Japanese farming: A tale of incentives and externalities

On my first trip to Japan I was astonished by the prevalence of rice paddies in dense urban areas. A friend I was visiting mentioned that he occasionally had to cycle around a rice harvest from the plot next door on his apartment driveway. Throughout the city little patches of green space were being used for some kind of vegetable farm or rice paddy.

Why is this? What is so peculiar about Japan that people would forgo higher value urban land development to grow rice?

It turns out this pattern of farming is the result of Japanese agricultural subsidies. The treatment of capital gains from farmland provides an incentive to maintain some form of agricultural use, while local planning regulations provide direct and indirect subsidies for continued agricultural use of land. Also, a key factor is the political power that can be gained from manipulating complex agricultural regulations. This research…

…explains the political dynamics whereby traditional small farming communities are powerful voting groups that prefer to maintain their political power rather than increase farm income. By exerting political pressure upon the authorities, farmers can obtain large returns through the manipulation of farmland-use regulations, even though such manipulation causes social harm by preventing efficient land use.

The research starts with the premise that inefficient small scale agriculture, rather than large scale efficient agriculture, is social burden. However, as a visitor I found that these patches of agriculture provided a social service of open space and a degree of community connectivity, with neighbours becoming involved with the harvesting and eating of produce.

Japan’s agricultural subsidies and town planning limit sprawl and encourage agricultural production, but at a cost of giving much political power to those who remain in agriculture.

On a less serious note, the rice paddy art trend in Japan provides another positive externality from small scale agriculture in urban areas (follow the link to a sequence of photos from planting to harvest).

Induced traffic, super profits, and 3D TV

Induced traffic (a type of rebound effect) should be a major concern for Campbell Newman’s TransApex money pit. One would think that the need to duplicate the Gateway Bridge just 19 years after its completion was evidence enough that road space does not improve travel times for very long. We don’t want a city that looks like the picture above in another 20 years.

On that topic, I drove across the William Jolly Bridge on Monday at 4.30pm, and Thursday at 9am. I was alone on the bridge. I fear that the Hale St Bridge, at $1.50 then $2.70 each way, will be completely empty except for maybe a couple of hours each weekday – surely not a good way to spend $370million.

Ken Henry defends the Super Profits Tax on mining against a wave of political and media misunderstanding and misrepresentation. Whether the government adopts Henry’s ideal version of the tax, or some other politically modified version (or none at all), remains to be seen.

An interesting history of the private provision of public goods

3D Cinema and TV – how does it work and why can’t a normal TV project images that trick the eye into seeing 3D?

Update: Tax me, please

Last year I wrote about the important social benefits of land taxes compared to other forms of taxation. My headline was Tax me, please (also cross-posted at Online Opinion).

Maybe it is just a coincidence, but Mark Carnegie’s outstanding piece on the best recommendations from the Henry Tax Review, including the land tax as a substitute for transactions taxes such as stamp duties, is entitled Tax me!

Carnegie’s article sums up my thoughts on the Henry review and is worth reading in its entirety, but here is a taste.

“… economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”

“When a government builds a new railway line and the value of the surrounding property soars, surely it is right that this wealth be taxed.” The same is true of people who get dairy farms on the edge of cities rezoned as residential land in quarter acre blocks. As Churchill said, “To not one of these improvements does the land monopolist, as a land monopolist contribute, and yet by every one of them the value of his land is enhanced...”

We all hate paying more tax than we have to but Ken Henry has written a document that is a compelling argument for how to build a better country given that someone has to pay to run the country.

If I had my way, I would abolish the states and cut billions from the cost of running the country. But I know that will never happen because Australians would never vote for a referendum to do that and so we are pretty much stuck with the bill as it is. Can’t we at least come together for the good of the country and put aside our personal interests for long enough to capture this powerful vision of a better, fairer, more productive tax system?

One percent realty – a revolution in the making

Real estate agents have a poor reputation.  The cynical side of me would say that they get paid a lot for doing very little.  Unspoken collusion results in an unwillingness to negotiate commission from the maximum allowable, which, under the Property Agents and Motor Dealers Regulation 2001, is $900 plus 2.5% if the price is over $18,000.  Almost ten years on residential property prices have increased is many areas by 300%, yet agents still typically charge this maximum amount in a 'take it or leave it' fashion.

But things are changing fast. 

Economists often proclaim that market failures are best remedied by the market, since governments are very bad at improving outcomes even if they have the best intentions. I previously raised the possibility of government establishing a centralised real estate exchange to improve the efficiency of the property market.

Imagine a real estate exchange (REE) where home owners could list their properties. Maybe each property has a list of compulsory documentation to be included – Survey plan, title, aerial photo, front photo, number of rooms, bath, bed, total covered area, building materials, age, car spaces, maybe pest inspector and engineers reports.

The house would be put up on the exchange, which could be searched by any of the characteristics. The seller would nominate a price and contract conditions they are willing to accept, and buyers would nominate a price in a kind of open auction process.

There would be no time limit, and people could keep their house in the exchange at a ridiculously high price, and if someone agreed, they would be forced to enter the contract, even if it was a bit of a joke - “just testing the market” or something like that.

Now I am happy to say that this type of intervention is unlikely to be required.  Market forces are removing inefficiencies in real estate transactions.

The market dominance of the main on-line real estate search website, realestate.com, and the centralised map based searching for residential rentals and sales listings on Google Maps, is bringing buyers and sellers together – greatly diminishing search costs for buyers.  Google maps for instance allow any individual to list their home, and as it becomes a more prominent search tool, may surpass realestate.com, who only accepts listings from licensed real estate agents, as the main real estate website.

Not only is the centralising of information taking place, but competition amongst real estate agents is heating up.  In a revolutionary spirit I recently sold a house with One Percent Realty, where, as the name implies, the total commission is 1% of the sale price. 

My experience has been fantastic, and by all accounts (recommendations by friends), so has the experience of others who have sold with One Percent.  It is by far the best service from a real estate agent at a fraction of the price. 

GoGecko is also competing strongly with commissions capped at $5,950, although I have heard no first hand experiences with this agency (let me know if you have).  No doubt this trend will pressure others to follow although I have not yet heard of traditional agents entering into negotiated fees.

The reduced commission gives a seller a massive edge over properties on the market with colluding traditional agents charging the maximum commissions.  For a $500,000 home, a seller is $8,400 better off to sell with One Percent Realty.  

This type of competition works due to the centralised nature of internet searching for real estate.  The agent no longer needs to have a prominent office in ‘their’ area, distribute glossy brochures, or advertise in traditional print media.  Real buyers are online searching for property.  Browsers and neighbours are the only ones reading newspaper listings.

I have taken this experience as a lesson.  While markets may fail, over time they can be better are becoming efficient without government intervention than with.  

Housing and population updates

Australian housing finance is falling rapidly with prices likely to follow.

This graph of historical prices and housing finance approvals deserves a look. Also, the graph below was part of the RBA's Luci Ellis' speech on housing last week and was referred to as follows:

Australian housing debt is higher relative to housing assets now than in the past (Graph 4). We should expect this ratio to be higher than in the 1970s and 1980s. The financial regulation of that period artificially restricted household borrowing. For example, unmarried women found it hard get mortgages back then. The question is whether this measure of leverage is higher than can be sustained. After all, it is much lower than in the United States, even before their boom-bust cycle. But we should expect that to be true. Because they can claim home mortgage interest against their tax, American owner-occupiers have less incentive to pay their debt down than their Australian counterparts.
...
Recent data suggest that we do not have a credit-fuelled speculative boom on our hands.

I wonder what data would be required for Ellis to conclude otherwise? If it was so easy to see a speculative bubble in the data, none would ever form.

Finally, a word of caution about the graph. It is the ratio of debt to value. Therefore a rise can be caused either by an increase in debt or a decrease in home values. Clearly the dramatic lift in the US ratio in 2008-09 was caused by declining asset prices, not increased debt.

Strangely Ellis concludes that a 40% aggregate debt ratio was a massive bubble in the US, but 30% in Australia is not apparently, even though we should expect this relationship due to differential tax treatment of mortgage interest.

The RBA is sounding very confused these days.

On another note, the 'population growth increases house prices therefore the Australian market is safe' point of view is looking very shaky. Latest BIS Shrapnel report forecasts significant declines in population growth in the coming years.

BIS Shrapnel says annual net overseas migration - which includes permanent migration and longer-term but temporary stays - will fall from its pace of 298,900 in the year to June 2009 to 240,000 in the year to June 2010. It will fall more dramatically to 175,000 in 2010-11 and 145,000 in 2011-12.

Friday quick links

Latest research suggests that government owned banks are better for growth than private banks.

Another potential rebound effect - encouraging snus instead of cigarettes might lead to another avenue for nicotine addiction and potentially more cigarette use.

A belief in supernatural communication with the dead must surely be evidence for irrationality

One reason (not) to get an iPad - freedom from porn

Lower bound problems of hedonic indices

Prices are fundamental features of modern economies, yet measuring price changes is exceedingly difficult due to the constantly changing quality of goods and services. I have previously discussed the use of hedonic price indices, where adjustments are made for quality changes using regression techniques, and the potential pitfalls when interpreting the result from this method. I apologise for raising this issue again, but I hope to clarify my message with an example.

While a hedonic index is a useful tool, and when part of a package of price indices can clarify our understanding of price and quality movements, many unresolved issues persist. One issue that attracts little attention is how to interpret and apply results from hedonic price index calculations.

Today I want to further elaborate upon, and demonstrate using the table below, what I call the lower bound problem of hedonic price indices. Quality improvement does not imply that prices faced by consumers have dropped, especially if lower quality goods are no longer available. Buyers of cheaper products will not see the price declines measured by a hedonic index, and may even see price increases.

The above table has been constructed to show how different methods for determining price changes can produce significantly different results. This hypothetical market could be computers, cars (add a zero to the prices) or any other market where quality changes noticeably over time.

The animal names are the models. For car markets it they could be Corolla, Landcruiser and so on, or for computers, Dell Latitude, Apple MacBook or any other model. The reason to include models is that one method for determining price changes is called the model matching technique. Because models typically have fewer quality changes than the market as a whole, and that they typically represent a segment of the market (budget / premium), compiling prices over time for the same model can give a reasonable measure of price changes for similar quality products. In the table above two models are highlighted, Kangaroo and Echidna, to show how their prices have changed over the period. If we take the average price change of models we can match over the period (the model matching technique), we get a price change in this market of -42% over the eight year period.

The number beside each model is a measure of quality. I have used a single number in this situation, but typically there would be a number of associated quality measures. You will note that the quality of each model improves over time, thus if we use a hedonic (quality controlled) method for measuring price change, it will show a more substantial price decline. If we were to buy a ‘quality level 9’ product in 2001 it would be $3,000, while in 2009 it would be $1,000 – a 67% decline in price.

Using a median price index, where quality is not considered, the data in this table shows a median price increase of 14% over the period (assuming equal volume of sales in each price category). In this scenario this measure more accurately shows the movement in price of the market as a whole. If you wanted to stay at the same level in the market, this is the price change you would experience.

Finally, and this is the main pitfall when utilising quality adjusted prices measures to make policy decisions, the price change for the lower bound market entrant has increased 33%. The cheapest computer/car/shoe/phone/appliance or whatever good this happens to be, has gone up in price significantly while the quality adjusted measures show large declines.

Measures such as the CPI (a price index) and the Analytical Cost of Living Indexes do consider quality change, yet we apply these measures as a way to adjust welfare payments, even thought most welfare recipients will be lower bound market entrants for much of their consumption bundle.

In an ideal world a selection of price indexes using different methods would be produced for each major consumption category to show paint a clear picture of the situation being faced by a different members of society. Not only would we measure ‘pure price change’, but also changes to the cost of living which can more easily guide policy making.

A Rum Thing

Guest post by Stephen Hogg

This Business Spectator article gave me pause for thought. It is discusses how ASIC recently made a ham-fisted attempt at reigning in rogues in the market making a buck off spreading a rumour and then profiting from inevitable price movements. It’s called rumourtrage, and is the practice of spreading false or misleading information in respect of securities in order to take advantage of artificial changes in market prices.

Now don’t get me wrong, it’s a cunning idea. I know a lot of people who wish they had thought of it some years ago. But I became stuck on one point made by ASIC. At the end of the article it is made plain that when ASIC was figuring out how to put a stop to all this, that:

"The principles were developed noting concerns that confidence in the integrity of Australia’s markets could be undermined if investors believe rumours are actively spread in the market to distort proper price discovery"

I think is a flawed statement.

Let’s go back a step or two, and revisit the Modigliani-Miller theorem (which everyone conveniently forgot about until a year or so ago!). The theorem predicts that in a world of perfect information, the choice to fund your company with debt or equity won’t change its value. The same theorem leads us to the conclusion that with perfect information, the share price of a firm reflects all the information regarding that firm – a pretty well-known result!

“The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle.”

However, full information is absolute insanity. There are heaps of things we don’t know. For example, I would pay dearly to know what Andrew Forrest, CEO of Fortescue Metals, was thinking when he described his knock-down drag-out conversation (read: argument) with Ken Henry at the National Press Club last Tuesday as “delightful” to a pack of journalists afterwards. I’m pretty sure that if that tidbit was common knowledge the share price of Fortescue would be significantly different to what it is at the moment.

So in this world of imperfect information what does the share price of a company reflect? Not much, unfortunately. All you can really get out of it is the appetite for risk of the average punter which, when you put it on a chart, appears to go up in a boom and down in a bust. Seems logical enough.

Which brings me back to the problem with ASIC’s latest piece of work. If the prices of shares don’t really reflect anything at all aside from the appetite for risk of the average individual in the market, why on earth take on the Sisyphean task of making sure that price signals are representative of the shape a given company is in? There’s a far bigger problem at work here, which ASIC doesn’t appear to be focussed on. It is the welfare transfer which occurs because of rumourtrage.

Because of the ability to distort the perceptions of others regarding the state of the market and the general willingness of the participants to take on risk, a welfare transfer occurs, from the rumour monger to the rumour believer, which otherwise would not have. That’s the thing which needs to be sorted out here – which means unwinding selected trades rather than adjusting the share price for all trades, including those not subject to rumourtrage.

Barefoot running: The transition and Vibram Five Fingers

Economic instinct initially held back my enthusiasm for Vibram Five Finger (VFF) shoes.  At first glance getting less shoe for your money is bizarre.  At next glance it feels like a step backwards - expensive well-cushioned running shoes, the result of countless hours or research and design, should be the pinnacle of human endeavour toward running excellence.  There are so many people running in this world, both amateur and professional, that you just expect the current technology to be supreme. 

But there are a few reasons I became convinced that making the transition away from traditional running shoes (and shoes in general) to VFFs or barefoot was not a step backwards, but a simplifying step forwards.

- I generally prefer to be barefoot where possible
- The book Born to Run by Christopher McDougall was very persuasive
- Harvard researchers have been analysing the difference in running techniques between barefoot and shod and now running with shoes just looks wrong
- I saw a guy wearing VFFs at an adventure race (about 4hours running, kayaking and mountain biking) and thought he must have got the wrong information about how much time is spent in the water and worn his scuba shoes. 

I also tried running barefoot in the park a few times a week for a month before buying VFFs (the KSO model).  Apart from getting sore calves for a little while, the toe strike technique felt comfortable.  I considered forgoing VFFs and simply running barefoot.  Nowadays it’s either barefoot or VFFs depending on the distance, my mood, or the weather.

Let me share the experience and comment on the bizarre barefoot running culture that is developing.

It has been six months since I have stopped wearing traditional running shoes. I now run about 30kms a week in VFFs or barefoot.  During the first weeks of transitioning to a barefoot running style, runs were about one kilometre.  It takes time to build up strength in you calves and I recommend taking it easy at first.   Now, my longest single run in VFFs is 24kms while completely barefoot its 10kms, and I plan to run a full marathon in June.  I live close to the city centre and run on concrete, bitumen, grass, gravel, and have had no major problems (although small pebbles occasionally get stuck in your bare soles at first).   Two weeks ago I went for a quick run in my old running shoes and realised that I had crossed over to the dark side and couldn’t go back – they felt bulky, heavy, clumsy, and unnatural.

Two important questions remain.  How have the VFFs held up, and at a more social level, why hasn’t anyone thought of this barefoot running idea before?

VFFs are not perfect.  The durability of the soles has impressed me.  There are no pockmarks or signs of wear on the sole after more than 500kms of running.  The soles are even tough enough to allow you to ride a mountain bike with platform or cage pedals.

However, the abrasion-resistant stretch polyamide fabric of the upper part of the shoe, while light, thin and breathable, has not really stood up to its name.  I have stubbed my big toe on the bitumen at night a couple of times, and while the wrapped over sole at the front of the toes protects them, it results in the less durable fabric on top of your toe scraping the ground.  A hole above my big toe nail became large quite quickly and I decided to stitch it up before it spread (see photo above). 

Curiously, there has been no toe stubbing since the first month - maybe I watch where I’m going now, or maybe my running style has become more graceful. 

The second problem I have is that the internal stitching beside the knuckle of my right big toe (right next to the V in the yellow Vibram label but on the other shoe) is not sitting flat.  All the other seams are unnoticeable, yet the peculiar angle of this one makes it rub.  It is not a problem for short runs or when walking, but runs above 5kms generally need some Micropore tape on the skin to stop a blister developing.  This works a treat and 24kms later they still feel good.

It takes time for your feet to adjust and you may get hotspots from rubbing here and there both in the VFFs or barefoot (I have had blisters under my toes a couple of times) but the skin on your feet toughens up eventually.

In all, VFFs are very good at allowing you to run with a more natural barefoot style without having to condition your feet to the sometimes hot and unyielding urban surfaces (Brisbane roads in summer will destroy bare feet).

If barefoot running is superior to shod running in the latest $200 shoes, why didn’t we collectively realise that this whole industry was taking us for a ride?  $200 seems absurd when free is a better alternative (although I appreciate the irony that this post reviews shoes that cost almost that much).

The reason conventional padded running shoes dominated without competition can be explained by theories of path dependence.  Once society has been conditioned to accept a particular behaviour, custom, or object as 'normal' and as the best solution to a problem - we find it very difficult to break from the crowd and question it.

Think about a knife and fork.  These tools solve a problem of getting otherwise very messy foods into our mouths without much waste.  Does anyone ever think about improving the fundamental design of the utensils?  Maybe there is a better way, and maybe that way is to eat with our fingers as some middle eastern cultures might suggest.  Some Chinese might add that chopsticks are superior.  But inherent social conditioning makes thinking outside the square extremely difficult.  It is very difficult to eat with your hands at a restaurant if the norm is to use a knife an fork, even if there is a strong reason for it being the superior technique.

Interestingly, as far as I understand, the idea for a thin-soled separate-toe lightweight shoe did not arise out of a quest for a better running shoe, but was marketed as a shoe for boaties who wanted good grip and feeling of the deck.  It was not until Barefoot Ted found them and used them to give his bare feet a break that running in these odd things was even considered.  Once he became a lead character in McDougall’s book, the running world changed.

But to change the world there must be an underlying theory that demonstrates why a barefoot running style is superior to shod style.  If you use your hands to eat at a restaurant your friends might expect an explanation before they adopt your custom. 

McDougall explains that it took some time before researchers who first proposed that long distance running is an evolutionary advantage for hunting to find strong evidence.  Apparently, a few years after first publishing the idea, they received a phone call from a guy who had been living with an African tribe for a few years and said that they regularly used a technique now called persistence hunting, which uses a combination of running and tracking to pursue prey to exhaustion.

Hence the title of McDougall’s book and the strong evidence that our bodies evolved to specialize in barefoot running.

I will leave you with a little anecdote .  I was wearing my VFFs to teach a university class last week and on the footpath a fellow walked up to me and commented on my shoes.  “Nice Vibrams.  You run?” He wears them, except when he’s headed to the chemistry lab where more serious protective footwear is encouraged, loves them, and is happy to chat to anyone else who does.  It appears we have a secret society emerging.  Should we have a secret handshake?

Cycling culture through economist eyes

I have been fortunate enough to travel widely in the past decade and glimpse a sample of the breadth of human experience. Today I want to focus specifically on the evolution of cycling culture around the globe.

I have taken note of the popularity of my recent post on the proposed bicycle hire scheme in Brisbane and want to expand some of the points I made about the incentives to (or not to) cycle, and compare the diverse cycling cultures around the world.

The comparison will consider such obvious differences across countries such as speed, cost and safety, but focus on the historical development of cycling culture across countries. I will finish with some ideas about how to cities can embrace cycling as a legitimate mode of transport.

THE BICYCLE EMERGES

The common bicycle design is relatively unchanged since the Irish veterinarian inventor John B. Dunlop first put pneumatic tyres on one in 1887. While the first ‘walking machine’, a push along two wheeled bike that you might see two year old children riding, was invented in 1817, it took another 70 years before bicycle technology overcome some fundamental teething problems. The penny farthing was prone to throw the rider forward over the front wheel should he hit a stone or pothole, and the original solid wooden, metal, and rubber wheels all failed the comfort test on cobblestoned European streets. The 1880s and 1890s were boom years for the bicycle in Europe and America.

“The bicycle… was a practical investment for the working man as transportation, and gave him a much greater flexibility for leisure. Ladies, heretofore consigned to riding the heavy adult size tricycles that were only practical for taking a turn around the park, now could ride a much more versatile machine and still keep their legs covered with long skirts. The bicycle craze killed the bustle and the corset, instituted "common-sense dressing" for women and increased their mobility considerably. In 1896 Susan B. Anthony said that "the bicycle has done more for the emancipation of women than anything else in the world."

Bicycling was so popular in the 1880s and 1890s that cyclists formed the League of American Wheelman (still in existence and now called the League of American Bicyclists). The League lobbied for better roads, literally paving the road for the automobile.”

CULTURAL DIVERGENCE

The bicycle was brought to Asia with European traders as its design evolved in the later part of the 19th century. In European capitals, the bicycle was seen as swift method of urban transport for the wealthy industrialist. Chinese culture saw it differently, with a popular publication at the time showing little enthusiasm for the device.

…in the case of cycling it discouraged Chinese from this unfamiliar exercise. By hinting at the disgrace of the unfortunate cyclist, the text is probably pointing to the biggest cultural obstacle to the spread of the bicycle in 19th century China. Compared to Europe in the 19th century, for the tiny segment of Chinese society which could afford to purchase a bicycle, it was considered absolutely disgraceful to be seen pedalling through the streets, mounted on a machine, always in a delicate situation leading to a state of exhaustion. The wealthier Chinese was hardly ever seen walking in public. He was carried in a sedan chair or -if he made allowances to modern times- was pulled in a rickshaw, first introduced to China in 1874.

In contrast, by the end of the 19th century, the bicycle was dominating Europe, with bicycle racing developing as a sport and technical challenge of the industrial age, and bicycles being adopted for military uses.

This cultural perception at the time of the invention of the bicycle, I believe, plays a key role in shaping the modern cycling culture of a nation.

In Australia at this time, not only were cities less dense and less populated, the road conditions and weather were little help to the cyclist, and in relative terms, one must imagine a bicycle was an expensive possession – not something to flaunt in a country of convicts and rum traders.

Instead of cycling being a respectable mode of transport for the elite, in Australia there was little place for the contraption in these early years. Those with wealth and power had other more practical means of transport; however I imagine that there were some uses for bicycles by common people and traders in Sydney and Melbourne for transporting goods around the growing cities.

Despite this, in 1986 the Coburg cycling club was established by a group of recreational cyclists, and had a focus on racing. Cycling never had much of a start in Australia as a transport alternative – it was mostly a hobby and a sport, and to this day remains that way.

A 21ST CENTURY SNAPSHOT

Having acknowledged the different cultural histories of cycling in a select few places, we can compare the attitudes to, and uptake of, cycling in the 21st century.

In most of continental Europe, cycling remains a respectable mode of urban transport. Laws, such as the Dutch ‘strict liability’ law, and urban thoroughfares for cyclists have been developed over time to allow cycling to thrive, even amongst the very wealthy. Cycling is a legitimate mode of transport in most European cities – there is no stigma, there is government support, and there are natural advantages such as flat dense cities and moderate climate.

In China and many of the developing South East Asian countries, cycling has been widely adopted for all manner of transport needs due to its relatively low cost. It is not uncommon to see building materials transported by tricycle, and the whole family to be ridden on a single seat bike.

More recently as cost have dropped and incomes risen, the Chinese have taken to electric bicycles as cities spread and commuting and transport distances for many of the poorer urban working class lengthen. This is a great alternative where natural hindrances such as heat, hills and distance can make cycling difficult.

From my experience in China, bicycling is a legitimate mode of transport. A bicycle is something a poor family saves for and is proud of. The government supports this mode of transport for the majority of urban poor, especially in the capital where bike lanes dominate many streets.

In Australia, my experience with cycling has been quite different. Cycling is not perceived as a legitimate transport alternative (a must see video of 60 Minutes feature on cycling in Australia). It is seen as an inferior choice, for students and fitness fanatics. It is seen as a toy that the family might take out to the park on the weekend.  And it is seen as dangerous.  Australian helmet laws make the cyclist feel like and outcast who can't look out for themself - 'We don't really want you to cycle but if you are going to, wear this'. 

But it need not be so. Even though Australian cities face some natural disadvantages to cycling – less dense, more hills, and blazing hot summers – we can develop an inclusive cycling culture. We can make cycling be seen as a legitimate alternative.

HOW TO EMBRACE CYCLING

Australians are lucky that we can afford other transport options and that a cycling culture has not developed due to poverty.  But prosperity need not be a barrier, as it has not been in European cities, and the efficiency gains from cycling (reduced health expense, faster commutes, cost savings) can definitely improve our prosperity.

Change will happen from two directions. The early adopters can promote cycling in their community by discussing the benefits, and how to overcome the challenges, such as driver hostility, carrying loads and children.

Cyclists can also pressure governments to acknowledge that cycling is a legitimate mode of transport that they will support, and pressure them to act (at both local and state level). There is plenty of talk and acknowledgement, but little action. Car tunnels, bridges and roads are fast tracked, while the implementation of on and off-road cycling lanes is delayed and often put in the ‘too hard’ basket. We are extremely lucky to have two cycling bridges across the river, but at each end of the bridge cyclists have little road room to maneuver – why build a cycling bridge if it is so difficult to get to? A traffic bridge would never be built if it was disconnected from the existing road network, so why should a cycling bridge?

Bogota Columbia is a town where cycling culture has been recently embraced. An integrated network of cycling paths, both on and off road, was built in the city, in a spider-web fashion, extending out in to the poorer suburbs. This cycling network is linked into the bus system with bike storage facilities at stations. Cycling has quadrupled in Bogota since the introduction of the cycle path network. Building the cycle paths has signaled that cycling is legitimate, not just a second best alternative for the poor citizens.

In Brisbane, change is happening. Slowly. Bicycle lanes are appearing, but there is no coherent push for a strong connected network of bike routes across the city. There also remains a cultural barrier, which will change slowly, but could be accelerated by genuine government support.

Confusing macroeconomic situation

The Reserve Bank has lifted its stimulatory cash interest ratesetting and showed a willingness to continue to tighten monetary policy if required. At the same time, the Federal government continues to spend into the economy with its Nation Building Economic Stimulus Plan. The RBA started contracting their position when the Government was only half way through its rollout of fiscal stimulus. All data upon which the RBA acted was severely affected by the $25billion spent into the economy as part of the Plan. That’s not forgetting the $17billion still to go in 2010.

Unfortunately we have yet to see what is left of the ‘real economy’ once this artificial situation expires.  But at least the RBA has proved their independence.

The reason monetary policy (changing interest rates) works is because is can bring forward, or delay, consumption. Lower interest rates bring forward consumption, as the reward for saving is lowered and people choose to spend more now rather than save and then spend later time periods. The cost of borrowing is also reduced, and can stimulate debt funded current consumption. Conversely, higher interest rates encourage saving and discourage borrowing.

The Nation Building fiscal stimulus package is bringing forward government spending – the exact opposite of what the RBA is trying to do. The remaining $17billion being spent this year will offset the last 3 interest rate increases – each 0.25% rise increased the interest on Australia’s private debt by $4.8billion/annum; money which would have otherwise been spent on present consumption or investment (of course I have overlooked the impact on savings rates in this calculation).

My gut feeling is that the RBA was far more confident then it should have been, and we may see a repeat of the dramatic change in policy that we saw at the end of 2008 when the cash rate was more than halved in a few short months.  There might be some money to be made in foreign exchange - I expect the AUD to decline between now and the end of 2010.  Another forecast to be tested.

Friday quick links

A new direction for interest rates?

For risk taking behaviours, the rebound effect even has a name – The Peltzman Effect

New Mysterious Cities of Gold cartoons on the way.

Broken window fallacy or just plain old human optimism? Café Hayek is full of gems.

Ever wondered why all news is bad?  A must read on what happens to good news.
...there are huge vested interests trying to prevent good news reaching the public. That is to say, in the ruthless free-market struggle that goes on between pressure groups for media attention and funds, nobody likes to have it said that `their' problem is not urgent and getting worse.

Externalities addressed the Dutch way.
...in the Vondelpark, a delightful reserve in central Amsterdam, it is illegal to let your dog off a leash. But it’s perfectly legal to have sex in the park, so long as it is not in view of a children’s playground. The argument is that the dog may make a mess that imposes costs on the unwary walker, while the couple imposes no costs on other park users.

Steve Irwin's way: Economics of wildlife conservation

At Australia Zoo (I had a lovely time there on the weekend, thanks for asking) there are numerous signs posted to encourage visitors not to buy native animal products – crocodile, emu, and kangaroo meat for example.  I found this very odd, as crocodile and emu are farmed, and most kangaroo species are not endangered – far from it.  So what kind of conservation message was this I wondered?

Steve Irwin expressed his conservation message more clearly on the website:

"Sustainable Use" of native wildlife in so-called modern nations like Australia and the U.S.A. has inadvertently created a multi-million dollar 'bushmeat' industry, where local people kill native wildlife for meat, skins and products. Please don't blame the local people; it's not their fault! They're simply hunting for much needed money. The greatest wildlife perpetrators of today's world are those behind the driving force of "Sustainable Use." 

How are the Tiger Farms in Taiwan and China helping to save Tigers in India, SE Asia or Siberia? They are perpetuating the market in Tiger products, which is the single greatest reason for the endangerment of Tigers.

…If we can destroy the market, we'll destroy the industry. Historically the only reason spotted cats, like Leopards and Cheetahs are still found in the wild, is because of peer pressure. It became 'uncool' and controversial to wear spotted cat fur coats, so the market was destroyed and the industry suffered. Slowly, less and less Leopards and Cheetahs were being shot for their skins, and just as well or they would've been extinct 20 years ago.

The principle behind this message is that if we eliminate demand for wildlife products, we will preserve species.  But there are alternative ways to protect wildlife and biodiversity (a side note: do we really care about an individual species, or do we use iconic mammals as the canary in the coal mine of biodiversity protection?)

In addition to the ‘demand destruction’ technique, economists propose other ways to preserve threatened species – promote domesticated supply (farm threatened species), the Coase solution (give rights to the species to a group who can profit from non-consumptive use of the animals such as eco-tourism and research), and simple land conservation.

Which of these measures work?  Should we try them all, or are they mutually exclusive?

Promoting alternative supplies of animal products may sound strange at first, but has merit.  If we began farming pandas, bears, tigers and elephants, we could essentially flood the market for these animals’ body parts, bringing down the price to make hunting these species in the wild uneconomical for the risks involved.  The logic appears sound, and I can think of crocodiles in Australia as an example of where farmed animals have almost completely replaced wild animals as a supply of meat and skins.

But caution should be taken if this method is to be the primary conservation measure.  Solid institutional arrangements, regulations, and enough participants to avoid collusion are necessary, or this measure can simply backfire.  Because the farming of a species legitimises consumption of its body parts (thus increasing demand), farmers may collude to reduce supply and maintain a high price which may not discourage hunting of the species in the wild, especially in countries where hunting bans or their enforcement are non-existent.

For example, if all the crocodile farmers colluded to reduce supply of skins and meat while demand for crocodile products increases now that it is the new must have item, the price may be high enough for wild hunting to be profitable.

One unusual extension of this philosophy is to encourage farming by promoting various endangered species as gourmet food.  No doubt this will encourage farming, but it won’t necessarily ensure that wild animals are preserved, which is the primary goal here.  We don’t see many wild chickens, cows, or pigs anymore (or the descendants of the wild species from which they were originally domesticated).  Tuna farming is developing, and we may see whether this has any impact on wild populations; however I worry about the push for farming tigers for Chinese medicine as an effective conservation measure.  

The Coase solution gives private rights to utilise a species for non-consumptive use (such as tourism or research) to a particular group.  Since that group now has an incentive to preserve the wild population, they will protect an area for poachers, promote tourism, and potentially play a role in demand destruction (easing their efforts to protect against poachers).  For example, some African countries have private rights for tourism operators who make money from shooting elephants with cameras rather than guns, thereby having a strong interest in preserving their habitat and protecting them from poachers.  In fact, in some of these areas the elephant population is now estimated to be at the carrying capacity of the conservation area.

Alongside the Coase solution, habitat protection is also needed.  If the group with rights over the species have no assurance that a minimum size habitat will be maintained, there is little incentive for any group to take up these right and develop the tourism industry.  A combination of land conservation and private rights can be a potent solution.

How do we go about optimising conservation with these options?

If our primary goal is to protect the species in their wild habitat, promoting domesticated supply is probably the least preferred option.  It legitimises consumption of the species and does not always ensure that farmed supplies completely replace wild supply.  It also hinders the introduction of other conservation measures.  Why would tourist pay top dollar to see wild elephants in Africa when there is an elephant farm just down the road?  If hides the plight of the species in the wild when it becomes common in captivity.

A combination of the other measures probably constitutes optimal conservation – destroy demand for consumptive use of the species, promote non-consumptive use and give a group rights to benefit from those uses, and ensure a minimum scale of habitat is preserved for our top of the food chain ‘canary’ species. 

Australia Zoo’s message at first struck me as very odd, but it may just be that the animals they cite are not endangered (kangaroos), or have been successfully farmed (crocodiles and emus).  But their logic is sound.  They may simply have needed a message accessible to children and foreigners, which is achieved by referring to common Australian animals.

You can also see the commitment to this optimal conservation strategy from the Irwin’s purchase of land in Cape York to preserve habitat and promote non-consumptive use of wild animals, which is now under threat from mining exploration (since the State still holds rights to minerals on private property).  You can read more here and sign a petition to protect this land from mining. 

The take home message is to be wary of ‘too good to be true’ solutions from economists when the outcomes are irreversible. 

How much is this island worth?

I would appreciate some feedback on a little conundrum I face at work.  The following analogy is close enough for our purpose, and what I want to know is how much the island is worth?

Imagine a large island was discovered in Australian waters in the 1960s.  The government takes ownership of the mostly desert island.  It has little environmental value, with a surprising lack of biodiversity, some small mineral deposits that are uneconomical to extract, and otherwise is of little use. 

The government decides that they may as well put the island to some use, and offer people a licence to inhabit the island, and the rights to the minerals and any vegetation they find.  The licence is offered for free with the condition that the licence holder make use of it within 3 years (by inhabiting the island or making use of its resources in some way).  By 2010 a dozen people have licences and inhabit the island.  The government estimates that they could offer 100 more licences before the islands land is fully ‘developed’.

The government changes its licensing policy and decides that licences will be converted in title of the land in the island - much like it is on the mainland.    It now has 12 blocks of land in private hands, and 100 in government hands.

The government then decides to sell its remaining blocks of land to the market.  At what price could they sell these 100 blocks?

I see two drivers of price:

1. The previously free and seemingly non-scarce licence is replaced with a scarce piece of land, therefore people will be willing to pay something simply out of speculation of future value (because they now don’t have to inhabit the island to keep the block).

2. The price is still worth nothing if people weren’t willing to take the licences for free for 50 years.

How do we estimate the market price, if any, of these blocks of land?