David Walker is the chief operating officer of WorkDay Media, publisher of the online finance industry information service Banking Day, and a principal of the media consultancy Shorewalker DMS. He has previously been director of comunications and advocacy for the Business Council of Australia, director of policy and communications for the Committee for Economic Development of Australia, site director for online finance start-up eChoice and an editor and columnist at The Age.
One of the peculiar features of debates about big monolithic infrastructure projects, such as universal broadband networks and high-speed rail lines, is the way their supporters talk about them in public. To advocates, the wisdom of these projects is obvious. You can never have too much broadband! High-speed rail is the future! Why can’t we be like the visionaries who built the Snowy Mountains Scheme?!? $50 billion, $100 billion? “Chicken feed” is what we’ll call it in 20 years!
And indeed some opponents of these projects take the same attitude from the other side of the fence. Everything’s fine as it is! This new thing will be an enormous white elephant, obsolete before it is finished, you can bet on it!
What we don’t usually talk about is Knightian uncertainty – that is, risk you don’t know enough to quantify, or sometimes even recognise.
This was what former US defence secretary Donald Rumsfeld was talking about when he famously spoke of “unknown unknowns“. That Rumsfeld’s comment is frequently ridiculed just shows how alien considerations of uncertainty are in the public discourse*. Almost no-one wants to say, “well, we just don’t know”. There are things you might do if you just don’t know. They rarely get talked about.
But if you’re having a serious conversation about infrastructure, you have to talk about uncertainty. Continue reading →
I took particular aim at the claim by consumer group Choice that regulators should investigate whether Coles is engaged in predatory pricing. Said Choice: “It is difficult to see why any retailer would sustain such losses if it were not seeking to eliminate or damage its competitors”. Said me: Shouldn’t a consumer group know a little about how retailers operate?
My view was that Coles’ decision looked more like an implementation of the basic retail strategy known as “low-high” – price the basics like milk and bread cheaply, advertise the heck out of those basics, get people into the store, and then rely on them buying items which have more margin in them: frozen blueberries, dishwashing powder, ready-to-cook kebabs, flea collars, Tom Cruise DVDs, broccolini.
In July 2011, the ACCC rejected Choice’s predatory pricing claims and said the milk price cuts were good for consumers.
It looks to me like time for the ACCC (and me) to declare victory. Two years on, milk is still cheap, not just at Coles but at Woolworths and Aldi and IGA. Coles’ strategy is widely viewed within the industry as a success for the company, but there’s still plenty of competition to sell milk to you and me. And of course low-income people have cheap access to food basics. This hasn’t been the Choice organisation’s worst call, but it might make the top ten.
Choice’s dodgy claims about milk are just one example of a broader belief in what we’ll call the kill-them-all business plan, which seems common among consumer advocates. This is the idea that companies or industries can drive all of their competitors out of business, take over and charge what they like. The problem is that this rarely happen in real life, except in a small list of very special circumstances. Predatory pricing is generally very tough to pull off.
There are ways in which companies can control markets, but they are more common in service industries and they generally fit one of several well-known profiles:
The market is a natural monopoly. This is an issue in all sorts of infrastructure markets. Think of parking at Australian airports, or electricity transmission.
The market started with a giant government player. That was the case for the Victorian electricity industry and for national fixed-line telecommunications before the 1990s. One market (Victorian electricity) was redesigned fairly well under former state treasurer Alan Stockdale; the other (telecommunications) is still a regulatory mess, with a new monopoly player being put in place.
The market is subject to lock-in, often because people use the product to interact. Think Microsoft Office, which evolved into people’s default choice because they had to share files with other people. This is one case of a product market where competitors really are pushed out over time. For what it’s worth – and it might not be worth that much – consumers get a benefit (interoperability) as well as higher costs. These markets don’t stay monopolies forever – hello Google Drive! – but they can last a long time.
Feel free to nominate more special cases in the comments.
But in general, companies struggle to control goods markets. When you see someone claiming they can, it seems to me best to take a deep breath and then ask: how, exactly? If the answer is “they’ll slowly drive all their competitors out of business”, you might want to be sceptical.
I like trains. For a while when I was a kid, I spent Saturdays clambering around Adelaide’s Mile End Railway Museum and most of my pocket money buying items for an elaborate train set. Which may explain how I found myself today reading KPMG’s Phase 2 report in the federal government’s High Speed Rail Study, looking at a high-speed rail line from Melbourne to Sydney and on to Brisbane.
Sadly, the Phase 2 report essentially restates, with arithmetic, everything that most analysts keep concluding about a Melbourne-Sydney-Brisbane High Speed Rail (MSB HSR) project. It would be, like my old train set, a bit of a money pit. It would be very expensive ($114 billion in 2012 dollars), would never earn back its capital costs, would take decades to build, and would not be very green. It would doubtless be a buzz to see shiny locomotives surging through the countryside, but its economics don’t stack up.
It’s useful to have this point repeated. There’s a stream of public commentary that says, essentially, that anyone who opposes high-speed rail is just lacking in vision, because, well, to quote a cringeworthy lead paragraph from The Age’s transport reporter, “High speed rail would be the best“. The low point of this vein of commentary was probably Gordon Weiss’s evidence-free paean to HSR in the Global Mail last year, memorable mostly for a bizarre string of approving references to totalitarian governments: ”Benito Mussolini not only made trains run on time, he made them run fast … Unfortunately, Mussolini’s equally manic support for Hitler interrupted HSR technology … the Central Committee changed [China's rail system] with Mussolini-like bravura.”
When that’s the quality of policy debate, a little realism about costs and benefits should be welcome.
Predictably, HSR boosters are arguing the toss. Their first objection is that the $114 billion estimate is way too high. Hey, another study says we could do the job for a mere $70 billion!
This is an unlikely criticism to anyone who understands the recent trends in major developed-country infrastructure projects. The clear trend is for projects to come in way over their original cost estimates.
A video and an essay all on the same subject: measurement in the social sciences. Summary: It’s really worth doing and doing better, even though it’s really hard.
First, health statistician and visualisation expert Hans Rosling, co-founder of Gapminder and justly famous for his presentations on the past 200 years of human development. In the video below, Rosling explains how the world’s poorest countries are developing:
Given how tight budgets are around the world, governments are rightfully demanding effectiveness in the programs they pay for. To address these demands, we need better measurement tools to determine which approaches work and which do not …
… I think a lot of efforts fail because they don’t focus on the right measure or they don’t invest enough in doing it accurately …
… As 2015 approaches, the world is taking a hard look at how it is doing on the [Millenium Development] goals. Although we won’t achieve them all, we’ve made amazing progress, and the goals have become a report card for how the world is performing against major problems affecting the poor. The MDG target of reducing extreme poverty by half has been reached ahead of the deadline, as has the goal of halving the proportion of people who lack access to safe drinking water. Living conditions for more than 200 million slum dwellers have also improved – double the target …
… It is the kind of good-news story that happens one life at a time and so it often doesn’t get the same visibility as a big setback like the outbreak of a new epidemic. From time to time we should step back and celebrate the achievements that come with having the right goals – combined with political will, generous aid, and innovation in tools and their delivery,
Both Rosling and Gates single out the example of Ethiopia, which they argue has made huge improvements in effective primary health care. Their message is that we can see various development initiatives succeeding in such countries.
I’m sceptical of their Ethiopian conclusions, because measurement is one thing and determining causation is another. Development experts have a history of claiming credit for improvements which turn out to have flowed simply from rising incomes (and which reverse when incomes stagnate or turn down). In many African countries, including Ethiopia, incomes have risen in recent years because of higher prices for resource exports. Ethiopia’s biggest export is coffee, and coffee prices have soared in the past decade. They’ve had a terms of trade boom since 2004, a phenomenon Australians should understand. (Update: As commenter Patrick notes below, they’ve also stopped fighting a war with Eritrea. Yep, that could help …)
Still, for whatever reasons, we’re seeing measurable improvement.
I’ve always been in awe of Tycho Brahe, who compiled detailed measurements of the movements of the planets, and Johannes Kepler, who analysed those measurements and made the mental leap necessary (from circular to elliptical orbits) necessary to create the laws of planetary motion. Brahe’s story breaks your heart: all that painstaking work, and he did not live to see where it led. But Brahe’s work mattered. We need great data sets in order to find truth, though creating them is a tough and often unrewarding pursuit.
It’s particularly tough to do decent measurement in the social sciences. I’d argue that far too much social science starts with poor data sets and plows vainly on through poor analysis to pointless conclusions. But good measurement in the social sciences is not impossible, and we should try to do more of it.
Footnote: It turns out Rosling’s latest video is embedded in Gates’ online essay, making it more likely that they are part of a calculated effort to create a powerful narrative around development. Make your own mental adjustments.
The 1947 Grand Ozzie winner holds our restrained Austin Holmes Memorial Trophy.
The Ozzies are, of course, Club Troppo’s annual awards for think-tankery. Handed out ever since Troppo’s founding in 1863, they are … oh, all right, I made all that up. The Ozzies are an excuse for me to write up a few papers I missed at the time and make a point about two Australian institutions I admire. Though hey, Ken, Nick, if they take off, we could probably make a few quid out of an awards dinner!
Without further ado, on to the prizes.
The Ozzie for best think-tank which is actually a blog goes to The Urbanist, the blog of the remarkable Allan Davies. It started out as the Melbourne Urbanist, but Crikey did the nation a favour by giving Davies a higher podium from which to speak and asking him to address issues outside Melbourne. Davies is now doing the nation a favour by bringing sanity to the debate about the shape of our cities, perhaps the most under-rated of our national issues.
Davies’ ability to write prodigiously at high quality on a wide range of topics is pretty much unequalled. His blog posts are better than most think-tanks’ full papers, and there are more of them. Just in December 2012, he dissected high-speed rail claims, argued in favour of the latest Sydney light rail proposal, highlighted the ungreenery of much public transport, skewered a dodgy Age report about traffic forecasts, explained why Sydney’s CBD is growing more slowly than Melbourne’s, and much more. Early in the year, he pointed Australian readers to the latest literature on infrastructure project costs. He has been the most compelling critic of the Victorian government’s barmy plans for an Avalon Airport rail link. His approach is always to stress that the right solution for a city problem relies on a complex mix of factors. Yet he can tease out the factors that matter most, and he writes in a style which allows any educated Australian to absorb his arguments.
More than anyone else, Davies demonstrates why the traditional think-tank model is under threat from Internet-enabled individual experts.
The Ozzie for best speeches which are really think-tank papers goes once again to the Reserve Bank of Australia. The RBA is to the Ozzies what the Mazda MX5 is to best-car awards: year after year, it just keeps making the list. Continue reading →
