Scepticism about the capital market (as opposed to social) value of Google, led by econobloggers, and followed, much later by the financial press, seems to have had some impact.

Google said the new estimated share price range was $US85 to $US95 ($119 to $133), down from $USUS108 to $USUS135 previously. It also sliced the number of shares on offer to 19.6 million from 25.7 million.

The maximum the internet giant can now rake in, excluding over-allotments, is $US1.86 billion, a stunning climbdown from initial expectations of $US3.47 billion.

The new maximum price values the entire company at $US25.7 billion, down from $US36.6 billion.

Thanks to FX Holden for the alert.

Brad de Long points to a piece on the equity premium by Marty Weitzman and says,

Marty Weitzman is smarter than I am …This is brilliant. I should have seen this. I should have seen this sixteen years ago. I *almost* saw this sixteen years ago.

Weitzman’s idea[1] is the replace the sample distributions of returns on equity and debt with reasonable Bayesian subjective distributions. These have much fatter tails, allowing for a higher risk premium, lower risk free rate and higher volatility, in the context of a socially optimal market outcome. Here are some of the reasons why this is important

My immediate reaction is the same as Brad’s. Something like this has occurred to me too, but I’ve never thought hard enough or cleverly enough about it how to work it out properly. This is a very impressive achievement, and Marty Weitzman is very, very smart (which we already knew).
Read More »

Ross Gittins gets the word out on an issue that I’ve been hammering for years, and that’s recently been discussed on this blog: the spurious nature of measured productivity gains that arise when the pace and intensity of work is increased. He also refers to John Buchanan of ACIRRT, the source of some excellent work on this topic over the years.

There was an interesting report in Monday’s Fin (subscription required) showing how little hope there is for a coherent policy on Public-Private Partnerships. Over the past few years, all the state governments including Queensland’s, have produced impressive-looking policy documents saying that the idea of PPPs is to get reduce the cost of public projects (‘value for money’ is the key slogan) through efficiently sharing risk with the private sector. The documents are notable for denying that the idea is fund projects that would not go ahead otherwise, or that PPPs provide a way of getting infrastructure without debt.

But, as the Fin reports, the potential private partners have other ideas. They don’t want to take on risk and they don’t want the government to worry too much about saving money. What they want, it’s pretty clear, is private-sector rates of return on public projects, with the government ready to pick up the pieces if anything goes wrong.
Read More »

Alan Wood of the Oz, an occasional reader of this blog, has a piece in today’s Oz which links neatly to this post which in turn links back to Ross Garnaut in the Oz (thanks to Jack Strocchi for the link).

One striking feature is the statement that ”

total national savings – household, government and corporate – have plugged on at about 19 per cent of GDP

. This is superficially inconsistent with my observation, a while ago that net national savings are close to zero (I guessed 3 or 4 per cent of GDP). As this piece from the ABS shows, the actual rate is about 3 per cent. Wood’s observation presumably refers to gross national saving, which includes depreciation. I haven’t checked it carefully, but the number seems plausible.

It’s true that both gross and net national saving have been stable for the last decade or so, but I can’t say that’s comforting. A long expansion ought, I think, to have produced a recovery in national saving, rather than chronic reliance on overseas borrowing.

While I’m less sanguine than Wood, I agree entirely that

Slamming on the brakes now because of fears about our external debt and deficit would be a silly response, particularly as recent history has shown monetary policy cannot fix a current account deficit problem.

The correct lesson of the debate about the CAD launched by John Pitchford in 1990 was not that “deficits don’t matter”, but that contractionary macro policies are rarely a sensible response.

I’ve been working on a piece about productivity, targeted as an Economics Briefing for the Fin Review. This used to be the Schools Brief, but they’re trying to broaden the appeal a bit. The target audience, I think falls into two groups

* Students with a year or two of economics under their belts

* The subset of the Fin audience with an interest in economic policy issues, as opposed to business news

Any suggestions or criticisms will be much appreciated.

By the way, I hope no-one minds being used as unpaid editorial advisers. The payoff is that you get to read stuff well before the print audience.
Read More »

Ross Garnaut has been highly critical of the FTA with the US and the way it has been debated. He has now broadened this criticism into a more generally pessimistic view of the Australian economy. Since Ross has historically been an optimist, this is quite a shift. He points to excessive domestic demand, the current account deficit and signs of incipient inflation, masked by favorable movements in terms of trade.

Garnaut argues that our impending decline is due to the abandonment of microeconomic reform. In my discussion of the Howard government in Robert Manne’s book of the same title, I also observed that microeconomic reform has slowed down substantially under Howard. However, I’m much less of a fan of microeconomic reform than Garnaut – the Kiwis had reform in spades, and it didn’t do them any good. In diagnosing the same imbalances, I’d point to causes such as the deliberate promotion of a boom, then a bubble in the housing market.

In addition, while I don’t believe in mechanistic business cycle models, I think there is some truth to the idea that, the longer an expansion goes on, the more fragile it becomes. A good run of luck breeds complacency, which encourages unsound investments and unwise consumption, and thereby brings about its own downfall. Garnaut rejects this view, saying “no economic expansion is doomed simply on account of its longevity”.

Over at Marginal Revolution, Alex Tabarrok recently presented a graph showing a positive correlation between UN measures of gender development and the Fraser Institute’s Economic Freedom Index. Of course, Alex presented the usual caveats about causation and correlation, but he concluded “at a minimum the graph indicates that capitalism and gender development are compatible contrary to many radicals”

This prompted me to check out how the Economic Freedom index was calculated. The relevant data is all in a spreadsheet, and shows that the index is computed from about 20 components, all rated as scores out of 10, the first of which is general government consumption spending as a percentage of total consumption. Since the Fraser Institute assumes that government consumption is bad for economic freedom, the score out of 10 is negatively correlated with the raw data.

Looking back at Alex’s post, I thought it likely that high levels of government expenditure would be positively rather than negatively correlated with gender development, which raised the obvious question of the correlation between government consumption expenditure and economic freedom (as defined by the Fraser Institute index). Computing correlations, I found that, although it enters the index negatively, government consumption expenditure has a strong positive correlation (0.42) with economic freedom as estimated by the Fraser Institute. Conversely, the GCE component of the index is negatively correlated (0.43) with the index as a whole. By contrast, items with a strong ideological component, like labour market controls, were very weakly correlated with the aggregate index.
Read More »

Reading the discussion of earlier posts about the efficient markets hypothesis, it seems that the significance of the issue is still under-appreciated. In this post, Daniel Davies pointed out the importance of EMH as a source of pressure on less-developed countries to liberalise capital flows, which contributed to a series of crises from the mid-1990s onwards, with huge human costs. This is also an issue for developed countries, as I’ll observe, though the consequences are nowhere near as severe. The discussion also raised the California energy farce, which, as I’ll argue is also largely attributable to excessive faith in EMH. Finally, and coming a bit closer to the stock market, I’ll look at the equity premium puzzle and its implications for the mixed economy.
Read More »