Wednesday, December 29, 2004

Price fixing at a cinema near you?

It's the season to go to the movies. And on the face of it, Australians are incredibly well served. We have more cinema screens per head than just about anywhere outside the United States.

And yet our prices, disturbingly, are higher than in the US. An adult ticket to see The Incredibles in New York costs between $11 and $13. In Sydney it costs $14.50 to $15.30 - quite an imposition, and one that competition appears not to have lightened.

If you want to get an idea of why this might be the case, try going through the Yellow Pages and a Sydney street directory. After a tip-off I did it myself the other day. I wrote the letter "H" on those parts of the Sydney map that hosted a Hoyts complex and the letter "G" on those parts that hosted a Greater Union or a Village complex.

(Greater Union and Village operate their suburban cinemas as 50-50 joint ventures.)

West of Parramatta there are only H's for Hoyts, except for the south-west, where there are only G's for Greater Union. North of the harbour there are only G's, except for the shopping meccas of Chatswood and Warringah Mall, where there are only H's.

It's as though someone has drawn lines on the map allocating territories... the sort of thing that would happen if Coles had the supermarkets west of Parramatta and Woolworths had the south-west.

(The division isn't precise. For example, the new Greater Union complex in Bondi Junction is in the middle of what would otherwise be Hoyts territory and the Hoyts complex at Bankstown mars an otherwise clean sweep in Greater Union-Village's patch.)

I say it's "as though" there is an understanding about territories, but that's exactly what has been alleged in the Federal Court.

The US-owned chain Reading Cinemas went to the full Federal Court in 2001 seeking evidence in a dispute with a member of the Village group over access to a Brisbane shopping centre.

Among the documents it sought from Village were any referring to "the territorial division of cinemas in Australia by the Hoyts Group of companies on the one hand and/or by [Village-Greater Union] on the other".

Reading's chief operating officer at the time, Neil Pentecost (a former Hoyts executive), said he knew how the separation worked. In an affidavit quoted in the judgement he said that in Perth everything south of the Swan River was Hoyts territory, while everything north of the river was Greater Union-Village territory. In Queensland, Hoyts was limited to the Brisbane city centre and Surfers Paradise, and the rest of Queensland was left to Greater Union-Village. The other states were divided in similar fashion.

Speaking about his time as a senior executive of Hoyts, he said: "I knew that I could make my own commercial decisions on the basis that GU-Village would not be a competitor against Hoyts in its acknowledged territories. To the best of my knowledge I do not recall an instance when GU-Village and Hoyts competed for a site."

Indeed, at times the two swapped sites. He said that in 1996 Hoyts and Greater Union-Village swapped their Blacktown and Parramatta sites to ensure Hoyts consolidated its control of Sydney's outer-western corridor, while Greater Union-Village consolidated at Parramatta.

It is easy to see how such an arrangement would work to keep ticket prices high. With geographical separation, most Hoyts cinema managers, for example, would know there was no risk of a Greater Union cinema down the road cutting its prices to steal customers. There would be no Greater Union cinema down the road. There would be no need for a price war in order to get customers back.

If the arrangement that was described in the Federal Court is deliberate, Australia's two big cinema chains would appear to make up a cartel. The Australian Competition and Consumer Commission describes cartels as "a cancer on our economy". Its chairman, Graeme Samuel, says he has 40 under investigation. His definition includes companies that engage in "market sharing".

The Federal Court believed that the territorial division of cinemas was worth investigating. In 2002 it granted Reading the right to obtain the documents it sought. Justice Bryan Beaumont noted the evidence about territorial division was unchallenged by Village and its associates during the procedural hearing, a fact he thought was significant.

But whatever documents there may have been never saw the light of day. Shortly after being given the right to obtain documents from Village, Greater Union and Hoyts, Reading discontinued its case. It settled out of court with Greater Union and Village.

The competition commission has the power to take the investigation further. For all I know, it may be doing so. It will not reveal the names of the 40 suspected cartels it is investigating. But its previous record on cinemas gives theatre goers little cause for hope.

In 2000 it approved an arrangement whereby Greater Union, Village and Hoyts centralised their separate Sydney city centre operations. The commission's then chairman, Allan Fels, said at the time that the three had assured him they would continue to compete while at the combined George Street site.

"Hoyts and Greater Union will each utilise six screens and Village will utilise five. Each will buy films independently from distributors, program their own screens and determine ticket prices."

I don't know about Fels, but the last time I went to George Street I couldn't tell which company owned which screen, and the price for each screen was the same: $15.30 - just about the highest in Sydney.

The commission is to be applauded for its work busting cartels in the cardboard box industry. It has obtained $11 million in fines from freight companies which divided up the Australian market. It obtained $4 million from cement-lined-pipe companies for offences including market sharing.

It might be time for it to ask whether there is market sharing of our screens.


Reading Entertainment Australia Pty Ltd v Birch Carroll & Coyle Ltd [2002] FCAFC 109

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Wednesday, November 24, 2004

Johns Hopkins University: strange goings on downunder

This is as odd a story as I have ever had to tell.

As George Negus said in the introduction to the half-hour report on SBS Dateline:


When Australian medical entrepreneur Peter Osborne became involved with a representative of Johns Hopkins University in the United States and promoted a new online health care system for Australia with him, he thought his future looked rosy. Now, several years later he is facing financial ruin, governments in Australia have been misled and there are serious allegations of impropriety leveled against the project. SBS business reporter Peter Martin investigates a corporate intrigue that stretches across three continents.



Read about Johns Hopkins University or watch the video for an amazing and disturbing ride.

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Wednesday, November 03, 2004

Do unfair dismissals laws boost employment?

Anyone serious about following Australian politics is about to have to become serious about understanding the economics of unfair dismissal. You wouldn't have guessed it during the election campaign. But now that the Government is back, we are told that one of its first moves will be to reintroduce into the Senate its oddly named Fair Dismissal Bill. It could happen this month.

But despite the claims made on both sides, its effects are more symbolic than real. The Fair Dismissal Bill exempts businesses from the need to act fairly when dismissing their workers; but only small businesses (employing fewer than 20 people) and only those covered by federal law. Most small businesses are covered by state laws. And many more are too small to have set themselves up as legal corporations and so are already exempt.

The Parliamentary Library estimates that only about 600,000 of Australia's 10 million-odd workers stand to be affected by the bill and, as it happens, those particular workers in their present jobs have nothing to fear. The provisions of the bill apply only to workers taken on after it becomes law.

So why do you need to bother brushing up on what economists have to say about unfair dismissal? Because with little concrete to debate, the bill's supporters and opponents are going to spend the next few weeks arguing about economic theory. And the theory most in contention will be the one that says that the easier employers find it to sack their workers, the more workers they will employ...

To the Government this is self-evident. The former employment minister, Tony Abbott, noted that if only one in 20 small businesses took on an extra worker as a result of the bill, it would create 50,000 new jobs - which is mathematically correct, but meaningless without knowing what the employers would actually do.

The Melbourne Institute attempted to help, with a government-commissioned report finding that 77,000 jobs would be created if unfair dismissal laws were removed, but it was based on an opinion poll rather than historical evidence.

The opponents of the bill, among them the Democrats senator Andrew Murray, argue flatly that there is no evidence whatsoever for the theory - which is also technically true, but then it is a very hard theory to prove.

Until a few years ago the economics profession didn't try. Instead it argued about unfair dismissal laws from first principles. Two competing principles were at stake. On the one hand the workers already in jobs ("insiders") should find their prospects for continued employment improved by unfair dismissal laws. Even during economic downturns. That would mean that, all other things being equal, unfair dismissal laws should make employment higher than it otherwise would be when the economy turned down.

On the other hand, potential workers not yet in jobs ("outsiders") should find their employment prospects diminished by the laws (because of the extra potential costs for employers involved in dismissing them should things not work out). This should be the case even when the economy is turning up. This means that, all other things being equal, unfair dismissal laws should make employment lower than it otherwise would have been when things were improving.

More jobs in the bad times and fewer in the good times mean a more stable pattern of employment, but that doesn't necessarily indicate anything about the average rate of employment over time. It could be either higher or lower with unfair dismissal laws than without.

In 1990 Edward Lazear from Chicago University decided to find out. In a ground-breaking study published in the Quarterly Journal of Economics he examined employment data and changes in dismissal laws for 20 countries over three decades. He found that introducing a requirement for severance pay typically cut a nation's employed workforce by 1 per cent. For the United States, this would mean a cut of more than a million jobs, if it decided to introduce unfair dismissal provisions. The finding stood for a decade, and was doubtless influential in the Coalition's decision to weaken Australia's national unfair dismissal laws shortly after taking office in 1996.

At about that time, the economist John Addison of the University of South Carolina began to voice doubts about Lazear's findings. He persuaded Lazear to hand him his original data and the programs he had used to arrive at his conclusions. After correcting the data for what he said were errors and using better methods to pool the data, he found that none of Lazear's findings survived as statistically significant.

The publication of Addison's study in 2000 unleashed a flood of other research which, taken together, provides a more sophisticated understanding of the effect of unfair dismissal provisions.

Most studies find that while smoothing fluctuations in employment, the provisions do cut average employment over time, but not always by very much, and not for all types of workers. Men of prime working age typically are not hurt at all. That's because they are usually the "insiders" who benefit from employment protection.

The losers are typically younger people trying to break into work and the long-term unemployed, who are seen as risky to take on. Unfair dismissal laws are typically found to increase the length of time that a long-term unemployed person stays out of work.

That's if they have any effect at all. Another strand of research suggests that "outsiders" looking for work simply bypass them. They work casually, or part-time, or for themselves, all situations where unfair dismissal provisions don't apply.

The economics profession is able to provide something for everyone in the debate that is about to engulf us. The former US president Harry Truman is once said to have asked for a one-armed economist after the two-armed variety had driven him to despair, advising him first on the one hand and then on the other.

The economists we have today are likely to say that yes, unfair dismissal provisions do tend to cost jobs, but no, they needn't cost very many of them.
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Wednesday, September 22, 2004

OutFoxed: Rupert Murdochs War on Journalism

He's my SBS Dateline report on OutFoxed: Rupert Murdoch's War on Journalism. Watch it here.

And gee it was fun to see the US during the Republican National Convention, and witness a protest march and chanting against a news organisation!

Here's George Negus's introduction:


In the US, the presidential election campaign is now entering the home straight. And there is one man who may well determine the result - Rupert Murdoch, who owns what has become one of the most influential news outlets in the country.

Fox News is now the highest rating cable news network in the States.

But it is winning enemies as well, with critics claiming it is taking journalism to new lows with its outrageous bias in favour of the Republican Party.

Peter Martin has more.


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Wednesday, September 15, 2004

At any rate, we're on borrowed time

There's a real economic debate taking place in Australia, and there's a fake one, concocted for the sake of the election.

The fake debate concerns interest rates. You can sample it on the National Party website. There you are asked to key in the size of your home loan and are rewarded with a box outlining your likely repayments under three scenarios.

They were: "Coalition 7 per cent", "Labor 10 per cent" and "Labor 12 per cent".

The Nationals are honest enough to admit that these scenarios "should not be used as a substitute for professional financial advice". Too right. But why have they been used at all? In part because, like all good fables, the myth that the Labor Party inevitably brings with it higher interest rates contains within it an element of historical truth.

In November 1989, in a last, desperate bid to rein in what he felt was runaway spending, the then treasurer, Labor's Paul Keating, personally oversaw a hike in the cash rate to 18 per cent. His principal adviser said later he could hear the economy snap. Australia slid into recession. Banks and financial institutions collapsed.

In making that sort of decision Keating wasn't alone. In 1960 the Liberal prime minister, Robert Menzies, and his treasurer, Harold Holt, imposed a disastrous credit squeeze; in 1973 Labor's Gough Whitlam and his treasurer, Frank Crean, did the same; and in 1982 Liberal Malcolm Fraser and his then treasurer, John Howard, pushed up money market rates to a peak of more than 20 per cent ahead of the recession of that year.

But Keating was the last political leader able to do so. In January 1990 the Reserve Bank grabbed control of the process and never handed it back. It took a decision to cut interest rates and issued a press release in its own name saying so. It has decided on and announced every adjustment since. The Treasurer, Peter Costello, granted it formal independence with an exchange of letters in 1996.

As it happens, the Reserve Bank's decisions have been kind to the Coalition... In the final years of the Keating government the Reserve's then governor, Bernie Fraser, increased interest rates and kept them high to squeeze out inflation. He began cutting rates within months of Howard taking office. As the Macquarie Bank's Rory Robertson puts it, Howard had low inflation and low interest rates handed to him on a platter. Robertson asks: "Wasn't it Woody Allen who said 80 per cent of success in life is just showing up?"

Put five economists together and the odds are that none of them will be able to think of a likely scenario under which the Reserve would be forced to push rates higher under a Labor government than under the Coalition. Labor's $3.5 billion family and tax centrepiece is hardly inflationary. It is funded by 18 separate savings measures. And while Labor's industrial relations policy will increase the bargaining power of some workers, wage explosions are a thing of the past in the Western world. There is too much competition from China and India.

In any event, mortgage rates in the teens are unlikely in the years ahead precisely because we have got used to single-digit rates. They have helped double the price we are prepared to pay for houses. Reserve Bank figures show the typical mortgagee now devotes more of his or her income to mortgage payments than was the case when rates were at their highest at the end of the 1980s. (Memo to John Howard: remember that the next time you are about to claim, as you did on Sunday night, that paying off a home is easier now than it would have been had the old rates remained.)

The increased difficulty of meeting mortgage payments means that Australians are now very sensitive to even a small lift in interest rates. If the Reserve Bank wanted to cause us real pain, it wouldn't need to push rates much higher to achieve it.

Which brings us to the real economic debate, unmentioned in the campaign. The big shift in house prices has been devastating for Australians not yet in their own homes. It has slashed the value of their lifetime earnings.

But it's made the larger number of us who own or who are buying our homes feel suddenly wealthy - consumer confidence is near an all-time high - and act wealthy - 60 per cent of us now say it's a good time to buy a household appliance.

And we don't need to wait until we have earned the money. Refinancing allows us to dig into the equity in our homes and spend more than we earn.

Australian households have been spending more than they have earned for the past two years. The household saving rate is minus 3.2 per cent. Compare that with the crazy days of the late 1980s when the Coalition was driving "debt trucks" and issuing dire warnings about us living beyond our means. Then the household savings rate was positive - 8 to 10 per cent. We can't and won't go on forever spending money we are not earning. When we fall to earth we are likely to get hurt.

The Treasury warned in its pre-election statement on Friday that our rising household debt made us more vulnerable to shocks.

It's the real economic debate that we're unlikely to hear much more of until the election is out of the way.

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Wednesday, September 01, 2004

Money can buy happiness. Here's how.

Driving to work this past week, I've had an insight into the key to happiness. We have moved house, and it now takes twice as long as it did to get to work each morning. No big deal, do I hear you cry?

Well, it seems like a big deal to me, and the more I ask, the more I discover that to researchers in the field of happiness, it is one of the very few things that is.

Their problem is that happiness is slippery. Money or changed circumstances can buy more of it, but the effect usually doesn't last long.

It needs to be said first that happiness itself is easy to measure. The researchers ask people whether they are (a) very happy; (b) fairly happy; or (c) not happy.

The results line up with other measures of happiness.

The people who say they are happy are those more likely to call up friends, less likely to commit suicide. And their brains light up in the same sort of pattern when they are put under a scanner...

The researchers find that people who win the lottery do indeed feel happier to start with, but after a while they feel a little better than they did before. Conversely, people mutilated in accidents feel devastated at first, but after a year or so often feel as happy as always.

As Ethan Hawke puts it in the new movie Before Sunset: "If they were basically optimistic and jovial, now they're optimistic and jovial in a wheelchair. If they were petty and miserable, now they're petty and miserable with a new Cadillac, a house and a boat."

Each of us seems to have our own built-in happiness equilibrium, resistant to attempts to upset it. The Holy Grail in economic research (as with much pharmacological research) is to work out how to use money to break free of it.

Robert Frank, a Cornell University economist, believes that as a matter of logic it must be possible. He says money can buy many truly useful things. Surely, some of them must be able to make a permanent impression on the way we feel.

In the journal of the American Academy of Arts and Science, D├Ždalus, he asks: "Would we really not be any happier if, say, the environment were a little cleaner, or if we could take a little more time off, or even just eliminate a few of the hassles of everyday life?"

He says the problem is that we choose to spend money on things that don't help. In the US house sizes are getting bigger and bigger. In Australia the typical new house has doubled in size over the past 50 years. It's now more than 250 square metres; about 100 square metres of indoor space per person. And many of the new houses being built in Sydney's south-west are bigger still.

Is all of the extra space making us happier? The evidence suggests that more space doesn't make us happier for long, in the same way as better views from our office windows don't work their magic for long. We get used to them.

But there are things that we could spend money on instead that might make a good deal of difference to the way we feel about life.

Robert Frank asks us to perform this thought experiment. Imagine, he says, two societies, equally wealthy, but with different patterns of spending. In society A the houses take up 4000 square feet and the journey to work takes one hour each day in heavy traffic. In society B the houses are 3000 square feet, and the journey to work takes only 15 minutes. He asks in which society we would prefer to live.

If we were choosing on the basis of likely happiness, the answer would have to be society B. All of the evidence suggests that the stress of driving through traffic is something we never completely adapt to. It wears us down day after day, and it shortens our lives. Escaping it stands a very good chance of making us happier.

Frank performs other thought experiments. Which society would you rather live in? One in which everyone lived in a house of 4000 square feet and had one week's holiday a year, or one in which the houses were 3000 square feet and people got four weeks off each year?

In each case he is offering a choice between "conspicuous consumption" and what he calls "inconspicuous consumption". Frank's notion of inconspicuous consumption usually involves time: arranging things so that you have more time to do the things you like, by spending less time doing the things that you don't.

It's a lesson that would come as no surprise to my teenage daughter. She's grown up playing The Sims, an incredibly complex computer game in which you manipulate the decisions of artificially intelligent beings in simulated societies. It's a sort of electronic economic laboratory.

One of the unexpected discoveries made by fans of The Sims is that the best way to make the characters happy is to have them free up their time, rather than buy them luxuries. In the words of the game's creator Will Wright, time is the resource, happiness is the score.

Perhaps that's just a result of the way that game is set up. The characters in the computer game don't seem particularly susceptible to envy. But if we were less susceptible to envy as well, we probably would not be as keen as we are on large houses. We would look for smaller houses closer in; saving ourselves stress, giving ourselves the gift of time, and quite possibly genuinely buying happiness.

The boom in inner-city living over the past few years suggests it's a realisation that more and more are waking up to. The next time our family moves, perhaps we should, too.
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Wednesday, August 25, 2004

Credit card interest rates: no competition

There's something about the way we use credit cards that doesn't make sense - even to some within the credit card industry. Rohan Gamble is the managing director of Virgin Money in Australia. He says he "can't fathom why" the big card providers haven't been subject to the same sort of consumer pressure to cut their rates as have the banks when it comes to home loans.

Figures prepared for Virgin by BIS Shrapnel show that while the Reserve Bank's official interest rate has plunged over the past eight years (taking mortgage rates down with it) the rates charged on the major credit cards have scarcely fallen. Some of the rates have actually climbed.

It is as if we don't shop around on the basis of the rates when it comes to choosing our cards.
Certainly, that's been my experience.

I was stopped at Sydney Airport by a woman offering me one of the new transparent blue American Express credit cards. I signed up, only to notice later that the annual interest rate was 19.9 per cent. I'm not alone. When a company in the United States renamed one of its cards the "Elvis card" it received three times the usual response.

This stupidity - if that's the word for it - both intrigues and frightens economists... It suggests that at least when it comes to credit cards, one of the fundamental tenets of economic theory doesn't apply and that there's no reward for cutting prices.

Professor Lawrence Ausubel of the University of Maryland in the US has come up with an explanation. It involves what he calls "a very specific form of irrationality".

Ausubel believes that there are two quite different types of credit card customers: those who believe that they will pay their bills off in time, and those who know that they won't.

The first group of customers are beloved by the banks: partly because they are good credit risks (they are able to pay off their credit cards on time) and partly because being human, they often fall behind in their payments anyway.

Roughly half of all US families using cards think they "nearly always pay in full", while at the same time about three-quarters of all active accounts are overdue.

And the banks love this deluded group of customers for another reason as well. When they sign up for their cards, they genuinely don't care what the interest rate will be. Why should they, when they don't intend to pay it?

(Some in this group might even welcome a card with a high interest rate. It would give them an incentive to make sure they paid on time.)

The way to compete for these valuable if often misled group of customers is through anything other than a low interest rate. They offer service, convenience, rewards and image. That's what I was promised at the airport.

The second group of customers are different. The rate of interest is about the only thing that matters to them. They are people who know that they are going to get into debt and stay in debt, month after month. In many cases, they will be unable to get out of debt. In the industry they are known as "revolvers". They are by definition worse credit risks.

So what would happen to a credit card provider that decided to strike out on its own and grab more business by cutting its rates? In Ausubel's view it would gain hardly any more of the deluded desirables. Instead it would be flooded with applications from high-risk revolvers. Slashing rates might mean commercial suicide.

Even short-term low-interest honeymoon rates have their risks. They can attract revolvers who "card surf", jumping from one short-term low rate to another.

Economists at Australia's Reserve Bank examined our credit card market some years ago and found circumstantial evidence for the sort of effect that Ausubel was describing. They concluded that in those circumstances there might be a case for government intervention to force rates lower.

Doubtless to the relief of Australia's major banks our Reserve Bank took the idea no further. And it now looks as if it won't need to.

Virgin Money is acting as if it has never heard of Ausubel, and Gamble confirmed to me this week that he hadn't. He says by competing primarily on the basis of a good interest rate (12.4 per cent) he's been able to grab 400,000 customers from Australia's major banks in just over a year - 100,000 of them from the Commonwealth Bank.

He says the thing that's astounded him is that the Commonwealth Bank hasn't fought back with a lower rate of its own. Instead it and the other banks have upped their advertising. "There are now seven credit card ads on television. All of them promote an image. None focus on the rate."

It is as if the established banks are sitting back waiting for the upstart to fail, buried under a mountain of less than desirable "revolvers".

Gamble insists this isn't happening. "Our customers have the same profile as those of the existing banks: an average age of 40, a broad spread of demographics and so on."

It might be that things are changing. Some of the desirable deluded customers may be wising up. Four years ago, 80 per cent of Australian credit card bills were outstanding at any one time. Today the figure is a more prudent 75 per cent.

Mortgage brokers and specialist websites have made it respectable to shop around for mortgage rates. Those same websites offer information about credit card rates.

Virgin says it is lobbying the authorities to require card companies to include an honesty box in their advertising outlining the actual cost of using their cards, in the same way as the mobile phone companies are required to do.

Time may be running out for the "happy idiots", blissfully unaware of how much they are enriching their credit card companies, too lazy to shop around and not believing that it matters. It's up to us.

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Monday, August 09, 2004

Anything but simple is a tax within itself

I think Mark Latham is on to something. The words simple, simply, and simplify appear 12 times in his 20-page tax manifesto. We are told the new Working Tax Bonus will be administered simply. We are told that the Better Family Payment will replace three existing payments and be fair and easy to understand.

Labor appears to believe that the promise of simplicity is important in its own right, over and above the dollars that its tax package would actually put into our hands. And there is a vast amount of new psychological and economic evidence to suggest that it is right.

It was John Howard who twigged to the concept first. Asked in 1996 by the ABC's Liz Jackson to describe his vision for Australia, he replied, "relaxed and comfortable", an answer that on its face sounded inadequate, but may well have tapped into a national yearning. It is an understanding his Government has moved away from ever since.

Under Howard's watch, the standard income tax form has swelled from six pages to eight. Most of the extra invasive questions would have once had no place on a tax form. They deal with family arrangements and health insurance.

The family payments system itself is so complex that it takes a good deal of foresight and calculation to work out whether it is worth making an application. If you make a mistake, you have to pay money back.

Decisions about whether or not to take out private health insurance involve a complex interaction of sticks and carrots involving age groups and income-tax rates.

I know of at least one PhD in economics who finds it too complicated to calculate. Families using the new Medicare safety net are supposed to collect receipts or work out ahead of time whether they will need it.

Small businesses were promised an easing of their paperwork burden in a prime ministerial statement in 1998, but two years later were hit with the new Business Activity Statements as part of the goods and services tax. And soon all Australian employees will be required to choose between several competing superannuation funds.

Until recently, Australia's economic mandarins acted as if this extra complexity didn't matter. The important thing was that we were being offered choice: choice of phone company, electricity supplier, super fund and so on.

The Treasury view is that choice is still good. But last month something changed. For the first time in an economic statement, the Commonwealth Treasury acknowledged that simplicity also mattered. It said that the level of complexity that people were subjected to in their daily lives could amount to a significant economic cost.

It is new thinking that derives partly from research involving jars of jam....

Until about four years ago, the conventional wisdom was that people enjoyed being offered choice, and the more choices the better. But then two psychologists from Columbia and Stanford universities asked what would happen if the number of choices on offer became very big.

Sheena Iyengar and Mark Lepper set up a jam-tasting booth in a Californian gourmet grocery store. On display were exotic flavours including kiwifruit, black cherry and lemon curd. They asked shoppers approaching the booth to try as many flavours as they wanted and then take the opportunity to buy one of the jars for a discount using a coupon at the checkout.

At times, the booth offered a choice of six flavours, at other times it offered 24.

Their finding was startling. At the times when they offered only six flavours, 30 per cent of the shoppers who tasted bought. At the times when they offered all of the flavours, only 3 per cent of the shoppers who tasted bought. Too much choice appeared to have overloaded the shoppers' brains, leaving them paralysed with indecision.

And odder still was the fact that the booth was at its most popular when it had all of its flavours on display. More people stopped to try jams when the biggest variety was on offer, but most didn't buy them.

Like moths to a flame, we appear to be attracted to the idea of a big choice but beyond a certain point, incapable of handling it.

Iyengar and Lepper tried the same sort of experiment on their students. They offered higher grades to students who would attempt an extra essay. They told some of the students they would have a choice of six essay topics; they told others they would have a choice of 30. The students who had to choose between only six topics were both more likely to take up the offer and more likely to write better essays.

Through this and other experiments, Iyengar and Lepper have come up with a guesstimate of just how much choice human beings can comfortably handle. They say when the number of choices on offer climbs too far above seven, we get uneasy.

An exception comes into play for superannuation plans, in which case the number appears to be two.

In the US, super contributions are voluntary. Iyengar examined the super status of 800,000 workers and found that the contribution rate was the highest among employees of firms that restricted the choice of funds to two. For every extra 10 funds added, the contribution rate dropped by 1 to 2 per cent.

George Lowenstein, from Carnegie Mellon University, thinks he knows why we resent being asked to make complicated choices. He says it's because they take up our time, we know we are liable to make the wrong decisions, and we know we will blame ourselves if we do.

He illustrates the point this way: car manufacturers offer us choices of colour, engine size, upholstery and the like, but they don't offer us the ability to choose between internal seatbelt mechanisms.

Lowenstein says that's because the manufacturers know that we lack the expertise to make such a choice; they know that it would take time to acquire that expertise, and they know that we might never forgive ourselves if an accident proved our decision to be wrong. By relieving us of the responsibility for carrying out a task for which we are not equipped, the car makers are providing us with real value.

It's a strategy open for government to adopt as well. Once upon a time, it constituted the rationale for government.

By promising simplicity, Mark Latham has taken a small step toward reclaiming that rationale.

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Wednesday, July 21, 2004

Latham should walk tall, like McEwan, Hawke and Keating.

Tim Colebatch in the Age.

In his desperation for a deal, the PM accepted an agreement that would mean free trade in one direction, but restricted trade the other way...

Could you imagine Sir John McEwen, Bob Hawke or Paul Keating accepting this cringing, second-rate outcome?

As one advocate of a Australia-US deal puts it privately, the problem is that negotiations ended at the half-way mark. In February the negotiators should have walked away, taken a long break for consultations and rethinking, and then resumed talks after both countries had got their elections out of the way.

That is still the way to do it. It is only possible if Labor has the guts to defy the Murdoch empire - half-owner of Australia's pay TV network, and hence a major beneficiary of the deal - vote this agreement down, and restart negotiations in 2005.

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Thursday, July 15, 2004

"Among the most pro-American agreements... we've seen before this House"

This morning's AM has sound of US Congressman describing the US-Australia Free Trade Agreement as

among the most pro-American, pro-worker agreements that we've seen before this House.
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Do most Australians have any idea what our Government has just signed us up to?

The US House of Representatives has just approved the proposed FTA between Australia and the US.

Here Kim Weatherall gives us a taste of what's in store.

Removing Consumers’ Freedoms

The basic aim of the AUSFTA digital copyright provisions is to ensure copyright owners have the power to exercise complete control over how their material is used, played, accessed by individual consumers and new creators. The basic idea is: if they want to control some use or access; if they want to control some technology used to play their works: our laws will have to enforce that control. Let's follow that thought. What does it mean?

If copyright owners want you to pay a little bit every time you listen to the song? Australia will probably have to enforce that decision.

If copyright owners use technology to prevent home taping of TV broadcasts – Australia will probably have to enforce that.

If copyright owners want to stop Linux desktops playing DVDs or music files: Australia will probably have to enforce that.

Ever copied a CD onto a tape or a mp3 player because you didn’t want to carry your CD collection around? If copyright owners want to impose rules that say you can’t take a song you bought, and move it to your new digital music player, Australia will probably have to enforce that decision...

Has your child ever copied a picture from the Internet and put it in their school project? If copyright owners want to stop school students using copyright clips or pictures in their projects, or stop university students in media studies using clips to make documentaries or other movies: Australia will probably have to enforce that.

if the copyright owner wants to stop you fast forwarding through the ads on their content (or blocking or removing them) , Australia might also have to enforce that - depending on how the technology was put together
Once works are digital, and once TPM is imposed, all those "fair use" type rights you thought you have exist only so far as copyright owners think they should.

The government has said that we have our exceptions still. Reality check: not once the works are digital. If copyright owners use technology – the rules that physically prevent you making a home copy, or using a clip for your documentary – we can’t create effective new exceptions for those...

And you know what? Australia are the suckers here. This is not law that meets an international standard. This is law that has been rejected by other developed countries a bit like us – Canada, and NZ.

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Tuesday, July 13, 2004

The New York Times on the imminent US - Australia "Free Trade" Agreement

The Times says:

In negotiating the pact, the United States, for the first time, challenged how a foreign industrialized country operates its national health program to provide inexpensive drugs to its own citizens.
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Wednesday, May 12, 2004

A healthy appetite for higher tax

At last, a budget that gives the people what they want, eh? Well, if the Treasurer had really listened to what we want last night, he wouldn't have given us tax cuts at all. When asked, an astonishing 70 per cent of us now say we would rather have extra money spent on health and education than given back to us in tax cuts.

But we haven't always thought that way. As recently as the late 1980s it was the other way around: 70 per cent of us wanted a tax cut, fewer than 30 per cent wanted more government spending. What's changed?.

Andrew Norton, of the Centre for Independent Studies, notes that until recently our views about government spending responded to actual spending itself. So that when spending was low under Menzies and his successors we wanted more of it and then when it shot up under Whitlam and continued climbing until the mid-'80s we wanted less.

But that relationship shattered around 1993... From then on as government spending climbed, more and more of us have wanted more of it. This Government is the highest-taxing in our history (although low by international standards), yet our willingness to pay tax is the highest it has been for decades.

It could be that we don't realise just how highly taxed we are these days. Much of this Government's tax is invisible to many of us. We don't see the GST. It could be as well that we don't realise how much the Government is already spending on health and education - on some measures more per person than ever before. Yet at least on health this Government has been subtly implying that the public system is run down, offering us subsidies to take out private insurance.

Or it could be because of something more fundamental - a phenomenon known to just about every student who has ever enrolled in a first-year economics course.

Australia is enjoying its longest period of sustained economic growth in modern history. We are much richer than we used to be. And as people get richer their tastes change.

As Irish incomes increased in the 19th century the consumption of potatoes actually went down. Potatoes were what is known as an "inferior good". In Australia at the start of the 21st century health is what is known as a "superior good". The richer we become the more of it we want, much more so than goods such as food or entertainment.

And the basic health infrastructure we want can really only be provided by government, whatever the privately purchased add-ons. When Kerry Packer suffered a massive heart attack while playing polo at Warwick Farm in 1990 he was taken first to the State Government's Liverpool Hospital.

It is concern about health, more than anything else, which is driving our apparent new willingness to forgo tax cuts. An Australian National University survey suggests that 70 per cent of us would actually be prepared to pay more tax if we knew it would go to health, 63 per cent would pay more if it would go schools and only 34 per cent would pay more tax to see it spent on welfare.

And the Australians most prepared to pay more tax for health are those on the highest incomes. Only 23 per cent of Australians earning more than $78,000 say they would prefer a tax cut to spending on health and education, compared with 32 per cent of Australians earning $31,000 to $36,000.

So why do our national leaders act as if these polls aren't right and offer tax cuts regardless? In large measure it might be because of our peculiarly Australian division of state and federal responsibilities.

In Australia, the state governments run the hospitals and schools, while the Federal Government raises most of the tax. It is possible for voters to kid themselves that they can get the best of both worlds, voting for hospitals and schools at the state level while voting for tax cuts at national elections.

The Labor Party has won nearly every state election in Australia in the past decade. Right now it governs in every Australian state. It has traditionally been the party keenest to spend on schools and hospitals. State Liberal leaders such as Kerry Chikarovski, Jeff Kennett and John Olsen learnt this to their cost.

At the federal level the Coalition has done much better. Voters have occasionally been swayed by the promise (if not always the delivery) of lower taxes, believing hospitals to be a separate issue.

It is a fools' paradise that might be about to change. The state and federal health ministers have before them a proposal to remove hospitals from state control and place them instead in a national body funded directly by the Commonwealth.

Federal decisions about tax would suddenly have consequences. As the economist John Quiggin puts it: "Voters would be faced with a clear choice: they could vote for lower personal taxes and do without improved health care, or forgo tax cuts, and perhaps accept some tax increases, in return for high-quality, publicly funded health care."

And there's no reason to stop at health. The states could be given the full responsibility for funding and running schools. Each state election could then become a mini-referendum about the need for spending on schools and the level of state taxes, including the national GST, needed to raise the money.

It would improve the workings of Australian democracy and provide Australians who say they would prefer education or health spending to tax cuts with the opportunity to actually vote that way.

Quiggin would go further still. He would index the personal tax scales so that the Government's take no longer automatically increased. Then the overwhelming majority of voters who say they want more spending on health would find that the only way they could get it would be to vote for higher taxes and to accept them in federal budgets.

There's a good chance that they would.

See: Tuesday Column: An election without tax cuts January 30, 2007

See: After the tax revolt: Why Medicare matters more to middle Australia than lower taxes Trevor Breusch, Shaun Wilson; Australian Journal of Social Issues, Vol. 39, 2004

See: Money in your pocket, or money spent where it's needed? SBS Television 7.30pm Tuesday 4 May, 2004

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Tuesday, May 04, 2004

Money in your pocket, or money spent where it's needed?

That's one way of describing the question that will be posed on Insight tonight, SBS TV 7.30pm Tuesday 4 May.

Another way of putting the question is "the money or the box".

We recorded it last night at the SBS in Sydney.

Among the guests - former Treasury Secretary John Stone, "Krugman of the antipodes" John Quiggin, "responsible tax payer" Eva Cox, "develop the North" Bob Katter, "tax facts" Neil Warren, and Mike Keating, the head of Prime Minister and Cabinet under Paul Keating, who has authored a paper entitled The case for increased taxation.

It is a very good program (even if the producer has to say so himself).
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Saturday, April 24, 2004

The Four Billion Dollar Man - update

SBS TV's Dateline reported on Commercial IBT on Wednesday 10 March 2004.

Ratings Agency of Malaysia has just made this announcement.

23 April 2004

RAM has suspended the AA1/P1 ratings of Commercial IBT Pty Ltd pending the outcome of an investigation on the Company by the Australian Securities and Investment Commission (“ASIC”).


ASIC itself has yet to make an announcement.
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Wednesday, April 21, 2004

The damage halving capital gains tax did

For a moment there I thought that Bob Carr had done the wrong thing. I read that his new transaction tax on sale of investment properties was a "shocker", a "major attack" that would erode retirement savings and consign the property market to "oblivion". And those were just the reactions in the Herald.

In The Australian Financial Review an industry analyst explained that for an investor who bought a property for $600,000 and then sold it for an extra $200,000, the tax take would be $22,000 on the way in, $18,000 on the way out and $39,000 in capital gains tax - a take he described as "outrageous".

And then the spell broke.

The taxes in the analyst's example add up to just 39 per cent. Australia's top marginal rate of tax is 48.5 per cent. The rate below that is 43.5 per cent. About half of us pay those rates on every additional dollar we earn at work, as well as on every single dollar we earn in interest on our savings.

Looked at that way, the real question isn't "how did the taxes on trading in property ever get to be so high?" but "how did they ever get to be so low?"...

Most of the blame (or credit) belongs to two people: the Treasurer, Peter Costello, and John Ralph, the doyen of Australian company directors, at present chairman of both Telstra and the Commonwealth Bank.

In 1998 Costello asked Ralph to inquire into business taxation. One of the terms of reference was odd, and extremely specific. It dealt with individual, rather than business taxation. Costello wanted Ralph to examine "the scope for capping the rate of tax applying to capital gains for individuals to 30 per cent". Until that point capital gains had been taxed at the individual's marginal tax rate, minus inflation.

Ralph went further than Costello had suggested. In September 1999 he recommended that only half of each capital gain be taxed, which as he pointed out would effectively cut the top rate to 24 per cent.

What followed was an avalanche of funds pouring into investment real estate, and a change in our financial psyche. One in every eight Australian taxpayers now owns an investment property, firming to one in every three where annual income exceeds $100,000.

Ralph didn't see it coming. His report contained not a word about real estate. He said instead he expected the cut to bring about a surge in sharemarket investment, "particularly in innovative, high-growth companies".

Mark Latham saw it more clearly than most. In an extraordinarily prescient speech he said the cut would add "to the great Australian disease of asset and property speculation, particularly in our big cities. It will take away resources from the knowledge economy and put them into the least productive, least honourable aspects of Australian economic activity."

It was already legal to negatively gear. That is, to borrow so much to buy a property that your interest payments ensured you made a loss each year, which you could use to cut your income for tax purposes. It was also legal to claim a depreciation deduction after buying a new house or unit, regardless of whether or not the investment actually declined in value.

But as attractive as these benefits were, they did little more than defer the payment of tax. It would be paid on the day the property was sold. Or that was the theory, until September 1999. From that date, as Melbourne University's Professor Cameron Rider puts it, only half of the deductions were recouped - the other half were converted from a deferral of tax to a permanent exemption from tax.

The changes gave property an advantage over competing forms of investment. Shares could match it when it came to negative gearing and capital gains tax, but couldn't match the associated depreciation deduction, as scores of mesmerised Australians were being told in investment seminars each weekend.

Borrowing to buy property became the "smart" thing to do, even for Australians who had never borrowed before except to buy their home. As Macquarie Bank's Rory Robertson told his clients: "It is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries."

Or to make money renting out the properties they bought. The Tax Office says six out of every 10 of Australia's landlords actually lose money on an operating basis.

This tax-driven diversion of money and effort away from work, away from small businesses, away from productive investments, is without recent precedent. It has helped push property prices into uncharted territory and may have brought on our last two interest rate increases.

All this from a change that Ralph recommended in order to "achieve a better allocation of the nation's capital resources".

When Latham tried to have Labor oppose it in September 1999 he was overruled by his leader, Kim Beazley. Shortly after becoming shadow treasurer last July he explored with Access Economics a plan to restore full tax to capital gains and use the billions of dollars liberated to cut the top tax rate for all forms of income. Access believed it could sell the plan as being fairer for both high and low income earners.

When news of the plan leaked last month, Latham ruled it out. He did so again this week.In election mode neither Latham, Howard nor Costello is likely to propose what an increasing body of expert opinion believes has to be done.

The Productivity Commission is said to have recommended some sort of action on property taxation to Costello. He is yet to release its report.

By rushing in and taxing where our federal leaders are scared to tread, Bob Carr and his Treasurer, Michael Egan, may have done the nation a favour.

And they get to keep the money as well.


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Wednesday, April 14, 2004

What extending the copyright term exterminates

If there was one episode in the ABC's weekday reruns of Doctor Who that was not to be missed, it was the one that should have been shown three weeks ago. In it the second Dr Who, Patrick Troughton, is put on trial by the Time Lords and banished forever to one point in space and time - Earth in the 20th century.

Although that episode sets up everything that follows, the ABC was unable to broadcast it. Its problem: copyright.

For just a few seconds as the doctor's life flashed before him the episode showed a glimpse of his most infamous enemies: the pepper pot-shaped Daleks.

Copyright to the Dalek design is shared between the BBC and the family of the late writer Terry Nation and the two have fallen out. London reports say that before he died Nation told his executors never to let the BBC use the Daleks again. As a result the BBC cancelled its plans to rescreen the series last year. (The ABC appears to have been allowed to show some of the earlier Dalek episodes by negotiating a separate deal directly with the Nation estate.)

The use of copyright to attempt to stifle cultural celebrations is more common than you might think.

Last year Samuel Beckett's nephew threatened to shut down a performance of Waiting for Godot at the Belvoir Street Theatre on the grounds that it had some music in it.

In June the James Joyce Centre in Dublin is to celebrate Bloomsday on the 100th anniversary of the date on which the novel Ulysses is set. But it may not be able to read the novel out loud. Joyce's grandson has banned public performances, saying he will sue for breach of copyright if anyone tries... Fortunately the organisers of Australia's Bloomsday celebrations are in the clear. In Australia Joyce's works entered the public domain in 1991, 50 years after his death.

But they might not remain in the public domain for much longer. Australia's draft so-called Free Trade Agreement with the United States includes a little publicised clause that would extend our term of copyright from death plus 50 years to death plus 70, the new US and European standard.

Works such as Ulysses and books by authors such as Joseph Conrad, Ernest Hemingway and D.H. Lawrence, as well as music such as Rhapsody in Blue, are at the moment on a par with Shakespeare in Australia. It is legal to print, adapt and perform them without permission. If the Free Trade Agreement becomes law as it stands they will return to private ownership.

Would this really matter? You might be surprised to discover that the economics profession believes it would. Economists, more than most people, support the idea of private property. And yet a couple of years ago 17 of the world's most respected economists (among them five Nobel Prize winners) petitioned the US Supreme Court in an attempt to stop the extension of the US copyright term.

They argued that extending the term by another 20 years would actually impose extra costs on authors while at the same time providing next to no extra incentive for them to write.

Here's how: it is true that increasing the copyright term from zero to 20 years would provide a good deal of extra incentive to write. But increasing the term from an entire lifetime plus 50 years to an entire lifetime plus 70 years would provide much less incentive at the time when the decision is being made to write. A lifetime plus half a century seems so far away, let alone additional decades.

The economists estimated the size of the extra incentive. They said the prospect of an extra 20 years of copyright protection would be worth about the same to a would-be author as an increase in income of one third of 1 per cent. As one of the Supreme Court judges noted: "What potential Shakespeare, Warton or Hemingway would be moved by such a sum?"

This is not to say that the sums involved are small in the years that they are paid. The extra 20 years of copyright payments now legislated in the US are set to cost Americans an extra $US300 million ($393 million). Most of the money will go to the owners of works already created. For them it will be a windfall, an unexpected top-up. But it will give them the right to lock up the use of their work for years to come.

Many, perhaps most, works of art are created by retelling, remixing and playing with older stories. Certainly several of the Disney Corporation's most popular copyrighted works were created that way.

But Disney and its ilk are not keen to allow the creators that follow them the same access.

Lawrence Lessig is the Stanford law professor who led the unsuccessful Supreme Court challenge. He chillingly notes in his new book, Free Culture, that while a million patents are set to pass into the US public domain in the next 20 years, no copyrights are now set to do so.

In Australia a government-appointed committee recommended against extending our copyright term as recently as four years ago. It also recommended that no extension be introduced in the future "without a prior thorough and independent review of the resulting costs and benefits". The Government accepted both recommendations.

But the Government has now agreed to extend our copyright term, and unless the Free Trade Agreement is blocked in either the Australian or the US legislature that extension is set to pass into law.

There is still time for some sort of review. The Senate committee inquiring into the FTA is accepting submissions until the end of this month.

It might take heart from Canada. That nation enjoys a free trade agreement with the US and retains Australian-style copyright laws. Last week it knocked back a bill that would have extended those laws.




If you want find out to more, and get much more angry try:

Professor Lawrence Lessig and his stunning new book Free Culture which is available both in hardback and free on line.

There's the Subverted Public Domain List which effectively tells you which works are in the public domain right now in Australia but are still kept private in Europe and in the US as a result of the Sonny Bono Copyright Term Extension Act of 1998. The Australian public will lose those works, among them Rhapsody in Blue when and if the US Australia FTA becomes law.

One implication of the list is that the first audio Mickey Mouse went public in Australia on January 1 2004. Anyone want to start showing Steamboat Willie?

Our Senate Select Committee on the Free Trade Agreement wants submissions by Friday, 30 April 2004.

On one side of the economic argument are five Nobel Prize winning economists, among them Milton Friedman. Their brief is as clear as it awesome.

Justice Breyer of the US Supreme Court thought it didn't go far enough.

Lessig says the other side in US Court case didn't call any economists as witnesses, let alone Nobel Prize winners.

On the other side is an economists report commissioned by the Australasian Performing Rights Association and others. Headed: Copyright Term Extension: Australian Benefits and Costs (shouldn't that be the other way around?) It has no named author, other than the Allen Consulting Group.

I have quite a few problems with it (on which I will write later), but perhaps they are explained by the Allen Group itself which describes its mission as being "to identify the benefits" of copyright extension first, and then to "consider whether those benefits are outweighed by any demonstrable costs."

The whole question of copyright extension has been looked at before.

In 2000 Professor Henry Ergas's Intellectual Property and Competition Review Committee recommended:

"The Committee is not convinced there is merit in proposals to extend the term of copyright protection, and recommends that the current term not be extended. We also recommend that no extension of the copyright term be introduced in future without a prior thorough and independent review of the resulting costs and benefits."

Our government agreed.

Great Australian sites on this are:

Weatherall's Law, from Kim Weatherall, Associate Director of the Intellectual Property Research Institute of Australia, and

Dead poets society from Matthew Rimmer at the Faculty of Law, ANU.

By the way, there are even worse things than copyright extension in the FTA when it comes to intellectuazl property. Wetherall and Rimmer outline them.

John Quiggin has written about the FTA as well, and it was he alerted me to the pickle the Dublin organisers of Bloomsday find themselves in.

The Wall Street Journal has a view. It argues that "Viewed up close," copyright "looks like a constantly expanding government program run for the benefit of a noisy, well-organized interest group."

Bizarre, depressing, but apparently true: Girl Scouts in the US have been threatened with lawsuits for singing "Happy Birthday to You" on their camps.

AOL Time Warner owns the rights and apparently earns $US2 million a year by harassing "performers" of this song for funds, and now will do so for another 20 years. Australia is set to escape from its clutches soon. The copyright expires in 2010. Of course if the FTA as it stands becomes law in Australia we will continue to be harassed until 2030.

(At least AOL Time Warner hasn’t banned public performances of "Happy Birthday to You" as it is presumably entitled to do.)

UPDATE:

A correspondent writes from Canada:

It would have been nice if (Canada's) Parliament had truly closed the door on copyright term extension in general.

The Canadian bill that was recently "knocked back" only concerned the copyright term for unpublished works by authors who died before 1949. Shades of Disney and Bono, it was largely the product of lobbying by the estate of Lucy Maude Montgomery ("Anne of Greene Gables" -- if you don't know, don't worry), who hoped to milk the long-deceased woman's diaries (not even her published books) for another 34 years. She died in 1942.

The extension, together with the broad scope of copyright (everyone's an "author", almost everything is a "work") would have locked up millions of historical documents, going back to the 1850s. Canadians would not have had the right to publish such material. Not even important records on their own community's history. Not even war letters by family members, given how copyright ownership can rapidly be diluted and made untraceable. Not even material out of the National Archives, which, for reasons unknown, gave its blessing to the copyright clause.

Then it got worse. The clause was originally restricted to authors who died after 1929. As later amended, it became open-ended. No matter how old the document -- from a "Dear John" email, 2004, to a Babylonian clay tablet, ca. 2900 BC -- it would have been "protected"! It was only a fluke of Parliamentary timing that prevented this draconian law from passing, forcing the government to withdraw.

The works in question became public domain in Canada on New Year's Day.

The forces that pushed Australia over the 50-year edge are still at work here. If Australia falls, it makes it harder for Canada, New Zealand, and
the dwindling band of nations with the minimum 50-year Berne Convention copyright term. Bad as it is losing your cultural sovereignty to the United States, it's galling to lose it to Walt Disney and Sonny (ugh) Bono.

I live in dread of the day our cultural glitterati, the shills of Disney and Bono, realize that our other NAFTA partner, Mexico, now has a 100-year term.


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Wednesday, March 31, 2004

Paul Krugman - The Fly in Bush's Ointment


My SBS Dateline interview with Paul Krugman

Mark Davis's introduction:

Now to one of George Bush's most persistent critics. Until the emergence of Democrat leader John Kerry, Paul Krugman had virtually become the leader of the opposition in America, an unusual position for an academic economist. His column on business and economics in the New York Times soon broadened into a scathing critique. Not only did he attack George Bush's economic record, but almost alone in the US media until recently, he became known as a vocal critic of the Bush social and political agenda as well. Paul Krugman has been speaking with our economics correspondent, Peter Martin...

STATE OF THE UNION: Members of Congress, I have the high privilege and the distinct honour of presenting to you the President of the United States.

PROFESSOR PAUL KRUGMAN, PRINCETON UNIVERSITY: They've made no secret, the Administration doesn't say this but the people behind it do, that they view the whole welfare state, social security and Medicare as illegitimate. They want to reverse the New Deal and the Great Society, which means get rid of the house that Franklin Roosevelt built. On the social-cultural religious side, they've made it very clear that the boundaries between Church and State are something that they want to tear down.

PETER MARTIN: Paul Krugman the 'New York Times' columnist is as blunt, and fearless, in his observations about the Bush Administration as Paul Krugman, the Princeton trade theorist, used to be about entire national economies. Back in the mid-1990s, at a time when just about everyone was talking up the Asian economic miracle, Krugman labelled it a myth. Three years later, those miracle economies collapsed.
Now, with a twice-weekly column in America's most influential newspaper, the economist and opinion writer has begun issuing similar warnings about the US itself.

PAUL KRUGMAN: As a share of GDP, our budget deficit is bigger than Argentina's before the 2001 crack up, as a share of GDP our current account deficit is bigger than Indonesia's before the 1997 crack up. Advanced countries get the benefit of the doubt from financial markets, because advanced countries are presumed to have the political will and the technical ability to resolve these very serious budget problems. We have the technical ability, I don't think politically we have any realistic discussion on the table.

PETER MARTIN: The political problem that Krugman points to again and again in his columns is the Administration's multi trillion-dollar unfunded tax cut. He says it's sending American tax collections to their lowest level since the 1950s. In their place are borrowings from Asian central banks. He's worried even more by the attitude of the Administration that has pushed those tax cuts.

PAUL KRUGMAN: The same tax cut that was proposed in 1999 at a time of surplus, at a time of a thriving economy, was the one that they pushed through in 2001 in the face of recession, and was extended and enlarged in the face of record budget deficits. The policy of tax cuts at the high end, permanent tax cuts at the high end, they sold it different ways, various things at various times, but it's always the same policy even though the economic situation and the budget situation is completely transformed.

PETER MARTIN: Krugman's critique of the Bush Administration now extends way beyond its approach to economics. He says in all sorts of areas it appears to regard itself as a revolutionary force not subject to the usual political decision-making process.

PAUL KRUGMAN: On foreign policy, they always wanted to get Saddam Hussein, and the fact that it was actually somebody else who attacked us didn't seem to make a difference. They decided, you know, the satirists do a better job of describing reality than serious journalists these days. And one satirist said that we sent a message to the world - "If you attack us, we will strike back with overwhelming force at someone else."

And the notion that there could be a legitimate transfer of power back to the Democrats simply doesn't occur to these people. A number of people who are closely connected with the Republican Party from the religious right have said: "God chose Bush to be President, even exulted over the fact that he became President with fewer votes than his opponent, saying that just shows that he was God's choice." Almost a kind of right-wing Leninism. These are people who really have a very strong view about the way things should be, and are determined to achieve it.

REPORTER: Are these sort of attitudes, dangerous ones in your view, that are easy to report on?

PAUL KRUGMAN: The very extremism of what's going on makes it very difficult for journalists to talk about what's happening.

REPORTER: Why is that?

PAUL KRUGMAN: Because the convention, if you're at 'Fox News', if you're with Murdoch, then the right wing is always right. If you are at another mainstream news source then the conventions is that there are two sides to every story, and it doesn't matter if one side is grotesquely untruthful, there are still two sides to every story. So, well, we had a spectacular example just a couple of days ago, we had new poll numbers which happen to have been shockingly bad for Bush, and most of the headlines in mainstream news reports on it had something like, "Poll shows weaknesses in both parties." And I've said that if Bush said that the earth was flat, the reporting in much of the mainstream press would be, "Shape of earth views differ."

REPORTER: Why do you think you are not bound by those conventions in your writing?

PAUL KRUGMAN: Well, first off, I am an opinion columnist. I have a little more... I write what I like, but beyond that I have another job. If my outrageousness causes me to lose my journalistic career, well so, I'll go back teaching and other things and so, I'm a little, and also I think I was just, because I am a trained economist, and can do my own arithmetic, I caught on to the fact that there was a lot of just raw dishonesty going on in this Administration before anyone else did, and have had the courage of my convictions because they're just grounded in arithmetic, which gives me a certain advantage over other people, but I'm much less alone than I was.

PETER MARTIN: In recent weeks, Krugman has swung back to economics in his columns, warning of a financial crisis in the US very soon, quite possibly within the next 4-year presidential term.

PAUL KRUGMAN: If the markets were to believe in us until the last possible moment we could have another 15 years before all hell breaks loose. I don't think it's going to work that way, but it could certainly happen during the next four years.

PETER MARTIN: Might this be a good election for the Democrats to lose, in other words, to let George Bush deal with the results of what you see as the coming results of his Administration's policies?

PAUL KRUGMAN: Well, I'll give you several thoughts on that. First was, that a lot of Democrats said during the disputed election of 2000, "Well, you know, whoever gets this is going to be handed a poisoned chalice, so it's probably better for us to let Bush have it," and that turned out to have been stark-raving mad, it turns out that the advantages of incumbency, the advantages of holding the White House are enormous, and Bush exploited that absolutely to the fullest, so, look, don't knock the advantage of being there. In particular, given the way things are trending in the United States, given the raw use of power to rig the political game that the Republicans have undertaken already, given the replacement of voting machines with electronic machines that leave no paper trail, given the extraordinary use of patronage to reward friends and punish enemies in the business community, I'm not sure that if the Democrats lose this election, they're going to have any chance of mounting a challenge in any future election no matter how badly things go.
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Monday, March 22, 2004

They've taken you for a ride, Mark.

That's the concluding line to Ross Gittins' assessement of Latham's superannuation promises in this morning's Sydney Morning Herald.
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Thursday, March 18, 2004

Forget the spin! It's a record record.

The Australian recording industry should be congratulating itself. Both for pushing CD sales to an all-time record high and for keeping this fact out of the initial news reports.

The announcement from ARIA is (perhaps deliberately) hard to read.

For one thing, there are no comparisons with past sales going back more than a year.

But late last year ARIA blessed me with a spreadsheet showing sales by category going back to 1982.

Reading that, together with its latest press release, it is clear that:

Total sales (in all formats) climbed to a record high in 2003: 65.6 million, easily topping the previous record of 63.9 million set in 2001.

And the sales of actual CD albums climbed above 50 million for the first time (well above 50 million actually).

It's a real cause for celebration. Back before the advent of Napster and home CD burning the industry was selling fewer than 40 million CD albums per year...

In its announcement ARIA makes much of a decline in the sales of its (reportedly unprofitable) CD singles - down from 11.3 million to 9.4 million.

But if the industry reflected for a moment - it might see this as a good thing. CD singles were never an end in themselves. They were a promotional device - designed to feed listeners into buying the entire album.

Music downloads may be (slowly) replacing the CD single in this role.

They appear to do it much better (creating record sales of CD albums) - at virtually no cost to the record companies themselves!

The industry has fought, it has screamed, it has arrested, it has litigated. But it may just be stuck with the best device for promoting its product it never wanted invented.

See also: Forget the Spin, SMH 30.12.03.
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Tuesday, March 16, 2004

Tell me it isn’t true!

This reads as if I am angry.

Latham wants to cut the already hugely concessional rate of tax on superannuation to zero. [* see update]

The AFR deadpans: “The superannuation industry has reacted favourably.”

Well, yes – but the biggest winners would be Australia’s highest income earners. They are the people who put the most into super (both because they have the most to spare and because of its generous tax treatment, which Latham wants to make more generous still).

A zero rate of tax on earnings would be quite an achievement for Labor. It is a step not even John Howard was not prepared to take when he neutered the capital gains tax.

Here’s an idea – why not tax all earnings, even those from dabbling in financial markets, at the marginal rate.

It’s an idea that might have once come from Labor...

Despite what Latham is doubtless saying, it is a measure that would most likely not do much to increase the rate at which Australians save. Vince Fitzgerald notes in his landmark report (page 26) that “an increased return on saving is an incentive to save more, but also an incentive to save less.” “Save more” (through super) because it boosts the return on that sort of savings, “save less” because it makes it easier to reach a saving target.

And to the extent that a zero rate of tax on super earnings does push more of our money that way, history suggests that will happen at the expense of other (more reasonably taxed) forms of saving.

And what about Latham’s catch cry "65 at 65"?

It might be an understatement. Work the done by Anthony King at the National Centre for Economic Modelling (pp 27–29) suggests that a zero rate of tax on super fund earnings could give some Australians a higher standard of living post retirement than they had pre-retirement. [* see update]

(Assuming that the cut in tax on super earnings was paid for by increases in tax on other earnings in the working years, as it would have to be, otherwise his promised tax cut would be a cruel joke on retirees.)

As King says: “At this point, it would be fair to ask why one would want to aim for such high retirement incomes.”

We could ask as well: what would those high retirement incomes buy?

A higher retirement income for one Australian will buy that lucky Australian preferred access to the services of whatever working-age Australians are around during his or her retirement.

But a higher retirement income for all Australians would not buy all of them all preferred access to those services (except at the expense of working age Australians). It would bid up the price of the services they wanted access to. Another cruel trick, don’t you think?

Guess what? The best way to increase the purchasing power of our retirement incomes is to increase the number of workers around in our retirement years.

That's what Costello proposes. He wants us to work longer. And that's what the AFR says Latham opposes.

UPDATE: (18.03.04) It isn't true. In my anger I misread what Latham had promised. He has promised to eventually remove the (already concessional) 15 per cent tax on contributions, presumably leaving in place the (concessional) 15 per cent tax on earnings.

This blunts my criticism but does not change the thrust of it. The biggest beneficiaries would still be those Australians who earned the most. But the policy would not, as I feared, run the risk of giving some Australians a higher standard of living after retirement than they had before it.
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Friday, March 12, 2004

The four billion dollar man

For the two months or so I have been working on a story which went to air on SBS TV's Dateline on Wednesday 10 March. As you can see if you follow the link there is no transcript on the SBS site "on legal advice".

The story is about an Australian company, Commercial IBT Pty Ltd. It has a banking licence in the offshore financial centre of Labuan, Malaysia. It describes itself and the bank this way...

COMMERCIAL IBT BANK, Licensed Offshore Bank (030085C), a licensed bank in Labuan Malaysia (www.lofsa.gov.my) is involved in investment banking and provision of financial services including corporate finance and advisory, private banking, trade finance and fund and asset management.

We provide innovative financial solutions, support and auxiliary services ONLY to wholesale clients, sophisticated investors, substantial corporations and institutions globally.

Our commercial and entrepreneurial approach has seen success in our specialist divisions.

We have a good network in the Australia-Pacific, Asian and United States regions and specialise in providing investment opportunities in these regions.

We strictly observe and preserve our clients' confidentiality and as such we are very private. We therefore do not publicise nor advertise any deals or projects unless requested by our clients.

In Australia, COMMERCIAL IBT is a low profile financial institution involved in corporate finance, general investments and other financial services. For further information please go to www.cibt.com.au

We are a full member of the Asian Bankers Association (ABA). The Asian Bankers Association, one of the service councils of the Confederation of Asia Pacific Chambers of Commerce and Industry, is a regional association and membership of financial institutions based or have operations in the Australia Asia-Pacific region. The Association aims to provide a forum for advancing the cause of the banking and finance industry in the region and promoting regional economic cooperation.


Or that's what it used to say.

The morning after my story went to air that description vanished from its website, replaced with: "This page is currently being updated". Here is what is there now.

The website for Commercial IBT is here. The homepage for the bank here.

UPDATE 23.04.04:

Ratings Agency Malaysia suspends Commercial IBT's rating.
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Tuesday, February 03, 2004

The Economic Consequences of War with Iraq

I discussed on Life Matters this stunning paper by the economist William Nordhaus.

He compares the human and financial costs of wars past (and no, the Vietnam was not particularly expensive to the US) and then makes some very prescient predictions for Iraq.

I have given this paper to several friends. If you read one economic paper this year, this could be it.

He has also published a short and non-technical version in the New York Review of Books. Read it here.
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Wednesday, January 21, 2004

Love, marriage, contraception and money

More and more women are deciding to wait - for a Mr Right with a decent income, says Peter Martin.

What do Britney Spears and George Bush have in common? They both believe in the "sanctity of marriage". That's what Spears told MTV after her snap decision to get married and then unmarried in the new year, and that's why in today's State of the Union address President Bush will announce a plan to spend $US1.5 billion ($2 billion) promoting marriage.

It is actually Spears who is in tune with the times. Like Spears in the cold light of day, few American women now believe they are ready for marriage at 22. Most now wait until they are at least 25, and most Australian women wait until they are at least 27. But just a couple of decades ago marriage at Spears's age was typical.

Something has made us much more wary about getting hitched. Economists have come up with at least three explanations, one of which points some of the blame at the President himself...

(If you find the whole idea of economists analysing marriage offensive, I sympathise. My marriage is the result of deep love rather than a calculation of costs and benefits. Nevertheless, economists believe we act as if we perform calculations, and they say the financial ones account for about one third of a typical decision to marry.)

The advent of the contraceptive pill removed one big non-financial cost of not getting married. As the Harvard economist Claudia Goldin puts it, from then on you could "put off marriage while not having to put off sex". The marriage rate began falling and the marriage age began rising from the moment the pill became widely available around the start of the 1970s.

But the pill did more than make it easier to delay marriage. Goldin says it made it realistic suddenly for large numbers of young women to take on major university courses such as business, law, dentistry and medicine. Before the pill they faced a high chance of getting pregnant during a five-year degree and wasting their money.

One decade after the arrival of the pill the proportion of US dental students who were women had climbed from 1 per cent to 19 per cent; the proportion of law students had climbed from 4 per cent to 36 per cent. This pushed out the age at which those women made themselves available for marriage, and also increased the potential pay-off for men who waited. They might snare a doctor.

But something else is needed to explain the continuing slide in the rate of marriage in more recent decades. Since 1980 the marriage rate among Australian women has halved. It might be that Australian women are becoming more acquainted with some of the less publicised facts about marriage.

It is widely believed that people who are married earn more, are happier and live longer than people who are single or merely "living together". But a closer look shows that in most studies the increase in earnings applies only to men and that while marriage makes both sexes happier, men get the bigger benefit. And when it comes to longevity, marriage can actually harm women.

A landmark survey conducted by Warwick University in Britain concluded last year that married men were "a remarkable 10.6 per cent" less likely to die in any given year than men who had never married. Married women received no such protection.

Worse, women who had married and then got divorced were 7.2 per cent more likely to die in any subsequent year; women who were widowed, were 3.8 per cent more likely to die.

For women concerned about a long life the evidence suggests that it is best to either not get married, or if you have done so, stay married.

And here is the economists' third explanation for the continuing slide in marriage rates, the one with direct and uncomfortable implications for the policies of George Bush, and for that matter John Howard: incomes in the US and Australia are becoming less equal.

In the US Bush pushed the process along in 2001 and 2003 with very big tax cuts directed at the already rich.

Increasing inequality means, in the words of Hebrew University economists Eric Gould and Daniele Paserman, "an increase in the dispersion of husband quality". There is now a greater potential pay-off for women in Waiting for Mr Right, to use the title of the paper just published by Gould and Paserman.

They use census data to rank 300 US cities. The most unequal city is Stamford, Connecticut, just north of New York City. It happens to also be the city with the highest proportion of women in their upper 20s who are not yet married (waiting for Mr Right).

Gould and Paserman find that female singleness closely follows male wage inequality, both between different cities and over time. As US male incomes have become more unequal over the past 20 years, females have become commensurately less likely to commit.

They use statistical tools to show that the effect isn't due to men reacting to changes in female incomes, and it isn't due to women throwing themselves into work when and where male incomes diverge widely.

The finding expressed in numbers: "Increased inequality may account for up to 30 per cent of the overall decline in female marriage rates in the last few decades." And Bush has acted to increase that inequality further. In economic terms he has probably been anti-marriage.

A pro-marriage president or prime minister would use economic and taxation policy to make already successful men less financially attractive, rather than more so.

The very clear implication of the economists' work is that women are materialistic in their approach to marriage.

But that doesn't make me feel bad about women. Economists have shown that all sorts of decisions we make are based on prices, everything from wage rates to exchange rates - among those decisions: how long we sleep each night and where we choose to take our holidays. But much of the time we don't consciously think in those terms.

I prefer to think that women considering marriage don't realise what they are doing.
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Wednesday, January 14, 2004

Life's cheaper in the faster state

This year's holiday road toll was the worst in eight years. But it's not because we drive badly. When asked, more than three-quarters of us say our driving is better than average.

It is true NSW recorded more deaths than Victoria over Christmas (25 compared with 17), but that needn't mean we are bad drivers, either. In the reassuring words of the pro-free market Centre for Independent Studies: "Victoria has always enjoyed slightly safer roads per kilometre travelled compared with NSW."

Most of us are very easily reassured that the deaths on our roads are not our fault. Six out of 10 of us admit to speeding (which is presumably OK because we are better than average drivers); six out of 10 of us oppose attempts to make the road rules tougher.

Late last year the CIS offered encouragement to speeders. On the front page of its magazine it asked: "Speed Traps: Saving Lives or Raising Revenue?" Inside it argued that speed had little to do with road deaths and that those of us who speed moderately "tend to be the safest drivers".

Since then the CIS appears to have softened its stand. The latest edition of its magazine devotes equal space to both sides of the debate.

So in that spirit I would like to take a look at what is actually happening in Victoria and whether it has any lessons for us here in NSW...

It is beyond doubt that there are far fewer road deaths south of the Murray: 334 last year compared with 553 in NSW. Victoria's population is lower, but not low enough to account for the difference.

It is also beyond doubt that Victoria enforces its speed rules more rigidly. In that state you will be booked if you are caught driving just 3kmh over the speed limit. In NSW we expect to be allowed to drive up to 10 per cent over the limit.

And in Victoria the speed cameras are hidden. Nineteen per cent of Victorian drivers say they have been booked in the last two years. In NSW the proportion is only 12 per cent. (The tough approach has become a political issue in Victoria. The Opposition has promised to reset the cameras to catch fewer speeders.)

The CIS is right to say that these facts do not necessarily mean that Victoria's approach has brought about the lower rate of deaths. There could be something else at work. To conclusively determine whether getting tough on speed saves lives you would need to run a controlled experiment in perhaps as many as 50 states which were free to vary their road rules over a period of years.

Fortunately the United States has conducted just such an experiment.

During the energy crisis of 1974 the Carter administration succeeded in enforcing a low nationwide US speed limit of just 55 miles per hour (88kmh). Road deaths slid 15 per cent.

From 1987 each state again became free to choose to lift the limit on its rural interstate roads. Within a year most states had lifted their limit to 65mph. But seven left the limit unchanged.

In a paper soon to be published in the Journal of Political Economy, the economists Orley Ashenfelter from Princeton University and Michael Greenstone from the University of Chicago examine what happened in those states that lifted their limits. Their findings are surprising.

First, the actual increase in speed in those states was quite low, an average of only 2mph (3.2kmh) on the roads affected. The professors say that is because a lot of drivers on those roads were already speeding.

Second, the small increase appears to have pushed up deaths per mile on those roads by an astounding 36 per cent.

So the professors asked a question only economists would ask: what benefit had the drivers in those states gained in exchange for each of the extra deaths?

The answer was reduced travel time - about 125,000 hours were saved for each extra life lost, which valued at the average wage rate, worked out at a benefit to drivers of about $US1.5 million ($1.9 million) per life lost.

Did the states that pushed up their speed limits value life too cheaply?

Perhaps not. That value of $US1.5 million per life is curiously close to the average $US1.8 million per life which is to be paid out in compensation to families of victims of the September 11 terrorist attacks.

Those US states that chose not to lift their speed limits valued lives more highly.

If speeding rules are indeed linked to deaths in the way that the US data suggests, then right now Victoria is valuing human life more highly than is NSW.

Those of us who enjoy the more relaxed approach to speeding law enforcement in this state are perhaps fortunate that no one has done the calculation for Australia.
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