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Thank you for visiting this site, I hope you find this blog interesting. I write about microeconomic analysis, specifically the application of incentive analysis to real world problems. I argue that many of the world's social, environmental and economic problems have incentives at the heart of the problem. Hopefully, the discussion on this website can help create solutions for a better world by understanding the incentive dimensions of 'wicked' problems, rather than superficial remedies that only deal with the symptoms. I welcome your comments and views! Please keep comments civil and based on reason and evidence. Thanks for visiting!

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VIDEO: Sustainable Farming with Wayne Lording (Introduction)

Late last year Lindsey Beck and I interviewed Wayne Lording on his farm. I was interested to see why and how Wayne implemented sustainability technologies on his farm. Essentially, he gains a financial benefit from using renewable energy and water reuse. Interestingly, he is one of the few farmers using geothermal energy on his farm. The two videos here are an introduction this series. In the following weeks we will have videos on:

  • Renewable energy, specifically solar and geothermal,
  • Water reuse, and
  • Wrap up,

In all the videos, I provide a brief economic analysis of Wayne’s investments. I hope you enjoy this series.

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The Economics of Racial Stereotypes

During World War II, Australian soldiers were told they had nothing to fear from Japanese soldiers. They were short, wore glasses and their rifles fired puny bullets that would bounce off a strapping young Aussie lad. No worries. Should fix them up before tea then you can go and fight some real soldiers like the Germans once you’ve done with the Japs.

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Kindergartens as Engines of Economic Growth

I was flicking through the OECD’s Education at a Glance 2014 to get a quick understanding of how Australia’s education system compares to the rest of the industrialised world. Australia mostly did well in the indicators compared to the OECD average, especially for university education. Although, it was a bit worrying to see that Australian school students’ educational scores stagnate. But there was one indicator that caught my eye, and that was the very low enrolment rates of Australian children in pre-school education (less than 20%) compared to around 75% for the OECD average. This places Australia the 5th lowest for pre-school enrolments in the OECD, with only Indonesia, Turkey, Switzerland and Greece being ranked lower. This caught me by surprise because there is pretty strong education and economic research that demonstrates the long-term benefits of early childhood education.

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Indigenous Disadvantage and Impact Investment

I must commend the Australian governments, at both the Federal and State/Territory level for committing to reduce Indigenous disadvantage. As part of the governments’ efforts to reduce Indigenous disadvantage, they charged the Productivity Commission to produce a biennial progress report series – the Overcoming Indigenous Disadvantage (OID) series. The 2014 edition was released in November. I was interested to read this edition to see how efforts to reduce Indigenous disadvantage was faring, and if there was potential to for impact investment to make a difference.

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The Magic of Public-Private Partnerships: Really?

Last week I was visited by election campaigners who wanted to sell me on the merits of their party for the upcoming Victorian election. I may be strange, but I actually was happy to be visited by door-knockers so I could ask them some questions. The Victorian election has been fought on competing infrastructure projects but there didn’t seem to be clear details on how the projects would be funded. Being fiscally responsible, I wanted to know how these projects would be funded. So I asked the door-knockers the question. And the answer I got was: “through the magic of PPPs [public-private partnerships].”

I was quite frankly stunned that someone in our digital world still believes in magic! And in such a brutal arena as politics, it was great to see that innocence wasn’t dead. Then the implications hit me: what kind of magic are we talking about here? White or black magic? Then you get into finer categories such as illusionism, sorcery and necromancy. If it was necromancy, this would have major implications for workplace relations. Would the government use zombies to build the infrastructure? There will be huge cost savings from using the undead. But you need to feed zombies brains which may pose a public safety issue to live humans. Furthermore, the building unions probably wouldn’t be happy that their members’ jobs will be stolen by zombies. I can see why the issue of infrastructure financing is hard to explain to voters.

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Climate Change-Induced Financial Disaster

One of the extraordinary things to witness at the G20 meeting in Brisbane during the weekend of 15-16 November, was Australia’s rearguard action to keep climate change of the agenda. The G20 host’s justification was that climate change would distract from the economic policy focus. Besides, according to Australia’s Treasurer (i.e. Finance Minister), climate change is no impediment to economic growth. This is despite the wealth of economic research that has been produced that has modelled the economic impacts of climate change. A potential economic impact that has been gaining some traction is the ‘carbon bubble‘. The carbon bubble is where assets that derive most of their value from carbon reserves (i.e. coal, oil and gas) become ‘stranded assets’ as their value falls in response to international climate change action. For a country like Australia that is heavily dependent on fossil fuels for its prosperity, you would think a carbon bubble would have a serious economic impact. I went along to listen to a talk about what a carbon bubble meant for Australia. The panel was made up of Prof. Ross Garnaut, Jemma Green, Dr John Hewson and Tony Wood. Each of them an expert in economics, finance and energy in their own right. This is what I took from the discussion.

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Benefit-Cost Analysis of Ebola Response Strategies

The spectre of an Ebola outbreak has predictably prompted knee jerk reactions from governments around the world in an attempt to demonstrate that they are in control. Certainly, governments have a responsibility to protect their citizens and to prevent a panic amongst their constituents. In a sense, Ebola is only one example of how perception has come to dominate policy effectiveness in governments around the world. This post is not a whinge-fest on the hopelessness of governments. Instead, I want to demonstrate how a benefit-cost framework can help governments understand the pros and cons of different Ebola response strategies taken from my experience working on biosecurity issues. I will do so in a qualitative way to show that benefit-cost analysis does not necessarily involve lengthy reports and expensive consultants – this is something that can be done quickly to give policy-makers a sense of what are the main drivers of the problem (Ebola) and what strategies can be used to deal with it.

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Investment Approach to Deregulation

Image: Red tape.

Image: Red tape.

Last week, the consulting firm Deloitte’s released a new report titled, Get out of your own way: Unleashing productivity as part of their ‘Building the Lucky Country’ series. One of the main results was that Australian businesses imposed more red tape on themselves than the government does. Deloitte’s quantified the annual cost of self-imposed $155 billion compared to $94 billion from government-imposed regulation. Furthermore, this cost is associated with the growing ‘compliance sector’ that replaced the back-office staff that had been shed as a result of improvements in technology. So Australian firms have effectively spent their productivity dividend on beefing up their compliance capacity rather than concentrating on core activities. Deloitte’s attributes the growth of the ‘compliance sector’ to the growing risk-aversion among large Australian corporates to avoiding ‘stuff ups’. I generally found it an interesting report, although I thought it brushed over an important point: imposing rules is an implicit investment decision. I want to go through this important point in more detail in this post.

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Housing Bubbles as Economic Policy

 

I’m curious why governments around the world are fond of pursuing higher house prices as economic policy. Not that I have anything in principle against higher house prices. I understand why governments want to do it, housing is an important concern for many people and a significant contributor to an economy. But all of that is wasted if the policies stimulate a housing bubble that eventually bursts leaving people poorer because their main asset drastically falls in value. But I’m concerned that governments introduce significant economic risk to the whole economy by promoting housing bubbles. We saw this with the recent Great Recession that consumed the US and much of the world in 2008-09. Yet governments continue to inflate housing bubbles. In the end, we are worse off when a housing bubble pops. I’m no ‘economic girly man‘ when it comes to risk, but surely as stakeholders in the global economy (and voters, depending on where you are) shouldn’t we be cognisant of the risks that our governments introduce? That way if we know about it, we can demand our governments to manage or even prevent these risks. This post will attempt to identify the key ways that governments have introduced risks into our economies in order to stimulate housing bubble.

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Risk, Market Failure and Government: Case for a Social Impact Bank?

Last week, I attended the All-Energy Australia Conference because of my interest in renewable technologies and energy efficiency. A couple of speakers from the Clean Energy Finance Corporation (CEFC) were highlights for me. The CEFC is an Australian Government-owned financial corporation that was established to address financial impediments to private financing of renewable energy, energy efficiency and low emissions projects and emissions – i.e. it addresses a market failure in clean energy financing. It does this by developing innovative financial products and working with private financiers, principally aimed at reducing risk which in turns reduces the risk premium charged to clean energy projects and companies. Furthermore, it does so by actually generating a profit for the Australian Government; it provides loans and equity on a commercial basis and doesn’t provide grants. It seemed to me that basic model of the CEFC would be useful in catalysing private capital in other policy areas, such as reducing social disadvantage. This blog post will go through my thinking on how a ‘Social Impact Bank’ could work along CEFC lines.

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