Investing the easy way

If I combine the ideas of my land tax post, and my post on Tony Abbott, I end up with a generalised principle of scarce resources.  That is, that productivity gains across the economy accumulate as capital value of scarce resources that have few substitutes, with land being the ultimate example of this principle.

As we find dwindling environmental assets such as wild fish stocks, scarce rights to harvest fish begin to accumulate value due to economy wide productivity gains.  Australia is separating land and water rights as part of National Water Reform, and these finite water rights will also exhibit this general principle.

Most interestingly, and permits from the proposed Carbon Pollution Reduction Scheme will have this characteristic.

We will make a transition from a society where wealth accumulates in land, to one where wealth also accumulates in various rights to other finite resources.  I'm not saying this is bad. In fact the creation of finite rights is the best way I can think to place a value on scarce environmental assets.

I guess my point is that investing in these new finite rights to the environment is one way to invest in the protection of the environment.  Simply buying and holding these rights will accumulate wealth in much the same way that land traditionally has.  Of course, buying land and not developing (or even improving the environmental condition of the land) is a fantastic way to invest in the environment.

*Please note this idea is not yet fully developed.  Any ideas/comments are appreciated.

The Christmas gift arms race

I do like Christmas. Maybe it’s the memories of childhood where a simple water pistol was enough to keep the anticipation high for weeks, and then become an object of desire (and destruction) for months.

But these days I feel like Christmas has become more of a burden then a blessing. My experience suggests that the last decade has seen the demise of delayed gratification. Maybe it’s just because as a child you are subject to parental decisions, and so you learn about delayed gratification. Then in adulthood, you realise there is little need for that anymore and are happy to splurge whenever it suits you. But maybe it is a more widespread cultural phenomenon.

The cause of this burden I feel is what I call the Christmas arms race.

For a start, people are all buying themselves whatever goodies take their fancy all through the year. Then at Christmas family members are meant to search for whatever desires of yours remain unquenched and quench them with a thoughtful gift.

Then, one friend or family member goes all out and buys everyone some great gifts, while you, stuck for ideas (possibly suffering decision paralysis), end up giving token gifts such as chocolates or other tasty Christmas treats. The next year you feel the benchmark was been set last year and needs to be exceeded this year. This goes on year in, year out.

The Christmas burden is not usually expressed in this way. Economists mostly believe there is a deadweight loss because of Christmas because gift givers cannot know as much as receivers their tastes. Tests have shown that gift recipients value gifts at only 80-90% of their costs to givers.

So how do we maintain Christmas cheer and eliminate the arms race. Here are my tips for giving gifts that allow you to escape the arms race, but maintain the pleasure of giving.

1. Delay buying some non-urgent things for yourself, and drop them into conversation with you family in early December. “Those whatamacallits look fantastic, I’ve always wanted one but still can’t bring myself to try them.”

2. Find a gift that shows that you know the persons personality well (eg. for nerds a new fangled gadget is good)

3. For any male over 5 year old, one of these is a great idea (I’ve never known anyone to not like them)

4. Go for something practical that the recipient is unlikely to be aware exists – expect a response such as “Wow, that’s such an amazing idea. Why haven’t I seen this before”

5. Don’t fret about recycling gifts. Apparently many people are quite happy to do this, while others hate it. Convince your friends and family to embrace regifting to take the pressure off you gift choices.
Any other tips would by greatly appreciated? Are there any gifts that always impress?

Merry Christmas everyone.  I'll probably take a break from the blog until the 5th January 2010.

UPDATE:  Looks like everyone wants to talk about the inefficiency of Christmas gift giving (see here).  I especially like the last paragraph:

the gifts you received from your family and friends yesterday will probably bring you more satisfaction per dollar spent than the tens of billions the government has spent on our behalf since last Christmas

Summer Reading

The past few weeks I’ve somehow found time to read.  Here are a few interesting titles that I would recommend.

Born to Run: A Hidden Tribe, Superathletes, and the Greatest Race the World Has Never Seen

Christopher McDougall has written an intriguing story amidst a lesson in human evolution which will leave you inspired.  The following things have happened to me since reading this:

1. I run more
2. I run bare feet whenever possible
3. A pair of these are on my Christmas wish list  
4. I like to talk about human evolution and rabbit skeletons a lot more than I used to

I don't want to give away too much, but I can’t recommend this book enough – READ IT!

The Greatest Show on Earth: The evidence for evolution

I’ll admit that I am a Richard Dawkins fan.  In this book you get a break from his famous anti-religious crusade which was popularised by his documentary Enemies of Reason, and book The God Delusion.  Instead, you get an easy to read account of the emerging evidence for evolution, and a theoretical discussion that crafts often complex and counter-intuitive ideas into accessible analogies.

If you are short of dinner party discussion topics, you will find everything you need this festive season – from how the skull of almost every mammal is made up of the same 28 bones (in a rigid structure), or how the bizarrely long detour of the laryngeal nerve in the neck of the giraffe is exactly what we’d expect from evolution.

Those with a thirst for knowledge and an interest in evolution should read this book.

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means

I was expecting a lot from this book and after reading, felt that I was deceived by the title.  While George Soros may be a spectacularly successful investor, this book is actually about his theory of reflexivity.  

Soros’ theory can be a little philosophical.  Its starting point is fallibility, which is the idea that our understanding is always imperfect because we are part of reality, a part cannot understand the whole.  He says “The human brain cannot grasp reality directly but only through the information it derives from it.”  To translate, there is no such thing as perfect information – the necessary precondition for perfect markets.

What is important in this book is that Soros shows how much economic reasoning is fallacious because money is assumed to be neutral far too often.  One of his key messages is that the state of financial markets has a tangible impact on the real economy.  Of course, this idea itself is not new. 

But his ideas for improving the stability of the economy appear logical.  On the premise that the market is imperfect, and that regulation is imperfect, he suggests that governments set stronger boundaries for financial institutions – I interpret it as a bounded market.  By setting known boundaries to market behaviour he also hopes to avoid the moral hazard inherent in many financial institutions.  The fact that big banks know they can’t be allowed to go broke increases the propensity for risk taking.

Soros believes that there was a bubble riding on a super-bubble, which will both burst in time (it reminded me of Wave Theory).  Of course, like always, the timing can be a problem.

Snoop: What Your Stuff Says About You

For those budding detectives this book is quite interesting.  It is essentially a lesson in the psychology research of author Sam Gosling on behaviour residue.  What makes this book interesting are the experiments that show how good we are at intuitively knowing the personalities of people from the bedrooms, offices, cars, and websites.  

For example, researchers photographed cars and their owners separately by the side of a toll booth, and asked students to match up car and driver – and they were bloody good at it!  From a waist up photograph and a single external photo of the car, people could guess the personality and lifestyle of the person, and match it with the car that they thought reflected those characteristics. Quite amazing when you realise how difficult it is to deconstruct how we achieve this miraculous feat.

Tony Abbott...

…believes that a high price of oil will encourage new discoveries, such that the concept of peak oil is not valid.  This is a classic example of what could be called ‘Price religion’.

Could I suggest that Tony Abbott (and I guess many ideological economic zealots) try and apply their logic elsewhere.

For example, if the price of fish goes up, does that mean that we will discover more fish on the Great Barrier Reef?

If the price of land goes up, will we discover more land?

Of course Tony Abbott and other followers of the Price religion don’t believe we will find more fish on the reef if the price goes up. But somehow, they will leave their logic at the door when it comes to oil or other fossil and mineral resources.

Then again, he could just be reiterating his party line – it is probably not a good time to let the media catch a glimpse of anything other than unity in the Liberal party these days.

Best of luck with that Tony.

*Note: I have grown to dislike all the current political parties, although I used to give support to the Greens. Maybe there is an opportunity for a fresh young political party in Australia these days?

Are the States simply an historical legacy?

Kevin Rudd seems to be taking Federal control wherever he can.  His latest move is take more control over town and regional planning.  (Does that mean more regulation or less?)

But why not scrap the States altogether?  Aren't States just historical happenstance?

It's an old question. As a State employee I have witnessed the inefficiencies of this bureaucracy first hand.  More importantly, I have witnessed the animosity between State and Federal governments where open cooperation should be the order of the day.  The States always complain about the lack of understanding of Federal officers. "They don't understand what it's like in Queensland" - true, they don't understand the getting things down the slowest and most expensive way is the how we do it.

But my questions are, what is holding back Federalism (for want of a better word)?  Is there not enough public frustration with the States, no political will?

If there was the political will, how would one actually start the process of removing State governments?

Maybe in my lifetime I will get a chance to witness these things.

PS.  I'll be in Canberra next week liaising with the Federal government, so the blog may be quite for a while.  Maybe when I'm there I can get some thoughts from Federal government officers on this issue.

A graph I promised to make

There is a lot of talk about population and number of new dwellings in the housing market debate.  What is generally overlooked is that at any point in time everybody is living somewhere.  Occupancy rate is fluid, prices change, and in the long term, population growth in an area can't happen without prior construction of housing. 

The graph shows the new dwellings constructed per new person (per person of population growth).  We do notice a recent decline in the number of dwellings being constructed nationwide compared to the population growth, which is reflected in the later graph showing increased occupancy rates.  The direction of causation amongst these variables remains unclear, and in all likelihood, they are interdependent.

Regression with net new dwellings per person of population growth as an explanatory variable for change in the capital city price index gives a negative coefficient (-0.011) but really, has no explanatory power (r2 of 0.006).

That means that analysis of population growth and dwelling construction figures has no power in explaining housing price changes.

Australia's most expensive house

The previous record for Australia's most expensive single dwelling (don't think it falls into the house category, nor even the mansion category) was a measly $45million.  Just this week that record has been smashed by a respectable figure of $57.5million for a Perth waterfront mega/super/ulltra-mansion.


(What was he askin'? $70million - tell him he's dreaming!)


It shouldn't be a surprise that the sale was from one mining baron to another.  In Brisbane mining companies have a reputation for sending lots of cash in a hurry.


What shocked me was the claim from the real estate agent the he had sold Australia's most expensive house back in 1980 - for just $2,150,000.


Times have indeed changed.

The sleepwalking defence

I state in my profile that we need to turn our ideas on their heads to gain understanding.

So what did I make of this report of a man who strangled his wife in her sleep? His charge of murder was dropped, but I would be surprised if he is not now charged with manslaughter.

But behind the headlines there is an interesting tale about responsibility. We humans are extremely susceptible to external influence. Stanley Milgram’s famous experiment showed many years ago how our rational decision making capabilities can be heavily influenced by our interactions with others. We seem to obey authority figures, and we are known to also conform to group behaviours.

Economists generally assume people behave in a perfectly rational way, and that decisions are made independently. Legal practice certainly seems to take decisions as personal and independent. But we only can make these decisions based on our past education and experiences – past external factors.

But just as we still believe that people are responsible for the decisions and behaviour, even though these arise from past external factors, we should believe that a sleepwalker is responsible for their actions.

Tax me, please

People hate taxes. But they are necessary, and some are better than others.

Henry George’s arguments in his 1879 book Progress and Poverty are that all benefits from progress accumulate to land owners. He proposed a single tax on land because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses.

I agree. A land tax is by far the least bad tax. Milton Friedman even agreed – “In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

There are many reasons to prefer land taxes.

First, they discourage speculation. They provide a disincentive for land ownership without immediate prospects of productive use. This idea relates closely to the current (and let’s be honest, old and ongoing) debate about housing affordability and housing supply. A land tax would hinder the ability for developers to ‘land bank’ - artificially stifling supply of new dwellings. It will increase competitiveness of supply in the land market. This is one reason even the proponents of a housing shortage should embrace this tax.

Indeed, they may even encourage planning changes by governments (maybe through pressure on local governments by the federal government) to allow greater density to increase their tax base.

Second, a land tax has the effect of encouraging efficient use of land and investment in buildings. Those wishing to increase density in the cities to reduce urban sprawl should also see benefits here. Owners of land in urban areas would have more incentive for subdivision, and increasing density, to avoid this tax.  In fact the economic success of Hong Kong, Taiwan and Singapore has been attributed to high land taxes - a path that Korea is keen to follow.

Third, they are a difficult tax to avoid, and administratively simple (indeed small land taxes are currently enforced in all States for owners with land holdings above a threshold value). Land ownership is well documented, and tax evaders could have their land compulsorily acquired.

What about arguments against such a tax?

One of the main arguments against land taxes is that they discourage investment. For example, when developing a large estate, improving the amenity of the area from the first stage (think of the lake and shopping areas at Forest Lake) will increase the value of surrounding land still held by the developer and increase their tax liability until they can sell. This, it is argued, discourages investment in housing and buildings.

My response to this argument is that it will not, and for an obvious reason. First, the tax liability from these parcels can be fairly accurately known is advance and factored into the original decision to purchase the undeveloped site. The table below shows a stylised development feasibility in the ‘with’ and ‘without’ land tax scenario. Assuming people are willing to pay the same price for the final dwelling (because their tax reduction elsewhere offset their increased land tax liability - although that may not be entirely true, but is unimportant to this particular argument) the developer can still make a profit and has incentives to do so under the ‘with’ scenario. He makes the same profit, has the same total cost, and same revenue – the tax incidence is on the seller of the development site the original landholder, not the developer.

The only problem is harnessing public support for the transition to a higher land tax society. One of the main problems is that the tax falls solely on land owners – generally the wealthier sector of society with the greatest political clout. They can always popularise the argument that land taxes will add costs that will crush land ownership aspirations.

Another problem is that the development lobby will argue that such a tax will sent them broke because they have already committed to a number of projects without factoring in these increased costs. From the perspective of the public, that is perfectly fine – if they go broke their land holdings will make it to the market in a hurry. But I see no reason that a progressing increase in land taxes over a number of years should tip many big developers over the edge.

As a final comment I want to note why land taxes run counter to intuitive logic.  As a rule of thumb, if you increase taxes on a good, you get less of it. If you increase subsidies, you get more of it.  This was demonstrated recently by Andrew Leigh, where he showed that higher stamp duties decrease the number of sales of homes.  Tax selling, and you get less selling.

But a land tax is a holding tax.  To avoid this tax you get less land holding.  Which would encourage selling land to others who may use it more productively.  As the table above shows, the incentive to produce homes and buildings will not deteriorate.

I would appreciate any thoughts.

Fuel efficiency insights

I watched a Top Gear episode where Jeremy Clarkson raced a Toyota Prius and a BMW M3 around their test track for 10 laps. It wasn’t a race really. The BMW only had to follow the Prius as it drove the tack as fast as possible.

And what happened? The Prius, with its 1.3L engine used more fuel than the M3 with its 4L V8!

To make matters worse for the pro-hybrid lobby, Clarkson also drove a 1.7 tonne V8 Jaguar XJ6 from Basel in Switzerland to Blackpool in the UK on one tank of fuel – a similar result to the little VW Polo.

So what is going on here with fuel efficiency?

My gut instinct is that weight is the major factor determining fuel consumption. At almost 2 tonnes, the Jaguar seems very impressive. Maybe it’s the weight to torque ratio that is important, as when travelling at a constant speed, power is not so important.

To test this hypothesis I wanted to gather data on vehicle weights, fuel type, engine capacity, number of cylinders, torque, power, and add some dummy variable such as turbo/supercharger, hybrid, 4x4. Then run some regressions with highway mileage and city mileage as independent variables. I found most of the data here, but don’t have the time to add vehicle weights, drivetrain and turbo details into the spreadsheet. When I get a response from the geenvehicle guide with their complete data set I will let you know my findings.

But what does it all mean?  I take away a number of things.

1.  Some of the gains in vehicle fuel efficiency over the past few years may have been offset by and increase in highway speeds and acceleration (more stop-starting).
2.  Don’t scoff at the environmental ignorance of people with V8s
3.  If you buy a hybrid and race it you are just as crazy as Jeremy Clarkson
4.  If you have big car, you can drive slower and save money on fuel
5.  Doing your part for the environment is not as simple as it’s made out by green lobby groups