Sunday, November 17, 2013

Felling better about paying your tax? Thank an economist

Remember how you used to feel when you got a letter from the Tax Office?

Unless it contained a refund, you probably felt a bit like the late Sir David Frost, who memorably summed up the creed of Britain's Inland Revenue Service as: ''If we can bring one little smile to one little face today, then somebody's slipped up somewhere.''

It's not so much that the Tax Office doesn't know how to write nice letters, it's that those letters haven't made it easy to pay or submit the information that's needed. Until now.

Next week the Tax Office will go public with details of an extraordinary behind-the-scenes re-engineering of the way it interacts with the public.

It's borrowing ideas from Google, from behavioural economics and from psychologists. It even has some on staff.

Cheryl-Lea Field is the deputy commissioner in charge of service delivery (debt), which is another way of saying she is the chief debt collector.

She says the ATO used to be indifferent to the way its letters looked. It operated on the heroic assumption that ''because the law required people to do things they would'', she told me on the line from her Brisbane office.

It's a bit like economics. Until recently it overwhelmingly operated on the assumption that people did exactly what was in their interests. If it was in their interest to pay a bill on time they would, if it was in their interest to lose weight they would, and so on. That's all that mattered.

Until the incident involving cashews. In the late 1970s economist Richard Thaler had a group of graduate students around for dinner. While the food was cooking he brought out a large bowl of cashews.

''We started devouring them,'' he later explained. ''I could see that our appetites were in danger. After a while I hid the bowl in the kitchen. Everyone thanked me.''

And then it hit him. They shouldn't be thanking him if they really believed that human beings were rational. ''After all,'' he recalled in his biography, ''if we wanted to stop eating cashews, we could have done that at any time.''

With Amos Tversky and Daniel Kahneman (who went on to win the Nobel Prize in Economics) he founded the new science of behavioural economics. Its role was not to merely examine what people should do, but to examine what they actually did and identify the systematic ways it differed from what was rational.

As Field put it: ''Economists suddenly came to the conclusion that people don't act rationally.

So just because you say 'you have to pay on this date' or 'you have to lodge on this date', people don't necessarily do it.''

Taking the lead of Britain's Revenue Office (which got in quite early, perhaps stung by David Frost), the ATO has been quietly trialling different ways of asking for money.

It has set up a ''simulation centre'' in Brisbane to present pretend letters to real people and see how they react. It presents pretend web interfaces as well. Then, just as Google tests new search algorithms by randomly dishing them up to some customers and not others, it posts new letters to 1000 of its randomly selected customers and old ones to the rest.

The results, to be detailed in the Public Service Commission's state of the services report this month, are astounding.

Merely by removing some opening words and highlighting an ''amount due'' box, it has pushed up the response rate to one letter by 5 to 6 per cent. The phrase it removed was: ''Please disregard this letter if you have paid this debt in full in the last seven days.''

By including an extra phrase in a letter to small businesses it lifted their response rate 12 per cent. The phrase said most ''lodge on time''. It's also test marketing the phrase: ''Paying tax is a fair way for everyone to contribute to the Australian community.''

It's even changing the scripts it gives to its call centre operators. They have been told to state very clearly what the person calling them needs to do next, and repeat that statement at the end of the call.

The move to online tax filing will make fine tuning even easier. The ATO will be able to adjust its forms in real time. The Bureau of Statistics has found that people find it easier to fill in the census online even though it takes just as long with paper.

It's becoming easier to deal with government agencies because they are starting to treat us more nicely. They are absorbing the lesson reluctantly incorporated into economics - that we're not that rational, and we've got feelings.

In The Age and Sydney Morning Herald

Thursday, November 07, 2013

Sorting out the trash. Tax shows what matters to Hockey

You can learn a lot about someone's priorities by the way they sort out the trash.

Joe Hockey and assistant treasurer Arthur Sinodinos have sorted through 96 tax measures bequeathed to them by Labor as announcements not yet signed into law.

(That it ever got this far is an indictment of Labor in government. It was keener to announce measures than it was to ensure they were practical and give Treasury the resources to bring them about. One superannuation measure was announced in the budget of May 2012, took effect from July 2012, and didn’t finally become law until June 28 2013 - two days before the end of the financial year for which it had applied.)

Hockey and Sinodinos have sorted the measures into three piles - those they will proceed with, those they will dump or partly dump, and those they will discuss with interested parties but are inclined to dump.

Some of the decisions are no surprise. They were always going to dump the extra fringe benefits tax on employer-provided cars. They said so during the campaign. They were always going to proceed with Labor’s three successive massive hikes in tobacco excise. They meticulously avoided criticising them during the campaign, saying only that they wouldn’t panicked into “a knee-jerk reaction”. It’ll earn them $5.2 billion over four years and much more into the future.

Their priorities show in the measures they dumped, but didn’t need to. Gone is Labor's (minimal) attempt to impose tax on the super fund earnings of retired millionaires. Right now they pay nothing on the earnings of assets in their funds after they have retired (as well as nothing on the super payouts themselves). After a drawn-out battle in April Labor announced a feeble 15 per cent tax on the fund earnings of retirees, but only on the extra earnings after they had passed $100,000 per year. It would have applied to just 16,000 people, all of them millionaires.

At the same time Hockey and Sinodinos have drawn up their own legislation to axe Labor’s Low Income Super Contribution. It pays up to $500 into the super accounts of Australia’s 3.6 million lowest earners, none of them on more than $37,000.

In  The Sydney Morning Herald 

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Monday, November 04, 2013

Climate change. Direct needn't mean no action

Its the end that matters, more than the means

Ask 35 leading economists whether they would prefer Labor’s carbon price or the Coalition's “direct action” and only two will opt for direct action.

And one of them does it as a sort of joke. Queensland University’s professor Paul Frijters told Fairfax Media last week he thought "direct action" meant "no action". On that basis he thought it was exactly the right policy “for a small country like Australia”.

Economists love prices, for the very good reason that they work. In July, 2012 electricity prices jumped 15.3 per cent. Much of the jump was due to the carbon price. (By way of comparison the same time a year earlier they had jumped 7.7 per cent; the same time this year they jumped only 4.4 pc, the lowest such rise in six years.)

Household electricity use per person dived 3 per cent. Demand for electricity, like demand for nearly everything else, responds to price. If it didn’t, the alcopops industry wouldn't have fought so hard against moves to double the alcopops tax in 2008. Alcopops sales wouldn’t have slid 30 per cent as a result.

And yet there’s a wariness in economists embrace of prices when it comes to cutting emissions. Of course they are the cheapest way of changing behaviour. The Grattan Institute and the Productivity Commission have each examined the cost of command and control programs such as planting trees or paying households to install solar panels (two of the Coalition’s favourites) and found them enormously costly per unit of emissions saved - far more costly than the present carbon price of present $24.15 a tonne.

And yet...

Nobel prize winning economist Paul Krugman sums the diffidence this way in an article in the New York Review of Books, due out this week:

“Why is putting a price on carbon better than direct regulation of emissions? Every economist knows the arguments: efforts to reduce emissions can take place along many ‘margins,’ and we should give people an incentive to exploit all of those margins. Should consumers try to use less energy themselves? Should they shift their consumption toward products that use relatively less energy to produce? Should we try to produce energy from low-emission sources or non-emission sources such as wind? Should we try to remove CO2 after the carbon is burned? The answer is, all of the above. And putting a price on carbon does, in fact, give people an incentive to do all of the above.”

Economists overwhelmingly agree that a carbon price is the best way to move all of the relevant markets at once, cutting emissions for the cheapest possible price. “And I, of course, agree - they’d probably revoke my economist card if I didn’t,” Krugman says.

And yet: “studies attempting to analyze how we might most efficiently reduce carbon emissions strongly suggest that just one of these margins should account for the bulk of any improvement - namely, we have to sharply reduce emissions from coal-fired electricity generation”.

“Certainly it would be good to operate on other margins, especially because these studies might be wrong. Nonetheless... direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing - not as good, but not bad.”

It’s as unlikely an endorsement as you’ll find.

And behind the scenes the people who drew up Labor’s carbon pricing scheme were thinking along similar lines...

Quietly, alongside the planned carbon price, in 2011 they set aside up to $2 billion to buy and close as many as five of Australia’s dirtiest coal-fired power stations. Called “Contract for Closure”, the companion scheme was direct action of the most direct kind. The closure of just two of those stations - Hazelwood in Victoria and Playford in South Australia - might have cut emissions by 20 million tonnes.

Labor wouldn’t have developed the scheme if it didn’t see a role for direct action.

Later, minister Martin Ferguson abandoned the negotiations after none of the owners would accept his price.

(As it happens the carbon price, the rapid growth of wind farms and the lower demand for electricity generally has done much of what the Labor’s Contract for Closure program would have anyway. Hazelwood is operating below capacity and Playford has been mothballed. Wind farms now provide one quarter of South Australia’s power.)

The Climate Change Authority in its landmark report released last week also went out of its way to say there was more than one way to skin a cat. It was advising on “ends, not means”. Australia would need to ramp up its target for emissions reductions from 5 per cent to 15 or 25 per cent below 2000 levels by 2020.

The Coalition wants to buy emissions reductions through a tender process just as Labor did with Contract for Closure. The Authority reckons the Coalition's fund could “mobilise similar emission reductions opportunities” to Labor’s emissions trading scheme. The important thing is to get there. It’s how the minister Greg Hunt will be judged. Some goals are too important to quibble over the means of achieving them.

In  The Sydney Morning Herald and The Age

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Easy lovers. How to understand your adolescence

Meet an economist who’s about to make sense of your entire adolescence.

Kai Konrad is a specialist in public debt. In a departure from his normal role at the Max Planck Institute for Tax Law and Public Finance in Germany he has just published a paper entitled Affection, speed dating and heart breaking.

It’ll bring back memories. I am thinking about Phil Collins right now. He used to sing about “easy lovers”. Konrad calls them “high-frequency daters”. Pat Benatar would have called them “heartbreakers”. But why? Why do “easy lovers” cause so much heartbreak and why does so much of society think badly of them? Konrad lists some of the words used, and they are not nice.

As he sees it, it’s a problem of missed communication.

He says there are two types of daters. Low-frequency daters find the process emotionally exhausting. They are more interested in finding ‘the one’ than in shopping around. High-frequency daters quite like shopping around, they are in no hurry.

When high-frequency daters meet high-frequency daters there’s no problem. They have a good time and (probably) move on. When low-frequency daters meet low-frequency daters there needn’t be a problem either. The might even marry. (Although given that they are so cautious about exposing their feelings, they might quite likely never meet.)

The problem arises when a low-frequency dater meets a high-frequency dater and doesn’t know it. He or she can tell that the high-frequency dater is interested, but can’t tell whether or not it is because that person is nearly always interested (an “easy lover”) or similarly cautious and genuinely finds him or her extraordinary.

If it’s the second, marriage is highly likely. If it’s the first, there’s buckley’s chance. Konrad’s calculations show easy lovers turn out to be cautious marriers. As he puts it, they have “high reservation utilities for entering into a marriage”.

Stripped of the maths the reasoning is straightforward. High-frequency daters hook up with so many potential lifetime partners they can “afford to be picky”. This makes them “heartbreakers”...

Without meaning to, they hurt cautious daters who mistake their interest for something serious.

As Konrad puts it, somewhat technically: “High-frequency daters have a negative externality for low-frequency daters. Their higher fall-back utilities as players participating in the matching process make them more reluctant to propose. As a result, if people of different matching frequency meet, the high-frequency dater is more likely to disappoint the low-frequency dater.”

Disappointment turns to anger. Konrad lists several of the labels given to such men: womaniser, playboy, etc. He is gracious enough not to list those given to women, merely saying they are “labels that receive similarly low social approval”.

The labels sound like moral judgments, but Konrad thinks that’s not where they are coming from. Society comes up with hateful words for easy lovers simply because they unintentionally disrupt the marriage market.

What are people in the market looking for when it is working well? Economists used to call it “pizazz”. They thought it was one single property made up of things such as beauty, height, earning power and the like. Those who had more of it were more marriageable, those who had less, less so. Konrad disagrees. He thinks it is more of a matching process. What’s important for some is unimportant for others.

Last year German economists Arnaud Dupuy and Alfred Galichon examined 20 years of social and marriage data and came to more or less the same conclusion. Some things do matter, big time. But for others, its a matter of taste.

Education really matters. Dupuy and Galichon find it’s twice as important as is height or body mass index. All types of women find a more educated man more attractive. But only some types of men find an educated woman attractive. After that it gets messy. Emotionally stable men are attractive, but only to women who are “conscientious”, men with “autonomy” are attractive to women who are extraverts but repellant to women who are conscientious, and so on.

What makes a marriage stay together? One third of them don’t. Examining 2480 Australian marriages over seven years Rebecca Kippen of Melbourne University and Bruce Chapman of the Australian National University found it helps enormously if the couples are close in age and similarly educated. Nothing much else matters, or at least nothing much else economists can get at.

Perhaps some of it is meant to be mysterious.

In The Canberra Times and The Sun Herald

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Sunday, November 03, 2013

Never, ever, take dietary advice from the soft drink industry

It is reckless with the truth

Never take dietary advice from the soft drink industry.

Remember Coca Cola’s infamous 2009 “myth-busting” campaign featuring the actress Kerry Armstrong? It said it was it a myth that Coke made you fat, a myth that it rots your teeth, and a myth that it was packed with caffeine.

The Australian Competition and Consumer Commission made it publish corrective advertisements about all three. "Coke's messages were totally unacceptable, creating an impression which is likely to mislead that Coca-Cola cannot contribute to weight gain, obesity and tooth decay,” the Chairman said at time.

The industry is at it again. But this time the message is more dangerous, precisely because it sounds more believable.

Three leading health organisations - Diabetes Australia, the Heart Foundation and the Cancer Council - banded together this week to to run a television ad which shows the 16 teaspoons of sugar in a 600ml bottle congealing into fat as they enter a drinker’s body.

They want vending machines banned from schools, the sugar content cut, and the manufacturers to “stop promoting the message that high-kilojoule beverages are part of a healthy, balanced diet”.

I don’t like their chances. Appearing on ABC News 24 to respond the chief executive of the Australian Beverages Council Geoff Parker spoke instead of “getting people to understand the concept of the total diet”.

According to the Beverages Council, “all kilojoules matter, it doesn’t matter where those kilojoules come from.”

What matters is “energy in and energy out - what it really comes down to is that people will put on weight if they consume more kilojoules than they expend through physical activity”.

It’s simple, and it turns back clock on dietary science thirty years. It was indeed once thought that all fuels were much the same. It didn’t matter what you poured down your throat - if you poured in less you would get thin, if you exercised more you would burn it off and get thin.

It’s still definitionally true, but it tells us nothing about the way different types of fuel affect our compulsion to pour things down our throat and our ability to burn fuel off.

Carbohydrates - especially sugar - are special. Science journalist Gary Taubes outlines our emerging knowledge of them in his two latest books Good Calories, Bad Calories and Why We Get Fat.

Human beings grow because we secrete hormones. Insulin is one of them. Sugar fires up insulin.

Here’s what happens when we take in several teaspoons of sugar (there are 16 in a 600ml bottle)...

Insulin and associated chemical messengers intercept whatever fat we are digesting before it gets to our bloodstream and stash it wherever they can, often pumping it into fat cells. At the same time the substances that allow fat to leave our fat cells get scarce. Fat gets locked in to the cells. It becomes temporarily unavailable. We feel weak and hungry. If we are unlucky we’ll reach for more sugar.

As Tabes puts it: “We don’t get fat because we overeat; we overeat because we’re getting fat.”

(Some of the sugar also gets directly turned into fat in our livers as the television ad indicates, but the more important effect is that insulin helps push other fat into our fat cells and temporarily prevents it getting out.)

As with most science there’s room for disagreement. The mechanism is more complicated than I have just described and it is not yet fully understood. But what is known - for certain - is that fuels ain’t fuels. Some fuels promote fat growth, hunger and sloth in a way others do not. They help determine whether it’s more energy in or more energy out.

Advising people to take care with “energy in and energy out” when your own product is making that difficult is particularly cruel, in my opinion.

And so too is parading misleading statistics (a bugbear of mine, I’ll admit). The Beverage Council says across all children the proportion of energy provided by soft drinks halved from 3.3 per cent in 1995 to 1.6 per cent in 2007.

It sourced that claim from a report that doesn’t make it. When I asked for the real source it provided another, an analysis that happens to have been funded by the Beverage Council itself, with extra funding to “write the manuscript by Coca Cola South Pacific”.

That report specifically says that two figures are not directly comparable. Among teenagers soft drink consumption climbs with age. The 1995 figure covers children aged up to 18 years, the 2007 figure only children up to 16 years.

The industry is reckless with the truth. It’s the last place you should turn for advice about your diet.

In today's Canberra Times, Sun Herald


Saturday, November 02, 2013

The dietonomics of fat. Correlation does not mean causation

Repeat after me.

In economics as in medicine one of the easiest mistakes is to assume that correlation means causation.

In 2010 two of the biggest names in international economics produced a study showing that when a nation’s government debt hit 90 per cent of gross domestic product its economic growth fell. Politicians used the finding to promote austerity in Europe, with unfortunate results. But the researchers hadn’t proved causation. It was just as likely that low economic growth caused the high debt to GDP ratio as it was the other way around.

Science writer Gary Taubes who was interviewed on the Catalyst program believes that’s how it is with fat.

People who are fat either eat more than thin people or do less exercise. We’ve come to believe it’s the eating or lack of exercise that’s making them fat. But it could be the other way around. Their body’s compulsion to store and hold fat might be forcing them to eat more and stripping them of the energy they need to exercise.

Sugar creates such a compulsion. It produces insulin which pushes fatty acids into fat cells and temporarily locks them there removing a source of energy. Its why people feel weak as they are eating a sugary or carbohydrate-laced meal and hungry for more.

Taubes says that in contrast fat itself doesn’t do that. Taken without carbohydrate fat doesn’t make us fat. After all, we have been eating it for millennia and sugary foods are relatively recent. Which would mean the traditional food pyramid should be turned on its head. Instead of being told to eat only small amounts of fat and large amounts of carbohydrate we should be told to do the reverse (except that we couldn’t eat large amounts of fat - it satisfies rather than builds an appetite). But changing the advice would mean organisations such as the Heart Foundation admitting they have been wrong. Cardiologist Ernest Curtis ruefully told Catalyst, “that’s not going to happen”.

And it would antagonise incredibly important industries. How would the sugar industry cope if food producers tried to remove it from virtually every processed product? How would the grains industry react if we were advised to abandon porridge, corn flakes and bread in the morning?

Part of a larger piece for the Sydney Morning Herald on the ABC Catalyst controversy

Below, Robert Lustig explains the damage caused by sugary foods.

Warning: The video is 90 minutes! (Watch the rest later here)

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