I insure two cars. They are old - one 10 years, the other 14 years. I am a cheapskate when it comes to cars. My guess is in aggregate their market value is $5000-$6000. The insurance premium I have been paying each year for both is around $750 per car and there is an excess on claims of $650 on each. I pay $750 annually to insure a car whose replacement value net of excess I would have to pay of about $2100 plus, to be fair, I get comprehensive cover if I damage another car. The value of the comprehensive cover is about $250 per car (I priced this as a stand-alone policy) so that for the actual cover on each vehicle costs me $500 for a value of a written-off vehicle of excess of $2100. This charge seemed outrageous to me and I even felt foolish for allowing this situation to develop.
I have been insured with the firm for 25 years and have never made a claim - all the costs above are discounted to reflect this. After a long discussion with one of the insurer's representatives I found that about $150 of this charge was connected to the fact that one of the cars had initially been purchased with "finance". This adds a $300 premium to the total bill. I had failed to notify the insurer that the financing had ended 9 years ago and a finger was wagged at me for my failure! I had no idea I was being levied a surcharge for this.
Eventually I did the obvious thing and took out a policy giving me comprehensive insurance cover only. If either car is damaged beyond repair or stolen I will write it off. My premium total dropped from $1500 to $550 a saving of $950 annually. For this I gave up cover on the two vehicles insured of $4200. Happy with that exchange.
My lifetime experience of insurance companies has been unfavourable. On this occasion I have to say my own stupidity in not demanding a detailed accounting of costs in years past irritates almost as much as the over-charging.
The reforms on eligibility for the pension that Labor opposes seem sensible to me, The current eligibility for a part pension (for a couple) is $1.15m in assets whereas under the proposed Coalition-cum-Green reform this is reduced to $823,000.
Suppose couples want to leave no bequests and that they own a house worth $650,000. Suppose also they retiree at age 65 and know they will live for 25 years to age 90.
The big factor determining their sustainable income is the rate of return on their assets and whether they can engineer a reverse mortgage on their house that yields this rate of return.
Suppose their assets earn a paltry 2% annually real return. Someone just on the old current eligibility limit (without a home) can spend $58,903 annually over the 25 years (or $92,102 if you include the reverse mortgage). With the lower eligibility requirement they can spend $42,154 annually (or $75,448 with the reverse mortgage).
More realistically suppose returns of 5% annually on the investments. Under the old limit they can (without a home) get income of $81,538 annually (or $127,715 with the reverse mortgage). Under the lower eligibility requirement they can get $58,393 annually (or $104,000 with the reverse mortgage).
I have used simple annuity formulae* to do these calculations. The basic idea is that you can draw down the value of assets and draw interest on residual asset values until they hit value zero at age 90. The Labor Party it seems to me in opposing the Coalition reforms is supporting people who don't really need it. Of course they want it but it isn't an imperative.
With a bit more effort I could allow for bequests and longevity risk but these will change these calculations in a straightforward way. Bequests anyway are irrelevant in a situation where you are trying to compute eligibility for basic pension entitlements. Notice too how critically the value of the family home enters these calculations. Excluding the family home from these asset tests does not seem defensible if the opportunity to purchase reverse mortgages is available.
(*) It is a while since I have done these financial mathematics but the equation I used is that the sustainable income X * annuity formula given interest rates r and time horizon n, namely a(r,n), must equal the initially value of the capital asset V so X =V/a(r,n). I think that's right.
I have been glancing through the 3-part report by Infrastructure Australia (a summary here) on Australia's infrastructure needs over coming decades. I was mainly interested in the transport sector and proposals that looked - on casual reading of the press this morning - like yet another case for user charges (congestion charging and heavy vehicle charging for road damage costs). As I started working on these issues more than 20 years ago I do get a little peeved by the almost annual attempt to revive such discussions somewhere which always get promptly forgotten.
On this occasion I can only say I am underwhelmed by the stupidity of the Infrastructure Australia analysis. They still don't understand the basics of user-charging. Nor for that matter did Ian Harper in his recent reported proposals for competition reform.
Infrastructure Australia take as given Australia's dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result. Their answer? Build more roads everywhere and find ways of funding such investments. Their answer? Road use charges that fund the roads.
That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won't ensure efficiency. Indeed the issue is not primarily one of funding at all. All roads - new and old alike - that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently. Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.
Its the same old dumb-assed "engineer think" that has dominated Australian road infrastructure planning for decades. It is a shame that they cannot get the basic logic right.
A tax expenditure is a bit of tax the government could grab but it does not - it foregoes the tax. It is just like government spending in terms of its impact on the budget deficit. They increase the deficit. Actually more than a "bit" . Huge amounts of foregonee possible tax revenues arise:
Exemptions of capital gains-tax on family home $25b
Exemptions on residences previously lived in $20.5b
Concessional tax on superannuation $16.3b
These alone would boost the total tax take by 12% and obliterate the deficit. These tax expenditures have grown dramatically over the paast few years because of the property booms in our capital cities. Getting rid of housing exemptions would reduce property prices and leave our children better-off. Over-investment in housing would give way to more productive investments in other areas.
Generally even without adding to tax income the fewer these types of exemptions therec are the smaller are the excess burdens (deadweight losses) of the taxesc that remain. Big taxes impose disproportionatetely large inefficiency costs - roughly they are proportional to the square of the tax size.
Apart from income tax deductions there are also exemptions from the GST - Australia compared to NZ which does have a broadly based GST has 40% less coverage. Some big items here:
Exemptions of food from GST $6.4b.
Exemption of education $3.9b
Exemption of health services $3.6b etc etc.
There are plenty of opportunities to resolve our fiscal difficulties if politicians had the guts and stamina to approve such changes. They won't in the foreseeable future. We are timid of even modest cuts in childcare benefits! A basic principle of Australian policy (a version of the Pareto Principle) - no policy should be undertaken unless it disadvantages no-one. There are no such policies so we will do nothing!
I wrote a paper with Rob Waschik and Iain Fraser arguing that the ERF would be unlikely to achieve Australia's Kyoto target by 2020 - in fact we computed that the $2.55b in the fund would only hit 50% of the target. (The link is to a preprint - the paper itself is now published but paywalled).
The arithmetic in The Australian is wrong since, to this time, about 1/4 of the $2.55b has been spent but emissions cuts of 236MT are only 1/5th of the 236MT reduction that is targeted. Not a big deal this error however and the "within reach" conclusion might even be approximately justified.
The difficulty is that the emissions cuts achieved so far are likely to be the cheapest cuts available - the "low hanging fruit". As cuts continue to be made the cost per tonne of making the cuts is likely to rise well above the average rate paid this round of about $14 per tonne. The "marginal abatement curve" is always supposed be to be a strongly increasing function of the level of cutbacks.
This is not to say that Australia won't hit its emissions targets. It might. The economy may go into recession and continuing developments in energy conservation and the use of renewables (solar and wind) may help achieve this objective as might developments in coal burning technology and substitutions toward use of natural gas. But the ERF itself won't be enough to achieve desired targets with its current budget.
A few years ago I had an arthroscopy in my right knee. It followed acute knee pain that resulted from clumsy attempts to climb a locked gate at the Western Treatment Plant. The pain was intense and "burning" - it lasted several weeks while my GP suggested I rub Voltaren on it which had no effect at all. Finally I went to a "sports doctor" who recommended arthroscopic knee surgery. I was on crutches for a couple of weeks after which the knee went back to normal, the pain gone I think permanently.
I was intrigued therefore to read in this morning's AFR ("Rolfing and Rebates", unfortunately pay-walled) that some insurers (NIB) regard arthroscopies as being ineffective so that, like Rolfing, homeopathy, naturopathy, massage and herbalist treatments (and other evidence-free medical practices) insurance companies should not provide cover for them.
I am not expert on medical issues but I wondered if the claim with respect to arthroscopy is correct true. This article posted online claims they are. It claims the recovery I experienced would probably be achieved by a placebo procedure.
Two issues occur to me:
(1) Should insurance companies provide cover for treatments that consumers demand - if- like homeopathy - there is no clinical evidence they work. One insurer in the AFR answered "yes" to this question since insurance companies should reflect consumer preferences and, presumably, not science. I have problems with this view since providing insurance cover to procedures signals to customers that the procedures are valid. By reducing the effective cost they also increase incentives to use them.
(2) How many more mainstream "respected" treatments (like arthroscopy) are being insured even though there is little clinical evidence they work? I wonder, for example, about the widespread advocacy of Statin drugs for dealing with claimed cholesterol problems: See here - Statins of concern to me as I have taken these drugs for a decade. Or the now discredited, but still practised, advocacy of a carbohydrate-based "food pyramid" that has driven millions into obesity, Type 2 diabetes and heart disease. Ditto the rejection of carbohydrate intake as a treatment for diabetes and obesity.
Ireland has followed Australia in introducing plain packaging of cigarettes. David Prentice and I gave an interview on the Australian experience and its implications for such countries in The World Customs Organisation News, February 2015, Vol 76, pages 62-64. This type of work David and I did on plain packaging won't get prestigious academic awards but in terms of practical policy and promoting the public good I rank it among my best.
An excellent editorial in the AFR today (unfortunately paywalled, buy yourself an AFR!) identifies the core problem with childcare subsidy policies in Australia. The $6.7b from the Commonwealth and the $800m by the states that gets channelled into such subsidies should be skewed much more heavily towards low income earners. Parents earning $160,000 plus annually will still have 60% of their childcare costs covered by taxpayers, those earning $200,000 will get 20% subsidies - these are after the reforms suggested by the Productivity Commission are implemented. Indeed I would go much further than the AFR and look for very substantial cuts in the level of assistance provided across the board.
This childcare aspect of our entitlement society is absurd. The prevailing belief is that even if you earn high incomes the fact that you are a parent gives you a net claim over the incomes of those who are not parents.
People don't have a right to have children that they cannot afford to make a substantial contribution to supporting. Those earning high incomes should obviously pay their own childcare costs. Mothers (or fathers) who find that their incomes are too low to cover childcare costs should either stay at home and look after their children or delay having children until they can afford to by-in-large support their own children. People need to understand that their parenting decisions have consequences that they must bear.
Subsidizing children and having an active immigration program creates high child-raising costs in Australia by driving, in particular, high housing prices. We do not need to have an ever-increasing population - there are plenty of people - and, with less demand for housing, the cost of raising children would fall in accord with reduced market pressures. We would also experience lower infrastructure costs and less unpriced congestion in our urban centres.
I bought a schooner of draft beer in a pub bar in Carlton at lunch today. It was $11 for 425 ml. Yesterday I bought a dozen long-necked Coopers Sparkling Ale for $56 from Dan Murphy. That is $4-68 per bottle and each bottle contains 750 ml. The cost of 425ml of the Coopers would be (425/750)*$4-68 or $2-65.
The costs are not directly comparable. The beer in the pub was a draft beer and was not a Coopers but was a good local brand. But the Coopers bottle is a pretty good brand itself and hence a plausible substitute so the price comparison is not that misleading.
I wonder if it is the size of the price markup on beer - it was 415% - that might be the reason that almost no-one patronises pubs these days. There were 4 clients in the pub I entered today and none were drinking alcohol - they were eating cheap counter lunches.
Australia has high alcohol taxes, particularly on full strength beer, but the tax is lower per unit quantity on the beer sold in the large containers that hotels buy. Taxes create absolutely high priced beer but cannot account for these differentials. Consumption of alcohol creates road death "externalities" but these are better addressed by heavily penalising those who drink-and-drive rather than innocent economics professors seeking a beer with their pork and stir-fried. Finally health costs are real consequences of drinking excessively but not of having a beer with your lunch.
Low patronage due to the enforcement of "drink driving" laws might encourage high prices of pub-provided beer to cover high fixed costs and maybe this is part of the story. People drink most of their beer at home. I'd be interested to get more evidence on this. For sure, institutions such as golf clubs are recording low revenues from bar sales and fear on the booze bus is pervasive.
Beer consumption in Australia is at an all time low. A beer at lunch - part of the traditional Australian life style is also disappearing. While the health Nazis will applaud this those of us who enjoy a beer do not. Australia does not want to be swamped in an alcoholic culture but nor do we want to become a nation of wowsers.
I got a pleasant surprise from my $15,000 investment in solar last October. Power charges for the first quarter it has operated were $266 down from $887 the previous quarter or savings this quarter of $621. Naively assuming this trend will continue over the year (it might be more than this since the previous quarter is a low consumption quarter for my household) gives me annual savings of at least 4*$621 or $2484 per year which amounts to a tax free return of 17% on my investment. Interestingly a large part of the reduced bill was electricity sold back (at relatively low rates*) into the grid - around $367 in value for the quarter although our overall paid daily consumption fell considerably too - from an average of 28.5kWh last year to 20.3kWh in the last quarter. We are significant power suppliers!
I always assumed the solar vendors would exaggerate the economic case for their system. They did but only by a very small amount - in fact they were very accurate. If I continue with these savings this will be a great financial deal.
Why are households still buying power from the grid?
* We sold back into the grid 1501kWh and used 1889kWh. We sold back 80% of what we used.
The recent strong rally in the Australian stock market has been near-universally attributed to a 25 basis points drop in the overnight cash rate to 2.5%. I don't buy this. In fact, since September last year, the Australian dollar has depreciated much faster than stock market indices so the Australian stock market, valued in US dollars has got cheaper for US investors*. Real after-tax interest rates have barely changed and are not driving investment trends at present.
At the same time those Australian mining and agricultural exporters faced with declining commodity prices but selling their outputs in US dollars will now start to do much better than would have been thought possible even 6 months ago.
My guess is that foreign investors withdrew from the Australian market fearing capital losses associated with an expected devaluation of the Australian dollar - one that was even promoted by the RBA - but that now the Australian dollar has depreciated the foreign funds are rolling in**.
With the usual caution that goes with all my forecasting - for over a decade in the 1990s I said the Australian dollar was undervalued! - I am reasonably confident that the ASX will do well in the remainder of 2015, particularly starting in the 4th quarter. I also think the economy will do much better than expected from late 2015 with falling unemployment and moderate economic growth.
One of the most irritating things about Australian economics discussions is the overwhelming sense of dread and pessimism concerning the disaster around the next corner. To the extent we can talk ourselves into a bad outlook we do our best to do so. But even regarding such adverse impacts I think the Australian economy is strongly placed to recover as we move through 2015 and beyond.
* The Aussi dollar has fallen from 93 to 78 cents or by about 16% (here). The ASX100 has wobbled quite a btt from mid-September 2014 to today it has grown from about 4500 to 4850 or by about 8% (here).
** The correlation between Australian and foreign stock market indices is revealing - Australia's stock market health is driven by that internationally (here).
I've spilt a lot of printer's ink on the topic of the connection between population size and environmental quality. Indeed 24 years ago I co-wrote a book on the topic. At a Productivity Commission Workshop on "Sustainable Populations: Key Policy Issues" a few years back I was asked to summarise my bottom line. I immodestly think its one of my better contributions.
This argument (here) that $50US/barrel oil might be a ceiling price not a floor impresses me as sensible. The Saudi's are involved in a war with the US unconventional oil producers and the most sensible thing for them to do is to keep prices below a level that allows the unconventional oil producers to be profitable. That price seems to be about $50US/barrel. Moreover, the policy seems to be working.
According to the AFR page 9 this morning (unfortunately paywalled) drilling rigs are going out of business now in the US. Over the last 3 months oil rig numbers in the US have fallen from 1591 to 1366 while gas rigs have fallen from 330 to 310. One forecast is that 800 rigs will close by the end of 2015. This does not necessarily indicate a proportionate drop in oil production given the "flight to quality" rigs that will occur.
It will be interesting to see this Wednesday what BHP-Billiton says of the effects of the recent oil price collapse has on its $20b US shale oil investments. A fair bit of its production is low cost (around $40/barrel) but the outlook for returns will at least be disappointing.
I have only shopped in IKEA twice and was impressed with the quality of the merchandise once it is assembled. It is an interesting experience for me because you can choose how much effort you want to put into the purchase and that determines your costs.
Last week I ordered two sets of bookshelves with height extensions for about $200 - amazingly cheap for what look like quite elegant shelving. You take the order to a warehouse where you select the disassembled items and take them on a trolley to the cashier. For $40 they will do this for you so you only need to go the cashier but I didn't pay that - this involved trivial effort. The price for assembling the shelves and disposing of the packaging was $140 - a two part tariff consisting of a fixed $35 charge and a variable $90 charge for the assembly of the two units. I felt some guilt about my laziness in this respect but I my experience is that idiot proof assembly often defeats me so I paid up including the $15 fee for the assembler to remove the boxes. Delivery cost another $92 so all up my $200 shelves cost me $440. Still fairly inexpensive for what seem to be high quality units.
There were time costs of waiting for delivery of the items and for the arrival of the assembler cost me a whole working day. This was expensive in terms of at least one foregone golf game. In addition, as far as I can see, you cannot order from IKEA online so the shopping expedition through Melbourne traffic added to my user costs.
Update: This was written before the assembler came. Nice guy put the thing together in two hours plus - two simple bookshelves. It wasn't simple and very pleased I had it assembled rather than do myself. It would have taken me (at least) a day of frustration.
William S. Burroughs in his book (with Daniel Odier) "The Job" describes a de-conditioning exercise called "dont't have to do". No lessons, no books, no work to be done. It starts by mocking up a way of thinking you have to do - for example a set of errands or a speech before an audience you need to impress - and then a way of thinking you don't have to do - for example based on a person whose way of life is completely different from your own - what did Dutch Schultz the gangster have to do? This exercise, borrowed from Scientology, is intended to loosen up enforced ways of thinking.
You wind up understanding that you don't have to do anything. Even abandoning language and words and just seeing and relaxing. You can't work at it (or write blog posts about it) as that would be doing something. "Its a way you would think if you didn't have to think up a way of thinking you don't have to do".
I've been out of the workforce for 4 weeks now and thinking about these ideas. I still feel compelled to do things - even if they are non-work things. I still dislike the idea of "wasting time". Forty years in the workforce does that to you. Of course I don't want to wander around like a middle-aged spaced out hippy appreciating the great orgasmic nothingness of it all. But I do want to become a little less driven and more inclined to recognise the value of "don't have to do".
Don't have to prepare for classes, don't have to go to the gym, don't have to play golf, don't have to read Proust, don't have to...
Richard S. J. Tol, Climate Economics: Economic Analysis of Climate Change and Climate
Policy, Edward Elgar, Cheltenham UK, 2014.
This is a text on climate change and its
economics.It is written in a brisk,
lecture note format with much material tersely presented. It contains
exercises, reading lists and utilizes a supplementary website which contains
lecture notes, quizzes, lecture slides and supporting databases.As someone who teaches classes on climate
economics I found this useful. Particularly those early parts of this book
that involve describing the science and in establishing a conceptual policy setting.
Starting a new blog as my old WordPress blog, something I have maintained for 7 years, has grown to vast proportions in size - more than half a GB. Also I have reverted to using Blogger software as it is sophisticated enough for my immediate needs. On Blogger it is easier to post photographs as well.