NEWSFLASH! In September I will join The Conversation as its Business and Economy Editor. I have been honoured to work at The Age for the past ten years, originally alongside the legendry Tim Colebatch, and for the past four years as economics editor in my own right.

At The Conversation, my job will be to make the best thinking from Australia's 40 univerisites accessible to the widest possible audience. That means you. From the new year I will also write a weekly column.

On this site are most of the important things I have written for Fairfax and the ABC over the past few decades. I recommend the Search function. The site is a record for you, as well as me.

I'll continue to post great things from The Conversation and other places here, and also on Twitter and Facebook. Enjoy.

Wednesday, December 28, 2005

Googling books

You will find this hard to believe if you are spending this week in the sun dipping into and out of your favourite book, but the very idea of books is supposedly under attack. That's what the book industry says in two lawsuits filed in the Southern District Court of New York, one from the United States Authors Guild, and one from the Association of American Publishers.

Amid talk of "embezzlement" and "rape" they allege a "massive copyright infringement" of the type they say will do the authors of books "irreparable harm".

In the dock is the search engine company Google, and it is indeed orchestrating a revolution in the way we get access to the printed word - the biggest revolution since the introduction of the photocopier..

Right now in the Oxford University Library, the New York Public Library and the libraries of three US universities, staff are busy removing books from the shelves row by row and loading them onto trolleys for delivery to special centres where their entire contents are scanned and loaded into a computer.

When Google is finished in six or so years it expects to have on its files the words of some 32 million books - just about every book ever written in the English language.

Google describes the end result as a gigantic card index, but it will be much more than that.. No card index has ever allowed you to find books by searching the words within them. The clunky terminals in libraries now do little more than allow you to search the first words of the titles.

You can sample the early results by performing an ordinary search on Google and then clicking where it says "Try your search again on Google Book Search".

You will be presented with a list of books that contain the words you chose plus the sentences either side of the quote. If the publisher permits it, you will be able to read an entire page.

Google isn't alone in its plans. Amazon already allows searching within some books, and Microsoft is scanning books from the British Library. But there's a big difference: Microsoft and Amazon are only scanning books that are out of copyright or for which the copyright owner has given explicit permission.

By contrast, Google is planning to scan everything, whether or not it has been given permission. It will only exclude books if it has been explicitly instructed to.

It's this rudeness inherent in the Google plan that's sent authors and their representatives to court. As one wrote in a letter to USA Today: "I don't need to notify Google that they may not steal from me any more than I need to notify burglars that they do not have permission to rob my house or rapists that my body is off limits."

But Google's presumption that it can go ahead and scan every book ever written unless it is specifically told not to is necessary for the scheme to work. If it had had to ask for permission to scan web pages it never would have built its search engine.

On one estimate perhaps as many as 70 per cent of all the books ever written are "orphan works". They are still in copyright but the copyright owners and their descendents can't be traced. It isn't possible to get permission. As a result, by not seeking permission Google expects to scan tens of millions of books. Microsoft, which will seek permission, might scan perhaps only half a million.

It is not at all certain that Google will get away with it. US judges are famously protective of the rights of copyright owners. Every book that I've ever bought says inside the front cover that it can't be reproduced or stored in a retrieval system.

If Google loses, those of us who love looking up books will lose. But I would also suggest that books themselves will lose. If books can't be searched when other sources of information can, over time books will become less important. They'll stay unsearched on library shelves and in the back of lounge room bookcases.

Industries such as the book industry have been notoriously bad at predicting threats to their health. In 1982 Jack Valenti, the then president of the American Motion Picture Association, warned a congressional committee: "The VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone." These days film producers make more money than they ever did before the VCR, most of it from the sales of videos and DVDs.

Will the ability to search books really result in fewer books being sold?

Authors and publishers had a more believable-sounding case when they objected to the installation of photocopiers in libraries throughout the 1960s and 1970s.

A few years later an economist from the University of Chicago, Stan Liebowitz, examined the resultant change in the market for academic journals (the kind of publication most likely to be photocopied). He reported his findings in the Journal of Political Economy. He found an explosion in the number, page size and price of academic journals, and also in the number of subscriptions. Journals had become more sought after by libraries as a result of photocopying. The most sought after were those that were copied the most.

Will books become more sought after if people can find them? I have a feeling that they will, if they can be as easily found as pages on the web.

Book publishers may well face "irreparable harm" but they will do it to themselves if they win their fight against Google.

Read more >>

Wednesday, December 07, 2005

An economic case for the death penalty?

Never have those of us who oppose the death penalty felt more convinced that we are right. And never has there been a series of more impressive-sounding arguments to suggest that we are wrong.

For most of the past century we have been secure in the belief that executing murderers does little to stop murder. That's what the psychologists and the criminologists have told us.

But now economists have entered the debate. And they have brought to the task a dazzling range of highly sophisticated techniques originally developed to answer more prosaic questions, such as whether tax breaks encourage saving.

More often than not the economists find that executions do save lives.

The most dramatic finding comes from Joanna Shepherd and a team at Emory University in Atlanta. They have taken advantage of the fact that some parts of the US don't execute murderers, and only a handful of states execute them consistently. (One of those states, Texas, accounts for more than one-third of the executions in the US since the Supreme Court lifted the ban on capital punishment in 1976.)

After taking account of other regional variations thought likely to influence murder rates - among them the mix of races and the resources devoted to policing - they found that executions explained most of what was left...

As they starkly report their central finding: each execution results in an average of 18 fewer murders. Or, to present the finding in an even more unsettling way: any state that refuses to impose the death penalty for murder is condemning 18 or so innocent people to death.

It is a dilemma that those of us who abhor the death penalty would prefer not to think about. Now two professors from the University of Chicago have decided to make it acute.

Cass Sunstein and Adrian Vermeule set out their arguments in a paper to be published in this month's Stanford Law Review. It is provocatively titled: Is Capital Punishment Morally Required?

They say that if the findings of the economists are correct, or anything like correct, a serious commitment to the sanctity of human life might well require, rather than rule out, the use of the death penalty.

I should point out that their argument applies only to the use of death penalty as a punishment for murder. They acknowledge that the issues are less clear when it is imposed as a punishment for carrying drugs, as it was in Singapore last week for Australia's Nguyen Tuong Van.

The first response of many of us would be to wonder whether the economists have got it wrong. But Sunstein and Vermeule have a comeback. They ask what our attitude would be if it could be shown that capital punishment did save lives. Would we oppose it anyway?

They point out that in hostage situations where police have the option of ending one life in order to save maybe six or seven, most of us would support the use of deadly force.

What, they ask, would be so different about murder if it could be shown that ending the life of one convicted criminal would save the lives of as many as 18 other people?

One answer is that we can't be certain about the number of lives that would be saved by an execution. But Sunstein and Vermeule point out that we don't usually demand certainty before allowing the government to take action.

Most of us have no idea of the number of lives that are saved by the law requiring the use of seatbelts, but we support that law nonetheless on the understanding that it will save at least some lives.

Another response is to say that there is a difference between intentionally killing someone and allowing even a larger number of people to die as a result of inaction. The first is morally wrong: forbidden by the injunction "Thou shall not kill." The second is a lesser sin.

The authors respond that this is not how we usually judge the decisions of the government. If it imposes only light penalties on the perpetrators of domestic violence, for example, we don't let it off the hook because it has merely refused to act. Sunstein and Vermeule say that refusing to use the full force of the state as a punishment for murder comes "perilously close to licensing private killings".

Fortunately the journal also includes responses to the paper, one of them co-written by an Australian economist now with the University of Pennsylvania, Justin Wolfers. He gets me off my ethical hook.

Wolfers re-examines the data used by the team from Emory University and finds that when it is treated correctly it no longer shows that each execution saves about 18 lives. Instead it shows that each execution brings about an extra 18 deaths!

It is a result that Wolfers himself does not take seriously, just as he does not take seriously the initial claim that the death penalty saves lives. His broader conclusion is that the data is so difficult to interpret as to make it impossible to say with any certainty what effect the death penalty has. He says it is not reasonable to build an entire moral case around an effect that cannot be shown to exist.

He might have added: particularly when the end result is an injunction to kill people.

I am relieved to be able to put the arguments of Sunstein and Vermeule to one side for the moment. They were beginning to get to me.

Peter Martin is the economics correspondent for SBS television.

Sources:

Does Capital Punishment Have a Deterrent Effect? New Evidence from Postmoratorium Panel Data
Hashem Dezhbakhsh, Paul H. Rubin and Joanna M. Shepherd
American Law and Economics Review, 2003, vol. 5, issue 2

Is Capital Punishment Morally Required? The Relevance of Life-Life Tradeoffs

Cass Sunstein and Adrian Vermeule, University of Chicago, Public Law Working Paper No. 85

No, Capital Punishment is Not Morally Required: Deterrence, Deontology, and the Death Penalty
Carol Steiker, Harvard Public Law Working Paper No. 125

USES AND ABUSES OF EMPIRICAL EVIDENCE IN THE DEATH PENALTY DEBATE
John Donohue and Justin Wolfers
Stanford Law Review December 2005
Read more >>

Wednesday, November 02, 2005

A punter's guide to the bird flu pandemic

Like to bet on something more serious than the Melbourne Cup? At www.intrade.com you can bet on when bird flu will reach the United States. Disturbingly, the betting points to a 25 per cent chance that bird flu will hit the US some time this year and a 50 per cent chance it will hit early next year. Even more disturbing is that these markets have a history of being right.

In the US, betting markets accurately predict everything from election results to the weather. In recent elections they have predicted the winning margin of both Democrat and Republican candidates to within 1.5 per cent. In Australia's last election the punters at Centrebet put five times as much money on the Coalition as on Labor. They were right. The press and the opinion polls were saying the election would be close.

In his book The Wisdom of Crowds, James Surowiecki outlines one of the early successes of betting markets. In May 1968 the US submarine Scorpion disappeared at sea. It could have been anywhere in a region 32 kilometres wide.

Instead of asking one or two experts where they thought it was, the chief naval officer assembled a large group of specialists in all sorts of fields and asked each of them to guess the location. The prize was a bottle of Scotch.

Using mathematics to put the guesses together he came up with a spot just metres from where the ship was found. Intriguingly, it wasn't a location identified by any of the experts on their own...

What we really need right now is a market for betting on when, or if, bird flu moves between humans. We know that it sweeps through chickens and that it can jump to humans who handle them, although so far not easily - only about 120 people appear to have caught it, all of them in Asia. But the death rate among these people has been high, about 50 per cent.

Some of them may have already passed it on to other humans. Dick Thompson, from the World Health Organisation, has told the SBS Insight program that there have probably been a handful of limited transmissions in which the virus has moved from one person to another and then stopped. It hasn't yet continued to move on.

The Canadian economist Dr Sherry Cooper, of Harris Bank, has spoken to the world's leading bird flu experts and concluded that its spread among humans is just a matter of time. She quotes them saying that the virus "will learn to do it".

Her report is entitled Don't Fear Fear or Panic Panic. She says for perhaps the first time in history we are watching a global pandemic "unfold in slow motion".

There is a slim chance that we might be able to smother it before it develops. She says there is a 20- to 30-day window in which a huge application of antiviral drugs at the site of an outbreak might slow or stop it from spreading. But that will require international co-ordination on a scale rarely, if ever, seen.

If the disease does spread to humans and go global there will be an unknowable number of deaths. Martin Meltzer draws up the forecasts at the US Centres for Disease Control. He says the point isn't the exact number. "The point is: imagine a lot of people ill in a very short space of time. More than you've ever seen."

The task facing economists is to try to work out how such an upheaval would change things.

Cooper says it would fill all our hospitals and there would be nowhere to take the overflow. In a localised crisis victims can be ferried to hospitals in other towns and health-care workers can be brought in from interstate. But in a pandemic there are no healthy towns to draw beds or nurses from.

As well, the so-called H5N1 bird flu virus is thought most likely to kill or hospitalise those people with the strongest immune systems - typically those aged between 20 and 40. This unusual feature would see it disproportionately remove from the workforce our most productive workers.

The Treasurer is already worried about this sort of effect because of the ageing of the population. A pandemic would bring it forward, worldwide.

Unemployment, as measured, would fall further. Any worker who remained able-bodied would be in big demand and able to command a higher wage. It would be hard for employers to fill shortages with workers from overseas. Fewer 20- to 40-year-olds would mean fewer pregnancies and fewer new workers for decades to come. There would be less demand for houses. Property prices would fall.

Petrol prices would fall as well. With many of us too infectious to go to work and with schools quite probably closed there would be few reasons to drive a car. Coffee shops, restaurants, cinemas and airports would be particularly poorly patronised until the pandemic passed.

Other prices would soar. Among the items swept off the shelves would be face masks, rubber gloves and cans of baked beans as people rushed to stock up on news of the pandemic beginning.

News would become more important with so many of us stuck at home. But it would be news delivered by computers and radio and TV. Few of us are likely to pop down to the shop to buy a newspaper.

A radically different world awaits us if bird flu does begin to spread among humans, and it is entirely possible it will. It's little wonder the punters are interested.


Read more >>

Tuesday, November 01, 2005

Water: Running Dry

The transcript of my prescient SBS Insight program on water: running dry is here. It, and the research on which the program was based contain a lot of useful information, such including the capacity of the rainwater tanks on Malcolm Turnbull's Sydney waterfront property.
Read more >>

Wednesday, October 26, 2005

Who wants to be a millionaire?


Greed loses to caution when we have to take a chance at wealth, writes Peter Martin.

SO YOU think you want to be a millionaire? I'll let you in on an economists' dirty secret: deep down, you probably don't. Rob Fulton, of Sydney, made television history on Monday last week when he became the first person to win the top prize in the Australian version of the game show Who Wants to Be a Millionaire. But he was far from the first to be offered the opportunity.

Since 1999, nine Australians have been offered a chance to answer the million-dollar question. All nine have turned it down. Each has preferred to walk away with just $500,000 rather than risk it to aim for the big prize. As the relieved host, Eddie McGuire, exclaimed on the night: "This is the first person who's had the guts to have a go!"

It's enough to make you doubt whether Australians really are (as is commonly believed) instinctive gamblers. And enough to make you doubt whether we act as if we are (as the textbooks proclaim) profit-maximising machines...

It's a caution common throughout the world.

The British economist Ian Walker and two colleagues examined the behaviour of British contestants in a study entitled "Who Really Wants to be a Millionaire?" They presented their findings to the World Congress of the Econometric Society in August.

They found that most of the 500 or so contestants they studied didn't want to be millionaires at all. Two-thirds quit while they were ahead. And almost everyone who reached £125,000 (about $300,000) quit.

It is an important finding. Economists are not usually able to directly observe how we act when we are offered a really big gamble.

They know that we are notoriously and unreasonably cautious when we are offered small gambles. If I offer you a 50-50 bet: heads you win $200; tails you lose $150 - the odds are you will not accept, even though mathematically the offer is skewed in your favour. We are even cautious when the gambles are tiny.

Stanford University economist Baba Shiv and a team from Iowa University recently gave a roomful of Iowa residents $US20 each and offered them 20 chances to bet with it on the toss of a coin, risking $US1 each time. More was to be won each time if the coin came up heads than would be lost if it came up tails. It made financial sense to accept the bet on every occasion it was offered. And yet the Iowa residents typically accepted only about half of the time.

Then the researchers did something bizarre. They performed the same test on a group of Iowa residents who had either suffered a stroke or survived brain surgery. What they had in common was a damaged prefrontal cortex, the part of the brain that processes emotions.

These brain-damaged individuals turned out to be much better investors than the Iowa residents with brains intact. Given $US20 each and the same 20 chances to accept the attractive bet, they accepted more than 80 per cent of the time. They typically made $US3 more than did their counterparts with undamaged brains.

When the study was published in the journal Psychological Science in June the newspaper reports were sensational. One headline asked: "Are successful investors emotionally brain damaged?" Another declared: "Psychos best investors".

The importance of the team's finding is not that brain-damaged people make more sensible decisions. In many instances they do not. (Several of the volunteers with brain damage used in the study were bankrupt.) It is that the thing that holds many of us back from taking worthwhile financial risks is an emotion - most probably fear.

Much of the time fear is incredibly useful to us. It alerts us to danger and so keeps us alive. As a result, we appear to have evolved to become extremely sensitive to it.

The Iowa researchers now believe that fear might explain one of the biggest unsolved mysteries in economics. It is called the "equity premium puzzle".

Why is it that so many of us prefer to earn our money in interest rather than from shares, even though the payout from shares is usually much higher?

Conventional economics can't provide an answer. Indeed, some economists dismiss the puzzle as a statistical illusion.

But if the Iowa researchers are right, our behaviour begins to make sense. We may be so frightened of risking money, even if it is only a tiny amount - as little as $1 - that we are prepared to forgo the opportunity of earning much more. Fear may hold our finances hostage. The trick for those of us who would actually like to make money is to break free.

One way may be to hand over the management of our finances to someone else. Professional fund managers may well do a better job of managing our money than we would ourselves precisely because they don't act as if it is their own. They are prepared to take risks with our money that we couldn't stomach taking ourselves.

Another way might be to be genuinely free of responsibilities.

Millionaire winner Fulton says he took the plunge and went for the million in last Monday's show because he "didn't really have a lot".

In his words: "I lived in a one-bedroom unit. I wasn't really heading anywhere so I thought, 'I've got nothing to lose'."
Read more >>

Wednesday, August 03, 2005

Foot in Mouth


Here is the George Negus introduction to the story broadcast on SBS TV. You can actually watch it here.

"Every now and then in this business, a story comes along that leaves you shaking your head and asking, 'How on earth could they have ever allowed this to happen?'

Well, what you're about to see falls squarely into that stunned and amazed category. Essentially, it's a story of how bureaucrats in Canberra gave the green light to beef imports from Brazil - a country with a history of the dreaded foot-and-mouth disease.

Peter Martin has been investigating a decision that risked a $13-billion catastrophe."


Read more >>

Wednesday, June 29, 2005

TV's biggest crime - it's a thief of time

If you really want to be happy, throw away your television set. That's the bizarre finding of new economic research completely at odds with traditional assumptions. It has traditionally been assumed that people who choose to do a lot of something must enjoy it. And we certainly choose to watch a lot of TV.

I like to think of myself as a light viewer, but in truth I watch 30 to 90 minutes a night plus at least that much again of children's programs in the background each morning.

The typical Australian is said to watch two to three hours a day. Added up over a lifetime, that means someone who lives to 75 may have watched TV for nine years. The only things we do more of are work and sleeping.

So it's odd that economists haven't much studied TV viewing until now. When they have, they have found that we enjoy it. Most recently the Nobel Prize winner Daniel Kahneman asked 1000 women to record how they felt at each moment of the day. They felt their best when having sex, socialising, eating and watching TV...

They enjoyed TV more than they did talking to their spouse, shopping or caring for their children.

Now a team from the University of Zurich is suggesting that Kahneman and others have been looking at only half the picture. In a paper entitled Does Watching TV Make Us Happy? Bruno Frey and his colleagues argue that it is not enough merely to ask people how they feel at the exact moment when they are watching TV. It is also necessary to ask how people who watch a lot of TV generally feel.

They say that drug addicts feel great at the exact moment they are getting their fix, but they generally feel awful.

The team had access to data from a European survey in which 42,000 people were asked: "All things considered, how satisfied are you with your life as a whole nowadays?" They were also asked how much TV they watched. The team found that the people most satisfied with their lives were those who watched TV the least.

The effect was large. One of the most important predictors of happiness (for men) is whether they are married. The effect of not watching much television is about one third as big.

The team was left with a paradox. Watching TV made people feel good while they were doing it, but seemed to make them less satisfied overall.

Other activities affect us in the same sort of way. One is smoking. Cigarettes hurt smokers, but they do so slowly. Immediately, they offer relaxation - which becomes addictive.

Bruno Frey could see how television might act like that. It offers an immediate benefit - relaxation, with the costs not apparent until later. Those costs include tiredness, weak social relationships and insufficient attention to study and careers.

People who don't care about the future or who lack self-control will watch more TV than they should, and will be less happy as a result.

Opinion polls suggest that this is the case for many Americans. Forty per cent of US adults and 70 per cent of teenagers say they spend too much time watching TV.

But there is another possibility which Frey and his team have not been able to rule out completely. It's that rather than excessive TV use making people unhappy, people who are already unhappy may choose to watch a lot of TV.

Frey thinks this is not the case, and he designed a test to back up his opinion. He says if he is right about heavy TV viewing causing unhappiness, it won't do it to everyone.

The only people seriously harmed by heavy viewing will be those who have other things they can usefully do with their time. (Economists call them people with "high opportunity costs" of time.)

They include the self-employed, senior managers and people in professions where the work never ends. For them, lost time matters.

By contrast, pensioners and the unemployed (with low opportunity costs of time) shouldn't be that much harmed by the hours taken up watching TV - they might even welcome them.

Frey has gone back to the European data and found exactly that pattern. Watching TV for more than 1½ hours a day doesn't appear to hurt pensioners and the unemployed, but it makes a big dent in the happiness of the professionals who do it. Denied time in which they know they could be really achieving things, they feel perpetually unsatisfied.

TV appears to play with our minds in other ways as well.

The European survey asked people about their anxieties. One question asked: "How do you feel about your household's income these days?"

Another asked: "How important is it for you to be rich?"

Frey found that heavy TV viewers were both more anxious and more greedy than were light viewers on the same incomes. They were also more scared about the outside world.

Other questions asked whether people could generally be trusted, and whether it was safe to walk outside at night.

On both counts heavy viewers were more frightened.

Television viewing is by far our biggest leisure-time activity. And it's not all bad. (I happen to work in television.) But until now discussion of its impact has moved little beyond debates about whether or not it makes us violent. Its biggest crime may be to steal our time.

Read more >>

Wednesday, June 22, 2005

Honey, we can't afford the kids

If you are thinking about having a child, stop. I have a financial warning: you probably can't afford it. Don't take my word for it, look at the result of a massive financial exercise conducted as part of the Government's recent review of the Child Support Act. It is relevant more broadly to anyone considering having a child, even if their relationship stays intact. If there is a mortgage involved, the outlook is chilling.

There are two completely different ways to work out the cost of having a child, and the review used both of them. One is to measure what couples with children spend and to work out how much it exceeds what similar couples without children spend.

The problem with this approach is that it examines "what is" rather than "what should be". Many parents might not spend enough on their children (they might not be able to); others may spend far too much.

The other approach is daunting, if not impossible. It is to identify and cost every single extra item of spending needed to raise a child (including, for example, each extra toothbrush and the extra toilet paper) and to add up those costs. In all, there are more than 700 such costs...

The task is made more difficult by the knowledge that a lot of the costs involve goods that are shared between the child and the parents. For example, a fridge is used by an entire household, but if there is a child in the house extra spending might be needed to make it bigger or to replace it sooner.

Much of the work involved calculating what a couple without children should reasonably be spending. A researcher, Paul Henman, began the task a decade ago at the then Department of Social Security, and finished it off in his present post at the University of Queensland.

He had to make value judgements, among them: no household needed to spend money on cigarettes; everyone needed an annual visit to the dentist; each household needed a car (a 12-year-old Corolla) and membership of the NRMA or such like, but not membership of a union.

His team prepared budgets for two different standards of living: "modest but adequate", based on the prices of the leading brands sold at Woolworths; and "low cost", based on the prices of Home Brand and No Frills products.

When it came to adding in the costs of children, Henman erred on the low side. He says that was deliberate. He told me this week he was under enormous pressure from his employers at the Department of Social Security to keep the estimates low. They might later be used to set benefit levels. These low estimates, adjusted for present prices, were presented to the Child Support Review.

They appear to be comprehensive. A six-year-old girl is assumed to need 49 different items of clothing and footwear, all purchased at Target. Among the toys needed for a 10-year-old boy are a bicycle, skateboard and cricket set. Where there are two children in the house, they are permitted a second, portable television set.

But a lot is left out. Children up to 14 are assumed to get their hair cut at home. All their visits to the doctor are bulk-billed. They go to government, rather than private, schools. And, even when they are teenagers, they continue to be outfitted at Target. Most bizarrely, to my way of thinking, teenagers are assumed not to own, or make calls to, mobile phones. They are limited to two local calls a day.

I put it to Henman that he was out of touch with the needs of the modern teenage girl. He conceded that he didn't have one of his own and said the assumptions underlying his work were in need of revision.

But even so, the costs he came up with are large. The cost of a three-year-old to a couple trying to eke out a "modest but adequate" living is estimated at $17,620 - most of it spent on child care. Without child care, the cost is a more modest $6500 a year, but it climbs as the child gets older, reaching $10,300 in the teenage years ($7850 if buying "low-cost" items).

To put these costs in perspective, they are said to account for between a fifth and a quarter of a typical household's disposable income.

A typical mortgage takes up more than a third of household income. I know many home buyers who can barely make the repayments. Henman's numbers suggest they cannot afford to have children.

And the other set of numbers prepared for the review, using actual spending patterns, are worse. Spending on children is said to climb over time to $19,500 a year for middle-income couples or $13,520 for low-income couples. This amounts to between a quarter and four-fifths of gross family income.

There are also indirect costs not taken into account in either of the studies. They include the income lost by the parent who withdraws from work to look after the children. Even if both parents continue to work, one is likely to seek a job where there are easier hours, less responsibility and less pay.

About the only bright side is that incomes tend to rise over time, making the cost of caring for a child in the teenage years less daunting than it would seem at birth.

It might be a good thing that most of us don't do the financial calculations. We close our eyes and dive in. We manage by cutting our spending or by extending already impossibly large mortgages.

We sense that children bring benefits that can't be described in financial terms. They give us a sense of purpose - they believe in us, idolise us and depend on us.

It is almost financially impossible, but it's worth it.

Read more >>

Wednesday, June 15, 2005

Ricardo Semler - Brazil's Caring Capitalist

Ricardo Semler - Brazil's Caring Capitalist was the subject of a quick and surprising story while on location for SBS TV in Brazil. (There is a video link too)

George Negus's introduction:

With John Howard proposing radical changes to this country's industrial relations system - a look at a very different system with a very different boss on the other side of the world.

In Brazil, on the factory floor and in the office, workers at the SEMCO manufacturing and services conglomerate pretty much call their own shots. Some might call it Anarchic Socialism, maybe others, cutting-edge capitalism - whatever, it's certainly paying financial dividends.

Indeed, it's so successful that it's unorthodox "worker participation" approach is being extended to other fields as well.

Well you might ask is there anything this bold Brazilian experiment could teach us here in Australia? Imagine if you will, students sacking their teachers!

SBS economics correspondent Peter Martin starts his report in exotic Rio.
Read more >>

Wednesday, May 11, 2005

It's a granny gravy train - grab a ticket

The future sounds frightening. Before the budget, the Treasurer, Peter Costello, warned that working-age Australians would soon have to support twice as many Australians aged over 65 as they do today. The changes are due to hit us in the next 40 years. And they can't be avoided. As the Treasurer likes to repeatedly remind us, "demography is destiny".

So why do I find myself not feeling worried? In fact, why do I find myself feeling actually grateful?

I've put myself in the position of my three-year-old daughter.

Grace will be in the middle of her working life in 40 years' time, when the changes talked about by Peter Costello hit with full force. I used to be worried that my children wouldn't be able to find meaningful or secure work. Nearly all of the one million or so extra jobs created since 1990 have been casual or part-time. Uncertainty has become the new permanence.

But it won't be in 2045. By then, instead of there being five people of working age to support each one over the retirement age, there will be fewer than 2½. Workers will be in demand. Employers won't be able to treat them casually.

The current shortage of skilled workers provides a taste of what's in store... According to The Australian Financial Review, there are now four accountancy jobs on offer for every one applicant. As a result, it says, accountants in their mid-20s are being offered salaries of $100,000-plus, as well as cars, five weeks of annual leave, sign-on bonuses and subsidised gym memberships. It's the kind of future I want for my children.

It won't just be available to university graduates. If workers really do become scarce in the decades ahead, employers will start valuing them for what they can do rather than the pieces of paper they hold. Qualifications of dubious relevance will no longer be demanded as part of the selection process. Students will switch from four-year degrees to three-year ones or move straight into employment, picking up what they really need to know on the job or in employer-sponsored part-time training. The education that my daughter does get will be real and not part of a mind-numbing charade designed to get her a job.

The jobs will be better as well. What can be automated will be automated in an effort to economise on labour. My daughter's work is unlikely to be mind-numbing either.

And if ever she decides to leave the workforce for a while and come back in her 50s, she stands a good chance of success. Right now it can be employment suicide to admit that you are older than 50. Employers even try to screen you out over the phone.

A few years back, Lynne Bennington, a management specialist in Melbourne, employed actors to pretend to apply for real jobs. One in every four of the recruiters they phoned said unprompted they would prefer a younger rather than an older candidate. One in every five asked about the actor's age. Then, as now, it was illegal for employers to discriminate on the basis of age.

My daughter will quite probably never have to suffer the humiliation and the collapse of self-esteem that comes from being unable to work at the age when many of us have the most to give.

Employers might even find my daughter increasingly attractive as she ages. By 2050 one in every three Australians will be older than 55. They are more likely to want to be trained by or buy things from someone they can relate to. They might even want to see the TV news read by a woman their own age.

And when Grace finally does retire she'll join an incredibly powerful club. One in every three Australian voters will be older than 65. They will be the most influential voting bloc since the entry into politics of organised labour. Most likely free of the traditional party loyalties that my generation grew up with, the aged of the future will be able to sell their votes to the highest bidder.

If the over-65s don't want to work, no politician is going to risk forcing them. If they want affordable, high-quality health care they'll get Medicare Gold and its successors extended and improved in election after election.

Growing up I felt ashamed and powerless about the state of the nursing homes in which several of my elderly aunts spent their final days. I have no such concerns about the nursing homes that will await my daughter. Caring for the aged will rightly come to be regarded as one of the most important things society can do.

Will we be able to afford it? The Treasurer has used the Productivity Commission's report on ageing to suggest that unless something changes in the next 40 years his tax take will have to increase by about 20 per cent. But the Productivity Commission itself has made it clear it's a bill we will be able to afford. It says that by then the real income of each Australian is likely to be roughly double what it is today. And it's a bill we mightn't have to pay at all.

Last year two Treasury economists published projections examining what would happen if over the next 20 years Australia was able to lift its workforce participation rate up to the level of the best-performing countries in the OECD, among them New Zealand. They found that most of the predicted extra tax bill would vanish.

It's research of which the Treasurer is well aware. That's why he's been keen to use what may be his final budget to do everything possible to get more Australians into work, be they single parents, people older than 55 or those who have retired early on the disability pension. He is one of the few politicians who realises just how important that is.

An aged Australia won't be bleak by any means. I am looking forward to it. Peter Costello is trying to make the transition as smooth as possible.

Read more >>

Wednesday, April 06, 2005

The art of persuasion, going once ...

Spare a thought for any people you know still trying to sell their house. They're about to be hit by another rise in interest rates, pushing prices down further. If it doesn't happen at 9.30am today it'll most likely happen at 9.30 on the morning after one of the next Reserve Bank board meetings.

And they are about to be told they can't trust their real estate agent.

Steven Levitt has been lauded by the American Economic Association as the most promising US economist under the age of 40. Ten of the economists it has previously so awarded have gone on to win the Nobel Prize. But Levitt seems to lack the necessary seriousness. Among his research topics are the voting behaviour of contestants on the game show The Weakest Link, the inner workings of the Ku Klux Klan, and the things people lie about at online dating sites.

His unifying theme is that people with access to information tend to abuse it. His hobby is catching them. Which brings us to real estate agents.

Levitt says he first became involved with agents when he went looking to buy a house. He felt they were subtly encouraging him to bid low. Which should have made no sense. Real estate agents are paid by commission. But then he took a closer look at the structure of those commissions.

Agents usually get a fixed proportion of the price the property sells for. (In Australia it is often 2 per cent.) That means that while the reward for actually getting a property sold is big, the extra reward for extracting a higher price can be tiny. An Australian agent who held out for an extra $50,000 for example might find herself earning only an extra $1000. But the cost to the agent of holding out might well be large: opening the house, accompanying visitors and negotiating contracts for weeks upon weeks until a higher price is reached. Holding out could destroy an agent's business.

But to the homeowner it's quite different. The owner usually wants the extra $50,000 and is prepared to wait. It is in the agent's financial interest to persuade the owner to sell more quickly than the owner should. And this is where what Levitt calls "information asymmetry" comes into play. The agent is an expert in the market. The owner is not. And they both know it. If the agent insists that a quick and cheap offer is actually the best offer the owner will feel obliged to agree.

Levitt figured that if this was happening, agents would act quite differently when it came to selling their own homes... They would hold out for longer and get higher prices. He examined the records of 100,000 sales in Cook County, Illinois, over a 10-year period and discovered that the agents did indeed get higher prices when they sold their own homes - about 3.7 per cent higher than the similarly featured and located homes they sold on behalf of their clients.

Of course, that could have been because they presented their homes better and tried harder to ensnare buyers. But if that was the case, Levitt reckoned that the agents' homes would have sold more quickly than those of their clients. In fact they sold a lot more slowly, staying on the market for 10 days, or 10 per cent longer. Agents appear to encourage owners to sell more quickly than they would do themselves.

And they appear to use a different language to describe those owners' homes. Certain words turn out to be associated with high prices when used in real estate ads. They include "granite", "gourmet" and "state-of-the-art". Each conveys specific useful information. Other words are associated with a lower price. They include "fantastic", "well maintained" and "charming". Levitt found that the agents tended to use the first group of words to describe their own properties, the second to describe their clients' homes.

He believes the words in the second group function as a sort of code. The phrase "well maintained" might signal to a buyer that a house is old but not quite falling down. A low offer might be accepted. "But to the 65-year-old retiree who is selling his house, 'well maintained' might sound like a compliment, which is just what the agent intends."

Levitt says it's difficult to function well as a real estate agent. You need to convince owners that you are acting in their interests while at the same time persuading them to settle for less than the best price and letting potential buyers know that a house can be bought for less than the best price.

It isn't that Levitt especially has it in for real estate agents. He believes that they are about as honourable as doctors, lawyers, car mechanics and teachers, all of whom can misuse their specialist knowledge to act against the interests of their customers. Doctors recommend and perform a higher rate of caesareans in regions where the birth rate is dropping. And teachers forge exam papers in order to push up pass rates.

In 2002, Levitt examined the eight years' worth of primary school exam papers submitted as part of the Iowa Test of Basic Skills. He looked for unusual patterns of answers that would suggest that teachers had "improved" the answers of their students (and their apparent performance as teachers) after the papers had been handed in. He found evidence suggesting that teachers had cheated in 4 to 5 per cent of the classes he studied. The school system retested 100 classes and fired the teachers it found guilty.

Which doesn't mean that we shouldn't put ourselves in the hands of experts. Levitt makes the point that it's often worth using experts even if you know they are trying to do you in. An untrustworthy real estate agent might still be better at selling your house than you would be yourself. A corrupt schoolteacher might still be better at teaching students than would their own parents.

But it pays to check up on experts. And that's getting easier. Levitt says before the arrival of the internet in the late 1990s Illinois real estate agents were able to sell their houses for about 5 per cent more than those of their clients. Afterwards the difference fell to 3 per cent.

It might also be a good idea to let the experts know you are on to them. I'd suggest buying two copies of Levitt's new book, keeping one for yourself and giving the other to your real estate agent. It's due out in the US next week. Here, you'll have to order it. Its disturbing title is Freakonomics: a Rogue Economist Explores the Hidden Side to Everything.

Read more >>

Wednesday, March 30, 2005

Low tax, low work?

If you repeat something often enough, especially in politics, it seems to become the truth. All the more so if it is plausible to begin with. Take the idea that if we are given tax cuts we will work harder. The so-called ginger group of Coalition MPs and its fellow travelers are pushing this idea to build their case for a cut in the top marginal rate of income tax, which is 47.5 per cent plus the Medicare levy.

The head of Parliament's economics committee, Bruce Baird, went on ABC radio shortly after the governor of the Reserve Bank complained about a shortage of skilled workers. Baird said the high top tax rate contributed to the shortage. "If we want real incentive - for people to stay in the workforce, for skilled tradespeople to work overtime - when they're hit by a 47.5 per cent tax rate, it is too high."

Australia's best-known backbencher followed up. Malcolm Turnbull said he wanted to cut the top rate so there was "nothing in the tax system which discourages people from seeking work".

Briefing the ginger group has been the Centre for Independent Studies. Its paper Tax Reform to Make Work Pay asserts that a cut in the top rate would make people "work harder to earn more".

It is a simple interpretation of human behaviour not shared by one of the founders of modern economics...

William Stanley Jevons asked rhetorically more than a century ago: "If a workman can earn ninepence an hour instead of sixpence, may he not be induced to extend his hours of labour by this increased result?"

His reply was that: "This would doubtless be the case were it not that the very fact of getting half as much more than he did before lowers the utility to him of any further addition. By the produce of the same number of hours he can satisfy his desires more completely."

What was he getting at? Any increase in pay, or a tax cut that increases pay, affects the desire to work in two diametrically opposed ways. On one hand it increases the financial reward for doing an extra hour of work, just as the centre has noted. Economists call this the "price" effect.

But on the other hand any increase in the rate of pay makes it easier for a worker to obtain his or her income target. After that it reduces the need to do an extra hour of work. Economists call this the "income" effect.

A pay increase or a tax cut makes extra work both more attractive and less necessary. It is impossible to tell on the basis of theory whether a tax cut would increase the number of hours people put in at work or cut them. Or do nothing much at all if the two effects more or less cancelled each other out.

It is also very difficult to find out in practice. Many of us are in jobs in which the hours are fixed and the pay rates don't vary much. So in 1994 four American economists decided to investigate the group of workers they thought most free to respond positively to a hike in their hourly rates of pay.

New York taxi drivers are free to vary the number of hours they work each day up to a maximum of 12 hours a shift. After paying a fixed fee for use of the cab, they keep every fare they earn. And their hourly rate of pay varies from day to day. On good days, when business is brisk, their hourly rate of pay is quite high. On bad days it can be appallingly low.

If an increase in the hourly rate did encourage workers to put in more hours, New York taxi drivers would be expected to put in the most hours on those days when their pay rate was high, knocking off earliest on those days when it was low.

A Caltech University economist, Colin Camerer, and his team examined more than 1000 taxi company documents providing data on the daily pay rates and hours of work of about 500 drivers. What they found appeared to defy common sense.

Typically on those days when business was good, New York taxi drivers knocked off the earliest. On those days when their hourly pay was at its lowest, they worked the longest. It's the opposite response to that assumed by the Centre for Independent Studies. Camerer concluded that taxi drivers were "target earners" who kept driving each day until they made a certain amount of money.

(Interestingly, he found that not all drivers behaved that way. The more experienced drivers did tend to work longer hours on those days when business was good, as assumed by the centre, but the effect was small and overwhelmed by the behaviour of the less experienced drivers.)

Singapore taxi drivers appear to behave that way as well. Yuan Chou of the University of Melbourne discovered that in 1997 when he set out to test whether Camerer had stumbled onto a purely Western phenomenon. In the latest issue of the Journal of Political Economy the economist Henry Farber revisits Camerer's study and finds no connection between the daily pay rates of New York taxi drivers and their knock-off times.

But even this is scarcely good news for those politicians and think-tankers asserting that tax cuts make people work harder. If that was true you would expect to find a very strong positive connection between pay rates and knock-off times.

After surveying studies on all types of work Farber concludes that the response of men to an increase in pay is usually "very small and not significantly different from zero".

Intriguingly, he finds that for women, particularly married women considering returning to work, the response to a pay hike or a tax cut is a good deal larger.

There are several reasons that should be the case. Married women have other demands on their time (an Australian survey finds that married women spend twice as much time on housework and child rearing as married men); they often don't need to work in order to live (having access to their husband's income); and the effective rates of tax they face on returning to work are horrific. Many make next to nothing after paying for child care.

The evidence suggests that these are the people the ginger group should be focusing on if it wants to use the tax system to get Australians to do more work. Cutting the top rate of tax might do nothing at all.

A few years ago my wife and I needed to phone our plumber. He told us he had retired early and moved up the coast.

I have a suspicion that if he had been facing a lower rate of tax he might have retired even sooner.
Read more >>

Thursday, January 20, 2005

Stay grounded. House prices haven't hit the floor

So you think the slump in real estate is over? You are in good company. On Tuesday the research chief at Australian Property Monitors declared house prices might have "finally reached their floor". A day later real estate agent Ivan Bresic said the market looked "set to come back strongly in 2005".

They must be talking to the agents I've been talking to.

For six months my wife and I have been searching for a house. We sold and then rented while we talked to agent after agent. They all seemed to be decent people. None of them lied about the state of the houses they were selling. But when we asked about the state of the market they began to babble.

Prices were just about to pick up. They could sense it. They were getting more inquiries. Some confided that they believed prices were already moving up. This was at a time when Sydney prices were relentlessly falling and when the agents themselves were coming back to us with progressively lower asking prices...

If the agents had their heads in the stratosphere when it came to prices, the economists I met at an annual forecasting conference in December could not have been more firmly grounded.

Each year the executive of Australian Business Economists (ABE) presents its forecasts for the 12 months ahead. On the committee are Australia's leading private-sector forecasters, among them the economic chiefs at Westpac, Qantas and Macquarie Bank.

Not a single member of that committee expects an increase in overall house prices during the next 12 months. The committee's forecast is for a fall in prices of between 5 and 10 per cent. And it says there's no sign of a pick-up beyond that. There won't be a "meaningful" increase in prices until the end of the decade.

So who are you going to believe? On one hand it must be said real estate agents are pretty personable, and that until recently they seemed to have had a good grasp on the way prices were moving. On the other, it must be said that economists, while less impressive socially, tend to get the difficult forecasts right.

The past year was extraordinarily difficult to forecast. When it began, prices were still soaring. And yet the ABE's forecasting team correctly picked that there would be a downturn and got its magnitude about right.

And I have another reason for throwing my lot in with the economists. It's the broad sweep of real estate history.

Professor Peter Abelson, from Macquarie University, has done anyone interested in house prices a huge favour by putting together reliable data for each Australian city going back to 1970. It wasn't easy. Much of what has previously passed for good data has been suspect, depending on the sales the agents themselves have chosen to report.

Abelson got around this by using state Land Titles Office data where he could and also the work of a clerk in the Tax Office who compiled figures for Hobart as a hobby.

When adjusted for inflation, Abelson's data points to four distinct house price booms in Australia, each separated by years of stagnant or falling prices. The first thing to note is that each of the first three booms was short. Beginning in 1971, 1979 and 1987, each lasted two to three years. The most recent boom is the exception. It lasted from 1996 to 2003.

The second thing to note is that after each boom collapsed it took five to seven years for Sydney prices to crawl back to their previous real level. And Abelson believes the true story on prices is even grimmer than those figures suggest. That's because houses are getting bigger. New homes have typically 40 per cent more floor space than they did 20 years ago. And existing homes are continually being extended at the owners' expense.

If a house that used to sell for $400,000 now sells for $700,000 but has an extra bedroom and a living room and a deck, it didn't really increase in price by $300,000.

Comparing like with like, Australia's house price booms have been shallower than is widely believed and the slumps between them have lasted even longer: some for the best part of a decade.

If you are an owner who still wants to feel optimistic about the decade ahead, or perhaps an agent, you are perfectly entitled to declare this doesn't matter. History won't repeat itself. Sydney will be spared. But you would need a good argument. The ones that I have heard don't stand up.

One is that Sydney prices move differently to those in the rest of Australia. Abelson's figures show prices in all Australian cities move surprisingly closely together, with the recent movements in Sydney particularly closely tied to those in Brisbane and Melbourne. Only in Perth and Canberra have prices at times shot up on their own: in Perth's case because of a mining boom, and in Canberra's case following the election of Labor governments.

Another argument is that Sydney is becoming an international city, accepting the bulk of new migrants. It is true that Sydney takes in more new arrivals than any other Australian city, and that once here they typically stay here. But that puts less pressure on the NSW population than you might imagine. Migration pulls in about 40,000 people each year. But at the same time about 30,000 locals move out, mostly to Queensland and Victoria. As a result Sydney's population is actually growing more slowly than either Brisbane's or Melbourne's.

None of this need disturb real estate-obsessed Sydneysiders. If you own a house you've enjoyed a spectacular capital gain. On Abelson's figures, since 1980 the real value of your home has more than doubled. Even allowing for the money you have spent on improvements it has increased 75 per cent.

But savour it while you can. That gain will shrink if, as the economists expect, real house prices head down.

Read more >>

Wednesday, January 12, 2005

Lessons must be learnt if we are to keep teachers

I grew up in a family of teachers. Around the kitchen table the shop talk used to be about the unending teacher shortage. Many of my own teachers had been flown in from Canada, Britain and the US in a bid to plug the gaps. Others were retirees, barely able to cope, drafted back part-time. My dad had been a lathe operator, drafted without training into teaching metalwork.

And then suddenly, in the middle of the 1970s, the pendulum swung. Instead of a shortage the crisis became one of a massive and growing oversupply. Graduates in teaching were no longer getting jobs as teachers. Teachers who had left the service could no longer get back in. Official projections pointed to a surplus stretching out decades.

Now the pendulum is swinging again. The NSW Education Minister, Dr Andrew Refshauge, has launched a parliamentary inquiry into the recruitment of teachers, with submissions due next month. There's talk of a looming shortage. A big chunk of the teaching workforce is set to retire in the next five years.

What is it about the job market for teachers that makes it swing so quickly from famine to feast? The answer tells us something about politics and a lot about the very unusual nature of the job and the people who stick with it...

First, politics: it is true that the number of teachers needed at any one time depends on the number of students, but it also depends critically on political decisions about the desired ratio of teachers to students.

The decisions are political decisions because state governments make them. The states are by far the biggest employers of teachers.

Beginning in the 1960s, state governments aggressively raised their targets for the employment of teachers per student, even as the number of students was soaring. Class sizes, as measured by the pupil-teacher ratio plummeted. Australia-wide the ratio slid from 26 to 19.

And then in the mid-1970s the politics changed. In the midst of a worldwide economic downturn and a political crisis in Canberra each state government either temporarily halted further falls in class sizes or slowed the process. (By the early 1990s states such as Victoria and South Australia actually pushed up their class sizes in response to financial pressures.)

Looked at this way, our state governments have created much of the teacher "shortage" and the subsequent "oversupply". And they have also created the shortage they believe is about to come. The surge in hiring between the mid-1960s and the mid-1970s produced a workforce heavy in graduates of that time who are now approaching retirement.

But if it is our governments that create the swings in the job market for teachers, it is our teachers that turn them into crises. Here's how.

More so than in most professions, teachers don't particularly like teaching. Consider this: an astonishing 20 per cent of Australian teachers leave teaching within their first three to five years. In some parts of Australia, 50 per cent leave. The University of Sydney's Dr Jacqueline Manuel describes teaching as "the profession that eats its young".

Some of those who leave come back later. In fact, leaving, trying something else, and then returning is common in teaching. Some leave to start families, some leave to broaden their experience, and others treat teaching as a job of last resort.

Until the jobs dry up. When in the mid-1970s the state governments cut back their hiring rates, resignation rates plunged. The fear was it mightn't be possible to get back. Because resignations had typically created the bulk of teacher job vacancies, the hiring rates fell further, pushing resignations down further still, drying up the flow of teaching jobs almost completely.

(Naturally this frightened many would-be teachers and in time they moved away from teacher training courses, easing the surplus. But their decisions took years to have an effect. It takes three to four years to finish a teaching degree. Students who had already started continued to graduation.)

The same mechanism will work in reverse in the coming teacher shortage. The more job vacancies governments need to fill, the more relaxed teachers will feel about resigning, creating even more vacancies to fill, worsening the impending shortage.

If only there was a way to make teachers more serious about staying teachers. The Teachers Federation suggests higher salaries. Surprisingly, it's a proposition not strongly supported by evidence.

Melbourne University's Dr Michael Shields has examined the movement of teachers in Britain. He finds that most teachers who leave go to jobs that pay less than they got teaching, typically 22 per cent less expressed as an hourly wage. The new jobs have longer hours as well. Teachers are prepared to give up money and work longer hours in order to get out.

Shields has modelled the effect of a boost in teacher salaries of 10 per cent. He finds it would cut resignations by less than 1 per cent.

That isn't to say that higher salaries might not be important as part of a broader package of measures designed to get teachers to feel better about teaching. The 2001 Vinson report into public education described higher pay as a "gesture" and said that morale among teachers was so low that no other gesture could substitute for improved salaries.

But by itself higher pay would be wasted. There is something fundamental about the job or the way we ask people to do the job that makes teaching unsustainable for so many of our teachers.

For some it's a love-hate thing. Teachers report both greater levels of job satisfaction than other people and higher levels of stress.

My father told me that teaching was the only job he knew in which every day he faced people trying to stop him achieving what he was employed to achieve. They were called students.

Read more >>

Wednesday, January 05, 2005

Dismal failure to count the true cost


The tsunami can only be seen in a positive light by ignoring human values, writes Peter Martin.

It didn't take long after perhaps the greatest natural disaster of modern times for an economist to say what would otherwise be unthinkable.

Fred Bergsten runs the Institute for International Economics in Washington. He is a former assistant secretary of the US Treasury. Three days after the tsunami hit, with at that time tens of thousands confirmed dead, he told US National Public Radio (NPR) that the tragedy might be a good thing for the economies concerned.

He said: "Like any disaster, you get negative effects through destroying existing properties and people's health, but you do get a burst of new economic activity to replace them, and, on balance, that generally turns out to be quite positive."

What on earth could he have meant? How could the loss of so many lives so suddenly, with so many more to come, be "on balance, positive"?...

It is one of the mysteries that first got me interested in economics and economists. I remember hearing at school that it would have been a good thing for Britain, economically, if it had lost World War II and had its buildings and factories destroyed.

Bergsten agrees. He told NPR that after Japan and Germany were flattened in 1945 they experienced economic booms that lasted for the next 20 to 30 years. He said that happened partly as the result of reconstruction spending but mainly because their old factories were replaced with state-of-the-art ones.

Applying that lesson to the devastation wrought on the Thai island of Phuket he says: "When they put up new resort hotels, they'll be more modern, they'll be more attractive. They'll probably bring in more people in the future."

Bergsten isn't alone in his distasteful optimism. Britain's Standard Chartered Bank has told its clients it expects the impact of the tragedy to be "V-shaped". It says that was the pattern with the SARS epidemic, the Bali bombing and Japan's Kobe earthquake: a large dip in economic activity followed by increased aid and government spending, then an economic recovery a year or so later.

It says it expects the same sort of pattern in most of the countries affected by the tsunami, although it acknowledges that the present disaster is far greater and more widespread than the earlier ones. (The bank says the exceptions to its optimistic outlook are Sri Lanka and the Maldives. Each faces severe difficulties, being in bad financial shape before the tsunami and relying on tourism for most of its foreign income. The Maldives collects more than 90 per cent of its tax revenue from tourism-related taxes and import duties.)

Such analyses only make sense if you don't pay attention to the lives that are being lost. They would sound ludicrous to someone whose family had been swept away.

The models of Bergsten, Standard Chartered and their ilk value the production that has been lost with those lives (tourism services, factory output and so on) and look forward to its return. But they don't value the lives themselves. Most of us value human lives above what they can produce.

When one of our parents or children is at risk of dying we find ourselves prepared to pay almost anything to stop that from happening, regardless of their productive capacity.

I say "almost anything" because a relatively new branch of economics believes it has found an upper limit to what we are prepared to pay to save a human life. The most widely quoted American limit is $US6.1 million ($7.83 million), known as "Viscusi's number" after the Harvard University economist Kip Viscusi.

In more than 60 studies Viscusi and his colleagues have tried to determine the monetary value we place on human life by examining our behaviour. If, for example, I demand an extra $610 a year to move from a job which I know is completely safe to a job in which I know there is a one in 10,000 annual risk of dying, they conclude that I value my life at $US6.1 million. They apply the same sort of calculations to decisions about my purchases, such as how much extra I am prepared to pay to buy a car with extra safety features.

The range of values resulting from the studies is wide, from as low as $US900,000 a life to more than $US27 million per life. But the average, $US6.1 million, has acquired an almost mystical status in the US. It has come to be regarded as the statistical value of human life. In 2000 the US Environmental Protection Agency used it to set the permissible level of arsenic in drinking water. Had the Viscusi number been higher than $US6.1 million, the agency would have imposed a less lenient standard.

There are many reasons for believing the number should be higher. One is that most of the workplace studies conducted by Viscusi and his associates exclude women. Recent studies suggest that women typically value safety about five times as highly as do men.

Another is that most of studies conducted in the US examine the value of life only to the person whose life is at risk. But other people value that life as well. In my own case they include my daughters, my son, my father, my wife. If I died tomorrow my own loss would only be the beginning.

The loss resulting from the tsunami is far more than the missing production and infrastructure. And it is far more than one Viscusi number for each of the 150,000 or so people believed to be dead. The entire planet appears to be grieving. We all seem to have lost something.

The economics profession is struggling to find the language to talk sensibly about what has happened.

That it can't yet do it says as much about that profession as it does about the scale of the tragedy.
Read more >>