Thursday, October 15, 2009

It's back!!! Arthur, Ford, Trillian, Zaphod and the Guide itself return


I met Douglas Adams once and interviewed him - a lovely, enthusiastic, sort-of sad man, who died much too young.

Now, at the request of Adam's wife, Eoin Colfer has carried on the legacy.

He found writing part 6 in the increasingly inaccurately-named trilogy a challenge:




It's title: And another thing.

The Guardian says:

"Within pages, it's clear this is a triumph. Colfer has pulled off the near-impossible. It's faithful to Adams's humour and, more important, it's also got his rhythm, the cadences and the footfalls that made his style so often (badly) imitated. But Colfer doesn't shy from introducing his own brand of wit, his own complex logic confettis. It's the work of an author who can write anyway, with a beautiful, vaulting imagination, and who obviously loves Adams's style so much he can echo it without falsity or accidental parody."

I want to know... does it bring back Marvin? ??
Read more >>

Wednesday, October 14, 2009

New figures: we're clawing back wealth

From CommSec


"Federal Treasury’s Modellers’ Database shows that Australia’s private sector wealth stood at $4,894 billion as at the end of June 2009, up 4.0 per cent over the quarter. It was the first increase in wealth in 18 months and the biggest increase in five years.

"CommSec estimates that per capita wealth stood at $223,400 as at the end of June, up $7,400 over the quarter. However over the year wealth has fallen by around $12,500 or 5.3 per cent. Wealth peaked at $250,055 in December 2007.

Unfortunately no detailed break-up is provided of the quarterly wealth figures calculated by Federal Treasury."

Read more >>

Painless ways to learn economics

That's the title to Greg Mankiw's post pointing to this new video...



...and this new book by the Standup Economist Yoram Bauman:



Well, what about this whole (new) economics-as-fun genre?

Jack. Vromen from Erasmus University Rotterdam has just published the best overview yet.

It's below, and at the Erasmus Journal for Philosophy and Economics:

Economics Made Fun


Oh, and here's Bauman's earlier brilliant piece:

Read more >>

Tuesday, October 13, 2009

Skyhooks versus Cranes - why the Nobel committee wants economics to get real

By Paul Romer

"Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles.

In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses.

Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior...

When I started studying economics in graduate school, the standard operating procedure was to introduce both technology and rules as skyhooks. If we assumed a particular set of rules and technologies, as though they descended from the sky, then we economists could describe what people would do. Sometimes we compared different sets of rules that a “social planner” might impose but we never said anything about how actual rules were adopted. Crucially, we never even bothered to check that people would actually follow the rules we imposed.

A typical conclusion was that rules that assign property rights and rules that let people trade lead to good outcomes. What’s the skyhook? That people will follow the rules. Why would they respect the property rights of someone else? We had no idea.

We might have had in mind something like this: police officers will arrest people who don’t follow the rules. But this is just another skyhook. Who are these police officers? Why do they follow rules?

This is not an idle concern. Elinor showed that there are lots of important cases where people follow rules about ownership without police officers. One of the central challenges in understanding failures of economic development is that in many places, police officers don’t follow the rules they are meant to enforce.

Elinor’s fieldwork, followed up by her experimental work, pointed us in exactly the right direction. To understand BOTH why we don’t need police officers in some cases AND why police officers don’t follow the rules in other cases, we have to expand models of human preferences to include a contingent taste for punishing others.

In reaching this conclusion, she arrived at a point similar to that reached by Avner Greif (whom the Nobel committee correctly cites.) They, more than anyone else in the profession, spelled out the program that economists should follow. To make the rules that people follow emerge as an equilibrium outcome instead of a skyhook, economists must extend our models of preferences and gather field and experimental evidence on the nature of these preferences.

Economists who have become addicted to skyhooks, who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry.

If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today – how to improve the quality of bad rules that cause needless waste, harm, and suffering.

Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding."

Read more >>

The Economics Nobel explained, in a video


The win by Elinor Ostrom and Oliver Williamson helps take economics back to what it should actually be about, detailing the way things work.

David Hendersen writes in today's
Wall Street Journal:

"Many economists sit in their offices and derive proofs. Few go out and do the time-consuming work of examining the institutional structures that humans build to solve their own real-world problems. Among those few are Ms. Ostrom and Mr. Williamson...

Some have summarized their work by saying that institutions other than free markets often work well. But that statement can mislead you to conclude that government solutions are the answer. Free markets are only a subset of free institutions. A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that
voluntary associations work.

Most economists are familiar with the late Garrett Hardin's classic article, "The Tragedy of the Commons." His idea was that when no one owns a resource, it is overused because no one can control its usage and each person has an incentive to use it before others do.

Not so fast, said Ms. Ostrom. Examining dozens of case studies, she found cases of communal ownership that worked — that is, that didn't lead to the tragic outcomes envisioned by Hardin — as well as ones that didn't. Were there systematic differences? Yes, and interestingly the ones that worked did have a kind of property rights system, just not private ownership.

Based on her work, Ms. Ostrom proposed several rules for managing common-pool resources, which the Nobel committee highlights. Among them are that rules should clearly define who gets what, good conflict resolution methods should be in place, people's duty to maintain the resource should be proportional to their benefits, monitoring and punishing is done by the users or someone accountable to the users, and users are allowed to participate in setting and modifying the rules."


So where's the video? It's here, it deals with the unwritten rules governing hors d'oeuvres consumption, and it lasts just 1'40":

Read more >>

Monday, October 12, 2009

And the other winners are...


This year's Nobel Prize in Economics goes to Elinor Ostrom and Oliver Williamson.

The theme is economic governance.
Read more >>

Wayne's World: A Treasury analysis says you're out $3.2 billion, but I won't show it to you


What a joke.

Helen Coonan nails it.

We'll take you seriously Wayne when you take us seriously.

Does the Labor government care less about actually discussing policies?
Read more >>

They do things differently at NewsCorp


Here's how staff of the Adelaide Advertiser describe things in an internal memo:

(HT: Crikey)
"There are many conflicting instructions, blanket bans on certain words and subjects, and a lack of trust in the reporter to choose what to focus on...

Management often dictates an editorial line it wants reporters to take that is in conflict with what our contacts say. Much of a day can be wasted trying to find one person to say what management wants them to say. This is not reporting, it is fabricating news..."

Advertiser Memo
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If Obama can win the Nobel Peace Prize...


Who could win the Nobel Economics Prize?

Just about anyone with good intentions I reckon.

It'll be announced late tonight, and the Obama win has thrown the economics field wide open:

Greg Mankiw:

First-Year Grad Student Wins Nobel Prize in Economics!

From the Associated Press (with some light editing):

Pfuffnick's Nobel Economics Prize triumph hailed by many

LONDON — The surprise choice of first-year graduate student Quintus Pfuffnick for the Nobel Prize in Economics drew praise from much of the world Friday even as many pointed out the youthful economist has not yet published anything in scholarly journals.

The new PhD candidate was hailed for his willingness to tackle difficult problems, his commitment to improving the economic system, and his goal of bringing efficiency and equality into harmony...


So.

I reckon Australian candidates have a chance now.

Perhaps:

- Wayne Swan for prescience in omitting details from his Budget speech that will turn out to be wrong anyway;

- Godwin Grech for his impressive ability to craft both questions and answers for the Senate economics committee;

- Rory Robertson and Steve Keen (joint award) for the courage to stand - and walk - behind their forecasts;

- Malcom Turnbull and Joe Hockey (joint award) for early success in their campaign to rid Australia of $315 billion in government debt. Westpac has already sliced its estimate to $108 billion;

Perhaps not.

But seriously...

- Fred Argy for getting just about everything right very early in the crisis and suggesting actions the government should have taken way back then.

Any others?

Here's what the London bookmakers think.

And here's the Harvard betting pool.
Read more >>

Saturday, October 10, 2009

Friday, October 09, 2009

Ken Henry's devastating question to Senators


"Is 7 per cent unemployment too low?"

Crikey's Bernard Keane:

That was Ken Henry’s response to critics of stimulus spending as he fronted this morning’s hearing of the Senate Economics Committee inquiry into the Government’s stimulus spending.

Henry acknowledged that the Australian economy had performed better than forecast by Treasury, but warned that the withdrawal of stimulus spending would cost 100,000 jobs and 1.5 percentage points in GDP growth in 2010.

“Treasury’s view is that unemployment has yet to peak,” he told the committee, and suggested that the IMF’s recent forecast of a peak of 7% might be “reasonable”.

“The question for policymakers is whether 7% unemployment is too low. I think Treasury’s view is that that is not the case.”

Read more >>

Thursday, October 08, 2009

Malcolm Turnbull, April Fools Day 2009


“See Mr Rudd had a very expensive stimulus package - $42 billion – which has not created one job.”

-- Devonport Tasmania, April 1, 2009
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Bloody hell - employment soars



The unemployment rate is rising no longer:



Employers are hiring again.

The Reserve will hike again Melbourne Cup Day, perhaps by 0.50 points rather than 0.25


ADAM CARR: "It’s looking much more likely that the unemployment rate may be at or near a peak. I say that because this is the 7th consecutive month we’ve been around this level. Moreover there is no discernible move to shed labour and given the economy is on the path to glory I doubt very seriously it’s about to start."

CHRIS CATON: "As amazing as it would have seemed six months ago, we now may have to contemplate the possibility that unemployment may already have peaked! Recall that in the Budget, just five months ago, it was forecast that unemployment could reach 8.5-9% in this episode. At worst, a peak of 6.5% or less now seems in prospect."

STEPHEN ROBERTS: "There is now a much more compelling case for the government to revisit its fiscal stimulus plans and make appropriate cuts to avoid unnecessary competition developing between the private and public sector for resources – including labour – as the economy continues to recover.
Read more >>

Four pictures are worth...

From the Reserve Bank's Chart Pack, released Wednesday:





Read more >>

Wednesday, October 07, 2009

Do you think the CPI is a joke?



Many
other people do

Now's your chance to do something about it:

Professor Kevin Fox, Head of Economics at the Australian School of Business, has been invited by the Australian Bureau of Statistics to Chair the Advisory Group for the 16th series Consumer Price Index (CPI) Review.

Professor Fox said it was a great honour to be invited to Chair the review, as it had the potential to impact on the lives of all Australians.

“The Australian Bureau of Statistics is one of the world’s leading statistical agencies. They are great innovators and open to academic input, so I am looking forward to working with them on this review,” said Professor Fox.

The Consumer Price Index (CPI) is the main measure of inflation, or the average rate of price changes faced by consumers. It is used in a broad range of policy contexts, including underlying the setting of interest rates by the Reserve Bank and determining changes in welfare payments.

It is also used in wage negotiations and for a wide range of long-term contract escalation purposes. The Australian Bureau of Statistics regularly reviews the suitability of their methodology and information sources, given changes in consumption patterns and changes in technology.

“The 16th series CPI Review will be a major review, which will reassess the CPI's scope, coverage, and examine specific methodological issues,” said Professor Fox.

Professor Fox has had a long association with the Australian Bureau of Statistics. He has been on the Methodology Advisory Committee for more than a decade and is a member of the Productivity Measurement Reference Group.

He is also currently leading a major project with the Australian Bureau of Statistics and the Productivity Commission on productivity measurement through an ARC Linkage Grant.

An information paper on the review; ‘
Issues to be Considered During the 16th Series Australian Consumer Price Index Review’ is scheduled to be released late December 2009 for wider public consultation.


Don't waste it.
Read more >>

What went wrong: David Gruen


''It is as if, as the Titanic was sailing into iceberg-infested waters, those with the requisite skills and training to warn of the impending danger were instead hard at work, in a windowless cabin, perfecting the design of ship hulls … for a world without icebergs.''

Gruen is the had of macroeconomics at the Treasury.

He could be fronting the Senate inquiry this Friday.

Mark Davis profiled him for the Age:

PATHOLOGIES are unwholesome phenomena, abnormal and irregular conditions that disrupt the healthy order of things. In physiological systems, they cause disease. In psychological manifestations, they can give rise to personality disorders. And in the body politic, entire societies have fallen under the sway of pathologies such as totalitarianism.

Pathologies are not the kind of things that normally figure prominently in the highly rational world of David Gruen. Yet since the onset of the global financial crisis a year ago this week, they have been much on the mind of this senior Treasury official.

Gruen believes that for years the world's best and brightest economic minds, preoccupied with abstract models of how economies function, have paid far too little attention to the real-world role of economic pathologies - aberrations such as house price bubbles, excessive risk-taking by investment banks or the financial panic that gripped markets when America's fourth-largest investment bank, Lehman Brothers, collapsed last September.

Gruen is part of the creme de la creme of Australia's macro-economics fraternity - an economic elite who typically work in the upper echelons of governments, central banks and academia. They specialise in the big picture. What causes fluctuations in economic output, unemployment and inflation? Why do economies go through booms and busts? Can governments smooth these cycles and so improve the welfare of households and businesses?

The irony, Gruen tells The Age, is that it was ''pathologies'' in the Great Depression - crashing stockmarkets, panic-stricken investors hoarding funds - that gave birth to macro-economics in the first place...

''Yet the discipline just left that behind,'' he says. Instead, macro-economics concentrated on explaining economic fluctuations in terms of models in which individuals and firms were always well informed, always had a highly sophisticated understanding of what was going on in the economy - and always acted rationally.

In a speech earlier this year, Gruen used a
memorable metaphor to describe the problem. ''It is as if, as the Titanic was sailing into iceberg-infested waters, those with the requisite skills and training to warn of the impending danger were instead hard at work, in a windowless cabin, perfecting the design of ship hulls … for a world without icebergs.''

Gruen's assessment is all the more telling in that it is not the critique of a heterodox economist but a view from well inside the economic orthodoxy. A former head of the Reserve Bank of Australia's research department, Gruen is executive director of Treasury's macro-economics group, one of Treasury secretary Ken Henry's deputies, responsible for advising governments on the state of the economy.

While he and his colleagues have grappled for the past year with policy measures to ameliorate the crisis, Gruen has also been pondering the wider implications of the episode for his discipline.

In the process he has engaged in an intellectual mea culpa.

He believes the latest crisis should prompt a transformation of macro-economics, just as the Great Depression and 1970s stagflation - the paradoxical coupling of slow growth with high inflation - were catalysts for earlier overhauls in the field.

Tall and sinewy with the fidgety demeanour of someone brimming with intellectual energy, Gruen is one of Australia's economic policy insiders.

His late father, Fred, was an elder statesman of Australian economic policy. Fred arrived in Australia as one of the ''Dunera boys'' - refugees from the Nazis who came to Australia aboard the British vessel Dunera and were interned because of their Austrian and German extraction. He rose to become an economics professor and adviser to former Labor prime minister Gough Whitlam.

David's brother, Nicholas, also an economist, has worked at the Productivity Commission and the Business Council of Australia and is now a consultant.

Yet Gruen's pathway into the discipline was unconventional. After enrolling in science at Monash University in the 1970s, he tried a half-year course in economics but didn't like it. ''I found it much less satisfying than the science I was doing,'' he says.

He specialised in biophysics and took a PhD at Cambridge University in 1980. ''I was doing mathematical modelling of biological membranes,'' he says matter-of-factly. His doctoral thesis was titled: A statistical mechanical study of the adsorption of non-polar molecules into lipid bilayer membranes.

After Cambridge, Gruen spent four years as a researcher at the Australian National University's applied mathematics department before deciding at the age of 29 to give economics another try.

''I thought my father had an interesting life, and economics seemed like a more interesting discipline. It had a lot to do with the real world and it was kind of broadening, whereas what I was doing in science at that time was increasingly focused and narrow.''

A graduate diploma and a PhD in economics followed. Gruen followed his girlfriend, now wife, Jenny Wilkinson, to the Reserve Bank, and both then spent two years in the early 1990s at Princeton University, where Gruen sat in on economics courses taught by leading American economists Ben Bernanke, Kenneth Rogoff and John Campbell.

He returned to the RBA and headed its research department before moving to Treasury in 2003, about the time the pressures were starting to build in the financial systems of North America and Europe.

Gruen says most economists saw little to fret about in developments such as global imbalances that involved huge flows of funds going from developing to developed countries, or in the way low interest rates fuelled strong rises in asset prices, as happened with the US house price bubble.

''I think economists prefer economic explanations for things,'' he says. ''So if you have something like a big rise in house prices and you have one set of people saying, 'Well, this is irrational and people have massively overdone it', and then another set of people saying, 'No, I can explain why house prices are so high for these fundamental economic reasons.' I think economists have a kind of in-built preference for being influenced by fundamental explanations.''

MAINSTREAM economists, he says, are uneasy with the idea that there can be asset price bubbles lasting a relatively long time even in markets where investors have plenty of information to make judgements about the value of assets. ''The idea that there is something unsustainable going on, it gets into the realms of psychology rather than mainstream economics, and so economists are uncomfortable with it.''

The favoured tools of macro-economists have been abstract theories and sophisticated models that condense the decisions of the numerous economic actors in modern societies into systems of equations and mathematical relationships. Until the latest disaster, Gruen and his peers in the global macro-economics club could claim considerable success. After the turmoil of the 1970s and 1980s, advanced economies, especially in the English-speaking world, experienced long stints of growth, the defeat of inflation and stronger employment outcomes.

Intellectual disputes in the discipline had been settled and replaced with consensus on how economies worked and the proper role of policy.

Even as financial markets were on the brink of collapsing, in August last year, one of the club's most prominent members, Olivier Blanchard, now director of the International Monetary Fund's research department, said in an essay surveying the field: ''The state of macro is good.''

But the failure of economists to predict the financial implosion and the severity of the resulting global recession have prompted a rethink.

This debate has focused on two issues: the macro-economic models used by policymakers in governments and central banks, and the ''efficient market hypothesis'', which holds that market prices of financial assets are the best available estimates of their real value.

''The mainstream of macro-economics and finance has been taken up for several decades with how to model the behaviour of rational, far-sighted individuals who understand the environment they are in,'' Gruen says. ''Unexpected things happen to them, but they are completely comfortable with the economy in which they find themselves and they can therefore behave optimally.''

The development of these models has been the culmination of a ''grand project'' arising out of the intellectual disputes in the 1970s. This project aimed to uncover micro-economic foundations - theories grounded in the behaviour of individual economic agents - for macro-economic models of the whole economy.

But Gruen now says the grand project ''has given too much credence to rational behaviour and being far-sighted, having a sense of exactly how the world is going to play out.''

''[In the models] there are going to be shocks, but here is the economic structure and all you have to do is solve this complicated economic structure and then you will know what to do … Nothing pathological happens.''

The efficient market hypothesis was another theoretical construct believed by its supporters to be strongly backed by empirical evidence. In fact, Gruen says, it ended up obscuring economists' views of the real world. One of the giants of modern economics, Robert Lucas, argued recently that criticisms of the discipline's performance in light of the financial crisis were misplaced. Lucas deployed the efficient-market hypothesis to argue that no economic model can predict sudden falls in asset prices.

But Gruen believes this misses the point.

''It's not about being able to predict financial prices from one week to the next. It's about being open to the possibility that in a well-functioning economy like the United States - not an economy with hyperinflation, not an economy with a world war going on, none of those things happening - house prices for the whole country can get 30 per cent out of line and at some point that will just unwind, which has massive implications.

''The point of the efficient markets hypothesis is that sort of stuff is not supposed to happen.''

Gruen acknowledges that the ''grand project'' to build macro-economics on solid micro foundations chalked up spectacular successes. But he wonders whether those very achievements contained the seeds of the latest failure.

One of the key policy prescriptions macro-economists developed in response to the high inflation of the 1970s was to give central banks more independence. ''And indeed,'' says Gruen, ''inflation did come down and that was a huge success story.''

This was followed by an extended period of low inflation and stable growth that macro-economists dubbed the great moderation: ''The idea that, with independent central banks, we had entered a new world where business cycles may not have been eliminated but they had been tamed.''

Thus lulled, economists also paid less attention to the issue of financial market regulation.

''There was a broad view … that well-resourced financial firms can be pretty much left to their own devices,'' Gruen says. ''That was something the City of London prided itself on. There was an intellectual view that the light-touch regulation by the Financial Services Authority in the United Kingdom was part of the key to the success of the City of London.

''So the macro-economy was more stable and financial regulation wasn't that big a deal, it was just stifling innovation. But what in fact was happening was that imbalances were building up that were going to blow the top off the whole thing.''

So what is the way forward for the chastened macro-economists' club?

Asset price booms are a key issue - how to distinguish between those that reflect economic fundamentals and those that are unsustainable - and what to do about the latter.

But Gruen admits the answers are far from obvious.

Behavioural economists have incorporated insights from cognitive psychology into economic models. But this research is yet to deliver a paradigm shift, Gruen says. And expecting central bankers to use interest-rate policy to deflate bubbles is easier said than done.

In an asset price bubble, Gruen points out, investors expecting to earn 15 or 20 per cent returns on their funds are unlikely to be deterred by increases in official interest rates of half a percentage point.

''If you tighten monetary policy early and the bubble keeps growing, what do you do then? You've managed to slow the economy down, unemployment has risen a bit, and the bubble is still growing.

''You can't drive the economy into the ground,'' he says.

The way forward may not be clear, but in the end this physiologist turned macro-economist has a disarmingly modest aspiration for how economics might develop in the wake of the crisis.

''The hope is that the discipline will be invigorated and find the real world interesting again - rather than being stuck in that windowless cabin.''

DAVID GRUEN CV

BORN Sydney 1954.

FAMILY Married to economist Jenny Wilkinson. Children: Angus, 13, Jessica, 11, Emma, 7.

EDUCATION Haileybury College; Monash University; Cambridge University; Australian National University.

CAREER 1980-2009 Research scientist, ANU; visiting lecturer, Princeton University; economic research department, Reserve Bank; senior executive, Treasury. Current position executive director, macro-economic group, Treasury.

INTERESTS Chess, bushwalking and skiing.

Mark Davis is national editor.


Published in the Age


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Tuesday, October 06, 2009

What's the damage?

Not much, according to this helpful chart from the Treasurer's office:



We mortgage holders are about as well off as we have ever been.

And as for the cash rate:


By the way, when did the cash rate peak? Which Johnny was Treasurer at the time?

Adam Carr on today's action below the fold:

"Well you can’t fault the action, I’ve been arguing for it since the beginning of the year. So as far as I’m concerned today’s action (and ensuing ones) will do much to ensure we achieve a durable, lengthy expansion. You can however fault the RBA for the way they communicated today’s change to the market. There was plenty of scope through official means, for the RBA to flag today’s result rather than through a select number of journo’s the day before – as I mentioned this morning, it’s completely inappropriate.

Anyway that being our unfortunate reality…it’s a bit earlier than otherwise thought, but only because the RBA publicly said they wanted time to assess things. The economic case to tighten had been made some time ago and we were really just playing a game of tiddlywinks in guessing the exact month. Yet the RBA had previously expressed some concern about the strength or rather sustainability of the recovery in 2H09. That being the case, I don’t think this early action is immaterial.

In fact I think today was an important signal – but maybe to be sure well have to wait for another leak! The fact they hiked today suggests they are a little more anxious to get rates to a less, exceptionally stimulatory setting.

Note that during the last tightening cycle the majority of moves were tied into inflation results – the RBA highlighted that just recently. So they didn’t wait for that this time and they didn’t really wait for proof the economy, or specifically the consumer, was able to stand in the absence of cash hand outs. I’m not saying they should have – but it’s what they indicated to the rest of us - on the outside – that they would do. House price growth and housing credit seem to be the main concern here.

Their global and domestic economic assessment was more upbeat but only a little different to last month’s – excepting the hike.

Globally growth was still described as “resuming”; China being very strong, but the Bank was perhaps a little more specific on growth for Australia’s major trading partners - arguing theywould be close to trend in 2010 (a new assessment from last month).

Less was said on the major downside risk noted in September – in that balance sheets “remain a potential constraint on…expansion” for the relevant nations - a bit of a downgrade from last month.

On the domestic side their language was a touch more optimistic. The stand out being a new paragraph on housing credit growth and house prices “rising appreciably” – that’s why I think this was the tipping point for them. Watch this space. The faster they accelerate then the more aggressive the RBA is likely to be. Otherwise nothing else really stands out as being too different from last month - maybe just their expectation for trend growth in Australia next year – does trend growth imply a trend cash rate?

So in my mind that leaves another 25bp hike in November following the Q3 CPI as a good bet, for an end year cash rate of 3.5% compared to my 3.25% forecast earlier. A further 25bp in December is possible if the data comes in on the stronger side – specifically inflation, housing credit and price data.

For my money I don’t think 50bp hikes are an option for the Bank just yet. That may come next year, but to do so now would send the wrong message to the market and risk destabilising the recovery. So I think we’ll see 25bp moves at a time and not necessarily in every month.

Interesting times - but certainly still every reason to party like its 1999 2003. The cash rate is still extremely stimulatory and mortgage rates low. Fact is rates globally are going to be very low for a very long time - or so they keep telling us.

Enjoy."

Read more >>

Rates up!

Details at www.rba.gov.au

"At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.25 per cent, effective 7 October 2009.

The global economy is resuming growth. With economic policy settings likely to remain expansionary for some time, the recovery will likely continue during 2010 and forecasts are being revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia’s Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia’s trading partner group, growth in 2010 is likely to be close to trend.

Sentiment in global financial markets has continued to improve. Nonetheless, the state of balance sheets in some major countries remains a potential constraint on their expansion.

Economic conditions in Australia have been stronger than expected and measures of confidence have recovered. Some spending has probably been brought forward by the various policy initiatives. As those effects diminish, these areas of demand may soften somewhat. Some types of capital spending are likely to be held back for a while by financing constraints, but it now appears that private investment will not be as weak as earlier expected. Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending is also starting to provide more support to spending. Overall, growth through 2010 looks likely to be close to trend.

Unemployment has not risen as far as had been expected. The weaker demand for labour over the past year or so nonetheless has seen a moderation in labour costs. Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading. Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought.

Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months. Business borrowing has been declining, as companies have sought to reduce leverage in an environment of tighter lending standards. But large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk. Share markets have recovered significant ground.

Interest rates facing prospective borrowers on fixed-rate loans have already risen to some extent, as markets have anticipated a higher level of the cash rate. For many business borrowers, increases in risk margins will still be occurring for some time yet. In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector. These factors have been carefully considered by the Board.

In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."
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Conroy thinks our internet is slow


It's not.

But South Africa's is.

There a homing pigeon could deliver data faster.

Yes - a homing pigeon with a 4G memory stick attached to its leg.

The BBC reports:

"A Durban IT company pitted an 11-month-old bird armed with a 4GB memory stick against the country's biggest web firm, Telkom.

Winston the pigeon took two hours to carry the data - in the same time the ADSL had sent 4% of the data.

The firm said Winston took one hour and eight minutes to fly 60 miles between its two offices, and the data took another hour to upload on to their system.

The ADSL transmission of the same data size was about 4% complete in the same time."
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Monday, October 05, 2009

Rate rise tomorrow - Rory


I'm a little bit preoccupied at the moment, so I can't offer any insights myself, but Rory Robertson says:

"Prompted by last Wednesday’s stronger readings on household demand, the RBA now appears set to lift its cash rate by 25bp to 3.25%, at 2.30pm tomorrow.

· Whereas early last week the RBA reportedly had been inclined to wait until November to begin its well-advertised tightening cycle from 3%, it now seems that the solid gains in August for retail sales, house-building approvals, home prices and housing credit have dragged forward the first 25bp hike.

· This morning’s stronger reading for ANZ newspaper job ads – up by 5.5% in August, the strongest (believable) reading in several years - adds weight to the RBA’s thinking that the economic emergency has passed.

· The RBA of course has been saying for several months that it is keen to start removing the “emergency” element of its extraordinary 3% policy setting at the earliest available opportunity. For outsiders, it’s been hard to guess the date of the first hike with any confidence.

· The strongest indication that the RBA will hike tomorrow comes from key economic journalists in this morning’s newspapers. Ross Gittins now sees a “high chance” of a hike tomorrow, while Alan Mitchell says such a move “now seems likely”. It will be interesting to see if Terry McCrann tomorrow goes with this new flow..

Last week, Governor Stevens highlighted the fact that today’s half-century low of 3% for the cash rate reflected policymakers’ fears early this year that a savage recession was in the pipeline. Six months later, the RBA now is confident that the worst is over - we have suffered only a small (“mild”) recession, with much-less-than-expected upward pressure on unemployment and thus less-than-expected downward pressure on inflation.

· This good news on the Australian economy over recent months has been bad news for interest rates. Today’s reports from key economic journalists suggest the RBA no longer is comfortable with the story that its “darkest hour” 3% cash rate – alongside four-decade lows for mortgage rates in the low-5s - remains appropriate for today’s brighter circumstances.

While today’s reports suggest that the first RBA hike indeed is imminent, the year-long downtrend in full-time employment and the ongoing strength of the A$ (chart) keep the case for aggressive tightening rather weak.

Thus any RBA tightening cycle from today’s “emergency” 3% cash rate to a “neutral” 5% rate may take a couple of years, and come in fits and starts, a scenario quite different from the steady-straight line of hikes over the coming year assumed by market participants on average.


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Where Eagle Rock began

Eagle Rock is special.

Its laid-back sound turns on something primal - instinctive - in us.

As Ross Wilson explained 30 years after its creation:
It came from a Sunday Times liftout magazine A-Z on music. In the before blues section there was an evocative photo of rural black Americans dancing in a dirt poor juke joint - the caption was along the lines of "some negroes 'cut the pigeon wing' and 'do the eagle rock'
Now he has taken it back to where it began in this version, peformed live at the Melbourne ABC.

You'll have to click on this link to see the video.



Oh, and here's the original:



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Saturday, October 03, 2009

Rio's won the Olympics! It won't help its economy.


Like he Sydney Olympics stuffed Sydney's economy (in contrast to the advance promises).

Can you think a single host city who's economy raced ahead after it hosted an Olympic Games?

To quote the findings of a recent comprehensive study:

"The net benefit of the Olympic Games is therefore substantially negative when the estimates of Olympic benefits from this paper are combined with published estimates for event costs."

Australia's Olympic Games were meant to bring an extra 1.5 million tourists in the months that followed. Instead tourism collapsed.

Now, what was the name of the consulting firm that produced the impressive-looking study arguing that the Olympic Games would boost Sydney's economy?

"An economic gold medal for Australia," said the then Minister John Fahey.

Oh yes, the consulting firm was KPMG.

The NSW Treasury predicted an even greater boost.

Let's see now, did NSW surge ahead or did it stumble after the Games?

Has it since recovered?
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This year's IgNobel winners...

"A lot of things we now call breakthroughs were once considered pretty crazy" - IgNobel founder Marc Abrahams

And the winners are...

VETERINARY MEDICINE PRIZE: Catherine Douglas and Peter Rowlinson of Newcastle University, Newcastle-Upon-Tyne, UK, for showing that cows who have names give more milk than cows that are nameless.

PEACE PRIZE: Stephan Bolliger, Steffen Ross, Lars Oesterhelweg, Michael Thali and Beat Kneubuehl of the University of Bern, Switzerland, for determining — by experiment — whether it is better to be smashed over the head with a full bottle of beer or with an empty bottle.

ECONOMICS PRIZE: The directors, executives, and auditors of four Icelandic banks — Kaupthing Bank, Landsbanki, Glitnir Bank, and Central Bank of Iceland — for demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa — and for demonstrating that similar things can be done to an entire national economy.

CHEMISTRY PRIZE: Javier Morales, Miguel Apátiga, and Victor M. Castaño of Universidad Nacional Autónoma de México, for creating diamonds from liquid — specifically from tequila.

MEDICINE PRIZE:
Donald L. Unger, of Thousand Oaks, California, USA, for investigating a possible cause of arthritis of the fingers, by diligently cracking the knuckles of his left hand — but never cracking the knuckles of his right hand — every day for more than sixty (60) years.

PHYSICS PRIZE: Katherine K. Whitcome of the University of Cincinnati, USA, Daniel E. Lieberman of Harvard University, USA, and Liza J. Shapiro of the University of Texas, USA, for analytically determining why pregnant women don't tip over.

LITERATURE PRIZE: Ireland's police service (An Garda Siochana), for writing and presenting more than fifty traffic tickets to the most frequent driving offender in the country — Prawo Jazdy — whose name in Polish means "Driving License".

PUBLIC HEALTH PRIZE: Elena N. Bodnar, Raphael C. Lee, and Sandra Marijan of Chicago, Illinois, USA, for inventing a brassiere that, in an emergency, can be quickly converted into a pair of gas masks, one for the brassiere wearer and one to be given to some needy bystander.

MATHEMATICS PRIZE: Gideon Gono, governor of Zimbabwe’s Reserve Bank, for giving people a simple, everyday way to cope with a wide range of numbers — from very small to very big — by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000).

BIOLOGY PRIZE: Fumiaki Taguchi, Song Guofu, and Zhang Guanglei of Kitasato University Graduate School of Medical Sciences in Sagamihara, Japan, for demonstrating that kitchen refuse can be reduced more than 90% in mass by using bacteria extracted from the feces of giant pandas.

improbable.com
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Friday, October 02, 2009

Kevin Rudd's setting up a situation room?


Tony Wright, the Goanna, has the story.
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Beds are burning, again. A magnificent Australian re-export

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Thursday, October 01, 2009

It's time to properly tax super, and the 50% discount for capital gains looks silly as well - Henry


Actually he thinks everything about the way we tax savings is silly.

Here's the key graph from the talk Ken Henry delivered today in Adelaide:




Super contributions are negatively taxed, big time. Rental properties and shares are also negatively taxed big-time, but only if they are funded by debt.

Make sense?

Meanwhile savings parked in bank accounts are taxed massively - at way above the saver's marginal tax rate.

Make sense?

Hold on.

This speech throws the lot into the mix.
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Tragic acounting - the moral vacuum at the heart of modern economics

This is what I wrote after the 2004 Boxing Day tsunami

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.
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Wednesday, September 30, 2009

House prices surge for 8th consecutive month - Steve Keen to walk to Kosciusko!

Below he concedes the point with grace and style:

"2010 should be an interesting year for property. I will probably have to walk to Kosciouscko at its beginning; Rory may have to consider a fitness regime at its end."

Here's today's house price graph:


Here's Rory's account of the bet he and Steve struck with in November:

If capital-city home prices do indeed fall by 40% within the next five years - starting from Q2 2008, and as measured by the ABS - Rory Robertson will walk from Canberra to the top of Mt Kosciusko (that's maybe 200km followed by a 2228-metre incline).

If Dr Keen turns out to be less than half right, and home prices drop by less than 20%, he will take that long walk.

Moreover, the loser must wear a tee-shirt saying: "I was hopelessly wrong on home prices! Ask me how."

Rory later clarified:

For the record, Steve Keen is keen to clarify that our bet is "peak to trough", as agreed, with no five-year limit. Obviously, I expect this distinction will not make a difference, with the ABS house price index likely to surpass its Q2 2008 level well within 5 years.


Steve begins his concession post with some kind words about a Reserve Bank analysis of housing, presented yesterday by the head of its research department, Tony Richards.


KEENSIAN ECONOMICS
by Steven Keen

"Richard's speech was a welcome acknowledgement of the down-side of rising house prices – something I haven't seen in previous RBA statements. However, there is also a sense of futility about the position the RBA is in, because the paper also acknowledges the down side of falling house prices. One reason why Australia hasn't yet experienced a serious financial crisis is that our house price bubble is the only one that hasn't yet deflated. But if it does, Roberts acknowledges that we could experience the same runaway collapse in credit and the economy we've seen elsewhere.

So the RBA now has to play Goldilocks – it must keep house prices from rising (Mummy Bear) and stop them from falling too (Daddy Bear), thus keeping everyone comfy (Baby Bear). A fine tuning act of exquisite delicacy. After the last four years, I doubt that anyone has any confidence in the ability of economists to fine tune anything.

So the odds are that (a) the government's First Home Vendors Boost (let's call it what it was – not a handout to help first home buyers in but an encouragement to them to borrow up big and give it to vendors to sustain prices) will indeed cause a new bubble to inflate, which the RBA will prick with a rise in interest rates and (b) the tiny rise in rates will cause a huge increase in debt servicing costs for over-leveraged first home buyers, causing a collapse in house prices.

Of course, the removal of the boost at the same time means that the volatility of prices will be amplified by the two wings of government acting against each other, but changing strategies at almost the same time in a way that will drive house prices down.

2010 should be an interesting year for property. I will probably have to walk to Kosciouscko at its beginning; Rory may have to consider a fitness regime at its end."

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We're spending like, well - never before

Retail sales were up 0.9% in August.

But that's not the point.

The point is that even in August, nine months after the stimulus packages began, we are still spending way in excess per month of what we ever did before the packages.

The graph from the ABS tells the story.

The dark trend line stops just before the first package.


After the spending packages looks nothing like before them, right?
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What if Armstrong and Aldrin had been stranded on the moon?


July 18, 1969. William Safire prepared a speech:





HT: Gawker, via Boing Boing via Tim Watts

In the words of one commenter: I can imagine Safire writing this, privately pondering the etymological connections of lunar and lunacy. In a genre that requires weight and sober rhythm, it is beyond effective.

In the words of another: Did Bowie get an advance copy?


HIGHLY RECOMMENDED READING: The first man on the moon, Guardian July 2009










Related Posts

. July 20, 1969. Let's remember

. Space travel: The best newspaper correction ever

. I think it's going to be a long, long time... space shuttle edition


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Tuesday, September 29, 2009

$11 billion fewer reasons for the Coalition to complain


And they're just the start

From Swan:

FINAL BUDGET OUTCOME 2008-09

The Australian Government general government sector recorded an underlying cash deficit of $27.1 billion (2.3 per cent of GDP) for 2008-09. This outcome was
$5.0 billion better than expected at the time of the 2009‑10 Budget, reflecting lower than anticipated spending of $2.2 billion and higher cash receipts of $2.8 billion.

Total tax receipts were $3.3 billion above the estimate at the 2009‑10 Budget, primarily due to stronger than expected company income tax receipts of $3.6 billion, partly offset by lower than expected personal income tax receipts of $0.5 billion.

Lower spending was due to a number of one-off factors, as well as lower income-support payments, including a reduction in payments of $138 million for the Newstart Allowance. This outcome reflects in part the success of our economic stimulus which has meant more Australians in jobs and fewer Australians collecting unemployment benefits than would otherwise be the case.

The stronger budget outcome is also reflected in a significant improvement in the expected Australian Government net debt position. At the end of 2008-09, the level of Australian Government net debt was -$16.1 billion, which is
$11.5 billion better than expected at the time of the 2009-10 Budget.

The Government is fully committed to its fiscal strategy to return the budget to surplus as the global economy recovers.

The last bit's the kicker. You wait. From here on, we're about to learn what austerity means. And the Coalition won't be able to complain - they're been asking for it.
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