughtful, but the headline it carries: No Way Abbott Can Now Budget For Second Term is too strong.

Every reader fell greedily upon that story, I assure you, but the headline hints at far more certainty than the excellent Mr Aly projects.  Here’s three reasons why “one-term Tony” will win the 2016 election, and one reason he might not…

1. Parliamentary majority. 

Source: ABC

In the lower house, the Coalition leads Labor 90 to 55. Labor needs to peg back 21 seats to win. If you look at the pendulum, that means they need to win every seat that the Coalition holds be a margin of 4.3 per cent or less, while not losing any of their own seats.  That’s a lot.

Winning a lot of seats will be hard for Labor, because it requires not just a swing but a lot of good candidates, a lot of organisation and a lot of money.

2. Sophomore surge

In theory, someone who was an unknown at their first election becomes familiar at the second (sophomore) election. They enjoy a surge in popularity. This effect, if it exists, will help the Coalition a lot – they introduced 19 new MPs.

As the name implies, the sophomore surge is a US concept. Is it real in Australia?

Some bloggers argue yes.

This book written about the 2010 election thinks so:


That means that even if Labor gets 51 per cent of the vote in 2016, it can easily lose a lot of important seats and be stuck in opposition.

3. Budget trickery

Tough budgets now lay the foundation for easy budget later. I wrote about this last week. 

To most people, the grumbling of early 2014 [will be] as relevant to the political situation as the result of the 1974 VFL Grand final. Labor can’t get over the broken promises and keeps talking about the past, while Mr Abbott is focused on the future.

The evidence for the efficacy of this approach is mounting. Not only Victorian Premier Denis Napthine but also NZ PM John Key have unveiled more generous budgets on the eve of elections. (NZ is introducing free doctor’s visits just as we abolish them. Time to move to Wellington?)

4. But the polls are very bad.

55-45 is BAD.

I can see just one good example of a government coming back from that, in the early 90s. Keating took over a very unpopular government and won the next election.

Source: News


Howard was losing by almost as much prior to the 2001 election. I also commend to you this graphic of the newspoll:


If this polling continues, expect newspapers to push the idea Malcolm Turnbull should take over from Mr Abbott. Not only would it likely help the Liberals, the media have clearly learned that a good leadership challenge narrative attract eyeballs and, crucially, elevates their (our?) own importance.

Welfare works – new research makes federal Budget look rather short-sighted

Babies are a problem for economics.

Economics says we must reward people for effort. If you train to become a teacher then work hard, society rewards you. This is both morally sound and economically important.

The flipside: if you could work but sit on the couch, you get nothing. This is both morally sound and economically important.

The moral and economic imperatives are aligned perfectly. Right up until birth.

Children crack the perfection of this theory. A child born into a poor household will be punished by material poverty they do not “deserve”. A child born into a rich household will be rewarded in ways they have not earned.

So we muddy the moral and economic imperatives for generation 1, in order to secure the moral and economic imperative for generation 2. A trade-off. 

Decisions about this trade-off are shaped by a number of beliefs.

1. Does providing welfare hurt incentives for work?

2. Does raising taxes to pay for welfare hurt the economy?

3. Does welfare really help the second generation, or foster a culture of entitlement and dependency?

Just the other day I was snacking on this "coffee caviar" in a Fitzroy cafe. This Budget doesn't hurt me. Does our society have its priorities straight?
Just the other day I was snacking on this “coffee caviar” in a Fitzroy cafe, but this Budget doesn’t really hurt me. Does our society have its priorities straight?

The recent Budget by Messrs Hockey and Abbott reflects beliefs on all of these. It took an axe to welfare payments of all sorts.

So it was extremely timely to see new research (released May 12 by the US National Bureau of Economic Research) on the third point above – the effect of welfare payments on the second generation.

Researchers exploited a natural experiment to see the long run effect of cash payments to poor single-parent families in the United States. They compared the offspring of mothers accepted into a payment program with those rejected.

A stark effect is revealed:

“Male children of accepted applicants lived one year longer than those of rejected mothers. Male children of accepted mothers received one-third more years of schooling, were less likely to be underweight, and had higher income in adulthood than children of rejected mothers.”

The positive differential comes despite the boys who were rejected from the program being slightly better off on average prior to the government intervention. That means the effects are, if anything, likely to be an understimate. (The research is unable to track results for females over the long run because of their tendency to change their names. The use of a very old program allows them to more fully collect data on longevity.)


“While conditions today differ significantly from those at the beginning of the twentieth century, three important similarities remain. Then and now, women raising children alone (whether divorced, unmarried, widowed, abandoned, etc.) represent the most impoverished type of family. In fact, the income gap between children in two-parent versus single-mother families has only grown over time”

This research is very timely.

The 2014 federal Budget cuts a payment that goes to single parents: Family Tax Benefit Part B. The government has not only capped the rate of the payment from 2014 but reduced eligibility. Parents will now be cut off when their youngest child turns 6, not when it turns 18.

The Budget replaces Family Tax Benefit Part B with a new allowance, worth $750 per child per year. That will work out as less for many smaller single parent families. Family Tax Benefit Part B was worth up to $4,172 a year.

Single parent families will “manage” – buying cheaper groceries, scrimping on clothes and driving less. But these impacts add up. The cut to their incomes will likely be felt by their children for a long time, in educational attainment, income, and even longevity.

Betting on the Chinese Communist Party, and why that could make us poorer.

China’s economy is showing signs of failure, but people keep betting on it.

For example, last week an index of Chinese manufacturing output showed its fifth consecutive month of falls, and China-linked assets shot up.

The reason? 

Financial markets believe the Chinese government will come to the party with extra spending and extra stimulus.

Are they right? The question we are asking here is not merely academic. If we bet on China and lose, the following are likely to fall:

  • The Australian dollar.
  • Australian economic growth.
  • Australian share market.
  • Australian house prices.

The Chinese government obviously wants the economy to keep growing. The continued existence of the Communist Party is tied to the performance of the Chinese economy. They have to keep it ticking over. Their motivation is clear and pure and strong. But motivation is not always enough.

Shanghai skyline
Can we distinguish warnings signs from red flags?

Consider this. The only reason markets need to trust the Chinese government to add more stimulus is that previous rounds of stimulus haven’t done enough. Financial markets are betting the guys that got the market into this pickle can safely navigate out again.

“We expect Beijing to launch a series of policy measures to stabilize growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower,” said Hongbin Qu, chief China economist at HSBC.

A few iterations is enough for the human brain to learn a pattern. We’ve seen the Chinese government come to the party during the GFC and during the European debt crisis that followed, keeping China’s growth rate up over 7 per cent, rain hail or shine.

No wonder traders and hedge fund gurus trust their guts on whether the dragon will roar again. But a well established patten hurts the most when it breaks.

This time the problems in China seem to be inside China. They are not dips in demand caused by a failing USA or Europe. 

China recently experienced its first debt default and its first bank run. Corporate debt is being reined in.

The big pile of flammable material at the heart of China’s economy is house prices that are too high. China’s property market issues are unique. Everyone agrees prices are in bubble territory and will have to fall. Even the Asia editor of the Economist, who is otherwise totally excited by more China growth.

You can bet these weird Grotto apartments in Shanghai sell at a premium.

The question is what will happen when Chinese house prices fall. It’s easy to imagine that it will happen in a controlled way, or simply not be too important. That’s what Ben Bernanke imagined pre-GFC too.

China is enormous and its government freer to act than most, due to the absence of democracy. I suspect any crash would be over sooner than some expect. But even a short dip would be a big problem.

The value of China’s growth has been that it is consistent. It can be counted on. Having to risk-weight China’s future growth will take a lot of shine off Australian asset prices.  House prices would be under attack from all quarters, with receding Chinese purchases, a falling share-market, and a weakening Australian economy. Bank shares, which account for a quarter of our stock market, tend to follow house prices. The Chinese government’s ability to manage its economy has become, it seems, one of the biggest risks to our wealth and well-being.

It’s our head inside the lion’s mouth.

Latterday Knight Fever: the economics of prestige

The Abbott government has announced it bringing back Knightoods and Damehoods to Australia. Each year, four people will arise with the title of Dame or Sir.

Of course, the whole thing is a retrograde step taken by a man with, by George, a madness for kings. Knighthoods were first axed by Whitlam in 1975, reintroduced by Fraser in 1976 then axed again by Hawke in 1983.

In one way, I like it. The old honours system which topped out with ACs and AOs was both sterile and opaque. The Sir and Dame system is one that people can grasp. From Sir Lancelot to Dame Judi Dench, people see and understand. If a comprehensible public honour is not the point of an honour system, I don’t know what is.

(One also can’t deny it’s a political football that you kick up into the sky when you want to distract attention from something else, in this case the fact the Assistant Treasurer is featuring in a very unflattering way in a corruption inquiry.)

But the real question for an economist is why would people value a knighthood. It doesn’t come with a free horse and castle. It doesn’t get you a discount at the shops. In some ways it’s less useful than a seniors card.

While the income bump from winning an Oscar has been comprehensively studied, old-school conventional economics has little to say on the matter of awards for public service. Luckily our friends in the fields of behavioural economics have tuned their antennae more closely toward the workings of the human mind.

These Knighthoods and Damehoods are the ultimate in positional goods. A positional good is one whose value comes from the fact that others can’t consume it too. Being the richest person in the world, or gold medallist in swimming, having the best address in the best neighbourhood or a degree from the most elite university. The values of these goods “depend not only on the amount the individual consumes but also the amount others consume.” 

At my old employer, Fairfax, the publication of the BRW rich list was an event that carried huge importance. As if the money was not reward enough, certain business people would contact BRW to make sure their assets were sufficiently valued that they would feature prominently in the list. Being on the list did not increase the value of their money in a consumption sense, but it strongly increased its positionality.

Positional goods are theorised to create negative externalities for the many while benefiting the few (See paper from Brookings Institute.) And the giving of medals, etc. is not without negative externalities. Here is Churchill acknowledging that fact:

“A medal glitters, but it also casts a shadow. The task of drawing up regulations for such awards is one which does not  admit of a perfect solution. It is not possible to satisfy everybody without running the risk of satisfying nobody. All that is possible is to give the greatest satisfaction to the greatest number and to hurt the feelings of the fewest.”

In the case of Australia’s newest old-fashioned honour, just four will be handed out per year. Something so rare will indeed have cachet to spare.

The honours are apparently designed for public service, so the tabloids obsession with a Sir Shane Warne may never materialise: “My intention is that this new award will go to those who have accepted public office rather than sought it and who can never, by virtue of that office, ever entirely return to private life,” Mr Abbott said.

Such prizes may be efficient. In a world where tax dollars are not exactly overflowing from Treasury coffers, the government can use prizes as compensation for jobs that would otherwise command a lot of pay.

As Bruno Frey notes in his paper Knight Fever (which title I happily stole for this post) “The material costs of awards may be very low, or even nil, for the donor, but the value to the recipient may be very high.”

Where you can pay someone with a reward that costs you nothing, it would be economically unwise not to do so.

Phaleristics is the study of awards. There is a strong economic literature on the merits or using awards as motivation. From the merits of prizes in furthering science to prizes for poetry and independent film. 

Awards litter most fields. They are especially prominent in fields where the best make a lot more money than the rest, such as acting, and in fields where the government pays the players (the military). These may be fields where contracts are especially hard to specify ex-ante.

Awards like sportsperson of the year carry less weight than Best Actor awards, because it is far easier to identify success in sport, so an award adds little marginal value. (Roger Federer does not always show up to accept the Swiss Sportsperson of the Year award.) Similarly in fields where a free market determines the pay of participants, such as the private practice of law and business, awards are less visible and carry less prestige.

But the award benefits not only the recipient. Mr Abbott emphasises the reciprocal nature of these awards. They are intended in his mind not just as reward for service, but are in fact a payment for keeping mum:

“If you’ve been the Governor-General or a Governor, there are certain things that you can never really do again. You can never really be as free with your opinion as might otherwise be the case. There are certain jobs that you could never really do again because of the position that you’ve occupied. Ditto for a Chief Justice. There is lots of legal work, for instance, that a former Chief Justice could never really do. If you’re a former Chief of the Defence Force or a former Chief of Army, there are lots of issues upon which you can never really comment by virtue of the position that you’ve held. I think when someone does accept a position of such importance and gravity in our system, it is perfectly fitting to honour them in this way.”

When it comes to creating new awards, there may be motivation on the part of the giver, too:

“The institution (or person) bestowing an award can be taken to be a principal who maximises his utility by inducing the agents, as the recipients of the awards, to behave in his interests,” Professor Bruno Frey argues. He continues:

“The whole area of awards is very vague. The semantic is unclear and the various types of awards are not well defined. There is, for example, no clear distinction between orders,  decorations or medals, and they can go with or without titles and money. It will be argued in this paper that these unclear distinctions are no accident, but an important feature of awards. The suppliers of awards have an incentive to differentiate awards at many different levels and to continually create new awards.”

Managing to keep Australian knighthoods and damehoods to just four a year may prove very challenging. And if it can be done, might such an exemplary public adminstrator not be rewarded with the creation of a still higher honour? Time will tell.

Thoughts on the economics of honours and awards? Further reading you’d like to suggest? Put your thoughts in the comments section below!

How to make athletes pay for their training and still bring home Gold! Gold! Gold!

As Aussie athletes make a name for themselves in Sochi, we can look forward to another four years of seeing their smiley faces shilling for products on our TVs. No athlete steps up onto that podium without making their agent’s phone ring off the hook.

That’s why the idea of a HECS system for athletes is very tempting.

(For the international readers, a quick primer: HECS is a TOTALLY AWESOME student loan system. Zero real interest rates and no need to pay any of it back until you earn above $51,309. Meanwhile Australia’s Institute of Sport spends millions training athletes without seeking any recompense.)

The Australian Sports Commission (which funds the Insitute of Sport) spent $310 million last year, and that’s before counting the various state institutes of sport. (The VIS is boasting today about an athlete that finished 61st in cross country skiing).

Screen Shot 2014-02-14 at 11.32.00 am

But there are a few very intriguing twists to this tale that will require policy makers to work hard to stick their landing.

Problem 1. Athletes are So Poor.

We have a sample bias. The athletes we see the most are the athletes that earn the most. Thorpey. Cadel. T-Brizzle (Australia’s favourite Mormon!) Clarkey.

BRW tells us our top athletes are earning over $10 million a year. But the best need the rest to make their performances stand out. Their glory is made out of trampling coulda-beens, duds, ones with questionable work ethic, journeymen and hacks. The ones who make no coin.

Solution 1. The way an athletes HECS scheme works needs to be different to the student system. Most people are not going to pay off. But some will pay off in spades.

It’s not a low-risk low return game like training people in nursing or accountancy. It’s a high risk, high return set-up. That means you need to more than fully recover the cost of training from the few big winners. If Clarkey got $30,000 of support from the Cricket Academy, you need to get $300,000 back from him to cover all the guys who also got $30,000 but made a string of ducks and no cash. The debts should be 10 times the investment, and recovered progressively.

Problem 2. Sports skills are just not useful.

If the AIS trains you to be the best white-water canoeist you can be, in the hope of bringing home Olympic gold, and you don’t, but then years later you go on to found an IT consultancy and you invent a really quite terrific database that makes you a lot money, should the AIS be able to ping you for cash?

It hardly seems fair.

Solution 2. If athletic earnings could be kept separate from non-athletic earnings, that would be ideal, but I fear such a system is ripe for being gamed.

ATO: “Pay up, Clarkey.”

Clarkey: “Sorry ATO, no dice. Swisse Vitamins paid me this money because I’m a good-looking Aussie dude, they didn’t even know I played a spot of cricket!”

ATO: *curses*

A simpler idea might just be a time limit on AIS debt so it expires at about the time any sporting career ends. Ten years for gymnasts. 25 years for long-distance runners, or five years after any career-ending injury.

Problem 3. Some sports are cash cows, some are not.

The AIS supported 1233 athletes in the most recent year. This includes weightlifters. Pole vaulters. Badmintoners. These guys could be reigning nine-times world champion and spokesperson for the globe’s top shuttlecock brand and still need to pull shifts driving a forklift at a logistics company to pay their way.

Solution 3. This one is easy. Set the bar for repayment at $50,000 and the earners in these lesser sports will never trouble the threshold.

The Clifton Hill under 12s have as much profile as the Australian badminton team.

The reality is that sport is luxury. These are frivolous games to play and our national pursuit of Olympic “glory” is also a simple distraction.

When taxpayers lay the groundwork for a handful of golfers, cricketers, basketballers and boxers to own homes in Miami and St Tropez, there is a moral issue at stake. Sports training can fund itself using the above principles, and by god it should!

If there are any other clever features such a program should have, or if you think I’m totally wrong, leave a comment below!

Rent, buy, panic? Auckland’s House Prices now Higher than Melbourne

We have got so used to leading New Zealand in all matters (possibly excluding rugby) that the facts of New Zealand’s economy break into our consciousness only slowly. 


But here is the truth: New Zealand’s wool industry is a golden fleece and its dairy industry is a cash cow. The Chinese consumer’s taste for consumption is fuelling demand for soft commodities that is making Aotearoa like Perth. They are enjoying a “dining boom” just like our mining boom.

That’s happening at the same time as free-market policies pushed by right-wing Prime Minister John Key, so that New Zealand is coming out of the GFC far richer than it went in.

The rum in the punch at this prosperity party is Auckland property prices, which have risen wildly in the last two years.



If you’re a beneficiary of the great kiwi boom, you might like this “choice as” property offering:


The property price boom is spreading even to the unfavoured areas of Auckland.

Another sign of the booming Kiwi economy is their dollar. We may soon be on the wrong side of parity.


And it’s not just Auckland where house prices are booming. Ordinary homes in out-of-the-way parts of the South Island are also priced oddly high.



The other great explanation for this is low low interest rates. Australia got its official cash rate down to 2.5 per cent just last year. New Zealand has had rates at that level since March 2011.

The rise in house prices has been so marked that the government introduced special laws to try to cap price rises. They have tried to limit the value of loans going to borrowers with low deposits.

So can these high house prices be justified?

New Zealand is still not as rich as Australia, minimum wage there is $13.75, compared to $16.37 in Australia. Average and median earnings are lower too – Kiwis earn 26 per cent less.

It is concerning.

When I think about New Zealand’s housing market, I get the feeling it it is self-evidently frothy. That the bubble will pop. That the end of all this Will. Be. No. Good. 

That is almost exactly the same patronising attitude all these flown-in experts have when they talk about the Australian market. Here’s the latest one, printed just hours ago.

So what can we learn here? That an outside perspective on house prices can feel very different from an inside perspective? That rapid growth should ring alarm bells? That the Chinese demand may not be as guaranteed as the Kiwi market seems to believe? Or just that we should have bought in Auckland two years ago?

When job hunting is an endurance sport.


Unemployment in Australia is rising, and economists are relaxed about that generally, because it coincides with the end of the mining boom.

But new data out today show there is a hidden group for whom relaxation is just a dream – the long-term unemployed. The unemployment rate now sits at 5.8 per cent and rising, up from below 5 per cent in 2011. Getting a job is proving harder and harder:

The number of people starting new jobs (in the 12 months before the survey) is falling. It was 1.69 million in 2012, but had fallen to 1.67 million by 2013.

What that means is more and more people whose work skills are atrophying.

The proportion of unemployed people who had been looking for work for over 12 months has risen from 19.2 per cent in 2011 to 20.8 per cent in 2013.

And not all long-term unemployed people will show up in the figures. Some people will give up and disappear from the statistics if they stop seeking work, for example if they move onto the pension.

This is very bad news. Unemployment rates tend to rise sharply and fall slowly:


[It’s possible my entire interest in economics and statistics is because of the spike in the middle of the above graph. My first awareness of anything called the “economy” was the 1990s recession, which was also when I first heard the word “unemployment” and heard job losses discussed in hushed tones. I remember seeing newspaper articles about 11 per cent unemployment. Then my whole secondary schooling and university education coincided with the long, slow reversal of the unemployment caused by that short sharp recession.]

Unemployment is very hard to remove because of a concept called Hysteresis. It basically says that high unemployment is sticky – the economy “gets used to” functioning with more people out of work.

What that means is that a period of high unemployment is not just bad in the here and now. Its effects echo down through time in the shape of higher unemployment rates.

Like the top of the Rialto, jobs can be hard to find

The Australian situation is still the envy of the world. Our unemployment rate is well below that in the US. But that is cold comfort when you are scanning the job ads for the 53rd luckless week in a row.

The data also contain another interesting tidbit:

66 per cent of people look for job ads in the newspaper, but 84 per cent of people look for job ads online.

But young people use the internet more, with 85 per cent of them looking for jobs online. But for the first time even those 45 years and over reported they are now most likely to look for jobs online, with 79 per cent scouring Seek, Monster, etc. (And that’s why the newspaper business is in so much strife)

Who is making us rich?

Australia’s GDP is soaring. But per capita GDP is not.  

Source: ABS National Accounts

If the total income of the country is rising faster than the income of the individuals in it, that is because of population growth.

Where does Australia’s population growth come from? The ABS makes answering this question easy. Migration beats babies and has since around 2005.

Source: Australian Demographic Statistics


Specifically, China, New Zealand and India.

Source: ABS Australian Demographic Statistics

The boom in population is not working to increase per capita GDP. But there is a political consensus around strong migration. Wonder why?

Source: ABS Household Income and Income Distribution


One answer is that in the absence of strong productivity growth, we need population growth to prevent unemployment. The other, equally true answer is that immigration appears to benefit the rich.

It’s hardly surprising new arrivals don’t capture for themselves their contribution to national income. That necessarily flows to business owners and those already established here. It’s not surprising. Next time someone complains about immigration, feel free to pass them this link.

Australia: Rich and in denial

Australia, you are rolling in it. You’re loaded. Flush. But you don’t seem to realise. Continue reading Australia: Rich and in denial