Sep

30

Parental leave report

by Joshua Gans | Filed Under Economics | Comments Off

The Productivity Commission’s Parental Leave report is out. It’s headline recommendation is for 18 weeks paid maternity leave at the minimum wage with additional superannuation payments provided by the employer. In addition, there is provision for 2 weeks paid paternity leave.

The idea for this minimum payment is non-controversial. Basically, it morphs the baby bonus into a parental leave scheme although it is more generous. It is something that I was in favour of.

Of course, as a broad policy that idea is one thing but the specifics of its implementation really worry me. First, the whole scheme will be administered by employers who will have to determine eligibility and navigate any bureaucractic requirements. Second, the payment will literally be at the minimum wage which will mean that Professor Ian Harper will now have another lobby group on his hands in his annual decision: that is, baby welfare versus causing workers to perhaps lose their jobs! Third, there are big incentives for women to be employed prior to giving birth. This will be great fodder for ACA and Today Tonight especially if we have a recession and women can’t find work easily. In that case, we will have some women being expropriated by their employers on the eve of giving births and others faced with $5,000 less in payouts because they can’t find work. Fourth, the payments are less generous for women in high salaried jobs but the PC seems to think that they have it OK anyway.

Compare all this with the alternative: a means tested baby bonus payment, administered by government. Almost the same money but without all the rules, tax returns and what-have-you. After all, is the marginal incentive of higher payments for employed than non-employed women really going to make all the difference in labour force participation?

Anyhow those are just some initial reports. When I get a moment I’ll also comment on the timid nature of the PC’s entire report in trying to do something beyond the minimum.

Sep

30

If you think the financial crisis is scary …

by Joshua Gans | Filed Under Economics | 1 Comment

… check this out. And if you think that is familiar but can’t quite work out where look at this; well worth the rental by the way.

Sep

30

Just great

by Joshua Gans | Filed Under Economics | 3 Comments

I woke up this morning to news that the US Congress rejected its own bipartisan, negotiated rescue package for the falling economy and, as a consequence, it appears to have fallen as fast as it possibly could.

Part of the sales job for having a globally integrated economy is that each bit is managed by a responsible government. Let’s face it, right now, that can’t be said to be the case for the US. For this reason, I think people will have every right to question today our dependence on the US as a trading partner, hub in the global financial network and everything else. I am not suggesting protectionism or anything like it but the Australian government needs, more than ever, to assess our economy’s exposure to the poor economic management of others. Having the fourth largest pool of private savings demands that attention.

Sep

29

Intervention in Crikey

by Joshua Gans | Filed Under Economics | Comments Off

Christopher Joye and I had a piece in Crikey today on the government intervention in home mortgage securities. It is over the fold. Read more

Sep

27

Credit on credit

by Joshua Gans | Filed Under Economics | 3 Comments

With the government’s highly sensible move towards providing liquidity in the residential mortgage-backed securities market, it is with some bemusement that I note that much of the discussion this morning was about credit (here and here). That is, not credit as in credit crisis but credit as in who gets it.

My view is that the contribution towards getting this policy up was dispersed. To be sure, Chris Joye first proposed the idea to me back in March and convinced me of its importance. That led to our joint paper released very soon afterwards and much media discussion about it (see here for more details). In that paper, we identified the problem (just before the RBA came out saying much the same thing) and also proposed various solutions which we dubbed ‘Aussie Mac.’ But we have always considered that how this came about was very open. Certainly, initially it would be all government run but eventually we speculated that it could be privatised. And we were agnostic about the need for a new GSE in the short-term. For instance, in our House of Representatives submission in June we said:

If there is a pressing need to immediately implement AussieMac, it could be operationalised in the interim through the Treasury’s Australian Office of Financial Management (AOFM), which is purpose-built for this type of activity.

Of course, that is precisely what happened yesterday and was the route for which we were most quizzed about by the government (in private communications) and also something we raised when questioned by Malcolm Turnbull (among others) at the House of Representatives inquiry.

Around the same time, the Australian Securitisation Forum was gathering a coalition from the industry to support a very similar but ultimately more specific proposal. Given their need to convince their constituency, they were likely working on this for much of the year. But bringing that set of interests to the table was very important in getting government attention on the issue.

Indeed, in April, ASF chief, Greg Medcraft successfully brought the whole idea to the 2020 Summit and it was mentioned in the initial report. The government’s move yesterday can be seen as it implementing on the first state of a 2020 idea.

Given the troubles faced by Fannie and Freddie, the discussion of these options cooled somewhat as everyone tried to work out what it meant. That did not stop more right wing elements from continuing to critique the whole idea of intervention and in this regard they had some support from Treasury and RBA officials who told the House of Representatives that intervention in the RMBS market was not warranted. The August drop in bank interest rates gave them some comfort here.

And then we arrived at September. The problem had not gone away and there was another RBA rate cut on the cards with a real risk that banks would pocket the difference rather than pass them on. This state of affairs was not lost on Malcolm Turnbull who raised the idea of AOFM intervention again last week; explicitly tying it to issues of competition. That led to some politics as his statement was clarified.

I must admit that, in my experience, these types of policies are hard and they are difficult to communicate in sound bytes. We should expect some clarification as Chris and I have had to do over the last six months. But when it comes down to it, my reading of the past few days is that for the core idea there is bipartisan support. This is something that should be welcomed and compared with the lack of the very same thing in the US, should give us confidence that should things worsen for Australia, that we have leadership on both sides that could come together and do what is right.

Ultimately, the issue of policy credit is very unimportant. I see that we have overcome substantial uncertainty to put us on a path to supporting markets and laying down rules for their appropriate design as critically important and very welcome. Many have imagined and worked towards this and it is great to see it happening. I think we have lots more to do on financial reform but yesterday will be remembered as the real beginning of movement on that front. Today there is real reason to be optimistic.

Sep

26

Intervention is here

by Joshua Gans | Filed Under Economics | 6 Comments

Just yesterday I noted that intervention by the government to restore confidence in mortgage-backed securities was on the cards. Today, it is on the table and out the door. From the Treasurer:

Today I announce that the Australian Office of Financial Management (AOFM) will purchase Australian residential mortgage backed securities (RMBS) as part of the Government’s commitment to strong and effective competition in Australia’s mortgage markets.

The Rudd Government is committed to ensuring that Australia’s financial markets continue to perform strongly and provide Australian households with a wide range of financial products at competitive prices.

Since the deregulation of the financial system in the 1980s and 1990s, the RMBS market has provided an important source of funding for new and smaller mortgage lenders to compete with the major banks.

Australian RMBS are of high quality, and continue to experience low rates of arrears. However, due to recent extraordinary developments in international capital markets, liquidity in the primary Australian RMBS market has been reduced. Quarterly issuance has fallen to around $2½ billion since mid-2007, compared with $18 billion over the previous year. This has weakened the capacity of mortgage lenders reliant on the primary RMBS market as a source of funding to compete.

To reinvigorate the Australian RMBS market and support competition in mortgage lending, I will direct the AOFM to invest in AAA rated RMBS in two initial tranches of $2 billion each.

This is not an Aussie Mac as a long-term institution but is along the lines we had been suggesting earlier as a short-term or transitional measure and, more recently, as critical piece of insurance, as the crisis grew deeper. Aussie Mac was designed for the future. This use of the AOFM is for right now. It is an appropriate move and my expectation is that it will have an effect on those markets right way. Hopefully, we will see the non-banks and smaller banks get right back into this market and we will be able to turn the ticker on aussiemac.org off.

Sep

25

Intervention back on the cards

by Joshua Gans | Filed Under Economics | 4 Comments

What a difference a month or so makes. Back in August, RBA and Treasury officials paraded before the Senate and stated categorically that the markets were working as expected and the non-bank exit was but a blip and they would return forthwith or, at the very least, the expectation of their return would provide much needed competitive discipline to the major banks. And just to prove them right the banks played ball and dropped interest rates with the RBA.

But now another interest rate cut may be around the corner and with enviable profits it is not clear that the banks will follow suit. Nonetheless, I nearly fell off my chair when I heard the Treasurer, Wayne Swan, say this in Parliament yesterday:

We also, in that legislation, gave authority to the government for the AOFM to be more active in the area, should that be required. We stand ready to take further action in the mortgage market to make it more competitive so that Australian families out there get a fair deal. That is the government’s position.

This was surprising that the Treasurer all but ruled out such intervention only a few months earlier and the non-political executive branch had ruled it out as unnecessary. As it is unlikely that moral suasion will work again, I guess the Treasurer doesn’t want to face an electorate with limited bank competition.

So let me revisit the case for the intervention as I summarised it in July:

  1. Home lending is funded from two sources: deposits and securities.
  2. Thanks to the US subprime crisis, securities have dried up in Australia.
  3. The result is a contraction in supply, a rise in interest rates on mortgages, credit rationing of SME business lending and the major banks now having 90%+ of the home lending market (reversing a decade or more of competitive gains).
  4. Non-deposit taking institutions (and smaller banks) have been left out in the cold. Compared with the US and Canada that have GSEs where they are still operating competitively.
  5. An Australian GSE would bring back the securitisation channel. By using the government’s AAA-rating it would restore confidence to that market and so long as the GSE was not backing non-conforming (high risk or subprime) loans then there would be no cost to the government.
  6. The only risk would be a major housing meltdown (of the kind seen in the US recently) but in that situation the government is already carrying that risk by an implicit guarantee to the banks.
  7. There would be no moral hazard as loans backed by the GSE would have to be conforming.
  8. There would be no crowding out because supply is currently tight and the GSE could have a mandate to only ramp up activities in liquidity constrained times.
  9. At present, there is no other solution that offers to do all of this and back sustainable competition in home lending. (The spectre of re-regulation looms as a lack of a securitisation pathway removes the Wallis justification for de-regulation).
  10. And that is why we need a GSE.

The RBA and Treasury officials now appear to agree with 1-3 but don’t otherwise care. The Treasurer (and indeed the Opposition too) are now down on 4 and 5. But in the US, they have gone all the way to 10 with a nationalisation of the mortgage securisation business; the ultimate in government intervention and support and with no claims what so ever that this isn’t a market worth supporting.

When it comes down to it, Australian businesses (non-bank lenders) have failed but there has been no bail out. To be sure, this hasn’t caused a meltdown but it has left consumers with extra interest rate payments (now at a cost of almost $2.4 billion). And now Malcolm Turnbull has stepped left over the government and is calling for liquidity to address this and restore competition. It is not hard to imagine that Labor politicians are left wondering how they appear to have gotten themselves alligned with Terry McCrann and the CIS. The answer is that the advice they are getting is flawed both ideologically and factually. It is time for them to treat it just as advice and then consider their own predispositions on government intervention in failing markets.

Using the Australian Office of Financial Management was one thing that Chris Joye and I recommended as a transitional measure towards a government sponsored enterprise that did a transparent and committed job of ensuring liquidity in mortgage-backed securities. Others have called for the same thing. Right now that seems like a compelling proposition as our ‘too big to fail’ banks become even bigger. Indeed, perhaps because of that, the Treasurer should use the AOFM just to assist the non-major lenders. After all, the majors are against all that moral hazard and so assisting them would really be something they are dead against.

[Update: This post appeared in Crikey, 26th September 2008]

Sep

25

Good grief

by Joshua Gans | Filed Under Economics | 2 Comments

[HT: Mark Richards] A Pittsburgh school district has set 50% as a student’s minimum grade.

Pittsburgh Public Schools officials say they want to give struggling children a chance, but the district is raising eyebrows with a policy that sets 50 percent as the minimum score a student can receive for assignments, tests and other work. …

“A failing grade is a failing grade,” district spokeswoman Ebony Pugh said.

At the same time, they said, the 50 percent minimum gives children a chance to catch up and a reason to keep trying. If a student gets a 20 percent in a class for the first marking period, Ms. Pugh said, he or she would need a 100 percent during the second marking period just to squeak through the semester.

It gets better …

Superintendent James Lombardo said he’s in favor of implementing the idea, partly as a fairness issue. He noted that a failing grade carries far more mathematical weight than any other grade if the “E” or “F” has a range of zero to 59 percent.

“I guess I laud the Pittsburgh district for recognizing some of the foibles of our numerical system,” he said, adding low percentage scores sometimes are given to students because of their attitude or work ethic, rather than their level of accomplishment.

I guess if one were to be kind, this would be considered a nudge as opposed to a scheme that weighed early assessment lower as a means of providing a catch-up opportunity or for allowing a low assessment grade to be discontinued. That said, it doesn’t say much about the numeracy component of the education program.

Sep

25

Obesity and the financial crisis

by Joshua Gans | Filed Under Economics | 1 Comment

From the New Yorker.

Why am I too big to fail? It’s important to grasp the critical role that I play in a wide-ranging but fragile web of economic relationships. If I go belly-up, I will no longer be able to tip my doorman when he gets me a taxi. This is not a hypothetical situation. I have studiously avoided tipping him for a solid month now. Consequently, he no longer has cash to spend at the liquor store after work, and the liquor-store owner no longer has money to spend on Internet porn. Given that Internet porn is the only fundamentally sound engine of the American economy, we’re playing with fire here. If that stalwart industry is allowed to fail, Asian p*rn companies will rush to fill the void, offering porn that is both cheaper to produce and way hotter than ours. What will it take to keep this from happening? There are no guarantees, but sending me a check for twenty million dollars would buy us all valuable time.

That all made me wonder: is “too big to fail” just a commitment problem for governments? I don’t think so. The basics of coalitional game theory tell us that those who add the most value get the most rewards. (This is basically the way we teach economics here at MBS). So when you are dealing in the market place, it is, in fact, your goal (if you want to create lots of shareholder value) to make yourself as important or valuable as possible. What that means is that, should you ever consider leaving the game, through choice or impending bankrupcy, so long as that involves taking away what made you valuable others will fork up cash and other stuff to keep you around.

Of course, when a big supplier is able to hold-up its customers with this threat and force costs (including those of mismanagement) on to them, there are no apparent claims of moral hazard etc. But when an important firm holds-up the government the same way, there is some big issue.

Now my point here is not that the issue is not there for government hold-up. Instead, my point is that it is there in the private case too and as people from Oliver Williamson onwards have told us, this is not too efficient a state of affairs.

Interestingly, the solution to such hold-up in the private sphere can often be acquisition. So we shouldn’t be surprised and perhaps should even demand a similar solution in the public sphere. Basically, if we are worried that some firms are too big to fail, that is an argument for nationalisation.

Sep

25

Understanding Science

by Joshua Gans | Filed Under Economics | Comments Off

Has Science become so complex that even an Einstein can’t understand it?

In economics, many basic facts, such as prices, have an origin which isn’t completely understood by any single person, no matter how bright or well informed, because none of those people have access to all the hidden knowledge that determines those prices.

By contrast, until quite recently the complete justification for even the most complex scientific facts could be understood by a single person. ….

Science is no longer so simple; many important scientific facts now have justifications that are beyond the comprehension of a single person.

So do we need a market to aggregate scientific information?

Sep

25

Google Idea Drive

by Joshua Gans | Filed Under Economics | Comments Off

Celebrating its 10th anniversary, Google are offering $10 million to implement five ideas that will change the world. In an effort similar to the 2020 Summit, the 10 to 100th project will solicit ideas from individuals and choose winners. That was enough to get my childrens’ interest this morning and they are hard at work — I won’t disclose on what but I must say it isn’t half bad. Ideas are due October 20th.

Interestingly, the process is very Web 1.0. Just solicit ideas and videos but no space for community comment and development but there will be an open vote for the final 100 selected.

Sep

25

Managing the crisis

by Joshua Gans | Filed Under Economics | Comments Off

In today’s Australian, Chris Joye argues that the RBA isn’t infallible when it comes to economic management. This is true when it comes to everyone in fact but the real issue is the level of public debate and criticism. My view is simple, the more the merrier. Within the bounds of responsible discourse, questioning economic management and canvassing alternative options should be on the agenda for all politicians. Only where they are known to possess market sensitive information that may be revealled by certain statements is there a case for silence. Otherwise, the debate should be open and vigorous. In particular, speculation that there may be additional risks to our financial system is perfectly permissible; especially during these times where such speculation is limited in markets themselves due to restrictions on short selling.

Sep

25

Global President

by Joshua Gans | Filed Under Economics | 1 Comment

I have always thought that there was a democractic case for a wider franchise to elect the US President — you know, that people who are impacted (perhaps most impacted) by a politician’s decisions should be electing that politician. The Economist may be thinking the same thing with their Global Electoral College. No surprises for who is leading that race amongst Economist readers.

Sep

24

Open access to research

by Joshua Gans | Filed Under Economics | 2 Comments

It is a chief norm of academic science that research be published and disseminated. All incentives point in that direction but for one: the need to get funding. The issue is that if some of that funding comes from commercial sources that means that there is a potential conflict between the researcher and the funder when it comes to open access.

It looks like our Innovation Minister favours open access for publicly funded research. I can see how that will work for pure publicly funded projects but what about matched funding projects like those favoured by the Garnaut Report. The risk is that the matched commercial funds might not be forthcoming if access is required to be open (especially if that means no IP rights as well).

It was precisely because of this that I favoured a menu of options bringing more public funds with greater open access but allowing researchers and firms to choose after the fact whether they might want to buy back open access requirements. This might strike a better balance than a blanket requirement to open access or commercialisation for that matter.

Sep

24

Credit sqeeze and profits

by Joshua Gans | Filed Under Economics | 1 Comment

For most businesses, all other things being equal, when costs go up that is bad news for profits. Well apparently, all other things are not equal for our banks.

David Uren in today’s Australian:

“AUSTRALIA’S major banks were enjoying record profit margins when they cried poor and lifted mortgage interest rates independently of the Reserve Bank.

Official figures show the profit margin for the major banks was 54.8 per cent in the March quarter, resulting in $1 profit for every $2 in interest and fee income they charged.

The banks’ profit margin during the quarter was more than double the long-term average return of 26.9 per cent.”

So what do you know, a reduction in competition is more important for profits than higher costs. Why the government isn’t concerned about this when it is concerned about petrol and grocery prices is anybody’s guess.

Sep

24

Selling votes

by Joshua Gans | Filed Under Economics | Comments Off

Scott Adams realises that to get out of the financial crisis will likely require money and you need to get that from the rich. He proposes the following:

Suppose the next President made the following pitch. “This is a once-in-a-century cash crisis. To get us through, we are going to tax the rich heavily for the next ten years. In return, the rich will each get two votes in every election.”

He notes that (a) the extra votes to the rich will not likely impact politics too much (because there are few rich and they also have a ton of power) but (b) they will likely value the credence good of being more equal than others. Add usual concerns about the principle of the matter and we are on our way.

He then goes on to suggest another possibility:

Or how about requiring the rich to buy foreclosed houses, with a requirement that they rent them to others for the next 15 years? The rich can qualify for the lowest loan rates (or pay cash), so the credit problem would be solved. While the rental income wouldn’t cover the loan and other costs, there is some potential that the investment could turn at least neutral when home prices rise in the future. Low income people would get extra places to rent, and rich people wouldn’t feel so screwed if they owned property that had some chance of breaking even. And banks would be solvent.

And suppose you require the rich to install solar panels and other energy solutions to each foreclosed home they purchase, and optionally roll that expense into the mortgage. That would create lots of jobs and reduce national energy consumption at the same time.

Now this is interesting. Same impact on liquidity as government backing of mortgages and home ownership but with private ownership in place. So it is compulsory privatisation! Of course, this sounds terrible if compared with some normal state of affairs but the thought experiment is an interesting one (especially in these non-normal times).

Sep

24

Will Android be PC vs Mac all over again?

by Joshua Gans | Filed Under Economics | 1 Comment

So the Google sponsored Android phone is out to great reviews. Basically, it is just short of an iPhone 3G which means that effectively they are a few months or, in reality, more likely a year behind Apple. The Android version is no iPod and lacks the wealth of apps on the iPhone (and I suspect its computing power). But it works well with Google and has a compass allowing the phone to work out which way is forward when directing you. Having struggled with that on the iPhone I can tell you it is a good thing.

The key difference is in business strategy. Android is open while the iPhone is closed. Exactly the same difference that began the PC vs Mac wars of the 1980s that led to the Win-Tel (near) monopoly. Apple had the lead there but lost out because of software development (particularly in business). Then it came back when that was no longer the big issue (at least not in business).

Of course, it could also be somewhat like Intel vs AMD. Intel has a year to 18 month lead over AMD and that has been enough for it to dominate the industry and earn all of the rents.

Nonetheless competition is a good thing and hopefully Apple and Google will play nicer with each other over compatibility so that the competition is sustained (not that they have a short-term commercial interest to do so of course).

Sep

23

Google Petrol

by Joshua Gans | Filed Under Economics | Comments Off

Well, it isn’t a toilet finder but it is something. Google have teamed up with Motormouth to produce a Google Gadget that you can put in iGoogle to look up the cheapest petrol prices in your area. From an iPhone you can access the gadget using the browser but your location has to be put in separately. After that it comes up with a nice map view. If FuelWatch happens, this will get better in terms of up-to-date pricing (if the government allows access to it that is) and I can imagine an applicaiton that allows you to find the cheapest petrol on your route. For now, this is something at least.

Sep

23

Traffic light information

by Joshua Gans | Filed Under Economics | 2 Comments

[HT: Coolest Gadgets] So apparently Audi are developing a system that will let the driver know exactly how long they will be waiting at traffic lights or how much time they need before a light ahead turns red.

This is sold on environmental grounds but it is not hard to imagine all sorts of worrisome behaviour coming from this. For instance, speeding up to see if you can make it, etc. Then again, more information is supposed to be better isn’t it?

Sep

23

Today Tonight

by Joshua Gans | Filed Under Economics | 3 Comments

I just got word that Today Tonight is running a story on Parentonomics tonight (Channel 7 at 6:30pm). I gather it is a ‘reality TV show’ where some families are trying out Parentonomics in the home; whatever that means. If there is an on-line version, I’ll post a link in the next few days.

[Update: here is a link to the video. Scroll down to 'Bribing Kids']

Sep

23

Bartlett and Obama

by Joshua Gans | Filed Under Economics | 2 Comments

Excellent dialogue from Aaron Sorkin.

Sep

21

iPhone probs

by Joshua Gans | Filed Under Economics | 1 Comment

Well after having a very good time with the iPhone I ran into problems today. I was travelling overseas and it had been working just fine. Then when I turned it on, it went into recovery mode. It couldn’t be recognised by iTunes because the “information required for activation” could not be found and it indicated a SIM card problem. Tried a forced restore and the same deal. Rang Optus and my account was in order. Problem is, I faced a long flight home from London without the ability to access anything on the iPhone — no music, videos or games. Have no idea why and sadly the only option is to bring it in to an Optus store. This is a big pain. Once a solution is found, I’ll update this post.

[Update: Well it turns out that it is a known and insolvable problem. The phone is going back to Apple and I am getting a new one.]

Sep

19

Caution, Morals Ahead

by Joshua Gans | Filed Under Economics | 5 Comments

I have a piece in Crikey today about the global financial crisis and change in government direction. It is over the fold.

Read more

Sep

18

Turnbull Leighs towards simplification

by Joshua Gans | Filed Under Economics | 1 Comment

Malcolm Turnbull has announced a possible policy:

MALCOLM Turnbull is planning a tax assault on the Rudd Government, with new policies to streamline the system and spare thousands of PAYE taxpayers from filing returns.

Sound familiar? Here is Andrew Leigh on the issue some years ago. It is as close to a no-brainer in economic policy as you get. So you don’t need an Ergas Review to know exactly what the right thing to do is. The costs and benefits have been well and truly worked out and we should make filing tax returns optional giving back many Australians one day a year for the rest of their lives.

Sep

17

The Dilbert Economy

by Joshua Gans | Filed Under Economics | Comments Off

Scott Adams surveyed 500 economists and found that their Presidential perferences are alligned with their politicial affiliations — much like anyone else — but those who swing politically are swinging towards Obama.

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