I’m new to the site and it’s reassuring to find some people attempting to cut through the added hype/fear of today’s issues.

Interesting blog, but the rental thing errs me a bit. Won’t reduced wages and rising unemployment reduce the tenant pool (also the quality of the tenant, as homes become more affordable to the good quality ones)? I mean, any added migration (if there is any) surely couldn’t make up the lost numbers. Its just a hypothesis, but I’m a renter myself and I’ve never felt more confident in my situation (any rent rise in my rent would be ridiculous and will force me to leave to the current “buyers” housing market).

As for economic stimulus, there is a great opportunity to force innovation in some wasteful yet large industries which are now looking to hit a depression and are begging for bucks (looking at US and local car industry… for example). Lets face it transportation is a vital thing in today’s world, and the collapse of a large sector of the automotive industry could dangerously destroy competition and hamper technological improvements, creating a path for the industry to get back to this point again in the future. It’s today’s worst kept secret (for whatever reason it may be) that the industry holds back fuel efficiency/non-dependency technology. Can a bail-out include government intervention to ensure that an industry heads in the right direction, or do we not have enough resources (skilled labour, money) in this country.

I’m just using the car industry as an example, it looks like the banks and the mining sector have bumpy roads ahead of them too, but that’s another blog.

Sorry if the above suggestions are a bit raw, i only have a couple of years experience in the business assurance sector and am sadly enough finding the financial crisis very interesting!!!

Horsome

sure, skilled migrants can also flow out, but Australia remains a very attractive country to stay in and dnot forget that there are many skilled Australians (about a million if memory serves) overseas who might return as well. And its much harder to pack up the house, the jobs, the school, and the friends, than it is to disinvest a couple of stocks.
The emigration statistics will be interesting, and then mainly in view of the great decrease in the relative exchange rate. Compared to my European buddies, my salary just dropped about 30%
I dont know the age article you refer to, but I think (dont quote me on it) that a student can only stay if they have done particular degrees. If we stop trusting the quality of certain degrees, it is relatively simple for the Australian government to prevent those students from staying.

Just like capital inflows one must expect the skill tide to be coming out at critical times. Skilled migrants are a mobile mob with few allegiances. Also the broader the skill set the stronger the home-sick factor …

“This human capital boosts production at times when other investments in capital go down” – It’d be interesting to see the how the net emigration statistics would support the view under the recession.

Re: housing avaliability, rent levels and low quality degrees … One reads today’s Age to get the clue that skilled migration is being substituted by underpaid foreign student labour force putting stress on housing, getting crappy degrees and keen on staying in the country with few new skills to offer ;-)

you are right, it is a bit off topic, but at the start it was joined with the financial crisis in peoples mind, presumably because they blamed bad managing for the problems that emerged.

“Juggling power between a government … and CEOs …. in order to protect shareholders who fail to take an interest in their own wellbeing is a losers game.”

nicely put. That is indeed the dilemma and I dont think it will go away.

Just like we shouldn’t just trust the government but insist on all kinds of checks and balances, one can argue one shouldn’t trust CEOs.

Well, there’s no reason to trust CEO’s or anyone else for that matter, but this seems kind of off topic considering that the original plan was to find ways of solving the financial crisis (check the title of the article at the top of the page). Seems to me that if a business is not in crisis, nothing needs solving.

Maybe there’s some theme of political opportunism here, whereby the crisis can be used to garner support for offbeat ideas in redesigning our economic and legal framework. I don’t see this as genuine problem solving, but I’ll buy into the argument regardless by saying once again that the correct people to put pressure on CEOs are the shareholders, and if they can’t do the job then it seems a truly hopeless situation. Juggling power between a government that cannot be trusted, and CEOs that cannot be trusted in order to protect shareholders who fail to take an interest in their own wellbeing is a losers game.

the rationale behind interfering with CEO pay for me has always been that CEOs dont own the business they de facto control. Hence there is an agency problem, which is particularly strong if there are no big shareholders constantly monitoring the CEOs. Just like we shouldnt just trust the government but insist on all kinds of checks and balances, one can argue one shouldnt trust CEOs. That is a general phenomenon, not just a phenomenon of this or that firm. As I argued in October though, its not easy to see how one can improve on the agency problem.

But the fact is that species with low offspring survival rates tend to have lots of offspring, whereas species with high offspring survival rates tend to have fewer.

I would declare the possibility that cause and effect are the wrong way around in the above statement. Having more kids automatically implies spreading available resources thinner, thus putting pressure on survival rates. It sounds like a typical curve caused by the product of two inversely related variables (e.g. engine power is torque multiplied by revs). These type of curves have a sweet spot somewhere in the middle (engine gives more power for more revs up to the “red line” after which more revs gives less power). The exact sweet spot will depend on how quickly survival rate rolls off with reduced resource availability. Hopefully the optimal value doesn’t land on half a baby because then the difficult question arises of what to do with the other half ?

… but this also means its business as usual for those not asking for a loan, which is the vast majority of firms.

I don’t see any problem with this. Why would the teetering bankruptcy and government bailout of unsuccessful business A, be in any way a reason to apply sanctions to successful business B ? I have trouble comprehending such logic on either a moral level, or from an amoral efficiency point of view.

Luckily I was first born – so on Sunday, when it’s my turn to host our xmas do, I’ll be reminding them all how I’m smarter and it’s backed up by the science.

Actually, it would be really worth calculating this all through sometime to find what the final potential function actually looks like. The problem with saying 10,000 per year is that people automatically get it into their head that the amount is evenly distributed across people. However, it more than likely isn’t — the cost effects in terms of crime and so forth are going to be extremely high for a small percentage of the population. One can also imagine the opposite (one Bill Gates, for example). It beats me what the actual break-even point is, but I wouldn’t be completely convinced just by looking at this number and thinking 10,000 is a lot. It would also be worth working out how much you could get the overall costs down by targeting specific groups, rather than just having a sledge-hammer thou must have a 1:3 ratio approach.

yep, agreed on all this. Its a nice thought to auction off bits of the car-industry, but cant see it happen.

Tel_,

agreed on rents. Sure, the government can put string on loans, but this also means its business as usual for those not asking for a loan, which is the vast majority of firms.

love the Darwinism angle. If you would truly take the IQ of a child as the objective function though, there are various things governments can do already, like ban low-IQ men from propagating for instance. I guess our societies are not ready for this kind of intervenion and I personally hope we never will go down that road.
I was of course being a bit tongue-in-cheek when talking about big families, though its not that far back that our societes had huge families as the norm and I bet the kids didnt get much quality attention as babies then either but still seem to have turned out alright.

fine. The point on babies was indeed the trade-off issue. If you think about the pay-back needed later in life to recoup the pretty substantial extra investments during baby-time, it seems unlikely a reduction in the ratio will be cost-effective. For instance: if you add another year of full-time care to childcare (=1/3 more for 3 years) then this will cost you somewhere in the region of 80,000 AUS now. If you want to recoup this with wages 20 years later, you’d need something like 10,000 dollars extra for every year (using a discount factor of only 5%) later in life. This is using a conservative discount factor and also presuming you only want the extra care for 1/3 of the day (not the whole 24 hours). Now, I don’t care how good the extra carer is, its tough to buy the argument that a bit of extra attention spread over 3 babies only during office hours is going to permamnently increase yearly income later by 10,000 AUS.

As to the language of poverty and welfare dependency, I certainly do not think the majority wants to be on welfare support the rest of their lives, and I indeed agree that the recent experience with reducing DSP numbers has been a failure around the Western world precisely because the vast majority of people on it are unemployable at anything but a very low wage. I would agree with Patrick though that this is not entirely exempt from conscious choice-making. It is the case that I think the welfare dependent consciously refuse low-wage jobs later-on (partially because it makes them materially worse off to accept them!) and that earlier life-choices they made (schooling) did entail the conscious risk of becoming permanently welfare-dependent later in life (I have a paper on this with Lisa Farrell that came out earlier this year). Hence, I would say it’s a mixture of choice, self-delusion, bad-luck, and societal expectations.

but what if we reach a point where resource scarcity is so severe that

zzzzz

DD, people may not plan to live ‘lives of poverty’, but they certainly do make different choices as a result of the known possible outcomes. So if there was no DSP people might try harder to find any kind of job. You know that, of course, but I am just saying it because I think that was the sense in which Paul meant it. ‘Shirking’ is a matter of degree, really.

On a slightly different note personally I would rather means-tested payments to encourage mothers/fathers (not both!) to spend at least one year at home. My conservative side showing me up I guess.

I am of course well aware of yours and Bob’s fine work. I suppose what I objected to though in your post was the language – as though people planned to live lives of poverty, or as though the administrators who put them on DSP weren’t making realistic choices about their individual labour market prospects at the time. That more people go on to DSP in a sick labour market (and stay on it when the labour market does eventually improve) does not imply shirking. After all, there are quite a few forces other than business cycles pushing up DSP numbers – simple workforce aging, much longer life expectancies for the severely disabled, increasing rates of major depression, reduced availability of alternative forms of income support for the disabled such as workers compensation and veteran’s pensions, etc.

That attempts at making disability pensions harder to get have, throughout the developed world, been spectacularly unsuccessful at preventing rising pensioner numbers oughtta tell you things are not that simple.

NPOV, can you please explain an evolutionary basis for evolving to the point where women couldn’t bear more than one child???????!!!!??????!!?? Although I guess then the incentive to impregnate any given woman would be so high that we would simply evolve to mass rape of barely pubescent girls? I guess this would propogate those genes which manifested themselves in the strongest and most aggresive men! (although maybe the availability birth control would change the equation somewhat in favour of actually trying to persuade women, frankly, I doubt it would be significant)

FWIW, IIRC, there is also a free kick to being born from earlier eggs than later eggs, ie the younger the mother the healthier the baby. Psychological effects probably outweigh this too at some point, though, particularly in the above scenario.

BTW, I certainly agree that life with three babies, without professional help, would be amazingly difficult and couldn’t possibly be ideal for the kids or mum. Then again, how long ago were five-year-olds trucked off to boarding schools?

If you want some real data on this, then I think it’s generally accepted (although people argue about it a lot), that if you look at the IQ of kids, then you find slight decreases in birth order even at number 2.

http://en.wikipedia.org/wiki/Birth_order

So in terms of IQ, the optimum number is 1 (although I doubt Darwin would be too pleased :)

rents are about the peak of what people can actually pay and I think its more likely that prices will fall until rental yields are more reasonable.

With rents rising and house prices falling, the incentive is for renters to stretch the extra distance and buy a house (even a house that is smaller than what they wanted or older than ideal). This puts a floor on how far house prices can fall (unless the recession gets so very bad that borrowing is not an option for most people, and I doubt it will in Australia). To some extent at least, market equilibrium does really work.

Mortgage-belt Australians no longer need fear eviction.

Now they can fear job loss, followed by eviction. Only approximately half of the recent interest rate falls have actually been passed through (from what I can see). Most people are still paying around 6% while the peak was approx 8.5% so we’ll see if they really drop as low as predicted. Media talk about “mortgage stress” has little connection with what happens at street level. Media reports have become an idealised formal portrait of the people they report about.

I denounced political talk about restrictions on CEO pay to be mainly hot air because the underlying issues were too complex and it would be really tough to legislate against it. Indeed, talk of interfering with CEO pay have now been reduced to a few token protestations that bail-out money cannot be paid to CEOs, but no general moves have been undertaken to counter-act the self-enrichment of managers in the economy. No doubt libertarians rejoice over this.

It was good enough for the World Bank to tie strings to loans and come up with their magic “structural adjustment” plans, which seems to open a precedent for others to follow. I would have thought that no legislation whatsoever is required. You write a contract that includes cuts to CEO pay and you wait for the CEO to sign it before you hand over the loan. If the CEO won’t sign and the whole thing ends up in bankruptcy court then that’s OK, the administrators can explain to the CEO just where she sits in the the queue of creditors. Those CEO’s managing to keep their ship afloat through a recession without bailout money, just might be earning their pay.

As a self confessed libertarian myself, I’m always stunned by how conscientiously governments will avoid using established methodology for negotiating commerce, and will reach for the regulation tire-iron in an attempt to legislate the answer they want (invariably ignoring any collateral damage). I’m all for transparency and publication of CEO remuneration to keep the shareholders informed (the market depends on availability of information), but if those shareholders really want to keep throwing money, then we have to accept that it’s their money. Otherwise if we can’t trust out citizens to decide where to spend their own money, how can we trust them to do something serious like vote, or sit on a jury?

By the way, if the childcare centers get a bailout, why not help the family daycare mums who take risks and expenses on their own heads without CEOs, shareholders and other parasitic costs? I mean daycare is a labour-intensive industry, not an infrastructure-intensive industry so can anyone explain why capital investment even makes sense for such an environment?

1. expropriate existing shareholders leaving their equity at zero
2. try to auction off the brands and/or facilities to other firms who would agree to keep a lot of the production going for some period of time during which the workforce would undertake to co-operate in a complete restructure. (The ‘bailout’ money would be used to get buyers in this process).

I would have thought this could quite possibly be a cost effective use of the money particularly at a time like this, and that if it was done well it would work better than laissez faire but I agree it’s risky because the process would probably get politically subverted (particularly in the US). But with the economic situation the way it is today in the US the damage of these firms going bust all at once – and it would drag down a lot of firms that would be viable in the long run going under – would also be considerable.

Anyway, it actually presents an opportunity for the Australian industry. Ford – which has been assiduously positioning itself to be the next Mitsubishi might get a Chinese owner and the owner and its new asset would have a lot to offer each other!

I think the automotive industry is a good case in point. I agree that one wouldnt want a blank cheque and that there is some rationale for trying to salvage parts of the business. We might differ about how to do this. My stylised understanding is that it has effectively been bankrupt for years if you include the pension and health liabilities. It has been a constant drag already, whose pension fund undoubtedly took a huge knock in the recent financial crash, aggrevating their insolvency. Does it make sense to prolong the misery, subdsidising consumers to buy second-rate cars? No. The US government should at least let one car manufacturer go bankrupt, maybe more. It should look at consolidating the models that are viable or least unprofitable. In stead, it is being coopted to tax competitive industries to further prolong a losing battle.

Whether such a restructuring is politically feasible is another matter. It probably is not. If the choice is between letting them go bankrupt and dragging the rest down, my choice would be to let them go bankrupt now.

I agree that there is a rationale with going with the optimal level as long as you can afford it. My understanding of the rationale behind the legislation proposed though is that it is not really based on an optimal trade-off, rather its an asymmetric zero-risk policy that pays no attention to the employment effects. It is implicitly deemed better to force mothers to quit their job and to be at home rather than have their babies cared for by someone looking after 3 other kids already. You’d have to feel bad coming from a large family is you hear all this….

1. Kept the industry going for another year
2. Removed existing management and got serious concessions from the unions (one might also use federal money to retire some of their legacy liabilities to pay pensions)
3. The best way to get better management would be for the government to help arrange an orderly sale to a completely different owner. It would probably be best if it were foreign, but if it were a genuinely new owner I guess an American firm might be OK.

In other words, the bailout would not advantage existing shareholders. That is one of the bottom lines, the other is structural micro-economic change.

Do you agree that such a ‘bail-out’ would be OK?