Nathan Taylor

The case I made here, here, here and here about democracy and economics was more formally articulated in this paper. The authors made the prediction that:

“We also posit that economic reform will bring increased pressure for democratization in countries such as Egypt and Syria. For this reason, economic reform of the kind we discuss in this Article (simplifying and reducing the costs of business formation) will be a good “leading indicator” of political leaders’ real interest in implementing meaningful democratic reforms that go beyond mere public relations gimmicks.”

It was prescient in that Egypt’s current unrest may have been caused by the low level of economic wealth of the country. However, Egypt’s economy had been growing at one of its fastest paces ever prior to the revolution.

I like the author’s final quote:

“If you are a despot, unleashing entrepreneurship can be bad for your job security.”

Makes you wonder how long China will be able to manage the balancing act.

The change in State Governments in Victoria has created an ideal opportunity to revisit decisions from the past and critically assess them. While there is a strong element of making ‘political hay’ there is also an important opportunity to reassess past decisions in light of current reality.

One area to receive a lot of interest has been the previous government’s decision to invest a large amount on commissioning a desalination plant and contracts for future supplies of water.

The plant was run as a public private partnership (PPP) where private sector companies invests the capital to designing, building, financing, operating and maintaining a desalination plant in return for payment for the delivered service.

The new State Government recently released the contract details of the PPP – and with large swathes of Victoria recovering from floods – the details are not pretty. The 110228-Desalination-project-service-payments-PDF-565KB document summarises the contract payments.

This chart shows that even with floods the Victorian government has committed to extensive payments to their PPP counterparty. 

The current State Government is highly critical of the desalination plant contracts. However, in evaluating the decision, you need to be aware of the context in which it was made to avoid an ex post (after the fact) versus ex ante (before the fact) judgement.

The objective of the desalination plant was to ensure Melbourne didn’t run out of water. It was made at a time when prominent scientists (such as Tim Flannery) were predicting that Australia would have the first major metropolitan ‘ghost cities’ as a result of climate change. Remember, the desalination plant decision was made during an extended drought – which went on for almost 16 years without a ‘wet month’ that is required to provide water to dams and rivers.

While the desalination plant may have been a bad idea (there could have been other, less political palatable options such as potable water), it is not fair to assess the decision purely on the fact that the state has been experiencing floods recently.

There was no way to know if the rains would come in time at the time the decision was made for the desalination plant.

Such is the difficulty of making decisions in an uncertain world.

Back in 2009 I wrote about the own goal of the Rudd government in not reversing protectionism for book sellers. The Productivity Commission had recommended full liberalisation of book import restrictions as the current restrictions did not effectively protect authors and represented protectionism for the publishing and printing industry.

Tim Wilson wrote a strong opinion piece on the topic here. I love the comparison that in New Zealand, which abolished protectionism in this area in 1995, printing jobs have been static. In comparison, the protected, and uncompetitive, Australian industry has shed 10,000 jobs over the same period.

It’s not like New Zealand can be more competitive at printing than Australia…

PS. Check out the udders (simply have to include the image below)…

In a well timed comment here, the NBN Myths website responded to my comment that, “Finally, the technology of the NBN is outdated anyway,” by saying:

“Really? Fibre optics are out of date? Man, you’d better call all of the World’s telecommunications companies and engineers and let them in on the secret. Because there are an awful lot of countries out there that are rolling out fibre networks just like the NBN. South Korea, China, Japan, HK, Singapore, the Netherlands, Denmark, Iceland, Sweden, the US, the UK, Peru, Italy, Ireland, Sweden, Switzerland…….

Since a single strand of fibre can carry more data than the entire radio spectrum combined (let alone the tiny fraction of MHz reserved for wireless broadband), I wonder what magical technology you have come up with that has made this network out-of-date?”

The timing of this comment was impecable. Leaving aside the comparision with South Korea and the NBN (chalk and cheese) the real cooker was the announcement by Telstra that it will introduce 4G technology to compete directly with the NBN.

Sigh. A paper thin business case just got a whole lot weaker. I wish the NBN was being run by a private sector company so that I could short sell its stock. It is a terrible investment and it is unfortunate that it is also Australia’s largest!

A response to this blog stated:

‘‘Pink Bats Debacle’ When the failure of people installing the insulation was against established regulation and nothing to do with the Labour Government.’

On one level this is correct. The people who died installing the pink bats were going against government regulation/had no idea of what they were doing. So what is the problem? That may be so, but there are plenty of other government initiatives implemented every day that do not result in deaths or electrocuting houses.

The main criticisms against the pink bat scheme are:

• it was rushed; and
• it was fundamentally flawed and did not achieve its stated objectives.

The reason the program was rushed was that it was implemented with the notion of stimulating the economy. Because of the speed it was implemented proper oversights were not developed. It should never have gone ahead in its form. As a result, an additional $1 billion dollars were required to fix the problem created by the Government in the first place. According to the Auditor-general, Ian McPhee in a review of the program:  

“The department requested the program be rolled out over five years but that this request was denied because of the desire to stimulate the economy and create jobs.”

There is a reason government programs are slow to get up and are riddled with paperwork – they need to be in order to protect public funds.

However, the real fundamental flaw was that the program was designed to reduce the level of carbon emissions and was never going to be a good use of funds to achieve this. There were numerous ways that carbon emissions could have been reduced for less cost and more effectively. Unfortunately, none of those means involved an expensive program that would allow the Government to be seen ‘doing something.’

A recent study has found that having a ‘trained’ medical clown visit an in-vitro fertilization (IVF) patient at the moment the embryo was implanted resulted in a 36 per cent chance of successful pregnancy. Those women who were not visited by Patch Adams were only 20 per cent successful in reaching pregnancy.

The study was conducted on 229 Israeli women undergoing IVF to treat infertility. Time magazine describes:

“After controlling for factors such as the women’s age, the nature and duration of their infertility, the number of embryos used and the day on which they were transferred into the uterus, researchers found an even greater effect of therapeutic laughter: the women who were entertained by a clown were 2.67 times more likely to get pregnant than those in the control group. “

Apparently the medical clown would assist the women in relaxing and this had a major impact on their level of successful pregnancy.

While this may not exactly be a placebo (no one was informed that the administration of a medical clown would significantly boost pregnancy) it is indicative of the amazing complexity of the human mind and body.

Clearly, they were not visited by this clown:

The placebo effect is a well known phenomenon that can significantly impact on medical experiments. When conducting experiments to test the potency of a drug, scientists will often give half of the study groups ‘placebos.’ While the test subjects are told they are being given an experimental drug, they are actually being given an aspirin or sweet with no medical benefits at all. The strange thing is that people often experience the benefits of the actual drug even though none was administered.

Because they believe the drug will have a certain beneficial impact on them they manifest these results even though they haven’t received any drugs at all!

Jonah Lehrer describes a study by the neuroeconomist Baba Shiv of Stanford University. In the study a group of people were supplied with an ‘energy’ drink that was advertised as making them feel more alert and energetic. Some of the study participants paid full price for the drinks, while others obtained it at a discount. The study participants were then required to complete a series of word puzzles.

It turns out that the price is an important signalling factor for the placebo effect.

Those study participants that obtained the discount for the energy drink consistently solved around thirty percent less puzzles than the people who paid full price for the drinks. The price served to provide a subtle signal as to the ‘potency’ of the energy drink. It would be safe to say that all the benefits could be a result of the expectation that the drink would have meaningful benefits.

Lehrer went on conclude:

“This is why brand-name aspirin works better than generic aspirin, or why Coke tastes better than cheaper colas, even if most consumers can’t tell the difference in blind taste tests.”

Senator Stephen Conroy has provided the most powerful, and hilarious, example of the confirmation bias that I have ever come across.

I’ve previously written how the confirmation bias means that humans tend to put more weight in information that supports their preconceived notions or beliefs. Well, Senator Conroy is responsible for the largest infrastructure investment ever undertaken in Australia’s history. He has a lot of reasons to be biased in his assessment of information.

To justify this investment, Senator Conroy has frequently cited the benefits of IT investment in driving South Korea’s economy. He has stated:

“Although Korea was among the nations hardest hit by the Asian financial crisis in the late 1990s, the country turned a disaster into an opportunity to grow its IT sector. Spending on broadband and other high-technology equipment helped lead a transformation of the economy . . . By May 2004, about one-third of Korea’s exports were from the IT sector.”

But, as The Australian journalist Paul Kerin said:

“Actually, South Korea’s average annual GDP growth over the last decade (4.2 per cent) is less than half the 9.2 per cent it achieved in the decade preceding the Asian financial crisis. ICT exports were about one-third (33.9 per cent) of Korea’s exports in 2004, but Conroy didn’t mention that they were already 31.4 per cent in 1999, nor that they had dropped to 26.2 per cent — below their level before the Asian financial crisis — well before he gave his speech.”

When the The Economist’s Economic Intelligence Unit ranked Conroy’s plan poorly compared with the South Korean one, suddenly it was like comparing ‘apples with oranges.’

This is like the two groups of students who read the same information and found it justified their pre-existing, but diametrically opposing, views.

It is a natural human tendency to seek information and ideas that reinforce a preconceived notion, idea or belief. This bias is strongest for emotionally significant issues and well established beliefs.

As described by Wikipedia:

“A series of experiments in the 1960s suggested that people are biased towards confirming their existing beliefs. Later work explained these results in terms of a tendency to test ideas in a one-sided way, focusing on one possibility and ignoring alternatives. In combination with other effects, this strategy can bias the conclusions that are reached. Explanations for the observed biases include wishful thinking and the limited human capacity to process information. Another proposal is that people show confirmation bias because they are pragmatically assessing the costs of being wrong, rather than investigating in a neutral, scientific way.”

As I’ve previously written, another great study sorted a group of students into two teams, based on their opinions about capital punishment. These two teams, composed entirely of members who were either for or against capital punishment, were asked to objectively evaluate different opinions about the topic.

The students in each team found that the evidence, on balance, favored their pre-existing position! Both groups were using the same information and came to the conclusion that it supported diametrically opposing positions.

The confirmation bias is why it is often said that science proceeds over the bodies of dead scientists. New ideas and ways of thinking about the world can only gain acceptance when those ‘committed’ to the old ideas (often their own) are no longer around. When this happens, people can reassess the merit of information and develop new ideas.

The power of science is that it treats all information as being valid. The power of politicians is that they do not…More on that next!

The Australia columnist and demographer, Bernard Salt, recently wrote about how rapidly people move back to disaster zones. Citing the fact that:

“The Victorian fires of February 2009 claimed 173 lives and brought devastation to several towns, but perhaps the best known example is Marysville, in the Shire of Murrindindi. Between 2007 and 08, that shire recorded population growth of 1.5 per cent to 14,405. This level of growth is consistent with what would normally be expected from a lifestyle and tree-change community close to Melbourne.”

Bernard Salt put forward that this represented demographic resilience in the face of natural adversity.

I would disagree.

The reason people move back to regions that have been visited by natural disaster is because of the availability heuristic and the way people quickly forget the disasters of the past as they are caught up in the mundane.

Take the major example that was cited, New Orleans. Mr Salt points out that the population of New Orleans is now just five percent lower than before Hurricane Katrina, which made landfall over New Orleans in August 2005 and claimed 1800 lives. In contrast, just nine months after the Hurricane the population of New Orleans had fallen by 300,000 or 22 per cent.

Nothing has been done to prepare the city for a similar eventuality. It is not more safe than before the catastrophe. In fact, extreme climatic events are not showing any signs of diminishing. The reason people are moving back is simple: we forget. We base our decisions on events that are easy to remember – and more distant ones are always less likely to be remembered and less vivid.