Wayne Swan - Too Stupid to be Treasurer

Wayne Swan continues to be a dangerous embarrassment to Australia.

The Labor Government tried to introduce a mining 'super profits tax' that can be best described as 'let's tax to death the one industry propping up the Australian economy.'

The original version of this tax was that if a mining company earned more than the rate of return on government bonds, the government would impose an additional 40% tax.

Students of Finance 101 everywhere thought to themselves, 'Wait, aren't mining company shares significantly more risky than government bonds? Why would anyone invest in a security with the same or lower return than a government bond, but more risk than a government bond? Won't that send Australian mining companies broke?'

Even former Labor Party ministers like Barry Cohen pointed out how dumb this was. Wayne Swan was too stupid to realise this basic economic point, but thankfully the Australian electorate (watching their superannuation funds crater) saw through it.

But in case you thought he might have learned his lesson, he's back at it again. Here's a great example of Swan-onomics.

Treasurer Wayne Swan has seized on BHP Billiton's 72 per cent jump in first-half net profit today, saying it showed why Australia needed a tax on resource company profits.

"But what you will see in terms of the future of the resource industry is that it is very strong, that's why Australia does need a resource rent tax."

Got that? Australian business is showing strong profits, ergo we need higher taxes.

There's so much stupid packed into that sentence that I don't know where to begin.

For a start, we could note that this parasite views all corporate profits as potential revenue for the government, rather than realising that it's not his damn money. 

We could next move on to the assumption that the government should tax successful businesses until they're no longer showing successful profits, and whether this is likely to produce more successful businesses or fewer.

We could wonder about what incentives it will create for economic growth when companies that do well are hit with unpredictable taxes, and how business will respond in terms of investment and job creation.

We could take a detour via the observation that setting different tax rates for different industries based on which ones seem to be doing well is the favored policy of banana republics, corrupt autocracies, and communist kleptocrats.

But honestly, what's the point? It's just whistling into the wind with this moron in charge.

The Labor Party seems to have completely abandoned its reputation for solid economic stewardship so carefully (and deservedly) built up under the Hawke and Keating governments.

Make Child Tax Rebates A Percentage of Income

If I had to nominate a fact in the 'most significant under-appreciated truth about western society', it's that western societies have ridiculously low birth rates by historical standards. The United States has 2.06 births per woman, just under the replacement level of around 2.1. Australia is 1.78. Italy is 1.32. Singapore is 1.1. As Mark Steyn is fond of pointing out, this has huge potential consequences. Social security is a Ponzi scheme that only works in a growing population, so lots of workers support each retiree. It collapses when you have negative population growth, and more retirees than workers.As most first world countries are rapidly finding out. The alternative is mass immigration, which is fine as long as you're willing to accept that your country at the end will probably look completely different in many cultural respects from how it started. If you're a self-loathing leftist who sees nothing but greed and oppression in the history of the west, this is a big plus. If you have half a brain in your head, it is not.

Another alternative is of course eliminating these programs, which I'm fully on board with, but try selling that at the Iowa caucuses and watch the AARP vote stampede towards your opponents.

For one reason or another, most educated people in the first world don't seem to want to have kids. While kids may have negative externalities when you're on an airplane, they probably have positive externalities in the medium term.  Like any good economist, we want to incentivise people to have more kids.

And here's where current policy gets tricky. Most tax credits are in lump sum forms, or tax rebates that phase out at higher incomes. The US gives you $1000 per dependent child. The Australian government gives you a lump sum 'baby bonus' of $5294 when you have a kid.

Here's the problem. It costs hundreds of thousands of dollars to raise a kid. Who is actually going to be incentivised to have a kid by the promise of five grand?

Idiots, that's who. Absolute drooling innumerate fools who can't figure out that this is a drop in the ocean relative to what that kid will cost them. Morons with ridiculous hyperbolic discount rates fuelled by their crack habits. Or (more likely) people who will collect the 5 grand, but weren't planning on paying for the kid anyway as they live on welfare.

Now, you don't have to be a genetic determinist to have misgivings about this scheme. A relatively larger proportion of the children in the country will now be raised in households where the parents thought it was a great idea to have a kid for the princely amount of five grand. If you're confident in the ability of Australia's robust public schools to undo this kind of home-instilled stupidity, then it's no problem. I also suggest you probably haven't had much exposure to Australia's public schools.

If I were designing a scheme, I'd make each child generate a tax credit equal to $2000 or 2% of income, whichever is larger. That way the middle class and the rich are encouraged to have children as well. It also reflects the fact that like it or not, rich parents will spend more on their children, and so you have to offer more dollars to incentivise them to have kids. While 2% may sound like a lot, I doubt people are going to start popping out 10 kids to save 20% on taxes. Although if they did, those kids would be being brought in a family that really hated taxes, which is fine by me too. Either way, the future is looking brighter.

Supply and Demand of Public Nudity

Men are both the principal suppliers and the principal demanders of public nudity.

Sadly, what is supplied is not what is demanded.

Hyperbolic Discounting #2 - Nightclubs

Following on from the previous post on hyperbolic discounting, the other example where people seem to show much too much short term impatience is in nightclubs. 

For most nightclubs, even very expensive ones, it’s not too hard to get in without too much hassle if you go there when the place is deserted shortly after opening time. But as soon as the place starts filling up, the bouncers get free rein to exercise their pea-brained messiah complexes and start jerking you around by making you wait for hours.

The question is, why are people so unwilling to just chill out in a half-empty club for half an hour? Is it really worse than standing outside in the queue for 30 or 45 minutes because you turned up late? And if the half-full club is unbearable, why is the full club so awesome that you’re willing to wait so long for it?

It seems that people place an enormous discount rate on the club being awesome at the moment they walk in. So much so that they’re willing to endure a far crappier experience of standing in line for a significant fraction of the time they’d otherwise be in the half-full club. Which doesn’t make much sense to me.

Then again, I guess it depends on your model of the average person in a nightclub. If it's this:

then perhaps it's not really such a surprise.

Hyperbolic Discounting and New Release Movies

In economics, discounting refers to the way that you reduce the value of future costs and benefits. In the simplest example, $1 today is worth more than $1 in one year’s time. The reason for this is that I can earn interest on that dollar over the year. So if the interest rate is 4%, then the value of $1 in a year is $1 / 1.04.

When you discount things at a constant continuous rate, this is called exponential discounting. The value of $1 at time t when the interest rate is r is equal to exp(-r*t).

Hyperbolic discounting refers to the tendency to apply very high discount rates for the short term, and lower discount rates in the long term. Which is a fancy way of saying that people are very impatient for things they could get right now, but more patient when the thing isn't going to arrive for a while anyway. It’s irrational, because it leads to preference reversals.

For instance, if you ask people whether they’d prefer to receive $10 in one year’s time or $11 in one year and one day, most people pick the $11. But if you ask them whether they’d like to receive $10 right this instant or $11 tomorrow, more people will pick the $10. Implicitly, the value they place on waiting for the first day is much higher than the value they place on waiting for the 366^th day. But this leads to reversals. Take the guy who picked the $11 in one year and one day. Now fast forward 365 days. He’s now going to wish he’d taken the $10/one year option, because that’s what he wants when the choices are between the immediate and the one day delay. Hence he changes his mind.

(For a good example for the econ-minded, Stefano DellaVigna and Ulrike Malmendier have a great paper on gym memberships. They argue that hyperbolic discounting explains why people sign up for monthly and annual gym memberships and end up paying much more than if they'd paid for each visit).

To my mind, there’s loads of cases where people apply hyperbolic discounting, and they really can’t stand waiting. But let me give you one that stands out for people applying ridiculous short term discount rates – new release movies.

It’s amazing the amount of @#$% people will go through in order to see a movie on its opening weekend, or even worse, on opening night. They’ll line up for hours. They’ll sit in the second row and get neck spasms. They’ll sit in a packed theatre, knowing that there’s a good chance there’ll be someone in the seat in front of them at least partially blocking their view. And if you’re seeing it on opening night, you have to suffer double the indignity of spending your three hours in line next to losers dressed up in Harry Potter outfits, and reflecting how you apparently have similar tastes and preferences in life.

And for what? It’s the same movie that you can see 3 weeks later with no line, in a pleasantly empty theatre. I can understand it if’s a mystery movie where someone might spoil the ending. But how the hell does that explain Cheaper By the Dozen 2? Are people worried that their friends will spoil the enjoyment of the nuanced plotlines by giving them spoilers?

My best guess is hyperbolic discounting – when something is the latest new craze, people want to see it NOW! The alternative (which I also find plausible) is that most of the value of a movie is either a) sharing the excitement with people who’ve just seen it,  or b) signaling to your peers that you’re one of those cool people who sees things as soon as they come out.

Shylock says – lame.

The good news is that hyperbolic discounting can be overcome. You know how?

Think your way to better decisions.

Economics + Snark

One of the developments I like the most about the internet is the advent of blogs that combine accurate reporting of the news with snarky humourous asides. There's a whole lot of economic news that I'm interested in finding out, but wading through the WSJ or Financial Times is like dosing up on Ambien. After being awake for 24 hours straight. Before sitting down to a slide show of your Aunt's latest vacation to Acapulco.

Thankfully Zero Hedge manages to make it far more entertaining to find out about the world of finance:

http://www.zerohedge.com/article/111610-midevening-report-suck-irish

I'd give you the breakdown of the news about Ireland joining Greece in circling an increasingly crowded drain, but it's more fun to give you some of the best metaphors of the article:

"The biggest news of the day though was that Ireland is in talks with everyone from the EU to the IMF to NAMBLA to try to reach a deal to help them meet their spiraling budget deficit.

If a bailout can't be reached, Ireland may have to resort to selling some natural treasures such as the Blarney Stone, Michael Flatley's shaved chest hair, and Katherine Jenkins, in order to raise funds.

Citing the EU having to increase Greece's budget deficit three times already from "likely insolvent" to "Stephen Baldwin insolvent," Austrian finance minister Josef Proell..."

And I haven't even mined even half of the comic gold in there. Dig on!

Pooling and Separating Equilibria In Cool Places to Live

These days, areas predominantly populated by gay people tend to be the cool parts of town (The Castro in San Francisco, Boystown in Chicago, West LA) but they never seem to stay as gay areas for very long. The problem is that trendy yuppies  want to live where gay people live, because those areas have all the good restaurants, bars, and a generally fun vibe. Hordes of yuppies flow in, and quickly destroy the hip gay vibe that made the area attractive in the first place. Gay people can try to co-ordinate to live somewhere else (Andersonville in Chicago, for instance), but this can only delay the effect of the yuppies moving there too.In economics, this is known as a pooling equilibrium - gay people would rather not hang out with yuppies, but they end up pooled together because the yuppies will follow them where they go. They can't set up circumstances where the yuppies will voluntarily separate out, and can't make an actual requirement to be gay to live somewhere without likely violating exactly the same housing laws designed to protect them from discrimination.

[Edit: The people who really benefit from this pooling equilibrium are of course gay yuppies, who get the best of both worlds]

Compare this with the separating equilibrium you get between unwashed hippies and the same yuppies. Venice Beach, for instance, manages to keep most of its, ahem, "Bohemian" atmosphere for long periods of time. This is because while the yuppies may enjoy going down there every now and then to get "medication" for their "glaucoma" and soak up the ambience, nobody really wants to live in a place where there's a real risk that a homeless man might take a $#@% on your very expensive doorstep during the night. So the place is populated by tourists and unwashed vagrants during the day, and just the unwashed vagrants during the night (and the rich aging hippies who can afford the houses nearby, but enjoy the freakshow that is Venice). Yuppies, by and large, live elsewhere.

Maybe gay people could learn from the hippies and bathe less. That might finally drive off the yuppies and restore the separating equilibrium!

Greece - Circling the Drain, Fiddling with the Second Derivative of 'Screwed' with respect to 'Time'

Zero Hedge has an interesting post about how the European debt crisis is set to be the next focus of the market.

What's well known is that in Greece they've been rioting over the austerity measures.

Now, given things are so cruel and awful (apparently) that these pampered government sponges are on the brink of revolt, you'd assume that the government  must be paying down the debt pretty fast now, right?

Okay, they're not.

But surely, at a minimum, they've at least stopped adding to new debt, right?

Okay, they haven't.

No, all these cry-babies have manged to do so far is commit to add to the mess at a slower rate.





What a triumph of public policy for this society of moochers!

Somewhere, Socrates is spinning in his grave and muttering to himself  "Stop claiming national greatness by association with me, you lazy selfish clowns."

(This post dedicated to The Greek, who was complaining today that "there's been too much Oprah stuff on the blog recently, and not enough economics")

Untaxed Externalities

Here's a question I was pondering recently.

What's the biggest negative externality that isn't taxed?

It's not going to be the usual things people think of - pollution, carbon dioxide (!=pollution unless you're the EPA, but that's another story), noise, that kind of thing. Even if the aggregate impact of pollution or CO2 is large, the individual impact of your car is pretty small. And while noise might cause a lot of irritation, it's hard to blast your stereo at a whole city. You could argue for something like dumping botulin in the water supply, but that is taxed - with a prison term.

The key criteria are both the cost to each person and the number of people that you can affect with a single action.

So here's my suggestion: traffic accidents on freeways.

On the freeway the other day (thankfully going in the other direction), I came across a car that had overturned. Traffic was backed up for about 5 miles behind it. Think about that. Even just counting the cars I passed (let alone the ones still to arrive) we had 5 lanes of traffic, 1 car every 15m or so equals 5 *1609 * 5 / 15 ~= 2682 cars. If each person had to wait an extra hour because of the jam and their time is worth, say, $15 an hour, you've just caused $40K worth of loss to the citizens of your city, over and above the cost to any car you hit.* That's not even including the people who missed meetings and dinners that were worth a lot more than $15 an hour to them. And while you'll get a slightly higher insurance premium, you won't pay anything to the people you inconvenience.

Not bad for half a second's carelessness.

*(this is an extremely rough calculation - to do it properly you'd need to consider the rate of cars entering and exiting, and the duration of the blockage, as well as the possibility of the blockage having memory even after it's cleared - my hunch is that the real number is even larger).

The Price is (Rapidly Becoming More) Right

I recently read this great article on Slate about guys who go through used bookstores with a device that scans the barcode of books, checks what it's selling at on Amazon, and buys it if it can be sold at a profit. Genius! The usual crowd of market-haters don't like it, but markets will clear whether you like it or not, either rapidly by barcode scanner or slower by smart people doing the same task (but wasting lots of their time memorising the same Amazon price information in less accurate form).

If you ever doubted that there is a clear and unambiguous rating of book quality (and that prices reflect this), have you ever seen the standard book collection a the typical 'take a book, leave a book' place? They're truly awful. A whole lot of people seem to be implicitly engaging in the same type of trades as the guy above, swapping out anything of interest with the world's lamest romance novels, junk thrillers, and other literary detritus. I think this is about the worst fate that can befall an author - having your book as a permanent fixture on a TABLAB shelf. It means that if the market is clearing, your book was literally the worst book in the median person's bookshelf.

The existence of devices like this, however, will make it harder to implement one of my previous philanthropy plans for if I'm ever a senile old billionaire with too much time on his hands. My plan was to buy up a huge number of ultra cheap editions of Shakespeare and Dickens, and distribute them to TABLAB places. Not only does it distribute the gains to a whole lot of people who weren't expecting it, but there's two great positive externalities. One, people are reading more great literature. Two, you can take all the terrible chick lit novels you swapped out and put them in landfill, saving anyone in the future from spending valuable hours reading them that they'll never get back.