Thursday, February 21, 2008

Inflation in Zimbabwe

100,000%? Can that be right? Personally, I'm betting the official figures are actually too low, but who knows. I sincerely hope he gets voted out of office next month. I just worry that he won't leave...

Monday, February 18, 2008

Did the Dead Vote Too?

I'm not sure how we all missed this, but Cyprus just had their Presidential primary elections. The current president from the left-centre party, Tassos Papadopoulos, has been eliminated by the Communist party candidate Demetris Christophias and right wing candidate Ioannis Kassoulides. The big issue in Cypriot politics is reunification of the island, as the northeastern portion is controlled by Turkey.

But the most interesting thing about the article is this statement: "Cypriots living abroad, in Britain and Greece, were flown home on specially-chartered planes to take part in the vote." To me, it doesn't really seem like this is good for democracy. It's already expected to be a close election (the primary was decided by under 800 votes--that's not very many flights!), and it appears that whoever has the most money to charter the most planes might in fact tip the balance. Sure, I know that in the US the parties hire buses to shuttle people to and from polling places, but something about chartering planes to fly people in for an election seems to go way beyond that.

But maybe that's just me.

Sunday, February 17, 2008

Thank God for Government Hospitals

From BBC News:

A fully-equipped hospital that lay unused for two years has burned to the ground in northern Nigeria.

"The General Hospital in Maiduguri was built in 2006 but
the state government refused to open it until the president came to cut
the ribbon. The president was due to visit the hospital next month to open it...

Borno was recently hit by a measles outbreak that killed hundreds of children [and] existing hospitals in Borno are poorly equipped and overcrowded. Angry residents ... gathered around the burned hospital and shouted abuse at the alleged arsonists, local papers reported..."


One question: It's understandable why they are mad at the arsonists, but why not be mad at the government? It seems to me that the politicians willing to let hundreds of people die (And in all likelihood it is probably way more than just the hundreds from the measles outbreak) in order to satisfy their demand for political grandstanding is the real problem here.

Sunday, February 10, 2008

Stimulate This!

I previously blogged about the Bush Stimulus package, and it looks like a stimulus bill has just passed by a considerable margin. I just wanted to add a few comments to my initial points:

  • Government induced economic stimulus can not work when the government is attempting to stimulate the economy through increased government spending, as this simply represents a future tax burden.
  • Government induced economic stimulus is meaningless if they are simply offering temporary benefits and tax reductions--at best you can hope to push the problems of today into the future.
  • Real economic stimulus occurs by permanently relaxing government intervention into the market.

Thursday, February 7, 2008

How to "solve" the Howard Inflation

Seems like that is all that is in the news. Today, for example, Federal Treasurer Wayne Swan is using the Howard Inflation to attempt to reduce tax cuts. This follows his declaration of war on inflation. There is a lot of finger pointing going on, and Wayne Swan's answer is to return to the "dinosaur" Keynesian macroeconomic policy that everybody in the world realized was crap about 30 years ago. But, if Swan is accurate in identifying the underlying cause of the inflation, then the solution is simple--free trade!

He is implicitly describing inflation as being of the demand-push flavour (this is a bit dated, but the first paragraph sums it up on the demand-push issue). While I am not a fan of Keynes, that seems to be the framework Swan wants to use, so let's take a look. Demand-push simply means that aggregate demand is growing faster than aggregate supply. People want more stuff, markets aren't able to produce that stuff as quickly as people want to buy it, which causes them to compete the prices up. Why this is happening doesn't really matter. Swan, like any Labour politician, will blame things like lack of training and infrastructure and things of the like. But the standard Keynesian is to assume that aggregate supply takes quite a while change. Which certainly makes sense in the case of one-economy world.

But we don't live in a one-economy world. We live in Australia, replete with tariffs and import quotas and trade barriers galore. Get rid of those, and I promise you that aggregate supply will have no problem keeping up with aggregate demand.

Wednesday, February 6, 2008

And what if I don't like either choice?

I spoke earlier of the changes in the works at the ABC. Today, they have announced a number of changes in the services they will have on offer, including adding another channel and increasing the variety of programmes on offer. This sounds nice. After all, any free market economist will tell you that choice is good! However, markets work not just by offering you choices, but by rewarding producers who offer good choices and punishing producers who offer crappy choices, because after all, producing another option for you to choose among entails a cost. It's not the addition of more choices that drives markets to efficiency, it's the market process of entrepreneurs identifying an unmet demand that they can provide at a profit that drives markets to efficiency.

Sure, it's entirely possible that the new programming offered by the ABC could potentially earn a profit, and thus be efficient. It could be that there is an unmet demand for televised Australian ballet and opera, and the ABC is the entrepreneur that the market needs to provide this content. Or it could be that it simply is not worth the cost. My money is on the latter, and that we'll see the subsidy to the ABC rise as a result.

Monday, February 4, 2008

Centralizing the Federal Budget

At first glance, centralizing the Federal Government's technology budget seems like a good idea. After all, it follows the best practice of private industry, where firms typically rely upon procurement departments for purchasing. In so doing, firms are able to save money by streamlining purchasing processes, leveraging their position as volume purchasers to negotiate lower input prices, and take advantage of economies of specialization. This all sounds good, but I remain very skeptical of Finance Minister Lindsay Tanner's plan. Not only is it the case that what is true of firms is not necessarily true of governments, but this plan also has the ability to have a huge effect on the balance of power in Canberra.

Firms seek to cost minimize because any reduction in cost is translated directly into profit for the owners. But the profit motive that drives private procurement departments is conspicuously absent in governments. Assuming there are cost savings, then, where do they go? The obvious analogue to owners in this situation is taxpayers. If the reduction in spending was returned to taxpayers in the form of a reduced tax burden, great, that is the best outcome possible. But this overlooks an important element of human action--if you want people to engage in certain types of behaviour, you need to make sure their payoff from that behaviour is higher than if they did anything this context, the question we should ask is what incentive does the Finance department have to engage in the effort required to reduce costs, when the fruits of their labour go to the taxpayer, not them? The answer is very little. The same could be said about the second best case of using the reduction in costs to fund other government projects, like education or roads or something. Unless the Finance department sees a big chunk of the cash, they are not going to do it efficiently. If this goes forward, I see two likely outcomes. Note that they are not mutually exclusive.

The first outcome is that we might see a "second best" type solution which involves significant gold plating on the part of the Finance department. Gold plating occurs when a firm or agency is limited in the amount of profit they can earn (for example, the Finance department cannot earn a profit!). This limitation obviously reduces the incentives to increase revenues and reduce costs, since the only reason they might want to expend the effort to do these things is if they can get some private benefit from those revenue increases/cost reductions. And the way to do that in this situation is through overcapitalization (on-the-job consumption). For example, say your government agency is operating efficiently with $3m in revenues but $2m in costs. You can either return $1m to the federal government at the end of the year (and get nothing out of it), or spend the extra $1m on overcapitalization (things like computer upgrades or extra workers, that add capacity that you will not need or use) or on-the-job consumption (hiring limos instead of taxis, flying first class, and hiring former playboy playmates who can't read, let alone type, as personal assistants). This, in turn, increases your costs to $3m. On the whole, this gold plating equilibrium would be more efficient than the current system. Not necessarily by much, but the benefit is there. Cost savings will be made, but most of them will be passed on to Lindsay Tanner, not the taxpayer.

The second outcome, which I think to be far more concerning, is that this change would generate a great deal of "gatekeeper" type power to the Finance department. That is to say, the Finance department, and the Finance Minister himself (Lindsay Tanner), would have oversight power over the workings of all of the various cabinet agencies. After all, these rules would "enable the Department of Finance to withhold funds until certain milestones used by agencies to justify projects have been met." And in general, adding individuals with gatekeeper power is bad news.

Really, this plan is just a power play by Lindsay Tanner. He is using the guise of adopting best practices as exist in the corporate world to consolidate power for himself and his agency.


Arlen Specter is at it again, this time trying to use Spygate as a means to attack the NFL's anti-trust exemption. What one has to do with the other is beyond me, and it's fairly apparent that spygate is being used as yet another excuse for Specter to try and cosy up to Comcast, the cable company based in Specter's home state of Pennsylvania (and, completely coincidentally, a major contributor to Specter's previous campaigns). Despite the sham of a facade, it is worth considering to what extent the NFL should, or should not, be allowed to retain their anti-trust exemption.

Specter, in the past, has been primarily concerned with the sale of television rights (as opposed to, say, the claims of Maurice Clarett, who petitioned that the anti-trust exemption as it relates to the draft be overturned). Specter is arguing that the negotiation of television rights should be done on a team-by-team basis, rather than have the league negotiate a league-wide television package. One supposed benefit of this would be to allow regional stations to acquire rights to local games, giving local fans the ability to watch more games with their local team than otherwise.

In principle, this seems to make a lot of sense...this would benefit the fans as they could watch their local teams more often, and would force the teams to be more competitive, and surely anything that increases competition is a good thing? In the case of professional sports, I'm not so sure, because I'm pretty sure that the teams are not the products being sold, but rather the game itself is the product.

Suppose Specter's plan were initiated. One would expect to see big market teams, such as the Giants, Patriots, Bears, Redskins, and Cowboys, sign far more lucrative contracts with television stations than the Chiefs, Browns, Bengals, Bills, and Oilers. This would likely lead to greater income disparity between the teams than currently exist (Thought experiment: how much of the NFL's $24 billion contract is paying for the right to air Patriots games, and how much is for the rights to air Bengals game? Scrapping the anti-trust exemption would mean each team earns their marginal product, not equal shares of the total contract), harming the small market teams at the expense of the large market teams. This is neither good nor bad--being in a "good" market as opposed to a "bad" market is little more than a rent, and will be more or less directly capitalized into the value/price of the team. Sure, the Patriots might win more games than the Chiefs, and make more money than the Chiefs, but when somebody moves to buy the Patriots, they will have to pay more for the higher stream of profit that the Patriots bring in. In the end, owning the Patriots should be just as valuable as owning the Chiefs.

What other effects might this plan have? Well the first, and most obvious, is that we'd expect to see the playing field become a little less "level." Again, ex ante there isn't much to say about this. Big market teams win more often, but at the same time their owners pay more for their teams, so it would seem to be a wash. However, if externalities exist between teams, then the story becomes more complicated. As it turns out, there appear to be significant externalities present. Teams get more fans for games against good teams, fans would generally prefer to watch a close game than a blowout, and so forth. The Patriots, it turns out, are worth more to Robert Kraft if the Chiefs are good than if the Chiefs are bad. There are many ways to deal with the issues of externalities. One method is regulation, which Arlen Specter wishes to do. A generally more efficient means is internalization, which is exactly what the NFL league structure is doing. All of the teams, small and big market alike, are worth more if these bilateral positive externalities can be internalized.

This, in turn, should change the way we perceive professional sports. What appears to be teams competing against each other are in fact two firms engaged in the joint production of a single product. Which, in my mind, makes Arlen Specter's "competition" based argument have more holes than the Minnesota Vikings' secondary.

Friday, February 1, 2008

Coincidence? I think not!

Last week, we learned that housing prices in Melbourne rose by 25% in 2007. This week, the Victorian government is planning on raising property taxes, particularly on those individuals whose property rose in value the most.

Who didn't see that coming?