Thursday, May 15, 2008

So... The Budget was boring

This from Joshua Gans at ABC Online:

Back to Boredom

by Joshua Gans (13th May, 2008)

When I was growing up, Budget Night was a dull affair. It was a mind-numbing statement of a raft of statistics, tax changes and expenditures. The best thing to look forward to was the headline balance in the budget accounts. How large would that deficit be was the question in the early 1980s? How large would the surplus be was the question for the rest of that decade. Other than that, there were a few new initiatives and it was hardly a ratings puller for the ABC.

To keep interest flowing, the Howard government would use its Budget Night for some new announcements. Usually these were a new round of changes to tax thresholds but occasionally they would throw in baby bonuses and child care rebates to create some talking points.

Tonight’s affair was back to the sleep inducing days of old. Put simply, there were no surprises. The Rudd government has done pretty much everything it promised to. The only new stuff were some spending cuts achieved in small little bits throughout the public service. The image of a widespread razor gang armed with small blades is hardly a recipe for excitement. The Australian Chamber Orchestra will be reeling but the vast majority of us aren’t going to notice.

Now there was one small thing to talk about and, in desperation, talk about it shall. About 20,000 babies born after the 1st January 2009 are not going to deliver the $5,000 baby bonus to their parents. The baby bonus will be means tested with households earning more than $150,000 missing out. And I suspect that the government will hardly lose a vote amongst those folks. When it comes down to it, it was with some embarrassment that those parents were extracting $100m per annum from the social pool.

What is more interesting is why the government chose the 1st January 2009 for the big cut-off date and not 1st July when the baby bonus is due to rise to $5,000. As Andrew Leigh and I have demonstrated based on past baby bonus hikes, that rise will cause some delay in births. One might think that cutting the bonus for high income households would have accelerated births into the current fiscal years for those. To be sure, that would seem to smooth the waters but from a medical perspective, giving parents an incentive to rush things would be a bad idea. That incentive will not be transferred until the last week of the year. However, then parents are going to have to convince doctors to come in for special deliveries on what is usually a low birth week. I would have preferred a graduated elimination of the bonus but if you are going to remove it, best to do so at that time. (And by the way, no point in rushing out this week to make that birth date: you’ll find yourself a couple of months too late).

While it won’t create much talk soon, the infrastructure expenditure plans will probably be the lasting economic reform from this budget. The move to a fund for capital works signals a clear role for the government in providing transportation, digital, health and educational foundations. This is a big break from the previous government and makes it look more like the Bill and Melinda Gates Foundation than our big corporations. I like that image.

John Maynard Keynes hoped for a future where economics would be a boring activity — he aspired for them the status of dentists. Wayne Swan has delivered a budget that lives up to that aspiration. My children decided to watch the speech with me. It put them straight to sleep even more quickly than a Dr Seuss book. And it should be, should be, should be like that.

Joshua Gans is an economics professor at Melbourne Business School. He blogs on these issues at economics.com.au.

Tuesday, May 13, 2008

Science Must Prevail

This from Barry Brook in the Higher Education supplement in The Australian...


SCIENTISTS must work harder at making the public aware of the stark difference between good science and denialist spin. "Don't feed the troll!" This is a common admonition in the expanding science blogosphere, at least the rational quarters.

Trolls, in the internet vernacular, are people who intentionally post false or controversial messages to gain attention or foment a conflicting style of debate. Most remain shielded within the anonymous confines of their online pseudonym. A rare but vocal few are sufficiently emboldened by self-confidence (or hubris) to speak out in public.

For the longstanding ostensible debate over the relative merits of evolution v creationism, they usually style themselves as "creation scientists" or "intelligent designists".

In climate science and policy, those few apparently well-educated people who continue to deny the now vast body of scientific knowledge and analysis on the causes and consequences of global warming are variously called sceptics, denialists, contrarians, delayers or delusionists. Whatever the label you attach to them, they are all cut of the same anti-intellectual cloth.

Their business is the dissemination of disinformation, doubt and unscientific nonsense. One of their most regular ploys is to leverage the widespread lack of public appreciation of how science operates. The scientific process of theoretical postulates, hypothesis testing, critical evaluation (and re-evaluation) of ever accumulating empirical evidence, model validation and peer review is inherently complex and often technical.

Science has little top-down control on what should and should not be investigated (embryonic stem-cell research and bio-weapons development notwithstanding). There is no attempt to ignore inconvenient findings and no global conspiracy to distort the truth for securing funding or notoriety.

Good science -- evidence and ideas that are repeatedly supported by observations, experiments and models -- gradually emerges from the pack and moves from being hypotheses to theories, paradigms and laws. Yet some people will attempt to hijack science for political or ideological reasons and in doing so besmirch science's public image. They are good at doing this, and they often exert a disproportionate influence on policy. Some will simply argue that the Earth is flat because "it looks flat".

Groups with vested interests in business as usual (such as tobacco spokespeople or fossil fuel lobbyists) will attempt to push so-called "scientific evidence" to support their claims.
In fact they are at best drawing selectively on a small part of the evidence, or at worst relying on "junk" science: that is, outdated, discredited or fabricated data and ideas.

If confronted with good science, deniers sidestep valid critiques and ignore counter-evidence (or dismiss it by deferring to other discredited ideas). They are hard to pin down because they don't want a serious scientific debate.

The Washington Post recently reported Walter Meier of the National Snow and Ice Data Centre about the parlous state of Arctic sea ice: "'Flying over the Arctic, one might perceive the sea ice cover as broad,' Meier said, but that apparent breadth hides the fact that the ice is so thin. 'It's a facade, like a Hollywood set,' he said. 'There's no building behind it."'

Joseph Romm, who writes a blog on climate change and denialism (www.climateprogress.org), commented: "What a perfect metaphor for the delayers. Their arguments seem solid and impressive, but it's a facade."

Scientists should beware of feeding trolls by engaging them on their terms. Instead, be strong, well-informed advocates for good science.

Don't think that it is enough to be merely passive bystanders. Good science alone invariably wins these silly debates, but usually not before denialist spin does much damage.

Active and forthright public communication of science is not only an obligation of scientists, but a critical necessity. This is especially true for climate change and environmental sustainability, where we are perilously close to running out of time.

Barry W. Brook is director of the Research Institute for Climate Change and Sustainability at the University of Adelaide. This article is reprinted from Australasian Science.

Friday, May 09, 2008

Final Words of Wisdom

This is from Jim Parker's column, Outside the Flags, April 2008:

One of the world's more insightful finance journalists has quit the media after a quarter of a century. But before taking up his new job in the corporate sector, Jonathan Clements has offered some final words of wisdom.

For 14 years, Clements used his popular column in The Wall Street Journal to rail against a financial services industry that spends more time thinking about its fat fees than the welfare of the people who entrust it with their money.

For his final column before taking a job as an education director at Citigroup, Clements assembled a list of some of his favourite pieces from over the years. They include some great advice for investors everywhere.

In one article entitled 'Twenty Tips for No-Nonsense Investing', Clements blasted the notion of so-called "sophisticated" investment strategies.

"Sophistication is usually an excuse for Wall Street to charge fat fees," he wrote. "If you don't understand an investment, don't buy it. Most folks can do just fine with a handful of plain-vanilla mutual funds, preferably market-tracking index funds."

Unusually for a journalist, Clements also spotted that "excitement" and having a good investment experience were not necessarily compatible concepts.

"If an investment is exciting, it probably won't be especially profitable," he wrote. "Investors love to buy hot growth companies, trade mutual funds and take a flier on initial public stock offerings. Before you join the fun, however, consider how much you might lose."

As to the financial media itself, Clements didn't recommend his readers ignore the news so much as realise that their own portfolio decisions should not be driven by the events of the day.

"Sound investment strategies don't change with the news," he said. "By all means, read the personal finance magazine's . . . market prediction and listen to the television reporter's breathless dispatch from the floor of the New York Stock Exchange. But for goodness sake, don't act on this nonsense."

As a former financial journalist myself, I have to tell you he's got it right.

Friday, May 02, 2008

Inside Buffett's Investor Master Class

This from Smart Investing by Robin Bowerman 2/5/08

Warren Buffett is a multi-billionaire with a powerfully simple way with words.He is also notoriously selective about giving media interviews - largely one suspects because he doesn't have to talk to anyone he doesn't want to.

But there are a couple of events a year where Buffett is happy, even expansive in offering his thoughts on investing and the general state of business. One is his widely read annual chairman's letter to Berkshire Hathaway shareholders while the other amounts to a private tutorial with the world's greatest investor and it probably qualifies for the title of the world's best master class in investing.

Several times a year Buffett invites a group of business students to Berkshire Hathaway's headquarters in Omaha for an intensive day of business and investment education. Recently it was the turn of 150 students from the University of Pennsylvania's Wharton School (where Buffett studied) but unusually, US business magazine Fortune was allowed to sit in to give us an insight into what Warren is thinking and saying about the US economy and market turmoil.

After taking them to lunch at favored local restaurant (Piccolo Pete's in case you are passing through downturn Omaha) the day wraps up with a two-hour question and answer session with Buffett.

One question perhaps captured what most investors would like to ask Buffett should they ever be lucky enough to be in the same room: What advice would you give someone who is not a professional investor? Where should they put their money?

The answer will surprise many although not ardent students of Buffettology: "Well if they're not going to be an active investor - and very few should try to do that - then they should stay with index funds. Any low-cost index fund. And they should buy it over time. They's not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock," Buffett told the Wharton students.

Buffett is something of a paradox - he is arguably the world's most successful active investor yet advises people against following the same approach.

He has consistently argued this point over many years and if you go back to this year's Letter to Berkshire Shareholders he explains his reasoning a little more."Naturally, everyone expects to be above average," Buffett says.

"And those helpers - bless their hearts - will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group - the active investors. But this group will incur high transaction, management, and advisory costs.

"Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group - the "know-nothings" - must win," Buffett says. By "helpers" Buffett means the professional consultants/advisers who have built an industry helping other's invest their money.

Finally, in the Fortune article Buffett offers a typically pragmatic view of what went wrong with the sub-prime mortgage market and the infamous collateralised debt obligations (CDOs).

Buffett says he gets his investing ideas simply by reading. "I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them and then those all tranched into maybe 30 slices.

"You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean it can't be done.

"When you start buying tranches of other instruments nobody knows what the hell they're doing. Its ridiculous," Buffett says.

Which perhaps brings us back to one of Buffett's basic principles: don't invest in things you don't understand.

Simple really.