When the perfect order prevails, the world is like a home shared by all. Virtuous and worthy men are elected to public office, and capable men hold gainful employment in society.  Harmony and trust are strictly observed. All men love and respect their own parents and children, as well as the parents and children of others. Thre is caring for the old, their are jobs for the adults, there are growth for the children. There are support for the widows, the widowers, and for those who are alone and disabled. Every man and woman has an appropriate role… A devotion to public duties left no room for idleness…these are the characteristics of a commonwealth state…

There you go, disability pensions and full employment are clearly there in Confucius, predating Keynes by 2500 years!

The analysis is based on FT ranking data and done at the level of the school. The authors do make an attempt to account for he problem of endogeneity of GMAT scores. They conclude that

Controlling for the average quality of their students and some other schools’ characteristics, average salaries are significantly greater for those schools whose core MBA courses contain a higher proportion of management courses as opposed to courses based on economics or technical disciplines.

However, there is a major problem with the findings it seems to me. They measure the success of the course by average salaries (3 years after graduation). There is no measure of management ability. It seems to me that the authors have fallen into the very mindset that they decry. Measuring manager performance by the salary that the graduate manages to negotiate for themselves is precisely how a (rather poor) economist student might think!

I am not at all surprised that those students who major in management subjects (such as human resource management, negotiations and leadership) are better able to find a high paying job than those who major in Finance and Econometrics, poor tongue-tied geeks that they are.

*via Nick gruen at Clubtroppo

Today Ross Gittins commits this fallacy in arguing for stamp duty on home transactions. The traditional economic wisdom is that such taxes which are non-trivial sum of money in many states, reduce buyers’ willingness to pay for property and so reduce the number of transactions at any given point of time. How much? That is an empirical matter and from what I can gather then effects are real.

The trouble with this advice, however, is that like all neoclassical analysis, it’s based on an erroneous model of human behaviour that assumes the choices we make are always carefully calculated to maximise our material wellbeing.

For the past 20 or 30 years, behavioural economists have been pointing out to conventional economists all the flaws in their assumption that people are always rational, but this seems to have had zero impact on the happy analysis of the tax economists.

There is so much to deal with here it is not funny. First of all, zero influence? Starting with Sunstein and Thaler onwards it seems that tax is one of the major areas where behavioural economics has mattered. Think about this example for one. Second, Gittins argues that because people are spending so much money they don’t care about the tax. I don’t know where the evidence for this is but consider the sales strategy for new properties ‘off the plan to avoid stamp duty.’ That works because people care. Third, just because a land tax is politically unacceptable does not mean stamp duty is good and efficient even if it is a nice little earner for state governments.

Fourth, just because stamp duty might matter does not mean that anyone thinks it is the most important thing for every circumstance. So this statement really misses the mark.

Similarly, only an economist would be stupid enough to imagine conveyancing duty is a significant factor in explaining an executive’s reluctance to uproot their spouse and school-age children and move them to another capital city.

And, finally, in a similar fashion, no one is talking about encouraging mobility the only issue is not discouraging it. Ross Gittins seems to believe that it is not possible to move back to your social network but only away from them. Taxes may well discourage the former while preventing the latter. Which is socially beneficial depends on your perspective.

When it comes down to it, there is no evidence that behavioural economics as a clear and formal theory translates into housing markets through this route. Gittins cites no study or theory that suggests this to be the case only a bunch of unrelated stuff and ranting out economists. Indeed, it is precisely the blind application of general theory that behavioural economists are so against and so Gittins commits these same sins in spades.

Click HERE to open the tool in another window at a much sexier version of the original graphic (for the year 2007). You need Flash 7 and it may take 30 seconds to load but it is worth the wait.

A quick explanation. Each point is a country and upper right means high GDP and high life expectancy. GDP is on a log-scale partly because the distribution is so skew, but also because the relationship is almost linear that way. Colours are different continents – with Africa in blue. Size of the blob is population size – probably not of primary interest here. But the really cool thing here is the last dimension – time. Move the slider back to 1800 and hit the play button to see the data displayed in sequence for the past 200 years.

My original interest in these data was the AID epidemic in Africa. Focusing on the blue swarm of African nations, you will see that there was virtually no improvement in life expectancy until after WW2. Over the past 30 years however, you will also see the blue swarm stagnate to the bottom left. Then, during the past decade about 10 middle income countries just drop through the floor. Pretty stark it is.

You can follow individual countries just by clicking on them (or on their name in the list at the left). Below is the trajectory for Iraq. What do you think happened in 1979?

Other countries whose trajectory has a story to tell – Rwanda but ther civil war was devastating it pre-genocide (1994), Chile which did well after Pinochet (1974) but was doing extremely well in terms of life expectancy before 1974. Check out Russia…it hardly looks like the wall coming down was a resounding success.

Let’s get parochial. Apart from minor glitches after the great depression and WW2, Australia has enjoyed an uninteresting march towards wealth and health. Give me a boring trajectory any old time. For those who ever doubted that NZ was the eighth state, look at their trajectory at the same time as ours. Peas in a pod.

China watchers might like to focus on the middle kingdom around the late 1950’s. I was actually impressed that they managed to get data on life expectancy from a nation that does not like its dirty linen aired. But this thought process led me to a more obvious question – what does life expectancy mean for 2007? This has to be a model projection – it is not really data at all. So I checked the documentation and it is defined as “the number of years a newborn child would live if current mortality patterns were to stay the same.” In China’s case then this would mean that the drop we see is an extrapolation of what would have happened if the great leap forward continued indefinitely. Ditto Rwanda. It is certainly not the case that the babies who were born in Rwanda in 1991 will have a mean life of 24 years.

I look forward to the inclusion of 2008 and 2009 data so we can see the ffect of the GFC and how it is differentially felt in different countries. Look out for the Icelandic bubble to bounce faster than Novak Jokivich’s service routine. You can waste hours playing with this site. There is a huge range of economic, environmental, health, education and demographic measured to select from.

If you want to use this tool for your own data.. .. you can’t. But GapMinder suggest using Motion Chart, which is a free gadget in Google Spreadsheet (an online spreadsheet similar to excel).

Cross Posted at ClubTroppo and Fishing in the Bay

On their ShowtheLoo site is the following blog post which I quote in its entirety.

Nigel Hopkinson said he was disputing a charge of $8562.31 for 73GB of excess data use. The apparent usage was recorded by BigPond between midnight and 5.07am on May 10. He received an automatic email at 8.53am from BigPond, advising his account reached 175 per cent of his monthly 60GB usage allowance. He had left his computer and modem on, he said. Other customers that have been affected by excess data usage claimed to have turned their computers and modems off.

“I had no software running that would cause this and I do not believe with my connection speed, that it is even technically possible,” Mr Hopkinson said.

Another BigPond customer, Eian Mathieson, who is on a 25GB-a-month plan, said he began to worry about his account usage after having gone over the limit two months in a row.

Mathieson downloaded a metering tool, Netmeter, to measure his usage patterns. On one day, BigPond metering recorded more than five times the usage Netmeter reported, he said. On May 27, the BigPond meter showed he had used 1768MB, whereas Netmeter showed 342.6MB for that same day. The next day, the BigPond meter displayed 1650MB of usage and Netmeter recorded 358.62MB, Mr Mathieson said.

Well, add me to the long list of customers with this complaint about BigPond. I am on a 60GB per month plan which I went on a year ago because we seemed to be exceeding our 30GB and I didn’t want to worry about it. The problem is that we now seem to be reaching that limit too. Finally, I woke up and thought about it: how?

We download lots of TV and movies from iTunes but adding that up, it was clear it could not exceed 10GB in a month. There is plenty of YouTube viewing but even there it was hard to image it exceeding 2 or 3GB per month. Where was the rest of it given that we are all out of the house during the day? I tried an experiment switching off the WiFi just in case it was the neighbours, but the meter kept on ticking away. Surely that amount of downloads each month would be noticable on a hard drive somewhere but it was no-where to be seen.

I started to monitor usage closely. Since there are several computers network meters were fine but over-stated usage as they included file transfers. But even with this, they were way under what Telstra’s usage meter was reporting. So I rang technical support. We considered viruses but two things ruled that out: (i) there were no PCs in the house, only Macs and (ii) it was all downloads, with hardly any uploads. Actually, the upload rate seemed high to me but there was a vast asymmetry. I suspect that told them that no computer had been hijacked to send out illicit material and also that I wasn’t downloading illegally and getting into trouble on reciprocal uploads. So that month they reset my limit so I didn’t get extra charges.

But what to do? Telstra’s usage meter doesn’t get the time right so even when we switched it all off for a day it still recorded usage (an incredible 200MB!). So I can’t just monitor stuff for a day, send it to them and say, ah ha! I would have to do it for a week or more which would mean limiting to one computer and a big disruption. So I monitor the usage meter because, believe it or not, our usage is correlated with that and so close to the end of the month we lay off the iTunes, iView and YouTube.

This article has given me pause and I may make another call to BigPond support, or is it billing? I recall they had trouble working out which department was to blame.

Among Dr Gruen’s favourite sites already making government information freely available is one in which the NSW Registry of Births, Deaths and Marriages enables intending parents to check the popularity of names in each year from 1900.

Peter Martin approvingly directs us to the site in question as exemplifying the point of Government 2.0. Here it is. What it shows is a time series graph of 1200 popular baby names over the last century. You can hover over bits of it and find out just how many NSW babies had a name in a given year. Seems need until you ask yourself one question: what is this telling me? Near as I can tell, it is telling you that the birth rate has changed over time and that there are clumps of popularity-weighted boys and girls names at different parts of the alphabet — (yes, the plot is in alphabetical order). So perhaps it is a more convenient way of looking at name popularity than this.

Now, to be fair, it is an example of how data might be presented than is different from what is usually the case within government and so that is fine. Indeed, it is based on this. But the point is that it shows us that we can do better and indeed, it is precisely why the government needs to free the information so that others can provide it in a useful form and innovate on it.

So here is the question: is the NSW baby names data set publicly available as the SMH suggests? I made a few inquiries (and will try and confirm them officially and post an update) but it appears not. You can’t just ask for the data-set so that you can host it on your own site in a useable fashion. It all still resides with the NSW government. So rather than being what the goal of this taskforce, it is, in fact, a clear example of the problem. It is not making information freely available at all. That would require a ‘click here to download a spreadsheet of the data’ button. I’ll be looking out for it.

Despite widespread outrage about mortgage rate increases and the introduction of direct charging of ATM fees, a spokeswoman for the NAB told the Herald only two customers a week had used the “listing and switching” service since it was launched in November.

The chief executive of the Australian Bankers Association, David Bell, also told the Herald that uptake of the service had been very low.

The Government said last year it would inject competition into the banking sector by helping customers “vote with their feet”.

The scheme is a very limited one — allowing customers a list of direct debits and some help re-organising those. But when it comes down to it, that still takes time and paperwork. So it isn’t surprising that there is limited use of what doesn’t look like a very valuable service.

Instead, we need to think larger.

A professor at the Melbourne Business School, Joshua Gans, has called for all bank account numbers to be made portable, like mobile phone numbers, to enable people to switch easily. “The problem is this is not a piecemeal policy issue. This requires a lot of major changes to do it. It does require some serious investment and legislation to be passed.”

There are all manner of estimates as to the cost of this but our experience in telecommunications — an industry with much greater challenges than banking — was that the costs were exagerrated by an order of magnitude and implementation occurred in a timely fashion. The problem is that we also need to deal with switching of accounts in debit (e.g., mortgages) in order to make this work. I don’t have time in this post to outline how that could be done but I think there are mechanisms that could be deployed there too.

That said, the measure of success of any system to reduce switching costs is not how many people use it. Indeed, in principle, the existence of the service is all that is required and by facilitating competition — in particular, to retain customers — it will promote the social good. What we, in fact, want is for consumers to have the option of switching easily so that when they complain to banks about terms and conditions banks will adjust those terms and conditions to stop them from leaving.

Instead, the measure of success is an improvement in competition. And that is where the system is currently not effective. With news that the major banks command major market share and now major profit margins post-GFC, surely the pressure on the government to do something meaningful about bank competition should be on the cards. Resting on the laurels of a functional financial system relative to the mess the rest of the world is in, is simply no excuse.

 We have only had a few decades of activist central banking and in that time central banks have learned two things. Firstly, how to create inflation, and secondly, how to get rid of it! Inflation is created when too much stimulus is given to the economy, by keeping interest rates too low for too long and printing too much money. Low levels of competition and productivity make things worse, but the root of inflations big and small is excessive expansion of money and credit.

 Getting rid of inflation requires tight monetary policy – raising interest rates. And central banks now know that it is better to raise interest rates quickly and stifle inflation than to wait for inflation to rise before tackling it – to be pre-emptive rather than reactive.

Probably the closest precedent to current monetary events was the late 1980s. Australia began the 1980s with double digit inflation, and the recession of the early 1980s along with high interest rates reduced inflation slowly to around 5 percent by the middle of that decade. But inflation then began to rise again, and in October 1987 stock markets around the world crashed.

 Central banks had learned from the Great Depression that loose monetary policy is the key to not allowing a stock market crash to lead to an economic crash. In Australia, as elsewhere, monetary policy was loosened. This policy was very successful in averting economic meltdown. The economy continued to grow very strongly through 1988 and into 1989. The problem was that money and credit growth were now above 20 percent per annum, and inflation was still around 8 percent at the end of 1989. Asset prices in many countries surged to unsustainable levels, most notably in property and sharemarkets in Japan.

When it was clear that the economy had recovered monetary policy was tightened and in Australia we had the “recession we had to have.” Between early 1988 and mid 1989 banks increased their standard variable interest rate from 13.5 percent to 17 percent. There remain questions about the RBAs handling of monetary policy during the recession of the early 1990s, but the task of the RBA was made difficult by the high level of inflation at that time.

The difference between the late 1980s and today is that we are starting from a much lower inflation rate – currently 2.5 percent. Current economic weakness is likely to send that inflation rate lower before it starts to rise. The only way that inflation could rise towards 1980s levels is if the economy recovers very quickly. Even in that event, the RBA ought to be able to see the recovery as it gets underway. As long as interest rates are raised quickly enough, high levels of inflation should then be avoidable. If the economy recovers more slowly or stays in recession then inflation is likely to rise only very slowly, and the RBA should have ample time to withdraw liquidity and keep inflation under control.

It might be argued that the level of government spending and debt might lead to increased liquidity and inflation, but again, that seems unlikely. Projections of government debt levels in Australia as a percentage of GDP have debt peaking in a few years at close to mid-1990s levels. And the mid to late 1990s saw inflation steadily decreasing, not increasing. It is certainly true that some other countries with much higher debt levels may have difficulty not seeing those debts eventually cause some inflation. But in Australia that won’t happen.

But the first half of 2008 saw an unending stream of bad news coming out of the world economy. In a nutshell, US house prices were falling month after month, a significant number of US households were defaulting on their mortgages, and this was in turn causing banks to get into difficulty. But instead of US banks being the only ones hit by these defaults, foreign banks and others were hit. US mortgages had been parceled up into securities – securitized – and sold on to willing buyers across the globe. The ultimate holders of defaulting US mortgages turned out to be banks in the UK and elsewhere, pension funds in places like Norway, and others. And the size of this problem was enormous. Initially estimates of defaults in the range of $600 billion seemed scarily high, but estimates now of the size of these losses range from $2 to $3 trillion – which is  roughly three times the size of Australia’s annual GDP.

 The collapse of Lehmann Brothers in September last year brought home to all the fact that almost any global bank might be made bankrupt, and the global economy ground to a halt. Without banks lending to other banks, or to corporate customers, the global economy simply could not function properly, and many economies that until then had been relatively unscathed began to feel the pinch. This is when the GFC really hit Australia, and other countries in our region.

 In Asia exports to the US and Europe went into decline and economies as diverse as Singapore, Hong Kong, Thailand, and Korea went into recession. Even China started to suffer from a slowdown in its growth, especially in the export centres such as Guangdong province in the south of China. Australia was hit by declining demand for our exports as well as falling prices for these exports. This hit the economies of Queensland and WA especially hard. But banks were struggling, and their unwillingness to lend to businesses slowed down the economy across the board.

In the last quarter of last year it became clear that the Australian economy was not going to escape the GFC, and that the government needed to take action. Unemployment had already risen to 4.5% but it looked like rising a lot higher. The government and the RBA took a number of steps to shore up the economy. Bank deposits were guaranteed, stopping the flow of funds out of the banks and helping them to keep lending. The RBA cut interest rates, which are now 4.25% lower than in September last year. And the government announced $10 billion of cash handouts to try and stimulate spending by households. Eventually further handouts and a heavy spending budget were announced to provide further support for the economy.

 The measures taken by the government have helped lessen the pain of the GFC. Unemployment has risen to 5.7%, but in the US the unemployment rate is now above 9%. Households that have kept their jobs are probably in a better position than a year ago with mortgages so low, and government spending in areas such as infrastructure should provide support to the economy moving forward.

 At the moment there is debate about whether the global economy is recovering from the GFC, or whether the worst is not yet over. The optimists see measures taken by the Obama administration to stabilise US banks, and to spend money to support the economy as showing signs of working. If the US can recover, then surely so can the global economy. The pessimists see still declining US house prices, and therefore further large losses in global banks.

 It is always hard to predict turning points in an economy. But US house prices do seem to be stabilising, and I am cautiously optimistic, that we are at bottom, rather than getting worse. However, unemployment often continues to rise for some time after an economy bottoms out, and I think that in the next year or so this is what we are likely to see. I think we will see a slow and somewhat painful recovery, with unemployment still likely to rise somewhere towards 8% in Australia in the next twelve months before stabilising. Hold onto your belts for a little bit longer, but let’s hope that things will start to get better on the economic front pretty soon.

 In 1950 China’s population was 554 million out of a global population of 2.5billion. (India’s population was 357 million). But this 20% of the global population enjoyed only around 4% of global GDP.

 Between 1950 and 1979 economic outcomes in China were poor. An emphasis on growing the population saw China’s population almost double to 970 million people by 1979, but with almost a quarter of the global population, China’s share of global GDP remained at 4 to 5%.

 1979 was a pivotal year for China. 1979 saw the beginning of the one child policy, and the beginning of economic reforms. Economic reforms were (and often still are) slow and careful, but they have worked, and the changes to China’s economy are simply staggering.

 In 1979 China’s share of global trade was about 1 percent. The market economy was less than 20% of the economy. 80% of the population (i.e. nearly 800 million people) lived in the countryside…yet agriculture produced only 28% of GDP and the population were at constant risk of famine.

In 1979 China’s GDP was less than 50% bigger than Australia’s…but they had 50 times our population.

China’s approach to reform under Deng Xiaoping was slow but very pragmatic. If a reform worked, and did not threaten social stability then related reforms were likely. Initially reforms were in agriculture. Reforms were not always driven from the top down – a well known story is of a rural collective in Xiaogang Village in Anhui province, where in 1978 the village leaders agreed to the joint fulfilment of the collective quota, but output above this was allowed to be kept. The agreement stipulated that no-one was to tell outsiders, and if a team leader was jailed other villagers would support the team leaders family.

Of course this “Household Responsibility System” was discovered, but the fact that it worked meant that instead of the team leaders being jailed, this system was replicated across China. Output in Xiaogang village increased fourfold, and within 5 years output across China in the agricultural sector increased by enough to increase farmers real incomes 2.66 times. It is interesting that the initial reforms in China lifted hundreds of millions of China’s rural citizens out of poverty. The challenge today is to lift these same people to income levels closer to their urban countrymen.

A famous saying attributed to Deng is that China’s reform process will be “like crossing the river while feeling the stones under one’s feet.” Between 1979 and 1992 reform was very steady, but private enterprise was tolerated rather than encouraged. In 1992 China became a “socialist market economy,” and since this time the size of the private sector and the services sector has steadily increased.

A constant challenge for China’s government is to properly sequence reform, and to “maintain social harmony.” The growth of the private sector in China has not been matched by reform to financial markets, banks, and the foreign exchange market. Private firms are still very heavily reliant on internal sources of funds, with bank loans still being predominantly to state owned enterprises. This has in fact turned out to be an advantage to China during the GFC, as China has been able to very quickly increase financing to SOEs and stimulate the economy in recent months.

Much of China’s reform has been assisted by an opening up to trade. Opening up from 1979 was quarantined in small “special economic zones” which encouraged international trade with special tax and other concessions, and a huge supply of cheap but relatively well educated workers. Once again, the success of these special economic zones led to the creation of new zones, and eventually to relaxation of rules to encourage trade throughout the country.

It should be remembered that China’s trade rules were not designed just to encourage exports. Throughout the 1990s China did usually have trade surpluses, but China was a large importer from other countries in Asia, and exports tended to go mostly to Europe and the US. China’s accession into the WTO in 2001 dramatically increased China’s exports and imports until late last year. But the big loser from the rise of China’s trade growth has not been manufacturers in the US, but countries like Thailand and Mexico, who compete with China at low-medium skill industries. The NAFTA agreement saw a steady loss of US manufacturing businesses to Mexico in the 1990s, and many of these businesses moved to China in the early part of this decade.

The opening up of China to trade has not been matched by an opening up of the capital account on the balance of payments. i.e. China has not encouraged flows of funds into China, except through foreign direct investment, and until quite recently capital outflows were not allowed. As with other parts of the economy the capital account is being reformed, but in a very slow and steady way. The reason that we seem to be so aware of China “buying the farm” is that we have not seen this in the past.

But currently the stock of foreign ownership of Australian assets stands at about $1.7 trillion (or about 1.5 times our GDP). Chinese organisations own about $8billion, or less than half of one percent of this foreign ownership stake. Compare this with Japan, whose stake in Australia amounts to about $90 billion, or the United States with $418 billion, or the UK with $427 billion.

Australian entities hold just over $1 trillion in foreign assets (this amount has doubled since 2001). But only $7 billion  (or around 0.7%) is this comprises assets in China.

These investment flows will increase steadily in coming years. As China opened up its capital account it introduced quotas on flows of funds into and out of China. These quotas have been steadily increased, and China’s usual approach to reform would be to continue to increase these quotas until they no longer affect investment decisions. At that point China would be in a position to allow much greater exchange rate flexibility and eventually a freely floating exchange rate.

China’s progress in the past 30 years has been remarkable, but it is interesting to speculate on where China will be in another 30 years. Currently China conducts around 8% of world trade, and produces around 11% of global GDP.

Whether China’s trade share will continue to grow is questionable, but with 20% of the global population it is possible that integration into the world economy is not complete. What is certain is that China’s share of global GDP will not remain so far below China’s population share – in other words China will continue to grow more quickly than the global economy, and converge to global income levels. This may take all of the next 30 years, but it will happen.

China will also be much more open to inward and outward investment, and the challenge to the Australian government is to make our investment rules and processes more transparent – it may be that the fact that nearly 50% of our foreign ownership is located in two anglo countries has in the past been driven by the nature of foreign demand for our assets. This will not be true in the future, and demand for assets from Chinese entities should be seen more as an opportunity than as a threat.

Finally, since this is the Festival of Ideas, and the main theme is climate change, let me conclude with three ideas about what the future will hold as it relates to China and Australia.

Firstly, China’s income per capita levels will be approximately equal to current US income per capita levels in thirty to forty years time.

Second, the way that GDP is produced will be far less energy intensive, and more efficient. It has to be. Our per-capita greenhouse gas emissions are about 5 times those of Chinese citizens. Western countries have (arguably) reaped the benefits of being able to plunder the environment. China simply will not be able to pollute in the same way Australia has been able to in the past. Which is why it is important that Australia (and other similar countries) show leadership and significantly reduce our environmental footprint if we expect action from other countries that have not had the advantage of being able to exploit the environment. At last the US is showing some leadership in this area, while in this country we continue to disappoint.

Finally, I think that these developments are very exciting. The integration of China into the world economy has led to a more prosperous, but also a safer and more stable world.