Readership
Jul
20
NBN authorisation and the problem of distorted pricing
Stephen King | 6 Comments
The ACCC has authorised the NBN-Optus deal. So where do the public benefits come from? As background, remember that the ACCC can only authorise an otherwise anticompetitive agreement if the public benefits outweigh the public detriments. I have previously expressed my skepticism about this.
So where are the benefits? The Box 1 on page 27 of the decision has the answer. And it illustrates the problem of the hidden cross subsidies built into the NBN. Read more
Jul
19
U.S. allows surcharging, Australia restricts it – both end up at same place.
Stephen King | 2 Comments
Two (opposite) developments for card payments over the past month. In the US, Visa and MasterCard settled a legal case with retailers. As part of the settlement:
The card companies and banks would also allow stores to start charging customers extra for using certain credit cards in an effort to steer them toward cheaper forms of payment.
But these surcharges will be capped:
Merchants would also be required to disclose information about card fees to customers, and credit card surcharges would be subject to a cap, according to the settlement papers. Surcharge rules would not affect the 10 states that currently prohibit that practice, which include California, New York and Texas.
In Australia, the Payments System Board has decided to limit card surcharging to “the reasonable costs of card acceptance“. The report is here. The reasons for this change is concern about excessive surcharging and the charging of a single surcharge over different cards despite the different cards having different merchant fees.
Both these practices are inefficient because they can cause consumers to underutilise a particular payment method.
So we seem to have got to about the same place in both countries. However, I still have concerns that the Australian reforms are unnecessary micromanagement. Read more
Jul
19
Paying to lose control
Sam Wylie | Leave a Comment
A ‘person’ who owns more than 19.9% of a publically listed firm can only increase their stake by making a takeover bid to all shareholders, or alternatively, by ‘creeping’ forward in ownership by 3% per six months. So, to get from 19.9% to say 37.9% would take 3 years if maximum use were made of the creep provisions in the Corporations Act. The Act actually uses the word “creep”.
There has been a lot of hand wringing about this by journalists lately. Apparently they are worried that Gina Rhinehart will slowly but surely take control of Fairfax Media using the creep provisions. Adding more weight to the argument that the creep provisions should be eliminated, or curtailed, is the call by Australian Securities and Investments Commission boss Greg Medcraft for changes. The arguments put forward for ending or curtailing the creep provisions are very weak. First, it is argued that Australia has creep provisions and some other countries do not — so what? Second, it is argued that with the creep provisions in place a ‘person’ (as the Act says) could acquire control of the firm without paying a premium to the other shareholders – again, so what? Third, — there is no third point in the argument.
It is not obvious that small shareholders are worse off when a single party takes a large controlling stake. When the shareholder base is atomised then no single investor has a strong enough incentive to properly monitor the management of the firm. If a large stakeholder emerges, which does have a strong enough incentive to monitor, that may make the shares of the other shareholders more valuable. It may even be optimal for small shareholders to pay one party to take a controlling stake (if that party commits to hold the stake), by all small shareholders selling some of their shares at a discount. Read more
Jul
17
The recent spate of handouts to Alcoa and the car industry is part of a worrying trend. Governments (both Federal and State) appear to be open to vested interest lobbying that seeks self-serving intervention, even when that intervention is not in the national interest. This is a significant reversal from the post-Hilmer-report 1990s. Why has it happened?
Part of the answer is that governments have forgotten a key lesson from the Hilmer report. Like Ulysses facing the Sirens’ song, governments face lobbying by vested interests that can create short-term political gain at long-term cost: both political cost and economic cost to Australia. The song of the lobbyists sounds sweet to government – particular when it is sung in marginal seats for a minority federal government. But one under-recognised lesson from the Hilmer report is that government, like Ulysses, must ‘tie itself to the mast’ if it is to avoid the short-term temptation of the lobbyists. By forgetting this lesson, governments are currently the play-things for vested interests. It is time for governments to re-establish the binds that can protect them from the lobbyists’ Siren song. Read more
Jul
16
The electricity death spiral
Stephen King | 5 Comments
Paul Simshauser and Tim Nelson put out an AGL working paper last week that captured a few headlines. The ‘death spiral’ title probably helped! The paper is here.
They raise some interesting points. What if demand for electricity overall is falling but peak demand is rising? Looking at the components of electricity pricing they note that:
… current tariffs for households are about $260/MWh, with power generation (including carbon taxes) accounting for about 36% of the costs, high and low voltage network costs comprising about 46%, environmental schemes about 7% and retail supply costs about 11%.
So network costs are the largest component of electricity prices and these are driven by the ‘peak’. In other words, the transmission and distribution networks are designed and built to meet the peak load. There is ‘spare capacity’ at other times. So if peak demand is rising but ‘average’ demand is falling, this means bigger networks with more spare capacity most of the time. Read more
Jul
16
More of software – and other – price discrimination
Stephen King | 5 Comments
The Department of BCDE (as reported in the SMH) argues that the price discrimination faced by Australians for software and other ‘electronic goods’ is best left to the market.
For physical goods, some Australian shoppers already ”rent” mailing addresses in the US, and arrange to have the products then sent to Australia. Some consumers may also turn to piracy as a way to get digital content at foreign prices, it said.
I agree that the market will find lots of ways around the price discrimination (and indeed already has). Also, in the longer term, software pricing will probably drop due to innovation and new products. Apps have revolutionised software and price discrimination tends to exist for goods that are ‘platforms’ or ‘unique’ products that are protected by copyright (e.g. specific films). However, there are two points: Read more
Jul
13
Why software is more expensive in Australia, Take three
Sven Feldmann | 3 Comments
In light of a new Parliamentary inquiry over price gouging for software products, many analysts, including both Stephen King and Joshua Gans here at Economics.com.au, offered explanations for why prices for software in Australia are higher than, say, in the US.
Stephen observes that higher prices are the result of price discrimination provided Australian consumers are less price sensitive than their US counterparts. To explain the lower price sensitivity of consumers, he suggests that Australians have fewer opportunities to purchase abroad; but this obviously applies less to software purchases than to other products. Joshua points out that if digital piracy is more prevalent in Australia, then the price sensitive segment of consumers does not participate in the official market and the remaining consumers are less price sensitive. More often, “behavioural” or ad hoc explanations are invoked for why Australians are less price sensitive. Stephen concludes with the open question:
Jul
10
It’s just an economics editor in need of some modern undergraduate coursework, people (a fast and frugal history of recent economic theorizing)
Andreas Ortmann | 20 Comments
Ross Gittins, the economics editor of the Sydney Morning Herald, yesterday threw a fit; you can read it here. Basically arguing that economists are hopelessly committed to something he labels the “’neo-classical’ model”, he claims that
“This conventional economics reduces all economic activity to that which happens within markets. It further narrows the operation of markets to the setting of prices, assuming movements in relative prices are the primary thing influencing the behaviour of producers and consumers.
It thus abstracts from the role of ‘institutions’ – be they organisations, laws or conventions – in influencing market behaviour, so often leads economists to make policy recommendations that prove seriously misguided.”
These are astonishing claims; somehow Gittins seems to have missed the emergence of (non-cooperative) game theory of the eductive and evolutive kind, modern Industrial Organization (including organizational economics and contract theory as well as corporate finance as encoded in Tirole’s 2006 book), the law and economics movement, modern institutional economics, (market and mechanism) design economics, experimental economics, and behavioural economics. As a matter of fact, there are literally thousands of published articles, and consulting reports for governments and various government bodies, that have been written on various economic aspects of organizations, laws, regulations, and, yes, conventions. There are now even high-quality journals dedicated explicitly – qua title – to those areas of research. In fact, most of these topics are being taught at better Australian universities in their undergraduate program. That’s because the subtle influence of institutional details – for example in various matching mechanism and other market and mechanism design problems (e.g., here for an example of a prominent contributor and likely future Nobel Prize laureate and his work and here for an example of another prominent contributor who should, arguably, have received the Nobel Prize together with Smith and Kahneman a few years back already and still might) — is widely acknowledged.
That’s also why social, and anti-social, preferences have become a veritable cottage industry, as has a related literature on altruistic punishment (Google currently lists under “altruistic punishment” more than 3,500 scholarly articles.)
And, of course, economists have for a long time, and famously, been attacked for their “imperialism”, i.e., their attempts to analyze other than market phenomena. (“Economics imperialism” features 500 Google hits.)
The “’neo-classical’ model”, truth be told, has long been superseded by a wide and ever increasing variety, and diversity, of methods and models.
Yet, it does not mean that more standard game-theoretic models (probably to Gittins’s mind part of the neo-classical model world) are not useful. Somewhat ironically, his discussion of Ostroem’s work, and the claims that Gittins makes about the originality of her work, illustrates that point.
Says Gittins:
“For a good example of the way different analytical models can draw different conclusions about the same problem, consider an old economists’ favourite: the ’tragedy of the commons’.
…
Because no one owned the common area, no one had an economic incentive to look after it. Indeed, each individual had an incentive to get in and use as much of it as possible, as quickly as possible, before other individuals used it up. So what was everyone’s property was actually no one’s property – and that was the essence of the problem.
…
Many economists thought it obvious that the solution was to allocate private property rights over the commons.
…
Neat, eh? Of course, there were also some who saw the solution as having the government take over the common property, maintain it and allocate its use on some fair basis.”
Gittins then goes on saying that recent Nobel prize laureate Elinor Ostrom
“devoted much of her career to combing the world looking for examples where people had developed ways of regulating their use of common resources without resort to either private property rights or government intervention.”
Her excursions were indeed successful, something that would not even have surprised Adam Smith who wrote, after all, extensively about the emergence of languages, moral sentiments, and institutional regulations (and their abuse) .
Ostrom found, that “(i)n all these cases people drew up sensible rules for sharing the use of the resource and combined to perform regular repairs. People who broke the rules were fined or eventually excluded.”
Well, that is exactly what standard “neo-classical” game theory, with its heroic common knowledge and rationality assumptions, would suggest, no? The people living in mountain villages in Switzerland and Japan, and fisheries in Maine and Indonesia, and similar repeated-game situations might be able to reach other equilibria in social-dilemma situations than those in one-off situations exactly because they have punishment options of various kinds. That’s the kind of stuff – the issue of “reputational enforcement” (Google lists more than 1,500 scholarly articles on it) — now routinely taught in undergraduate courses. And, yes, Adam Smith understood reputational enforcement exceedingly well, too.
It is simply nonsense to argue:
“Few economists had heard of [Ostrom], or her model-busting work.Why had this solution to the problem never been considered by economists? Because of their model’s implicit assumption that we only ever act as individuals, never collectively. We compete against each other, but we never co-operate to solve mutual problems.”
No, no, no. This is what game theory is all about: individual actors inter-acting (or, acting collectively). There are well defined conditions, well understood by most modern economists, under which interacting optimizing individual actors co-operate. There are also good reasons why proponents of the Nash program (which postulated, for the sake of robust implementation, that cooperative solutions be grounded in non-cooperative assumptions) have belaboured for the last five decades that very point, with considerable success since non-cooperative game theory today is the only game in town that matters and that, incidentally, is the heart and soul of theorizing about reputational enforcement. And has been that for at least three decades, as demonstrated by the classic work in the early 1980’s by people such as Klein and Leffler and Shapiro.
That the economics editor of one of Australia’s finer newspapers is that uninformed about modern economic theory is bad enough. That he has no qualms to regurgitate the same old tired misperceptions about economists, and the alleged false policy advice they give, is appalling. For all I can see, Gittins’s poorly informed opinion piece reflects more on his ignorance than the stupidity of economists currently working in Australia. At least not economists working in academia.
Jul
10
On the question of whether the Marriage Act should be changed to allow gay couples to marry, both proponents and opponents think that they represent the silent, moral majority of Australians. Since both sides think their position has the backing of the Australian public, neither side should be worried about putting the question to the people. This seems like the most natural question for a plebiscite at the next general election. Both sides seem to agree that representative democracy is the problem rather than the solution here. Supporters of gay marriage believe that a minority of ALP parliamentarians, beholden to religious interests, is preventing the will of the majority of Australians being expressed in law. Opponents believe that Marriage Act reform is only an issue because a minority of activists members of parliament are trying to bully the rest into supporting changes to the Act that are not supported in the general population.
Nobody can argue that members of the House of Representatives are better informed than the general public on this issue. There is nothing technical here. This a purely a question about whether social mores are being expressed in the current law. Ordinary Australians are every bit as qualified as the members of parliament to decide the question. To say otherwise, is either elitist or fundamentalist non-sense. Elitists will say that ordinary people cannot be trusted to make the right decision and will be too easily swayed by conservative tabloids and radio hosts. Elitists (by definition) have throughout history argued that democracy is dangerous. Religious fundamentalists believe that God has spoken, and hence asking the people can only lead us away from the true path.
Some people will worry that in the lead up to a plebiscite the public debate will descend into demagoguery or worse. I think that very unlikely. Extremists, with shrill and strident voices will be damage their cause. We are a mature, moderate, well-educated and civil society that is facing an important question on how our social mores should be expressed in law. The parliament is failing us in this, because no vote can be taken. A pox on Parliament for its divisiveness and ownership by minorities. Let the people decide.
Jul
9
The Economist can’t be wrong (or PERHAPS it can …)
Andreas Ortmann | Leave a Comment
A famous saying has it that, if we were to ask “n” economists for their opinion, we would be assured of at least “n+1” opinions because one of them would surely have two opinions all by himself.
So when 172 economists (professors all and by and far German, to boot!), motivated by the outcomes of the recent EU summit (specifically the politically agreed-on direct recapitalization of troubled banks through the European Financial Stability Facility, and its planned future replacement, the Europen Stability Meachnisms, or ESM), … when these 172 economists sign off on one statement, something extraordinary must be happening. Indeed it is.
Germany’s chancellor, Angela Merkel, already losing fast her domestic political support (see here), now also faces considerable public opposition in the form of a letter to the public (see here) that those 172 professors – many of them quite prominent – have signed. (Here is The Economist’s take on things ). The letter of the 172 profs is quite a challenge. Nevermind the multiple legal challenges that are on the way (see here) and that already led Germany’s president, Joachim Gauck, upon request of the country’s High Court, to postpone his signature on documents initiating the European fiscal pact and the ESM.
The letter of the 172 profs drew immediate reactions from Merkel and Schaeuble (her minister of finance) as well as the popular press which has supported Merkel for years in a fairly uncritical manner. (Indeed, Merkel’s public approval ratings until recently were almost those of Gillard and Abbott together.) The 172 profs were called everything from “unknowns outside of their university” (clearly wrong) to “Stammtisch economists” to “irresponsible” by various partisan commentators including two groups of economists: one spearheaded by alleged “heavyweight” Bofinger and the other by a group of economists connected to the Frankfurt Center of Financial Studies. It is noteworthy that the first group consists of a handful of economists while the second group of about 15. Hardly a strong counterattack, to go by the numbers.
Most recently, a couple of prominent Swiss economists (Monika Bütler, Urs Birchler, B&B from here on) have commented for Swiss newspaper Der Tagesanzeiger on this developing story (see here). Coming from well-informed outsiders, what they have to say strikes me as about right. What follows below is a summary (and partial translation of key passages) of their commentary.
B&B start out by stating that the 172 profs see the proposed European banking union as a means to have tax payers ultimately pay for bank debts (and private profiteering gone awry). They stress that the signatories swim against a current that got stronger in recent weeks and months, with even The Economist, which they call “otherwise reliably market-oriented”, now suggesting to Germany: Pay already! And even though Merkel already has a worldwide reputation as a spoilsport, due to her resistance to the socialization of European debt, the 172 economists argue that she has gone way too far with her agreement to the plans hammered out at the recent EU summit.
B&B summarily dismiss the critique of Bofinger et al. as high in rhetoric and low in substance. B&B then argue that, in contrast, the critique of the 15 economists from the Center for Financial Studies (CFS) in Frankfurt, including Jan Krahnen and Martin Hellwig, ought not to be dismissed. They note that these economists see the ESM as a suitable mechanism to recapitalize banks directly, in return for various suitable conditions.
B&B next ask who is right in their assessment of the EU summit agreements (and in particular the ESM): the 172 economists who wrote the public letter or the 15 CFS economists? B&B conclude that the assessment in the latter case is based on the idea as such (no socialization of European debt), while in the former case the assessment is based on the likely reality (money today for promises to be enacted tomorrow but promises that will not be kept).
B&B then offer an “anatomy of the crisis” stressing that there are really three separate crises (the Euro-crisis which has to do with the diverging competitiveness of the countries in the Euro-zone, which seems to necessitate the exit of some of the countries from the Euro-zone or tremdous efforts by Germany and others able to provide such effort; the national debt crisis, which puts many governments at the mercy of the vagueries of international financial markets; and the bank debt crisis, which has European banks suffering the consequences of the financial crisis, the real estate bubble and the high stock of government bonds with many undercapitalized still distributing huge amounts of dividends and bonuses.)
B&B argue that the EU has been responding to these three crises without any recognizable concept but with ever larger amounts and with ever emptier slogans through which subsets of the crises were linked (“If the euro fails, Europe fails”) and which were then used to dismiss previously adopted rules. B&B argue that the increasing amounts of funds invested in rescue operations and emergency pots have helped neither the Euro nor the indebted countries, and that the Euro can only be saved with economic adjustments in the afflicted countries. Whatever help is currently being given out ends up in the hands of the banks’ creditors, i.e., internationally active banks.
The concluding paragraphs seem worth translating:
“Rescued Banks – Shattered state institutions
With the bailout of Spain, the facade has now fallen. Money goes directly from the printing presses of the ECB to ailing commercial banks. You have to imagine such transactions five years ago. The financial press would have raised hell: A central bank finances troubled commercial banks! By abandoning the commercial banks’ (and their owners’) responsibility for losses and by abandoning its abstinence from handing out selective benefits, the ECB destroys two pillars of the financial architecture.
It seems that no one bothers – except those 172 economists from German-speaking countries through their, in light of the circumstances rather tame, letter. Admittedly, the letter simplifies much, but in its essence it is right on target. The results of the attempts to rescue the Euro and the Euro-zone come to this: on the one hand the far-reaching bailout of banks, on the other hand a shattered European monetary system, broken public finances, and a shattered confidence in European institutions.
This time no one will be able to say: The economists did not warn us.“
So much for B&B.
The subject matter is, of couse, complicated and reasonable people can have differing opinions on some of the matters. The letter of the 172 profs has created new realities in the current debate and certainly will make it more difficult for Merkel and her government to push things through without proper examination of what she commits Germany to.
At the minimum, the 172 profs have invigorated a debate that so far was mostly conducted by professional politicians (i.e., the same people who are majorly responsible for the current malaise of Europe and the Euro). That has to be a good thing. As Germany’s influential weekly Der Spiegel noted (see here), the discussion has become one about ideas rather than ideologies and that has to be a good thing, too.
Will developments in Europe have an effect on Australia? The local experts seem for the most part to think it won’t (see here) but they diverge widely in their forecasts. As one might expect in such a complex matter.