Wednesday, June 30, 2010

The Hon Malcolm Turnbull - UoS alumnus

I had the pleasure of attending an alumni breakfast this mrorning at which the Hon Malcolm Turnbull spoke on "Politics, Policies and Personal Life". More interestingly it mostly took the form of a Q&A discussion.

It was the engaging contemplative Malcolm on show without any of the debater or the "try hard" about him. That is, the Malcolm that it is possible to like and admire.

He observed that politicians are judged on their competence and conviction, and that often the people will forgive the occassional failing on competence if there is demonstrable conviction. His view is that Kevin Rudd ended up with neither.

In response to a question that asked whether a third c - communication - belonged there, Malcolm made the observation that the communication failure was what I think of as the customer service gap. If you talk up the expectation but don't commensurately increase the delivery you increase dissatisfaction. A really good example is the gap between climate change as our "greatest moral dilemma" and what was ultimately (not)done about it.

He pointed out that it is really difficult to assess the claim that the Government's action averted the effects of the GFC and more importantly whether better managed policies might have been effective.

When asked "how's life" he replied that he believed it was better than the only available alternative. That is a strange answer for someone who is a Catholic - one would think he expects the alternative to actually be better!

He went on to note that the Westminster system has become more presedential than the executive presidency in the US because there the President doesn't by definition control the legislature.

He observed the error in the handling of the Henry tax review - the report should have been released when received (I didn't try to ask him about the other Henry (Ergas) tax review he commissioned).

Malcolm also commented on the 24-hour news cycle - which he more accurately called the 60 second news cycle - that's how fast there is comentary. e bemoaned the fact that the formal media is only full of polls and not analysis of policy positions. He described it as the media only reports "personality and the game" which aligns perfectly with David Forman's description that the media reports politics as "celebrity and a horse race".

Finally there was some reflection about the challenges of taking the public along on issues like climate change and the republic. This made me think they have the same problem - you can get people to agree on the fundamental question (should we be a republic - should we act on climate change) - but it all turns to mush when you get to detail because it is too easy to attack the actual proposal (the politicians republic or a great big tax).

And only as I type that am I reminded that Tony Abbott stood on the side of the negative attacker on both. Ultimately this will be Abbott's problem in ever winning Government - he really doesn't stand for anything.

Gratuitous promotion

In February vividwireless announced the extension of their network to select areas of Sydney and Melbourne.

There is now a registration page available for people interested in the service.

50 Years of Elizabeth David

As the Australian MasterChef contestants make their way back from their surprise trip to London and Paris, this article pays tribute to the fact that it is now 50 years since the first publicatioon of Elizabeth David's French Provincial Cooking. It is actually sixty years since the English got reconnected with food courtesy of her writings, starting with Mediterranean Food.

I had to wait till 1966 until my mother discovered the cuisine of Europe and returned from a trip with a clutch of David's books. These are books that explain more the joy of constructing and sharing the food, than the techniques of achieving it. As such they make great partners with Mastering the Art of French Cooking, which has gained renewed popularity off the back of the film Julie and Julia.

One of the joys though of cooking in Australia is that so many of the ingredients still apparently considered quaint and imported in Britain are available in plentiful supply in Australia. Many of my generation can still remember the kind of cuisine that is referred to in the article as being the standard fare. The beauty of both Child and David is that they thought that this was food we should make in our homes, not leave to dining experiences.

Tuesday, June 29, 2010

Structural Issues in Telecommunications

I cannot make it to all the conferences I would like to attend, and one of these is going to be this year's ACCC Regulatory Conference. The program notes that industry structure issues will feature twice, once on the issue of "Structural design for effective competition" and once specifically on communications covering "Structural models for NBN deployment".

It is perhaps a suitable time for this consideration, or it might alternatively be a conversation being held after the policy world has moved on. The relevant olicy issue is the agitation that followed the exposure draft of the NBN Co legislation and the "wriggle room" over the scope of the NBN Co's "wholesale only" operation.

But elsewhere Telstra seems to have reached agreement on "prospective separation" and Telecom New Zealand has announced that it is reviewing structural separation.

The main speaker at the ACCC conference on the overall question is Professor Martin Cave, who has had a bit both ways on the topic. In a report he wrote for CEDA Cave supposedly "argues that structural separation is an unnecessary risk." Meanwhile the T4 campaign pointed out that Cave had twice written approvingly of separation options.

The other speaker is Dr. Karl-Heinz Neumann, who is the head of a consulting firm WIK. WIK recently hosted a conference on National strategies for ultrabroadband infrastructure
deployment: Experiences and challenges. This was presumably how he put together his presentation, Investment in Broadband and Next
Generation Networks to Foster
Development and Innovation, a couple of weeks later for the ITU. At the conference both Rob lbon from the ACCC and Kris Funston from the NZ Commerce Commission spoke.

I hold little hope that either ACCC conference sessio will shed any new particular light on the issues. One of the critical factors is whether separation is seen as a regulatory solution to a problem or whether separation is seen as a good market issue. I've previously been published arguing that separation is in the interests of incumbent telcos. This contrasts with the usual view that separation is a regulatory instrument and hence designed to confiscate rents from a monopolist.

Is it possible to reconcile these views? The benefits of competition are usually described in two ways. The first is in terms of the price effect, and the idea that competing firms price at marginal cost unlike firms with market power. The second is that competition provides a stimulus for innovation as firms compete on matters other than price.

I'm increasingly convinced that the price effect is largely illusory. I haven't done the full study yet, but the decline in telco prices over the last thirteen years looks to be due to technology effects rather than competition effects. This is consistent with the dynamic market model constructed by Steve Keen and Russell Standish. That model assumes incremental change in firm production decisions rather than the simultaneous market clearing from an all knowing market in the classic model. They conclude;

The simulation results demonstrate that markets can be locked in a spiral of restricted production converging on monopoly pricing levels as though the firms were colluding, even though no interaction between firms takes place. Perfect profit-seeking rationality and the dynamics of the economy tends to lock firms into synchronous behaviour, leading to a global monopoly behaviour.

There is benefit from competition though, but it is the benefit that Hatek noted of the ability of the marketplace to transmit information on preferences. If all we had to do was set price to marginal cost then an all knowing central-planner could do that. But anyone who has been involved in regulatory price setting knows that it is revealling the demand that is the challenge.

In the competitive market model firms competing can all obtain their share of the monopoly rent, but to "outperform" their competitors they need to obtain the additional benefits from growing market share or reducing costs that comes from innovation.

Where structural separation becomes important for incumbents is where vertical integration becomes an impediment to innovation.

Perhaps the most interesting case study is automobile manufacture. One of the economists favourite examples of vertical integration is the case of Fisher Body and General Motors. The man responsible for much modern theory of the firm and a sub branch of institutional economics summarises the case well. We will ignore for now the details of the case, but instead observe that automobile manufacture was held as a case for vertical integration, but has subsequently evolved into a highly unintegrated business. Actual vehicle manufacture is a process of assembling parts made throughout the world.

The particular significance of this in the telco case is that we are in grave danger of imagining that the structural separation of NBN Co alone solves a regulatory issue, and that merely having a regulator set (or accept) a cost based price resolves all. What is most concerning is that no discussion of the NBN in Australia has considered how to create a dynamic element of the discussion between supplier and acquirer - at least that has been occurring meaningfully within the vertical structure of Telstra. (Yes sorry to disappoint theorists, but CEOs don't work like classic central planners either).

It is to be hoped that the ACCC conference discussion will touch on the dynamic aspects of separation, not just the pre-conceived regulatory constructs.

Self-regulation and convergence

The Australian Communications and Media Authority has published a thoughtful piece on Optimal conditions for effective self- and co-regulatory arrangements.

I must admit to being somewhat pleased that my own working paper on self-regulation was referred to in a footnote. The ACMA paper has considered a range of sources to propose ten optimal conditions for the operation of self- or co-regulatory frameworks. It is a great pity, however, that the work has largely lumped these two together as if they constitute the alternative to direct regulation. The detailed commentary of the ten factors does provide some indication of the relevance of the factors for the appropriateness of self-regulation over co-regulation, but this is only a minor consideration.

The paper is also marginally delusional - repeating as it does the kinds of exhortations found in the Office of Best Regulation Handbook. As a consequence the paper asserts "The ACMA, along with all Australian government agencies, must clearly analyse the costs and benefits of undertaking regulatory action and needs to consider alternatives to formal regulatory action before deciding that regulation is necessary." This reference to cost and benefits is usually met by toting up some list of unquantified impacts, whereas the technical definition stems from the microeconomics of policy evaluation and is meant to consider real costs and benefits as measured by producer and consumer surplus.

The principle is modelled on the economic analysis of "regulation" such as barriers to entry or price control, the effects of which can be assessed through static partial equilibrium models or more broadly using a general equlibrium model.

But for the vast bulk of real government regulation nothing like that ver occurs, nor is it practical to do so. The cost-benefit analysis degenerates into little more tha the "vibe" of the thing - and I have even heard a senior bureaucrat argue that the benefits of a policy existed because the Minister had identified benefits. A wider discussion of cost-benefit analysis is for another day.

In then describing self- and c-regulatory models the paper notes that;

In practice, pure self-regulation without any form of government or statutory involvement is rare. Commentators have noted that self-regulation has become embedded in the regulatory state, reflected in the range of 'joint productys' between the regulator and the regulated, and is best reflected in the understanding of the term 'co-regulation'

As it is at this point that the reference to my working paper occurs I tink it important to state that this is not my conclusion. My conclusion is that regulators habitually fail to utilise or promote self-regulation and instead rely upon the construct of co-regulation.

The paper itself identifies that the Telecommunications Act specifically states the policy intent that the sector be regulated to promote "the greatest practicable use of industry self-regulation". It doesn't go as far as my own paper i noting that that legislative prescription was a direction to regulators, not industry. The conclusion is that the ongoing failure to promote self-regulation is a failure of the regulator.

The issue will have particular significance as the "convegence review" of 2011 unfolds. A question for this review is whether the regulatory objects and policy across the four principle acts administered by the ACMA need to be reviewed and/or harmonised. The brodcasting and radiocommunications acts merely include the invocation that regulation not impose undue burdens on industry (which also is a failure of economic analysis because the policy concern with regulation is that the burdens are borne by society as a whole).

The paper includes as a concession to the primacy of self-regulation that;

To that extent, the relevant legislative schema requires the ACMA to give industry an opportunity to develop self-regulatory solutions before other forms of intervention are considered.

A strict reading of that claim would be that the ACMA should have declined to register industry codes until there was evidence that industry behaviour would not change through voluntary compliance. There is no documented case where the ACMA or its predecessor the ACA has ever given primacy to a self-regulatory rather tha co-regulatory outcome. The one instance where we might have got close was in unfair contracts, where industry had imposed a guideline. When the ACA undertook its assessment of performance against that guideline it was clear that there was one firm only that had made almost no progress, but rather than take action to get that firm to comply the ACA rushed to the principle of an "enforcable" code.

The simplest explanation for the ACA and the ACMA being unable to promote self-regulation is the hammer and nail analogy - when all you've got is a hammer, everything looks like a nail. This comes through in the paper's discussion of non-regulatory tools. Under "rewarding good behaviour - positive incentives" the paper states "Traditional approaches to regulation do not acknowledge or reward compliance with regulations." But this is still considering non-regulatory levers through the prism of regulation. It focusses on the idea of rewarding "compliance" as opposed to rewarding "good behaviour".

Ultimately this reflects the void between morality and legality, or between the idea that regulation can be a choice between "lowest common denominator" and an "aspirational" achievement. The boundary lines that denote behaviour that should be punished and behaviour that should be rewarded are not co-incident.

Finally, the ten optimal factors that the paper identifies as conditions for using other than explicit regulation are reasonable, but should be expanded on to identify how they affect self- and co-regulation separately.

At this point I just want to note the particular issue with the first two - these are "number of market players and coverage of the industry" and "whether its a competitive market with few barriers to entry". The conclusions reached on these points are contradictory - they suggest that a concentrated industry is easier to achieve self-regulatory co-ordination but at the same time that a competitive market with easy entry will facilitate self-regulation or co-regulation. These are contradictoy positions.

In fact, an issue with the telco market is the overall market structure being too concentrated in a few large firms but also having low barriers to entry. The former is an issue because no overall market improvement can occur without the will of the big incumbents, but equally ant attempt to achieve standards is disrupted by entrants.

The ACMA has made a god start, but it may be beneficial for the ACMA and or DBCDE to follow the occassional paper up with a consultative process - probably in the context of the conergence review.

Monday, June 28, 2010

In which I bag Henry Ergas again

I receive a morning e-mail of a simple blog called Breakfast Politics. It is a very easy way to get a daily overview. It can also be quite entertaining in the way Christine Wallace links to articles, like the one today In which I bag the NBN again (and again), Henry Ergas, Australian.

The article is a general whine about the NBN. It incorrectly claims Telstra offered 18 months ago to invest $10B of shareholders funds in an NBN but this was rejected because of the compensation required. This is incorrect as Telstra never actually bid...their bid was non-compliant despite employing five external law firms on the bid (of whom I'm led to believe exactly none reviewed the final proposal).

The compensation to Telstra was one reason for the move to FTTP, but the bigger factor was the realisation that the FTTN offer that was on the table at that stage entailed costs that would be unrecoverable once the move to FTTP occurred.

Last time I looked, of the $11B to Telstra, $9 is coming from NBNCo and is included in its total funding cost. In addition, the implementation study that Ergas must have read made it clear that peak funding for the project is only $28B - a number more likely to be realised as the project is "de-risked" following the deal with Telstra.

Ergas tries to argue that the $1B being paid by the Government to establish USO Co should be considered a cost of funding the NBN. In reality this is just tidying up some of the policy failures of privatisation. Why is it that we expect one telco to provide the E000 service and payphones. Telstra has been lobbying for these to go on budget for some time.

Ergas and others who regard the NBNCo/Telstra deal as "suppressing competition" need to go back and look at the empirical data on the costs of deploying access infrastructure. Competitive duplication of this infrastructure is inefficient.

I'll believe in competition in distribution networks when I see competition in electricity distribution networks. I can live with the logic of intermodal competition, especially where networks with different features and demands partially overlap - like gas and electricity, or HFC (Pay TV) and twisted copper. But FTTP is a superior delivery technology to both twisted pair and HFC, more diurable and easier to deploy and repair.

I personally think that we are finding evidence that the mobile networks are increasingly "subadditive". Despite a policy bias towards new entry we are back to the three operators licenced in 1992 (except for the market operator differentiating by specialising in data - vividwireless).

Finally Ergas is prepared to throw general mud at the Rudd Government over policy positions. It remains a great shame that the Liberals never saw fit to release the other Henry Tax review - that of Ergas. I'm also trying to figure out how that review was conducted. Ergas maintained that he wasn't "employed" by the Liberal Party to do it. But I can't seem to find it as a donation in kind on the AEC website. It may well have been commissioned by the Menzies Research Foundation - but that would make its non-release even stranger.

Meanwhile I will save for another time and place my ongoing frustration with the deification of "benefit cost analysis" by Ergas and the Business Council of Australia.

Friday, June 25, 2010

So what the f*** happened?

I think that's what we are meant to believe is what Kevin Rudd would have woken up screaming today.

Is it possible to piece this together? A thoughtful piece from Patricia Karvelas put together the sequence of events.

It starts becoming clear that there was the start of a move by some in the FPALP (Fed Parl ALP) to unseat Rudd about a week ago. Gillard rejected it, but it was the reaction from Rudd's office with his CoS effectively being seen to doing the numbers that really threw the party into a tizz. Christiner Jackman suggests Jordan is being set up as the fall guy. The most charitable interpretation is that Rudd's office had to do this because no MP came forward to do it. Ultimately the PM had no support base.

The more interesting part is exactly who was responsible for what. Andrew Bolt tries to brand Gillard with all the failures. According to Karvelas, in the caucus Rudd claimed that the ETS and RSPT decision was made by Gillard and Swan not him.

While the decision of Lindsay Tanner to walk for personal reasons is I'm sure genuine, in all things there is a calculus that balances different factors. Being the fourth member of the "kitchen cabinet" that was perceived to be getting everything wrong cannot have been giving him a good feeling about his daily grind.

Ultimately it is hard not to feel that Wayne Swan has been the accidental winner here but really is the main culprit. There is a really big lesson. If you commission big reviews, release the report when you get it not when you are ready to respond. here probably would have been community demand for an RSPT if handled that way.

Meanwhile it is nice to see that there are some in Britain envious of our process. Most important is the realisation that electing the leader from the party membership is a disaster. The public elects MPs who then determine who will govern - the fact they are gathered in parties makes the information issue a whole lot easier.

If we want to vote for the leader of the Government directly then we should support an executive presidency like the Americans. For Tony Abbott to suggest the process we've just gone through is wrong means he doesn't understand the model of a parliamentary monarchy that he so earnestly wants to retain.

Thursday, June 24, 2010

After the deed...

So the deed has been done, and Julia Gillard is now our first female Prime Minister. Thank goodness Anna Bligh has already broken the pattern that the outcome of a female leader is just a sacrifice.

I really liked the montage in Crikey of the photos of Gillard saying no to the leadership. But the crap coming from Julie Bishop in Parliament about the PM being elected by the people and being knifed etc was rubbish. Kevin only ever had at most four years in him - he was always going to run out of ideas. And I think he is still delusional about the core of staff who stood by him.

But what actually depressed me is Lindsay Tanner's announcement that he will not contest the next election.

That means we need a few lighter moments - and I give you Italian scoccer training (an oldie but a goodie - thanks Vic) and a Czeck Rugby ad (thanks Liz).

When you sell your photocopier think

Interesting story on CBS.

I don't think the actual risk is as great as made out. The funny thing is that next to every photocopier these days is the shredding bin or secure destruction bin for documents that you don't want. But then you leave them all on the hard drive!!!

Julia and Kevin ... well just Kevin really

The speed of activity in Canberra last night makes it really hard to judge what's going on.

According to some reports matters were brought to a head because, after weeks of denial by the Deputy PM of a challenge, the PMs Chief of Staff had been testing his support.

Judging by the PM's press conference a core issue is that the party Right wants a major change on asylum seeker policy. What we do know is that Right factional organisers took the idea of a challenge and the numbers to Julia, not the other way around.

The most bizarre element in the whole process has been Paul Howes of the AWU deciding to go public on the decision of his union to swing its support. He made a cogent case on Lateline that the Union was concerned about the IR policy they would confront under an Abbott Prime Ministership. That is fine and a good reason, but does he really want the public message to be that a union deposed the PM?

Ultimately the news story here is not that Rudd looks like he will be gone, but that it has taken so long to get here. Rudd was never really liked by anyone much in his party - he was just always better than the other pretenders during their previous leadership troubles - certainly Swan and Smith never cut it.

In Government he proved to be everything his parliamentary colleagues feared and the experience of Kevin in the Goss Government led us to expect. He simply did not know how to manage the business of governing. To a degree he couldn't walk and chew gum at the ame time - problems were dealt with serially. The resource rent tax meant climate change policy was pulled. He simply couldn't make cabinet work.

It was no real surprise to see John Faulkner accompanying Julia to Rudd's office - as Cabinet Secretary (before becoming Defence Minister) he was exasperrated at the inability of Rudd to make the Cabinet process work. In many sectors the Government continues to leave critical senior appointments unfilled - there has been no Deputy chair of the ACMA for a year.

If Kevin goes today it will be because he doesn't get it that the real job of the PM is not as leader of the country, but as leader of the government and that government is by necessity a collective activity.

Note: I almost wrote an item yesterday that was going to defend Kevin and point out that most first term PMs suffer the same kind ofdifficulty he has faced. The difference is that most other first term PMs adjust as they develop in the job - by al reports Kevin just got worse.

Wednesday, June 23, 2010

On new parties and old christians

Firstly dear readers a quick apology for being so long between posts.

Today I seenews of a new political party that goes by the horrendous name of the Republican Democratic Party. Its founders (Peter Pyke and Graham Higgins) simultaneously announced that the RepDems would be unfettered by "outdated left-right models of the past" but that it would "appeal to people in the broad centre, including Australians on the intelligent left and the compassionate right."

I'd like to see a bit more before I pass judgement. Thus far it just looks like another "pox on both your houses" party. It possibly benefits over the old Australian Democrats by at least aiming to position in the Centre. But what else do they stand for other than an Australian "third way". Meanwhile i the Penrith by-electio the latest hurrah for the Dems was a 0.9% share of the formal vote. And this in a poll widely conceived to be a stand-out for a protest vote.

Richard Farmer writing in Crikey suggested the new party needs a "name" like Don Chipp was for the Dems. My sense is they need to work harder at a few defining issues.

First among these is the idea that embracing the capitalist market state is not the same as accepting that "what's good for BHP is good for the country" (to praphrase a quote originaly made by GM. It is also not about promoting the idea that "market failure" is an excuse for regulation. Ultimately all markets fail, they just fail by less than a centrally planned economy. The objective of government is not to choose between markets and regulation, but to establish the set of regulations that enable markets to operate efficiently and, to a degree, equitably.

The second area to sort out is exactly where they stand on what was the original great divide between Democrats and Republicans - which is the role of central Government, both with respect to State Governments and individuals. The Republicans were actually the good guys in the war between the states - believing as they did in the responsibility of the Federal Government to outlaw slavery. But the other difference is between a strong support for representative democracy over direct democracy - but that distinction is breaking down as fruit loops from the tea party movement misinterpret "freedom and liberty".

The third area is the one the Democrats could have made their own and didn't - the real meaning of the separation of church and state. We saw this week both leaders go to address a "2010 Make It Count" conference organised by the Australian Christian Lobby. I seriously believe that churches should be prohibited from being actively involved in politics and so should religions. We react massively against the Muslim demands for a theocratic state, we battled against it in the reformation, and yet we tolerate this nonsense.

That is to say nothing of the repeated mantra that "our civilisation is inconceivable without the Christian faith" from Mr Abbott. Actually it is more a miracle that we've sustained it. Democracy had to be fought for against the clutches of the church he holds dear. he church of which the PM claims membership is one of the few establishment" churches left and still vests the head of the church in the head of state.

I will write at greater length on my twin beliefs that the Christian bible and religious faith in and of themselves are "forces for good". But at the same time I can only accept that society as a whole needs to be organised around secular values of human rights - so that these values can be shared by all irrespective of faith.

Christopher Hitchens work "God is not Great" makes very well the cases for why creation does not provide a scientific case for the existence of god, and for how the scriptures of different faiths have been the basis of much global misery. Thankfully, and unlike Richard Dawkins, he merely asks that the religious understand their bounds. I go one step further, the truly religious christian who values the ethical principles of their faith - especially those of the new testament - should embrace the project for standardising a global secular humanist ethic.

Meanwhile, the hypocricy of the Christians gathering to lecture on "protecting children" is breathtaking. I think Hitchens has expressed greater outrage about the exploitation of children than any of them. And as we survey the sorry state of churches it is hard to not conclude that the organised churches have been the greatest abusers and "sexualisetrs" of children on the planet.

Friday, June 11, 2010

Flint on taxes and federation

David Flint, a legal academic, has relied upon an economist to interpret a tax (the RSPT) to tell him it is an acquisition of property. I cannot agree. The capital gains tax allows me to discount from capital gains any prior capital losses. Does that mean the Commonwealth has acquired all my capital assets? Of course not. The suggestion that Government is constrained from taxing income is nonsense.

Flint should also know that we've almost always had a vertical physical imbalance in the federation. It's just changed direction. At Federation the Commonwealth had responsibilities in defece and communications, but only the excise tax. I don't know if there were actual transfer payments in reverse, but the reality was that the Commonwealth had responsibilities greater than its ability to raise revenue. That of course magnified in WWII which was when the income tax arrangement changed.

The solution to the imbalance and the other idiotic constitutional issues is abolishing the States. They are totally unnecessary.

Finally, referring to the drafters of the Australian constitution as "founding fathers" is a massive insult to the grand theorists like Maddison and Jefferson who undertook that task a century and a bit earlier and forged the first modern republic from a set of disparate states. Those drafters did a lot more than balanced the competing interests of state and national government - that part in fact was so contentious they still managed to have a "war between the states" which also happened to be about whether slavery was a state or federal issue.

Their greatest achievement was designing a system of Government not dependent upon some historical mystique of a hereditry monarchy - something Flint still thinks would be the end of civilisation in the antipodes.

The public service

Piers Ackerman has written today that "fat cats" (equals public servants" are in bed with their "labor paymasters".

He quotes some interesting statistics from the budget papers on wage rate increases in the NSW public sector versus the private sector and other public sectors. Unfortunately, wage growth isn't the right measure - it is wage comparability. If NSW was lagging badly in 1997 but comparable now then they'd need to have been greater increases than the average.

The figures also miss some of the other intricacies. Public sector wage rates used to be lower but were balanced by better terms and conditions in leave, superannuation, employment tenure. These have all changed and so the salary needs to change to match it.

And there is the unfortunate fact that Sydney is a more expensive part of Australia to live in - not because of State Government induced inflation but because of capacity constraints.

Finally, the reason proposals to cut public servant numbers at the last NSW State election was NOT because of the public sector votes - as you note they were labor's already. It is because swinging voters know that cutting staff in labour intensive service delivery means less service.

Thursday, June 10, 2010

What the oil spill tells us about regulation

Regulation isn’t an obstacle to thriving free markets; it’s a vital part of them.

That's the conclusion of a small item in the New Yorker that talks about regulatory failure in the light of the oil spill. Picking up the other elements of insurance and finance, the article describes two kinds of regulatory failure. One is the traditional regulatory capture, the other is political appointments by an anti-regulation Government (the Bush strategy was to not repeal regulation just to appoint regulators who wouldn't do the job or defund the agency as outlined in The Wrecking Crew).

This results in the worst outcome;

Too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.

Tuesday, June 08, 2010

On rhetoric

There have been two interesting policy discussions in Australia recently in which "big business" and its fellow travellers like the IPA have ben pushing scare campaigns using elements of global trade or more particularly the sanctity of prpoerty rights as weapons.

The funniest has been the campaign by Tim Wilson from the IPA to campaign against the proposed move to "plain packaging" of cigarettes. The proposition is advanced on three fronts, an acquisition of property, a violation of a treaty on trade marks and a violation of world trade rules. A succinct rebuttal was provided in the same debate.

Wilson writing in Crikey today has tried to describe this as a reasonable dispute about legal opinion. But Wilson hasn't retracted claims of a potential $3B compensation payment for "acquisition of property" despite dropping it from today's rhetoric. That part of the claim has always been bogus and it is bogus on two counts. Firstly banning the use of property isn't acquisition. More importantly if the High Court finds a law does acquire property other than on just terms the law is ruled invalid. Only if there is a saving clause known as a "historic shipwrecks clause" that the Commonwealth will pay compensation if it is an acquisition of property is the law valid and compensation payable.

I don't want to get into the rest of it, but I'd argue there have been plenty other limitations on the use of trade marks, if not the exiting legislation.

The biggest bogey is the one the miners and their acolytes have found in the PSPT invoking the bogey of "sovereign risk". Two definitions of sovereign risk from financial media actually claim it is the risk of exchange rate movements. As the Australian dollar falls our exported minerals get cheaper on global markets (or the miners get more $A for their $US denominated contracts). Some would have you believe that currency move is related to the RSPT - if so it isn't a sovereign risk but a sovereign benefit.

More nuanced understanding of the concept is Risk to participant in a project that a government action will cause loss which could not have been
foreseen when project committed to, and with no adequate legal remedy available
. It is a component of country risk that includes all the risks relevant.

More importantly there are rating agencies that actually compute sovereign risk. If I'm trying to attract investors to a project I need a third party valuation of that sovereign risk. I'm waiting to see an actual rating agency come out with a relative movement of Australia on its sovereign risk league table rather than justy miners blathering on.

As a telco person though I'm reminded that the "sovereign risk" argument and the "acquisition of property" argument were both elements of the Sol Trujillo/Phil Burgess rhetoric at Telstra. The former was particularly advanced in relation to structural separation, and the latter in relation to access prices.

Both, like these more recent incarnations, are not really rhtoric - they are just "right wing piss and wind".

Monday, June 07, 2010

Teleommunications Policy

I was trying to decide whether to head this post "Telecommunications Policy" or "Communications Policy". The choice occurred because I am going to write about existing regulation and convergence. But I've decided on the former because I've decided that it is time we accepted that electronic broadcasting always has been a subset of telecommunications, it is just that it has been one to many rathr than one to one. However, "communications" includes a whole lot that has nothing to do with the "distance" (tele) component.

Telecommunications Policy in Australia since 1988 has been built around an objective of increasing competition in the provision of telecommunications services. The principle theory for this has been the supposed static efficiency benefit of confiscating monopoly rent. This is the well known propositon that a monopolist reduces capacity to below the "efficient" level thus boosting prices to capture "rent" and producing a "deadweight loss". As Steve Keen has reminded us in the context of the RSPT, the theory overstates the static benefit. I suspect (and will one day soon try to measure) that the supposed benefits of competition in telco have been completely illusory.

There is however a dynamic benefit in the innovation and choice presented as firms compete. The consequences of this benefit are far harder to measure, but the examples are readily easy to note. Until the Unbundled Local Loop was declared there had been little action on broadband services in Australia (and I do note that once it was declared Telstra was prohibitted from offering services till their competitors did). More significantly ADSL2+ services were offered by competitors before Telstra and 3G mobile services were also offered first by a non-Telstra player (3).

But the question to ask is how well competition actually works to achieve this objective and whether there are any other losses on the way. An example of a loss is that the nature of competiton in industries with high sunk costs is that firms can end up with either incentives to price at short run marginal cost or be able to because assets were revalued. That typically occurs if the industry suffers from excess capacity. The consequence of this will be an investment drought as no one recovers a return on their capital.

When we do get to the competitive space, we notice that in practical reality we are already operating effectively in a rate of return regulation regime, not a competition regime. Fixed telephony and broadband both depend for competition on access to the Telstra "distribution" network. The process for reaching prices was meant to be a negotiate/arbitrate model, but in practical reality it has devolved into the regulator setting a wholesale price to allow Telstra to recover its Weighted Average Cost of Capital (WACC). That is little more than a rate of return regulation model.

The marketplace has been distorted by the access prvider also competing downstream in retail services which throws up an additional set of regulatory issues, not least of which is the opportunity for price squeezes, discrimination on terms and conditions and misuse of information (see note below). The move under the NBN to a structurally separated access provider is designed to remove some of these impediments. But the change is not coming with a mindset to try to mimic markets in seting wholesale prices. Indeed the opposite seems to be the case. In announcing the new Principal Regulatory Affairs for NBNCo today the company seemed to reaffirm a view that the way they will go to market is via a Special Access Undertaking lodged ith the ACCC.

So despite fixing the structure there is going to be no attempt to use market mimicing mechanisms to set the prices and terms and conditions of access to the NBN.

Meanwhile the other side of the competition agenda is also broken. Telcos maintain they compete on service not just price, but you wouldn't recognise this from customers' perceptions. This is often described as the "failure of self-regulation". This is resulting in calls for more regulation of the industry. I argue in this paper that self-regulation hasn't failed because we haven't really tried it.

Meanwhile the Government is proposing a "convergence review" of aspects of the regulatory regime in 2011. I'm wondering whether that review will get beyond the rhetoric of competition and into the way the market actually works and the options for future market design.

Note 1. There have been two interesting recent pieces of litigation, one by Optus against Telstra over whether Telstra was misusing information obtained from Optus about its customers. The second is the ACCC against Telstra over what used to be called "lost keys to the exchange." I'm actually pretty leased with both for two reasons. The first are both cases that would never arise in the structurally separated model. The second is that they vindicate the views I expressed in he years from 2000-2005 that (a) Telstra was nopt misusing wholesale customer information - the practice had stopped well before then and (b) that the process of frustrating access to exchanges was staff being over-zealous and acting outside of instruction not an intentioonal management process of frustration.

Note 2. The kind of "market mimicing mechanism" I have in mind has been covered in some of the literature on Experimental Economics. I particular the kind of access bidding model I favour used to be used by a central programming group for public broadcasters in the US, and the process was successfully modelled in a "laboratory" setting.

Friday, June 04, 2010

Some nice imagery to describe a disaster.

I'm not usually a great fan of Guy Rundle but his piece today on Israel and Gaza provides some nice imagery to reflect the fundamental problems of Israel.

He gives a run down of the early Labor years and thenm the Likud years before turning to its current problems. First he says is the Beitinu party with a base of Eastern European Jews which;

has significant control of foreign policy, a manic need to assert a Jewish identity politics, and a shedload of ressentiment at the gross anti-Semitism they suffered in the southern former USSR nations -- a ressentiment they appear to be dealing with by applying it to Arabs inside and outside the 1967 borders.

As if "pay-back" racism wasn't enough it is added to by

a specific fundamentalism coming in with immigrants from the US -- people fleeing not pogroms in New Jersey, but the anomie of American life, and bringing a cloddish, historically fictional fundamentalist Judaism owing less to Orthodoxy and more to the style of US Christian fundamentalism.

Under this style, your faith does not suffer from being an absurd contradiction with your secular knowledge -- the more absurd, the more you feel an achievement of faith by believing it. Under that rule, you can even falsify the present to serve the higher truth of the past.

He concludes

Why would Israel act so crazily? That gets us to the final part of the riddle. Israel’s actions make sense only if much of it is in fact mere reflection and projection of an internal struggle – between the old Likud elite, now swamped by corruption and cynicism – and chauvinist and fundamentalist elements within, relentlessly focused on futile confrontation with the world.

He goes as far as to suggest that the botched IDF raid may have been an initiative of the IDF that the politicians had no alternative but to defend.

As Rundle says Israel is "dependency on steroids. Created by a UN partition fostered in a colonial mandate and designed as a continuation of it, its independence fight rendered successful by international recognition, it returns again and again to the western court of opinion to legitimate its acts – and then claims victimisation when it is judged by those standards."

What drew me to this most was the description of the Eastern Europeans - determined to pay out for the discrimination they have sufered by discriminating against Arabs, and the idea of fundamentalism as being self-reinforcing by just how illogical it is...the more illogical the belief the stronger your faith must be.

On Quadrant

There once was a time when reading Quadrant was a worthwhile exercise as it greatly exercised the mind to do battle with the best of conservative and libertarian thinkers. But then Paddy retired.

The June issue includes at the back the most horrendous two pages by Peter Ryan. The first part of it is a weird tirade about Anzac Day and the mini-culture war about its representation in history, but this follows a single paragraph in which he tries to resurrect claims from before the 2007 election that "Rudd is a Dud" and then tells us that "His [Rudd's] government already ranks way below Whitlam's". This is apparently because Rudd has used office "to display all the deficiencies I had noted". I must admit I have no interest in reading the earlier item, and mostly find these kind of articles to be just the same kind of irrational "Rudd haters" as were "Howard haters" - though this lot were previously Howard lovers.

Ryan then decides to tell us that Sarah Palin is clearly a great person because her father brought her up on the poems of Ogden Nash. He then goes on to (mis)quote from one called "The Four Bastards" and pleads with Quadant readers to provide him with the text.

It shouldn't srprise me that neither Ryan nor his editor tried the simple process of Googling "Ogden Nash "The Four Bastards"". They would have found this.

Or even the version supposedly recorded by Nick Cave and the Bad Seeds.

A little harder work would find that it was not a poem but a song.

Thursday, June 03, 2010

The question is...

The questio is what is the optimum ratio of Mentos to Coke...(thanks Crikey)

Henderson and Fraser

It is always disappointing when a letter to the paper isn't carried, but all the disappointments are worth it for the joy when it does happen (as happened last week with a letter on internet censorship).

But when the paper finds it has other more interesting or pressing letters I at least can resort to my blog. And so I come to comment on something from Tuesday, and take the opportunity to be more expansive.

Gerard Henderson wrote about Malcolm Fraser's decision to resign from the Liberal Party. In it he implies that Malcolm Fraser is trying to reposition himself as a lifetime small l “liberal”, a position he thinks is inconsistent with Fraser’s political career.

I would agree with Henderson that Fraser has never been the classical small l "liberal". After all his battles inside the Liberal Party included with people with some rights to that title like Don Chipp, John Gorton and Andrew Peacock.

The explanation for the apparent confusion is that Fraser has not said the Liberal Party no longer represents liberalism, as in the philosophical tradition of Mill and Bentham. What he has said is that the party does not represent the Liberalism that was the hallmark of the original Liberal Party led by Deakin and the recreation of it by Menzies.

This was a party that defined itself not by a philosophy of its own, but by its opposition to collectivism, as either socialism or communism. According to Margaret Simons piece in Crikey Fraser joined the Liberal cause on exactly that basis, as a reaction to collectivism. As such, it put great emphasis on the need to create Government that delivered both security and equity for all outside of the socialist realm.

Unfortunately, the victory of “liberal democracy” over all forms of collectivism in the late twentieth century left that side of politics confused as to the objective. The Liberal Party has adopted the “freedom and liberty” literature of the (later) Friedrick Hayek and Milton Friedman. It is interesting to note that the earlier Hayek (at the time of The Road to Serfdom was more avowedly merely anti-collectivism rather than the pro-freedom view in The Constitution of Liberty).

As a consequence the Liberal Party has become apologists for a distorted view of liberal democracy in which corporations are almost deified as the embodiment of “freedom” because they supposedly represent the choice of markets over the choice of voters. The modern Liberal Party looks far more like the United Australia Party in its dying days than the Liberal Party of Menzies. That, I think, is Fraser’s point.

Henderson also writes;

Fraser claims he is in the tradition of its founder Menzies, which he defines as liberal while the likes of Howard and Tony Abbott are not. To Fraser, Howard and Abbott are conservatives.

I personally struggle with the latter part of this. Howard was an interesting combination of a virulent anti-collectivist demonstrated by a passionate dislike of labour unions and a distrust of government that seems to have been forged by his youthful experience of petrol rationing. Howard was not a conservative, but nor was he a pure liberal. He was very much the neo-conservative or neo-liberal.

Abbott personally has more claims to being a conservative, he really does believe that inaction in all things is better than action.

Finally Henderson finds Fraser inconsistent for criticising Howard's asylum seeker policy as racist but having been a supporter of Menzies invocation of the "red menace". I suggest that Henderson is colour blind and is confusing the "red menace" with the "yellow hordes". It was the colour of their politics not their skin that motivated Menzies and Fraser.

I never was a great fan of Fraser's - I chanted "Shame Fraser, Shame" and "Export Fraser not uranium" with the best of them. I'm not even a latter day fan, because he hasn't particularly used his position of statesman to produce a coherent policy theme. But I do not think he is being disingenuous in his reasons for finding that he no longer has common cause with Liberals. The question is where voters like he should go - as there really is no party between Labor and Liberal, and the Greens are as pro-collectivist as Labor.

Israel and the flottila - UPDATED

I have paid very little attention to the Israeli action against those trying to breach its blockade of Gaza. I pay so little attention not because it is not tragic, but because I know that "value free" reporting on the issue is impossible and because the intransidence of the problem and my inability to identify a (simple) solution merely leaves me depressed.

However, I have engaged in some conversations. I asked someone to tell me if the Israelis stopped one boat or a flottila, I was assured it was one boat and that there were another two on the way to make up the flottila. I was told that the humaniraians were an Irish based organisation.

I therefore found the item by Andrew Bolt today interesting. According to this item there were six boats, on only one was there violence and this boat was sponsored by a Turkish organisation with links to Islamists.

The issue of whether the actions occurred in international or Israeli waters is really rather irrelvant as no-one is disputing the intent of the boats.

Underlying this protest and many other recent protests (especially the ones that flourish around globalisation) is an inherent theory that "peaceful protesters" are allowed to do things that disrupt but that law enforcement shouldn't use force because it is a "peaceful protest". These people need to better understand the concept of peacful demonstration as taught by Gandhi. Line up in your thousands, block access or whatever it is you want to do, and when the police try to remove you by force GO PEACEFULLY.

As for the deeper issues of the Middle East it really is time that we changed the cnversation, and the single most important part to change is the 19th century idea of "national self-determination". It was a meaningful concept as a reaction to Empires, but it is a totally meaningless concept when it is applied to any geographic land mass or ethnic group. The Isrealis have no claim to a "Jewish state" and the Palastinians have no claim to a "Palastinian state" ... there is one land mass and a diverse group of people occupying it. They need to find a common basis for a market state of consent.

It is particularly disappointing that the USA that is the country that elevated the idea of the secular state from its European antecedants into a constitutional provision cannot take a firmer view.

The video below is Israeli "propoganda" - but that doesn't make it false by definition.

Wednesday, June 02, 2010

From Stilgherrian at Crikey

From Stilgherrian at Crikey comes news of an open source project to create a privacy aware social networking site Diaspora.

Tuesday, June 01, 2010

Facebook again

The saga continues of the very sudden change in sentiment towards two iconic Web 2.0 companies. This time it is a very cogent criticism of Facebook.

The question really is whether the recent concerns expressed about these firms will have any impact on their businesses. Google would appear to be quite safe in their three major applications - search, maps and gmail.* But their more innovative ventures, like buzz and streetview, re-creating concerns about privacy and are creating concerns about their corporate attitude.

The concerns about Facebook are more general, but the sets of complaints made by Renai Le May in his article are not just about privacy, they are also about the relationship of the individual to the corporation. It is not really a sufficent defence for Facebook to say it is a commercial concern responding to customrs. The structure of social networking sites means the thig economists call a "network externality" has an incredible effect. As an individual user the attraction of Facebook is the number of other users who are there.

I suggested to a colleague the other day that maybe the market is ready for a new social networking site, just as Facebook replaced MySpace. The response was that users don't care enough about their privacy concerns.

Here is a challenge. Is there anyone out there who wants to bite the bullet and decide we should build a new social networking site, that we should design it to be "multi-domestic" (that is be responsive to all the national markets), to have a better approach to privacy and assistance with law enforcement. It would be an interesting anyti-trust action to try to force chat and networking "interconnection" with Facebook.

*Note: This blog is run in Blogger which is a gmail property. When I get time I'm going to learn Drupal and redo my website and host my own blog. I don't particularly need all the widgets now offered on Blogger and most that are of any use are easy to implement in Drupal.