Monday, December 22, 2014

Striking a blow for statistics…

Today’s ruling by the Supreme Court which stymies the Christchurch City Council’s attempts to impose a 67% of “modern code” rule over older building renovation versus the 34% intended by Parliament is a step some way toward perspective around risk, and respect for statistics not politics and unnecessary fear.

No one is dismissive of the horrors of the earthquake. To misunderstand the meaning of the statistical descriptors of such events and to seek solace and backside cover through upping standards to unrealistic levels adds insult to injury while imposing costs to no great benefit.

In respect of the likelihood of earthquake events nothing has changed. The probability of an event of a specified magnitude remains what it was prior to this event and now, after the event.  Because you saw a head come up in a series of coin tosses does not somehow change the probability of heads or tails coming up next flip.

Much the same applies to the ever misinterpreted “return periods” – just because an earthquake with a 100 year return period (say) has just “happened” does not mean:

  • there won’t be one next year;
  • they were “due for one” because the last was 160 years ago;
  • there won’t be one for 160 years; or,
  • any similar grim or glad warning.

It means that over long periods of time events of this magnitude will be observed, on average, once every 100 years.

The hard questions remain. How much do we want to spend to save a life? Is this area the best place to spend our scarce risk management dollar, does what we are planning to spend match the size of the problem we have.

This calls for use of a concept the legal fraternity fancy themselves as experts in – ensuring proportionate responses to events having regard to the evidence.

Statistics refuse to bow to sensationalism, to justify mad regulators in search of zero risk, bureaucrats trying to hide behind ever tighter regulation, journalists seeking easy stories, construction investors and companies seeking demand for risk proof buildings, material suppliers wanting to sell gold plating and much else besides.

If this is baffling – read more statistics. The cost of being baffled is high.

Wednesday, December 17, 2014

Why being sucked in by “scientific consensus fads” is deadly…

The Big Fat Surprise: Why Butter, Meat and Cheese Belong in a Healthy Diet. By Nina Teicholz. Simon & Schuster; 479 pages; $27.99. Scribe; £14.99. Buy from Amazon.com;Amazon.co.uk
A historical study of how fat came to be demonised, especially in America, by a mix of academics, government officials and food companies, and how the few sceptics who dared take on the fat orthodoxy have been much disparaged for their pains. Detailed in its research and eloquent in its argument, this is the year’s most surprising diet book.

Monday, December 8, 2014

Unhealthy ignorance and healthy foods

Green “healthy food” spokesman Kevin Hague says he has a problem with Food and Grocery CE Katherine Riches “conflict of interest” in being a member of the Health Promotion Agency  which, amongst other things, promotes healthy food while at the same time heading an organisation whose members make a profit out of distributing and selling food.

He’s right. He does have a problem.

Like the numerous others who still some 5,000 years on from first ever production, do not understand what a profit is.

At the simplest level of course, people selling healthy food make a profit. The production of muesli, St John’s Wort, mescaline weeds and all things green and vegie is undertaken for profit – just like the production of pies, potatoes and steak.

A profit is the cost of risk. Risk is an input to making healthy and unhealthy food. Without that input there is no production – healthy or otherwise. Just as a car will not provide transport without fuel so a food business will not provide food without the input of risk.

The cost of providing that risk input (the risk the business will lose its shirt) happens to be called profit. Profit does not come from the devil, thin air, nasty CEs, National Party voters, Labour Party Voters, Kim Dotcon, people who with Commerce degrees rather than BAs in literature or from people who don’t like Morris Dancing.

Profit is the cost of risk pure and simple. If you want healthy food you must pay for the risk involved in producing that food. Just as you must pay for the risk involved in producing unhealthy food. The cost of that risk is called profit.

Sending Katherine Rich out of the room, or asking the Minister of Health to fire her or asking the Auditor General to dispatch her to the corridor will not eliminate the need for profit.

It might though, hinder production of healthy food because the Food and Grocery Council members know more than a little about how to manage risk and profit in food production.

Tuesday, December 2, 2014

Grandiose poverty statements both bury the desperation and understate the progress

In N.Z. poverty is defined by some – including various quasi official qangos as including all who earn less than 50% of the median wage:

image

The line has been trending down since 1990. Is there no poverty? Of course there is. Big gesture alarming statistics hide the extent of extreme poverty while burying the hope which improvement over time is offering.

Study of those in absolute poverty shows they are living far differently from those earning the $30,000 a year the “poverty line” sets – because its a meaningless number – especially if you are poor.

On the other hand even the minimum wage for a 40 hour week delivers a gross income above that line… again probably meaningless because circumstances vary so much.

A more useful idea centres on the fact that a smaller and smaller proportion of people stay low earners for any length of time providing they can enter the workforce. The stress then needs to be on up-skilling to do that and making sure the workforce is easy to enter.

Monday, December 1, 2014

More “F word” problems…

“Forcing in an illiberal way the French style of equality of outcome, cutting down the tall poppies, envying the silly baubles of the rich, imagining that sharing income is as efficacious for the good of the poor as are equal shares in a pizza, treating poor people as sad children to be nudged or compelled by the experts of the clerisy, we have found, has often had a high cost in damaging liberty and slowing betterment.  Not always, but often.”  

McCloskey, D. p.31

Measured, Unmeasured, Mismeasured,  and Unjustified Pessimism: A Review Essay of Thomas Piketty’s  Capital in the Twentieth Century , Erasmus J of Econ and Phil. (forthcoming).

Thursday, November 20, 2014

Free(er) trade in India–quote of the week

From the Economist “India has never been able to manage a free trade policy – even with itself”.  There possibly is hope if they can get states and the centre to stop warring amongst the unproductive over spending the spoils of taxes which belong to the productive. The proposed GST could do that… courage please.

Thursday, November 6, 2014

Latest Stats NZ jobs and wages

The latest jobs and wages data from Stats NZ finds:

  • Employment up 72,000 in last year, being 66,000 full-time and 6,000 part-time
  • Unemployment down 14,000 in last year
  • Labour force up by 57,000
  • Unemployment rate down to 5.4%, from 6.1% a year ago
  • NZ 9th lowest unemployment rate in OECD of 34 countries.
  • Unemployment rate now 0.7% lower than Australia and US, 0.9% lower than UK and 1.5% lower than Canada
  • The NEET (Not in employment, education or training) rate for under 20s down to 7.2% from 8.1% a year ago
  • Average weekly earnings up (over year) 1.8%, being 2.2% in private sector and 1.4% in public sector
  • Average hourly earnings up 2.4%, being 3.0% in private sector and 1.0% in public sector
  • Male hourly earnings up 2.0% and female hourly earnings up 2.7%
    Thanks to David Farrar, Kiwiblog for this summary

Thursday, October 30, 2014

Losses Don't Save Lives

We know that “framing” – how issues are presented - has an indelible impact on how they are perceived and often on subsequent behaviour. If they are framed in a misleading manner misleading conclusions may be drawn and resulting behaviour perverse.
This morning Radio NZ reports “Port profits up but at a cost” and sets out the numbers associated with the shocking accident record at NZ ports in the last year.
The high rate is unacceptably high, absolute tragedy for those affected and has unnecessarily brutal results.
It is not however a necessary result of profit or  a “high cost” of profit.
The implication that it would somehow be lower and all would be well without such high profits is mischievous sensationalism which is likely to stand in the way of fixing problems.
Running at a profit is never an excuse for a poor safety record or an inevitable cost. Numerous companies including ports make profits and have a better safety record than the NZ effort last year.
Companies running at a loss or unacceptable profit do not have better safety records than profitable ones. Quite the reverse. Lives cannot be saved by simply running at a loss.
Running at a profit offers the resources to address safety issues and for pressure to be placed on managements and boards to address poor safety records. Losses give them the ideal excuse to do nothing.
Success including earning a healthy profit demands safe sustainably healthy conditions. Unsafe practices and a poor record threatens profit.
A less sensational report would have highlighted the problem areas, asked what is being done and how quickly and might well have scolded companies for moving too slowly or too narrowly.
Only the sloppiest of journalism coupled with slow brain editing grabs pointless unsupportable sensation resulting in predictably illogical conclusions which inhibit improvements rather than help. 

Wednesday, October 15, 2014

Hardly a lesson learned… a $1m plus education fail

Another day another failed prosecution. Hardly news. Hardly surprising…. but hardly anything learned either.

Media analysis of the SFC debacle is busy writing lazy headlines full of melodrama while the major lessons are being lost.

Just so we are clear…. the Janet and John here is:

  1. no “guru” is infallible. Having an old Volkswagen, a folksy “way”, and being a “good joker” is not enough and never was.
  2. this applies to Buffett as much as anyone else. Buffett’s greatest attribute is probably the fact that he is the world’s least deluded investor. He does not kid himself – ever.
  3. If you do not use your brain and do some homework you will lose your shirt or (regrettably) lose the taxpayers shirt. And you deserve to – big time.
  4. There is always risk – every time. If you can’t see it that just means you are blind to it. It’s there. Look for it till you find it. If you can’t find it invest elsewhere.
  5. don’t whinge, moan and blame the government – bond holders did it with Equiticorp, investors were “saved” with SCF (which the judgment now says there is little evidence did anything wrong (so can I have my tax money back then?). Its poor logic and pathetically dim.
  6. As the promoter of the awful Deposit Insurance Scheme himself (the beaming RH Cullen) said  “You lost, eat that”.

As for governments:

  1. The rat always smells the cheese. If governments say “come to Santa” the kids will flock. Deposit guarantee schemes always produce “too big to fail / not pay / hand out”. Come to Santa policies are just silly – that’s all. Do stop – its my money you are wasting.
  2. Less is more. It is pointless – utterly pointless passing laws you can’t, won’t or don’t have the bottle and competence to enforce. The Serious Fraud here is that taxpayers spent over a million on a failed prosecution which helped no one (legal fraternity aside).
  3. Do not, ever, try to save investors from risk. You can’t, you look silly, you delude them in a cruel hoax – and you still lose everyone’s shirt. Also – note – it doesn’t even get you votes for heavens sake.

So use your brain, face risk, get educated… it needs to be part of our culture.

I have long argued that if the average Kiwi knew as much about investing as he and she know about power tools, DIY, various “Idles”, and My Kitchen Rulez then we wouldn’t have a retirement problem.

DIY being in our genes does plenty for Placemakers, Mitre 10 and Bunnings and close to nothing for our kids and your retirement.

Thursday, October 9, 2014

What Academics Are Really Saying

 

All walks of life have their codes. Academics no less than other gangsters. Below some glimpses of the argot:image

Hat tip to Conrad Hackett

Faulty Logic…

Please note – the fact that “we”, or NIWA or even the PM have discovered a fault which we hadn't noticed makes not one whit of difference to the probability of an earthquake event. It was there all along.

So much – one would think – is obvious…. but

Monday, September 29, 2014

This graph says plenty…

image

Labour’s General Election vote since 1938 thanks to David Farrar.

Note:

  • best score since 1938 was the capitalist Labour Govt of 1984 –1990
  • 1938 – 1984 is how long it took to cripple the economy enough to get that turnaround
  • as the overall benefits of the “model” slid down so did the vote

The current review of the Labour Party has no chance of going anywhere useful for them until they face a few serious questions (as other Social Democrat parties world wide have done) about the model itself.

Monday, September 22, 2014

Classic from the textbook–Election 2014

There is a substantial body of work in the areas of behavioural economics and cognitive psychology which shows that the record of political pundits, political forecasters and the media is appalling in forecasting all but the most obvious of outcomes (a comprehensive review is to be found in Nate Silver’s The Signal and the Noise).

Kahneman shows that we tend to have a systematic bias which involves:

  1. Consistently underestimating extremes – National won and by a significantly greater margin than was forecast while the left suffered greater than expected decimation; and,
  2. that we are very poor at estimating ranges or spreads – much the same thing here too. The gaps between the factions were not well estimated as forecasters cramped things around the averages.

Did forecasters do better than a random pick would have? Yes – very likely they did. Even the Peters NZ First result has become systematically bizarre to the point where it is unlikely to be the result of a coin toss (the main guy who ran the coin toss – Hone Hariwera dipped severely).

Did the pundits and forecasters do any better than an amateur would have done? Very unlikely – and they got the extremes wrong – just as the amateur would have.

Moral? Don't pay forecasters much attention and certainly not money unless you are wanting to buy moral support – and even that is a dubious purchase – just ask the left.

Wednesday, September 17, 2014

The most boring bankrupt economic argument–“we export raw logs when we could be adding value and making jobs”

The rot set in in the late 1940s on this. Jim Anderton was maybe the first in the modern era to believe we wantonly refused to profit from the blindingly obvious money and jobs to be had from processing timber.

In recent times only Winston Peters has been bright enough to see what the entire business sector has apparently completely missed.

Now, joining him as a value add timber processing expert we have the lawyer from Herne Bay – Mr Cunliffe who has spotted the opportunity.

It is, you understand, not so profitable that any of them would give up their day job… it never is, is it?

It seems that only these elite economic whizz kids can see what needs doing. Mr Cunliffe even wants to stop Fonterra doing the unthinkable – exporting what people want to buy and what they will buy – and focussing instead on processing raw product here in NZ.

Apparently there is more money to be made ignoring the reality which sees us export what people want and instead “processing” here in NZ… at an uncompetitive wage rate all these people, in a curious coincidence, want to hike.

Evidently the business sector, with skin in the game and a shirt to lose – not just “the baubles” knows we are more than lucky to be able to export the logs and milk fat – and doing that is far from a cinch.

Shouting “value add” does not make one a competitive processor, it does not convince consumers in a world full of competitively priced product they should buy from you, and it will never justify giving up the hard earned offering you do have.

Besides… 50 years of bleating about this wrong headed nonsense produces boredom by the tonne none of which can be exported.

Sunday, September 14, 2014

Measured views of minimum wages

Eli Lehrer September 13, 2014

Highly relevant in NZ – none of the parties have a measured view – the polar positions are BOTH WRONG…. but it still doesn't help the poor.

The ground has been shifting in the battle over the minimum wage. With President Obama's proposal to hike the national minimum from $7.25 to $9 an hour stalled in Congress, local labor activists have been aiming even higher, getting behind a vastly higher minimum wage of $15 an hour.

The proposals are gaining steam. The small city of SeaTac, Wash., which includes Seattle-Tacoma International Airport, already has a $15 minimum in force, while Seattle plans to implement one over time. Similar "super-minimum" proposals also are under consideration in cities like San Francisco and Chicago. Recent state-level legislation will phase in a minimum wage of greater than $10 in California, Connecticut, Maryland, Hawaii and Vermont. Massachusetts' minimum will rise to $11 by January 2017, while the District of Columbia's is set to rise to $11.50 by July 2016.

Predictably, market advocates and business interests warn that such laws portend disaster: layoffs, benefit cuts, huge surges in consumer prices, mass unemployment and business closures.

Just as predictably, labor unions and their allies on the left paint the subject in terms of "fairness," arguing the higher wages will be paid out of what one SEIU lawyer called "billions and billions" in “extra” profits earned by fast food restaurants and others.

In truth, while the proposals are deeply flawed, the projections of economic catastrophe are at least somewhat overblown. The best reason to oppose a $15 minimum wage is that it's a bad way to help the very people it is intended to help.

Though the economic literature on the subject is mixed, a comprehensive review done in 2013 by the National Bureau of Economic Research found most studies do find a small but measurable increase in unemployment in response to minimum wage hikes.

The effects tend to be concentrated in a few industries that employ lots of low-wage workers, often teens and seasonal employees.

That a rising minimum wage would have only a small impact on unemployment shouldn't be terribly surprising, because government regulation doesn't have that large an immediate effect on jobs anywhere.

The Bureau of Labor Statistics regularly asks employers the reason behind layoffs. Those attributed to "government regulations/intervention" are routinely less than 0.5 percent of the total.

Both because they want to take care of their employees and because they would lose customers if service levels get cut sharply, business owners will avoid layoffs if they can. Nor are the costs of higher minimum wages simply passed on to customers. While a portion of almost any cost increase will almost certainly be passed on to consumers in the form of higher prices, price competition alone means that consumers will rarely have to pay all of it.

Instead, businesses may look to cut the cost of non-labor inputs, or to slow cost-of-living adjustments, cut raises for employees earning more than the minimum wage, or increase employees' share of health-care costs.  And yes, some will accept lower profits.

Of course, none of this makes a vastly higher minimum wage a good idea.  Higher labor costs will encourage businesses to automate more tasks and, over time, look for creative ways to avoid filling vacancies.

This will encourage elimination of many of the easiest-to-replace jobs.  And while mass insolvencies and rampant unemployment may be unlikely, there will certainly be some effect. Some already teetering businesses will almost certainly be pushed over the edge and some jobs that could have been taken by teenagers, the disabled and those lacking familiarity with work itself will never be created in the first place.

What's more, raising the minimum wage is simply a terrible way to help the poor. Only about 7 percent of those below the federal poverty line work a full-time job of any sort. Meanwhile, many of those who earn the minimum wage aren't poor at all. Roughly 42 percent live with a parent or relative, while another 18 percent are married second income earners, which helps explain why the average family income of a minimum wage earner is $53,000 per year.

Expanding the Earned Income Tax Credit, a direct subsidy for those who work for modest wages, is a much better and much more direct way to help the working poor.

Changes to healthcare, nutrition and education programs could do still more to help those in poverty. By comparison, a $15 minimum wage, even if not as disastrous as some market advocates claim, is likely to do more harm than good.

Eli Lehrer is president of the R Street Institute.

Monday, September 8, 2014

The Rough Guide to Voting on Policies

Finding the “signal” in the “noise” is close to impossible in an election campaign… and the effort can soon become boringly tedious. Here is the rough guide.

For any policy ask:

  1. Is this actually a problem? Or is it a “nice to have” for some self interested group who would like a better ride at everyone else's expense.
  2. Could a government, any government, actually solve it? Governments move motions (lots of them), pass resolutions and pontificate but their abilities to achieve are limited.
  3. What would the cost be – the full cost after paying for enforcement and all the knock on costs no one is mentioning – if they actually know them.
  4. Who exactly is going to pay those costs? Is it the people who will benefit or is it “us”, the tax payers all governments hope will not add up the bill of all those motions.
  5. Finally – a first rule of economics – pay attention to what politicians actually do – never what they say, or what they say they will do. Only behaviour counts.

Hints – to help you along try these tips as well:

  • never assume the “goodies” wouldn’t go for self interest. Be very careful of “goodies” in health, education and welfare. These “goodies” are just as self interested as the rest of us – and they are typically smarter at speaking, writing, persuading and being moralistic.
  • you don’t have to enjoy policies for them to be good for you. I don’t like not getting subsidies for economists and not having guaranteed markets and all the competition that drives down what I can charge and mechanics being picky about my WOF… but I know there are long term benefits for everyone here.
  • be very, very careful of policies which “won’t cost much when spread over all the tax payers” or which involve “only a a couple of cents more on the tax rate”. These marginal costs are what kill us. It is not inability to pay the first $10.00 of your mortgage which hurts… its the last $1.00 you can’t pay that bankrupts you. Same with the country’s budget.

None of this will guarantee a good outcome… which brings the final rule “there is no free lunch”. There is always a cost even if you can’t see it.

The old poker player’s adage applies – if you can’t figure out who the fool in the room is after 40 minutes – it’s you.

Investment–Harmless Superstition NOT

Numerous pieces of irrational nonsense are passed off as “harmless superstition” . Nowhere is this more the case than with investment advice where the search for the holy grail of riches without risk, fear or hard work ever beckons.

Is superstition harmless….. actually no. And that, according to the Economist report of August 30 2014.

Thus we find that the Chinese love of the number “8”  (which sounds similar to “prosperity” in Chinese) and their studious avoidance of the number “4”  (which sounds similar to death) leads to investment strategies which seek prices for assets ending in “8” rather than “4”.

The consequence? The research shows, for the studies examined and more broadly “superstition driven trades” on the Taiwanese stock market, returns diminished by around 2%.

Before concluding that Chinese culture and superstition is a returns killer though, consider the very widespread research on “anchoring” a phenomenon whereby people of all colour and hue attach unjustified significance to round numbers (e.g. those ending in zero), “certain” numbers e.g. 100 (rather than 99) or perhaps 1,000 (rather than 1002) or the first number they were confronted with at an auction.

The lesson? Eschew and avoid witchcraft and clear nonsense just as you would avoid walking under a ladder.

Wednesday, August 27, 2014

So useless we can’t even “become unequal” ??

Tyler Cowan at Marginal Revolution notes….

I sometimes say it is coming first to Israel and Singapore (and England?), but the Kiwis are a different case.  Eric Crampton quotes from an NZ Ministry report:

Overall, there is no evidence of any sustained rise or fall in inequality in the last two decades. The level of household disposable income inequality in New Zealand is a little above the OECD median. The share of total income received by the top 1% of individuals is at the low end of the OECD rankings.

You also will note that New Zealand has been a steady under-performer in terms of economic growth, despite a lot of good policy decisions.  This has helped keep income inequality down.

It does rather show that if you grow slowly enough, or not at all or decline rapidly – you can have all the equality you want……

Tuesday, August 5, 2014

Some science about what is fashionable in clothing

Abstract

Fashion is an essential part of human experience and an industry worth over $1.7 trillion. Important choices such as hiring or dating someone are often based on the clothing people wear, and yet we understand almost nothing about the objective features that make an outfit fashionable. In this study, we provide an empirical approach to this key aesthetic domain, examining the link between color coordination and fashionableness.

Studies reveal a robust quadratic effect, such that that maximum fashionableness is attained when outfits are neither too coordinated nor too different. In other words, fashionable outfits are those that are moderately matched, not those that are ultra-matched (“matchy-matchy”) or zero-matched (“clashing”).

This balance of extremes supports a broader hypothesis regarding aesthetic preferences–the Goldilocks principle–that seeks to balance simplicity and complexity.

Here is the source and reference. Thanks to MR

Monday, August 4, 2014

Wanting the story to be true… inequality

Recent media discussion and comment has focussed heavily on a story many seem to want to be true – in spite of the fact that it isn’t. 

Claiming that inequality is growing in NZ is an easy sell at present. Couple it with the idea that the fault for such inequality lies with the rich and you have a sure fire winner but for one thing.

It is incorrect.

It may appeal. It sounds cute. It may “resonate” for those wishing to sound “concerned”.

The Ministry of Social Development states, baldly and boldly in their latest report:

Overall, there is no evidence of any sustained rise or fall in inequality in the last two decades. The level of household disposable income inequality in New Zealand is a little above the OECD median. The share of total income received by the top 1% of individuals is at the low end of the OECD rankings.

Inequality is a non story.  Does it mean there is no poverty?

  1. No – assuredly it does not. All aggregate figures and averages mask the sub groups in populations – including NZ – who undoubtedly suffer and in some cases suffer badly.
  2. Moreover, numbers give only the most mechanistic impression of the horror of poverty for some.  Read the Auckland City Mission’s “Speaking for Ourselves” to get some impression of that.

Still – stories built for political and other self interested motivations around the idea that inequality is growing overall in NZ simply cannot be supported.

What’s more, change in who is affected and how needs to be considered.

More than three quarters, some 76% of the people in the lowest decile in 2002 were, seven years later, no longer there. Moved up, migrated or dead in blunt terms – the majority had moved up.

Notice too that the entire decile group moved upward – and quite considerably.  Between 2002 and 2009 GDP per capital (PPP in USD) increased by some 35%. On average people were 35% richer than before – so what we regard as “average” moved along at 5% a year.

So – on average people were a good deal better off than they had been and that with no increase in inequality. What’s more more the period spanned considerable chunks of both Labour and National led governments – so point scoring there is irrelevant as well.

Acknowledging that reality ought encourage further growth while  focussing on the seriously poverty stricken.

Sunday, July 20, 2014

A non result news filler piece of rubbish

Not one of the numbers in this story shows anything at all compared with the last poll. The margin of error is + or minus 3%. There is no story here – the numbers show neither disappointment nor triumph for Labour or anyone else. It is a non-story – a dead parrot:

The latest political poll contains more disappointment for the Labour Party.

The 3News Reid Research Poll out on Sunday has National also slipping slightly, but it remains more than 20 percentage points ahead of Labour.

The poll has National on 49.4 percent, down 0.3 percentage points since the last 3News poll.

Labour drops back to 26.7 percent, down 0.6.

The Greens are also down slightly, to 12.4 percent, and New Zealand First is just shy of the threshold to get back into Parliament, on 4.3 percent.

The new Internet-Mana party alliance is up to 2.3 percent.

The 3News poll surveyed 1000 people with a margin of error of plus or minus 3.1 percent.

What is it that eludes the RNZ journalist and editor here? What is so difficult? Why is this so hard?

Saturday, July 19, 2014

The medical fraternity–ignorant bleating

Yet another call for income and GST tax concessions on fruit and vegetables and increases on “sugary foods”from a medic (with superb medical qualifications)  demonstrates yet again substantial ignorance of:

  • substitution effects
  • elasticity
  • cross elasticity amongst products
  • supply and demand effects
  • subsidy capitalisation
  • net present values
  • income transfer effects
  • capture and rent seeking effects
  • prospect and endowment theory
  • anchoring and confirmation bias
  • comparative advantage – do try to stick to things you know something about

In short they know as much about the micro economics of human behaviour and it’s wildly dangerous but seductive cousin economic policy making, as I know about medicine and interventionist surgery. Close to nothing.

The difference is I, and most other economists, indeed most other self respecting scientists of any kind,  don’t bleat and advocate gratuitously about matters of which we are profoundly ignorant.

Wednesday, July 2, 2014

The last six months… book list

Brain Rules - John Medino... understandable neuroscience of practical use and the bones of cognitive behavioural concepts. All people in all cultures have a graveyard shift 1:00pm - 3:00pm.... get over it.... and don't do my job at that time.

Thinking Fast and Slow - Daniel Kahneman. Compulsory. 20 years of thought and experiment nailed and explained. What's behind almost all behavioural economics. Scholar, writer, scientist, entertainer... and humanist.

China versus the West - Ivan Tselichtchev. Non west global economics. Written while the pot was still boiling hard but still sets the framework usefully. Knock you dead stats but with feeling and insights.

The House of Rothschild – Nial Fergusson. (Two volumes). Jewishness, family businesses and banking over several centuries. How to fund a Franco Prussian war. Impeccable research. No magic in banking, or being Jewish and families are just as scary everywhere.

How to Think Like a Freak - Levitt and Dubner's 3rd. Strong as ever. Entire "wine buff" rubbish crushed with evidence. How to annoy David Cameron. Great economics. David Lee Roth uses revealed preference theory.

Dice World - Brian Clegg. Excellent journey into randomness and quantum physics without the grief. As arguably “the” critical phenomenon I spend a lot of time studying randomness – and our ability to accept it, manage it, even exploit it. Clegg assembles the vital where and why and some of the how.

Hitler - A. N. Wilson - weak and rather bigoted. He is still annoyed about Hitler - but also Churchill, possibly Thatcher. Achievements by those he despises really cause bother. Stick to Victorians, even Elizabethans.

Paradox: The Nine Great Enigmas in Physics - Jim Al-Khalili. Kim Hill rather knocked him over. Just satisfactory but Kim and Callaghan are better. Strong on the speed of light and why no SUV will ever beat it. Origins of physics envy slightly apparent.

Being Prez - The Life of Lester Young... David Gell. Far from the first but strong musical analysis and no pseudo white man's status seeking through fake "apologies". Contrast between musical and sonic authority versus insecurity is staggering.

Staying On - Paul Scott - death of colonialism by 1,000 cuts seen from an Indian minion's perspective. The long march into oblivion with nowhere to go back to. Something of an OE from the British end that wound up in a stranding.

The Adventures of Sherlock Holmes - Conan Doyle.... repeat read of one volume per year (4 Akl - Dud returns by Air NZ). This year.... how Conan Doyle makes induction meet deduction. Unbeatable logic and yet the guy became a spiritualist in later life.

Bird: The Life and Music of Charlie Parker - Chuck Haddix. Strong on the context of American life in which Bird featured. What Kansas City was about during prohibition - instructive on what such regulation does. Mayor Prendergast etc. Territory bands - and other bygones.

Eminent Hipsters - Donald Fagan. My Old School and other real stories from the Steely master...terrifyingly easy to identify with. Suburbs growing up in 50s, 60s, 70s. Surprising parallels with (my / our I suppose) NZ child, teen aspirations. Less obscure than most SD lyrics.

Antifragile - Nassim N Taleb. Strong summary from "Fooled by Randomness” to now (via Black Swans). Powerful concepts. Some irritating condescension but never a problem. His unique mixture of psychology and statistics which falls just this side of smart ass but close enough to challenge and inspire.

The Success Equation – Michael Mauboussin. Knowing which outcomes are determined systematically versus randomly is a critical skill. It is not easy. The notion that there is “a reason for everything” is wrong and dangerous. Mauboussin is amongst the very best in this space (and other investment areas) Anything he writes pays dividends when read.

How to Think Like Sherlock Holmes - Maria Kornikova. Cognitive behavioural processes in "that" framework. Clever and not forced at all. Watson gets thumped - and he is us. Links strongly (and deliberately) to Kahneman (above) and the guys in the band.

What it Takes - Charles Ellis..... what makes successful consulting, law, investment, healthcare enterprises fly by the guy who wrote "Winning The Losers Game". Not another business war story - Ellis is healthily cynical.... mixes the madness with the achievement. Vital for anyone with work life balance... lose it and succeed.

Hornet’s Sting – Derek Robinson. Class war through aerial war and Etonian madness with boys toys in WW 1. Very strong writing over a credibly spun anti-hero theme that spins into broader points beyond war. Also humorous in an Adderian fashion.

Sunday, June 29, 2014

What the Lucan Case can Teach us about Rule Making

While much of the debate about school boy hair length has made for lazy TV stories, emotion and re-visiting personal convictions of various “commentators” there are some useful lessons here – highlighted by the judgment.

These largely boil down to trying make useful rules if we choose rules to achieve our goals. We might well note the following:

Making efficient rules involves giving thought to both content and process. In turn:

Content

  1. Rules should be certain and to the greatest extent possible they should avoid ambiguity. Since we don't necessarily want rules to be utterly unchanging forever, clear specified processes for changing them (amongst which parental grandstanding is unlikely to be a good candidate) are helpful;
  2. It is preferable that the content of rules does not involve requirements which can be seen to be hypocritical (rule makers disobeying or near disobeying their own rules) or grossly inconsistent;
  3. Rules which seek to impose subjective judgments are typically troublesome. Seeking to justify such impositions by reference to committees, boards or other small collectives does not overcome the basic flaw; 
  4. Content even remotely approaching “fashion” is subjective. There are no logical constructs which allow its objective evaluation; and,
  5. Remedies and sanctions ought to be spelt out. Those should be proportionate (transportation to the colonies or capital punishment for theft of a loaf of bread is not proportionate by most measures), enforceable and easily understood.

Process

  1. The granting of unfettered discretion to single individuals to interpret, enforce and apply remedies is typically troublesome.  The weaker the content of rules (see above) the worse this problem becomes;
  2. Enforcement and remedial measures should be spelt out before the fact – i.e. when the rule is introduced. Wildly swinging about grabbing for any action which might annoy the rule breaker does not qualify as considered, reasonable practice;
  3. Proportionate application of flexibility in administering rules is useful. It adds to the credibility of the rule, the rule maker and the rule enforcer. Unwarranted entrenched behaviour tends to beget entrenched behaviour.
  4. The abuse of any aspect of the process – from rule design to enforcement – for the purposes of asserting authority for its own sake is both unacceptable and likely to lead to ridicule.

Rule making can be a process which is then “simple” but not “easy”. Less is typically more especially when objectives are unclear, motivations are suspect and the love of good “copy” overwhelms considered thought.

Friday, June 27, 2014

Do not confuse attitude with randomness…

Kevin Roberts – ever a source of original ideas and their applications reports here…..

The message is not that people are “lucky” or “unlucky”…. the message is that truly random processes are very different indeed from systematic behaviour:

Apparently you can. Richard Wiseman, a psychologist at the University of Hertfordshire, has spent the past decade studying what makes people luckier than others. We know these people: The ones who win random spot prizes, have golden opportunities land in their laps, nail their dream job, and their soulmate.


I’ve never believed that luck is random. Lotto is, sure. But not happiness, and that’s ultimately what people equate lucky people with. Wiseman understands this too and set out to rationalize it. As you might guess, thoughts and behavior play a major role in the situations we find ourselves in, and the opportunities we see and embrace.


One of Wiseman’s tests was to give both lucky and unlucky people, as they had deemed themselves to be, a newspaper. The task? Search through the sheets counting the number of photographs inside. The unlucky took about two minutes, while the lucky wrapped it up in just seconds. On the second page of the paper, Wiseman had planted a half-page message: "Stop counting.

There are 43 photographs in this newspaper." For fun he placed a second large message at the mid-point saying: "Stop counting. Tell the experimenter you have seen this and win £250." The unlucky missed that too.
Wiseman’s conclusion is that unlucky people are generally much more tense and anxious than lucky people.

They’re creatures of habit and don’t often listen to their gut instincts or act impulsively. They’re overly analytical, and as a result, don’t notice the unexpected. But it’s behavior that can be changed. Through Wiseman’s ‘luck school’ he got his volunteers to carry out exercises to make them behave like a lucky person. And it worked. As they say, you make your own luck.

Wednesday, May 28, 2014

Impact of Regulation

In a classic case of the left being at war with itself, the very parties who called for the RBNZ to impose regulation on mortgage lending now suddenly find themselves asking for restrictions of rates to be lifted. The impact of regulation was nothing if not consistent with its centuries old reputation – it hurt the very people it was designed to help – but it made a few people “pulling the levers” “feel good” and feel as if they were “doing something”.  And they were. So now people such as the Mayor of Auckland want the ability of Pasifika communities to be able to take on a bit more risk to be restored. Some financial education, lowering of local body rates and a commitment not to intervene again would reduce that risk – at least at the margin but there is no sign of that.

I suppose the best one can say is that the learning turnaround has been reasonably swift.

See the Radio New Zealand article Here (browser back button to return to Eye2theLongRun)

Tuesday, May 27, 2014

Not so fast champ–one single doesn’t make an album even in rock econ

People have been quick to dub Thomas Piketty a “rockstar economist” – the latest in NZ being (predictably) The Listener – though even they have a healthy dose of “balance” in their recent review.

The Financial Times is less forgiving with a heavily researched demolition job….. and not just on the advocacy but on the argument and evidence.

The following though – from socialist HQ France is even more damaging given that France starts well down the track in his favour.

Sunday, May 25, 2014

Impounding–a badly misunderstood concept

Notice that:

  • if a house costs $200,000 and you make a grant of $25,000 free to everybody pretty soon that house will cost $225,000
  • if a doctors visit costs $50 and you make a grant of $5.00 free to everyone pretty soon that visit will cost $55.00

You can try to hide it behind “criteria”, “targets”, ages, genders, ethnicities – anything you like to dream up…… and worst of all votes (vote for my party and we will “fix” housing, doctors visits…. you name it by giving you “free” whatever to the value of $xxxx…..) but it will be impounded into the price.

Notice too that even if the “free” money is available to only a few then the price will still be impounded…..

World wide there are various subsidies are made so people can buy hearing aids more cheaply…. result? Costs are in the several thousands for a piece of equipment which is less complex than an iPhone at $300 – $500.

Truly there is no free lunch. Giving away lunch drives the price up.

Monday, May 12, 2014

Type I and II Errors–the Visual

Further to my post on our site, here is the visual for those who are still struggling with Type I and II errors.

Type-I-and-II-errors1-625x468

Thanks to Marginal Revolution.

Sunday, May 11, 2014

Saturday, May 10, 2014

What engineers think of themselves…. and what the rest of us think

I read today in Phil Rosenzweig’s brilliant new book Left Brain, Right Stuff that in one study of performance and reward systems, 37% of engineers rate themselves in the top 5% of all professionals.

The stat is quoted in part of an explanation of why such numbers (including the very common assertion that “x” (being some number well over 50%) of drivers rate themselves as better than average drivers – plainly an arithmetic impossibility, but not necessarily surprising or irrational.

Rosenzweig is ever worth reading since his analysis is careful and thorough. He is never afraid to knock so called gurus with cute stories, statistics or Nobel prizes.

I am confident that I am not being overconfident in asserting that the statistic about engineers will come as no surprise to more than 37% of non engineer readers.

Thursday, May 8, 2014

Some stats on being bumped off–Dicing with Death

 

A 2012 study published on the 10th April by the UN Office on Drugs and Crime provides some interesting statistics. 437,000 people around the world whose lives ended in murder were studied. Here are some of the results:

     
  • The average person around the world had roughly a one in 16,000 chance of being murdered.
  • Murder rates in the Americas or Africa (one in 6,100 and one in 8,000 respectively) are more than four times as high as the rest of the world.
  • Western Europe and East Asia are the safest regions.
  • The safest country was Liechtenstein (population 36,600) which recorded no murders at all in 2012.
  • Singapore with 5.31million people clocked up just 11 murders in 2012, or one killing per 480,000 people.
  • In Honduras, the world’s most violent country, one in every 1,100 residents was killed and one man in every 599.
  • Your chance of being murdered if you are a woman will be barely a quarter what it would be were you a man.
  • Nearly half of all female murder-victims are killed by their partner or another (usually male) family member.
  • In Japan and South Korea slightly over half of all murder victims are female.
  • From the age of 30 onwards, murder rates fall steadily in most places.
  • However European women over 60 years of age are more likely to be murdered than those aged 15-29.
  • Alcohol featured in half of murders in Australia, Finland and Sweden, making it a more common factor than any weapon.
  • Worldwide only 43% of murders result in someone being put behind bars.
  • Europe’s police solve eight out of ten murders; those in Asia nearly half and three-quarters of killers in the Americas escape justice (a smaller share in North America)
  • Over a lifetime (assuming a life expectancy of 71 years and a stable murder rate), a Honduran man’s risk of being killed accumulates to a horrifying one in nine.

Wednesday, April 30, 2014

No Free Parking Sorry

There are numerous reasons for parking the new Labour “tool” for macro economic fiddling well out of sight.

One however is a perennial Parker problem – failure to look beyond end of nose.  Mr Parker claims that by forcing people’s hard earned through the funnel of a compulsory KiwiSaver scheme we are somehow better off since money does not flow into overseas capital markets.

Where does he imagine the ever grateful for the fees funds management industry put the money? Being prudent as well as fee rapacious they diversify the holdings – globally - and the higher the NZ dollar the more cost effectively this can be done.

A costly way of moving the bump along the carpet then….. again.

Sunday, April 27, 2014

“No Parking”–Don't Trade Forex with David

David Parker – Labour’s finance spokesman echoes numerous commentators who 30 years on from when the NZ dollar was floated, still can’t understand that exchange rate movements cut both ways. Yesterday he gave us this wonder…..

Parker criticised the strength of the New Zealand dollar, saying the International Monetary Fund thought it was overvalued by 5-15 per cent.

If it were 15 per cent too high, that would mean exporters were losing $9 billion a year, he said.

"Imagine how many more people they could employ in well paid jobs if they were earning $9 billion per annum more from our exports.

Imagine how many people would be impoverished if importers had to pay $9 billion more for goods and services for imports. 15% extra on  petrol, healthcare products, clothes and on and on.

It’s called a zero sum game. There are still no such free lunches Mr Parker, even with the latest upgrade.

Do try to get with the programme.

Friday, April 18, 2014

Why isn’t New Zealand richer and more productive?

This is a good summary of this important study. It is critical that we try to understand and learn from it – not react either politically or defensively. Denial will not be helpful in the slightest.

 Tyler Cowen on April 18, 2014

Here is a new study from the New Zealand Productivity Commission, and here is the basic puzzle:

Based on its policy settings, the authors estimate that New Zealand’s GDP per capita should be 20% above the OECD average. But it is actually over 20% below average, making New Zealand a clear outlier. The size of the gap indicates an apparent “productivity paradox” that costs more than 40 cents in every dollar of output.

Here is one problem:

The increasing importance of global value chains – where production activities are spread across countries – may have worsened the impact of New Zealand’s geographic isolation on trade in goods.  Because global value chains typically require intensive interaction and just-in-time delivery, they tend to be regionally based. For New Zealand, international transportation costs for goods are about twice as high as in Europe. This reduces access to large markets and the scope for participation in global value chains , where the transfer of advanced technologies now often occurs.

More generally, the “gravity equation” — also known as distance — makes it harder for New Zealand to trade with the rest of the world.

Another big problem has to do with problems of underinvestment in knowledge-based capital:

Most of the rest of New Zealand’s productivity gap…appears to come from an underinvestment in knowledge-based capital. Knowledge-based capital encompasses a wide range of assets including product design, inter-firm networks, R&D and organisational know-how. Knowledge-based capital can be used simultaneously by more and more firms without re-incurring the initial development costs.  This generates increasing returns to scale – an important property that makes ideas and knowledge a key engine of productivity growth.  It can also be difficult to prevent others from using knowledge-based capital, an example of “spillovers” of knowledge and ideas between firms.

While comprehensive data on knowledge-based capital are currently not available, indications are that New Zealand ranks well in software investment and trademarks but very poorly in R&D and, to a lesser extent, patents. Indeed, R&D intensity in New Zealand – particularly business R&D – is among the lowest in the OECD. This not only reduces capacity for frontier innovation but also the ability of firms to absorb new ideas developed elsewhere, constraining technological catch-up.

In part, New Zealand suffers a low return on R&D due to its limited access to large markets, which reduces the likely payoff from the successful commercialisation of new ideas. New Zealand’s economic structure may also play a role. The industries in which New Zealand specialises typically have low R&D intensity. For instance, across countries, R&D in agriculture rarely exceeds 0.5% of value-add.

Here is a good FT summary blog post on the study.

I would have liked more comparison with the time when New Zealand was one of the world’s wealthiest nations per capita, and when, pre-1973, privileged access to British markets for Kiwi lamb and dairy was enough to maintain such high living standards.  And might we be reading a very different piece if the Chinese had a stronger taste for milk?

I recall the Michael Porter report from the 1990s, arguing that New Zealand did not have enough strong economic sectors which could lead to the accretion of cumulative advantages.

Overall, if there is any nation which should be aiming to double or triple its population, it is New Zealand.

Wednesday, April 16, 2014

Farm Management not Urban Hysteria is the answer

Extract from “Smarter farming the answer for waterways” ODT, Wed, 16 Apr 2014
 
Ciaran Keogh – former CE Southland Regional Council.

To put the issue of further agricultural intensification into perspective, a comparison between the Netherlands and Southland is illuminating. The Netherlands is roughly the same land area as Southland (34,000sq km).

Southland has a population of 100,000 and about 600,000 cows and an annual agricultural production with a value of about $2 billion.
The Netherlands, in contrast, has a population of 16 million and a dairy herd of 1.5 million cows (it used to be 2.5 million but got reduced in the 1980s to contain the environmental damage).

The Netherlands produces $55 billion in annual agricultural and horticultural production. It produces 20 times as much revenue from the same land areas as Southland. It gets seven times the milk production from a little over twice the number of cows.

It does this with very tight environmental regulations, and because of this it farms far more scientifically and responsibly than we do in New Zealand.

It would not be difficult to double New Zealand's dairy production while at the same time reducing the adverse consequences to a 10th of their existing level. There are farms in in New Zealand doing this already, and unsurprisingly many of these are farmed by Dutchmen.

Full article at the Brent Wheeler Group website.

Wednesday, April 9, 2014

What a little thinking shows….

Mark Perry’s and Andrew Biggs’s essay – “The ’77 Cents on the Dollar’ Myth About Women’s Pay” – in today’s Wall Street Journal; today, by the way, is so-called “Equal Pay Day”:

These gender-disparity claims are also economically illogical. If women were paid 77 cents on the dollar, a profit-oriented firm could dramatically cut labor costs by replacing male employees with females. Progressives assume that businesses nickel-and-dime suppliers, customers, consultants, anyone with whom they come into contact—yet ignore a great opportunity to reduce wages costs by 23%. They don’t ignore the opportunity because it doesn’t exist. Women are not in fact paid 77 cents on the dollar for doing the same work as men.

Far too many policy proposals are premised on the absurd notion that privately available profit opportunities exist but remain unnoticed by all but professors, politicians, pundits, and preachers.

Café Hayek

Notice it is still possible for women to be paid, on average, less than men… but not for the same work under identical conditions,

Sunday, April 6, 2014

Get out of my pantry you interfering agenda toting neo wowser

In this thorough summary David Farrar demonstrates more than adequately why politicians of all hues but especially the local body variant, have no place in the bedrooms, pantries or bank balances of the nation. Unfortunately it also benchmarks the size of the “slow learner” brigade in Aotearoa NZ.

Monday, March 31, 2014

The F word

There is little doubt that one of the most troublesome words in the entire English language is the word “fair” and its inverse “unfair”. Unfortunately it is also one of the most popular words being slipped out at regular intervals by those who feel they are hard done by both generally and on numerous specific occasions.

Even the Economist has written on the topic. Rent seekers who dislike removal of their protection from competition intone with it regularly. Invariably it is a thin and poor disguise for simple envy or lack of cognitive capacity.

Here is a true life example found recently in an actual letter of complaint to a travel company:

"It  took us nine hours to fly home from Jamaica to England . It took the  Americans only three hours to get home. This seems unfair."

When finding oneself tempted to use the F word, stop re-think motives, try for the word which describes accurately and truthfully what you want to say and then ask yourself if you still wish to say it. You may be surprised.

Sunday, March 30, 2014

People with learning difficulties–still failing trade 101

It is said that the hardest lesson to understand and learn in all of economics is why free trade benefits all of society. We have been consistently failing to learn this thoroughly and in numbers for many centuries – and bearing the cost accordingly.

The most obvious example of this failure in modern times can be seen in the Corn Laws debate prior to the reform of that legislation in 1846.

Its current manifestation may be seen in protests about the idea of a Pan Pacific Free Trade Agreement. Just how tough it is to learn and understand is evidenced by the very considerable number of extremely intelligent people from all walks of life – all of whom have benefited from free trade – who fail miserably to understand it.

The economists' job it seems, is never done.

Friday, March 21, 2014

Do try a little scientific reasoning now and again….

Don Boudreaux explains exactly why some logical thought would be a  good idea…

This famous Sidney Harris cartoon (below) captures what is wrong – what is deeply unscientific – about far-too-much modern economics.  The miracle assumed by the unscientific ‘scientific’ modern economist is that government will act (1) apolitically, (2) without any of the human imperfections, myopia, and psychological quirks that (are assumed to) give rise to the market imperfections that allegedly justify government intervention, and (3) with more information and wisdom than is discovered and used in markets.

All the fabulous ballistics(a term that I understand was used by

 miracle_cartoon

the late Jack Hirshleifer) that lead up to the miracle and that describe matters following the miracle might well be the flawless products of unquestionable brilliance.  But it is simply, deeply, and inexcusably unscientific for economists (or any one, for that matter) to simply assume that government will perform as the social-engineering theory requires it to perform. 

Put differently, despite more than a half-century of scholarship in public-choice economics, too many economists mysteriously regard warnings about government failing to act ‘perfectly’ as being unworthy or, at least, only of secondary or tertiary significance.  It’s unscientific – deeply so.

DON BOUDREAUX on MARCH 20, 2014

Thursday, March 13, 2014

Blowing hot and cold–climate change

The latest Economist 8th – 14th March explains the many and varied attempts by climate scientists to “explain” the decade long slow down in global warming. The Economist is generally a climate change “enthusiast” so no “denier” slander here please.

Amongst the ironies uncovered is the explanation which rests on the fact that pollution (mother of all sins) comes in handy to deflect sunlight – so - a little more pollution this week please?

More seriously, the slow down – which is not in doubt – has occurred over a period during which carbon emissions  have increased throwing further doubt on the link between the two. Showing reliable correlation between  warming and carbon (issues around sequence and other inconsistencies) let alone causal links is challenge enough without this  relationship emerging.

Something over two thirds of the climate change policy response has rested for its validity on reducing carbon emissions – an easy religion to sell but pointless if it doesn’t  get you to heaven.

The most robust conclusion is that our understanding of climate change is up there with our knowledge of why the chicken crossed the road.

Thursday, March 6, 2014

Local Govt subsidises its own incompetence

In a classic example of why sticking to core business is what local government ought to do – as opposed to playing wannabe commercial investors and developers - the Dunedin City Council finds itself subsidising its own development oddities.

The Council “owns” and developed a complex called Wall Street – a retail complex with offices – a risky little number with the apparently whizz bang design features of the day. Grand.

Seemingly this “asset” has less lettable space than it could have, due to its design, and thus to get the tenant it wants the Council is about to embark on a $2.3m upgrade of the building next door which it owns 49% of.

So the ratepayer invests in a development which is sufficiently unworkable as to require what is effectively a $2.3m subsidy from the Council to the tenant. Grand.

Needless to say there are those who don’t completely see the joke. Other local businesses and property owners for example who compete against the Council for tenants and run their businesses in such a way as maintain the jobs they provide in Dunedin much in the way the Council claims it is doing.

What local businesses do not have is a $35,000 annual grant per worker from the Council.

In a final surprise, one Councillor – formerly an ACT MP where the role of government is well understood -  is muttering about disclosure and information rather than arguing that local government get out of areas it has neither expertise nor legitimate business in and focus on its own not inconsiderable challenges in its core business.

Sunday, February 23, 2014

Tigers, the minimum wage and like rip offs

Martin Phillipps of the Chills might be afforded some respect since  in his admitting that, having some 20 years ago written a song about the imminent disappearance of tigers from the planet and finding that, in fact, there are plenty of tigers still around, he feels rather “ripped off” (Radio NZ – Sunday Morning).

This is not unlike reading the US Congress latest analysis of the likely impacts of lifting the minimum wage law in the US to $10.00 (U.S.) an hour which in their analysis (bearing in mind they are charged with producing a non-partisan assessment) which shows that the increase would entail:

  • the loss of around 500,000 jobs
  • benefit some 19% of those on the US poverty line
  • that 29% of those benefiting have incomes three times the  poverty rate, and,
  • amongst the rest, those with jobs fall in between these levels.

Not being an exact science levels vary of course. Jobs lost could for instance vary – between 200,000 and 1,000,000 they note (see Mankiw and link).

Saturday, February 22, 2014

The value of successful succession

One of the more difficult business challenges is to engineer succession between generations (especially in family businesses)such that value is preserved. As in so many other areas Walmart is an example of getting it right:

It's important to note the incredible growth of Walmart AFTER Alice, Jim, Christy, and S. Robson Walton inherited ownership of the chain.

Walmart in 1992 (year of Sam's death)
Revenue - $43 billion (or $127 billion in 2013 dollars)
U.S. stores - 1,922
International stores - 8 (Mexico and Canada)

Walmart in 2013
Revenue - $466 billion
U.S. stores - 4,005
International stores - 6,148 (26 nations)

What did the Walton heirs do after Sam's death? They continued to risk their original inheritance, plus the much greater earnings since then, invested in the company they believed in. They continued to select talented leaders who successfully earned the trust of hundreds of millions of customers. They approved the many important strategic moves offered by those leaders over the past 22 years.

Assembled by John Dewey – commentator Cafe Hayek.

Governance which develops workable succession processes thus has the potential to add greatly to value retained – and grown.

Monday, February 17, 2014

Let even a little sun shine in…

One day solar power may be sufficiently cost efficient in terms of both operations and capital, to be viable on a widespread basis. On that day I have no doubt whatsoever that the entire of the construction and related sectors will utterly bombard the populace with its merits – and profit accordingly.

Meantime, if the current worthiness of solar heating was even remotely close to being of the value suggested by the Brisbane originating co leader of the Greens, folk would be flocking and there would be no need for any form of subsidy.

Does he genuinely believe that he and fellow Green persons are the only ones in the land with a miracle insight into solar power economics which eludes all the rest of the population – and will continue to elude them unless and until their taxes are used as subsidies to offset this massive over sight?

A close to first rule in economics is to observe what people do rather than listen to what they say. I am watching Normanomics.

Friday, February 14, 2014

Confused logic –> unjustified advice

The following is an extract from a securities advisory letter. It is from one of the most respected advisors on Wall Street. It is also an example of how utterly confused even the departure point for the logic can be:

This week battle lines were drawn between those claiming nothing but blue skies ahead versus those emphatically stating the market is overvalued by most historical measures.

Ok… so the logic here is that stocks might be over or under valued. No argument except that the statement makes no sense until we ask “compared with what?”.

Compared with “historical measures”  for one group it seems. Fair enough – so that is the measure.

Yet even the valuation hawks had to admit that there is no other viable investment alternative right now for those who want a decent rate of return.

And in here it all comes unstuck. Somehow “viable investment alternative(s)“ have entered the equation. This is either an unrelated comparator or the question has changed from “are stocks overvalued” to “what is a viable investment alternative”.

There is also

“for those who want a decent return”.

So over / under valuation seems now (in addition to the two comparators we already have) a matter of returns.

We also seem to have returns which are “decent” and “poor” (assuming indecent returns is not the focus) – and no idea what “decent might mean”.

Combine that with a lack of a negative catalyst (recession or Risk Off scare) and they reluctantly agreed that stocks will likely move higher before lower.

Now add in “the absence of evidence” as yet another consideration – impending doom or the lack there of seems to be relevant as a measure of over valuation.

Ok – its no big deal that there are lots of variables we might talk about. It is a big deal to miss the point that the conflation of all of these ideas into a blurry mix where every variable measures some relative not absolute condition means that conclusions such as this:

you should have a little more eye towards stocks trading at reasonable valuations to increase your odds of success.

simply cannot be justified but do imply that the form of reasoning used is a viable means for making decisions. It isn’t. Don’t.

Tuesday, February 11, 2014

Of electricity and apples

On another grim note I see the Greens have concluded that people are simply “paying too much” for electricity. This conclusion apparently arises since:

- Demand is dropping

- Clearly no investor is making a fortune out of the sector

- Inflation is running at 1%

- Power prices are rocketing along at 3% or so

- Even the absence of competition can’t account for it

- And NZ has the highest switching rate in the world

Obvious conclusion apparently is, “simply paying too much”.   How could this be? Moreover how will a totally centralised supply commissariat stop these errant fools paying “too much”.

I believe God may have told Adam he “paid too much for it” as well… mind you the Apple and Pear Board never believed him.

Friday, January 31, 2014

Nudged into poor returns

The not inconsiderable number of people who believe NZrs need to be “nudged” into savings (due to their dim witted nature and inability to understand anything much) also nudge these hapless folk into “default funds”.

The brilliantly conceived administrative slope to be climbed to get out of these defaults, understand easily where is a better place to go and then get there at low cost in a timely manner, means that default providers are having “a big time” and a good time.

The investor who is “looked after” with a little nudge into a “safe place” is not necessarily having fun though – as Fundsource point out here:

Let’s use the example of KiwSaver and, as the majority of KiwiSaver funds under management are sitting in Default funds (more than $5 billion), the Conservative sector. Currently, the average performance from inception to 31 December 2013 for the Conservative sector is 4.74%. And over any of the six calendar years to 31 December that the Scheme has been running the average performances range from 0.32% to 8.27%. There are currently twenty five funds in the KiwiSaver Diversified Defensive (Conservative) sector and the annualised five year return starts at 4.07% per annum to 10.94% per annum (not a Default fund).

So its seems that there is wide variation in what can be earned. Competition between these funds would be useful then. So would pressure on fund managers to compete hard for investors funds.

Fundsource has not published on variations in costs for investors (fees etc.) but the variation is equally wide.

The moral is clear and “letting the government nudge you and pick your default position is likely to be bad for your health.”

Tuesday, January 21, 2014

Without a Net – it’s safer

The trampoline and its add on for idiots – the trampoline safety net – continues to provide the most brilliant example of both the unintended consequences of over intensive societal wimpishness coupled with our striking inability to learn from mistakes.

The ODT of 21st Jan 2014 reports that accident claims arising from the safety enhanced trampolines now touted as “protecting your child”, a clear sign of “responsibility” and adding a mere $150 or so to the cost of a trampoline have risen and risen remarkably – from 298 to 451 in the last year in Otago and 10% nationally.

It seems that in a fit of enthusiastic confidence engendered by these “now safe” pieces of sports equipment, children throw caution to the wind, leap aboard and go for it. Not just kids either. The number of 64+ “masters” doing the same has also risen. An “expert” pronounced that users need to “learn”, “establish rules” and otherwise use their brains.

A startling revelation indeed. 

Apart from manufacturers and retailers of these safety enhanced products it is likely that the original intention was to enhance safety (for the former an optimal level of injury entices just enough safety net purchasing as to breeze up margins without turning consumers off completely – a delicate balancing act – but if one tries it is doable evidently).

Far from from enhancing safety, the reverse appears to have occurred. The unintended consequences of this and like plonker intervention will continue while we take comfort in fooling ourselves that risks can be eliminated, that we can do better than learning from experience, and for as long as we refuse to accept that attempts to protect people from themselves is a near certain means of harming them.

Tuesday, January 14, 2014

Fonterra–again!

 

More death at Fonterra with the current recall of product.

Questions:

1. If this is a hazard how come they test after it's on the shelves?

2. If it matters why is the recall only voluntary ?

Monday, January 13, 2014

The ethics of job prospect denial

As it becomes unsurprisingly fashionable and trendy to generate plenty of oil drilling hate in Otago there are some who claim that there are “ethical issues” in supporting fossil fuel exploration and use.

Leaving aside myriad consistency and hypocrisy issues regarding the fossil fuel consumption involved in making such protests and car ownership amongst protestors, a reasonable question concerns:

How ethical it is, in a regional economy where job prospects are grim, layoffs have been and are promised to continue to be high, and the economy is weak to deny those seeking work and the families that depend on them, at least the potential for work which such prospecting may bring?

Inconvenient as it is, ethics cuts both ways. Net benefit based on the statistical record is a better criterion  for considering the issues than the garnering of political capital .

Sunday, January 5, 2014

The Dogonomy and Dogonomics

It takes a good deal of courage to depart much from Adam Smith. The great economist philosopher once stated that man is an animal who makes contracts. Others have pointed out that man is, in this way, unique and in particular distinguishable from say, dogs.
I’m not so sure.  The Christmas break has given me a chance to think more carefully about what we can learn from the ubiquitous dog habit of “hiding things”. Bix (Beiderbecke fame) the “local subject” griffon does plenty of hiding – but with discrimination.
Not everything is to be hidden. Dried pigs ear are especially prized. Dried hide bites less so. Other bits and pieces fall in between. What does this tell us?
For a start the dog has the ability and the inclination to value assets, to value them differently one to another, to value them relatively in respect of one another and (presumably) tastes. These values seem to dictate certain behaviours.
Secondly, he appears able to make sense of the value of time, discounting and net present values (in this he is ahead of Russell Norman). Thus one buries some assets for the future since the NPV of consumption right now is below that of other items to be eaten right now – better to save.
A third point is the implication that Bix grasps opportunity cost. The opportunity costs – the sacrifice in time that could be spent barking, chasing cats and other activities – is simply not worth the candle for a bit of dried hide. A pigs ear is a different matter.
Notice too the grip he has on substitutes here. The price elasticity of a pigs ear is clearly lower (in his subjective valuation) than the ever substitutable commodity – any old piece of dried animal hide readily obtainable in the here and now.
Finally, in this first brush with dogonomics, notice that he has a grasp of the significance of private property rights. Hiding places have value – since it is monopoly possession of that knowledge which ensures that the value of the asset is maintained through time.
It is then rational to incur the significant transaction costs involved in finding a hiding place, silent and careful hiding assets so that others do not notice and are unable to easily misappropriate the property in question.
All the elements of trade are here then….. efficient running of the dogonomy (and thus the maximising of dog utility) depends, as in other economies, on respecting the fundamental rules. This means  not attenuating property rights by interfering with inappropriate leashes, or through undue command and control, and certainly not by arbitrary re-distributions of wealth .
It seems that to call one’s dog Marx would be to risk a serious labelling error.