The Google circle

John Quiggin6 Comments

I found this mildly snarky piece from Alan Wood in today’s Oz

Google’s worth is not only preoccupying Wall Street advisers and investors, but has generated a great volume of argument on the web itself, which can of course be tracked by using Google. One of the first into the fray was Australian economist John Quiggin, described on his own website as “more intelligent than Britney Spears”.

A popular market guess of the value of Google’s equity is $US20 billion ($28 billion) to $US25 billion, with more recent estimates of $US30 billion or more. Quiggin, who is in fact quite bright, said he couldn’t draw a plausible earnings path that would yield a present value of $US25 billion at any reasonable discount rate.

But what’s really interesting is that I didn’t have to look for the article. It was sent to me by Google news alerts. As I said in the original discussion, I use Google all the time, but unless text ads have a subliminal effect for which Google is being paid, I’ve never contributed a penny to its revenues, and quite possibly never will.” This implies that the social value of Google is more than its market value.

Why does the efficient markets hypothesis matter ?

John Quiggin23 Comments

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.
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More on the National Water Initiative

John Quiggin

I was overseas when the Council of Australian Governments (bearer of the unlovely acronym COAG) announced the details of the National Water Initiative. Based on the newspaper reports I read at the time, my preliminary evaluation was quite negative.

I’ve now had the chance to read the actual announcement and supporting documents, and I’m feeling a lot happier. The crucial clause is the one about reductions in water usage, which says

a framework that assigns the risk of future reductions in water availability as follows: –

* reductions arising from natural events such as climate change, drought or bushfire to be borne by water users,

* reductions arising from bona fide improvements in knowledge about water systems’ capacity to sustain particular extraction levels to be borne by water users up to 2014. After 2014, water users to bear this risk for the first three per cent reduction in water allocation, State/Territory and the Australian Government would share (one-third and two-third shares respectively) the risk of reductions of between three per cent and six per cent; State/Territory and the Australian Government would share equally the risk of reductions above six per cent,

* reductions arising from changes in government policy not previously provided for would be borne by governments, and

* where there is voluntary agreement between relevant State or Territory Governments and key stakeholders, a different risk assignment model to the above may be implemented;

This seems like a pretty good balance to me. The ten years to 2014 should provide enough time to deal reasonably with the worst mistakes of the past. After that, it’s fair enough that governments should bear most of the risk if they’ve still overallocated water.

A nice feature for me is that the time-scale fits neatly with my proposal for governments to meet environmental goals by purchasing reversion rights for water allocations in ten years’ time.

Scandal

John Quiggin15 Comments

As far as I can see, the Right seems to be winning the scandal wars just at the moment. I didn’t follow the Plame-Wilson scandal the first time around, so I can’t really tell how damaging or otherwise the latest claims from US and British intelligence may be to Wilson’s credibility. Similarly, although it seems clear that Sandy Berger has made a fool of himself , I have no idea what this means for anything that might possibly matter. Finally, it appears that last Thanksgiving in Iraq, Bush posed not with a fake turkey, but with a display turkey, never intended for carving but to adorn the buffet line. I’m glad that’s been cleared up.

All this confirms me in the view that the kind of “smoking gun” or “what did X know and when did s/he know it” scandal that has dominated politics since Watergate is a waste of everybody’s time. The real scandals are those that are, for the most part, on the public record.
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TANSTAAFL

John Quiggin10 Comments

I managed to prove Milton Friedman[1] right in fine style today. First I gave a talk on the FTA to about 700 high school students, which was supposed to sell them on the idea of studying economics at UQ. In return (and in addition to a small gift from the Queensland Economics Teachers Association) I got an invitation to lunch which I declined so I could lunch with the seminar speaker in my other department, Political Science and International Relations (it was Joe Camilleri, talking on Islam and the West). Arriving early, I ordered straight away to beat the rush, only to discover that, had I waited I would have had my lunch paid for out of some fund or another.

So, if there are any free lunches about, I wasn’t getting them today. Instead, I paid three times (giving the talk, turning up at the seminar and handing over the cash) and only got fed once. Fortunately, I love giving talks and (given a good speaker) like attending seminars.

fn1. Although Friedman and Robert Heinlein usually share the credit for this acronym, Tyler Cowen points out that it should actually go to Alvin Hansen, America’s most prominent early advocate of Keynesianism, and someone whom the average person with a TANSTAAFL bumper sticker might be surprised to find they agreed.

Arbitrage and the video store

John Quiggin21 Comments

A discussion about excessive advertising over at Troppo Armadillo led me to think a bit about the fact that I never watch movies on commercial TV any more, because there are too many ads. Being an economist, I naturally like to assure myself that my conduct is rational, so I did the numbers.

The Media Watch story linked by Ken Parish indicates that TV stations are allowed 15 minutes of ads per hour, which implies that a 2-hour movie can be padded out with around 40 minutes of ads. This seems consistent with my memory of the last time I tried watching such a movie.

For most of the movies shown on commercial TV, I have the alternative option of walking to the video store up the street (10 minutes return) and hiring a video or DVD ($5 max). So, the trade-off is $5 vs 30 minutes. in effect, the TV station is paying me $10 an hour to watch ads. Since I value my time at more than $10 an hour, I choose the rental option.

This seemed convincing to me, but how generally applicable is it? Not everyone lives as close to a video store as I do, but then you can always rent a week’s worth of videos at a time, so the allocation of 10 minutes per movie seems reasonable. As regards the $10 an hour, I have, I think it a perfect arbitrage argument. The average video store pays $10 an hour[1], usually has casual work going, and, in most cases, will let the staff borrow reasonable numbers of videos free of charge.

fn1. I’m ignoring tax here, but if your marginal tax rate is an issue your time is worth more than $10 an hour.

Some links on the Middle East

John Quiggin4 Comments

Just a few links with useful info and argument on various aspects of the situation in the Middle East and the surrounding region (very broadly and loosely defined)

* An excellent piece by Stephen Kinzer on Turkey’s democratic Islamist government, and the prospects for admission to the EU

* Juan Cole points out that the case against Iran is every bit as problematic as the case against Iraq.

* Also via Juan Cole, two views on the Wall being built by the Sharon government

* A powerful piece by Nicholas Kristof on Rwanda and Darfur

The virus of error

John Quiggin4 Comments

In the most recent London Review of Books, Hugh Pennington has a generally excellent article on measles and erroneous (to put it charitably) research linking the combined MMR vaccine to autism. It’s a pity therefore that, on a peripheral issue, he perpetuates an equally glaring error, saying

‘Most people have an intuitive appreciation that the best vaccine programme, from an individual’s point of view, is one where almost everyone else is vaccinated while they are not, so that they are indirectly protected without incurring any of the risks or inconvenience associated with direct protection.’ If too many people act in this way, the infection becomes commoner in the population as a whole, and returns as a real and significant threat to the unimmunised. This is a modern version of the ‘Tragedy of the Commons’ described by Garrett Hardin in his influential 1968 essay: 16th-century English peasants had free grazing on commons; their need to supplement food supplies and income was very great; the resulting overgrazing wrecked the commons for everyone.

As I’ve pointed out previously Hardin’s story was, in historical terms, a load of tripe.

It’s interesting to note that, in repeating Hardin’s story, Pennington adds the spurious specificity of “16th century England”, whereas Hardin’s account was not specific regarding dates and places, and therefore harder to refute. This is characteristic of the way in which factoids are propagated.

Respect

John Quiggin15 Comments

Don Arthur and Ken Parish have been discussing values and civility, with links to other bloggers. Both posts are well worth reading. I don’t have anything new to say on this at present, but civility is the kind of thing that’s better shown by example than described in the abstract. With some exceptions, and with occasional lapses by nearly everyone, I think Ozplogistan sets a pretty good example. I rarely agree with, for example, Andrew Norton or John Humphries Humphreys, and frequently disagree with Ken Parish, but we manage to have productive discussions despite this.

Rational manias

John Quiggin51 Comments

There’s a cottage industry within economics involving the production of historical arguments giving rational[1] explanations of seemingly irrational historical episodes, of which the most famous is probably the Dutch tulip boom/mania. This Slate article refers to the most recent example, a complex argument regarding changes in contract rules which seems plausible, but directly contradicts other explanations I’ve seen.

Once opened, questions like this are rarely closed. Still, articles of this kind seem a lot less interesting in 2004 than they did in, say, 1994. In 1994, the efficient markets hypothesis (the belief that asset markets invariably produce the best possible estimate of asset value based on all available information) was an open question, and the standard account of the Dutch tulip mania was evidence against it. In 2004, the falsity of the efficient markets hypothesis is clear to anyone open to being convinced by empirical evidence.
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