HECS. Why the new university rules hit low income earners the hardest

Life Matters Wednesday July 23, 2014

Imagine this. Two students, both going to university at the same time, both charged the same fee and both graduating together, but one has a manageable debt - perhaps 50 or 60 thousand dollars - and the other ends up paying $100,000.

New calculations about the effect of the government's higher education changes suggest it's possible, and the student who ends up paying the most will be the student on the lowest income....

15 minutes, play or RIGHT CLICK to download mp3




Reading:

. Poor graduates to pay about 30 per cent more than rich under Abbott government's university interest rate fee changes

. Unpopular uni debts likely to be reversed

. Overview of Higher Education Budget Changes


Related Posts

. Tony Abbott: the most radical prime minister since Whitlam

. "A crime", "absurd". Stiglitz on the budget changes to health and education

. Where's the Gonski report? It's back, on a government website

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Everyday Economics. Going cashless?

Life Matters Wednesday July 9, 2014

Searching around in your pockets? Looking for cash?

You might need it for a parking meter, for small change for the school lunch or to buy a quick cup of coffee.

It would be easier if we abandoned cash altogether, as several states have for road tolls.

But are you ready?

Cash has a hold on us. We'll abandon it for some things, but could we ever be ready to abandon it altogether?

The idea's been given a push along by a new paper from the US National Bureau of Economic Research entitled "Costs and Benefits of Phasing Out Paper Currency".

A recent article about it asked whether our grandchildren would one day look at us and ask "“…are you serious? You used to use bits of paper as money?"

Are we ready...

12 minutes, play or RIGHT CLICK to download mp3




Reading:

. Izabella Kaminska, Negative interest in cash, or goodbye banknotes, FT Alphaville, May 20 2014

. Kenneth Rogoff, Costs and Benefits to Phasing Out Paper Currency, NBER Working Paper 20126, May 2014

. Kenneth Rogoff, Paper money is unfit for a world of high crime and low inflation, Financial Times May 28, 2014

. Chartered Alternative Investment Analyst Association, The End of Paper Money, June 8, 2014

. Ken Banks, The Invisible Bank: How Kenya Has Beaten the World in Mobile Money, National Geographic, July 4, 2012 

Related Posts

. Why do we have so many $100 notes?

. The grey economy. Might pensioners have those $100 notes?

. The cashless society... the paperless office: we're rolling in it

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The Economic Consequences of War with Iraq

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

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

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

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

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Australian Financial Planners are shockers!

As this ASIC investigation reveals.

I discussed this with Geraldine and also reported on it for The Business Show. In July 2003 I reported for SBS on analogous situation of mortgage brokers, also the subject of a report for ASIC.

A lot of the problem is commissions, particularly trailing commissions, and in the course of preparing my SBS report I was astonished to discover that neither ASIC nor the Financial Planning Association knew what proportion of planners accepted commissions and of what kind!

I also discussed with Geraldine this fascinating APRA report on the performance of superannuation funds. The industry funds, often run by volunteers did okay, as did the employee funds run by big corporations. The bad performers were the funds run for the employees of small firms and the professional and expensive retail funds. Price is no guarantee of quality!

Later in the year for SBS TV and Life Matters I reported on the success of Do It Yourself super funds. The DIYers have a catchcry: Why pay to have someone else lose your money, when you can do it yourself?

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Friday on my mind 17/3/2003

Economists have been so busy designing tests to determine what makes people happy that they have overlooked something basic:

It depends on what day of the week you ask the questions.

Mark P Taylor, at the University of Essex outlines what it is in his paper Tell me why I don’t like Mondays: Investigating calendar effects on job satisfaction and well-being.

Men and women interviewed on Friday report higher levels of job satisfaction and lower levels of mental stress than those interviewed in the middle of the week.

Fortunately he concludes that the results from earlier studies probably hold up.

On Life Matters I also outlined the preliminary results from a survey entitled: STRESSED OUT ON FOUR CONTINENTS: TIME CRUNCH OR YUPPIE KVETCH?

Evidence from Australia, Germany, Korea and the United States suggests that the more you earn the more you'll feel time-stressed. In the United States a move from the 25th to the 75th percentile of the income distribution raises time stress by half as much as an interquartile change in the amount of weekly employed work!

Gerry played “Friday on my Mind by the Easybeats.

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The Prime Minister’s Home Ownership Task Force 10/3/2003

When a really good idea comes along, a lot of people immediately assume that there must be something wrong with it.

The joke goes: Two economists are strolling down the street when they come upon a $100 note lying on the ground. One economist says to the other "Aren't you going to pick it up?" The economist from Chicago replies: "No, it's a fake. If it wasn't someone would have picked it up already.

It was like that with the Prime Minister's Home Ownership Taskforce. I have outlined the idea here and here. And also to Gerry.

The ideas derived by the Menzies Research Centre for the Prime Minister hold the promise of solving a number of problems very well. Why have Do It Yourself super funds done so much better than professionally managed funds in recent years? Because the DIY funds had housing in them, and the professionally managed funds didn't as much. How could they? There is no easy way for super funds to own houses. The idea of sharing ownership between financial institutions and part-owner occupiers ("managing partners") would give the funds access to the largest asset class on earth and would give would be home owners to ability to move in.

Critics say it would force up the price of housing. So would any move that makes it easier to get into houses. The Task Force has come up with ways to increase the supply of land for housing as well, using innovative techniques to stop NIMBY's complaining. For low income homeowners there would be government loans, repayable in the good times along the lines of the HECS scheme.

They are good ideas whose time is coming.

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Our love affair with Cash 3/3/2003

How much cash do you have about your person right now? When I asked Gerry shed told me the answer was less than twenty dollars. For most of us, it certainly wouldn't be $1,000. Yet according to the official figures around $32 billion in notes is out there in people's possession at the moment - that's about $1,600 for each Australian man, woman and child. That’s more than the typical American, the typical Canadian, the typical Brit, and about three times as much as the typical New Zealander.

RBA comparative figures from 1996 show Australians holding cash of $US870 each, yanks $US610, and NZers $280!

We are eclipsed by some European countries and Japan. The Japanese held at the time $US3,588 under their beds and in other places.

Which is understandable. Japan has deflation. The Japanese don't trust the banks, and for historical reasons neither do many Europeans. But how can we explain Australains love affair with cash?

Christopher Bajada, of the UTS attempts to and comes up with the conclusion that much of it is used to store the proceeds of crime.

The RBA figures suggest this may well be the case. Almost half of the cash we hold about our person is in the form of $100 notes.

Officially we each hold about as many $100 notes per person as we do $20 notes (six to seven).

You and I know this is not true, leading to the thought that perhaps most of Australia's 130 million $100 notes are stored away in suitcases somewhere unopened.

Reserve Bank figures on the life of the notes lend support to this notion. $100 notes last an estimated 70 years. $20 notes last twelve years.

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The US is surprisingly vulnerable. 24/3/2003

It is throwing its weight around militarily and in questions of trade, but its economic underbelly is very soft.

And, I told Geraldine, not just when it comes to being a very big debtor to the rest of the world.

Most of the US's exports are intangible, entertainment and drugs among them. I mention drugs because most of the value in them is the intellectual property.

The countries the US sells to don't actually need to buy US music, drugs, films, TV programs etc.

They could copy them.

Think about it. The bulk of exports from the US are only worth something if the rest of the world agrees to pay something.

Or the rest of the world could pay less, or less than the US wants. Against Australia's financial interest we agreed to extend the patent life on drugs a few years back. The US would like us, and the rest of the world, to extend the term on copyright.

We could refuse. And the more the US throws its weight around worldwide the more likely it is that that someone will.

The US has a very soft underbelly.

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Indulgence

Self-control is a problem for spendthrifts and drug addicts, right? People prepared to indulge themselves in the present at the expense of their welfare in the future. These people can get around their problem by precommiting to do good: locking alcohol away and hiding the key, or paying most of their salary into an automatic savings plan.

But self-control can also be a problem for people who are addicted to not spending on themselves. The papers I discussed on Life Matters conclude that about 30 per cent of people have this problem.

I and my wife have this problem. We won't spend on indulgences on any given day because it always makes more sense to save the money up for necessities later. But a life lived this way means no indulgences ever, which can hardly be optimal.

Ran Kivetz outlines the problem is a newish paper The Joyless Consumer: Pre-Committing to Luxury to Overcome the Necessity Compulsion.

The solution he offers to those of us who find it hard to be bad is the same as the chief solution used by people who find it hard to be good: precoimmitment.

At the start of this year my wife and bought season tickets to every show put on by the Sydney Theatre Company during 2003.

That forced us to get out and to stop worrying about the cost. We wore the psychological pain of our decision to spend on indulgence once at the start of the year, and then were forced to enjoy ourselves throughout the rest of the year.

Kivetz conducts hypothetical and real lotteries and discovers that a substantial segment of consumers choose the luxury prizes over the cash prize of equal or greater value. He says most explain their choice as motivated by the need to pre-commit in order to guarantee a luxury experience and to stop the money ending up in the pool used for necessities.

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Waiting for Mr. Right: Rising Inequality and Declining Marriage Rates

The thesis of this paper discussed on Life Matters is that women are waiting longer because there is now a greater potential payoff from doing so. When all the potential males earned pretty much the same income there was little to be gained (financially) in Waiting for Mr. Right.

Increasing inequality, say the authors, explains about 30% of the marriage rate decline in the US over the last few decades. They purport to show that this is not due to the labor force decisions of women in response to rising income inequality, or to the marital decisions of men in response to rising income inequality.

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Kill the rich.

Sell them cigarettes for far half the price you charge poor people.

On Life Matters on Monday I explained that a carton of Peter Jackson Extra Mild (10 x 25) costs $60.65 retail, but only $33.50 at a duty free store. Australians can only access duty free stores if they have a ticket to travel overseas. The top 20 per cent of income earners in Australia spend five times as much on overseas travel tickets as do the bottom 20 per cent.

The Australia Institute has published an analysis of the duty-free system in Australia entitled Tax Flight from which I drew heavily. I also quoted from a long forgotten Industries Assistance Commission report on Passenger Concessions released in 1985 and not available on the internet.

The whole idea of duty free started because of enormously high tariffs in Australia. Locals didn't mind paying them (they didn't know any better) but the few Australians who did travel overseas at the time could see what was happening and so were 'bought off' by being permitted to bring in a certain amount of overseas goods "duty free", a privilege not available to other Australians.

Logic dictated that if our jetsetters were able to buy duty free overseas they should also be able to buy duty free in Australia, so DF shops were set up at airports.

Then in 1972 a group of would be downtown DF stores took their case to the High Court and won the right to operate DF stores outside of airports. The number of DF shops in Australia exploded from four (in 1972) to 50 at present.

Helping along the way in the mid-eighties was a Labor Party election promise to allow "inward duty free" stores at airports to sell booze and fags to Australians upon their return. The Industries Assistance Commission pleaded with the government not to do it finding that "Inward duty free shopping does not assist the achievement of any of the objectives of passenger concessions."

It foresaw another High Court case using the same arguments as the earlier one to extend inward duty free shopping downtown.

On Life Matters I imagined it working like this: "You've just returned from overseas and you still haven't bought your carton of Peter Jackson, please come in and do it next time you're in town."

It would, I said highlight the absurdity of what happens at the moment.

Tariffs are now low, down to five per cent, and sales tax, once 30 per cent wholesale for electrical goods, is now also low (the 10 per cent GST). The original rationale for duty free stores no longer applies, if it ever did.

The only big savings to be made are on alcohol and tobacco, they are subsidy to the well-off costing upwards of $300,000 a year, and as I said on Life Matters, we may not like the rich, but do we have to kill them?

It’s good to be back.

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Back on air January 27

Life Matters returns to life on Monday January 27, as does Monday Economics with me and Geraldine.

Two weeks after that The Business Show returns to air on SBS TV at the new time of 7.30pm Fridays.

Seasons greetings.

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No gifts, just cash

That's what some economists say. The person who knows how to get the most for Geraldine Doogue out of $50 spent on her is Geraldine herself. Anyone else trying to guess what will make Geraldine the happiest won't hit the spot as well. That's I told her on Life Matters this week and I presented estimates from the US last Christmas suggesting that eight billion dollars of the 50 billion dollars spent on gifts is wasted as a result.

The debate has important implications for welfare payments. Should needy people be given cash that they probably want, or gifts in kind that they might not such as cheap bus trips, discounted housing etc.

But there's another side to the debate, and I said on Monday that I was reluctantly quite taken with it. The paper I quoted from had the intriguing title of Here's something you never asked for, didn't know existed, and can't easily obtain: A search model of gift giving.

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Inquiring all summer

On Life Matters 9 December I talked about the extraordinary number of important government inquiries taking place over summer and asked - why it is that John Howard (belatedly) seems in so much of a hurry.

By far the most important is the Prime Minister's Home Ownership Taskforce.

Set up at the end of November, with submissions due by the end of December and with a final report due by March the deadlines are tight.

But the work won't be as hard as it might have been. Virtually everyone on the Task Force and its subcommittees has already indicated that they support the idea that'll be investigated. (See John Quiggin for a note that suggests that this may have been a criteria for an invitation to work for the Taskforce.)

Malcolm Turnbull's Menzies Research Centre will run the Task Force. It is the group which has been pushing the proposal. As was once said about Allan Bond the Prime Minister appears to want his advisors to tell him how to do what he wants not whether he should.

Which worries me little. The idea of allowing individuals to buy houses through a limited partnership with financial institutions has much going for it...

Right now, many individuals are condemned to all of the indignities and uncertainties that go with renting because they can't afford to buy a house.

Almost as bad, most of those that can have put everything they own and more into "one property in one suburb of one city. No one who is engaged in any sort of responsible financial advice would ever advise someone to do such a thing, and yet most Australians do."

Super funds and financial institutions by contrast are crying out for an asset such as housing. In aggregate residential real estate is safe - a much-needed hedge against stocks and bonds.

The MRC wants stamp duty and other rules changed to allow financial institutions and individuals to buy houses in (say 50-50) partnership. The individual ("managing partner") would have the right to live in the house and make alterations etc to it for as long as they wished.

They would have an incentive to maintain the house well, because when they did decide to sell they would get to keep a certain proportion of the proceeds (say 50 per cent, or maybe 45 per cent).

Although the institution has no say in when the house is sold, in aggregate the resale rate will be predictable and will provide regular income, without the fund needing to lift a finger to manager the property.

Australia has led the way in financially innovative solutions before. We invented HECS, we invented the Child Support Agency ideas now copied elsewhere. This idea has the same sort of potential.

At least that's what the Prime Minister thinks. On Life Matters I said he is acting like a man who has little time, and wants to achieve something worthwhile before he goes. Curiously Ross Gittins arrived at the same conclusion (about little time) at about the same time.

Also inquirning over summer is the Dawson review of the Trade Practices Act which was due to report at the end of November but has had its deadline extended until the end of January. Allan Fels looks set to get much of what he wants.

And the HIH Royal Commission which has to report by the end of February. Its terms of reference do not include and have been interpreted not to include the political donations made by HIH and FAI. A pity. Because they may be part of the explanation for what happened.

And there's the hard-to-come-to-grips-with Prime Minister's review of the corporate governance of Commonwealth statutory authorities. John Uhrig ex of Westpac and CRA has been given until June to report on the management of organisations including the Australian Taxation Office, Australian Competition and Consumer Commission, Australian Prudential Regulation Authority, Reserve Bank of Australia, Australian Securities and Investments Commission, Health Insurance Commission and Centrelink.

What's it all about? The PM promised it during the election. He gives the impression it is about bringing the organisations which bug business under tighter control of Government Ministers. Which is probably exactly the wrong thing to do. As the Palmer Report into the collapse of HIH makes clear. If the relevant Minister (the then Treasurer John Howard) hadn't intervened to issue an insurance licence to FAI over the head of the Insurance and Superannuation Commission in late 1970's the HIH collapse may not have happened. The right answer is probably less Ministerial control over Allan Fels, Graeme Samuel and the lot of them. It must be said though that there was a failure of corporate governance at APRA. It was under funded and as the Palmer Report makes clear, its board members had a hands-off approach to their job.

I discuss here what appears to be a general laxity in these organisations when it comes to investigating complaints.

My fear is that the people to whom the Prime Minister promised the inquiry want more laxity not less.

Update/ Correction

A closer reading of Ross Gittins talk shows that he didn't suggest Howard was to resign in the year ahead. He canvassed the possibility in great detail before concluding that Howard wouldn't do it.

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The physics of peer pressure

Bracks. Listens. Acts. Econophysists have a cynical view of elections. They say that's the way the evidence falls. I explained on Life Matters this morning that according to econophysists Jozef Sznajd and Katarzyna Sznajd-Weron from the Polish Academy of Sciences and also Dietrich Stauffer from Cologne University a 'signature' in the pattern of voting at elections matches that found in the alignment of metal filings. The metal filings get that pattern through the simple decision-making rule of each aligning itself in the same direction as most of its nearest neighbours. In other words, the filings decide their alignment based purely on the alignment of the filings they happen to rub up against. They don't decide based on the strength of an argument.

There are circumstances in which the strength of an argument does matter for magnetically-charged particles. It is when they are in solution, and they cluster around 'seed particles'. The most convincing particles build up the biggest clusters. But the 'signature' pattern of the distribution of alignments that results is completely different to that that we see in the results of human elections.

Peer pressure appears to matter when we decide to vote. Considering the issues does not.

Bruce Schechter, the author of the New Scientist article concludes that "there's only one way to be sure that our future elections are not determined by the opinions of our neighbours. We need to abolish the right to free speech: it's undermining democracy."

Perhaps he is right. Perhaps we need secret and silent deliberation of the issues, in the same way as we need a secret ballot.

Then again, perhaps our decisions about how to vote at elections are no different from any of our other decisions. (Whether to buy Levi's jeans etc.. etc.) Most of the "decisions" we make may in reality be no more than simple responses to simple stimuli. Our minds may invent a rationale after the event to make us feel that we are in control.

Inventing explanations might be the hardest work that our conscious mind does. A bit like a section of the bureaucracy that devotes most of its effort to proving that it actually has work to do.

Just a thought... or perhaps a simple response to stimuli, or perhaps an explanation for a simple response to stimuli.

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Copywrong

Geraldine informed her listeners today that Mickey Mouse turns 74 this month. His debut was in a cartoon entitled "Steamboat Willie" on November 18 1928.

This means that next year he turns 75 and the Disney Corporation will no longer own the copyright for his distinctive image. Or it wouldn't have had it not been successful in persuading California congressman Sony Bono to introduce the Copyright Term Extension Act which blows the term out to 95 years. Mickey will now not be forced to leave home until he is 95 in 2003. The same for Donald who was due to enter the public domain in 2009. Disney will now continue to own his image until the year 2029. Bono and other legislators had support ass they drew up the Bill. Disney is reported to have spent $US 6.3 million in campaign donations in the leading up to the Act's proclamation.

Of course it affects everything. Documents and artistic works from the war which were about to become publicly available now won't for another 20 years. Unless of course Disney gets the copyright term extended again. And there's every reason to believe that it will. Sony Bono's widow Mary who now has his seat in Congress has foreshadowed extending the term of copyright again and again until it lasts "forever less one day".

Disney which itself has plundered the public domain for material (Cinderella Pinocchio, Alice in Wonderland, Snow White, The Jungle Book" etc) appears to want to make sure that it never has to give back to it...

To paraphrase Paul Keating (about tax) people who drink from the well should not complain about attempts to fill it."

And so there's a legal challenge before the US Supreme Court right now.

The US constitution says the Congress shall have the power "To promote the Progress of Science and useful Arts, by securing for limited times to authors and Inventors the exclusive right to their respective writings and discoveries."

The challenge asks how extending a term of copyright protection for a work already created can promote the progress of science and useful arts.

And anyway 95 years of exclusive rights seems a bit longer than is necessary to encourage people to draw cartoons. The US term of copyright used to be fourteen years. It's been extended eleven times since then, many of the extensions just as Mickey Mouse was about to enter the public domain. But Disney has continued to draw cartoons every step along the way.

Drug companies get by with patents of 14-15 years - and Australia's own Productivity Commission thinks that's too much.

Personally I am not sure copyright "protection" is needed at all. The internet (and blog sites) demonstrate that people are willing to create art and contribute ideas without the need for payment.

Elton John is unlikely to stop writing music just because he isn't given about 100 years in which to exclusively profit from it. It think one year would do him.

My Dad told me that many true inventors refused to have their inventions patented, believing that they belonged to the people.

Okay so my view is extreme and utopian. But what about the view attributed to the American Association of Publishers about Libraries. Libraries allow people to read books for free and so are apparently similar to "terrorist organisations" opposed to the basic principles of the US system.

My eldest daughter admires Walt Disney. She would like to emulate him. If the challenge to the Son Bono Act fails she is unlikely to ever be able to do so. The term of copyright will be extended and extended again way beyond the human lifespan leaving virtually nothing in the public domain to comment on or improve upon without falling foul of a lawsuit.

UPDATE January 17 2003 The constitutional challenge failed. Details here.

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Any complaints?

I am not a real blogger. I talk on the radio Monday mornings and (these days) take forever to blog what I have just said. When I started bogging I would go straight into the studio next door to Geraldine's and blog what I had meant to say within minutes of not quite saying it. Recently I have waited up to a week.

So here goes, to catch up.

LAST Monday 18 November I spoke with Geraldine about what happens when you try to complain.

When you see a fire and you report it, you expect the Fire Brigade to investigate. But that wouldn't be a wise expectation when you report something to the Australian Prudential Regulation Authority, the Australian Securities and
Investments Commission, the Australian Competition and Consumer Commission, or the Australian Tax Office.

The Palmer Report into APRA's conduct in the lead up to the collapse of HIH Insurance discloses an amazing mindset. "A company could not be considered to be in breach of the solvency standard until it had reported a breach in its returns." When HIH did fall below minimum solvency standards "no action was taken but to hope that it traded out of it." When in July 2000 APRA received an anonymous document that was a "road map" to HIH's troubles it warned its likely author that he was leaving himself open to legal action. HIH supervisors concluded that the comments should be treated with caution because they came from a disgruntled employee. Palmer appears to have been astounded.

APRA's attitude was partly cultural, the "London tea and bickies" approach in the words of APRA Board member Alan Cameron, and partly caused by very limited resources, according to Palmer. Only four people were supervising HIH and more than one-hundred other similar institutions, the man initially given hands-on responsibility for HIH was 24-years old with no general insurance experience.

So what?

Firstly APRA and its predecessor the Insurance and Superannuation Commission liked to give the impression that they were keeping our money safe. Some of us may have taken out insurance or extra supervision because we believed that they did.

And secondly APRA is not alone in, shall we say, a "selective" approach to complaints...

I quoted from annual reports that reveal that ASIC routinely investigates 2 to 3 per cent of the seven to eight thousand complaints it receives each year. It makes some contact with the complained about party in fifty per cent of the cases, and forty per cent of the complaints are merely "analysed, assessed and recorded."

Its lack of checking extends to prospectuses. Last year it inspected only 237 of the 913 prospectuses lodged with it. Not that the prospectuses lodged with it are squeaky clean. It had to issue stop orders for 67 of the 237 prospectuses it did examine.

The ACCC received 51,000 complaints last year. It investigated just 4,000 of them.

The copper isn't routinely on the beat.

The Tax Office copper no longer reveals in its annual reports the number of returns it selects for auditing.

The last time it did, in 1996 the number was -- 5,121.

Which isn't very many, in a nation the size of Australia.

Not that our tax returns are squeaky clean. No matter how many returns the Tax Office audits it seems the proportion that need correcting is about 70 per cent.

The last Budget gave the Tax Office an extra one billion dollars to start auditing again and the accounting profession is having kittens. They had grown so used to getting away with mistakes they'd forgotten that the act has grown just about too complex to apply, or so argues tax lawyer Michael Inglis in this and other brilliant pieces.

The Tax Office and its brethren bodies defend what they are doing by talking about "meta risk management". It is quite an interesting idea, but a bit like fighting the Taliban with technology and no troops or intelligence gatherers on the ground. And we know where that leads.

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Meaning

It may be as important to us as happiness.

After talking about happiness on Life Matters earlier this year, this week I returned to the subject and asked in the phrase made famous by Peggy Lee: is that all there is?

Our other big need appears to be meaning in what we do. We get it by having an identity and being true to that identity, or at least that is the persuasive argument made by two academics from the University of Connecticut.

Often the identity comes from religion. How else to explain the actions of people who don't eat or drink anything from dusk to dawn during Ramadan, or of people who don't eat pork without ever having tasted it, or of suicide bombers.

"They only do it in the pursuit of happiness" is an unsatisfying explanation. A better explanation is that most of the time people do such things in pursuit of meaning.

This means that changes in prices are likely to have very little effect on certain sorts of behaviours. I haven't eaten meat since I was 15 or 16 years old. A cut in the price of meat is unlikely to tempt me. A cut in the price of alternative leisure activities is unlikely to tempt a would-be suicide bomber.

And there are more issues raised in the paper. Traditional microeconomic analysis assumes that all our tastes are pretty much the same. (So much for classical economics celebrating the individual) Our behaviour is determined by our income and by relative prices.

The new approach recognises that different people have different tastes, and create different tastes as part of creating an identity. It means that behaviour is determined not only by changes in income and relative prices but also by who we are and who we have decided to be.

If taken on board it'd make economic modelling much more complicated (perhaps unnecessarily so).

But how else can we take seriously the actions of someone who won't eat or even drink water from dawn to dusk?

Worth a read.

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Unpalatable as it is, we need a bond market

I spoke about the threatened demise of the Bond Market on Life Matters on Monday, which is where you will find several good references.

I am philosophically inclined to agree with Alex Erskine who refers to bond traders as "basket weavers and candlestick makers" who almost deserve the same fate as they've been prescribing for others workers made redundant by the progress of technology and new work practices.

If they weren't so arrogant (arrogant as a bunch - a few individuals in the bond market are humble) it'd be easier to feel sorry for them.

BUT the more I thought about this preparing for Life Matters the more I realised that, unpalatable as it is, we need a bond market.

And more. We need, yes we really need, the government to invest for the sake of it, and to borrow to raise the money.

Nicholas Gruen of Lateral Economics makes the point in a paper not on the net, although a dot-point version of it is.

He says for the Australian Government, as for any organisation, there is an optimal level of debt and an optimal level of funds invested. These should be decided quite separately from the question of whether or not the government should own a phone company.

Given the government's long-term investment horizon it makes sense to borrow at around 5 per cent and invest for an average return over the longer term of 10 per cent. Who wouldn't?

More importantly: there can be big benefits to the wider economy from the government doing so.

Buy buying Australian stocks when they are cheap and selling when they look pricey (an sensible practice) the government can deepen and smooth out volatility in the Australian stock market.

This is what the Reserve Bank of Australia does in the Australian Foreign Exchange market.

To the extent that the arms-length government investor put funds into the Australian stock market it would also would be helping to raise equity prices closer to their true value, reducing the debt-equity premium.

Everyone wins? That's how it looks.

I can see no good reason why the government should deny itself the right to invest and deny itself the right to raise funds. Indeed, it seems to me that the business of government is too important to deny it these rights.

What if a real crisis arises and the government suddenly needs to borrow - without a bond market it would find it hard. Australian might well regret the boldness of the brash Australian Treasurer who paid off his debts.

Update: Nicholas Gruen's paper IS on the web - here.

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Deflation

This week on Life Matters with Geraldine Doogue I discussed deflation, as I had on The Business Show on SBS TV on Sunday.

If you haven't thought much about deflation, that's okay. Many Australians hadn't thought much about inflation back at the start of the 1970's. They needed to be convinced that it could be a problem. That's the sort of situation we are in now with deflation. It is happening. Price indexes are falling in China, Japan, Singapore, Hong Kong and Taiwan. They are on the edge of falling in Europe, and may soon fall in the United States. But is it a problem?

Japan's problems are well known - but there's more than deflation involved. The argument is that falling prices encourage consumers to put off spending in the expectation that prices will fall further, which encourages producers to cut prices to try to sell goods. And so on. Also loans become harder, not easier, to repay over time, forcing investors to sell assets, which pushes down the value of houses etc. in another downward spiral.

Well, that's the argument. On Life Matters and on the Business Show I asked whether deflation was really that bad, just as skeptics asked the same about inflation in the early 1970's. The answer may be that it is a question of degree. Mild inflation (two or three per cent) probably doesn't encourage consumers to bring forward spending, just as mild deflation probably doesn't encourage them to postpone it. As the macroeconomist Barry Hughes asked me: If you save $200 on the price of a $20,000 car by delaying buying for a year, would you do it?

And the downward asset price spiral caused by the inability to pay off loans is probably unlikely to take hold while interest rates are falling.

Which brings us to the real fear about deflation - seen in Japan, that it'll be impossible to get out of by cutting interest rates. In Japan they are already at zero.

The US Fed has studied what happened in Japan and it finds that there's a fundamental asymmetry in the management of prices. Interest rates can always be pushed high enough to kill inflation, but they can't necessarily be pushed low enough to kill deflation. Therefore it says central banks should err on the side of caution when deflation is a possibility. It's better to have prices moving up too much than it is to have prices moving down too much. You can always correct inflation. You can't always correct deflation. It is a message Australia's Reserve Bank is probably taking on board.

So, does Australia need to worry? Our CPI looks healthy - it is moving up at the rate of 3.2 per cent a year, but within that, the price of goods is scarcely moving at all. The price index for private sector goods moved up only 0.1 per cent in the September quarter. And this after three years in which our dollar has devalued against the US by about 30 per cent. So deflation is clearly knocking on our door. But against that most of what we do in Australia is not particularly affected by the price of manufactured goods. Australia specialises in mining, agriculture and services. We may be one of the last countries in the world to succumb to worldwide deflation should it take hold. Although we would certainly be affected by any worldwide recession that resulted.

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