Finally, return to work tax rebates

I have been following the Australian election at a distance and it is amazing how much more policy-centered it is than elections taking place here in North America. There are so many policies it is easy to miss some. Thankfully an alert Twitter follower noticed something familiar about the ALP’s new policy with regard to employment by small businesses.

Top of the list was a new promise to give small businesses an additional $20,000 a year tax deduction for taking on a new employee who is under 25, over 55 or a parent returning to employment and parental leave.

There is alot here but the one that got my attention was the notion of giving small businesses a tax rebate for employing someone return from parental leave. I searched for details and couldn’t find any but I did want to say that this has the makings of the best parental leave policy ever, anywhere. Of course, I would say that as it is the same as the policy I have been advocating for almost a decade.

Anyhow, for those interested, here are some links to accessible articles about this:

And here is a set of videos I recorded explaining the scheme.

The bottom line is that rather than simply handing out dollars to parents on leave, this policy targets the real issue — discrimination in the workplace — and makes it easier for businesses to encourage parental leave and ensure parents return to work successfully. In other words, target the problem rather than the symptoms. While the policy announced is small scale relative to what I was proposing, I should note that is the sensible place to start so we can learn whether what is proposed in theory actually works in practice.

I already left Australia because of continual idiotic debates like parallel imports

Magda Szubanksi said she would consider leaving Australia if the Productivity Commission’s recommendations regarding parallel importing of books were to come into place. Leaving aside the notion that leaving Australia would make absolutely no positive difference to her income with or without Australia’s current laws — her core market is still Australians — this is just one in a continual douching of verbage that comes from Australian authors ever single time the parallel importing laws come up. This time around the most ridiculous bit of self-interested dribble came from Richard Flanagan.

His argument is that he is a writer, the things he and other writers are good. Actually not just good so bloody good that the government should pay for them because they can’t convince readers to shell out. Flanagan argues that look other interest groups get money so we should too. That last bit is not a bad argument — if ship is sinking let’s get more people lifeboats — but I am not in the multiple wrongs make a right mood.

The Productivity Commission’s crime is to suggest that Australians should not pay more for books than people overseas. That includes the fraction of those books that are authored by Australians. So the Flanagan argument is that all books in history should cost much much more so that the fraction of current Australian writers can get a little bit more. This is basically the same argument as big coal uses to stop climate change policy — we shouldn’t have to pay more even if it is going to help save every living thing on the planet.

I hate these continual interest group based arguments. Their on-going nature and my personal failure to do anything about it was defnitely on the ‘reasons to go’ side of the ledger when I left Australia six years ago.

But on this issue I have more moral authority. I am an author. Several of my books cannot be bought digitally by Australians because we have parallel import laws and their like. I can’t even give them away! But more critically, I am a co-author on Australia’s leading textbook on economics. That is one of the books that earns a shit-ton of money (mostly for publishers but also for its authors) by charging Australians ridiculous prices — sometimes a couple of hundred dollars. Parallel import laws may well crush those prices. And that is just fine by me. Why? Because it will lower the prices of all books.

My strong wish is that finally this time around the Government actually follows the Prouctivity Commission and stands up for Australian readers and Australian students and the culture of the world.

Why don’t Australian banks support Apple Pay?

Apple Pay is near ubiquitous in the US despite the relative lack of terminals to support them. But in Australia, those terminals are all over the place yet the only card accepted on Apple Pay is American Express; a card not issued by the major banks.

Why?

For those who don’t know, Apple Pay is as convenient as a tap and pay card but with the security that no one can use it other than you because of the finger print identification. It came to Australia and Canada last week but only with AmEx. I have used it this week and it works beautifully. As magically as Apple claim.

With iPhones capable of doing this the now largest set of iPhones out there, why is the use of Apple Pay so constrained in Australia but not in the US.

In this morning’s SMH, Ed Husic, a Labor politician, lays blame at the big banks and specifically at some sort of collusion or coordinated boycott by them of Apple.

Normally when politicians suggest the banks are colluding they are off base; tapping into our generic distrust of banks. But this time around, it is hard to come up with an alternative rationale.

The card issuing market is supposed to be relatively competitive and the banks pay a ton of money in terms of loyalty programs to get users to use them. As Apple Pay makes it easier to do just that, why isn’t competitive pressure driving adoption?

The banks appear to be claiming that Apple are negotiating for too high a fee. That may be true but two things run counter to it. First, Apple are providing a real cost saving in terms of radically decreasing the probability of card fraud through the touch ID system. Second, this hasn’t been a problem in the US and the UK. Why would Apple be different? I suspect they are offering exactly the same model to the banks as AmEx.

Now one possibility is that the banks actually earn margins over the fraud costs on transactions and so Apple eliminating those costs threatens their business.

But another that I am unable to readily dismiss is that there is some coordinated conduct going on. I am not saying that there is but, in my opinion, I am struggling to provide alternative explanations. Credit cards is one area where the banks cooperative in order to have a system and for that reason the Reserve Bank and ACCC have always paid closer attention to it. The question is: where are they now?

Australia after 3 years

I have been back in Australia this past week for the first time in over three years. Here are some brief impressions:

  • The airports are great. Even better than before, Security is no issue (I passed through in 30 seconds) and Canberra airport is now fantastic — world class as they say. Why airline lounges are still popular I have no idea as the terminal themselves are as good as lounges elsewhere in the world.
  • Broadband is terrible. If anything it appears to have deteriorated over the last 5 years (if such a thing is possible). People complain about it and they have legimate complaints. This is not about streaming video but just doing what is now normal business that has to be conducted from the home. For instance, relying on video conference calls is, for many, virtually impossible. Wireless, by contrast, is actually a better performance option. At the time, I liked the idea of the NBN as private investment had stagnated. Now I have to admit that I place some probability on the notion that Australia may have been better off letting Telstra run the show. In reality, the lack of vigilance on encouraging competition in this space is likely the big culprit. In Canada — no paragon for great broadband — I have 300Mpbs at home on cable from Rogers. The reason I have that is that there are three broadband cable competitors.
  • Nothing has changed with the Universities. Same issues, same challenges, same toying with the idea of spending $$$ on online education without any proven model existing anywhere. Oh yeah, they also throw money at startup incubators now.
  • Melbourne CBD is booming. Full of people and buildings. Large shopping malls. Indeed, it has to be the largest concentration of affluent people in the world not to have an Apple Store anywhere near them. What is the deal with that?
  • Coffee is wonderful. I mean really wonderful. Australia has that reputation and it is deserved. Virtually whereever you go you can get coffee that is equal to the best in the best cities elsewhere. The coffee you have to search for in other places is flowing in the streets. Why? I have no idea. It is not expensive but the barristas are competent and everywhere. Chains, by contrast, are far less prevalent. No Starbucks etc. Perhaps that tells us something.
  • People are the happiest with their government than I have ever seen. In my left leaning set, folks are talking about voting Liberal in the next election for the first time ever. Of course, that set prizes intelligence and the PM has that (especially in contrast to the previous one). But Australians tend to default to cynism. At this moment, that isn’t happening. It is nice to see.

Top Trump: The Game theory of the Trump endgame

pres15-001For those of us outside the US, the Trump entry into the US Presidential race so many months out from the actual election has been entertainment heaven. Sure, he is destroying the fabric of a great nation by bring horrific stereotypes and misinformation to the fore, but sometimes that is the price to pay for depravity.

But there is a strong sense that this will come to an end. There is no one who believes he will be the Republican nominee, let alone President. Our favourite prediction markets have the odds of the former at 7% and the latter at 3%; both actually higher than the priors of most. The real question is how long will he last. To be sure, as viewers our interests are in him lasting some time, but when we put our rational heads on, what prediction do we get?

To apply game theory to all this, we need to make some assumptions:

1. The GOP will not nominate Trump

2. For Trump, running and losing has more disutility than not running. I don’t know this for sure but I am willing to go with it. Trump doesn’t strike me as someone who wants to be tested.

3. For Trump, losing as a third party candidate involves less disutility than losing as the GOP nominee.

4. Trump could not stand to be at an event without being the centre of attention.

5. Trump is not really able to “work for it.” In other words, coming from behind isn’t in him.

That should do us to get some predictions.

First of all, let’s consider the actual primary race that starts early next year. The Iowa caucuses aren’t really that critical for leading candidates but New Hampshire is. The chances are, the field will have shrunk enough by then that, whomever is the alternative to Trump, will actually poll higher than Trump in New Hampshire. Thus, being at that race for Trump means losing.

Second, given this, he won’t run in that race. He has two options. First, to pull out for the GOP race prior to that and run as an independent. Second, to pull out of the race entirely for that citing medical reasons. This last one is appealing as a prediction as it satisfies Trump’s preference assumptions. If this is the case, however, he will want to do this when it was still the case that he had a chance in New Hampshire. That way he can claim “I was going to win, but what can you do?” Effectively, the Republican equivalent of Bobby Kennedy although with a healthier degree of endogeneity to the decision.

Third, what this means is that running as an independent isn’t likely to happen. When we get to just the point where the medical exit or mexit is feasible, the mexit option will be taken. So there will be no opportunity for the independent run at that stage.

Fourth, which brings us to now. The first Republican debate is next week. Trump and nine others will be on the stage for a couple of hours. Think about that for a moment. Trump will be on stage with nine other people presumably with rules that will require him to spend 80 to 90% of the time listening to others speak. We are all tuning in to watch it. But to be sure, we are doing so because we don’t think that can happen.

Fifth, in addition, there is a strategy available to the other candidates. We can term it “Top Trump” or alternatively the “Quayle Fail.” Remember when Quayle stood there like a stunned mullet against Lloyd Bentsen. If one of the other candidates can get that reaction or sometime equally embarrassing from Trump, not only will Trump be out of the race but that candidate will become the leader. Basically, the “vanquished Trump” title is a game winner. But it will take something big and if someone can do it, they deserve kudos up the wazoo.

Sixth, just before you get too excited, the game theorist in me has to tell you that Trump will surely know about the “Top Trump” possibility. He’ll be watching for it. Obviously, if someone can do it, it is too late for him.

Seven, points 4 – 6, suggest that there is a reasonable probability that Trump will pull out of the debate or, at the very least, be off the stage early to destroy it. He’ll claim “why am I on a stage with all you losers” and that will be it. It is a clear win-win for Trump. A debate does him no good and carries risks — especially at this stage.

Will that mean that he forms a third party then and there or that he pulls out altogether shortly after with a mexit? Sadly, this is as far as my game theorist’s predictive lens will take me. My point is: I hope I’m wrong but our entertaining run seems like it will come shortly to an end.

Are we kidding ourselves on competition?

The traditional textbook model of competition in an oligopoly goes likes this. Firms choose prices and other variables (like product quality, advertising and R&D) to maximise their own profits and disregard the impact of their actions on (a) competing firms and (b) consumers; although with the latter since they want them to buy products they aren’t completely immune to their welfare. This model is essentially unquestioned but, in reality, it relies on a view of firm ownership that is markedly different from corporate reality. In particular, large firms are owned by shareholders (who may also be their consumers) but, more importantly, may be the shareholders of their competitors as well.

Let’s start with that latter notion. What it means is that the presumption that firms maximise their profits independent of their consideration for the impact on profits of competing firms is surely suspect. And it is disturbingly suspect. Consider a situation where there are 10 firms in a market and they compete with one another. Now suppose that all shareholders — say because they are following the dicta of diversification — allocate their wealth in equal proportion across those 10 firms. That means that each owner of the firm — even if there are thousands of these — cares equally about each firm’s profits.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

To see how that might arise, think about, oh I don’t know, Comcast and Time Warner. These are cable companies/ISPs who are the largest of their kind in the US. I suspect that there is lots of cross ownership of mutual funds of each of these. Why? Because they happen to each focus on different regions in the US and so any mutual fund worth their salt would want to diversify their portfolio to hedge geographic risk. And so ask yourself: how readily would the boards of those companies improve massive infrastructure investments to expand the reach of their networks into the territory of the other? With cross-ownership, they wouldn’t have a powerful incentive. (Actually, we can now just add that to the list).

Now this isn’t just speculation. Jose Azar, an economist now at Charles River Associates, did his Princeton PhD on this topic. His theory paper is here and it builds on others including Gordon (1990), Hansen and Lott (1995) and O’Brien and Salop (2000). Frank Wolak and I came up with a similar set of issues related to cross-ownership and hedging in electricity markets (for vertical ownership) and verified anti-competitive consequences arising from this. But Azar, along with Martin Schmalz and Isabel Tecu have demonstrated that cross-ownership has anti-competitive impacts on the US airline industry. They find that cross ownership increases US airline prices 3–5%. When they use the event whereby BlackRock acquired Barclays Global Investors (a merger changing the shares of common ownership in airlines), they found such ownership could indicate 10% bumps in pricing with US airline ticket prices rising by 0.6% as a result of that merger alone.

In Slate, Eric Posner and Glen Weyl took these results to their logical conclusion: that we should consider banning mutual funds or anyone from holding shares in competing companies. This confounded and shocked the Financial TimesMatthew Klein but he clearly was struggling to understand the basic industrial economics of the situation and also the power of Azar et.al.’s empirical findings.

In reality, the Posner-Weyl policy is on the risk averse side of the equation. Shareholders influence companies by voting and so it is the median voter who matters. In this regard, so long as 51% of shares in companies are owned by funds or people who do not have shares in competitors, we don’t need to be concerned. Of course, how we think about a policy that restricts competitive cross ownership remains an issue here but this is, at least, a softer place to start. My guess, however, is that we can come up with a formula for sufficient asymmetries in cross ownership to assure us that any anti-competitive hanky panky isn’t going on.

But there is another issue which I believe is likely to be more related and of importance for the wealth inequality and power story that Posner and Weyl concern themselves with: i.e., that wealthy shareholders are likely to exercise market power and harm consumers overall. That issue is that the relationship between the distribution of shareholders and the distribution of consumption across firms will be important. As Joe Farrell (1985) pointed out in 1985, if firms are owned by shareholders in equal proportion to their consumption levels, then shareholders would vote to self-regulate any firm’s market power (see also Mas-Colell and Silvestre (1991)). This would be a great outcome and would apply even if the shareholders had holdings across competing firms. Of course, the distribution of wealth is actually more uneven than the distribution of consumption, so this great outcome is unlikely to arise. However, thinking about shareholders more fully will lead us to consider these ownership issues and how they relate to market power more extensively.

The point here is that we cannot really ignore this issue as economists or as policy-makers. We have “known” about it for decades. Now’s the time to take it seriously.

Did the University of Queensland suppress a study?

Possibly and so I am putting the question out there in the hopes a journalist might investigate.

But first some context. In 2013, Redzo Mujcic and Paul Frijters (a frequent blogger here) published a study demonstrating unconscious discrimination on the part of bus drivers in Brisbane. Today, Ian Ayres took to the New York Times to promote the study’s findings.

As they describe in two working papers, Redzo Mujcic and Paul Frijters, economists at the University of Queensland, trained and assigned 29 young adult testers (from both genders and different ethnic groups) to board public buses in Brisbane and insert an empty fare card into the bus scanner. After the scanner made a loud sound informing the driver that the card did not have enough value, the testers said, “I do not have any money, but I need to get to” a station about 1.2 miles away. (The station varied according to where the testers boarded.)

With more than 1,500 observations, the study uncovered substantial, statistically significant race discrimination. Bus drivers were twice as willing to let white testers ride free as black testers (72 percent versus 36 percent of the time). Bus drivers showed some relative favoritism toward testers who shared their own race, but even black drivers still favored white testers over black testers (allowing free rides 83 percent versus 68 percent of the time).

The study also found that racial disparities persisted when the testers wore business attire or dressed in army uniforms. For example, testers wearing army uniforms were allowed to ride free 97 percent of the time if they were white, but only 77 percent of the time if they were black.

Wow. That’s quite a result and certainly the sort of thing we want our social scientists to be doing. No wonder Ayres raised it in the NYT. I did wonder, therefore, why I hadn’t heard much about it.

A possible answer came from Ian Ayres in a follow-up post at Forbes.

Professors Mujcic and Frijters deserve our thanks for authoring a study that is not only illuminating about what white privilege means.  But their employer, the University of Queensland, has not thrown them a parade.  After the City of Brisbane complained that the study encouraged fare evasion, the University initiated a complaint process against Professor Frijters and has ordered the authors to suppress this important paper.  Blessed are those who are persecuted for righteousness sake.  Instead of being persecuted, the authors should be praised for offering us a model for civil rights testing in the new millennium.

Now that is some allegation. If it is true it is shocking to an incredible degree. Not just that the City of Brisbane complained to the University but that the University, my alma mater, actually went so far as to suppress a paper.

I did a quick — but hardly investigative search — to see what this might all be about but didn’t come up with anything. But I think a response at the very least from UQ is required.