The case for plain packaging of tobacco
2The Australian Government has proposed to legislate to ensure tobacco in Australia must be sold in plain packages, rather than the branded packages in use at the moment. This is designed to reduce consumption of tobacco, and thereby reducing the cost to society from smoking. As I have shown below, currently smokers are not paying anywhere near the costs of tobacco use in Australia, action designed to reduce consumption is sensible public policy, which is probably why the majority of Australians support this action.
On equality of opportunity
2No doubt I’m not qualified to enter this debate. All of the people I quote are more experienced in this than I am, and I’d highly recommend you subscribe to their blogs rather than mine. You’ll learn more, for starters, and they update more often than I do. But the debate on equality of opportunity is an important one, and it is – like many debates – too important to be left solely to the professionals. This is, I think, going to be in several parts (I do run into problems with brevity).
Recently, Andrew Leigh (ALP Member for Fraser) wrote a book called Disconnected, arguing among other things that the social fabric of society is fraying. Christopher Joye critiqued the concern for income inequality: (more…)
The last lament of a dying retailer
21 year ago
I wanted to consider the issue of GST on online sales, as raised by Gerry Harvey recently. I think he’s wrong – at least at the moment. He’s engaging in rentseeking – or at least, trying to. It’s worth looking at what’s happening, and why. Harvey claims that parity of the Australina dollar with the US dollar hurts retailers in Australia, and that there is not a level playing field, as GST does not apply to sales with a value of less than $1,000. It’s worth noting that online retail sales are a relatively small part of total retail sales – about 3%, according to Assistant Treasurer Bill Shorten, and of those, 20-50% are from overseas.
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The problems with a zero-growth economy, part 1
01 year ago
by Alister
in Macroeconomics
This post has been prompted by a few things. Most recently, Left Flank (in my view, in an exercise in question-begging), posted a critique of a zero-growth economic system as Greens policy (it isn’t). But it’s true to say that there’s sympathy for the idea within the Greens, including at the top.
While I hesitate to enter into a debate with people like Richard Denniss and Tim Jackson – who know much more about this than I do – I feel there are basic things that are missing from critiques of economic growth. In itself, I don’t see economic growth as a problem, and so I thought I’d note why. This is going to be complicated, so I’ll do it in parts.
The first thing to do is define your terms, and then to defend the definitions. I’ll go with a conventional definition of economic growth, which is growth in Gross Domestic Product (GDP) over time.
In defence of Gross Domestic Product
This leads to an obvious problem. GDP is often criticised as a bad measure. I’m going to argue not that it’s perfect, but that it’ll do. Near enough can occasionally be good enough.
First, an overview. GDP (Y) is simply consumption (C) plus investment (I) plus net government expenditure (spending minus taxes – G) plus exports (X) minus imports (M). So, Y = C + I + G + X – M. GDP approximates total economic activity. It’s a measure of income as well (because income can only be consumed or saved, and C + I captures spending and saving). The conventional critiques are not without merit, but are misguided when considering economic growth. Here’s why:
| GDP doesn’t measure wealth. | True, but irrelevant. Wealth isn’t income – wealth is a stock, income is a flow. Wealth does not contribute to income directly – while interest can be earned on deposits, that interest is picked up in GDP. |
| GDP doesn’t measure inequality. | True, but irrelevant. Economic growth knows nothing of inequality. There are other arguments that note the problems inequality causes within a society, but that’s not a critique of GDP as a measure. GDP alone isn’t going to tell you everything you’d like to know about a society – no single measure will. |
| GDP doesn’t measure the underground economy. | True, but unimportant. Nothing else does reliably either. If you could measure it, it’d no longer be underground. If a reliable measure of trade in illegal goods (assorted illicit drugs, for example) could be measured, it could be added to GDP if necessary, but if the value of the marijuana trade in Australia in 1998 (with marijuana being quite expensive at the time) was $3.2 billion, this represents less than 1% of GDP (and its contribution is largely picked up within elements that comprise GDP in any case). |
| GDP doesn’t measure non-monetary transactions. | True, but unimportant. Transactions by barter are few in Australia (and in most industrialised economies). The value of such can be disregarded. There are few subsistence farmers in Australia – folks who grow and eat their own food entirely are few and far between. |
| GDP doesn’t care what’s being produced. | True, but unimportant. Production of weapons, or repair of environmental damage all contribute to GDP, while a carbon tax reduces it. But GDP isn’t a measure of desirability of production. It’s just a measure of the production itself. This production adds to economic activity, and to income. |
| GDP ignores externalities. | Only the ones that aren’t taxed. Tax them, and they’re brought into the fold. And all externalities should be taxed, as an externality represents appropriation of a publicly-owned good for private gain. |
| GDP doesn’t measure whether growth is sustainable. | True, but besides the point if the argument is that growth itself is unsustainable. |
| GDP doesn’t measure unpaid labour. | True, but unimportant. The argument about growth is that it increases consumption of irreplaceable resources. Labour (whether paid or unpaid) is replaceable. One could quite easily cost unpaid labour and add it to measures of GDP if it came to that. |
So, for arguments about growth, GDP serves well enough as a measure. Generally, given the correlation of GDP with many measures of interest, it’s a handy proxy measure for comparisons between countries. It fails as a measure within countries, but then again, that’s not what it was designed for.
Next up, I’ll talk about the nature of economic growth – what causes it, the reason why zero growth is improbable, and the reason why it’s undesirable.
Letter in The Age
0I got my first letter published in The Age today:
Garrett revisited
CATH Bowtell – Labor’s new candidate for the federal seat of Melbourne – may well believe in same-sex marriage, workers’ rights, a fair go for refugees and everything else (The Age, 6/7). But her party does not. Any organisation that can turn Peter Garrett from staunch advocate for the environment and social justice into a faint echo of his former life should have no problems eliminating Ms Bowtell’s beliefs in less than a single term. Progressive Melbourne voters know that our Labor MPs do not stand up for us. This will not change with a new face.
Price discrimination and the Apple iPad
01 year ago
Price discrimination is a way of charging some people more money than others for more-or-less the same good. For some goods or services, some people are willing to pay more than others. Charging everyone a high price means that you’ll lose sales. Charging everyone a lower price means you’ll miss out on some of the income that would be generated by people who are willing to pay more. Typically, a firm will determine a price that it thinks will be high enough to catch those who are prepared to pay a high price, but not so high as to dissuade too many of those who aren’t. The alternative is to vary the price based on willingness to pay. This is price discrimination, and today I’m going to use the Apple iPad as an example.
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Comment in Crikey
0I had a comment posted in yesterday’s Crikey. It’s not necessarily all that illuminating, although it’s probably as informative as the piece I’m responding to. Some members of the IPA are at least both interesting and informative, even if I disagree with pretty much everything that they write. Others are perhaps of less value.
Preferences and utility
01 year ago
by Alister
in Running notes
Two new pages in the Consumer Theory section of the Microeconomics page – Preferences and Utility. Coming up – more on utility, types of goods, and income and substitution effects. Ever so slowly I’ll populate this site, so I don’t forget what I’m (supposed to be) learning…
What is Myki, really?
02 years ago
So, a lot has been made about Myki. 
Myki is a notionally contactless card designed to replace the existing Metcard magnetic stripe ticket used for public transport in Melbourne. Most people consider Myki in this way – as a public transport card. They’re right, but not completely right. Myki is something else too. It’s a worse than zero interest loan by public transport users to the Victorian State Government. Let’s see how.
Fixed price purchasing
Firstly, consider a Metcard. Let’s think about a zone 1, ten trip, two hour ticket. In 2008, such a Metcard would cost $28.00. In 2009, the price increased to $29.40. This represented a 1.05% price increase – lower than CPI. But Metcard tickets, once bought, entitle the buyer to their trip – in this case, ten zone 1 trips. The value of your purchase is not diminished over time. A Metcard does not store value – it stores journeys paid for in advance, with a set charge at the time of payment.
Diminishing value to the traveller
A Metcard holds its value fixed. Myki does not. Going by current prices, let’s consider a balance of $100 on a Myki in December 2008, as opposed to $100 worth of ten trip Metcards. Myki is bright enough to give the same discount for buying ten trips at a time. This gets you 35.7 trips on a Metcard or on a Myki. In January 2009, the price increases. Your Metcard still gets you or 35.7 trips. Your Myki now only gives you 34 trips. This represents a 1.05% decline in value for the traveller in the space of a month. This will be endemic, even if smaller price increases are introduced more frequently, the number of trips a given value of money allows diminishes over time with Myki in a way that it does not with a Metcard.
Buy in bulk and save
What’s been done correctly is that the price for a two hour zone 1 trip with a Myki is $2.94 – the same cost as a ten trip Metcard. On the assumption that prices standardise on the bulk purchase rate, this leaves a consumer who buys in bulk no worse off with Metcard or Myki. While Myki has a fixed cost of $10 to buy, this cost can be split over the cost of every trip made throughout the life of that card. If you lose cards frequently, you’ll pay for it, but if you don’t, the cost per trip of the purchase of your card rapidly approaches zero. And travellers who frequently buy their tickets on the tram or bus, or who don’t usually buy in bulk will benefit from Myki’s charging regime[1].
An interest free loan
Using Myki, you don’t buy trips, but rather you store value. You could think of it like a savings account that pays no interest, and the money in it can only be used for one thing. It’s a store credit, if you will. The key difference here is that when public transport costs increase, the value in your Myki in no way will reflect this, whereas the value of a Metcard does. A 3% rise in fares coupled with a 3% increase in the cost of living is cancelled out with a Metcard (roughly – see the forthcoming page on indifference curves and CPI). A 3% rise in fares with Myki represents decrease in the value of stored money (as seen above). But that stored money also represents an opportunity cost for the Myki account holder and a bonus for the State Government[2]. Let’s consider 500,000 Myki holders (roughly an eighth of Melbourne’s population in 2010), each with a balance of $20. This gives $1,000,0000 in credit. Invested at 5%/annum, this returns $50,000 in profit. So at the same time as the value stored in your Myki (as measured in trips) is declining, your money able to be used to get investment returns for someone else. You’re caught coming and going[3].
Returning the value
The two flaws above are by design. They’re part of the point of the system. They tilt the field slightly against public transport travellers and in favour of the State Government. Over the lifetime of Myki, this tilt may represent a reasonably significant amount of money. Designing the system to accommodate this would be simple.
One way – which would not work – would be to not increase fares again. This gets around the first problem, but not the second. And it creates a new one. Fare income is (I hope) put back into the system. The real cost of no fee increases in an inflationary environment would, over time, approach zero. A zero fare public transport system will still cost the state money, and would represent a transfer of wealth from areas without public transport to areas with it. I’ve a feeling that areas without public transport are already generally less well off than areas with it, so a close to zero fare approach is probably regressive.
A way to ameliorate both problems above can be implemented with two steps. Keep fare increases (only at a reasonable level), but increase the value stored on a Myki at the same time, to the same proportion as an increase. If fares increase by a flat 2% across the board, increase my $20 balance by 2% (to $20.40). Any money I put in after that increase in balance would not be subject to that increase[4]. This allows me to still make the same number of trips before and after a fare increase, but also helps fare income has the same real value from year to year[5]. In addition, balances should also be increased by the rate of return the State Government gets on the money invested[6]. If the Myki Fund is returning 5% on the amount invested, balances could be increased by this amount annually (as with footnote 4, probably 5% of the average balance in a year).
Wrapping it up
I’m aiming to write short pieces on things that are happening to consider how basic economic concepts can be applied to real life in a way that helps to understand those concepts. I’m not proposing public policy here – I’d be amazed if any government would do anything other than offset the profits from the two problems identified above against the losses from single trip tickets, not to mention the $1.35 billion (at least) that Myki has cost. But hopefully this has you considering money and value, how they can change over time, and the effects of leaving money stored in a card that doesn’t increase with value over time, rather than leaving money in your bank account (or better, paying off any debts you may have).
FOOTNOTES
1. It’s likely that this will have a significant impact on ticket income, but there was never going to be any other way to implement it. Given a single two hour zone 1 ticket is $3.70, imagine the outcry if each Myki trip cost you $0.76 more than the equivalent bulk Metcard rate?↑
2. I can’t find who owns the money stored in travellers’ Myki accounts. I’m assuming the State Government does, but the argument holds irrespective of who keeps your money. If it’s shared between the private consortia who are managing the public transport system, it represents a bonus for them.↑
3. Clearly, $50,000 is not a lot of money. My point is not to suggest that there’s some grand plan to rake in loads of cash at the expense of travellers. My point is to help you think about money and value over time.↑
4. And we introduce a new problem – if I then put in $100 on December 31, I get an increase in value of $2. A better version would be to increase the value by the mean value stored on the card throughout the year, but my simpler example above serves as a theoretical explanation. Software makes such tasks trivial.↑
5. In a period of sustained deflation, it would be impractical to reduce balances if fares were reduced. But no government would actually reduce fares, so there’s no substantial problem here.↑
6. Again, a theoretical example – it would cost much more than $50,000 to return $50,000 to 500,000 Myki users. I am not actually suggesting that this should be implemented (whereas the balance increase at the same time as a fare increase one probably should be).↑
The payroll tax/job creation myth abounds
2Adam Schwab in Crikey yesterday had a go at Bernard Keane. It’s here – possibly paywalled. My response may be a little too long for Crikey, so I’ve also posted it here, below the fold.
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