Public Choice Conference

Public Choice conference in Hobart. Looks pretty interesting.

http://www.inomics.com/economics/conferences/2012/6/25/australasian-public-choice-conference

RBA Essay competition.

http://www.rba.gov.au/media-releases/2012/mr-12-11.html

Time to deregulate the energy industry?

Interesting interview between Fran Kelly and Matthew Warren from the Energy Supply Association of Australia on ABC Radio National's Breakfast Program.  
http://www.abc.net.au/radionational/programs/breakfast/energy-suppliers-agree-on-need-for-change-matthew-warren/4070206

Fairness and Economics

Like many economists I like to think of myself as a liberal in the 19th century sense. I believe that for the most part when governments intervene in markets they distort those markets more than the market failures they are attempting to eliminate. I also am inclined to to believe research into public choice which indicates that government regulator tends to favour special interests rather than society as a whole. Examples such as airline, taxis, electricity and labour regulations have historically shown that when government intervenes the outcome is often not favourable for the consumer or third parties.

Keeping this in mind, I acknowledge that governments have a real role in maintaining some level of fairness and equality of opportunity. Life by it's very nature isn't fair. Why are some people attractive and born with talents while others are born unattractive and with few natural talents? Nothing is fair about this fact. For most of the 20th century political philosophy shifted from liberty to equity.

I have personally benefit from this shift. I was educated in the State school system and have been able to attend university on an interest free loan from the government. Of course I feel that I would have benefited more had the government's education policy allowed me to attend the private school in my suburb, instead of the state school 45 minutes away on the bus. (READ DIFFERENTIAL VOUCHERS)

For me the question is about the degree to which we intervene, many people feel that university should be free. I however disagree, I know with the grades I had and the schooling I attended, I wouldn't have been offered a place in the university system. In fact, I would imagine this golden era imagined by many students mostly benefited the middle class. Even to this day subsidies to higher education mainly benefit middle class families at the expense of the poor and the rich. Equally, it is not fair that someone who will never attend university and who will most likely earn less over their lifetime than me pay for my education. By removing the obstacles to a higher education such as having to fund it has definitely made society more fair while maintaining my personal responsibility to fund it in the long run.

In my day job I work as a disability employment consultant, in this role I work with people who far greater disadvantage than I ever did. I have seen people with chronic health issues which has made maintaining employment almost impossible and I have seen intelligent people with enormous potential struck down with mental illness and/or disabilities. To the best of our ability my colleagues and I work with our clients attempting to over come these barriers and to support them into finding employment. However, even with this intervention such people will be economically worse off than average due to no fault of their own.

Ultimately, there will always be conflict between our desire for a free society and one that is fair. I purposely did not say equitable as this is a unachievable and a undesirable goal. Humans are by their very nature unequal and through history we can see that societies have risen to greatest by letting individuals to prosper. I do however, feel that we can make society fairer to some degree the challenge will be to intervene in a way that actually helps the disadvantage and doesn't create a class of rent seekers. No small task!

Young Economist Trivia Night

If you're in Brisbane on the 6th of July then I recommend coming along to the Young Economist Trivia Night. http://youngeconomists.org.au/home/2012/5/28/the-young-economists-trivia-night.html

Has economics education become too mathematical?

At Inomics.com I discuss the role of maths in economics education.

Has Economics Education Become Too Mathematical? | INOMICS BLOG

Economic reform still unpopular after 30 years.

John Quiggin shared a link to a recent survey which shows after 30 years Australians from all political persuasion do not fell economic reform has helped ordinary Australians. The question, "Thinking about the major economic reform in Australia since the 1980s like floating the dollar, removing tariffs and privatisation of Government services like Telstra and utilities, who do you think has benefited most – ordinary Australians through higher incomes and more growth and jobs, or corporations through higher profits and less regulation?"


Based on my personal experience this is quite believable. Regardless of arguments to the contrary most Australia still believe that we should 'buy Australian', are opposed to foreign direct investment and are opposed to privatisation of government owned monopolies. 


I believe this can be explained by the fact, gains from trade are invisible while the loses are highly visible. For example, the factory worker who loses his job due to foreign competition is highly visible, while the increase in real incomes caused by cheaper goods is largely invisible.


Another example, the privatisation of Telstra the job loses and shutting down of uneconomical services was highly visible while people largely take for granted the cost of telecommunications has dramatically decreased since the introduction of competition.


Without dismissing the real downside of many reforms over the last 30 years, I believe that this phenomenon of gains being invisible can largely explain continued opposition to the reform process.     

Nudge - Book Review

Behavioural economics is a exciting developing field in the study economics. It seeks to improve assumptions made in economics by incorporating behavioural science research into current economic models. Core to our understanding of economics is the assumption of rationality. This assumption flies in the face of decades of psychological research and is often used to discredit economics.

Richard H Thaler and Cass R. Sunstein explore this conflict between the assumption of rationality and behavioural science in their book, Nudge. Rather than being an attack on traditional economics, nudge provides a way of understanding human behaviour and explains why people do not always act rationally.

Topics covered include, the difference between humans and econs. Choice architecture is explained, showing how it is used to manipulate the decisions people make. This is applied to personal finance, superannuation contributions, school choice, organ donation and many other areas.

The authors subscribe to what they call a libertarian paternalist philosophy, meaning that people should be free to choose and the cost of the chooses should be low. However, through using default options, automatically renewals the consumer is nudged into making the "best" decision. Many libertarians would consider this overly paternalistic, however the use of choice architecture and nudges preserves more freedom than many regulations currently in use.

I would recommend this book to anyone interested in human behaviour and how it relates to decisions made by consumers in the marketplace.

Nudge is available for the Kindle for $10.  http://www.amazon.com/Nudge-Improving-Decisions-Happiness-ebook/dp/B004YKSXXS/ref=sr_1_4?ie=UTF8&qid=1339074118&sr=8-4 If you're old school and like actual books I recommend www.betterworldbooks.com

Victorian Taxi Inquiry

On the 28th of March the Victorian Government announced an inquiry into the Taxi Industry to be headed by Professor Allan Fels.Allan Fels unleashed on Cabcharge taxi monopoly - ABC News (Australian Broadcasting Corporation) The taxi industry in that state and most other places is an example of regulatory failure.

The taxi industry is dominated by a few large players and exhibits anti-competitive behaviour. Like any other other industry where competitive markets do not exist the taxi industry under supplies and over charges.The Victorian Premier Ted Baillieu said in a press release, “It is obvious that the current industry structure and regulation has failed."


The problem's with the industry listed in the press release included:

• low customer satisfaction, with a sharp decline over the past five to six years
• safety and security for passengers and drivers
• insufficient support for drivers
• too many poorly-skilled drivers with inadequate knowledge
• a high turnover of drivers resulting in a shortage of experienced drivers;
• complex ownership and management structures
• lack of competition
• too much of the industry revenue not being directed to the service providers – the drivers and operators.

Many of these problems are related, the fact that the industry has few players means there is a monosony for drivers and operators leading to lower earnings resulting in a decrease in quality of drivers available and higher turn over. The low quality of drivers naturally leads to decreases in customer satisfaction and  potentially less safe drivers. Of course, this may also be the result of decreased unemployment. I remember catching cabs in the late 90s early 2000s when unemployment was still between 6%-7% the cab driver then tended to be a middle age local man who had been in the game for several years. In today's tighter labour market being a cabbie is most likely less appealing to many locals resulting in the increase in foreign drivers. 

It's likely that the Victorian Government is seeking guidance on regulatory reform rather than proposals to deregulate the industry. When I first saw this article my first thought was, "Why is the government regulating the taxi industry anyway?" Though I'm not familiar with the regulations surrounding the taxi industry. I know that I can't put a meter in my car and a little light on my roof that says taxi and start charging people fares. The question is why? 

One reason of course is revenue. The Victorian Government like other State governments are able to raise significant revenue from the sale of taxi licenses, driver's authorizations and other fees they can extract from this industry. In return for their fees the purchasers of these licenses are able to compete in non competitive markets. These fees and government regulation create a significant barrier to entry into the industry. These barriers can largely be blamed for the lack of competition in the industry. There is no natural monopoly for taxis, anyone can access the roads with a registered vehicle and cars are relatively cheap. In fact starting a taxi business should be one of the easiest industries to enter. Of course it's not. 

When I was traveling in South East Asia there was no shortage of affordable taxi services available. I had a choice between getting a ride on the back of scooter or traveling by car. On one occasion I had traveled far from the tourist part of town and was able to get a lift from a friendly local for a small fee. I was able to decide for myself the level of safety I wished to have and was willing to pay for. Obviously, taxi fares in Australia would still be far more expensive then in Asia under competitive markets but clearly the current system makes it far more expensive than it need be.  

This free market taxi industry was a far cry from the highly regulated industry that exists in Australia. By comparison the taxis in Australia are extremely expensive and scarce. This is even more disturbing when one considers the main consumers of taxi services are the aged, disabled, poor and drunks. A competitive taxi market in Australia would mean lower fares, increased service and increased self employment opportunities for people with a car and driver's license.