Jul

29

Have the economic/strategic lessons of WWI been learned? How the West is handling the emergence of China and India.

Paul Frijters | Leave a Comment

One of the big mistakes responsible for the outbreak of WWI was that existing Western powers actively tried to contain the influence of emerging powers. England and France tried to hold on to all their colonies and keep Germany out of the colonial game. Conversely, Austria and Germany were wary about Russia’s growth and housed opinions that advocated war as a means of halting the growing threat. The notion of aggressively holding on to the current division of the spoils was a large factor in the outbreak of WWI. It seems a valid question to ask whether we are making the same mistake with China and India now, or whether ‘we’ have apparently learned our lesson.

Thinking about the openness of markets, the West has learned its lesson well. Export growth of China and India is hardly contained by new trade barriers at all, even surviving the recent financial crisis. Comparing this to the collapse of trade relations during the great Depression of the 1930s, one has to see this as a victory of reason. Slightly worrying is that this support for continued relatively ‘free’ international trade had to be carried by elites (governments and economists) rather than by whole populations. Lessons might have been learned, but apparently not by whole countries.

Thinking about access to resources, the question is whether the West is allowing China a growing share of overseas spheres of influence in order to secure its supply of raw materials, i.e. is China allowed to encroach upon the traditional overseas dependent territories? Here again, it has to be said that the West is not making great efforts to keep the Chinese from gaining footholds in the regions of great natural resources. The explicit Chinese program of investment in natural resource sectors of other countries has not been opposed, and the buying up of mineral deposits in Africa and Latin America of the Chinese is still proceeding relatively unopposed (for a discussion of China’s investment in Africa and Latin America see here). It is the case that the recent introduction of the resource tax effectively means we Australians have cheated the Chinese out of some of their expected profits from investing in Australian mining, but in the scheme of things this is small potatoes.

Thinking about ego-rents, it is also clear that the West is allowing both China and India their ‘place in the sun’. The Olympics were in Beijing; skilled Chinese and Indian migrants are welcomed in Australia and the US; China has a permanent veto at the UN security council; Taiwan and Tibet are not recognised as separate countries by most Western countries; thinking about the future, Taiwan will clearly be abandoned as an ally to appease the Chinese and no-one will seriously interfere in Tibet; Western governments are not talking up the threat of Chinese investments in their army; etc.

On balance, you would have to say that the West seems to be applying the main lessons of WWI when it comes to China and India. It recognises that China is the next world superpower and is letting it happen without too much fuss.

Jul

28

China’s minimum wage

Mark Crosby | 2 Comments

Early this month a number of Chinese provinces raised their minimum wage by one-third, and the Director of  the Wages and Labour Institute at China’s  Ministry of Human Resources and Social Security has suggested that it ought to be possible to double wages within 5 years. Normally economists would be worried about the employment effects of such a large increase in legislated wages, but in China there is reason to believe that these wage increases will have a positive effect on the economy. As with any economy, the key to growing wages without having employment fall is rising productivity. In China this productivity needs to be underpinned by rising human capital, and the physical capital to support growth. In both areas there is no reason to believe that reason trends won’t continue to support strong labour productivity growth. The other factor supporting strong wages growth is the fact that the wage share of income has steadily declined in recent years, from 53% of GDP in 1999 to below 40% today. By comparison this share is 57% in the US and 51% in Japan (so who’s  the communist here!). Raising wages will of course reduce the profits share, but there seems to be room for profits to shrink without harming employment too much. As always with reform in China all of this is a bit of a balancing act – higher wages require continued investments in education, infrastructure, and also a slow appreciation of the exchange rate – fast appreciation and fast wages growth would be place too much risk on profits and employment. But if wages do double in the next 5 years the implications for the global economy are very positive. That would lead to a huge increase in China’s middle class, and to consumption spending and imports. This is likely to  have a much greater impact on closing the US-China trade deficit than changes in the RMB/USD exchange rate.

Jul

26

The limits to evidence based policy.

Paul Frijters | 6 Comments

Evidence-based policy is a buzzword that conjures up images of responsible government: difficult decisions taken after a careful examination of the evidence, tailored local experiments, and then implemented using the best advice available. Sounds good, no? As a buzzword, it is a clear winner and something we all want more of.

But how much can we really expect of this buzzword and what will it actually lead to? Let’s have a look at the dangers and benefits.

The dangers and limitations

The first thing to note about the buzzword is that its main association is with rational control. In order to have evidence based policy, you must gather evidence and have a policy process. That means hiring more bureaucrats to do the gathering and the processing. Hence the buzzword is first and foremost a means for a bureaucracy to get their hands on more resources.

The buzzword also works to legitimise more power to a centralised bureaucracy: if you are going to have evidence-based policy, you must be able to implement the centrally-decided policy. Hence it is an excuse to take independent decision-making power away from local actors to the benefit of a supposedly rational centre. One might note the inherent contradiction here: with less power to local actors comes less local experimentation, meaning less policies are tried out and less possibilities for learning. Evidence-based policy is hence an engineer’s view of how an organisation learns (top-down). An alternative view could be that an organisation learns by following successful examples within the own organisations, which is a more organic but far less ‘evidence-based’ view. One might not know why something works and have no evidence that it will work in other places, but by simply following previous successful examples one can nevertheless reasonable hope to improve over time. That is how evolution works (what accidentally happens to fit its environment gets to procreate) and how many markets work: not by a rational gathering and analysing of information but by an almost blind mimicry of accidental success.

These initial thoughts mean that adopting the word ‘evidence-based’ policy implies increased bureaucracy, increased centralised control, and decreased local experimentation.

Then, let us consider the limits of ‘evidence’. New events that have no clear precedent but to which one must react are clearly outside the scope of evidence. What is one supposed to do then, wait until evidence is gathered? For instance, the recent Global Financial Crisis had no clear known precedence. It only vaguely resembled previous recessions. Should this then mean that all kinds of policies that were not implemented before and for which there was no evidence should not have been implemented? Should there have been no fee for the bank guarantee? Should we have stopped migration? Should we have started government work programmes (which were deemed so successful during the Great depression)? Or should we have done nothing for 50 years during which we gather more evidence?

It is clear that in the case of new major shocks hence, evidence-based policy has no meaning. We react to these based on vague rules-of-thumb and a vague understanding of how the whole economic system behaves. Such vague knowledge, based on vague historical evidence, can hardly be called evidence-based, but it is all we have to go on in such situations.

Then, onto the plus side:

Read more

Jul

26

Should I leave Australia?

Joshua Gans | 7 Comments

It is hard to watch the current ‘population’ debate in Australia, be overseas and not think about that question. Let me put it more specifically, if I am nationalistic towards Australia, should I consider remaining overseas and not returning? In particular, what is the logical answer to that question if I am to believe the general arguments put forward seemingly by both major political parties — albiet one more starkly stated than the other.

To begin answering this question let me state a few axioms from which to base logical consequences. First, I’ll assume the goal is the welfare — happiness, economic prosperity, etc — of all current resident Australians in some sort of aggregate — the nationalistic assumption. Second, I’ll assume that I am not allowed to base my decision on my own economic circumstance and also on the ‘economic contribution’ I might make to Australia in the future — this is the no-economic discrimination assumption that I see politicians as making. Those two should do it.

Now what are the criteria we should use to consider the value of my absence? For one, let’s start with the ‘burden on public infrastructure’ argument. Well, there I am a clear liability. I consume all manner of public infrastructure but, in particular, I consume education resources — and here I am assuming that if I leave, another adult and three school age children will leave as part of the mix (call it a household family emigration policy). While you might say that as an Australia who pays more than the average in taxes, I should take that into account I need to remind you that that would be an economic factor and so I can’t take that into account. My absence would free up resources.

Second, let’s consider what one might call the ‘Western Sydney’ argument. This is the argument that some localities are suffering more from immigration and over-population than others. Well, I don’t live in Western Sydney nor (I’m pretty sure) whatever someone might define as the Melbourne equivalent. So you might think that I am off the hook there. But not so. If I leave, that will free up one house elsewhere that one of the families from the over-populated regions will — through a chain of movements — eventually claim. So long as we leave the country, we are creating the potential to reduce the congestion issue whereever it might be.

Third, my environmental impact. Well, that is surely a disaster; I’ll not pretend otherwise. So if I were to leave that would be a reduction in any future emissions goal. That said, this argument I should not is a fallacy anyway since it is only an improvement to the world problem if I move somewhere that allows me to emit less. Hard to see how I can guarantee that.

Finally, there is the ‘cultural fit’ issue. Now from what I understand that comes from my willingness to partake in Australian culture in all of its forms. Well, it is hard to judge that obviously but let me give you a few bits of information and let you decide whether on that basis I would be cleared for fit from our mainstream politicians. For one, I don’t drink. Not at all. Nothing. Second, I don’t watch sports. I used to watch cricket but no longer have the time and I have lived in Melbourne for 14 years and have never been to an Aussie Rules match — not even for the children. Lastly, I’m an economist.

Near as I can tell, if I accept these arguments as to why we should have a small population as both major parties seem to be arguing, then the logical consequence is that, for the good of the country, I should leave. And I have to say that hearing the current arguments and their flawed moral logic, that thought becomes easier to contemplate.

Jul

23

The social information ideal?

Joshua Gans | 2 Comments

In a carefully choreographed launch, a new iPad ‘social magazine’ app called FlipBoard was released. I say it was choreographed because there were several key ‘influencers’ who released reviews simultaneously with gushing testimonies (here’s one). As it was free, I downloaded it to see what the hype was all about. Read more

Jul

22

Want to know more about market design?

Joshua Gans | Leave a Comment

Take a look at this week’s Forbes.

Jul

21

Post-mortem on the RSPT II: observations and lessons

Paul Frijters | 10 Comments

In May of this year, the Australian government announced a tax increase on the mining company whereby all profits over the long-run bond rate would be taxed at 40%, with off-sets for losses. This tax on the rent created by the boom in mineral prices was spent on reductions in the company tax rate and on various overall subsidies. Following a fairly extensive campaign by the big mining companies and their representatives such as the Minerals Council Australia, the government in July negotiated directly with the three major mining companies and reduced the planned tax increases in return for the explicit promise to stop campaigning. If we compare the revenues the tax would have gotten (under the revised price estimates) with the current expected revenue, it seems radio silence has come at a cost close to 5 billion dollars per year. In terms of discounted values, every dollar spent on campaigning by the mining industry seems to have paid off (ball park figure) something like a thousand dollars in less tax.
Elsewhere, I have talked about how the media campaign was made up of false arguments and wild exaggerations. Essentially, jobs and investments in mining were never truly at stake and it was a straightforward fight over money with on the one hand a few dozen billionaires who stood to lose and on the other hand millions of small businesses and consumers who stood to gain but of whom a fairly large slice was scared into thinking they were going to lose.
Observations:
1. One lesson from this saga is that negative campaigning works, particularly in an election year. The basic recipe for protecting privilege has been applied here: muddle the argument; roll out experts with minor doubts and represent those doubts as sincere opposition; get the masses to believe something unfair is happening and they have something to lose; and never once talk about money. Not once did the media blitz even try to run the argument that it is fair for billionaires to make more money out of Australia’s mineral resources. The eventual outcome, 5 billion dollar less taxes for the mining industry per year, was never put forward as the goal of the campaign. Will the mining companies give this bonanza to charity? Don’t count on it.

2. The super-wealthy stood fairly united. As I remarked in an earlier blog, other wealthy organisations who make their money from rents, like property developers, banks, and most financial institutions, could have expected to be the next in line for tax increases. This is clearly the whole idea of the Henry Tax review. Probably as a result of this, Business Councils did not line up behind the tax even though all non-mining businesses clearly won out because of the reduced company tax rates.

3. Nothing is secret when this amount of money is involved. The mining industry had clearly prepared for this campaign long in advance, even though the Treasury tried to keep the exact plans secret.

4. The dip in Rudd’s popularity was used to settle old scores within his party and his administration. They must have really hated his guts.

5. The media seems to have been a victim in all this, being fed stories about Rudd from within his own circles, being fed all kinds of storylines by the mining interests, and being bombarded with opinions from all and sundry. No wonder the mainstream media had no idea what to believe.

Lessons:

Read more

Jul

21

Population and Growth

Mark Crosby | 18 Comments

Some business lobby groups are apparently opposed to Julia Gillard’s plan to reduce immigation rates, and hence population growth. It is argued that reducing population growth rates would reduce economic growth. Unfortunately this is far from clear cut. The workhorse model of economic growth, the neoclassical growth model, suggests that rising population growth reduces steady state living standards, and has no effect on per-capita economic growth.  The simple and intuitive reason for this is that higher population growth increases investment required to keep the capital stock growing, which becomes more difficult the faster is population growth. If Tony Abbott cuts infrastructure spending and increases population growth we have pretty much a recipe for reduced living standards, according to the standard model. More recent work on economic growth, both empirical and theoretical,  has come to conflicting conclusions about the relationship between population and growth. Some of  Michael Kremer’s work suggests that larger populations increase innovation and economic growth. Becker suggests that it is not growth per se, but fertility rates that affect economic growth (what is clear is that the type of immigration will affect economic growth, with skilled immigration likely to increase growth).

It is almost certainly the case that changing immigation rates will affect the composition of economic growth, with the construction sector for example more dependent on a growing population. But it is far from clear that reducing population growth reduces economic growth.

Jul

20

You can’t go wrong with ‘dynamic’

Joshua Gans | 1 Comment

[HT: Scott Stern] Richard Bellman — of the famous Bellman equation — recounts how he came up with the name ‘dynamic programming’

An interesting question is, ‘Where did the name, dynamic programming, come from?’ The 1950s were not good years for mathematical research. We had a very interesting gentleman in Washington named Wilson. He was Secretary of Defense, and he actually had a pathological fear and hatred of the word, research. I’m not using the term lightly; I’m using it precisely. His face would suffuse, he would turn red, and he would get violent if people used the term, research, in his presence. You can imagine how he felt, then, about the term, mathematical. The RAND Corporation was employed by the Air Force, and the Air Force had Wilson as its boss, essentially. Hence, I felt I had to do something to shield Wilson and the Air Force from the fact that I was really doing mathematics inside the RAND Corporation. What title, what name, could I choose? In the first place I was interested in planning, in decision making, in thinking. But planning, is not a good word for various reasons. I decided therefore to use the word, ‘programming.’ I wanted to get across the idea that this was dynamic, this was multistage, this was time-varying—I thought, let’s kill two birds with one stone. Let’s take a word that has an absolutely precise meaning, namely dynamic, in the classical physical sense. It also has a very interesting property as an adjective, and that is it’s impossible to use the word, dynamic, in a pejorative sense. Try thinking of some combination that will possibly give it a pejorative meaning. It’s impossible. Thus, I thought dynamic programming was a good name. It was something not even a Congressman could object to. So I used it as an umbrella for my activities (p. 159).

I think the same might be said of ‘forward.’

Jul

19

A couple of stories

Joshua Gans | Leave a Comment

A few weeks ago two of my friends (on the same day in fact) shared some lengthy stories that, while not about economics, are worth the read. Here is Shane Greenstein on his trials with bacteria and here is Chris Joye on his trials with international espionage.

Jul

19

Lasers and the NBN

Joshua Gans | 4 Comments

I’ve been generally supportive of the idea of a government push to build a real high speed telecommunications network across Australia. I’m not sure whether they will get there with the social benefits intact but very early on it was clear that the wired versus wireless technology choice was a tricky one. I advocated a market design (yes, a market design) that did not specify technology by benchmarks and rewarded providers for connecting up Australians. The reason for not specifying the technology was because I think it is generally better for the market rather than the government or monopolists to decide these matters.

As a case in point look at this post from Robert Scoble. It discusses lasers, yes lasers, as a potential broadband technology that avoids having to lay down cables. I have no idea if this is feasible but what I do know is that if it is the NBN as it is currently being envisaged is not going to look too great a decade from now.

Jul

19

What is market design anyway?

Joshua Gans | 1 Comment

This article by David Uren has got some international attention. It is about Per Capita and its potential influence on our new Prime Minister. The particular bit of interest is the idea of “market design.”

The idea of “market design” is a key theme for Per Capita. Governments have always had a role in setting the rules of conduct for markets through trade practices. Per Capita argues that with due government guidance, markets can perform a powerful role in delivering human services, such as the jobs network.

This prompted a question from, arguably, the founder of market design as a field in economics — Al Roth — who asked me whether what they mean by ‘market design’ in Australia was the same as what they mean at Harvard. Well, as with all concepts, there is a danger it might be used to justify anything but my impression was that the concepts were supposed to be the same. That is, market design is the careful evaluation and commitment to rules and procedures to ensure that otherwise undirected economic agents choose socially efficient outcomes. In particular, it involves using the hard headed techniques of game theory to propose rules and to back these up with experimental, field or trials to ensure they work as intended in practice.

I have attended Per Capita’s annual conference on two occasions. At the first, I actually talked about Roth’s ideas regarding market design and I think that talk went over well. The second was more wide ranging but about design in the face of financial crises. Sadly, I won’t be able to attend this year.

Jul

19

Economic consensus, tell him he’s dreaming

Joshua Gans | 10 Comments

A week or so ago, I reacted to this piece by Ross Gittins that I thought may have implied that I was anti-action on climate change. I was wrong and that was not his interpretation but it was an issue I was sensitive on as I had gone out on a limb in the past to support the Government’s proposed actions on climate change (see here and here) even as most others had moved their support away. I did something that I rarely do and pulled the post.

Today, Gittins was back with another swipe against academic economists. The thesis this time is that the “lack of consensus” amongst Australian economists on how to implement climate change policy led to its downfall. Gittins is careful to note that some did support the Government’s plans but was scathing in his conclusion:

Parkinson concludes that economists’ lack of agreement on key implementation questions renders their preference for a carbon price signal largely meaningless in practice. In fact, it undermines public support for least-cost solutions. Well done.

The article recounts the Secretary of the Department of Climate Change’s view of why economists disagree. The possible reasons for this are (a) environmentalism has become synonymous with anti-growth (although that reason doesn’t quite wash to cause lack of agreement); (b) economist’s can’t evaluate catastrophic risk (well, who can do that well and in any case, I am pretty sure they can); (c) economist’s have a strong preference to leave things to the market; (d) they prefer perfection rather than a good compromise. Of these reasons, only the last has anything to do with disagreement on how to implement climate change policy. And even there it is arguing for agreement just agreement that the Government wasn’t on the right path! Oh and by the way, where are the perfection arguing economists in this debate. Could someone please name one and point to a few public words to that effect? Just one! I’m not even looking for The One who has supposedly de-railed current policy.

In any case, trying to work out why economists disagree is hardly practical. Indeed, it is lamenting an ideal view of public debate that policy-makers pine for but can’t have practically. Surely, we need to take it as an axiom of public policy implementation that economists will disagree.

Now, here is the thing, if it is an axiom, then it falls back on the policy-makers to work out what to do about it. My guess, given all of these discussions, mainly from public servants, is that in days old, public servants were the ones who did the job of translating academic economist opinion for politicians. There were few other paths by which academic economists could engage in policy debate and all of them were so costly very few bothered.

Today, that isn’t the case. Any defunct economist with a computer can hit ‘publish.’ The amazing thing for me is that this actually is mattering. I imagine that the politicians are being given the published arguments and that within the internal workings of government this is making the public servant’s job harder.

The right reaction to this is not to criticise the lack of agreement amongst now visible economists in public speeches. Instead, it is to work out how to engage with the new process. Public servants need to recognise it is there and come to meetings armed and ready to deal with it rather than, perhaps (and I don’t know if this occurs), dismissing them as the work of cranks. They need to be proactive in engagement, talking to academic economists who are likely to comment prior to policy releases. Work out how to explain the practical constraints earlier on. It is a new task to be sure but it reflects what seems to be a new reality.

And there are other ways of doing this. We economists don’t like to see public debate moved by politics rather than sensible discussion. That is why we organise conferences and certainly why we organise petitions to demonstrate large support when it exists. Others, in particular Warwick McKibbin and CEDA, have led moves to organise economists to collate policy debates in a more usable form. These moves require Governmental support to continue — and not in money but attention. Per Capita has been one think tank that has been doing this but more on that later.

Finally, perhaps this is the very charge that some budding young politician who might have some academic cred might be able to get behind and cut through.

Update: Over the fold is one of my favourite scenes from The West Wing. Josh has been sent out to sell free trade but they keep him in the dark over potential job losses in the short-term. He finds out and is upset. The episode is entitled Talking Points and is about how economic policy is sometimes just hard to sell. Read more

Jul

19

Bank Regulation

Stephen King | 5 Comments

With the election campaign now on, it will be interesting to see the policies of the major parties on banking, particularly bank regulation. Just because China saved Australia from the worst effects of the GFC does not mean that our system is all fine and dandy. We have learnt some lessons about banking from the GFC and we need to see how the parties are going to deal with these lessons.

I have touched on these lessons before.

Lesson 1: The Government WILL underwrite financial institutions – whether it wants to or not. This is the big lesson. The federal government currently implicitly insures the banking system. It is politically impossible for the government to do anything else.  This lesson is the starting point for thinking about bank regulation.

Lesson 2: The banks should pay an insurance premium: The government’s insurance of the banks needs to be made explicit and the government needs to act as an insurer through its regulation of the banks. We do not need a new ‘bank tax’ but the banks should pay an insurance premium to the government. The premium should be based on the actuarial risk associated with the allowed bank activities.

Lesson 3: The banks should only engage in a more limited set of activities to avoid moral hazard: The government must police the activities of the banks like an insurer. This means restricting the activities that insured banks can undertake and splitting off some of their current activities. For example, Christopher Joye in a recent speech suggested that banks should be required to divest their funds management activities. From an insurance perspective this sort of separation will be necessary to avoid the banks raising risk at taxpayers’ (i.e. their insurer’s) expense.

Lesson 4: Design financial regulation carefully:We have a lot of experience of industry regulation. Apply it to the banks. We will not get perfect regulation but we can design clear regulation that is not subject to gaming.

The banks will not like these changes. After all, they have been getting free insurance for years. Why would they now want to pay for it?

They have had an insurer who has placed little restriction on their activities. Why would they want to face (actuarially sensible) restrictions now?

The banks will argue that the rules will make them worse off. Yes! They will. The banks have had a free ride through the government underwriting, so obviously they will be worse off by having to pay for an insurance service that they previously got for free. The banks will argue that ‘others’ will be able to compete in markets that they cannot compete in. Of course. But the others better not have an implicit (or explicit) government guarantee.  The banks will argue that money will flow to these ‘others’ to avoid the regulations. Yes – if people wish to place their money in a riskier, non-insured option then that will occur. The government needs to make sure it can credibly commit NOT to underwrite these ‘others’. But given that commitment , if consumers want to take the risky alternative they can do so. But the banks cannot – because the government cannot credibly let the banks go bust.

Which brings me to my final lesson.

Lesson 5: Regulated banks will lobby to remove regulation. Don’t!

Jul

19

non price increasing carbon taxes

Mark Crosby | 4 Comments

Tony Abbott has already stated that there will be “no carbon price on consumers” under the Coalition. As Geoff Carmody has pointed out in the AFR and elsewhere, this is ludicrous. I suspect that Abbott really means no taxes or other action on climate change, but assuming that this is not the case, any new climate change initiative will and should impose costs on consumers. Imposing a tax on producers does not mean that the incidence of the tax is on producers, and ultimately we need better price signals to move our economy from being such an energy hogg. Unfortunately both sides of politics have played this game of we can change the world but we’ll do it by not making any (median) voter worse off for some time.  Disappointing but predictable.

Jul

18

Organisation of iron ore exporting countries (OIOEC)

Sam Wylie | 4 Comments

Australia, Brazil and India completely dominate the export of iron ore in seaborne trade.  In a market of about 750 million tonnes, Australia have about 40% of market share each and India has about 13%.  You might think that these countries would cooperate to capture the surplus from rising iron ore prices and volumes.

India has an export tax or 15%.  Brazil was considering an export tax earlier this year, but as far as I know they have not imposed one yet.  Instead of the failed RSPT, why didn’t the Rudd Government just impose an export tax and at the same time collude with Brazil and India to have them impose a similar tax.  And then increase or decrease export taxes in unison to achieve the optimal extraction of rents from the market.

On current expansion plans Australia will be exporting about 700 million tonnes of iron ore by 2018.  The spot price of iron is about $100 per tonne (having fallen from $180 earlier this year) and the average total cost of extraction is about $35 per tonne.  A $20 per tonne tax would raise over $10 billion per year of extra taxes.

With the cooperation of Brazil and India, a much, much higher tax might be sustainable.  It depends on the long term price elasticity of iron ore, of course.  I don’t have an estimate of elasticity, but I suspect the market is inelastic because of the shortage of high quality iron ore outside of Australia, Brazil and India.

If the three countries formed an Organisation of Iron Ore Exporting Countries (OIOEC) it would initially be met with fury from iron ore importers, especially China, but eventually it would be accepted, just as OPEC is accepted.  The three countries could have a clandestine agreement, but I am not sure that could survive the open political process in Australia.  Better to have an explicit, open agreement of collusion between India, Brazil and Australia.  OIOEC would have to be structured in such a way that it did not run afoul of our WTO membership.  That just means it would have to be a loose understanding between the countries rather than a formal agreement, but that could be arranged.

An export tax would reduce overall investment and production in iron ore in Australia.  But, that is what you want as a monopolist; to restrict output to drive up the price.  Since the economy is capacity constrained, deadweight losses on the Australian side would be moderate.

It seems to me that the RSPT was ridiculously convoluted.  The new agreement will raise much less tax because of the market value provision for calculating a reasonable on assets.  It is better to keep it simple and take a whole market approach to rent extraction by colluding with the other producers.  If we don’t do that we will be leaving of a lot of money on the table over the next 30 years.  Let’s say that global trade averages a 1.5 billion tonnes per year for 30 years and rent extraction is $45 per tonne with effective collusion between Brazil, India and Australia.  There might $2 trillion, to be divided between those countries.  That is the big prize that we should go after.

Jul

17

Only one choice

Joshua Gans | 14 Comments

I think there is only one choice in this election; Labor. Let me go through issue by issue:

  • The economy: Australia missed the recession. Was it due to the Government or to luck? Hard to tell. The point is that it would have been very easy to have stuffed up with economic management and have blamed it on the world. The fact that that did not happen is amazing and, if ever a Government deserved some credit for good economic management, it is this time.
  • Immigration: I can’t say that the new Gillard direction on immigration is inspiring much confidence but the politics of this issue suck. The point here is that the Liberal Government in its current ‘old hat’ conservative guise (as apposed to ‘new hat’ liberal guise we briefly saw with Malcolm Turnbull) cannot be trusted on this issue at all.
  • Science: the Government, like so many before it, has failed here. But no one else is proposing anything better so it is a wash.
  • Competition policy: the NBN policy was looking good but the deal with Telstra is a big worry. That said, the issue is not with the politicians at the moment but the ACCC so it is not decisive for the election.
  • Censorship: the Conroy Internet censorship plan will not go away. Again, though, no other party is willing to make this an election issue.
  • Financial system reform: the clear big issue facing us is the need to review and make sure we future proof our financial system. Amazingly, no party has taken the charge on this so we languish.
  • The environment: this is the big issue that will not be resolved at all by the election. That is the Prime Minister’s fault. But I note that John Quiggin is likely to advocate a vote for The Greens on this issue. Here is the problem with that: it is the Green’s fault that the CPRS was not passed. The Greens blocked the only move forward that had been proposed ever! Had they been supportive the Government could have bribed one of the independents or, let’s face it, a Liberal or two may well have crossed the floor. They didn’t and now we don’t have climate change policy for at least 3 more years. How can anyone vote for a party that would let perfection be the enemy of the good in such a blatant manner?

There are other issues: health, tax and education but I can’t be bothered to write about them. So, looking at the above, we either have reasons to support Labor or complete indifference amongst all parties. Had Malcolm Turnbull still been at the head of the Opposition, this would have been a much harder choice. But then again, had he been there we would have had climate change policy.

I have to admit that I am not inspired by this election (although I would by much happier about expending the costs involved in casting a vote if I lived in Canberra). In the past when I have felt this way I have let one of my children determine what I should vote. That led to a vote for The Greens in a previous Victorian state election. But I know what my 11 year old daughter will want me to do: this time, she will want me to vote for Australia’s first woman PM so we can see how she does. And so that is what I will do.

Jul

17

Is this what’s changed?

Joshua Gans | 3 Comments

All through the twitter coverage of Steve Jobs’ press conference, I wondered what would have happened if this issue had emerged with the media as it was in 2000 or 1990. Users may have noticed the antenna issue. Random ones may have brought the issue to the attention of media outlets but it would have taken more than 22 days for it to have become a story. In that time, Apple could have adjusted the problem and also, given away free cases — not as an apology as they have now — but as a promotion. The marketing issue would never have emerged.

But that didn’t happen. Thanks to the Internet, the problem flared up in 22 minutes (I’m being poetic here). It was too quick for the company to react with a counter-strategy by stealth while that issue simmered in the media for all that time. Had Apple done what they had done to react today — namely, a fix of the algorithm and free cases — without anything else, their reputation would be damaged. The Internet changed what they had to do.

And what they did was provide information. They told us about their own investigations, data from AT&T and so on. Pretty much all of the information is verifiable and the verification process will be public. But not to admit fault was no longer an option for Apple. And not to be ahead of the game — to some extent — on data provision was not an option for them. The new media has brought with it, the end of stealth and patience as a business strategy in the face of a quality issue.

But what is interesting is that their competitors are now on the back foot. They were silent and now Apple has challenged them with their own antenna issues that others will verify. In the past month, they could have come out with this first and preempted Apple but they did not. And what is more, I reckon iPhone cases sell more than other smart phones. I’ve never see a Blackberry with a case. What bodes for them now? I think a bit of ‘raising rivals costs’ has occurred.

[Update: It looks like the great Scott Adams (of Dilbert fame) agrees with this.]

Jul

17

Outsourcing fail

Joshua Gans | 3 Comments

… or win, depending on your perspective. From the WSJ:

Billy Raye, a 51-year-old unemployed bike courier, is looking for work.

Fortunately for him, the Mid-Atlantic Regional Council of Carpenters is seeking paid demonstrators to march and chant in its current picket line outside the McPherson Building, an office complex here where the council says work is being done with nonunion labor.

“For a lot of our members, it’s really difficult to have them come out, either because of parking or something else,” explains Vincente Garcia, a union representative who is supervising the picketing.

So instead, the union hires unemployed people at the minimum wage—$8.25 an hour—to walk picket lines. Mr. Raye says he’s grateful for the work, even though he’s not sure why he’s doing it. “I could care less,” he says. “I am being paid to march around and sound off.”

Kudos for the union’s efficiency drive. What next? Anti-globalisation movements hiring workers in India to staff call lines?

Jul

16

Time to give priority to the urinal issue

Joshua Gans | 9 Comments

If there is one thing I know attracts a great deal of interest on this blog is when I feel its time for another urinal post. As I know from my popular economics book — the only one in existence to include a full chapter on toileting — no issue commands more interest than ones in this area.

So it was with delight that, on no less an media outlet than the BBC, that the issue of ‘Potty Parity’ was given prime billing. It appears that John Banzhaf, a law professor at GWU, has led a push to bring equality to public bathrooms in the US. As I raised in a previous post, there is a complex issue of the allocation of space as well as the queuing problem in bathrooms. From experience, we know that women have to queue more than men and so incur waiting costs. These waiting costs are different from those incurred by the men outside waiting for the women as we already have done our business; for instance, men could avail themselves of this iPhone app while they wait. A straight economics perspective would suggest that there is an imbalance in the allocation of facilities between men and women and Banzhaf’s mission is to restore some fairness. Read more

Jul

14

Airline body scanners

Sam Wylie | 3 Comments

A ground swell seems to be building against the introduction of full body scanners at airports around the world.  The SMH reports today that Dubai has banned the scanners for privacy reasons.  On top of privacy concerns there are concerns about the radiation from the machines calling cancer.

One of my sisters is a radiologist.  She is a leader in her field of breast cancer screening and has published over 20 papers on the subject.  I asked her about the danger of extra radiation the other day.  She said that more radiation means more deaths, as simple as that.  If full body scanning becomes ubiquitous then tens of billions of scans at 0.1micro sieverts per scan will cause either hundreds or possibly thousands of extra deaths.

A full chest x-ray is apparently 100 micro sieverts; a lot more than a body scan.  The radiation is not intended to penetrate the body, but instead ‘back scatter’ from the skin to give an image of anything under clothing.  Moreover, airline travel involves a lot of radiation anyway.  A body scans equates to a few minutes of flying at altitude (I spend nearly 200 hours per year up in the air), and you inhale some nasty compounds when flying; who knows what they do to you.  But there is a problem will calibration.  A properly operated machine will give 0.1 micro sieverts but some machines will give much more, even ignoring the temptation for operaters to turn them up.

The cancer risk is low.  Probably a few hundred people will die young per decade if full body scanning is implemented world-wide.  The problem is that the terrorism risk is low too.  How many extra people do you expect to die on aircraft from terrorism over the next decade if the scanners are not installed —  a few hundred maybe, or fewer?  It is hard to compare improbable events.  We don’t know whether the cancer risk is higher or whether the terrorist attack risk (attacks that would not otherwise be prevented) is higher.

What weighs against the scanners is the right to privacy.  Going into public spaces involves giving up the right to some privacy.  The police have a reasonable right to insist the drivers submit to breath tests, for instance.  Saliva tests are on the edge of what is reasonable and they do not have the right to test your blood.  Police, in Australia, do not have the right to stop and search citizens without due cause (they soon will in WA).

I think I know how this will pan out politically.  The fear of terrorism will trump privacy and radiation issues if terrorism is front of mind.  Opposition to the scanners was building slowly until the planned attacks at Christmas time were narrowly thwarted.  Then, terrorism was back to front of mind.

It seems that the public has hyperbolic discounting of data when it comes to forming subjective probabilities.  Recent events are exponentially more important than more distant events.  This was true after Sept 2001.  It is also true in the global warming debate, where the public’s demand for action on global warming has collapsed since the end of the drought in Eastern Australia.

For me, the scanners are too much and the issue is privacy.  We should be able to go through public spaces without having our naked bodies exposed.  The invasion of privacy does not match the terrorist threat, net of the deaths from extra radiation.

Jul

13

Antitrust and Apple

Joshua Gans | 4 Comments

Once indication of when a company has ‘made it’ is when they start to be the target of antitrust attention. A couple of years ago, Google entered that club and now Apple looks set to follow.

Apple is facing two antitrust accusations. First, there is its exclusive deal with AT&T. This was a deal inked prior to Apple even entering the phone market but we should recognise that, on its face, it hinders consumer choice. Of course, that is not the antitrust standard. The question is whether it damages competition. Now normally an exclusive deal can do that by allowing one firm to extend its monopoly position into related markets — in this case, it would be Apple and AT&T locking up the iPhone so that other networks will be driven from the market. Notice that it isn’t about other phone makers being driven from the market as AT&T still sells other phones — so exclusivity is one-sided. Now AT&T’s market share has grown but it hardly looks like other carriers will be driven out of business or crimped anytime soon. Indeed, I would say that the general consensus is that the main harm from this deal has been to Apple itself. In other countries, I suspect that the iPhone market share is much higher where there is no network locking of iPhones. The point here is that it is tough to define a market where Apple has dominance let alone a monopoly. It isn’t the mobile phone market (Nokia still is the largest). It isn’t the smart-phone market (where at least in the US Apple lags both RIM and Android-based phones). The only market it is a monopoly in is the market for iPhone. Now while I, for one, will accept no substitute, you will only need to look at the comments (I am anticipating) to see that that is not a shared view and maybe, not a widely shared view. A monopoly for a market defined so narrowly around one company is a monopoly by definition but that is hardly the standard for antitrust analysis.

The second claim is on the access to the iTunes App Store and by virtue of that access by developers to being able to sell iPhone apps. Apple controls that access and sets its own criteria — criteria that likely are not universally shared. It also appears to limit access by apps that compete with its own functions; although those functions are ones it gives away for free. Moreover, apps need to satisfy Apple’s pricing terms. But is this illegal monopolisation? The question again is what market does Apple have a monopoly or substantial market power in? The best candidate is that there is a market for application distribution and use and that Apple has a large share of that platform. Now it still lags both Android and RIM for installed base on such platforms but it does appear to have the largest revenue. But that does not necessarily equate to market power. Could Apple, for instance, raise all app prices by 5 percent and find that profitable? It is highly unlikely. While its installed base of current iDevice users would not be able to substitute out, it would face a terrible time competing for new consumers and renewals. This is probably why Apple has not done this even as its installed base has grown. But even if Apple has substantial market power here, there remains the question of its rights to set terms. One issue is that it set those terms at the beginning — well, before it had, by definition, a market, let alone market power — and it has not changed them since. It has only added features. If it took features away, at the very least, we could start to consider whether there is a case against them but that hasn’t happened and nor does it look like it is going to happen.

Jul

11

Videos now available for “Who Owns The News?” seminar

Kwanghui Lim | 2 Comments

who-owns-the-news-panel

Click Image for Video Album

Last week MBS hosted a public seminar on “Who Owns the News?” exploring the impact of the internet on the news industry. The event was organized by IPRIA, CMCL and MBS CITE. It serves to clarify the key issues and lays the groundwork for a discussion of these issues. I had fun and hope that the 110+ people who attended it did too.

Sam Ricketson, Professor at Melbourne Law School, chaired the event and did a great job orchestrating the Q&A session. Mark Davison from Monash spoke about changes in copyright law and expressed concerns over the “Hot News” doctrine, an approach currently being proposed by news organizations in the US to prevent others from copying their content. Stephen King outlined the economic issues and has posted his very thoughtful comments at http://economics.com.au/?p=5909.

As the discussant, I described what I had learnt from Mark and Stephen and also tried to consider various options faced by a CEO in this industry. My pdf slides are at http://works.bepress.com/kwanghui/18. While my comments might have been perceived as pessimistic by Stephen and others, I am actually quite optimistic about the future of the industry, but mainly for individuals and  firms trying out innovative ways of gathering and delivering the news. I am however pessimistic about existing firms: if history has taught us anything, it is that many of them will struggle to adapt with these drastic changes.

The video recordings for “Who Owns the News?” are now available. I have posted them at http://vimeo.com/album/253549. Portions were removed to protect the identity of audience members. We thank the speakers for permission to share their insights online. Enjoy the show ;-)

Jul

10

NTP Sues Apple, Google, Motorola, HTC, LG, Microsoft

Kwanghui Lim | 4 Comments

Last year David Weston and I wrote a teaching case on how in 2000, NTP sued Research in Motion (makers of the popular BlackBerry device) for infringing its patents that cover the wireless delivery of email (free download from WIPO). Well, NTP is at it again, and has just sued a number of firms including Apple, Google, LG, Motorola, HTC and Microsoft that make smartphones. The Washington Post has a brief description of the patents. The earlier case ended with a $600+ million settlement, but that large amount was partly the result of (a) RIM was found to have willfully infringed NTP’s patents and attempted to deceive the court when presenting evidence of “prior art” in 2002, and (b) as the case escalated, RIM faced the very real threat of having its US operations closed down in 2005. A number of the original patent claims were subsequently revoked, but I imagine that NTP is hoping that the larger base of email users these days will give it enough licensing revenue from each of the mobile operators. If you haven’t heard of NTP, that is because the company is sometimes thought of as a patent troll and is not well-loved. In my opinion, the lawsuit also highlights a more subtle problem with the patent system. When successful firms like RIM and Nokia choose to settle with companies like NTP, it gives NTP an incentive and the financial resources to then attack a broader group of other firms. A precedence is also set. It would be better if such firms fought back, e.g., by establishing prior art that invalidates such patents or by pushing back on the claims.

Jul

9

Who owns the news?

Stephen King | 2 Comments

I gave a talk as part of a seminar on ‘Who owns the news’ last night. For those interested, my speaking notes are below. Thanks to Megan Richardson, Beth Webster and others for organising the event – it led to a very stimulating discussion. Read more