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I had the pleasure of attending the final of the Monash University ‘Viewpoint debate’ last week. This is a debating competition between high schools involving economics topics. The idea is to encourage high school students who might be interested in economics as well as to promote Monash University’s economics program.

The competition was a huge success and the final was between Scotch College and Gippsland Grammar. The topic: “Should the Rudd government delay the implementation of the Emissions Trading Scheme until there is an economic recovery”. The final debate was extremely high quality and both teams are to be congratulated. Fortunately I was not an adjudicator – I did not envy their task separating the two teams. The winner was Scotch (who had the ‘negative’) but, as I said, I would not have liked to call it!

Can I thank all the members of the Faculty of Business and Economics and ‘friends’ who organised and participated in the event. From the Chinese dragons at the beginning, Red Symon’s 10 minute ad lib while waiting for the Minister, Ross Booth’s sales pitch for the Monash B.EC degree, to the debate itself, the whole event was fantastic and incredibly high quality.

The iTunes App Store has in less than a year become one of the most significant digital marketplaces ever. There is over a billion downloads and 35,000 apps to choose from. It is one of the most liquid markets ever seen on both the demand and supply side and it is only embryonic.

So another puzzle emerged today. With so many apps, you would think there would be big opportunities for Apple to profit from priority. Apps are featured on the front page of the App Store and it is well-known that this spikes downloads. But they are also featured on iPhone commercials and in-store promotions. There have been calls for some better system of giving priority and I speculated whether a position auction might be worthwhile.

According to this report in the New York Times, that publicity does come for free.

“Apple doesn’t want the money. It’s a level playing field,” said Matt Murphy, a venture capitalist at Kleiner Perkins Caufield & Byers. If Apple likes the app, he added, “it doesn’t matter if you’re a one-person or a 10,000-person company; they’ll put it in ‘New’ or ‘What’s Hot.’ ”

… “For 99 bucks a year, Apple gives you the ability to sell software to millions,” Mr. Scott said. “They solved the distribution problem, but they did not solve the marketing problem for developers.”

Other sites fill the gap. 148apps.com is one I follow. But it is curious that Apple have not developed a Google-like mechanism of giving high position both to Apps that deserve it on a non-monetary metric and others who are willing to bid for the slot.

On the 1st January, 2007, Germany made a significant change to the payments it made upon the birth of a child. Prior to that, they had a means tested payment of between 5,400 and 7,200 Euros paid over 12-24 months. After that date, a payment of 67% of the mother’s pay would be made for 12 months with additional bits if the father took time off too. Of course, it was capped and so the payment was between 300 and 1800 Euros per month for 12 months. Some would actually lose under the scheme but working mothers, especially those in higher paid jobs, would gain.

So there likely existed families who would gain 25,200 Euros if they had a child in the January rather than December. Not surprisingly, German news reported lots of attempts to delay births in the last week of 2006. This is, of course, familiar to Australians where similar things occurred for just a $3,000 marginal payment. Now, the hard data is in and a new paper by Marcus Tamm looks at it using the same methodology as I did with Andrew Leigh.

He finds that about 8 percent of births were shifted as a result of the policy change and he has more data on the characteristics of the babies and mothers and so could observe shifts of 13 percent for working mothers. Interestingly, that is less than the 16% shift we observed in Australia but the policy change and its application were far more transparent. In addition, the German payment varies with time off work, etc., so while for some the benefits would be salient that isn’t otherwise the case. Nonetheless, as in the Australian case, there is statistical evidence that some births were delayed over 2 weeks from mid-December.

More interesting are the findings on health outcomes. Tamm confirms that birth delay appears to cause higher birth weight just as it did in Australia. But he also examined the impact on the probability of still births (something we could not do due to a lack of sufficient data). The proportion of still births in the first week of January were 50 percent lower than expected (a statistically significant result). So delay was associated with an improved health outcome on that front. I expect that the numbers on still births are pretty low but this was enough for Tamm to report it but the mechanism for this is unclear and let’s face it, controversial as the whole thing here was a deviation from ordinary medical practice. This confirms what I have long suspected that, whatever else these policy timing issues might be, they are an opportunity to study what happens to health outcomes in the face of non-medical variation in timing and in this case, duration of pregnancy.

An interesting article in by Stephen Bartholomeusz in The Business Spectator on mergers and tacit collusion. The idea that mergers can increase the likelihood of tacit collusion (called ‘coordinated effects’ of the merger) is not new and is well covered off in section 6 the ACCC’s merger guidelines (downloadable here). It has also been raised in a number of merger matters in Australia.

Mergers law is, in some sense, a legal oddity. A merger is illegal if it is likely to substantially lessen competition. In this sense, mergers examination is always speculative. An enforcement agency like the ACCC necessarily has to try and predict the future behaviour of market participants, which is never an easy thing. Merger enforcement is a bit like trying to make sure that you only buy insurance when you will have a car accident and never buy it otherwise. Inevitably this is hard (I never could get the crystal ball to work perfectly when I was at the Commission). However, it is necessary. Letting markets concentrate with higher prices and explicit or tacit collusion harms all Australians.

The title of my blog piece earlier today was meant to remind me to write about the fact that one of the risks facing the global economy is the swine flu risk. Lots of guesstimates going around about the number of likely infections. The Age yesterday had a 1 in 5 infection rate, which was based on a quote from a health official that one in 5 was “possible”. When I tried to translate this into Chinese I raised the infection rate to 50%! That’s how to start a panic. Warwick McKibbin was quoted as saying that the economic costs of the swine flu could approach $2 billion. But the reality is we have no idea of the likely costs. SARS is clearly the closest recent parallel to Swine flu, and the ADB estimated that the SARS epidemic would cost East Asian economies somewhere between US$12 and US$28 billion. Sectors most heavily affected were services, in particular tourism and other customer facing businesses. At the beginning of the SARS epidemic Hong Kong was beginning to show signs of recovery after a long recession following the housing market collapse after the Asian crisis. SARS took the HK economy back into recession, and delayed this recovery for several more quarters. Given the high infection rate, but low morbidity rate Warwick’s estimate seems as good a guess as any. Bad times for Qantas and the tourism industry, but the rest of the economy is not likely to see too much of an impact from Swine flu.

Recently the RBA has argued that the Australian economy will be in recovery by year end, though the economy will still only grow at 2.25% in 2010/11 so that the recovery will be gradual and quite weak. The Treasury’s much discussed budget estimates have very strong growth after this of 4.5% in 2011/12. There do appear to be “green shoots” appearing at the moment, but downside risks remain. Both the RBA and the Treasury are relying too heavily on a strong global recovery and at the moment it appears to me that there are too many things that can still go wrong for global recovery to eventuate before year end. Yes China might grow at 8%, but the US, Japan, and Europe are unlikely to recover to any significant extent this year. Nouriel Roubini has a nice piece available at the Project Syndicate site that points to growing financial sector losses (concentrated in the US) and weakness in the economies of the US, Europe and Japan. Roubini mentions the risks in supporting ”zombie” banks in the US, but as I pointed out in my piece in the AFR last November (reproduced below), “zombie” risks are much broader than this. Japan has shown that the zombie path is disastrous for an economy. Continued economic reform and productivity are the path to a sustainable recovery, not protectionism and mollycoddling…and on that note the Singaporean PM is asking again for Singapore Airlines to be allowed access to the US through Sydney and Melbourne. To you politicians in Canberra who sit in first class on Qantas, please let the rest of us who pay for our tickets have some competition. Let them in!

read more

A little while ago, I had reason to learn a little about public broadcast rights in copyright law. This is where copyright owners (say of sound recordings) can grant firms rights to play those recordings to a group. This was the issue at the heart of the ‘nightclubs’ case at the Australian Copyright Tribunal. But there are others too.

In my mind, a public broadcast right license fee should be no higher than the sum of individual license fees. So if you play a recording of a song to a group of 30 people, then it seems reasonable to me that the license fee for that cost no more than 30 x $1.69 (that is, the cost of each buying the song from iTunes). Of course, that is an upper bound. iTunes songs can be played again and again and kept forever and so are more valuable as an individual than a public license but it surely provided some sort of cap on what a public license fee could be.

In explaining this to others (i.e., lawyers), there was confusion as they thought I might literally mean that individuals would come to the event with the song on their iPods and press play simultaneously. I didn’t mean that, it was just a thought experiment but I must admit I thought that such a technology might exist in the near future. Anyhow, it turns out that Improv Everywhere have proved that this could exist right now using iPods in the ‘press play together’ mode. Click here to read an account.

A new study provides some useful analysis of the effects of academics’ gender on university outcomes. The authors cleverly take advantage of the fact that the US Air Force Academy randomly assigns students to sections, with little opportunity to switch.

Sex and Science: How Professor Gender Perpetuates the Gender Gap
Scott Carrell, Marianne Page and James West
Why aren’t there more women in science? Female college students are currently 37 percent less likely than males to obtain a bachelor’s degree in science, technology, engineering, and math (STEM), and comprise only 25 percent of the STEM workforce. This paper begins to shed light on this issue by exploiting a unique dataset of college students who have been randomly assigned to professors over a wide variety of mandatory standardized courses. We focus on the role of professor gender. Our results suggest that while professor gender has little impact on male students, it has a powerful effect on female students’ performance in math and science classes, their likelihood of taking future math and science courses, and their likelihood of graduating with a STEM degree. The estimates are largest for female students with very strong math skills, who are arguably the students who are most suited to careers in science. Indeed, the gender gap in course grades and STEM majors is eradicated when high performing female students’ introductory math and science classes are taught by female professors. In contrast, the gender of humanities professors has only minimal impact on student outcomes. We believe that these results are indicative of important environmental influences at work.

Leon Gettler argued yesterday in The Age that economists failed to properly warn the public about the risks of financial crisis. I’m afraid this is absolute BS. For many years the IMF and most prominent economists have been warning of the risks associated with global imbalances. See numerous articles available at www.imf.org for a start, beginning from the early part of this decade. The appropriate policy response was to reduce the size of US budget deficits, among other policy adjustments in different countries. Economists have also been worried about the financial sector risks associated with deregulation for some time. Again go to numerous papers available at the BIS website on this issue. And for an excellent overview as well as suggested policy reforms see the excellent paper by Raghuram Rajan (formerly Chief Economist at the IMF) from the 2005 Jackson Hole Conference. Rajan argues that financial sector deregulation and technological change had increased risk, and that these financial sector risks were higher in a low interest rate environment. He argued the case for oversight, greater transparency and disclosure across the financial sector (including hedge funds).

The problem with the financial sector meltdown was not a lack of economists warnings – rather a lack of political will to make hard policy changes, as well as a blind faith in unregulated markets among some in the Bush administration. This blind faith is not shared by the vast majority of economists, who are aware that markets can, and do, fail.

In most years it rains a lot in Perth from late May until Mid-September. Perth’s average annual rainfall of 850 mm is between that of Melbourne (660 mm) and Sydney (1200 mm). Where I live, in the hills east of Perth, annual rainfall averages over 1000 mm. The rivers coming out of those hills — the Helena, Canning, Serpentine, North Dandalup and South Dandalup rivers — are dammed to provide most of Perth’s water supply. The city also has a 45 gl desalination plant in service and a 100 gl plant under construction. There are low level water restrictions in Perth which allow for sprinklers to be used twice per week, but there are none of Melbourne’s draconian restrictions where even the washing of cars in banned.

Nonetheless, it has been dry and warm this May, and with dam levels at only 28% the WA Water Corporation has become concerned about the level of water consumption. Recently a Water Corporation spokeman accused WA households of going on a “ridiculous binge” of garden watering. Apparently the users of the service are to blame for any problems in meeting demand, not the supplier. The public seems to be curiously happy to receive this tongue lashing from bureaucrats. Now, compare that public reaction to water supply problems, to the reaction to electricity supply problems in WA in 2006. Read more

In 2003, the UK government started a major randomised evaluation of the Employment Retention and Advancement project (ERA), to test the effectiveness of interventions to improve job retention and advancement prospects for low wage workers (background here). Like the US and Canada, British policymakers decided that randomised evaluation needed to be a key part of understanding what active labour market programs work best. They’re now reaping the rewards of their foresight, as the results couldn’t be arriving at a more useful time. Most of it is still under wraps, but a report on costs is now out.

(HT: RS)

ACCC head, Graeme Samuel, has come out swinging on bank competition in the last few days. He is concerned that banking competition may be barely workable with reports that non-bank institutions are hardly active in lending markets and, indeed, of new mortgages, just two banks, Commonwealth and Westpac, have captured 85% of that business. Two years ago the share of the four major banks in home lending was below 75%. This is a worrying turnaround especially given that it is those two banks that were allowed the most significant mergers by the ACCC.

Samuel blamed the bank guarantee. However, that guarantee covers all banks and so it would be surprising that it is contributing to consolidation relative to a situation without any such guarantee. More likely this is the consequence of the drying up of mortgage securitisation leaving deposits virtually the only source of financial institution funding over the past 18 months. The government’s $8 billion injection of funds into securitisation isn’t enough to make a competitive splash when one considers that banks would rather lend for home mortgages than to small to medium enterprises in the current climate.

The operation of the banking sector is not going to be right until we fix the regulatory apparatus surrounding it. There are things the government could do to prepare for that — most notably on the issues of information provision for regulation and also the continuing problem of bank switching costs. A proper review and regulatory redesign is difficult to do in the current climate but at some point a full scale  undertaking is needed. Until then it is difficult to see how we can do anything but accept major bank rule for the time being.

The Government has been forced to back down on the changes to the taxation of employee share ownership plans (ESOPs) that were proposed in the May budget.  That is a pity because the special tax treatment that ESOPs currently receive is hard to justify. 

Under current tax law, employees can receive up to $1,000 in shares of their employer and pay no tax on that income.  That means that an employee can essentially forgo (sacrifice) $1,000 of salary and receive shares with a market value of $1,000 instead and no income need be paid.  The same is true of superannuation of course.  Employees can forgo salary for contributions to their super fund and pay only 15% tax on the forgone salary.  The budget reduced the maximum salary sacrifice permitted into superannuation from $50,000 to $25,000 per year in a welcome reduction of “middle class welfare”.  The budget also proposed that employees earning more than $60,000 per year no longer get the $1,000 ESOP concession, but this piece of middle class welfare is somehow sacrosanct.  Read more

I generally assume that everyone knows how to use Wikipedia, but it seems not. From today’s Age:

Reports suggest that in the 19 American presidential elections between 1888 and 1960, the candidate with a height advantage won all but one.

As Wikipedia notes, between 1888 and 1960, Coolidge, McKinley (twice) and Harrison all beat their taller opponents.

More generally:

For the 47 elections in which the heights of both candidates are known, the taller candidate won 29 times (approximately 62% of the time), the shorter candidate won 15 times (approximately 32% of the time), and the candidates were the same height three times (about 6% of the time). If the scope of elections is restricted to 1900 and on, only 6 out of 28 elections were won by the shorter candidate.

Full table of US Presidential candidate heights here (and Canadian Prime Ministers here, but nothing for Australia – does anyone feel like creating one?).

Update: Reader Alistair Campbell takes up the challenge, posting a Google spreadsheet with heights for the PM and Opposition leader. Anyone with more information, please update it (I suspect there is much that is hidden in biographies).

My academic home is the Economics Program in the Research School of Social Sciences (RSSS). Located in a building named after HC Coombs (an economist turned social campaigner), RSSS is comprised of five programs – philosophy, history, political science, sociology, and economics.

One of the benefits of being part of an interdisciplinary school is that we run an annual social science conference. This November’s conference is being organised by my philosophy colleague Kim Sterelny, on the theme “Darwin and the Social Sciences”. Details over the fold.

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A nice example of poor economics emerged this week from the Senator Joyce – Frank Zumbo camp. I recommend it to anyone who wants to set a simple assignment to a third year undergraduate economics class – what is the effect of requiring a large petrol chain to charge the same price across all its outlets so that it can’t simply lower its price in areas where it faces local competition? A brief summary of the policy is given here (as are all quotes given below). Read more

It was announced in the British Parliament yesterday that all Gurkha soldiers who served in the British Army for more than four years are entitled to settle in the UK.  This is a continuation of an age old practice of granting citizenship to foreigners in exchange for their military service.  During the first century AD, the Roman Empire began granting Roman citizenship to foreigners who served for 25 years in auxiliary units on the frontiers.  This practice was highly successful during the “Pax Romana” period until the end of the second century AD. 

The US and its allies in the conflict in Afghanistan might consider offering citizenship in exchange for military service.  Otherwise they probably cannot win in Afghanistan. Read more

 Markets spat the dummy overnight as Standard and Poors cut the UK’s rating outlook from AAA (stable) to AAA (negative). Apparently this surprised the markets and for a short time the $US rose. Let me get this straight. Spain has a public debt level of about 40% of GDP, which is expected to rise by about 20% of GDP in the next few years due to the crisis and bank bailouts. S&P already downgraded Spain in January. US and UK net public debt levels are around 80% of GDP, and budget deficits this year are well over 10% of GDP (see below). It seems to me that you’d have to wearing red white and blue glasses not to see that the public finances in the US are in exactly the same dire straights as those of the UK. And poor old Spain – presumably S&P is run by Basil Fawlty.

Read more

John Quiggin makes that case for offering banks a ‘deal or no deal.’

It’s time to offer the banks an offer they can’t refuse (unless they’re feeling lucky). Either withdraw entirely from the prudential regulation system, and stand on their own credit, or accept the fact that the public, as the residual risk-bearer, is their ultimate owner, and act accordingly.

The problem with this is that I don’t think it is possible for future governments to commit to not saving one of the ‘stand on your feet’ banks. Those banks will have a competitive advantage during the good times and unless they are required to be heavily labeled to consumers — “try this and if things go bad, you are stuffed” — they will become a large part of the sector. The lack of commitment comes because that sector will still be subject and perhaps the cause of systemic risk.

Instead, what we need is a good bank. I proposed this some time back. My older more experienced colleages tell me that apparently we had one of those once. Really? Which bank was that exactly?

In general, I have a healthy respect for the news media. But occasionally, things spin  out of control. Somehow, my finding (with Michael Kortt) that there is no wage penalty to being overweight in the Australian labour market got spun into a story that there is a benefit to carrying a few extra kilos. So the British Sun newspaper ran a story headlined Fatties Earn More Cash (complete with obligatory cigar-chewing man).

This prompted my brother-in-law to forward me the cartoon below, from PhD Comics.

Employee share ownership programs (ESOPs)  have been praised by the Federal Government, the ACTU and industry bodies this week for giving employees a stake in their firms and improving employee incentives.  It looks now as though the Rudd Government will reverse its changes to the taxation of ESOPs announced in the budget because of the suspension of those programs by many firms. 

The advocates of ESOPs seem to be forgetting the maxim of “not putting all your eggs in one basket.”  Employees already have a large stake in their firms through their undiversified labour income.  It does makes sense for workers to invest in equities for their retirement.  But it is folly for employees to buy shares in the firm that they work for.  How does that deliberate reduction in diversification help an employee??  Read more

Alongside the NBN is a heap of whining about whether it can be commercial at reasonable prices. Well, take a look at this data from the rest of the world [HT: Peter Martin]

Look at Japan and Korea. A fibre to the home network and half our prices for much much less. This tells us much about what is possible.

Here is more about the most recent OECD data.

Yesterday, I wrote an oped in the AFR arguing that we should have prediction markets on unemployment.

This morning comes a press release from Centrebet:

Leading financial bookmaker Centrebet has today released the country’s first market on the next national unemployment figure, with a 5.6 to 5.7 per cent jobless rate as the opening $2.85 favourite

Their odds – and the implied probabilities – are below.

Below 5.0%	$15.00	4%
5.0 – 5.1%	$11.00	6%
5.2 – 5.3%	$7.00	10%
5.4 – 5.5%	$4.00	17%
5.6 – 5.7%	$2.85	23%
5.8 – 5.9%	$3.75	18%
6.0 – 6.1%	$6.00	11%
6.2 – 6.3%	$11.00	6%
6.4 – 6.5%	$21.00	3%
Above 6.5%	$34.00	2%

The profit margin implied by these odds is currently pretty high. Hopefully trading in this market will be sufficiently thick that it will come down.

I also hope that they’ll be able to open a market in the really policy-relevant number: unemployment in June 2010.

(xposted @ andrew leigh.com)

For consideration as we consider what our tax system should look like in future, published in today’s AFR.

The budget this week clearly laid out the challenges facing the government as it tries to balance its books in the post commodity boom environment. The government has been rightly criticised for relying on predictions of a booming economy in two years time to generate the revenues that will eventually bring back a surplus in 6 years time. Forecasts that far ahead are notoriously unreliable, but at the very least the government faces some tough choices in coming years, and it would be wise to prepare for some painful tax and revenue measures once the recovery of the economy is underway. And the right choices on the tax front would be a higher GST, and the reintroduction of an inheritance tax. Read more

Tim Lohman recently wrote an article for CIO Magazine (and ComputerWorld) on the impact of the  Australian budget on IT spending and innovation. It includes comments from an interview he did with me. See http://www.cio.com.au/article/303038/little_cios_get_excited_about_federal_budget. Feel free to share your thoughts about this issue here.

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