iHate Steve Jobs or Why I Won’t Buy Anything Made by Apple (Yet)

Guest post by Ben today

At the moment it seems that the ascendance of Steve Jobs and the Apple Empire knows no limit. With the media player and smart-phone markets sewn up and their eyes firmly set on conquering the tablet PC market with the omnipresent iPad, it seems that Apple can do no wrong.

But not for me; I can see the Apple vision for the future and it’s a safe, bland, white-chrome corporate hell. Why do I say this? Well maybe it might have something to do with:

• Apple’s restrictive licensing conditions for the sale and development of apps which basically amounts to censorship and discourages innovation;
• Their refusal to allow 3rd parties to sell apps; iTunes is it – monopolistic price gouging anyone?
• Draconian digital rights management – installing unlicensed apps on you iProduct voids the warranty as does ‘jail-breaking’ them;
• Stupid ongoing court antics with Adobe meaning that iProducts aren’t compatible with Flash;
• Rechargeable batteries which can’t be replaced;
• And the thing that irritates me the most: requiring the use of propriety peripherals e.g. iPod shuffles are designed so that you can only use Apple headphones; USB devices or HDMI monitors can’t be plugged into an iPad - you need to purchase a Apple ‘adapter’ first etc.

But these are secondary to my main issue with Apple, which is their pricing policy.

The personal computing market is a good example of a ‘Lemon Market’, that is, a market where information asymmetry is skewed to advantage the producers of goods rather than consumers. Apple represents a particularly egregious case of this by charging premium prices for their products which aren’t substantially different from other competitors in the market (in fact, I would argue they are inferior).

I’m currently in the market for a good quality laptop and one thing that immediately struck me while shopping around for one was that Macbooks are about $1000 more expensive than their equivalent PC-based competitors. And they get away with it. Sure they look pretty, but so what? It’s a tool not a fashion accessory (yes, I know some people do use them as fashion accessories). In an amazing slight of hand, the Apple PR/marketing machine has managed to convince a substantial subset of IT consumers that their computing products are actually worth paying premium prices for.

Why is this? Is this brand ‘tribalism’ of the ‘I’m a Ford man, he’s a Holden man’ variety? Or are Apple products an example of Veblen goods i.e. goods whose demand perversely increases with increasing prices (although it is surprising how many economists are Apple crazy). Whatever the case, Apple is relying on the ignorance of consumers combined with shiny aesthetics to sell people overpriced electronics.

So what’s the moral of the story?

If you’re determined to waste spend money on Apple you’re better off buying Apple stocks rather than Apple products. The US$5,700 you would have paid for an Apple G3 Powerbook in 1997 for would be worth US$330,563 today if you’d bought Apple stocks instead of a computer…

Housing crash makes us winners and the bubble checklist

It’s no secret I am forecasting price declines (or prolonged stagnation) in the Australian residential property market. The intricacies of this topic have led many to the conclusion that the government won’t let that happen - there are simple too many people going to lose in the short run, even if we may all benefit in the long run. While I agree that the government may not let this happen (although foreign ownership rules are being tightened up again), and may produce an arsenal of economic weapons we haven’t even though of yet, I disagree that there are more losers than winners from a significant housing price correction.

The mainstream ‘more losers than winners’ message is aptly summarised in this article:

The only people who would rejoice in a house price slump, it seems, are the young and aspirational. As Willem Buiter put it in his 2008 paper for the National Bureau of Economic Research, 'Housing Wealth Isn't Wealth', “…the young and all those planning to trade up in the housing market are made better off by a decline in house prices. The old and all those planning to trade down in the housing market will be worse off.”

This view is wrong.

Why are the elderly and those planning to trade down in the housing market worse off? If the elderly are planning to sell their home to fund retirement they may be (on paper at least since they never realised their capital gain) worse off. If they plan to leave their home as inheritance for the children, the children are equally well off. If they plan to sell to leave money for the children they are also equally well off, as the children now face lower housing costs with the lower inheritance.

Those trading down in the market may lose if the price gradient (the percentage difference between two different quality dwellings) flattens, however if it does not, they can still take good gains on the trade.

I also believe we forget that the ‘young and aspirational’ are the children of the old and well off. It would be (is?) a strange world where parents find satisfaction in keeping their children out of the housing market so they can fund an extravagant retirement.

In Australia, 36% of households are owners with a mortgage, 35% own without a mortgage, and around 23% are private renters, the remaining 6% rent from State housing authorities. All of these groups will either be in an equal position or benefit from a major housing price decline. The renters will be have better ownership options, the owners without mortgages will be in identical situations, and the owners with mortgages will also be in the identical situation. The fact that the mortgagor’s home is now worth less than what they paid only reduces their opportunity to relocate, as they may have an overhanging debt burden. But, if they were willing to pay the inflated price for the home, and the home is identical, one can argue they are in an equal position.

Which brings me to the key loser from price declines; the investor/speculator. While private housing investment is a key supplier of rental accommodation, rental yields have been ridiculously low for the past half decade. Investors have banked on tax breaks and capital gains for their returns. But as with all investment, there is a trade-off between risk and return, and is appears that the risk factor in the housing markets has been completely forgotten. For those investors looking to take gains in the near future, they will (on paper) lose out significantly – more so depending on their level of gearing. In the long run however, especially if the government tries to inflate our way out of the debt burden, investors who hold on may still do well from residential property (it should be a long term investment anyway).

And what about social benefits more broadly?

But Keen points out that there is a wider benefit to a deflation in house prices – the flow of capital into housing can find a more productive home in business lending.

This is a point I have long made – that borrowing money to inflate land prices (remember that we have a land price bubble not a housing bubble as such) is unproductive. This should be a key message from property bubble discussions.

To wrap up today’s discussion I want to share a bubble checklist I found in a book entitled When Bubbles Burst: Surviving the financial fallout by John P. Calverley. My take on Calverley’s message is to get back to basics. In the long run, there are certain ‘normal’ returns to be expected in various assets. For property he cites a 2-4% capital gain and a 2-6% net rental yield (or a 6-10% gross yield after factoring the high cost of property ownership).

You only have to wait to page 13 to get John’s checklist for identifying asset price bubbles:

1. Rapidly rising prices
2. High expectations of continuing rapid rises
3. Overvaluation compared to historical averages
4. Overvaluation compared to reasonable levels
5. Several years into an economic upswing
6. Some underlying reason/s for higher prices
7. A new element (technology for stocks, immigration for housing)
8. Subjective “paradigm shift”
9. New investors drawn in
10. New entrepreneurs in the area
11. Considerable popular and media interest
12. Major rise in lending
13. Increase in indebtedness
14. New lenders and lending policies
15. Consumer price inflation often subdued (so central bankers relaxed)
16. Relaxed monetary policy
17. Falling household savings rate
18. A strong exchange rate

Let’s check off the Australian housing market.

1. Yes. The period 2002-2004 saw a massive price boom followed by modest rises until the mild decline seen during 2008. Since late 2009 prices have bounced back with force, with record increases seen in some parts of Sydney and Melbourne.
2. Maybe. There are plenty of bears around, but there is no shortage of property spruikers talking up the ‘housing shortage’ (see 7.)
3. Possibly. Gross rental yields in areas I have bought real estate are now about 4-5%, with net rental yields about 2%.  Read here for more on low yields and overvaluation.
4. As per 3.
5. Definitely. And we came through the GFC unscathed.
6. Nothing that I believe warrants the bubble (thought others might disagree)
7. Housing shortage anyone? Population growth? Immigration?
8. Some people have noted that Australia is now becoming like other developed countries where housing is expensive.
9. Yep. Every man and his dog (including me some time ago)
10. Who isn’t a property developer/investor these days
11. The Block reality TV series take two
12. Check
13. Check (Steve Keen would have plenty of good data at hand)
14. Maybe not so much now. Lending is tightening up a bit.
15. Tick. CPI has been notably well behaved.
16. No. RBA tightening up now.
17. Yes. Temporarily no (2008-09) but we’re back on a spending binge.
18. Check. Partly (or mostly) the carry trade, maybe some other factors.

If you disagree (either with the list or my answers) let me know. All signs, including the RBA governor himself, point to a property slowdown.

Suggestion box and a call for help

After more than two years of blogging I have still not run out of topics to discuss. Like the television series Mythbusters, who seem to find that humanity can produce a constant stream of urban legends, I too seem able to constantly find economic myths, political promises, and social conundrums to pick apart.

However, I would love to hear what topics are currently of interest to readers – anything from social, environmental, and political concerns to the downright nonsensical. Please post a comment if you have any suggestions and I will endeavour to investigate in future posts.

For your interest, some of my favourite topics include:
• leisure time, helmet law and sunscreen rebound effects
• the food security myth
• arguments against population growth
• unintended consequences from maternity leave and child care subsidies
• why preventative health care adds to rather than diminishes the cost of the health system (here and here)
• and of course the many myths surrounding the housing market (here, here, here, here and here)

Finally, I would very much appreciate your help promoting this blog to the world. If you have your own blog site I would appreciate a plug (and will reciprocate).

If you want to be very helpful, you could promote some of your favourite posts by email, twitter, or some other medium to your friends and family, or post a link on your Facebook page.

One final prediction.  Next week's CPI release from the ABS will come in lower than expectations.  The probability of the RBA increasing interest rates again will drop from 70%, and the AUD will drop at least 1c against the USD.

CityCycle scheme, bicycle helmet laws, and a better alternative

In my bio I promise to turn ideas on their heads to gain a better understanding. In this spirit I ask the following question of Brisbane City Council’s proposed CityCycle bicycle hire scheme – is it better for council to subsidise a bicycle hire scheme to stimulate bicycle use, or is it better for council to subsidise a car hire scheme to encourage bicycle use?

(And yes council will have to subsidise the scheme through the donation of public space, and possible contributions to ongoing costs, as has happened with such schemes in Europe, even though hire costs and advertising on bikes provide the main sources of revenue for the operator).

I suggest the latter may be preferable. Here is my logic.

Council declares the purpose of the bicycle hire scheme is to encourage short trips by bike. It offers the first half hour of hire for free to encourage such short trips to be undertaken. As far as I can tell at this stage, it will also offer long term subscription for “about 17c per day”. However, a single day hire will be $11. The incentives appear to be stacked towards either very short trips or very long hire.

While such schemes operate relatively successfully in many cities around the world, Paris, Barcelona, Vienna, Amsterdam, Oslo and Lyon for example, there are many local conditions that favour cycling in these cities. These cities are generally flat, have wide streets, low speed limits, cool climates, bicycle lanes, high urban density, and no helmet laws.

Even with these advantages, these schemes still face major problems. The now famous Velib scheme in Paris has had to replace its whole fleet of 20,000 bikes within two years due to vandalism and theft. They have also implemented an incentive scheme to encourage users to deposit bikes at stations at the top of hills and on the outskirts of the city. If we want to determine the success of this scheme we are still left with a burning issue.

But for all the hype, has Vélib' actually stopped people using their cars? Anecdotally, most people using the bikes are coming off public transport, seeking an alternative to bus, metro and expensive Paris taxis at night. At rail stations, so great is the rush for suburban commuters to jump on bikes rather than cram into Metro carriages that some have tried to lock up bikes on stands at night to secure them for the morning.

Regardless, some more general benefits have been observed:

But the increase in people cycling does seem to be boosting bike awareness and challenging the car mentality. Paris, with its wide streets, is already a better city for cyclists than London. And no, you don't wear shorts, helmet or pollution mask; most people prefer a suit or high heels. Blase cyclists can be seen negotiating the high-speed free-for-all that is the Place de la Concorde while puffing a cigarette and calling a friend.

In sum, it seems that the scheme is taken up with tourists, drunks, and commuters already using public transport, yet the mass of cyclists does raise awareness and make cycling appear the normal thing to do.

What about Brisbane?

In Brisbane we have a number of local conditions that discourage cycling; intolerant drivers, few connected bicycle routes, burning hot summers, low urban density and steep hills – the same things that currently discourage bicycle use. And lastly there is one big problem, helmet laws (which are also undermining Melbourne's ambitious bike hire scheme)

How do you get people on a bike for a trip less than half an hour if a helmet is needed? Are helmets included? Is there a helmet vending machine at each station? This is a make or break issue. Local bike mechanic Jens Uhseman, from Bicycle Revolution at West End, a store that also offers a bike hire service, offers this opinion on the matter:

The problem is getting people on the bikes anyway. If they wanted to go on them they would have their own bikes. Even when we sell cheap bikes to students we have to tell nearly every second person they need a helmet in this country.

If the inconvenience of helmets discourages the main users of such a system - tourists, drunks, and commuters already on public transport - who is left to ride these bikes? Regular local cyclists may take up the offer of a free half hour, but having your own bike, helmet and lock is cheap and allows you to be much more flexible. Even though I live just fifty metres from a proposed CityCycle station, I will probably still use my own bike for commuting around the city.

To summarise the analysis so far, the European cities where bike hire schemes are successful have far more incentives for cycling, including no helmet laws, yet they still don’t get cars off the road and are a financial burden on the city council.

If the Brisbane City Council was serious about cycling as a viable means of urban transport they would offer incentives to get people out of cars (even out of crowded bus and train routes) and onto bikes. They need to make cycling faster (bike lanes, short cuts around steep hills, connected bikeways), and safer (more road space for cyclists for example).

One might assume from this analysis that the Brisbane City Council is not serious about cycling, but is using the scheme as a cheap means of buying the Green vote. Not such a crazy idea.

But is there a better way?

To increase cycling and get people out of cars I might suggest that Council push for a car hire scheme with depots around town stretching out further into the suburbs. People living nearby a depot might decide that there are significant financial rewards if they sell their car and commute by bike, using the hire care when necessary. Cars are far more expensive to run than bikes ($1,000/year for a cheap car plus fuel costs, and less than $100/year for a bike), and if people are doing away with car ownership it may encourage a city wide shift to alternative modes of transport.

On top of this scheme you could offer other incentives to decrease care ownership, such as a higher registration rates for a household’s second car or other financial disincentives.

Whether a bike hire or car hire scheme will decrease congestion, decrease urban pollution, and get people into more healthy habits remains a matter for debate, however there is one strong message emerging - implementing a bicycle hire scheme to encourage bicycle use is putting the cart before the horse. Once cycling becomes a viable means of transport, with a useful network of bike paths and street space, then a bike hire scheme may add to a cycling culture in this city. But if the experience in Paris is anything to go by I have reason to worry that implementing the bike hire scheme may backfire and fuel Brisbane's pro-car lobby.

Already taxi and bus drivers are complaining about the mass of inexperienced cyclists hogging bus lanes. Paris city hall has stamped rules of the road on the handlebars such as "Don't cycle along pavements". But everyone knows rules are made to be broken. Of regular Paris cyclists, 71% admit to jumping red lights, over a third regularly go the wrong way up one-way streets, and more than half cycle without lights at night.

In any case this bike scheme is an interesting experiment economically, technically, and politically.

Wine Equalisation Tax, microbreweries and the grape glut

Subtle examples of the unintended consequences of government intervention in markets are not hard to find. Today we follow a path from the introduction of producer rebates for the Wine Equalisation Tax on wine makers, to the grape glut of 2010, to the call for tax relief from microbrewers.

The Australian government introduced a Wine Equalisation Tax (WET) to smooth out price changes when sales tax was abolished and the GST was introduced [A New Tax System (Wine Equalisation Tax) Act 1999]. However, small wineries receive a rebate on the WET for the first $1.7 million of production (a rebate of up to $500,000). Enshrining this rebate into law sheltered small wineries from the rigours of market discipline, and could be a key contributing factor to the current grape glut. At least 1,250ha of vines were abandoned in SA in 2008-09.

Did the rebate contribute to the glut, and should we offer a similar rebate to brewers?

Tracing a path through the decade from winery subsidies to the grape glut is not too difficult. Any subsidy generally results in market inefficiency and an oversupply because producers face artificially higher prices.

One often overlooked reason for the grape glut is that grape vines take some years to establish and are perennial (they are permanent). Unlike other agricultural commodities such as cotton, sorghum and wheat, which are an annual crop and will be planted only if the market price justifies planting, grape vines will continue to produce each year. Growers cannot easily adapt by reducing supply in the short term.

There are many reasonable arguments for this rebate which would have been very powerful at the time of its introduction – encourage domestic wine production, and stimulate competition and innovation in the wine marker. These goals have definitely been met, but what about those unintended consequences?

Intervening in the wine market in this way has led to unequal competition more broadly – in the battle between wineries and breweries. Brewers entering the market get no tax relief and face stiff competition from well established players and the subsidised boutique wine market.

The Australia Association of Microbrewers has been feeling the effect of the lopsided Australian beverage market and has launched a petition to give local wineries and brewers equal tax treatment. They have gained some media attention, although strong loyalty to existing brands is probably hindering traction in the public psyche.

This unequal treatment has led to a beer market where boutique beers are mostly hitting the shelves from abroad rather than from domestic competition.

But will a producer rebate for small breweries lead to a barley glut in 2020? I think not. My reasons include that fact that the ingredients for beer are also commonly traded agricultural commodities in global markets, and that barely and other grains that can be used for beer making are annual crops. If beer producers ‘overshoot’ due to the subsidy, grain growers can easily sell grains to other markets and grow different crops the following season if there are significant price changes.

We cannot expect governments to consider all of the infinitely broad possible consequences of market intervention. However, simple rules of thumb can be applied. For example, this examination of the wine producer rebate suggests that isolating just some players in a market for special treatment can be hazardous. Governments could easily apply this even treatment of market players as a rule for future reforms.

Has anyone some interesting examples to share of unintended consequences from government choosing winners with market intervention?

Friday quick links

My childhood street is famous for building cubby houses in trees on council land

Obesity epidemic growing for a century - much longer than ever thought before….
and now Jamie Oliver does his best to tackle obesity the ‘old fashioned’ way, but faces strong resistance in the US, even after success in the UK. He faced tough opposition on the Letterman show:

'I don't care how much ground up sea grass you eat or wheat germ - or stuff you find in your pocket. As long as they are selling 160 different types of cookie what hope do you have?'

Oliver appeared to become resigned to the fact he wouldn't convert Letterman to his way of thinking, turning to the audience and saying: 'As you can see ladies and gentlemen, my challenge is big.'

Does this support a 'sin tax' on junk food, or are we aware of the obesity externality and simply don't care, making obesity an optimal outcome?

China housing bubble and government intervention
Beijing recently introduced much tighter rules for home loan lending. The discount on the mortgage rate for first home buyers has been cut, while discount for second-time home buyers has been scrapped altogether. In addition, second-time home buyers have to make a deposit of 40 per cent of the value of their home, while people buying their third home have to come up with a 60 per cent deposit.

A bit of social engineering for home ownership that just might work? Would there be any major problems implementing such restrictions in Australia (we could start a company to buy the investment property, but then only have tax beenfits in the 30% corporate tax bracket, and face the costs of company reporting requirements)?

Interest rate gamble
Looks like my bet was closer to the mark than it first appeared with weak lending data (a leading indicator) pointing to house price declines. Will the RBA let that happen?

More support for a National Resources Fund (this time from RBA chairman Warwick McKibbin)
RBA board member Warwick McKibbin suggests that Australia follows Norway’s lead and sets up sovereign wealth fund that goes beyond the narrow ambition of the Future Fund to finance public service pensions. Norway’s 4 million souls now own a fund worth more than $US400 billion, throwing off a big contribution to national income every year.

The plastic brain: a theory of human experience

Norman Doidge has written a book that encapsulates the latest research in neuroplasticity and delivers it to the curious mind in an intellectually stimulating and satisfying read. The Brain that Changes Itself: Stories of personal triumph from the frontiers of brain science, is a book that had me raving to family and friends after each chapter. I could only put it down to ponder the significance of the subject matter to human society before reading on.  I want to take this opportunity to highlight a few titbits that stuck with me.

Early on, we find out that our brains can use almost any input as a sense. A lady who has lost her sense of balance (her vestibular function), and couldn’t stand straight and felt dizzy as soon as she turned her head or her focus of vision. Her brain learnt to take the electronic impulses of a plate under her tongue, power by a gyroscope, as a new vestibular system, and she learnt to balance again. In fact, there was a residual effect even after the device was removed. She learnt to balance again without the sensory input from our balance organ.

Sensory input, including pain, is not a one way street from the skin, nose, tongue or ears, but a two way street that also leads from the brain to the organs. That’s why phantom pain of amputated limbs can still persist. But can you see pain?

One of researchers we meet, Vilayanur Subramanian Rmachandran, demonstrates that we can. He primes the brain to associate the visual input of light touches and taps on a tabletop, with touch input onto our hands. The subject puts one hand under the tabletop and the researcher taps the table top in sync with tapping of the subject’s hand under the table. When the tapping or stroking of the tabletop moves to the left, the stroking of the hand also moves to the left. He can trains a subjects brain to associate the surface of the tabletop with the surface of their hand. Soon, the subject can ‘feel’ the touch on the tabletop without the hand being touched at all. And the result of his intensive experiments are very interesting.

Ramachandran has wired subjects to a galvanic skin response meter that measures stress responses during the table experiment. After stroking the tabletop and a patients hand under the table until his body image included the tabletop, he would pull out a hammer and bash the tabletop. The subjects stress response went through the roof, just as if Ramachandran had smashed the subject’s actual hand.

The underlying plasticity theory presented in the book explains many other psychological and social theories. Is encompasses so much existing knowledge you wonder why we haven’t thought of it before (we had thought of it, just couldn’t provide evidence because for so long you could only examine the brains of dead people). Plasticity explains why our childhood experiences cement our adult personalities, and how learning actually occurs in the brain – why it take so much repetition to learn a task or some facts, then once they are learned, you find it hard to forget. For parents there are plenty of insights into childhood behavioural patterns, and how to break or reinforce them, and insights into why toddlers are sponges for information. The saying “Give me the boy for seven years and I’ll give you the man” has a neuroplastic explanation.

You also gain insights across such broad psychological topics as pornography addiction, and encounter the 'plastic paradox', which explains why we become so habituated even though out brain is able to fundamentally restucture itself. 

After reading this book you may become absorbed with amazing feats of the human brain, like echo location (and an interesting case here), and blind people seeing with their tongue through the assistance of video inputs.

This book with radically change your understanding of the world.

Economic arguments against population growth

While Population Minister Tony Burke may be new to the debate, the population debate itself is certainly not new to politics. In 1994 the Commonwealth commissioned an inquiry (the Jones inquiry) into Australia’s population and carrying capacity, yet the inquiry failed to make firm recommendations. One of the inquiry’s authors then wrote a book in protest of the ‘government’s timidity’ and concluded that “that a sensible population policy for Australia would be to aim at stabilising the population within a generation or so and that this was quite feasible if net immigration of something below about 50 000 a year (say 100 000 migrants in gross terms) could be maintained. Population would then more-or-less stabilise somewhere between 19 and 23 million (depending on actual immigration) sometime before 2050.”

Now, Tony Burke is faced with twin challenges of developing a policy position on population that keeps enough people happy to keep him in government.

We can easily run through some of the options available to Minister Burke – stimulate or dampen population growth. I suspect he would also like to encourage migration away from capital cities due to the ‘obvious housing shortage’, but as far as I can tell the Federal Government has little power to influence such regional migration (maybe an income tax relaxation depending on how remote your residence?)

To stimulate growth we could increase migration intake, and encourage higher birth rates – maybe $15,000 per child would do it? Or Burke could moderate population growth by reducing immigration quotas and discouraging high birth rates (by removing the baby bonus or even having a ‘child tax’).

But which option is best for Australia? Are there strong economic arguments in favour of either higher or lower population growth? I would argue that on balance, economic principles strongly favour a declining rate of population growth (even a negative rate of population growth not a problem).

For a start, we need to discredit some of the nonsense economics floating around. Bigger is not better. China and India both have plenty of people, while countries with the highest per capita incomes and standards of living generally have fewer people. China has greatly reduced population growth with its one child policy and seen vast economic growth – shouldn’t China have failed to grow because its population stabilised? The map above shows a pretty clear inverse relationship between population growth rates and standards of living.

Nor is a comparison of population density meaningful in this debate, or we could argue that any region with a low population density is ‘underpopulated’ (like Antarctica or the Simpson desert) because we have compared the region to Hong Kong or the Netherlands.

One core economic argument in favour of a greater population is that utility theory suggests that a trillion people living in poverty and slavery are better that one million happy and fulfilled people, leading lives directed by their own desires. It is known as the repugnant conclusion. I doubt anyone believes this is a good outcome, nor is claimed to be a good reason for greater population – it just happens to be at the heart of economic theory and can spawn unusual conclusions.

A second argument appeals to economies of scale and suggests that with greater domestic consumption industries can expand to a point where they have economies of scale that make them internationally competitive. Why domestic population is currently a barrier to industry development is beyond me. If there are no artificial constraints on trade, shouldn’t the world be the marketplace of any industry even in its infancy? This argument only works if you couple high population with protectionism (the infant industry argument, which itself is often challenged).

A third argument, that may be the focus of this debate, is that the demographic shift towards a flat population pyramid means that the proportion of people in the workforce will be much lower, and that public welfare support for the elderly will become a burden on a smaller workforce. However, one does not need to think too hard to realise that stimulating population growth simply delays this inevitable demographic shift. We have known this shift was coming for decades yet have failed to act.  But it is not too late to implement solutions more practical than stimulation population growth.

Another argument is that of national security. Unless we have enough people, we won’t be able to defend our borders. To truly defend Australia from all others, how many people would we really need? 150million? More? This is a ridiculous argument and a reason we have strong allegiances with countries with large defence capabilities.

Apart from these arguments for high population growth over low growth or declining populations, Chris Joye cites the following reasons for a population minister, all of which have confusing and possibly contradictory implications

1) Australia’s long-term human capital requirements;
2) The ramifications of those population projections for real GDP per capita and public finances;
3) The infrastructure that will be required to support the population base;
4) How that infrastructure will be funded by the public and private sectors;
5) The consequences of the population expectations for the nation’s housing needs;
6) Where we expect to locate this new housing (i.e. in which cities), and hence our long-term urban plans; and
7) The inextricable linkages between new housing supply and infrastructure investment, where the latter is a condition precedent to ‘enabling’ new shelter.

My response would include such lines of questioning as:
- Why would our human capital requirements ever be greater than our human capital?
- Why would population change have ramifications on per capita measures of GDP?
- Would not points 3), 4), 5), 6) and 7) suggest a slower rate of growth is preferable?

My last challenge leads to the heart of the arguments against high rates of population growth. My (and many others) argument is that providing basic services for these new people diverts investment from new technologies that improve per capita productivity. Population growth inflated by policy wonks is a burden many of us would choose to live without.

Like my argument that housing investment does not improve productivity, simply expanding the scale of capital infrastructure (such as roads, water supply, electricity supply etc) to match the scale of the population does not improve our per capita productivity. This investment diverts labour and resources away from actual productive capital investments such as new manufacturing technologies.

A second economic argument against stimulating population growth is that a high fertility rate will keep women (and some men) out of the workforce for longer. If we are worried about the welfare burden on a smaller workforce, we should also be worried about so many parents out of the workforce, and the increased welfare burden from the children (their education and health costs).

My final argument against high rates of population growth is that environmental impacts of new land developments are difficult to assess. The faster our rate of population growth, the lower we will be our standards of environmental controls. New mines, new housing, new industrial areas and ports will all have environmental impacts. To preserve environmental amenity for the current population, we should be careful about these impacts and adopt a cautious approach.

And what of a declining population? Traditionally a population decline was the result of war or famine, but, as suggested here, that doesn’t mean population decline should always be in the disaster basket.

But if the causes are benign, what about the consequences? If the decline in the number of people is slower than the natural growth in productivity (or output per person), then the economy will still grow. For example, a modest population decline of 0.25% a year would reduce Britain's economic growth rate of 2.25% to just 2% a year. That's hardly a recession. The number of consumers may decline, but the growth in incomes-and export markets-will ensure that demand stays buoyant. Nor will there be a demographic crisis, with huge numbers of old people overburdening those of working age. Population decline also leaves fewer children to support, train and educate for the first 20 economically unproductive years of their lives. The dependency ratio of workers to non-workers is virtually unaffected whether the population is growing 0.255 a year or falling 0.25%. Adjustments to an ageing society-discouraging early retirement, moving from pay-as-you-go to funded pensions-will be necessary in any case.

A high rate of population growth, stimulated by policy wonks on the back of fallacious economic reasoning, is a social burden I am sure we can do without.

The Norwegian solution to Dutch Disease

If you are unfamiliar with the term Dutch Disease then read on, because Australia has it, and needs to address it for our long term prosperity. 

The phrase Dutch disease was coined to describe the process by which a resource export industry has the capacity to undermine competitiveness of other sectors of the economy by pushing up the exchange rate and wage levels.  This process occurred in the 1960s following the a discovery of natural gas in the North Sea by the Netherlands, which subsequently pushed up the value of the guilder, and decreased the competitiveness of other Dutch export industries, particularly manufacturing.

Norway faced a similar situation upon discovering vast petroleum deposits.  To address the temporary nature of the windfall gains from resource royalties, smooth out revenue streams that would eventuate from fluctuating oil prices, and to insure against impacts on other sectors of the Norwegian economy, a Petroleum Fund was established in 1990 to invest these royalties for future prosperity.   Combined with the balance of the Norwegian Pension Fund, it is the second largest sovereign wealth fund in the world, worth almost half a trillion dollars.  Australia’s Future Fund which is a pool of budget surpluses and revenue from Telstra privatisation has a mere $66 billion under management (that’s about $100,000 per person in Norway’s fund, and $3,000 per person in our Future Fund).

The Norwegians had a significant head start, but I can’t help but wonder why our mineral royalties are not expressly invest to fund future assistance during the inevitable decline of our resource-centric economy.  In Queensland we have just had a massive revenue boom from coal royalties and stamp duties, yet are essentially broke.  We have had our credit rating downgraded, and are selling government assets as an emergency response to our financial predicament - the exact opposite of a responsible financial position.

I am not the only person to suggest such a scheme. In fact just this week Bob Brown announced that the Greens party would push for a National Resources Fund for Australia to ensure the gains from our mineral wealth are shared amongst society, and that we can make a smooth transition away from our resource dependent economy in the future.  He even cited Norway’s Fund as a working example of his proposal.

In my mind, responsible financial planning for a State of country should reflect responsible financial planning for an individual – saving in the good times for inevitable future bad times.  The Greens make a solid economic argument in favour of such a fund – one even John Howard, whose legacy is a lesson in fiscal responsibility, could endorse.

Interest rates up

The RBA maintains its credibility today by following through with their threats of a rate rise, and in the process, making my forecast look ridiculous.  I still maintain that declining asset prices will pressure the RBA to decrease rates in the near future.

The combined impact of the cessation of the FHOG boost and the interest rate increases of 2010 paint an interesting picture for Australia's housing market.  Obviously my bearish outlook remains.

Why not a fixed money supply?

I asked this question in a macro-economics class at university once.  It seemed simple enough at the time, and seemed to me like a pretty simple and effective way to control a country’s monetary system. 

The question was side-stepped quite successfully.  So I went to my knowledgeable friend instead.

While there are some interesting conversations happening, I have yet to find a solid overview of the fixed money supply idea and the implications in practice. 

Thinking out loud here, as a general rule technological change and capital investment will enable a given society to produce more goods in future periods.  With a fixed money supply, that means that prices will decline over time – deflation.

So the relevant question becomes - how does an economy function with persistent deflation?  And my friend has a lot more to say on that.  (Just quietly, imagine you lived in a world with persistent deflation, you would be blogging about a how crazy it would be to propose a world with persistent inflation – how on Earth would it function with the value of money being destroyed each day?)

This interesting article outlines a number of tangible problems facing an economy with deflation, including sticky nominal wages and the inability for central bank to have a negative nominal interest rate.  However, past deflationary periods have not curtailed our passage of economic growth, nor do we often read about deflationary periods of prior to the Second World War.  The graph below shows the number proportion of inflationary and deflationary years pre and post WW2.  The ‘old fashioned’ long-run has almost equal periods of inflation and deflation - a time when money supply was far slower to grow than at present.

One problem is that deflation rarely recovers to mild inflation but springs back to hyperinflation, as suggested here.  Because people hoard money during deflation, the government response is typically to increase the money supply, then, when deflation looks under control, these hoarded reserves come back into the flow of money, leading to rapid inflation.  With a fixed money supply, this effect should be dampened.

Maybe then the best thing for governments to do is live with a little deflation, rather than actively responding by increasing the money supply.  From the Austrian School we get these insights into money supply, and why a little inflation might still be a bad thing, and find this conclusion:

... to Mises even a monetary policy that would pursue a pre-determined rate of money supply expansion (as proposed for example by Milton Friedman's k-percent rule) for stabilizing a broadly defined price index would remain a potential source of crisis which, in turn, bears the risk of undermining the value of the currency. This explains why Mises, in an effort to reduce that very risk to the ideal of a free society, argued for stopping the expansion of the money supply, thereby arguing for a concept quite different from today's state-of-the-art monetary policy.

With a fixed quantity of money maybe we could end up with less volatile swings in the value of the currency because behaviour would not be influenced by expectations of monetary policy changes.  The expectation of a standing by the fixed money supply would lead less uncertainty, less hoarding, and potentially far more confidence in the currency.

However, we are still left with detailed questions about how debt or could work in this environment, whether people can perceive negative nominal gains as positive real gains (maybe there is a behavioural bias), and whether such a system provides a strong incentive for innovation and capital expansion.

I would appreciate thoughts on the matter as this is a bit of early brainstorming on the issue.