Scarcity: A book review

I just finished reading a book called Scarcity, by two US academics – a Harvard economist and a Princeton psychologist. It’s an economics book, sort of. But mostly it’s completely innovative.

It contains a theory of a new kind. One I had never thought of, but which I have found very useful.

The theory is that scarcity – no matter what its source – affects your brain. People affected by scarcity have their mental capacities focused on the problem at hand. And that diminishes their ability to deal with everything else.

The authors use four main categories of scarcity in the book.

  • material poverty:  a scarcity of money;
  • being too busy: having a scarcity of time;
  • being on a diet: facing a scarcity of permitted calories;
  • being lonely: having a scarcity of social connections.

For each category they find similar effects on mental capacities.

The person facing scarcity focuses on their own immediate problem, which gains them a limited upside in that sphere – perhaps they scrounge and borrow enough to pay this weeks rent, or remain disciplined enough to not eat dessert tonight. But the focus means other things are ignored to their detriment. They may not be focused at work, for example.

Anyone who has tried to play a computer game and hold a conversation at the same time knows performance and distraction are not compatible.

The theory that scarcity is distracting is well-backed by research. For example, simply reminding people of their financial constraints can lead to a drop in IQ of over 10 points in one famous study.

It is an appealling theory in part because it knits well with a socially progressive view of the world.

The poor, data shows, are worse at sending their kids to school, at taking medicines, at getting their forms filled in at Centrelink, at quitting smoking, eating well, etc. This is a puzzle that would appear to lend credence to a conservative viewpoint that says the poor are lazy.

This theory as expounded in the book helps explains these phenomena by reference to the circumstances of poverty, rather than by blaming the individual.

The authors created a study in which Princeton students had to play Family Feud. They were allocated to either a “rich” group with plenty of time to answer the questions, or  a “poor” group with little time to do so. The poor focused hard. They made more correct guesses per second. But the rich outperformed them overall. Then the authors offered the groups the opportunity to “borrow” time from future rounds for use in the current round. The “poor” group’s performance overall tumbled as they borrowed more and more. The scarcity mindset itself led to poor decision-making.

The book not only describes the problem of scarcity. It suggests interventions that could prove helpful.

The effect of scarcity is described in the book as a “bandwidth tax”. Which is to say that focusing on a single problem of scarcity inhibits the amount of mental bandwidth we have to deal with other scenarios.

Recognising that the “bandwidth” of the poor is especially thin permits better-designed social programs. Rather than intensive financial education programs, a few behavioural nudges will be more effective, for example. And where education is necessary, courses that are cumulative and that fail to accommodate students who miss a class will be far less effective than modules learners can take at their own pace.

They suggest  boom and bust scenarios, such as those issuing from monthly welfare payments or variable pay cheques, can create bigger bandwidth problems as people struggle to manage cashflow. The implication is that stable, frequent, predictable payments are better for bandwidth.

Homelessness – an extreme version of scarcity – is another good example. With nowhere to sleep, wash, prepare food, relax, read or store possessions, it is no wonder the homeless are rarely focused on their health, education or financial futures. Fixing the lack of accommodation in one fell swoop may be more effective than complex incentive structures (and evidence shows that is the case).

The book is excellent at describing scarcity traps, where we get behind – in payments or on a schedule – and constantly borrow from the future, all the while sinking deeper and deeper into the morass.

For those of us not stuck in grinding poverty, the book has some great examples of how to avoid being stuck in a scarcity trap. It is eloquent on the need for “slack” in order for systems to function. Much like when the fridge is literally full to bursting you can access nothing in there easily and things tend to fall out onto the floor, any system that has no slack is inefficient.

A great example comes from a hospital which was able to manage its surgery schedule far better by leaving one operating theatre empty for emergencies. The authors are also advocates of agreeing to fewer commitments than you can manage, and of leaving spare space in your diary so meetings can be moved around without creating disastrous cascades.

The seed of the book, in fact, comes when Professor Mullainathan, writing a book chapter about low-income Americans, sees a great deal of his own time management habits in the budgeting of Americans with payday loans and food stamps. The commonality of the scarcity mindset – which makes a top economist likely to snap at his kids because he’s stressed and busy – is reinforced throughout the book, all the while acknowledging poverty is a more severe, more binding problem than being over-committed at work.

The suggestion scarcity can be better managed with explicit provision for slack could have pay-offs in any number of realms – not least at a national level.

What is our national budget if not a circumstance where every last dollar is committed and deficits keep cropping up most unexpectedly? Is our Treasurer stuck in a scarcity mindset? Is his ability to think clearly about the big picture damaged by his burning desire to fix the budget in this time period? Is the Treasurer more like a 28 year old single mum trying desperately to pay the rent this week, or a 28 year old bond trader with a million dollar portfolio trying to optimise returns across their lifetime? I fear it is the former.

This book got me thinking thoughts like that. And that’s reason enough to recommend it whole-heartedly.

Five notoriously brilliant business models Netflix cobbled together into an undefeatable vortex of binge watching.

This story originally appeared over at The New Daily, where I’ve been writing a consumer-focused story each week.

Netflix – the subscription TV service that launched in Australia this year – is a juggernaut. It drags people in and captures them. And they love it.

Binge-watching TV shows is not just a national pastime. It’s global. The stock-price of Netflix shows the incredible extent of the company’s success. Screen Shot 2015-07-16 at 8.51.18 pmIf you’d put $1000 into Netflix in 2003, you’d have $115,000 now. In just one day last week its stock rose 18 per cent as the company revealed more new users than expected.

How did they do it? What’s the secret to turning the globe into zombies who spend all their spare time consuming your product?

The answer is shamelessly appropriating good ideas.

Netflix has swiped the world’s sharpest and most effective business models – some well-known, some well-hidden – and combined them into one unstoppable force.

Netflix owes a debt to big oil, all you can eat buffets, airlines, Microsoft and casinos.

Screen Shot 2015-07-27 at 1.52.37 pmThe Oil Industry perfected the concept of owning the whole supply chain.

Think about Shell. It owns everything it needs to do business – from exploration activities that discover where the oil is, to drilling machinery, to the service station where you fill up your car.

When Netflix decided it was going to spend $100 million to hire Kevin Spacey and make House of Cards, it was thinking like an oil company.

Owning the whole supply chain is known as vertical integration and it gives a company power. Oil companies do it to control price, quality and quantity.

Don’t just own the distribution mechanism, because that makes you vulnerable. Own what you’re selling too. Netflix’s most famous house-made products are House of Cards and Orange is the New Black, both of which have proven to be black gold. It has dozens more.

The risk for Netflix is a hit show gets made and someone else wants it. For example, Amazon.com got exclusive rights to Downton Abbey by paying up big. The makers of a hit show can charge a fortune for the rights. By making its own shows, Netflix can’t be held to ransom.

Instead, when it owns content we’re dying to watch, it holds us to ransom. When you call the shots you can raise the prices, which Netflix this week announced it would do.

Screen Shot 2015-07-27 at 1.56.56 pmAll-you-can eat buffets perfected the idea of eliminating transaction costs.

In a normal restaurant, you pay only for what you eat. But you do pay for everything. Market economics at its purest.

We weigh up the value of every choice, and get a bill that lists each item. That mental and administrative effort are part of what economists call transaction costs.

Buffets, though, are like an anti-market. Once you’ve paid, it’s a wonderland where the rules of economics don’t apply. Want more lasagne? Go for it!

Humans love buffets. It’s no surprise Netflix acts like a buffet. Who wants to pay every time they click on something? Who wants to weigh up the value of letting the kids watch yet another episode of the Wiggles?

Of course, real world buffets have a problem – if lots of hungry people or lots of fat people show up, they can go broke. To manage this they cut quality and try to entice people into eating bread and potatoes. It’s a fine balancing act.

Netflix, has no such problems. It generally costs them no more whether you watch Seinfeld repeats once or a thousand times. That’s why they are happy to let you binge for hours.

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Microsoft perfected the art of bundling.

Microsoft doesn’t care that you never want to make a slide-show. When you buy Microsoft Office, you get PowerPoint whether you like it or not.

This is bundling. You get some stuff you want, bundled in with some stuff you don’t want. Companies do it because it let them make more profit.

The ideaa is simple: imagine I would pay a maximum of $10 for product A and $6 for product B. Your preferences are the other way round.

If the company tries to charge $10 for product A and $1 for product B we each buy just one thing. The company makes $20.

If the company wants to sell two of product A and two of Product B, it must set the price for each at $6. It can makes $24. Better, but not the best.

If it bundles the products into A+B packages costing $16 each, it can sell all four items and make $32! This is their best option.

When you buy Netflix you get a lot of stuff you’ll never watch. Maybe horror films, or BBC murder mysteries. That’s the Microsoft PowerPoint part of the bundle. IMAG3814Airlines perfected the art of price discrimination.

When you go to the Netflix website, you face a decision. Pay $8.99, $11.99 or $14.99.

No matter how much you pay, you get access to all the same shows. The difference is in whether the content is delivered in high definition, regular definition, or ultra high definition, and how many screens the content can be viewed on.

This is what experts call price discrimination. Airlines do it best.

Whether they sell you an economy ticket for $700, a business class seat for $2000 or a first class experience for $5000, you all take off and land at the same time.

Charging people different amounts for the same basic thing works well because of a concept called “willingness to pay”. Not everyone will pay the same amount for the same good.

If a business sets just one price, it misses out on profit. There are some people that would pay more than that. Even more important, there are people who would be profitable customers if the price was just a bit lower. Different prices for different folks is a proven model.

Netflix wants to skim their first-class passengers for as much as possible, but also fill up the back-end of the plane. The great thing for them is their plane has an unlimited number of seats.

Expect even more pricing levels to arrive in future.

Screen Shot 2015-07-27 at 1.53.43 pmCasinos perfected the art of keeping us hooked

The flashing lights on a poker machine are scientifically designed to provoke the reward centres in our brain. Like rats in a cage we get addicted on the dizzying sequence of highs and lows, pay-offs and disappointments.

Just one more spin, says the poker machine addict.

Just one more episode, says the Netflix addict.

Scientist have shown a good film or a good show controls our brain. A director makes a character act in a certain way and cuts the scene. The brains of viewers all release neuro-transmitters on cue. (The same is not true of a bad film.)

With free-to-air TV there was nothing we could do except wait a week to watch the next episode. But with Netflix the next episode is right there, ready and waiting to deliver more brain stimulation.

Its hard to believe Netflix has only been in Australia for a few months. Its devotees are already wild-eyed with fervour and Google Trends data shows it blowing rivals Stan and Presto out of the water.

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Netflix has nearly doubled its subscriber base outside America from 12.9 million to 21.6 million, in just the last 12 months. And it plans to launch in Japan very soon.

The executive at Blockbuster that passed up the option to buy Netflix for $50 million over a decade ago is probably feeling very sheepish.

Is this Budget pushing 50,000 people out of work?

Australia’s economy seemed to be repairing itself, right?

Unemployment was finally falling.

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Job ads were rising.

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Growth was out of the doldrums.Image

Corporate profits were rising and the stockmarket too.

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So how come the Budget forecasts the unemployment rate to worsen?

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The documents released by Joe Hockey last night forecast unemployment rising from 5.8 per cent up to 6.25 per cent by 2014-15. That would represent around 50,000 people out of work.

It makes this forecast despite expecting a fall in labour force participation and a rise in growth in our “major trading partners,” from 4.6 per cent to 4.75 per cent.

There’s been plenty of good news recently. I thought unemployment forecasts might go the other way. In fact unemployment forecasts haven’t improved since MYEFO, despite this:

“Since MYEFO, the near-term outlook for the household sector has improved. Leading indicators of dwelling investment are consistent with rising activity, while household consumption and retail trade outcomes have improved recently, consistent with gains in household wealth.” 

No change since MYEFO? That surprised me. Unemployment forecasts often change between a MYEFO and a Budget. For example, 18 months ago, that MYEFO tipped unemployment of 5.5 per cent in 2013-14. Twelve months ago – at the following Budget – the world looked worse and the forecast was 5.75 per cent. 

This time, all the good news since MYEFO seems to be nullified by the government’s surplus rush.

The qualification in this sentence is perhaps important:

“The timing and composition of the new policy decisions mean that the faster pace of consolidation in this Budget does not have a material impact on economic growth over the forecast period, relative to the 2013-14 Mid-Year Economic and Fiscal Outlook (MYEFO).”

You could read that like this: ‘All the good news on the economy in the last six months is about to be wiped out by austerity.’

The Budget talks a lot about lower investment in the resources sector. It notes in passing that non-mining businesses are waiting to see what happens. It doesn’t note that a slashing budget might frighten them out of investing. (There are exceptions of course: a business selling new work outfits to School chaplains would be wise to get a new warehouse, ASAP.)

ImageThe Budget’s unemployment forecasts are higher than the consensus economics forecast (see chart at right). Perhaps because they wouldn’t cut so hard at the moment the economic recovery is gaining momentum.

All spending helps short-run growth, whether that’s government or private. That’s Keynesianism for you in a nutshell.

The government is apparently allergic to Keynesian concepts of economics. They rail against the spending that flowed during the global financial crisis: cheques for $900, funding for insulation, school halls. All they see is the years of deficits. They can’t see a counter factual where Australia’s economy hit the skids.

But this allergy is now apparently inflaming the ranks of unemployed.

This budget is austere:

“The headline annual pace of consolidation is 0.7 per cent of GDP over the forward estimates. Abstracting from the one‑off nature of the Reserve Bank of Australia transaction, the pace of consolidation is 0.6 per cent of GDP.”

If you’re thinking, “I’m okay because I have a job,” consider this:

“Subdued wage growth is expected to continue until the spare capacity in the labour market is absorbed. The wage price index is forecast to grow by a still subdued 3 per cent through the year to the June quarters of both 2015 and 2016.”

Also know that your taxes will pay more unemployment benefits. Despite cuts to access to the dole, total spending on it is forecast to rise because of the change in the unemployment rate.

Essentially the budget is pushing more people into a position where they need the dole, but then compensating by – for some – whisking it out of their grasp.

Economics of Graffiti

Sometimes I ask myself if market forces are broken. All over my suburb I get art, totally for free.

An army of workers accept nil pay, terrible hours, and poor conditions to head out and paint each night.

Right near Clifton Hill StationNot only do they work without pay, but they are forced to buy their own materials and if they get busted, the justice system is not kind.

I guess the economists whose models rely on rational actors maximising their consumption never woke up to find this on their back fence:

taggedWhat motivates these characters? Is it the cash??

Once upon a time, the notion would have been ridiculous. Graffiti was a way to raise your status among people who never had the chance to finish school or get the Benz. There was no money in it.

Is graffiti different today?

Two storeys tall. That's a lot of paint.

Piece by Putos.

The answer is both yes and no.

The graffiti economy works for guys like Cope2, who grew up in the Bronx and illegally painted subway trains for 20 years before cashing in. He sells pieces for around €3000. Banksy is the other case in point – probably the most notable street art millionaire.

Sheaprd Fairey (the HOPE guy) has also cashed in big time with his OBEY clothing line. Even Justin Bieber is dabbling in “street art.”

Then there’s things like this:

Royal Doulton puts these posters up in dodgy laneways near my house.
Posh dinnerware company asks: has street art jumped the shark?

How has graffiti gone from definitely underground to potentially lucrative? The difference is in the web.

Some graffiti really caught my eye when I was growing up but it was difficult to take interest in what was going on and turn it into understanding or appreciation.

Then the internet came along. I contend that it has done for graffiti what radio did for music. Made some superstars.

The first Melbourne artist I really googled is Rone, who paints pretty girls all over the place and is kind of a gateway drug for graffiti appreciation

Rone and wonderfresh street art - Won't Stop
Rone and Wonderfresh mural, Wellington St, Collingwood

Rone’s instagram reveals that he has recently been in Miami for Art Basel, after a stint in London painting in Shoreditch and being hosted by a gallery to paint a huge wall in Berlin.

The guys who I first noticed up around Collingwood and Fitzroy are from the Everfresh Crew. They have an extensive internet presence and advertise services for rent. Oh yes, there’s money in them thar walls.

Makatron
Makatron paints animals.

Collingwood’s Backwoods gallery is also in the game. They bridge “the gap between the street and the gallery wall, whilst remaining authentic to their artists’ history and vision,” by selling prints for around $100.

There’s not heaps of cash in it, but there is certainly the opportunity for travel.

Some Melbourne artists I follow on Instagram (e.g. dvate) recently took off for the Tahiti Graffiti festival (sponsors include a hotel chain, a bank and the Alliance Francaise.)

Many were already Pacific-savvy after having recently gone to the Hawaii Graffiti festival (sponsors include an airline and a clothing company.)

It seems the internet lets the artists who patrol the night control their image, and helps make money from it.

So is graffiti just another culture co-opted by capitalism?

jetso pzr
Jetso and Pzor

Not yet. Melbourne’s graffiti scene is arguably dominated by two names. Jetso and Pzor. And this is where you can go down the rabbit hole and end up like me, taking a photo of a dumpster.

If you start looking for them, they are everywhere. Their work tends not to be elaborate pieces but quick bubble-letter throw-ups, tags and stickers.

pzor left, jetso right
pzor left, jetso right

They have no website, no instagram, no representation in the gallery scene (as far as I know). Their art is not visually appealling at first. The art is in the effort. It’s hard to find a part of inner Melbourne, east to west, that shows none of their finger prints. Once you start to notice, it’s hard not to admire.

For these guys, there’s no money in it. And that tells you that for them, graffiti is not work. The question I asked above about market forces being broken is irrelevant. For these guys, painting is leisure. They’re doing it for the love of it. I respect that.

Melbourne is an amazing place, and it gets even better if you can appreciate the art that’s all around you. Here’s three amazing Melbourne graffiti artists you should know.

1. Rone

2. TwoOne

3. Lush (The artist behind the pirate cat. Also dabbles in cartoons. Often nsfw (not safe for work.))

How voting for a crazy candidate is smart (and voting for a smart candidate is crazy.)

Could voting for a really crazy candidate work in your interest?

That’s the implication of a new study by some very sharp economists from the World Bank, MIT, Universitat Pompeu Fabra and Northwestern University: ELECTORAL RULES AND THE QUALITY OF POLITICIANS: THEORY AND EVIDENCE FROM A FIELD EXPERIMENT IN AFGHANISTAN.

They compare the results in two types of local elections:

1. Where multiple candidates are elected; and

2. Where one winner rules.

In the latter, voters opt for clever moderates. But in the former, voters identify hard-cases and elect them.

“We propose a theoretical model where the difference in the quality of elected officials between the two electoral systems occurs because elected legislators have to bargain over policy, which induces citizens in (type 1) elections to vote strategically for candidates with more polarized policy positions even at the expense of candidates’ competence. Consistent with the predictions of the model, we find that elected officials in (type 2) elections are more educated than those in district elections and that this effect is stronger in more heterogeneous villages. We also find evidence that elected officials in (type 1) elections have more biased preferences.”

Negotiation is a staple of politics. Greek democracy was founded on the idea of thesis and antithesis entangling in order to forge synthesis. Our modern-day parliaments are the inheritor of this intellectual tradition.

But negotiating is tricky.

Coming to the negotiation table with a smile on your face and a sensible plan immediately marks you as the loser. President Obama found this out the hard way in his first term.

The Atlantic:

“When it came time to deal with the expiration of the Bush Tax Cuts, President Obama again immediately abandoned the liberal — and his own original — position of allowing all of the Bush Tax Cuts to expire and started negotiating from the centrist position of allowing only the Bush Tax Cuts over $250,000 to expire. By holding hostage the extension of unemployment benefits, Republicans quickly got their way in the tax talks.”

Obama is a smart guy and he did not repeat his mistake. Think Progress quotes him on the topic:

“I suppose what I could have done is started off with no tax cuts, knowing that I was going to want some and then let them take credit for all of them. And maybe that’s the lesson I learned.”

ImageBy his second term, Obama took a hard-line position to negotiating and the Republicans were the ones that copped the blame for the government shutdown of 2013.

Politics has become more polarised in the United States, as the fantastic Graphic on the right here illustrates (source: The Economist). That means more divisive figures in public life.

For example, Ted Cruz, the barnstorming Republican Senator from Texas who led the Republicans into the debt default impasse (an issue that required negotiation to resolve).

Cruz is described as…, well, let me Google that for you.

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Now, Cruz lost the wrangle over the debt default. He was cut out by his own side. But his ploy might have been the only way to win. If the other side thinks you are an idiot before you start negotiating, you’ve convinced them they need to offer something stupidly good to close the deal.

The lessons for Australia are many. The moderates in parliament hold less power than the wildcards. And this is especially so in the Senate, where neither party currently has a majority, and negotiation is far more important.

This may be why you hear so much from the Greens Senator Sarah Hanson-Young and so little from the ALP Senator Carol Brown. The less mainstream your position, the more you can expect to gain in concessions, and so the more favour you can expect at the ballot box.

Evidence the Australian public is savvy on this topic can be found in the most recent Senate election, which sent a full box of Froot Loops to our nation’ capital.

This line of thinking raises two important questions:

1. Does this way of voting represent an inherent conservative desire? If we want to gum up the works of politics, matching the other side’s wildcards with wildcards of our own should just about do the trick. A government system stocked with outliers on the spectrum will create a lot more noise and fireworks than one stocked with moderates, but perhaps just as much in the way of real reform.

2. Where we see moderates elected to rule a system, can we assume this means we don’t expect any negotiation to happen? That if someone seemingly sensible like Bill Shorten is elected to head the ALP, that we expect him to rule it with an iron fist?

I value your thoughts on all this – please leave a comment below!

Vomit-onomics: A tale of online reviews, chef’s hats and marauding bacteria.

A CHRONOLOGY:

Thursday night: Special occasion dinner for two at a restaurant. (which boasts a chef’s hat in the Good Food Guide – the Melbourne equivalent of a Michelin star.)

Friday: Peking Duck at a Peking Duck restaurant in the suburbs.

Late Friday night: My partner engages in copious vomiting.

Saturday: She spends the day in bed, speculating about the possible effects of so much Peking Duck.

Saturday night: I discover that I too have a ticket on the vomit comet. I suppose that I also ate an excess of Peking Duck.

Sunday: I spend the day in bed.

Mid-week: Our housemate also falls violently ill. Speculation about the role of the Peking Duck falters and wanes. No decent alternative theories emerge.

Time passes. All recover.

A week later: A missed call from the Victorian Government Department of Health Communicable Diseases Unit. (A frightening voice message if ever there was one). 

The lady on the end of the phone is duty-bound to provide no information and engage in no speculation. She’s a bug detective, not a news service. But the questions she asks tell the story.

“I got your telephone number from the booking sheet at Easy Tiger. Did you eat there on the night of April 17?”

“I did,” I said, having an aha! moment.

She then goes on to ask a range of questions about symptoms. She also reads out the whole menu, in a seeming attempt to isolate the cause. She tells me not to go to work if I work in the food industry.

Now. It’s very nice to know that the Victorian Department of Health is out there fighting the good fight. But the fact they are involved suggests a certain level of seriousness. I wouldn’t, for example, report a quick spew to the government. But hospital emergency departments are obliged to

The fact that we passed the bug on suggests it was not your standard food poisoning, but either norovirus or Salmonella, and the fact the government cares enough to investigate may, perhaps, imply it is Salmonella, which is potentially fatal. 

The end point of this, and the part where economics comes in, is what we did next. 

The Victorian Government has not published anything about any outbreak. Of course the restaurant may be innocent.

But Google suggests we are not alone in harbouring suspicions:

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Clicking on that link leads here:

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Kudos to you if you noticed they don’t match. It seems to be policy to remove accusations of food poisoning from review websites, due to legal issues. 

We considered the possible ramifications for the restaurant of writing a review linking them to food poisoning.  On the one hand, there remains a chance they are not guilty.

On the other hand, making such a review could do a lot of good. If it prevents somebody with a compromised immune system from eating infected food, it could save their life. 

But the long-run effect is also important. If restaurants know they can’t poison their diners without facing the consequences, their food safety standards will improve.  (It could be the fault of their supplier, but shaming the restaurant will have an effect back up the supply chain.)

So we left a story on Urbanspoon (a restaurant review website) that delivered the facts, as I did above. A chronology of eating, spewing and taking calls from the Communicable Diseases Unit. Nothing definitive, nothing defamatory. 

That has since been removed from the restaurant’s Urbanspoon page (while remaining visible via the users page, which nobody would visit).

Meanwhile, crap like this remains:

“My friend ordered the coconut braised wagyu beef in a soupy broth, which the waitress said, came with a “complimentary” serve of rice. And she never got to taste the broth/gravy, because the waitress took her plate away before she could touch it! My friend had finished removing the beef and putting it onto her plate with some rice. She was going to take a spoonful of broth/gravy, but suddenly a waitress appeared, and without asking if she was finished, the waitress whisked the broth-full plate away!”

If you can’t communicate assertively with your waiter, you get to rant and rave. But if something genuinely serious happens, you can’t write about it.

The quality of food is what marketers call an unobservable product characteristic. You can’t know everything about it before you buy. Firms use signals to try to tell you about these unobservable characteristics. For example, they may set prices high (check), or make very public the awards they have won (check). 

But with food, quality has an important dimension. Will it make you sick? This dimension is one which the restaurant won’t signal, and consumers are currently blocked from signalling in the most obvious place.

This blog post is therefore designed to stand in place of all those deleted reviews. I do not know for sure what made us sick, but I do know for sure that I’d like to hear about people’s reasonable suspicions before I make my next booking. 

Four really awesome, quite left-wing ideas from the Commission of Audit

1. Letting states raise income tax to pay for services.

States have responsibility for things people really care about, like schools. 

The Commission proposes dividing up the ability to levy income taxes between states and the federal government. (States lost this power in WW2). States would start off with a 10 per cent rate, which they could then move up or down. If implemented in Australia, there’s plenty of reasons to believe this would result in higher taxes and higher quality of services. People move house to access better schools all the time. State governments live and die on stories about ambulance waiting times.

Competitive federalism is a classically liberal idea. But these days one could argue the left, broadly defined, has as much claim as anyone to be the custodian of that tradition. Providing the right amount of government services efficiently is as much a left-wing idea now as right.

You give your money to the federal government they will only spend it on fighter jets and diplomats. You give money to state governments, they spend it on schools and hospitals, roads and transport. 

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The states have been, in the last 50 years, more red than blue. Anyone who doubted states leaned left before the last SA election got a big surprise when they gave Labor another chance. Putting more tax and spending power in the hands of a demonstrably more left-wing level of government will likely lead to more spending on – and better outcomes in – health and education.

If we had a lot of border towns, there would be big risks of distortion where states had different tax policies.  Luckily most Australian population centres are far from the borders. The Gold Coast (QLD) is the closest big town to a border, being 23km from Tweed Heads (NSW).  

This idea is the only really big game changer in the whole report. Every thing else is about levels of spending or ownership of entities. This one is about the fundamentals of our Commonwealth, and it is not a bad idea. Locating responsibility for expenditure and responsibility for taxation in the same level of government makes perfect sense. Of course commentators are opposed, and it will be, ahem, looming understatement, tricky to get off the ground.

2. Paid Parental Leave to clock out at incomes of $58,000, but keep the surcharge on the profits of big business. 

This week, Tony Abbott cut maximum wage matching for the PPL from $150,000 to $100,000. (I estimated this would impact the payments of around 5400 women.) The audit commission argues it should be far lower, at Average Weekly Earnings, or $57,460. But the tax introduced to pay for the scheme should be retained, it argues, and spent on child care.

No upper middle class welfare, and higher taxes on big business? It’s like Bob Brown himself wrote this part of the Commission’s report.

3.  Cutting a promised boost to Defence spending.

The Government, in its madness, has promised to boost defence spending to 2 per cent of GDP. Why 2 per cent? Not because that’s proven to be the level we need to keep the barbarians from the gate, but just because.

The Commission rightly argues we should choose our spending level based on strategic and fiscal need, not on easily memorable even prime numbers. (It then waters down the strategy-first argument by saying the government should prioritise: “reducing the staffing size of Defence headquarters in Canberra, including senior staff, to 1998 levels;”).Nevertheless, the government’s 2 per cent of GDP pledge is a shocker of an idea, and the Audit rightly sends it out on to the firing range where it belongs

4. Benchmarking the ABC.

Now, this one is a bit of a stretch. The government is clearly looking for opportunities to cut. But if you benchmark honestly, and compare the ABC to its peers, you’re going to find it hard to do anything but conclude they are very very frugal and represent a good return on investment.

This excellent analysis finds the ABC spends 14c per Australian per day. The BBC gets 39c per Briton per day. Canada’s public broadcaster also gets 14c a day, but it has advertisements. The ABC, is the runaway winner. The article adds that it is 4 per cent of the price of subscribing Foxtel.

The ABC gets $1.2 billion in revenue, which it uses to run 12 radio stations, a 24 hour news channel, two main channels, a kids station, an international station called Australia Network, abc news and opinion online, etc. Channel 7 has revenue of just over $1.2 billion, which it earns for running 7, 7Two and 7Mate. 

While the ABC pays its top stars up to $356,000, I have it on impeccable authority that ABC Melbourne journalists have to BYO teabags to work.

I cannot imagine how a benchmarking exercise would find anything other than great opportunities to invest in the ABC.

The Commission of Audit report contains some other ideas I regard as excellent, like cuts to industry assistance, better e-government and slashing the hell out of DFAT. It also contains ideas I oppose wholly, like restricting access to Medicare, and cutting the minimum wage.

The full set of Phase One recommendations is here. Use the comments section to let me know any other parts that catch your eye!

A deficit tax: Now we really do have a Budget Emergency

Tony Abbott is floating a special deficit tax. If you earn over $80,000 you’ll be up for an extra $800 in tax next year.

Here’s four reasons it’s a bad idea, (and one reason it’s not so bad).

1. We do not have a Budget Emergency. Yet. Our deficits are small and our debt is manageable. What we do have is a looming structural trainwreck as health spending rises while labour force participation falls. A short-term Budget deficit tax fixes the non-problem, while ignoring the real problem.Image

2. Raising taxes while the economy is in poor shape won’t help the recovery. Australia’s growth has been meagre and our unemployment rate rising for most of the past few years (with a blip down in April’s numbers). Smart economics says to spend more and tax less when you’re trying to induce a recovery. This is Keynesianism.

3. Keeping the focus of the budget on the deficit (simple, easy to understand, irrelevant) misses the opportunity to make the budget about something important.

4. If we are so allergic to a deficit of a few billion, we may never borrow again. With Australia’s long-term government bond rate at 3.93 per cent, borrowing is cheap right now.  If we are ever to build any infrastructure round here, we need to borrow money. (Infrastructure costs a lot now and pays off in the long run, so if buy it using cash current generations subsidise later ones). Insufficient borrowing will mean the country comes crumbling down round our ears.

BUT

5. It’s hard to imagine Treasury proposing this idea to the government, except perhaps as a second-best alternative to slashing a lot of programs, and only if the government was hell-bent on returning to surplus immediately. Where you do discern the fingerprints of the department is in the progressive design of the tax, that would mainly slug high-income earners:

[It would] “cost earners on $80,000 at least $800 a year rising to an extra $8000 a year for those earning $400,000 a year.”

Hitting the high income earners may work for Mr Abbott politically too. He hurts only people who are likely to vote for him anyway, keeping western Sydney sweet. That means the people with the highest tendency to consumer their income won’t be hurt, so the economic effect of the tax will be more muted than if it were shared equally. 

Apparently there is a backbench rebellion against Mr Abbott’s paid parental leave scheme, which has s price tag of $5.5 billion, and is genuinely not a clever policy. I’ve written before about the economics of cutting it – reducing eligibility from incomes of $150,000 to $100,000 doesn’t make much of a saving – you’d need to be much bolder.

 

The Internet is Proving Quite Popular. (Or, Why I Might Be Wrong On The NBN)

I’ve written before on the National Broadband Network, under the following headings:
National Broadband needlessness.
National Broadband Nuff-Nuffs.
I believed the cost of the NBN was too high, the case for it had not been made, and the idea of rolling out fibre to every premises failed to recognise the differences in need between certain types of premises.

Also, I wrote this:

“I think there is a cap on how much data we can consume. No doubt data demand is increasing. From 286 MB/month in 2000 to 14,909 MB / month in 2009. But this is a result of moving real-world activities like photos and video onto the internet. YouTube’s audience is double that of the three big channels broadcasting US prime-time TV.

Data demand is limited by human constraints. Pixel demand is limited by the size of screens we can fit in our homes, audio quality demand is limited by our hearing and demand for video is limited by the number of waking hours in the day.

Camera megapixels are a good example of this. For about five years after the advent of digital cameras, the number of megapixels available grew exponentially. But then it plateaued at about 10-12. For the majority of people the marginal benefit of more and more data wasn’t worth it.

Similarly, telephone call sound quality is abysmal and noone cares. Most of the value is in the existence of the link not the quality.”

Well, the data is in, and while I hold fast to my fundamental point about eventual data satiation, that point looks far away. Data demand is nine times what it was five years ago.

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There’s another point to make too. Both this data set and my analysis above are obsessed about downloads. But that’s not the only thing that happens on the internet these days. User-generated content is becoming more important.

It was not until I started making a bit of video that I understood how very very poor upload speeds are. The NBN as imagined originally would offer much better download speeds.

Especially for business, upload speeds can easily be a major choke-point. The shadow minister for communications walloped the government with this point earlier in April.

I still believe that the NBN should be subject to a proper cost-benefit analysis and weighed against other investments. It may be the NBN has an extremely positive return but still yields less than public transport investments. In which case we should probably reconsider our aversion to debt.

Also, this argument still stands:

“There’s a big difference between giving hospitals and the square kilometre array incredible internet speed (8 tbps!), and giving incredible internet speeds to every terrace house, flat and bungalow in postcode 3068. Where productivity demands better internet access, users should pay.”

But the idea that data demand won’t create need for the NBN, I concede, looks wrong.