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I’ve been unable to read properly for a few weeks, but a few things that I have been able to hear are worth me writing about this week. Firstly, the IMF have suggested that Australia introduce capital gains tax on housing, and also allow mortgage interest deductability. This is a really dumb idea, but will leave for tomorrow. And the national accounts come out this week, with forecasters now expecting 2nd quarter GDP growth in Australia of around 0.7%. Not bad, but if that rate continues (and on that I’m skeptical) unemployment will still trickle upward. Which leads to the fact that the RBA are now expected to raise rates before year end, while the government wants to continue with the stimulus package. This is Reagan and Volcker all over again, and is likely to end equally badly. It makes much more sense to slow down the rate of fiscal stimulus, and to hold rates where they are as the signs of recovery continue. Stimulatory fiscal policy and a tighening of monetary policy makes no sense – particularly in a 1.5% inflation environment. See chapter 2 of Sargent’s “Rational Expectations and Inflation” for more on the Volcker/Reagan episode.

Reading this while eating lunch? You’re not alone…

Grazing, Goods and Girth: Determinants and Effects (gated, sorry) 
Daniel S. Hamermesh
Using the 2006-07 American Time Use Survey and its Eating and Health Module, I show that over half of adult Americans report grazing (secondary eating/drinking) on a typical day, with grazing time almost equaling primary eating/drinking time. An economic model predicts that higher wage rates (price of time) will lead to substitution of grazing for primary eating/drinking, especially by raising the number of grazing incidents relative to meals. This prediction is confirmed in these data. Eating meals more frequently is associated with lower BMI and better self-reported health, as is grazing more frequently. Food purchases are positively related to time spent eating–substitution of goods for time is difficult–but are lower when eating time is spread over more meals.

[HT: Nieman] Here is some data for the iPhone app, WriteRoom:

• 08/20/2009 9 @ $4.99
• 08/21/2009 4280 @ Free
• 08/22/2009 7166 @ Free
• 08/23/2009 4901 @ Free
• 08/24/2009 88 @ $0.99
• 08/25/2009 56 @ $0.99
• 08/26/2009 119 @ $0.99

Based on the positive priced data, that is a price elasticity of -4/7. It suggests (based on a marginal cost of around 1 cent) that the optimal price is $0.04. Damm it, the iTunes App Stores minimum positive price is $0.99. Is that policy holding back micropayments?

Two new NBER working papers look at the  increasingly tough market to get into the best US colleges, and suggest that it may be having implications for high-schoolers, parents, and maybe even lil munchkins. (Both gated, sorry.)

Read more

My article in The Age on broadband caps got a bit more attention than I had bargained for. There are several themes that I wanted to follow up on. My starting point was high bandwidth costs in Australia. I suggested based on my reading of those in the known (for instance, this great piece by Ben Edelman in the Journal of Economic Perspectives) that bandwidth costs are now low — of the order of 15 cents per GB. If the Australian broadband market is working like a competitive industry then usage charges would reflect those costs. Instead they are 1000 times higher at 15 cents per MB.

First, what is the cause of high bandwidth costs? Are they really that high for Australian ISPs? Some suggested it was about international capacity. But if that was true, we know that capacity has been growing (click here). Why has the 15 cents per MB charge stuck? Others suggested that the wholesale providers (Telstra, Optus and some others) were keeping wholesale prices at that level. That could well be true but again, why are the wholesale providers doing that? Surely they want to compete for wholesale market share too. The final issue — that I hinted about — was congestion. But at these ridiculous prices surely more than just a few smaller ISPs would offer plans that shaped that congestion. Why can’t Telstra or Optus do that? It just doesn’t make sense that they are facing those constraints. They don’t even have congestion pricing for businesses.

My point was that something else is going on. To explain Telstra, Foxtel looks like the elephant in the room. To explain the others, it is a harder task. To me, the idea that these are real costs of 15 cents per MB just doesn’t add up.

Second, shouldn’t an economist be in favour of usage pricing? This came up over at catallaxy and in the comments there. To which I respond. Absolutely, and I have favoured usage pricing in all manner of circumstances especially where people are taking actions that are imposing costs but they aren’t paying a price for it.

In my article, I was not suggesting that broadband use be free — just that it reflect true costs. 15 cents a MB is not usage pricing. It is non-usage pricing. There is no-one who (knowingly) pays that charge for use. The highest ‘free’ allowance on BigPond is 60MB per month. They may be users who want consume more than that and pay the cost (more like 15 cents per GB or even $1.50 per GB — 10 times more) for the privilege. They are not served by this. The 15 cents a MB charge is Telstra’s way of saying we don’t want to sell you any more bandwidth this month. Come on. Could it really be that they don’t want to do that in a normal business? Can’t imagine.

So to those who think 15 cents a MB is reasonable, produce ONE PERSON who knowingly purchases say, 100MB, or 0.167% of the top Telstra allowed monthly usage of this. If there isn’t anyone, you can’t claim this is usage pricing. To do so, gives the whole concept we fight everyday for a bad name.

From The Onion:

CHICAGO—Though the stock market remains shaky and consumer spending has reached a standstill, the U.S. economy is apparently still robust enough to produce nearly half a dozen television shows about cake. “This flies in the face of basic economic theory,” University of Chicago economist John Holloway said Friday, referring to such programs as Ace Of Cakes, Cake Boss, and Last Cake Standing. “Despite the worst recession in a generation, these shows somehow make enough money to pay for sets, celebrity hosts, producers, camera crews—not to mention the cakes themselves—all so people can see a dessert that looks like a Dr. Seuss character.” Holloway made it clear, however, that no known mathematical model has yet been able to explain why in the hell anyone would watch those Real Housewives Of Whatever shows.

An example of the ‘portfolio of portfolios’ problem appeared in the AFR on Tuesday.  An article by Ben Wilmot discussed the purchase of a shopping centre in Perth by Colonial First State Asset Management for $450 million.  The article considers what CFS Asset Management will do with its new property as follows.    “It is uncertain whether the centre is destined for the listed CFS REtail Property Trust, which reported last week, or whether it will be kept in an unlisted vehicle.”

In this situation an asset management firm (CFS) manages more than one portfolio on behalf of different investors (a listed property trust and unlisted trust) and it must decide which of those funds to favour.  If CFS believes that the shopping centre is worth substantially more than $450 million then it can favour the investors of either fund, but not both.  CFS has an interest in this decision.  CFS will receive management fees on the $450 million, but those fees will differ across the two funds.  Moreover, the recent investment performance the two funds will differ.  So CFS could choose to favour the poorer performing fund to prop up its performance, or favour the better performed fund, possibly building a “star” fund that attracts a lot of new money.  There is no suggestion in the AFR article, or here, that CFS has acted improperly in any way. Read more

I have a new paper out today, looking at the impact of the Australian 2009 household payments on expenditure. It uses a poll question contained in the June ‘ANU Poll’. Here’s the abstract (click on the title for the full paper):

How Much Did the 2009 Fiscal Stimulus Boost Spending? Evidence from a Household Survey
Andrew Leigh
Using survey evidence, I estimate the impact of a $12 billion package of household payments delivered in Australia between March and May 2009. Forty percent of households who said that they received the payment reported having spent it. This is approximately twice the spending rate that has been recorded in surveys assessing the 2001 and 2008 tax rebates in the United States. Using an approach for converting spending rates into an aggregate marginal propensity to consume (MPC), this is consistent with an aggregate MPC of 0.41−0.42. Since this estimate is based only on first-quarter spending, it may be an underestimate of the longer-run impact of the package on consumer expenditure.

Surveys aren’t the ideal way of estimating expenditure, but in my view they’re superior to looking for sudden movements in quarterly macro figures, which has been much of the debate so far.

I am a big fan of Philip Tetlock. From a recent article in The National Interest:

Read more

You know the story of the two guys who are being chased by a lion. One says to the other “We are going to die. We can never outrun this lion.” His friend replies: “I don’t have to outrun the lion. I only have to outrun you.”

Read More

My AFR oped today asks: does it matter for economic policy which individual leads a particular political party? The conclusion: not in most cases.

Of course, a 750-word piece can only do justice to one strand of a vast literature. For example, my piece didn’t even begin to touch upon the fascinating research agenda of my political science colleague Paul ‘t Hart, to mention just one of the people doing interesting work on political leadership.

Read more

I got in one of my — let’s complain about broadband usage cap — moods this weekend. The result is the piece (over the fold) in today’s Age.

Read the article

A coordination game is one where everyone benefits from choosing a similar strategy but there are many such strategies so the issue is how coordination occurs. Usually, we think of which side of the road you drive on as a legal issue but it is actually a coordination issue: we drive on the same side as everyone else otherwise things would be bad if we took liberty into our own hands.

With that it is really interesting when a country decides it is in the ‘wrong’ equilibrium and wants to change to another. Samoa has decided just that and will early morning on 7th September switch driving from the right to the left hand side of the road. Why?

The main reason for Samoa’s switch is that two of its biggest neighbors, Australia and New Zealand, drive on the left-hand side, whereas Samoa currently drives on the right, as in the U.S. By aligning with Australia and New Zealand, the prime minister says, it will be easier for poor Samoans to get cheap hand-me-down cars from the 170,000 or so Samoans who live in those two countries. It could also help more people escape tsunamis, says Mr. Tuilaepa.

Tsunamis? OK, that is just a reflection of clear dissent on this issue and political handwaving. There’s more.

In a TV address about the road change last week, the prime minister warned that “the only thing to fear is fear itself.”

The reasons for change seem weak (e.g., the ability to buy Australian cars!). Sweden switched in 1967 but at least you could drive somewhere.

Oh yes, and if you think that there wasn’t enough cost, 7th September is a Monday. It is hard to imagine a worse day of the week to switch things. That said, the Government did realise that and declared the Monday and Tuesday a holiday. It also has set up a training area now so Samoans can practice driving on the left. Of course, that has only illustrated the issue they face.

One recent Sunday morning, a bus was seen barreling down the right side of the road in the training area, the driver apparently oblivious to the fact that it was the wrong side. After nearly running head-on into a sport-utility vehicle, the bus driver swerved then returned to the wrong side of the road and chugged on.

I think the 7th September is the day to watch for South Pacific YouTube activity.

I have an article in The Punch today on costs and the ETS. Not sure about the title!

Read more

Occasionally, I get blog post requests and more occasionally I respond. This is one response from a reader who is wondering what I made of the whole ‘public option’ debate in the US over health insurance. This is actually something I worked in for Australia back in 2003 (or thereabouts) and was part of Finishing the Job.

As I understand it there are several problems facing the US system. First, there are 50 million uninsured. Second, many of those who are insured have deals that might mean they are actually uninsured as treatments and even coverage may be denied when they come to claim it. Uwe Reinhardt calls this ‘unsurance.’ Third, too much is tied to employment. Fourth, it is hard to work out what is going on and so competition may be impeded. Finally, it isn’t clear the system with these problems is even economical (i.e., in maximising health per dollar spent).

The proposals cover various things. The first is to set-up an exchange that makes choices easier for consumers. We don’t have that here but anything that improves transparency is, prima facie, not a bad idea. The second is to launch a public scheme in that exchange. The idea is that will be both cheaper and less discriminatory than private plans and so will be able to close some of the uninsured gap. The issue here is that it will surely cost more money because you are paying for more health (which is, by the way, not a bad idea) although if there is a competition issue in private insurance, this effect will be muted.

To the outside eye, this all seems messy. For instance, if a public provider can solve the ‘unsurance’ problem surely with appropriate regulations, private providers can do so to. In Australia, this is done through community rating and last time I looked the industry survived. In addition, universality can be solved be appropriately extending Medicare. Finally, there is a rationale for breaking the whole employment-based system by taxing the benefit while at the same time reducing payroll tax — that way, insurance isn’t likely to be tied to an employer.

That said, when you think about it, the optimal system – whereby everybody in insured to some level of treatment with those treatments reimbursed at a set rate with private coverage being allowed to offer additional treatments, quicker treatment and fancier surrounds — would be really hard to jump to. The transition would be painful especially without publicly-owned hospitals to catch the bits that are missed while the private sector re-organises itself around a new model. When you start to consider transitional issues, the public option — for all its messiness — starts to look more attractive.

[Update: Another interesting perspective]

The Federal Communications Commission asked AT&T, Apple and Google to answer some questions on why Apple rejected the Google Voice app. They have done so now with AT&T denying knowledge while Apple claims it is still considering it due to issues of compatibility with its interface. But the interesting bit of their response is this:

There is a provision in Apple’s agreement with AT&T that obligates Apple not to include functionality in any Apple phone that enables a customer to use AT&T’s cellular network service to originate or terminate a VoIP session without obtaining AT&T’s permission. Apple honors this obligation, in addition to respecting AT&T’s customer Terms of Service, which, for example, prohibit an AT&T customer from using AT&T’s cellular service to redirect a TV signal to an iPhone. From time to time, AT&T has expressed concerns regarding network efficiency and potential network congestion associated with certain applications, and Apple takes such concerns into consideration.

Now just so we are clear. VOIP usage is not a network congestion issue. So blocking Skype and the like outside of WiFi is strange. The reason is this: the iPhone has always had YouTube front and centre. That is the bandwidth hog not to mention streaming services such as Pandora. VOIP is nothing compared this. And it is not only AT&T. Australian carriers appear not to allow similar things.

I get the feeling the FCC didn’t ask the right questions. What it wants to know whether the exclusivity deal with AT&T brings with it incentives that modify Apple’s behaviour in terms of the applications it approves. The possibly correct response is that it is nothing to do with exclusivity and is just something imposed by all carriers even where there are no such deals. Alas, we didn’t get an answer because the FCC didn’t get to the issue.

Imagine that you were speaking to an ordinary man in Western Europe in the year 1500.  If you asked him to describe his identity, the very first thing he would say is that he was a Christian.  Then he might identify with his  village and family.  His world view would be necessarily local.  He would believe that all authority to explain the creation and nature of the world rested with his religion.  He would be confounded and disturbed by the idea of democracy or liberalism.   He would consider women to be essentially the property of men. 

By 1750 much was changed.  The Renaissance (beginning in Italy in the 1350s) reintroduced to Europe classical learning.  The democratic ideals of ancient Greece and the example of the Roman Republic and Roman law were immensely influential on the emerging polity.  The Renaissance also promoted humanist teaching and civic virtue.   The Protestant Reformation rested power from the established church.  Crucially, the Reformation elevated the role of individuals relative to society by insisting that each individual had a personal relationship with God regardless of institutional arrangements on Earth.   Most importantly, The Enlightment took authority for explaining nature from the Church and gave it Science.  Enlightment rationalism swept away millenia of embedded ideas on how society should be structured and put the West on an unstoppable path to liberal democracy. 

Imagine now that you were speaking to an ordianry man in Helmund Province in the south of Afganistan today.  His views the world and society would more likely remind you of the Europe of 1500 than the Europe of 1750.  Read more

On the topic of randomised social policy trials, UCD Dublin’s Professor Colm Harmon draws my attention to a symposium on evidence-based policy in Ireland (proceedings here), and a new randomised trial of early childhood intervention that’s now afoot. Details over the fold.

Read more

From Barney Frank on economists [HT: Greg Mankiw]:

Not for the first time, as an elected official, I envy economists. Economists have available to them, in an analytical approach, the counterfactual. Economists can explain that a given decision was the best one that could be made, because they can show what would have happened in the counterfactual situation. They can contrast what happened to what would have happened. No one has ever gotten reelected where the bumper sticker said, “It would have been worse without me.” You probably can get tenure with that. But you can’t win office.

That would be right. I wonder what would have happened had Barney Frank become an economics professor rather than run for Congress.

The renewable energy target legislation will soon clear the federal parliament and await royal ascent. I am happy to give my ascent right now — 1.5 thumbs up I would say.   When the legislation comes into effect, wholesale electricity buyers will be required to have renewable energy certificates to cover 20% of their electricity purchases, or else pay $65 for each megawatt hour of electricity without a matching certificate.

I like the expansion in electricity supply that will come with the renewable energy target scheme. Our growing economy will demand more electrical energy over time, but the building of fossil fuel power plants will become more politically untenable in coming years. The renewable energy target should result in about an extra 45,000 GWH per annum of new electricity production over the next 10 years. Read more

My Wryside Economics talk today was on prediction markets. If you’re interested, you can download it from the ABC website.

The recent Frontier Economics proposal to treat emissions differently in electricity has been framed as being about whether price signals flow through to consumers or not. But there were no claims that the Frontier proposal might be favourable in encouraging low emissions generation in electricity. I thought that the CPRS and Frontier’s scheme would be equivalent in that regard.

According to a new paper released today by Stephen Holland there may be a difference. The abstract is over the fold. But the bottom line is this: if generators have significant market power in wholesale electricity markets, then an emissions intensity standard (similar to the Frontier proposal) dominates an emissions tax (equivalent in the  model to a CPRS scheme).

The intuition of these results is relatively straightforward. The weakness of an intensity standard is that it relies more on substitution effects than output effects to reduce emissions. With incomplete regulation or market power, this disadvantage may be helpful since leakage  may offset gains rom reducing output and since market power already inefficiently reduces  output.

The reason is that with market power, output is restricted and carbon prices have less of an impact on it. Now, I didn’t see this in the Frontier report but they are the experts on electricity markets and, in light of this paper, I’d be happy to admit that their scheme may be superior in driving the optimal mix of emissions in electricity if they would provide clear statements and evidence about the existence of significant market power held by electricity generators in Australia. (The issue on price signals remains live, however).

Read the abstract

I’m attending a Productivity Commission roundtable in Canberra today on the topic ‘Strengthening Evidence-Based Policy in the Australian Federation’. In an attempt to provoke, my paper is titled Evidence-Based Policy: Summon the Randomistas?. Full text here. I’ll have a month to revise it, so all comments are welcome.

That’s the message from Bill Wyman in this excellent article about why newspapers are failing. The answer is competition but the way he depicts the problems is first-rate. Here is a taste:

And some of it was useful to readers. But let’s be honest. It wasn’t the information the republic needs to govern itself. A very large percentage of it was based, one way or another, on information from press releases, either physical or de facto, from organizations with products to sell.

Press releases contain dated information, the release of which is valuable only to the companies involved; in most cases, they’d actually pay to advertise it, and in that sense it has a negative news value. But vast swaths of a typical American daily is filled with news whose primary source is a press release of one form or another, from entities governmental, political, or corporate. It was part of an unspoken but implicit agreement the papers had with advertisers—that the vast majority of what the paper printed would be complementary with the advertising. (It would be complimentary too, of course.)

…

The irony is that this all wasn’t as corrupt as it sounds. The primary cause of this wasn’t, paradoxically, to curry favor with advertisers, though they certainly liked it. That was just a lagniappe. The big attraction of a press release? It was safe. No one has ever canceled a newspaper subscription (and no one has ever gotten into trouble internally) because of the publication of material contained in a press release. Anyway, I argue this genetic evolution made timidity the hallmark of most daily American newspapers. It manifested itself in myriad ways.

In today’s Australian, Danny Price, MD of Frontier Economics, has attempted to clarify what became obscured about their argument on the ETS last week. First, he argues that there has been little acknowledgement by the Government of the economic cost of an ETS. Part of this is a claimed enormous error in the Government’s modeling. But the other part is surely the usual political issue of how policies are sold. In my mind, those economic costs have hardly been hidden and in economics circles they have been all the discussion.

Second, he argues that the shielding in electricity price signals the Frontier report advocates is not about households but about small to medium enterprise. I must admit that I missed this in the Frontier report and didn’t see the reference to the evidence on this. Like the whole notion of gradualism — that has a legitimate basis in economics (unlike so-called ‘churn’ which was not called that in the Australian piece) — what is disappointing is that Frontier provided a theoretical argument but no evidence to push-back on the Government’s more, big bang like approach. Recall, however, that the Government has adopted some shielding too with a carbon tax being favoured for the first year of the CPRS. To me, it seems very important the SMEs see the energy costs they face with carbon prices embedded so that we have a flow-on effect to less energy intensive production. How often are computers replaced? To wait 3-5 years seems silly. But then again, I agree that we need evidence to sort these competing theories out. Where is it?

Finally, the piece talks about a problem with churn (that is, making generator’s pay for permits and making it up at the household end with tax cuts). It was not (again I might have missed it) mentioned in the Frontier report but it has to do with political economy:

The government plans to charge the same carbon price to all generators whether they are high or low emitters. This will make all emitters, good and bad, more expensive and drive up the cost of electricity across the board. But this is one aspect to the scheme the government seems to like. Over the years the government’s coffers will swell from an additional $4 billion a year to $20bn in the sale of permits. This will give it a lot of discretionary expenditure, and the political power that comes with it.

So when it comes down to it, the reason to go with the Frontier scheme rather than the Governments is that we don’t trust the Government to not divert the money in ways that destroy the economy. Again, I’m not sure about that but in the end the Frontier scheme and the Government’s are legislated outcomes. The Government could legislate more commitment — maybe it already has — that prevents this, somewhat speculative, dire consequence. But even if they legislated the Frontier plan, it would be subject to the same political risk.

I agree with the piece that there is lots still to debate on the details of the ETS. What I am not sure about is whether theoretical discussions are contributing to that debate. Evidence is still lacking.

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