There’s been a bit of discussion of fertility issues in comments threads. Rather than present a view of my own, which I’m still refining, I’ll point readers to a paper by coming out of the Monash Uni Centre for Population and Urban Research, and commissioned by the Australian Family Association[1]. Here’s the blurb. As I read it, the central theme is a causal chain from economic reform to less secure employment for men with low education to low rates of partnering to lower fertility. The paper gives some good evidence on the later links in the chain, while assuming the earler ones. I don’t have a problem with this, since I think it’s clear that there has been a general increase in economic insecurity, though it rises and falls over the economic cycle.

I’m less concerned than the authors, and some commentators on this blog, about declining aggregate fertility levels. But I think the study makes a strong case that economic insecurity is producing a society in which central life goals like having a family are out of reach for (or at least not attained by) an increasing proportion of the population.

fn1. The AFA is a socially conservative lobby group, which is very concerned about things like cloning and the “gay agenda”. As with all such groups, it’s necessary to apply an appropriate level of scepticism. But in my reading of the Monash study, I haven’t noticed any obvious signs that the research has been slanted to fit a particular agenda.

When I first studied economics ( a long, long time ago) the textbook explanation of why income differed between countries was based on capital. In the simplest version (for example, that of Harrod and Domar), rich countries had a bigger stock of capital than poor countries, and the problem was one of accumulating sufficient capital to catch up. In more sophisticated versions, rich countries had more modern capital stocks, and therefore benefited from embodied technological progress.

Even when I was a student, this kind of thinking was already being superseded by notions such as human capital theory [1]. Still, I’ve never seen a really convincing refutation. It strikes me that computers and the Internet provide one, at least as far as differences among developed countries are concerned.
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I’ve been meaning for a long time to collect my thoughts about US interest rates, and where they are and should be going. As is often the case, I’m largely in agreement with Paul Krugman, at least as far as long-term rates are concerned. On the other hand, I’m a bit more hawkish in relation to short-term rates than Brad DeLong, with whom I agree on a lot of things.

I’m planning on reworking this piece as I have new thoughts, and in response to comments. so please treat it as a work in progress.

Warning: long and boring (but maybe scary) post over the fold.
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The Google IPO has now been announced, and there are some more figures to analyze. In addition, I wanted to talk a bit about the option, suggested by one of the commenters on Kevin Drum’s blog of arbitraging by short-selling overpriced dotcoms and buying those with more reasonable valuations.

Looking at this NYT report, that doesn’t seem likely to be an option.

In 2003, Google reported an operating profit of $340 million on sales of $960 million. But the 2003 figure appears to understate the company’s cash profit margin, since it includes very high expenses related to stock options that will probably decline in future years. On a cash basis, Google had an operating profit of $570 million in 2003, and an operating margin of 62 percent.

Given those figures, Google will easily command a market valuation of at least $30 billion, and perhaps much more. EBay, which had an operating profit of $660 million on sales of $2.2 billion last year, is valued at $54 billion; Yahoo, with sales of $1.6 billion and operating cash flow $428 million, is valued at $36 billion.

I’m not an accountant, but I think the “operating profit” referred to here is EBITDA (earnings before interest, tax, depreciation and amortisation): in any case, it’s more than the profit accruing to owners of equity. So it appears that all of these well-established businesses are valued at more than 100 times annual earnings.

As I recall, the ratio for profitable companies during the hyperbubble was around 400, so some progress has been made. But these values still look bubbly to me. To match an investment in 10-year bonds, without allowing for any risk premium or for the inevitable increase in long-term interest rates, all these companies need to more than quadruple their earnings, then maintain those earnings for at least 20 years. Maybe Google can do this, and maybe Yahoo can do it, but it’s most unlikely that both of them can.

At one time, I would have tried hard to think of an explanation consistent with some notion of aggregate market rationality, in which capital markets allocate capital to its most productive us. In the light of the evidence of the last ten years – the dotcom bubble, the US dollar bubble, the (still continuing) bond bubble – I no longer bother. Capital markets are driven by fashion (in this case, the continuing desire to be part of the Internet happening, in the face of mounting evidence that it provides almost exclusively public goods), fear and greed. On average, capital markets do a better job than Soviet central planners, but I think they do less well than the mixed economy that was dominant during the postwar Golden Age.

Eventually, no doubt, reality will prevail. If I knew that was going to happen within the next twelve months, I’d be shorting the remnants of the dotcom sector for all I was worth. But, as Keynes apparently didn’t say, the market can stay irrational longer than you can stay solvent.

One of the most pleasant aspect of being a Research Fellow is guest lectures. I give guest lectures in a number of different courses, ranging over several faculties and sometimes different universities. This gives me all the things I like about teaching, including (since a change is as good as a holiday) generally attentive audiences, and a chance to present material that’s not the standard textbook, but not new or rigorous enough to justify an academic seminar. On the other hand, all the unpleasant stuff – booking rooms, litigious students complaining about their grades, administrators trying to promote customer-centric shareholder value in a dynamic enterprising university, and so on – is taken care of for me.

I tend to do most of my guest lectures around mid-semester, since this is what fits the standard course structure best, and I’ve got quite a heavy load (by my very relaxed standards) this week. I’m just between lectures, then rushing off to a seminar in town[1], but I thought I’d pass on the reaction to my lecture today on the economics higher education.

I started with the human capital and screening theories. I’m a violent partisan of human capital theory and opponent of screening theory, and didn’t try to hide this, but my success rate in convincing the students was, based on a small sample, only 50 per cent.

One student came up to me at the end and said “Thank you. I learned a lot”. Another came up to the lecturer responsible for the course and asked “Will this be on the exam?”.

fn1. For those interested, it’s The US-Australia free trade agreement: folly or our future? at a meeting of the Australian Institute for International Relations from 6-7.30pm, April 28 at 46 George Street, Brisbane. For details, contact Colin Kennard (telephone 3371 2454, email c.kennard@uq.edu.au).

According to this report, the widely-predicted Google IPO is likely to value the equity in Google at more than $20 billion – others suggest $25 billion. I immediately wondered whether Google was really worth $25 billion.
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