What have the mining companies done for us?

There's a wonderful scene in Monty Python's "The Life Of Brian" where Reg, the leader of the People's Front of Judea (not to be confused with the Judean People's Front) asks "What have the Romans ever done for us?". To his annoyance, his fellow rebels answer, eventually leading to Reg having to reword his rhetorical question:

All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?

What makes this even more brilliant is that the benefits of Roman civilization on conquored people have very likely been enormously exaggerated. Ex-Python Terry Jones' book (and television series) Barbarians makes a very strong case that, whatever benefits Roman conquest had (if any!), they were enormously outweighed by the harm done. The Romans were not benevolent conquorers bringing civilization to the benighted savages, they were rapacious looters who drained the wealth from half of Europe and the Middle East and left the conquered people vastly poorer.

Which brings us to Australia in the 21st century. In the same way that the conventional story of Europe is that the Romans brought civilization to the barbarians, Australia's conventional story is that in the late 20th and early 21st century (that is, right now) the mining boom brought wealth and prosperity to our land. But, like the story of Rome's civilizing influence, the story starts to fall apart when you look a little more closely at it. Australia's mining boom has come with enormous costs, not just environmental and political but economic as well, and the wealth generated has mostly gone to a relatively small number of people.

Compared to the resource curse suffered by many developing nations, Australia has escaped relatively unscathed. We don't have warlords and private armies fighting for control over our gold and coal mines. But our all-but-unshakable belief that we are The Lucky Country blessed with natural resources, together with our cultural cringe that nothing we do is as good as what the Pommy Bastards and Damn Yanks can do (even though we're the best bloody country on earth bar none), has made us complacent. With a tiny handful of exceptions, the national character is not just uninnovative but anti-innovation. We give lip-service to loving our inventors and innovators, but except for medical research we just don't want to know. We celebrate the Aussie inventor who builds a better mousetrap, but won't buy it until it's been sold to the Americans for a fraction of what it's worth, then sold back to us at an enormous profit margin.

We have the scientific know-how and the popular support to lead the world in green energy. If Germany can now generate fifty percent of its peak daytime electrical power from solar and wind, we could surely be doing eighty or ninety percent without even raising a sweat. But we lack the political will. Of our two main political parties, the nominally left-wing (but actually middle-of-the-road centre) ALP is lukewarm about green energy, while the right-wing (and getting more extreme every day) Liberal Party is now actively hostile to it. It's not hard to see why: mining companies are big, big supporters of the Libs. Since 2007, for every dollar the mining companies have given the ALP, they have given $25.75 to the Liberals. No wonder Joe "poor people don't drive cars" Hockey thinks that wind power is utterly offensive. In Queensland, Australia's "Deep North", the even more right-wing National Party are trying desperately to destroy the solar power industry because it is too effective.

So what have the mining companies done for Australia? Apart from making us complacent and corrupting our political process?

• Not jobs. Mining provides about 1% of Australia's jobs, compared to about 9% employed by the manufacturing sector.
• They're quick to shed jobs too. If the rest of the country sacked people as quickly as the mining companies did, our unemployment rate would have reached 19.5% during the global financial crisis instead of 5.9%.
• Not taxes either. Despite record profits, they pay only around 2/3rds the tax rate of other companies: the average company tax rate in Australia is 21% but the mining companies pay only 14%.
• Not only don't they pay their fair share of taxes, they're quick to demand handouts. Despite all their profits, they receive $500 million in direct subsidies each year, plus another $4000 million in indirect subsidies, freebies, discounts and other handouts.
• The diesel fuel subsidy alone costs every Australian (at least those who paid taxes) $87 a year.
• They're not Aussie miners either. 83% of Australia's mining industry is foreign owned, which means that up to 83% of the profits are going overseas.
• Let's not forget the environmental destruction caused by mining.

All right, but apart from the pollution, the corruption, the lies, the destroyed industries, the sense of entitlement, and the lost opportunities, what have the miners ever done for us?

Where has all the money gone?

The CEO of the Blackstone Group, Stephen Schwarzman, has claimed that over the last eighteen months 40-45% of the wealth in the world has been lost.

Lost? How can people lose trillions of dollars? Did they check behind the sofa or in their spare pants? Did some super-villain break into Fort Knox and teleport all the gold away? Perhaps they put it in a Swiss bank vault and lost the key and now can't get it back.

No, the reality is that most of the money lost never really existed -- it was all in our heads, and by "our" I actually mean mostly the jokers on Wall Street and bankers and crooks like Bernie Madoff. These guys fooled themselves that they were producing value when all they were doing was shuffling electrons in computers: a shell game, a confidence trick, where so long as everybody stays confident we don't notice the trick. Money is, when you get right down to it, a shared illusion, and often based on some really weird ideas too. Gold, too soft to make into either swords or plowshares, is considered valuable, while good clean air, without which we sicken and die in as little as minutes, is valueless.

Another example of the illusion of money is the diamond trade. Diamonds never wear out, they don't rot or break down. Almost without exception, virtually every gem-quality diamond every found still exists. Every year, the total pool of diamonds available in the market continues to increase. In truth, diamonds are not really that rare, and getting less rare every year. By the accepted laws of economics (to say nothing of common sense), diamonds should depreciate in value. But they don't. Under the cunning marketing of De Beers, diamonds are massively over-valued relative to the number of diamonds potentially available. De Beers' genius was to convince people for the last half century to buy diamonds, but not sell them. And now, with a Depression looming, they fear that this massive stockpile of diamonds may suddenly re-enter the market, flooding the market for diamonds and causing the price to crash drastically.

This is what happens when you value something under the assumption that it is far rarer and more precious than it really is. Sound familiar? Tulip mania, the South Seas bubble, the dot-com boom, the various housing bubbles, Worldcom, Enron... the list goes on and on.

By the way... what's wrong with Forbes? How can a magazine with their reputation write something as ridiculously stupid as this?

In 1920, Charles Ponzi, an Italian immigrant, began advertising that he could make a 50% return for investors in only 45 days. Incredibly, Ponzi began taking in money from all over New England and New Jersey. By July of 1920, he was making millions as people mortgaged their homes and invested their life savings. As with all frauds, he was discovered to have a jail record and was indicted on 86 counts of fraud. Some tens of millions of dollars were invested with him.

(Emphasis added.)

All frauds have a jail record? How can they make this claim in an article about a fraud with no previous jail record?

(I was also interested to see that Wikipedia seems to suggest that all financial futures are martingales. If this is the case, and I haven't misunderstood something, then futures are mathematically guaranteed to lose money in the long term.)

Why loony leftists matter

The consequences of giving power to the far-left -- whether the loonies in the London city council, Politically-Correct socialists in the ivory tower of macademia[1] or the genocidal criminals in Soviet Russia and Cambodia -- has been baneful and calamitous. As James Wimberley of the Reality Based Community says:

The record of these people in power is so disastrous that it would be tempting to wish them gone, as has more or less happened in the USA. Tempting but wrong. Like the gene for sickle-cell anaemia, the far left plays a useful irritating and balancing role, so long as it stays in a permanent minority.

I'm a great believer in the value, no, the necessity, of a few irritating trouble-makers, malcontents and enfants terrible who can stop us from becoming complacent, arrogant and self-satisfied. In the late 1800s and first few decades of the 1900s, capitalism was scared of communist revolution. Marxism was still a vigorous intellectual paradigm. The workers were flexing their muscles and demanding improved working conditions, better conditions and a measure of justice. Consequently, those hard-hearted and selfish capitalist leaders feared for their profits and their lives, and (eventually, reluctantly) modified their behaviour, and so the 20th century saw massive improvements in quality of life for those who weren't at the top of the social pyramid: pensions, universal health insurance and education, the 40 (or even 38) hour week, holiday pay, unfair dismissal laws and much more.

But in countries like the USA, where the masses turned their backs on unions and swallowed the lie that class warfare is by definition the lazy and envious poor against the deserving rich, things are very different. It seems like at least half the country -- even many of those going hungry because of medical expenses -- believes that having the government use its massive purchasing power to buy medicine at a discount is one tiny step away from outlawing private property and sending everyone to the gulag. Far-right wingers pose as centrists and moderate right-wingers are vilified as communists. Consequently, the fat cats in the capitalist classes have been behaving like the fox in the henhouse for decades now, with crisis following bubble every couple of years. Every crisis is followed by an even bigger one, and those perpetrating the disasters get rewarded each time. After losing inconceivably large amounts of money, the banks have gone to the US government begging for bailouts. No social safety net for the tellers, but the CEOs and executives get to give themselves massive pay rises.


And why not? What have they got to be scared of? The working class in the US is convinced that all they need is a couple of lucky breaks and they too will be as rich as Bill Gates, or at least comfortably middle-class, when the reality is that income inequality has exploded over the last thirty years. It's not clear whether the current economic crisis will level things out again, or simply punish those who work for a living while allowing the mega-rich even more opportunity to buy up assets. A lot will depend on moral outrage, and very few people do moral outrage over pigs-at-the-trough like old-school leftists. So let's give three cheers for the Loyal Opposition of Loony Leftists, may they prosper, but not too much, just enough to keep the bastards honest.




[1] Caution: May Contain Nuts. Back

Water water everywhere

Via Les the Stupid Evil Bastard, another article debunking the myth that people are chronically dehydrated and need to drink at least eight glasses of water a day.

Myths have consequences, and this myth leads to an absolutely enormous market in bottled water: $7.7 billion in the USA in 2002. In Australia, consumers bought 520 million litres in 2004, and at a growth rate of 20%, that's probably passed a billion litres this year. The water has to come from somewhere: often it's merely tap water stuck in a fancy bottle, but it's often shipped great distances, increasing the environmental harm done by the manufacture of all those billions of one-use-only throw-away plastic bottles. And it frequently doesn't make economic sense either: the water companies have enough muscle to distort the market. For example, in the middle of a long-lasting drought in Victoria, a subsidiary of Coca-Cola has a permit to buy aquifer water at one quarter of one percent of the market rate for water: $2.40 per megalitre, compared to $960 per megalitre for tap water.

The Sydney Morning Herald wrote:

The 750ml size remained the same - people want a big drink these days. And as many people say they find it hard to drink the recommended two litres of water a day, Frucor brought in flavoured - but still colourless - waters to relieve the monotony.

Here's a hint folks: if your body is telling you "No more water please!", that's a sign that you should stop.

On a related note, with Australia in a state of essentially permanent drought, a British House of Commons report on the state of water treatment in Australia makes fascinating reading.

The Conehead Economy

Economic growth is a good thing. (Well, there's some big questions over both the possibility and desirability of perpetual growth, but let's ignore them for now.) On average, economic growth means that more people can afford more things, which means they can live happier and healthier lives and not need to worry about starving to death.

Ah, but there's a trap hidden in that statement: on average. Average growth is a very different thing than real growth, especially if you measure average with the "arithmetic mean" that you probably learnt about in school. A toy example will show what I mean: suppose our toy economy consists of five workers: Homer, Moe, Apu, Barney and Mr Burns. In 2006, Homer, Moe, Apu and Barney make $30,000 a piece, and Mr Burns makes $3,000,000. In 2007, Mr Burns' income has increased by $1,000,000, while the others earn exactly the same amount. The result is that the average income increases from $624,000 to $824,000. Lo and behold, Mayor Quimby can crow that his Millionaire Friendly Policies has led to the average worker getting a 32% increase in income in just one year! Marvellous! Obviously a rising tide raises all boats.

Drawn out in detail like that, it seems so obvious that nobody could possibly be fooled by it. Lies, damned lies and statistics. But in fact, that is precisely what the miracle of American economic growth since the late 1970s is made up of. Only the numbers are different, the principle is the same: the vast number of Americans have seen virtually no economic growth, or even a loss of income, while the overall average is inflated by enormous gains at the top of the pyramid. There's been growth, and plenty of it, but only a relatively small number of people, the richest 1%, have seen much benefits.

As Ezra Klein writes:

In the past, I've called this "The Conehead Economy." Plenty of growth in the economic body, but all of it happening in the top percent. Were that to happen to a person, you'd see six inches of growth in their forehead and doctors everywhere would be puzzling over how to correct the grotesque deformity. As it is, the media trumpets the growth, the politicians backslap over the roaring economy, and everyone wonders why the average American seems so unhappy. [...]

Meanwhile, government policy is explicitly aimed at accelerating the income distortions. [...] But don't object, o' Democrats, lest you be accused of class warfare which, as we know, only happens when the middle class wants their wages to keep up with productivity, as they did in the last generation.

Lest anybody conclude from this that statistics are essentially dishonest, consider this: there are many ways to calculate the average. The method used above, the mean, is just one way of many, and while it has its uses, it is very vulnerable to being distorted by a few very high or very low values. When it comes to income, a better measurement of average is usually the median, which for the above toy economy works out at $30,000 a year, with zero growth on average. Not quite so useful a figure for either the economists or for Mayor Quimby's re-election chances, but it reflects better the actual experience of 4 out of 5 people.

Comparisons are odious

Especially when they don't support the myth that conservatives are better for the economy.



(Via Brad De Long.)

Diamond-coated Oscar madness

People with more money than sense can sometimes be amusing, and in the lead up to the Oscars the entertainment press is usually good for some Hollywood-silliness stories.

It seems that the latest fad amongst actresses is for diamond-dust facial scrubs.

The most crowded waiting room pre-Oscars is at the Beverly Hills clinic of celebrity skin specialist Sonya Dakar - where stars line up for her signature £1,000 facial.

Madonna is said to have headed there for a treatment last year which includes a diamond scrub (using diamond particles to exfoliate the skin), an exfoliating skin peel, green tea face mask and red-and-blue UV light therapy to prevent acne.

Diamond particles huh?

Even the oldest, toughest, most dried-out and sun-fried human skin is unlikely to be tougher than pumice stone, let alone the regular quartz particles you find on emery boards. Even Madonna's skin is unlikely to be harder than (say) a steel nail file (6.5 on the Mohs hardness scale, compared to diamond at 10). This is a good example of conspicuous consumption. Diamond dust is quite cheap: I wouldn't be the least bit surprised if the diamond scrub contained less than a dollar's worth of diamond dust.

Why don't more conservatives go to university?

Why are most university professors liberal? Two academics, Matthew Woessner and April Kelly-Woessner, have done a study that suggests that most conservatives simply aren't interested in the sorts of things that attract people to academic careers. Matthew Woessner himself is an interesting counter-example: he's a fan of Fox New, Rudy Giuliani and Rush Limbaugh and usually votes Republican, and unlike most of the conservative students he has studied, has a deep interest in the scientific method. (Although he clearly doesn't apply it to Fox, Giuliani or Limbaugh...)

The Agonist has this to say:

What do you do when there are not enough laissez-fare loving, personal responsibility professing and family values fundies at your university? You make it more socialist:

The research led the Woessners to conclude that if higher education wants to attract more conservatives to the professoriate, it should smooth the way financially, offering subsidized health insurance and housing for graduate students

I've often thought that conservative politics simply meant "handouts for me, not for thee".

Read more here.

Market failures

Slate has an article discussing the ways that Adam Smith's "invisible hand" of the free market can be very bad at providing goods and services that are outside of the norm.

This brings us back to Nike's new shoe. Foot Locker is full of options that fit me and most other Americans. But American Indians make up just 1.5 percent of the U.S. population, and with feet on average three sizes wider, they need different-sized shoes. If we had all voted in a national election on whether the Ministry of Shoes should make wide or typical-width shoes, we surely would have chosen the latter. That's why Friedman condemned government allocation. And yet the market made the same choice. If Nike's announcement looks like a solution to this problem of ignored minority preference, it really isn't. The company took too many years to bring the shoe on line, and according to the Associated Press, the new sneaker "represents less of a financial opportunity than a goodwill and branding effort."

The Wall Street Journal is reporting on a different sort of market failure: the ever-increasing gap between rich and poor. This might be defensible if the rich were getting richer and the poor richer too -- in fact I remember being suckered into believing this myth as a teenager, but as the WSJ explains, in fact the poor are getting poorer, the middle class are treading water to keep from sinking, while only the rich are moving ahead. America hasn't been so unequal since the 1920s.

Follow that spam!

Make Wade over at the CA Security Advisor Blog decided to find out what happens when you buy from a spammer.

Our journey begins outside of Washington, DC. I am sitting at my desk, going through my SPAM filtered email, when I see one that catches my eye, “Dreams can cost less repl1ca w4tches from r0lex here”. Sounds interesting I thought, and I could use a new watch. Knowing the harmful effects of opening unsolicited email, I decided to open the email in a controlled virtualized environment.

It seems that the spam most likely originated in a small church in Washington State, probably from a malware-infected computer used by Cheryl Neff, the assistant to the senior pastor. Mark followed the link in the email to a professional-looking, but temporary, website. Using a credit card opened specifically for the experiment, he then purchased a set of earrings for $77 including postage and handling.

Mark followed the money, from websites in China and Korea, through a series of shell companies starting in Las Vegas, and finally ending up in Cyprus where the money was collected. Surprisingly, the earrings may have been shipped from China, but if they were, they got lost in the mail, because the parcel never arrived.

I'm fascinated by the fact that spammers can actually find any buyers at all. Economists will often talk about trust issues. For example, banks tend -- or at least they used to, before the economic rationalists moved in -- to go for big, imposing, expensive buildings, with high ceilings and marble floors and Grecian columns as far as the eye could see. The more risky the industry, the more important to convince people that you are trustworthy by showing commitment. "You can trust us not to take your money and run, because we've invested a lot in this business and we won't be going anywhere for a long time". And yet this seems to go right out the window when it comes to on-line purchases, at least for those who buy from spammers. Most spam websites are active for only a few weeks, before they are close down and re-open under a new name. But there seems to be an never-ending stream of buyers.

It's tempting -- oh, so very, very tempting -- to just put it down to pure, unadulterated stupidity. But that's a simplistic answer. Many buyers are hardly stupid: they have good white-collar jobs, educations, can walk and chew gum at the same time.

So what's going on? Is it that buyers are so naive that they can't recognise that they're being scammed? Is spam just the 21st century version of the old con of selling the Brooklyn Bridge to some country bumpkin, still with hayseed in his hair, visiting the big city for the first time?

I think there's more to it than that. For various reasons (advertising, welfare, the legions of pop-psychology books...), we live in a society that encourages a sense of wishful thinking, that wanting something to be real makes it real. Not that Homo sap needs much encouragement to wishful thinking and delusion. Rather than "if it seems to good to be true, it probably is", too many people act as if "if it seems too good to be true, it will be true anyway just because you deserve it".

Add to that the widespread use of credit cards, which encourages people to act as if money didn't matter even when it does, at least until all five of your cards are maxed out. Since you're not really paying for the goods, the credit card is, the risk is minimal -- or so seems to be the perception.

But one thing that doesn't make any sense to me at all is that people can take seriously any advertising written as shoddily as "repl1ca w4tches from r0lex here". This is worse than Greengrocer's Apostrophe; worse than VCR instructions translated into English from Chinese by a Korean. Not only does it look careless and incompetent, it is a deliberate attempt to bypass software that filters out spam. That screams "Deceit!". Why would anyone choose to buy from somebody who as good as says "Hey, I'm lying to you right now"?

They make it hard to do the right thing

Studies into file-sharing patterns at American universities repeatedly show that the major factor involved is less price and more convenience. It's often been said that you can't beat free, but in fact you can: it's worth paying something for fast, reliable, good service.

There aren't a lot of television programs I watch, but there are a few. I have most of them on DVD box sets, but for the couple remaining, what to do? I for one would never Break The Law, but it gets tiresome watching the latest episode of Heroes by remote viewing: psychic powers are notoriously fickle and unreliable, and can sometimes be slow and flakey.

So I was very excited to receive an email from Amazon telling me that, as somebody who had purchased the Heroes Season One DVD, I might be interested in purchasing Season Two episodes for just ninety-nine cents. Would I ever -- with the current exchange rate, that's around the "sweet spot" that I'd be prepared to pay for Internet downloads.

Alas, it is not to be. They don't want my money:

Before you can download your Unbox video, you need to install the Amazon Unbox video player. ... Currently, the Unbox video player only works on PCs running the Windows XP operating system (see all system requirements) and is only available to our customers located in the United States (see all terms of use).

This is wrong in so many ways...

• There are standard, open formats for video that are viewable on any computer fast enough to deal with video. Your old Apple II won't make the cut, but there's no technical reason for restricting users to only people using Windows XP.


• Bittorrent and other file sharing technologies don't restrict users to those in the United States. If the studios want to compete, they better start learning that the marketplace is now global: 95% of potential viewers are not in the USA.


• Don't try to lock people into your shoddy, proprietary technology: I expect to use the browser and video player of my choice (within reasonable technical restrictions) to watch the videos.

Get with the program guys. You can compete with free, because people do want to pay for the videos they watch. You just have to make it easy for them to give you money, and provide a good service.

Secrecy is like a weed

Unless you take steps to keep it under control, it spreads and takes over everything.

The Bush government has been one of the most secretive ever, for less reason than ever before. This stain has started spreading to even scientific organisations like NASA, which has refused to release the results of a survey into airline safety.

Anxious to avoid upsetting air travelers, NASA is withholding results from an unprecedented national survey of pilots that found safety problems like near collisions and runway interference occur far more frequently than the government previously recognized.

NASA gathered the information under an $8.5 million safety project, through telephone interviews with roughly 24,000 commercial and general aviation pilots over nearly four years. Since ending the interviews at the beginning of 2005 and shutting down the project completely more than one year ago, the space agency has refused to divulge the results publicly.

Just last week, NASA ordered the contractor that conducted the survey to purge all related data from its computers.

The Associated Press learned about the NASA results from one person familiar with the survey who spoke on condition of anonymity because this person was not authorized to discuss them.

A senior NASA official, associate administrator Thomas S. Luedtke, said revealing the findings could damage the public's confidence in airlines and affect airline profits [emphasis added].

Heaven forbid if the airlines profits were hurt because people could make informed decisions. That's not the capitalist way!

Rent seeking

The Volokh Conspiracy has a good article by guest writer Ward Farnsworth on one of the reasons that economists consider "rent-seeking" to be harmful -- or rather, had a good article. It seems to have disappeared from the website, although it's still visible in Yahoo's cache.

(Rent-seeking in this technical sense is related to, but not precisely the same as, the common-English sense of renting equipment or housing.)

Suppose the wreck of a ship is found on the ocean floor. Four teams race to lay hands on a treasure chest the ship is known to have on board; it contains artifacts worth ten million dollars. Each team spends about three million dollars trying to get there first. Eventually one of them succeeds, and the others are out of luck. Question one: do you see why this outcome is perverse?

Answer: A total of twelve million dollars was spent to recover something worth less than that. The result is perverse from a social standpoint -- i.e., considering all the costs and benefits involved in the aggregate, not from the point of view of any one party. Looking at the salvors as a group, they would have been wealthier if the treasure hadn't ever been found in the first place. Indeed, spending anything more than the bare cost of raising the treasure is a waste; all the other money just goes into efforts by the teams to beat each other out, and there is nothing to show for it once the treasure is raised.

The essential difference between this example and (for example) four companies engaged in searching for minerals at the bottom of the sea is that in this case, there can be only one winner. When companies compete to search for oil or minerals, each company runs a risk of finding nothing, true, but it is not a winner-takes-all situation except by accident. The first company that finds oil or minerals is merely the first, and does not prevent the others from succeeding as well.

Rent-seeking can be, naturally, very lucrative for the winner who takes all, and that's why people do it, regardless of the greater economic inefficiencies.

The idea, to oversimplify only a little, is that there are two general ways to increase your wealth: by creating things people want, or by fighting over prizes that already exist — things other people have created or found. Either strategy might be more successful than the other, and perfectly rational to pursue; it depends on the circumstances. [...]

The difference between these methods of gaining wealth -- between, say, competing to build a better restaurant and competing to get to the treasure first (rent seeking) -- is that the first one creates wealth, or better-offness, for the world. Customers are made happy, and restaurants gradually get better. Fighting over who gets the treasure isn't like that. The treasure doesn't get bigger as a result. In a sense it gets smaller because wealth is eaten up in the effort to lay hold of it.

Think of this on a larger scale and you can see that the more a society spends on rent seeking -- on quarrels over who gets what -- the poorer it becomes. If that's all that anyone did, everyone would starve in due course.

While rent-seeking is usually an economic bad, there are arguably situations where the good it does outweighs the harm. For example, most nations artificially restrict the supply of doctors by insisting that only those who have passed an approved training programme can practice, rather than allowing anyone to call themselves a doctor. Even the most laissez faire supporters of the free market generally accept that this is better than leaving it up to the free market to drive the bad doctors out of business -- although there are exceptions.

The situation is less clear for other trades such as teacher, plumber, electrician and others. These trades, like doctors, are restricted to those who pass a government-approved course, which therefore artificially reduces competition in the field. Whether the harm to society from that reduced competition is more or less than the reduction in harm from allowing unqualified teachers and plumbers to practice is unclear.

Another classic example of rent-seeking is the patent system, where the first person to file a patent can gain a monopoly over an entire range of ideas, regardless of who invented them. While it is an article of faith that patents do more good than harm, there is remarkably little actual evidence to support that idea.

If we're so rich, why can't we afford anything?

Alternet has a good look at the two apparently contradictory mainstream stories about the American economy (and to a lesser extent, Australia's as well). The first is that the US is rich and successful, with a booming economy, a healthy stock market (at least up until a few days ago!), productivity and economic growth are up, unemployment and inflation under control.

But the second story is the opposite: the US can't afford to pay for a such luxuries as universal medical coverage, social security programs for the poor and unemployed, education, a safety net for the unemployed. While some circles of laissez faire conservatives and libertarians oppose such programmes on moral grounds, more commonly conservatives will claim that the country can't afford them, almost as if "Paris Hilton has to dig between the cushions of her sofa to buy a can of tuna". [link]

But, at the same time, we're also told that we don't have the money to pay for a robust social safety net. When it comes to paying for universal health coverage, affording retirement security for our elderly, investing in programs for the poor or educating our children, we need to pinch pennies. According to this story line, we face a looming "entitlement crisis" -- we won't be able to afford to keep the Baby Boomers in good health and out of poverty, we're told, unless we slash their benefits and privatize the programs that their elderly parents enjoy today.

This is the line we hear from the administration when it talks about entitlement "reform": Treasury Secretary Henry Paulson says that "the biggest economic issue facing our country is the growth in spending on the major entitlement programs: Medicare, Medicaid and Social Security." The solution, according to the Heritage Foundation, is to cut entitlement spending. "Reforming Social Security, Medicare, and Medicaid is the only way to get the budget under control," it says.

At first glance, it seems to be a paradox: how can a country so rich afford so little?

The solution to the apparent contradiction is to realise that the "we" who is doing well is a very small minority, and they don't get any benefit (or at least, they don't think they get any benefit) out of the programs that they say "we" can't afford.

There's no doubt that the US economy has grown by leaps and bounds. Between 1973 and 2005, the economy has grown by 160%, just a little short of the post-World War Two economic miracle between 1947 and 1973. Despite (or perhaps because of) the GI Bill, reconstructing Europe and Japan, cheap or free education for many, Social Security, the Cold War, the Moon landing, and the Korean War, the US economy not only grew by 176% but income inequality plummeted as American families' incomes shot up. At least the white families' incomes.

Following WW2, the US saw a quarter century of rapid economic growth and significant increases in income across most of the population. In the quarter century since 1973, the US has also seen rapid economic growth. Where has the money gone? Alternet gives some sobering statistics:

• After adjusting for inflation, nine out of ten American families have seen their income fall by 11% between 1973 and 2005.


• The bottom half of the richest ten percent -- those between the top 90% and the top 95%, with an average income of $85,000 per year -- have seen virtually no gains.


• The lion's share of income gains have gone to the richest one percent of Americans.


• But even that fails to give an accurate picture. While the richest one percent have done quite well, it is the richest 0.01 percent whose income has exploded by 250%.

(Note: Be careful interpreting these figures. It would be a mistake to multiply 0.01 percent by the population of the USA and conclude that it refers to just thirty thousand people who have shared almost all the economic growth between them. The income groups refer to percentiles of the population, not individuals. The richest 0.01% were not necessarily the same people in 1973 and 2005.)

• Although they are richer than ever before, the mega-rich at the top of the pyramid are paying less and less in taxes. Although the American tax system remains, in principle, progressive, in practice the working poor and middle classes pay proportionally more of their income on taxation than the rich -- essentially a regressive tax system in practice.


• Despite record company profits, corporations pay a smaller proportion of their profits, contributing only one third as much as they did in 1962 to the Federal government. Their avoidance of state taxes is even worse. Seventy-one companies on the Fortune 500 list managed to pay no state taxes during the period 2001 and 2003, despite making $86 billion in profit.


• While worker productivity has increased significantly, worker wages have remained flat. The difference has gone to greater corporate profits and higher CEO salary packages.


• The Gini Coefficient, a measure of the inequality of income distribution within a country, has increased to almost 0.5, making it on a par with, or higher than, such countries as Russia, Iran, Peru and Venezuela.

The majority of Americans have failed to see any economic gains from the last quarter century, despite working longer hours and taking fewer holidays. The average family works thirteen weeks more on average than families did a generation ago, just to avoid falling backwards.

A picture is worth a thousand words, never more so than when it comes to income distribution:

(Click for a larger view.)

Each block represents a percentile of the population, where the width represents the percentage of the population and the height their average income. From left to right: the 20% of the population with the lowest income, then the next three groups (20-40%, 40-60% and 60-80%); then the 80-90% , 90-95%, 95-99%, 99-99.5%, 99.5-99.9%; and finally the tall spike at the end is the 99.9-100 percentile: the richest 0.1 percent.

Figures in the graph are adapted from data here [PDF]. See also here for additional data.

Even the ultra-conservative former Chairman of the Federal Bank, Alan Greenspan, told Congress that the every increasing concentration of wealth and rising inequality is a "really serious problem". The last time the US had this much inequality, it lurched from depression to depression, an average of three years out of every decade. Nations ignore history at their peril.

* * *

Update, 2pm: corrected a miscalculation re the top 0.01% (not 0.1% as initially quoted).

Credit crunch and interest rates

Mark Kleiman at the Reality Based Community gives a small sign that the inevitable credit crunch in the US has lurched another step closer: even with new anti-consumer laws putting bankruptcy out of reach for those who actually need it, credit card companies are getting nervous about the ability of even well-off people to pay off debts.

Meanwhile, here in Australia, the media has finally re-discovered the majority of Australians. Oh, they're still singing the same old tune of our booming economy, which I for one am skeptical about, but they're starting to notice those who have missed out on the boom.

It isn't that I doubt that on average we're better off now than ten years ago, but the word "average" can hide a lot of sins. E.g. if Uncle Rupert's income climbs from ten million dollars to twelve million, while Marge and Homer's incomes both fall from one thousand dollars to nine hundred, Uncle Rupert can honestly say that on average the three of them have increased their income by almost 20%.

But I digress... over the last couple of months, the Australian media have finally discovered something I've been complaining about for years. (Not in writing, more's the pity.) The government's rhetoric about Australia's booming economy is mostly illusionary:

A recent survey by NEWS.com.au in June revealed 42 per cent said their financial situation was worse than it was a year ago due to higher living costs.

So, despite all the joy being reaped on the stock market, mainly by higher income earners and retirees with super, the bulk of Australians are battling just to keep their heads above water.

Cheap DVD players and big screen TVs, but food, rent and medical costs are all up:

• The consumer price index (CPI) was 1.2%, but that was modest compared to some increases:


• Fuel costs up by 9.1% over the June quarter.


• Fruit costs increased by 8.4% in the June quarter, and vegetables by 6.1%.


• Medical costs increased by 3.4%.


• Over the quarter, house costs increased 1.0%, and rents 1.6%.


• Over the full financial year, house prices increased by 2.7%, rents by 5.2% and property rates and charges by 5.6%

Taken altogether, my back-of-the-envelope calculation suggests that the average person might be spending $70 a week more just a necessities now than they were a year ago.

Most interesting, the media have also opened their eyes about interest rates, after years of blindly parroting the government's party line. And right at the time when it will hurt the Prime Minister the most, before an election, tsk tsk tsk. (One wonders if John Howard forgot Rupert Murdoch's birthday?) The Liberal Party has been beating the ALP over the head about interest rates and home loan repayments for years, based on the high rates during the 1980s Recession. It is true that interest rates are lower now than then, but housing prices have blown through the roof, and the average (that word again) monthly repayment is a far greater proportion of income now than it was during the worst of the Recession. In other words, home buyers are doing it much tougher now than they were during the Bad Old Days when Australia was climbing out of an economic crisis -- and record bankruptcy rates are reflecting this.

Despite the ALP's apparent lack of interest in taking the fight to Howard on this matter, the media seems to have realised that Howard's promise-that-wasn't-actually-a-promise that interest rates wouldn't go up under his watch was an untruth. And it only took them five interest rate hikes since the previous election in 2004 to notice.

I note that three years ago the former head of the Reserve Bank scoffed at claims that the Liberals would keep interest rates down, pointing out that they must think people are gullible to make such a claim. Right on three counts: yes, the Liberals were unable to keep rates down; yes, they thought the voting public was gullible; and yes, they were right.

And, still back in 2004, it was pointed out that Howard's governments have been running what business leaders call "a lazy balance sheet" -- ignoring opportunities for growth and investment in favour of a timid, short-sighted and miserly approach:

Any fool can sell assets to reduce debt, but it is a way of becoming uncompetitive and eventually going out of business. Since 1996, the Howard Government has sold infrastructure and cut spending on higher education. Its stock of assets has depreciated at a faster rate than gross investment, and programs designed to upgrade industry, such as the 140 per cent R&D allowance, were slashed - all in the name of reducing the deficit.

For the want of a few hundred million dollars a year to maintain these programs, business R&D, which was growing about 18 per cent a year in the decade up to 1996, has now slowed to a virtual standstill and the deficit on Australia's trade in elaborately transformed manufactures has blown out.

As a consequence, Australia's external current account deficit now stands at 5.4 per cent of GDP, and foreign debt is far larger than any other major industrial country apart from the US.

Three years later, things are if anything worse. Howard's bribing the electorate with tax cuts (and at long last, even the bottom half are getting something). While a tax refund is always welcome, I'd rather a booming economy and a well-paying job with high taxes than a slowing, fragile economy with low taxes. Better to keep 70% of a lot than 80% of a little.

Sicko - Moore versus the media

Mike Moore's new movie, Sicko, takes aim at the American healthcare system, and by the look of it, the entire corporate media is closing ranks to defend the rotten system. Not just the conservative wingnuts who would argue if Moore said water was wet, but the (supposedly) liberal media like CNN. And Mike is taking aim right back at them.

PZ Myers points out that the supposed "facts" argued by CNN's hired-gun doctor differed from Moore's only by trivial amounts: e.g. the claim that Moore was wrong to say that Cuba spends $251 per person per year on health care when the "correct" figure is $229.

Now, honestly, figures like $251 and $229 have utterly spurious accuracy: it is beyond credibility that the government of Cuba, or any other country, knows medical spending down to the closest dollar. (The medical budget and the actual spending are only approximately the same.) Mathematically, I'd be surprised if we could do any better than round both of them to "about $240", give or take twenty dollars.

But that's not the most important point.

The important point is that even if CNN's hired gun was right, even if Moore's figures were wrong and his were correct, the US would be spending $6000 per year per person on health care to get results barely better than Cuba was for their $230. The US rates #37 in the world for the quality of health care, compared to Cuba #39. That's the scandal, and supposedly liberal CNN is trying to whitewash that by pedantically nit-picking on a few allegedly wrong numbers, as if a difference of a few dollars was really significant.

One of the comments on PZ's blog describes Mike Moore as "a propagandist, muck raker, and rabble rouser". I knew I liked the man. When society is broken, it takes a muck raker and rabble rouser to drag the sickness into the light. Another comment pointed out that one half of the one million bankruptcies in the US in 2000 were because people couldn't pay their medical bills. I expect the figure is even higher now.

One million bankruptcies per year is a frighteningly high figure, and one which casts a completely different light on the American Dream. That's a proportion of about one bankruptcy per 300 people. By comparison, Australia's bankruptcy rate is the highest since records began, at one per 800 people.

Telling lies with statistics

There are lies, damned lies, and statistics.
-- attributed to Benjamin Disraeli.

I'm a great fan of Darrell Huff's perennially[1] best-selling How To Lie With Statistics. The title is deliberately ironic, as the book is really about how not to be be misled by the misuse of statistics.

One of the most egregious examples of seductively bad reasoning in economics is the Laffer curve, particularly as the central plank of Reagonomics and supply-side voodoonomics. Not surprisingly, the Wall Street Journal loves it (they know their audience...), as PZ Myers describes.

See also Brad DeLong, and Crooked Timber on throwing out outliers like Norway.



[1] Amusingly, this too is an example of lying with statistics. Back

We will make you whole again

On March 24, 1989 Captain Joe Hazelwood was drunk on duty of the oil tanker Exxon Valdez and ran it aground in Alaska's Prince William Sound.

Exxon (now ExxonMobil) did nothing to contain or clean up the spill for three days of clear weather. On the fourth day, a storm hit, spreading crude oil across 3,200 miles of coastline. In the face of one of the greatest man-made environmental disasters in history, Exxon official Don Cornett told the Price William Sound community "We will make you whole again."

Not only did the oil spill cause environmental havoc, but it also meant ruin to the locals: ruin to their livelihoods, ruin to their businesses, and in some cases, ruin to their health due to exposure to the toxic chemicals used to clean up the oil. Eighteen years later, the area has still not recovered from the disaster: out of the thirty significant species in the area, seven have not recovered at all, and only ten have recovered fully. With such long-lasting damage to the environment, neither has the economy of the area. The multi-million dollar herring industry which supported the local economy has been closed indefinitely.

In 1994, a US Federal Court awarded the 34,000 locals affected US$4.5 billion dollars in punitive damages: about $26,000 per person per year at the time. This was on top of the $300 million in voluntary payments Exxon made to eleven thousand of the locals.

Eighteen years after the disaster, Exxon have still not paid the damages. Of the 34,000 people who are yet to received one cent to compensate them for the harm caused by Exxon's negligence, about six thousand people have died.

The purpose of punitive damages is to discourage negligent and harmful behavior. Has ExxonMobil been discouraged? As early as 1994 they had written off for tax purposes $2.8 billion, turning what could have been a big loss into a small loss. They successfully sued their insurer, Lloyds of London, and recouped $411 million for cleanup expenses and interest. Exxon has still not fitted double-hulls on its tankers in the area, displaying an appallingly negligent attitude.

In 2005 ExxonMobil had the most profitable year of any corporation in history, posting a profit of $36 billion dollars. Obviously not enough for them to pay off their obligations to the people of Prince William Sound.

Ribena maker fined

Two days ago, the maker of the Ribena blackcurrent syrup, pharmaceutical giant Glaxosmithkline, was fined $NZ217,500 ($A192,900) for deceptive advertising in a New Zealand court.

Glaxosmithkline admitted that its ready to drink cartons of Ribena did not, in fact, have "four times the Vitamin C of oranges". Instead of the claimed 7mg of vitamin C per 100ml, the Ribena in fact had no detectable vitamin C at all.

The false advertising came to light in 2004, when two New Zealand schoolgirls, Anna Devathasan and Jenny Suo, tested the children's drink for a school project, and found no Vitamin C. Glaxosmithkline ignored their complaint until it was taken up by the New Zealand Commerce Commission.

The case is seen as a win for consumer correction, but it isn't really. Glaxosmithkline got to lie in their advertising for at least four years, and possibly as many as fifty-five years. I remember the claim from their advertising thirty years ago. And now that they've got caught out, the punishment is 0.00102% of one single year's profit.

That'll learn them.

The only bright side of the case for consumers is that Glaxosmithkline has been ordered to run corrective television advertising, which will embarass them for a few months and cost them sales. Why, by the time the whole thing blows over, it is quite possible that they'll have lost an entire day's profit.

Who do they think they're fooling?

It must be hard being a cold-calling sales drone, but is it any surprise that people despise them for their tactics when this sort of thing takes place?

I just had a call from a sales drone, I'll call him Henry Deschen (not his real name) who tried to convince me that my boss had personally told Henry that he was interested in being a reseller in Henry's product, let's just call it a Bio Tech Snake Oil Delivery System.

Now, I know that not only isn't my boss interested in Snake Oil Delivery Systems (Bio Tech or otherwise) but the chances of him being interested in reselling anybody else's product is about the same of him winning the lottery three weeks running.

So what is it with the sales drones? Do they really think that the best way to start a business relationship is with something like this?

Actually, it works for advertisers, so why not? I must try it some day -- call up a random customer, and say "Hey, your boss said he wanted you to order thirty-seven cases of Premium Impala Chow. I need a purchase order stat!"