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Actually, not the very young but, say, those who have just got a job. That is who Ian Ayres and Barry Nalebuff are targeting in their new book, Lifecycle Investing. They want to convince people that it is a good idea to have more of their savings in riskier assets such as stocks and, in fact, they should do this through margin lending. It is a bold claim given what we just went through but Ayres and Nalebuff back their arguments up with clear theory and lots of evidence. Put simply, time is on your side and so restricting your portfolio to your earned wealth makes no sense. Of course, in one sense this doesn’t mean borrowing to buy stock rather paying down home mortgages at a slower rate. Here is Ayres explaining the approach.

Now I won’t go into details although I find their argument fairly convincing. But I do want to point out that the Australian government may have stumbled upon this in a forced way through superannuation. Not only does that increase likely savings of younger people but it also does so in a way that forces them to diversify away from cash and property. It is like the entire country joined the Ayres-Nalebuff plan and I wonder if this isn’t a big driver of why we find ourselves in such a good economic position today. This is certainly something I hope people might study one day.

On another score, if you are thinking of following the Ayres-Nalebuff approach, read this NYT article about some social websites that might help you along the way.

Last week, IPRIA organized a public seminar on the banning of tobacco logos. I have just posted videos at http://vimeo.com/album/232376. Drop by for an interesting debate on private versus social costs, Government policy and WIPO/TRIPS. Details of the seminar and Powerpoint slides from each presenter are on the IPRIA website.

The Australian Government recently announced its intention to ban the use of artwork and logos in the branding of tobacco products, effective from 2012. In this seminar, four distinguished speakers, comprising: Professor Mark Davison (Law, Monash University); Professor John Freebairn (Economics, University of Melbourne); Associate Professor Angela Paladino (Marketing, University of Melbourne) and Mr Tim Wilson (Institute for Public Affairs), consider the economic, legal, ethical and marketing implications of this decision.

The recently announced Resource Profit Tax is in principle a profit grab, taking from those who owns large mines, and handing this out to those that dont. Obviously this makes mining executives angry and the noise they are creating at the moment is deafening, with all sorts of nonsense bandied about in the media about how this tax will mean the end of the world as we know it. Leaving the noise from a few super-rich to one side, it is useful to think of who belongs to the winners and the losers of the proposed tax.

A difficulty in making that assessment is that no-one yet knows how this tax will be carried out. Part of the difficulty is that the tax is meant to replace the existing royalty system in individual states, but these individual states are unlikely to simply agree to such changes in their tax raising activities. Also, definitions of ‘costs’, ‘rents’, and just exactly what constitutes a ‘mining project’ are yet to be worked out, so we can at the moment do no more than give a best guess. Let’s presume that the tax gets implemented in the way it designed, meaning that the profits of all current and future mining projects will be taxed at 40%, whereby the initial costs and losses count as a kind of tax-offset.

At the moment, the government’s plan includes the possibility that mining firms that made a loss on a project get part of that loss reimbursed, but exactly how that will work out is not clear (what happens in the case of bankruptcy?), so let’s presume that costs and initial losses will be treated as tax off-sets, which is what they will be for most of the big mining companies.

Since a profitable project now remains a profitable project in the future, the long-run effect of this tax is that at least as many projects will go ahead as without this tax. Indeed, more will go ahead because the tax replaces existing royalty taxes which tax all mining activity and do discourage all mining activity. Hence, in the long-run more mining will take place under this new tax, implying higher levels of investments. The beauty of the tax is that the underlying assets (minerals in the ground) cannot run away and hence the tax cannot be avoided by mining somewhere else. It is just not credible for any company to pretend they will refuse to make money and not dig up and sell the minerals that are there. All talk of capital flight, sovereign risk, and other forms of saber rattling are just not credible.

Another clear effect of this tax is that it will give mining companies (like Xstrata and BHP Billiton) an incentive to increase the costs, just like any tax-offset increases people’s incentive to use those offsets. This means that one should see increased job security, higher wages, and increases in other cost factors like transport. Indeed, the tax office will have a tricky time in deciding whether all the costs mining companies will start putting on their books are really costs associated with mining activities. Mining companies can for instance try to hide profits by paying excessive amounts to transport companies for transporting the minerals if these transport companies are owned by the same parent companies. All kinds of tax-avoidance games can be played. However, let’s presume the tax office will do a reasonable job and manage to keep the increase in ‘fake costs’ to acceptable levels. Even then, anything that is essentially a cost to mining (like employment, wages, and inputs) should get an easier time in negotiations with mining bosses because the government now effectively pays some of those costs.

Who, then, are the winners of this tax? Read more

From David Pogue, here is the story of iForce, an iPhone app that is a magic trick. The issue is that it has a ton of negative (1 star) ratings on iTunes. Those ratings are accompanied by great reviews! The reason is that magicians and others who like the app do not want to many people to know about it or it will spoil the trick. It is like a negative network externality. This is a common feature of magic tricks which have codes of secrecy built up precisely to prevent dissemination. These are ideas whose value, like insider information, comes from restricted access.

I have just posted a contribution from Tom Gole who is an Aussie PhD student here at Harvard. Tom approached me with the idea if occasionally posting. The notion of encouraging more active student involvement seemed like a good one to me and inspired the idea of having a contest to allow one or possibly two posts this month from students.

So here is the deal. If you are a student, email me your 200 to 400 word contribution on any topic that you think might interest readers of the Core Economics blog. Also include 25 words about yourself and a link to your website/blog. Do this by 20th June. I’ll select the best one and publish it afterwards. Tom’s post is a good example of what I am looking for. The reward is kudos and also the opportunity to put your thoughts in front of Core Economics’ discerning readership.

Student Contributor: Tom Gole (Tom is an Australian PhD student in the Harvard Economics Department. He is a Frank Knox Fellow, and holds degrees in Law and Economics from the University of Queensland.)

In a recent paper, Gennaioli, Shleifer and Vishny proposed a model of the role of innovation in causing financial crises.  Their basic story is that investors seek a particular type of cashflow, usually riskless, and financial intermediaries create new types of assets that meet those demands.  The problem arises when investors neglect the possibility of extreme, but unlikely, negative events: in that case, intermediaries issue too many of the new securities, and when investors receive news that reminds them of the unlikely events, the market crashes as they flee to the genuinely secure assets. Read more

As regular readers know, I love my iPad. What I like most about it is how easy it makes reading. Books have clear nice pages that can be flipped and navigated. Children’s books are even better making the words and pictures come alive. And just the generic digital stuff like email, webpages and pdfs; it is so nice to have it in your hand but not in miniature. That said, I have yet to come across a Feed Reader that does the job. Nonetheless, Instapaper is a good substitute. When I encounter an article I want to read later, I click a button on my browser and the text — not all the other gunk — is sent to my iPad. It makes reading articles book like and hence, a pleasure to read.

But there has been this undercurrent of interest in bringing print media — most notably newspapers and magazines — to iPads with advertisements intact. Personally I would happily pay for The Economist and New Yorker in this way — or at least I thought so (as Instapaper is a pretty good substitute). So today when Wired released its long awaited app, I decided to pay the $5 and see how it all went. And the answer is terrible.

Now, this is not for want of trying. The iPad app is a better version of the print magazine and has some smooth interactive bits. But it is 500MB (not great if you are on an Australian download cap) and, because it was not constrained by paper, highlights exactly what is wrong with paper. First of all — and this is fixable — when you read a magazine you often encounter full page ads but they effectively take up half the reading space — you know, per flip. On the iPad app, they are a whole page which means you have to flip past them. That makes reading an article somewhat annoying although articles flip vertical so you can get around this. But I found a whole page ad taking up my view confronting. Second — and this also fixable — there is no way of ‘saving’ articles and coming back to them easily let alone sharing them. On web pages, I like to do that. I know I can’t do that in print but once you are digital being without that function is a pain.

But the big problem is that it isn’t fun to read this way. And the reason for that is that it isn’t fun to read print magazines. They have columns and ads and pictures which are nice for browsing but when you want to actually read — you know, the text — it is a big pain. When I think about it, it is pain to do this in print — the text is too small, you have to search for the next bit of the article, etc. For some reason we put up with it, but we know it is bad. That is why some cruder electronic media actually work out better. Crikey, for years was an unsophisticated long email. But you know what, it is was easy to actually read. You got to an article and it was an article. And they all were the same. I knew what to do with it. But with magazines that is never the case. Same with newspapers. We put up with small columns to save paper but really, do we have to have the same when it is all digital?

This isn’t Wired’s fault. They were leveraging off what people seemed to like in terms of reading and they did it well. But I think it highlights exactly how far we have to go. Put simply, someone has to work out what the best way to reading is. I think Instapaper is a good place to start but there is a ton more experimentation still to come. Until then, the spectre of doom over the news media wont go away.

For some reason, I have decided to ponder the resources rent tax today. The sensible debate is not focused necessarily on the principle of the tax as its implementation. The principle is very sound: it is more efficient to tax rents than other forms of income. Ross Garnaut said as much. The issue is in terms of risk. Read more

The Henry Review has done the right thing and has at least reviewed the literature in justifying evaluating of the RSPT. One paper was by Kevin Markle and Douglas Shackelford published by the NBER last year. That paper demonstrated that effective tax rates in the mining industry in Australia were lower than tax rates elsewhere. From what I can see, it is a solid piece of work and exactly the sort of thing that we want governments to take into account when conducting evidence-based policy. Read more

So in the saga of Apple’s leaked next generation iPhone, there was a conspiracy explanation going around that it was just a ploy by Apple to get free publicity ahead of the likely June launch of the upgrade. Of course, it is hard to imagine that Apple who can get all the publicity they want without any tricks should try such an uncontrolled route.

It turns out that Apple are claiming otherwise but also that the leak was damaging commercially to them. Here is the report of what the Apple attorney said:

“By publishing details about the phone and its features, sales of current Apple products are hurt wherein people that [sic] would have otherwise purchased a currently existing Apple product would wait for the next item to be released, thereby hurting overall sales and negatively effecting [sic] Apple’s earnings,” Riley said, according to the affidavit Brand swore out for a search warrant of Chen’s residence.

When Brand asked Riley to put a dollar amount on the loss, Riley said he could not estimate it, but believed it was “huge.”

Well, this is a testable proposition. We can look at the decline in sales (if any) of iPhones in April following the leak and compare it to the decline in sales that arise in April every year when it becomes clear Apple will release a new iPhone in the next few months. We would also have to offset this decline with any increase in sales that might have come from the additional publicity. After all, an iPhone sale lost today is one gained tomorrow. So the ‘huge’ loss is the loss in interest on iPhone sales between April and June. Of course, Apple may have hoped to clear out inventory of old iPhones in these months and so the loss may be there too. But I don’t think Apple would want to claim that the loss is arising from a lost opportunity to duping customers to buy older phones.

European finance ministers just voted to tighten regulations as they apply to hedge funds, over the objections of the UK and US. There was a lot of debate around hedge fund transparency after George Soros shorted the pound in the early 1990s, and again as LTCM collapsed in 1998. In 1998 hedge funds shorted the $A and also the HK equity market, causing significant chaos on those markets (the HKMA finished up buying HK$118 billion in shares to thwart the hedge funds). One of the issues at the time of the attacks on the $A and the HK market was that many hedge funds are not subject to any meaningful disclosure requirements. This is partly by design. Under original SEC requirements hedge funds with less than 100 members do not have to register or disclose their activities. The first hedge fund was set up in the US in 1949, and still today many hedge funds have between 65 and 99 investors, in order to get around SEC disclosure requirements. The problem for regulators is that hedge funds can speculate, but also potentially manipulate markets without having to disclose their activities. In my view the speculation is not the problem, it is the potential for market manipulation that is problematic. In the case of both HK and Australia in 1998 it was quite difficult for regulators to be certain about what hedge funds were trying to do. In Australia the forex market was subject to rumours about hedge fund activity that drove the $A down by about 10c in a matter of months.  Read more

After the PIIGS, the US and UK are often discussed as potential risks when it comes to sovereign debt. Interestingly very little attention is paid to China, where public debt is usually seen to be quite low. Central government debt is only in the order of 18 percent of GDP, but local and provincial government debt is an issue. Local governments are not able to raise taxes or borrow directly, but they are able to get around these rules by setting up special purpose vehicles to fund infrastructure and related spending – an example being urban development investment vehicles or UDIVs. According to China Daily  total local government debts rose to above 6 trillion yuan (about US$1 trillion) in 2009, and continues to rise steadily due to the surge in local infrastructure spending. The risk is that much of this debt will eventually not perform, with implications for China’s banks – currently local government debts are about 1/5th of total bank loans outstanding. Is this a big problem? Yes and no. Yes in the sense that this is a risk to the banking system, and there is little doubt that bad debt levels will rise. But the central government’s tightening of monetary policy in recent months has been aimed at slowing down this form of lending in an attempt to rebalance the economy.  This rebalancing of the economy away from investment and towards consumption, and away from SOEs and toward the private sector remains the critical task for China’s government.

The NYT’s has an interesting and long article about the future of the newspapers and, in particular, how to reward journalists. For the most part, it is a good read but its diagnosis of the problems facing the news media leaves alot to be desired.

First, on the problem of declining advertising revenues, the article accepts the following as the key explanation:

online ads sell at rates that are a fraction of those for print, for simple reasons of competition. “In a print world you had pretty much a limited amount of inventory — pages in a magazine,” says Domenic Venuto, managing director of the online marketing firm Razorfish. “In the online world, inventory has become infinite.”

The idea here is that in the market for advertising, supply has become infinite so the price has dropped to zero. This is wrong. The supply of advertising space is the amount of space per content actually read by consumers. Consumer attention is limited and so even if there is an infinite number of ads out there (which there isn’t), the number that is actually read is still well and truly finite. So this supply-side effect is not the reason why prices have declined. Put simply, this is no Craigslist type situation.

Second, on what a web view means:

Online, advertisers have immense power. Because it’s easy to track who is clicking what, they can aim with efficiency and typically pay according to the number of times their ads are actually viewed. Instead of sending word of its shoe sale to a million print newspaper subscribers, who may or may not be looking for shoes, a store can buy the page views of 50,000 people who are reading articles about fashion. Or the advertiser can place ads on heavily trafficked portal sites like Yahoo and AOL, both of which are currently expanding their production of original journalism. Or it can pay Google to insert its ads into search results. Or it can go to one of the large digital advertising networks that have arisen in recent years and buy unsold “remnant” page views at deep discounts. There is a lot less waste and a lot more choice, and the upshot is that advertising, which once produced robust margins for publishers, now sells for spare change online. Generally speaking, while some ad placements — like those on a site’s home page — go for a significant premium, pages of individual articles, if sold at the going rates, bring in between a penny and nickel each time a reader looks at one.

So it is true that advertisers have more options. However, what is also true is that if it took a million impressions to reach a target set of consumers before whereas it only takes 10% of that number to reach the same target set now, does not mean advertising revenues fall by 90%. Instead, they are exactly the same. Indeed, the price per impression should rise ten fold.

Neither of these two things account for the decline in ad revenues. I think that competition has increased and that, at the moment, the efficient of matching is lower than it used to be because of the internet. But the effects are subtle and hopefully I can write more about them in a future post.

The logic behind the introduction of the resource super profits tax (RSPT) seems to be as follows.

Demand for mineral resources in the global market is growing more quickly than supply.  So, prices and revenues are rising and rising total revenues in most mineral resource markets is expected to continue over a long period.

The increased revenue will be divided among the providers of factors of production: the owners of the mineral resources, the labour force, the providers of physical capital and consumables; and the providers of debt capital and equity capital.   The Government (grouping all levels of government together) is the owner of the mineral resource and also takes a portion of cash flows to the labour force (payroll tax) and cash flows to equity capital providers (corporate tax) through its coercive right to tax.   There is a prioritisation of claims on the revenues.  The claims of the royalties, providers of physical capital and consumables, and the labour force are senior, the claim of debt holders comes next and the (residual) claim of shareholders and corporate tax comes last.

The Government has decided that its share of the revenue from royalties, payroll tax and corporate tax is not enough going forward.  It argues that current arrangements will give too large a proportion of increased revenue to equity capital providers.

The Government could choose to increase any one of its three existing claims: royalties, payroll tax or corporate tax.   It argued that an increase in royalties is inefficient because it would lead to the shut down of marginal operations.  An increase in corporate tax is inefficient because, among other things, it would lead to a substitution of debt capital for equity capital to avoid increase payment of corporate tax.   But what about increasing payroll tax on wages in the resource  sector?  As far as I know, and I haven’t read all of the Henry Enquiry report, there is no explanation of why it is inefficient to increase payroll tax in the resources sector.     Read more

A big storm in Canberra over opposition MP Peter Dutton buying BHP shares (see Joshua’s post below), in the belief that the coalition will win the next election and his shares will be worth more when the mining tax is abolished. Which raises the question of whether politicians should be allowed to bet against themselves. Betting markets exist for the Federal election, and surely we should be worried about our low paid politicians putting a few hard earned on their opponents and then lying down and collecting their winnings (or maybe just lieing)? Seems odd that politicians can bet on electoral results but sports stars can’t back themselves – and even more odd that I suspect that most of us would have no problems allowing MPs to bet against themselves.

I have been hoping for a while that the leadership of the The Australian Securities Investments Commission (ASIC) is going to improve.  They don’t have a very good record.

1.  ASIC didn’t provide proper oversight of dodgy property development funds and the investment advisors who spruiked those funds and ordinary households were fleeced.  ASIC allowed the issuers of mortgage debentures to make promises about security and liquidity that were plainly false.

2.  ASIC introduced a total ban on short selling of stocks after October 2008 which was completed unwarranted and damaged the efficiency of the stock market for the time it was in place (a ban on short selling of financial firm stocks for a short period would have been ok).

3.  ASIC’s attempts to suppress the spreading of rumours between stock market participants was a complete fiasco and shows how out of touch the leadership of ASIC can be.

4.  ASIC has failed to turn a string of high profile prosecutions into convictions, including AWB boss Andrew Lindberg, One-Tel’s Jody Rich, but overall ASIC’s record with prosecutions isn’t so bad.

The latest reason to believe the leadership of ASIC has poor judgement is the decision to make it easier for Australian listed companies to issue corporate bonds to Australian households.  ASIC believes that if the burden of disclosure (the prospectus cost) of issuing bonds is reduced then Australian households will buy lots of bonds and that will have many benefits.  The benefits apparently include improved depth and liquidity in Australia’s capital markets, and assistance in making Australia into a global financial centre.  The ASIC statement is here.         Read more

… aagh, can’t resist. OK, politicians should be able to purchase shares in peace and the disclosures made are to reveal conflicts of interest in real policy-making. The actions of Peter Dutton buying BHP shares two days after the Government revealed plans for the new tax doesn’t really fall in that category. But the whole ‘revealed belief’ thing is just too hard to resist commenting on.

Interestingly, the issue is revealed beliefs about what. One view is that he doesn’t believe the tax will harm BHP and, indeed, that the market has over-reacted to it. That gives us to potential hypocrisy line — you can’t attack the tax for harming mining companies at the same time as buying stock — but also a lack of belief in markets line — the markets don’t know how to evaluate these things as well as Dutton. Both beliefs are revealed by this story.

The alternative is that Dutton knows that the tax won’t actually be put in place. This requires a ‘being ahead of the market’ belief on the part of Dutton again, but this time he may actually know more than the market on this. Specifically, he may have information that others do not possess that the tax is likely to be blocked and so BHP shares are under-valued. Of course, this might just be a guess on his part in which case he doesn’t think the markets are working properly again.

So which is it? Markets don’t work properly or extra information that the market does not have, or both? Or, maybe these investments are not made with very much thought.

If you are in an export industry, life can be harsh and volatile. I work in one – international education. Every Australian dairy farmer works in one – the international dairy industry. However, apparently neither the farmers nor a recent Senate inquiry want to accept this harsh economic reality.

A recent Senate inquiry has called for more intervention in the milk industry due to a lack of competition between domestic retailers and excessive market power of multinationals. A report is here. A Victorian government web page giving some industry background is here. There are two key things to note. First, most Victorian milk goes to the export market – very little ends up as the stuff we put on our Breaky cereal.

[T]he liquid milk market consumes only 8 per cent of Victorian production …

About 45% of national production goes to exports. I understand that Victoria is the most efficient dairy producer in the country (a claim based on my ACCC experience and sure to be roundly disputed!) and :

Victoria supplies around 85 per cent of national dairy exports.

Second, in export industries, the world market tends to set the price. And that looks like the case for the farm gate price of milk.

Farm gate prices increased from around 32 cents per litre in 2006-07 to around 50 cents per litre in 2007-08, on the back of an international price spike. As international prices decreased between July 2008 and March 2009 (around 50 per cent for skim milk powder), the farm gate price returned to around 35 cents per litre (Figure 3). The current farm gate price is around 28-30 cents per litre, but this is expected to reach around 30-33 cents per litre by the end of 2009-2010.

I am not sure of the accuracy of the Victorian government prediction. The Aussie dollar is still around 90 cents US and the Euro is weak. The EU is one of our largest international competitors in the dairy industry. But it looks like farm gate prices reflect international prices.

Now – are there issues in the dairy industry? Yes! Farmers in some areas have limited options for selling their milk to local processors. Collective bargaining rules under the Trade Practices Act help level the playing field a bit here. Farmers have historically been subject to various protections that were removed about a decade ago. The adjustment is still occurring and these adjustments are painful for farmers in low-productivity areas or with farms that are below an optimal size. And we do have a concentrated domestic retail industry – but as already noted, the prices follow exports as this is the ‘fall back’ for domestic farmers. Prices for milk destined for domestic markets can’t fall below the price of ‘export milk’.

Between drought, the GFC, exchange rate variability and changing patterns of international demand and competition, life can be very very hard for a dairy farmer. It is the nature of export industries. It is not a reason to find a local excuse or to have the government beat up the very parties that the farmers need to work with to get their product to both domestic and international customers.

Parentonomics is being translated into another five languages. Of course, I have no idea how it will translate and if it will end up saying what I had originally intended. I also wondered how easy it was to translate. So to get a clue I decided to use Google Translate to translate a piece of the book into another language and then to use it again to translate that piece back into English. The results are over the fold. I think the results speak for themselves. Read more

In recent days I read a couple of interesting related pieces on a big challenge for democracy. Thomas Friedman writes in his NY Times op ed piece on the fact that baby boomers happily voted for lower taxes, increasing services, and printing money to pay for it, creating the current chaos in Greece, but plenty of other problems in store for the US, UK, and other large western European countries. Dani Rodrik writes that the problem for Greece is that  globalisation, democracy and the nation state are irreconcilable. As far as Greece goes the issue is that democratic pressures will make a bailout for foreign creditors difficult – democracy will trump financial globalisation, putting pressure on the EU as a political force.  Putting the two arguments together leads to the question of how democracy can have stronger fiscal checks and balances. We have given monetary policy over to unelected central banks. The question is how much faith should we put in elected politicians to deliver good fiscal outcomes? In my view stronger fiscal checks will strengthen, rather than weaken democracy. No economist would advocate balanced budgets always, but a balanced budget “over the cycle”, with verification from an independent body over achieving that aim would seem to be a good direction to take. The charter of budget honesty act goes some way towards this, but does not ensure proper independent verification. Of course this is not a new idea, and I’m hoping that this is one that Andrew Leigh will continue to pursue when he enters Parliament!

We all know that you’re not supposed to be able to pull yourself up by your bootstrings, but that is the logic behind the EU/IMF bailout of Greece. Greece will be guaranteed that there will be buyers of their bonds, but will have to submit to an “austerity” package. The austerity package seems austere only to mollycoddled public sector unions in Athens, but in any event is not sufficient to make Greece solvent. Solvency would require more drastic cuts, and probably more importantly much more of an attempt to improve productivity in Greece. But the bootstrappers at the EU have somehow convinced the markets that they have 300 billion euros to spend to buy debt. EU revenues come from contributions from EU members, to the tune of roughly 1% of each member country’s GDP. Budgeted spending in 2010 is 141.5 billion euros, a major chunk of which goes to agricultural support. The idea that the EU can take more money from bankrupt members to support bankrupt members is preposterous. Maybe the EU is planning finally to get rid of the CAP? Anyway, for a day this week the markets loved bootstrapping, but I’m betting in a few more days we’ll be back to Greek default worries.

Let me be upfront first – I’m long resources, so not unbiased on this one, but follows is some more on the resource rent tax (RRT). My initial reaction to the RRT was that it was reasonable, if a bit high – I noted that the combined corporate plus RRT rate for miners was higher than that proposed in the Henry review. Henry worried about a combined tax rate on miners above 55%, so he suggested cutting the corporate tax rate to 25%, and introducing a 40% RRT, which would have led to a marginal tax rate of about 55% (not sure exactly how that works out). Not surprisingly the government went with the RRT but opted to reduce the corporate tax rate to 28%, not 25%. But the government ruled out categorically the other tax on rents suggested in the Henry review – a land tax. Read More

Over the fold, a piece that appeared in The Drum (ABC) on one part of the Budget.

Read more

Can there be too much football?  Yes — the AFL’s Monday night matches are too much, in my opinion.  Sports administrators don’t seem to be able to stop themselves from scheduling ever more matches to bring in more revenue.  They don’t seem to understand the economics, and especially the industrial organisation of sport.  They don’t understand the importance of maintaining scarcity.

Consider the mismanagement of cricket in Australia.  There used to be a real air of excitement about every match that the Australian team played.  Nowadays they play so many games, it is hard to know when they are playing and when not.  Cricket authorities could not resist the temptation to schedule more games.  The sense of importance of each game was lost, crowds and viewing numbers have plunged and now Cricket Australia is wholly dependent on the broadcasting rights on Indian cricket team tours of Australia to make a profit.

A similar thing has happened with international rugby union.  Australia plays so many test matches now, it hardly matters whether one is missed (or lost).  Rugby union at least has the excuse of having a close substitute in rugby league.

In the US the governing bodies of sports seem to be more savvy.   In baseball and basketball they effectively have two products.  The regular season has a huge number of games, played all week, and is intended for the die-hard fans.  At the end of the regular season they have a long finals season.  Many fans tune-in just for the finals, which amount to another season of higher level competition all by themselves. Read more

There is a change to contribution limits in the Government’s response to the Henry Tax Review.  Under the proposed rule anyone over the age of 50 years, who have less than $500k of accumulated super, can contribute $50k per year from pre-tax income.  Previously, the limit was $25k (there was an age group who could contribute $50k under a transition arrangement, but that is irrelevant for this post).   Under the new rules, only $25k can be contributed if the taxpayer has more than $500k of accumulated super and / or the taxpayer is younger than 50 years.

This creates a natural experiment.  Economic theory implies that some households should increase the riskiness of their super investments as a result of the new $500k transition limit.  An example will illustrate.

Erica has just turned 50 years and has $520k invested in her super.   She holds a balanced portfolio of stocks, fixed income, real estate, cash, etc.  The portfolio allocations reflect her long investment horizon and low level of risk aversion.  Erica expects to work for another 15 years and make maximum super contributions in each year to take advantage of the low tax on super investments. Read more

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