Announcing 'The DigEcon Gazette'

I have started a new blog with the intention of placing my digital economy and ICT policy related commentary in a separate place, it is The DigEcon Gazette.

Joe Hockey and THAT budget

This morning's SMH reports that Joe Hockey has resorted to his three key themes in a speech selling his Budget at the Sydney Institute (which is of course the wrong audience, they would mostly already be convinced.)

The first is to call opposition to the budget "class warfare." The second is to say criticism of the budget is all political, or it is politics not economics.  The third is to say it is not the job of government to pursue equality if outcomes but equality of opportunities.  

In reverse order, how does one measure equality if opportunity except by measuring the equity of outcomes? Surely if there were genuine equality of opportunity there would be equality of outcome. The only deviation could be from differential effort or dumb luck in terms of natural endowment, inherited endowment or simply being in the right place at the right time. 

If equality of opportunity were genuinely achieved then there would be no differential effort as each person would equally be aware of the opportunity before them. The opposite is the equivalent of blaming the unemployed because they haven't found a job, rather than blaming society for there being no job to find.

The variability of endowment is not something within the individual's control. Gina Rhienhart was doubly lucky, first to be born of Lang Hancock and secondly that Hancock was the one who discovered the Pilbara ore.  Many prospectors gather on a goldfield, only some find big nuggets.

The distinction between politics and economics is a false one. To the extent that economics is positive - a description of what is - it is no guide to action. To the extent that economics is normative - it describes what ought to be done - it is better known by its original name, political economy.

And to stand up for ordinary Australians, the Australians who make their living by what they do rather than by what they own, is not class warfare. The Labor Party makes no apologies for this, we do not represent the interests of capital. That does not mean we are the enemies of capital. Just that the design of markets and the distribution of surplus value must treat those who work for a living fairly.

Surely it is not too much to ask that the Treasurer resort to selling the budget on its merits rather than on slogans.

Media Diversity

Unsurprisingly The Australian did not publish my letter to the editor below defending Malcolm Turnbull.

Your editorial ‘Malcolm’s excellent adventure’ (The Australian 6 June) contained the most extraordinary claims about the Minister for Communications, namely that he has been something other than a team player as Minister.

A fact used as evidence for the claim is the disloyalty to conservatives displayed in launching Morry Schwartz’s The Saturday Paper. This is the Minister who is proposing to weaken cross media ownership laws in a move widely perceived to favour the interests of News Corp.

The Minister on launching the paper sought to make the case that the current laws are not required to ensure diversity. This is the case he needs to make if reform is to occur.

The Australian has long made the case that it is entitled to be a conservative newspaper. So too are Schwartz’s stable of publications entitled to be ‘left-wing’. The Australian has feasted on a series of NBN stories largely provided by Mr Turnbull’s office

Mr Turnbull might add to his list. Why with friends like The Australian do the Liberals need enemies.


The simple fact is that Mr Turnbull at least recognises the importance of diversity in news coverage, a diversity that is important to the operation of democracy. This piece in On Line Opinion captures the essential elements of that argument. However its conclusion is wrong - the media doesn't need to be "impartial" (which is not the same as accurate or even objective) so long as it is sufficiently diverse in the range of partiality represented.


I have also previously commented that the actual influence of the Murdoch press is probably over-rated. The difficulty is that it is Mr Murdoch himself that wants us all to believe how influential he is.


So on this day as Mr Abbott has dined with the person I think the PM has called Australia's greatest businessman (who has chosen to live in what Mr Abbott calls the world's greatest country) let us hop that the conversation might have been two way. Let us hope that Mr Abbott explained that any change to cross media ownership laws has to be based on preservation of diversity rather than Mr Abbott just turned up to take orders.

Logical confusion in privatisation policy

'Asset recycling' is the current buzz phrase developed by the financial sector to convince politicians that they should part with some assets to raise money to build other assets. It all sounds terribly sensible, until you do some rudimentary analysis.

The first is about the nature of the assets. Selling an asset with a dividend stream (like electricity distribution) is totally different to building infrastructure that doesn't have a direct return to revenue (like the roads for Sydney's second airport). John Quiggin called it "melting down your tools to pay the rent."

Queensland to its credit is being a little trickier - it is using a quasi-equity instrument that Quiggin elsewhere discussed under the heading 'If it looks like a debt, walks like a debt and quacks like a debt...'
But it becomes even more bizarre when we hear about the visit of the PM to Canada. According to the AFR he has spruiked the value of investing in Australian infrastructure to Canadian pension plans. The story however includes some interesting facts.

Canadian entities have $27 billion invested in Australia, but Australian firms have $54 billion invested in Canada. We are told The Economist calls Canada's 10 pension funds the "maple revolutionaries" - but we then learn that the $1.1 trillion funds rates them sixth behind the US, Japan, the UK, Australia and the Netherlands. We also learn that the average Canadian allocation to infrastructure of 5% is second only to Australia.

The Canadians don't need much encouragement. The Canadian Pension Plan bought Broadcast Australia from Macquarie Bank.  Ontario Teachers bought 70% of NextGen which counted among its assets the telecommunications transmission built by the Regional Broadband Blackspot Program.

The first of these needs a bit more explaining - since a major part of Broadcast Australia is the old National Transmission Authority privatised by the Howard Government. Its assets are a series of broadcast towers and two big contracts with the ABC and SBS for transmission.

But it is these very contracts that are at the heart of one of the considered savings from the Lewis review. I'm not exactly sure what potential Canadian utility investors will think of that.

But can we just consider how idiotic it is that we are suggesting that Governments, especially State Governments with unfunded superannuation liabilities, are selling assets to other superannuation funds (some of which are for Government employees) for the purposes of converting future dividend streams to upfront cash?

The situation gets even more absurd with the NSW idea of 99 year leases.  These are a sop to the community so that it looks like the assets aren't being "sold." But the electricity grid only came into existence 110 years ago, and it puts off to the future the issue that for the last ten years or more the lessee has no incentive to invest in maintenance. 

If you want to convert a future income stream to an immediate cash injection that is easy. You do something akin to the Queensland structure, the important part being that the income is entirely guaranteed by the entity not the State. But you don't need to call it privatisation - and you don't need to spend the very unhealthy amounts of money with lawyers and bankers required for a sale - whether by trade sale or IPO.

While Mike Baird has made great play of the infrastructure he proposes to build, one quarter ($5 of $20 billion) is supposed to come from the interest earnings on the money raised by the sale.  As private investors can be assumed to be rational, this $5 billion in interest must be less than the dividends foregone.

The biggest issue though is the argument being spun by Baird that the privatisation will reduce electricity bills. This argument is based on research that one column said "was released to the Daily Telegraph." That is a tall claim - since the column was written by Brendon Lyon who is CEO of Infrastructure Partnerships Australia.  This looks to be Australia's institutionalised infrastructure construction cartel. The research "released" to Mr Lyon was actually commissioned by his organisation from Deloitte Access Economics.

I cannot find the full research. The IPA (known in policy circles as "the other IPA" to distinguish it from the Institute of Public Affairs) press release simply notes:

The modelling of NSW consumer price impacts from electricity reform was undertaken at arm’s length by Deloitte Access Economics for Infrastructure Partnerships Australia. This modelling forms part of a larger research programme that considers the structure and reform of the National Electricity Market. The modelling will be released in its entirety over the coming months.

The release is quite upfront that these savings occur over 15 years. The only possible basis for this is the idea that incentive regulation - that is capping a company's prices to rate of return regulation on a regulated asset base and letting it keep efficiency savings - works.  But that only works to the extent the firm makes bigger profits - not that prices are any different. Without the full report it is impossible to analyse this any further. And consistent with all such claims of what modelling "shows", if the model isn't available for interrogation the output is worthless.


All of this shows bureaucrats and politicians totally in thrall of an unproven superiority of private sector firms.

Meanwhile tonight I am going to hear Gavin Gatenby of Ecotransit Sydney. Gavin has a great video on the 'Great Rail Rip-off' that highlights the extraordinary cost of infrastructure construction in Sydney. He has another that highlights that the "rapid transit" model chosen for Rouse Hill to Chatswood is inappropriate for that section - let alone an extension through the city. It is not so much about the trains as it is about the tunnels!

And these videos pose the final question - why do we need to privatise electricity assets to build a privatised metro that creates a new harbour crossing that can't be used by the rest of the network?

The campaign needs to also go to the Northern Beaches. As we plan for a new Harbour Crossing we should also make the future plans for an underground rail line at least as far North as Mona Vale.

Preventitive Health - Nanny State or Growth Strategy

The Australian breathlessly (pun intended) reported last Friday that tobacco plain-packaging laws had failed as cigarette consumption had actually increased.  The article relied on one market research study and anecdotal evidence.


Stephen Koukoulas on his blog pointed out that the core of the story was simply wrong...and to do so he relied upon the ABS National Accounts figures for sale of tobacco products. And quite frankly I'll take the ABS over InfoView.


Now there is the possibility that both are right - because another part of the claim is that additional excise on tobacco has simply moved people to cheaper brands - and so there could be an increase in volume together with a decline in dollar value sales.


But that argument has nothing at all to do with plain packaging!


The Kouk makes the equally valid point that if the plain packaging law was INCREASING tobacco sales rather than decreasing them, the tobacco industry would be wanting to retain them rather than eliminate them.  Yet this isn't the industry's behaviour.


But what is far more worrying is the follow-up story in The Australian on Saturday. Here Coalition backbenchers are reported to favour repealing this "Nanny State" law.  And this is where the poor thinking becomes important.


The question that they need to understand is why does any Government care about how many people smoke? And the short answer is because smoking costs the economy a lot. It costs the economy in two ways. The first is the cost of avoidable health care. And if you don't know the long drawn out respiratory conditions require a lot of hospitalisation and treatment. The second is in shortened life expectancy. The two biggest economic inputs are labour and capital; and despite the rhetoric of the "labour market" not all units of labour are the same. In particular people in later years have developed many useful skills, reflected in the higher incomes of older workers. Reduced effective working life from smoking is a major negative on economic output.


Alex Hawke is quoted as saying "I think our policy should be evidence-based and where governments get the best bang for their buck; that is on individual responsibility rather than big government."  The fact is that the plain packaging is exactly the kind of thing he should support.  It is a very low cost to Government (once introduced virtually free) and it is Government rather than the individual that gets most of the benefit. Admittedly there was a high implementation cost for industry and especially retailers. But that one off cost has occurred and is now sunk.


The second view comes from George Christensen who says "If we honestly believe that smoking is that evil, we should have the guts to ban it. If we don't feel that strongly about it, get out of people's lives." The two of them should really talk, because a ban is exactly the wrong policy because it has far higher implementation costs for Government. Bans are effective only to the extent they are enforced -as every prohibition movement - alcohol in early 20th century America and the war on drugs - proves.  And, of course, a ban really is the "Nanny State" intervention


So, in summary, discouraging smoking is good for the economy. Restrictions o the promotion of smoking - including advertising restrictions and plain packaging - are a low cost government intervention to support the economy. That's the sort of thing I thought the Coalition parties believed in.


PS It is worth noting at this point that the Abbott Government had a host of retreats on preventative health initiatives in the budget, notably abolishing the National preventative health advisory body and tearing up the preventative health agreement with the states.

Geo-blocking and all that

A very short blog post about a very simple article on geo-blocking.


The article makes the case for differential pricing in geographic markets by overall willingness to pay (which is facilitated by geo-blocking in software and content sales) on the simple argument that as a consequence the total volume of sales is higher hence reducing the average price over all.


The case is reasonable - and is similar to why it makes sense to have differential speed tiers on the NBN.


Assume I have an upfront cost of $100 I need to recover and $1 per unit marginal cost, and two geographies - one very populace but poorer and another smaller and wealthier.  If I can sell 50 copies in one country for $2 and 10 copies in another for $6 I will be able to recover costs. If I have to charge the one higher price I may be able to sell none in the larger market and need to charge $21 for the 5 customers I can convince to pay that price.


We can see how this actually worked in software by disaggregating markets by users. The release of Office for Home and Student use at a lower price point was far more effective than the earlier strategy of creating Microsoft Works.


That said, the theory is good and does a little to explain the Australian case - because despite what the Coalition Government would tell you this is one of the wealthiest places on earth.