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Monthly Archives: December 2009

China announces $38.5 AUD billion of public funds disappeared this year. As a rough benchmark, the US TARP (economic stimulus package) was about $73bn USD.

So even in our wildest pork-barrelling dreams, the US can’t match communism for its sheer wasteful expenditure. Dear god, Obama* you have a long way to go in your socialist ambitions.

*And by Obama, I actually mean Bush, since he was the one who enacted the TARP.

(This post was written on my iPod on the way to/from work today. Please excuse any spelling or syntactical errors).

This Christmas, I absolutely had my heart set on this yellow Mustang. Such power, such agility. The brilliant yellow would perfectly match the summer sun. I simply could not imagine a better Christmas present. So, Boxing Day rolls around and there’s this massive two tonne wrapped present on my front lawn. Hastily unwrapping it, I’m shocked to discover it’s a red Porsche instead. What the hell? I wanted a yellow car and I get a red car? Absurd.

That was the position the American people had when they woke up on Christmas Day and discovered the Senate had surprised them with universal health care.

The Left woke up and thought they were getting a public option and public funding for abortions. The Right woke up and saw pork barrelling everywhere and overregulation. Each had their hearts so set on an All-American muscle car that they just couldn’t see that they got something that does exactly what they wanted except better.

A public option is designed to promote competition in the insurance industry. If your insurer provides you with a faulty plan then you can say fuck you, I’m going to Medicare – their plans are better. But the health care bill, whilst unrooting unfair practices also unroots anti-competitive practices at the same time.

Before, if you got sick, you couldn’t switch insurers. You have a pre-existing condition. But the insurer could choose to switch insured – by terminating your policy at will.

But under the Reid bill, insurers can no longer discriminate against those with pre-existing conditions. You can change plans. And insurers can no longer terminate policies at will. The power has been returned to the People, and the people being the consumer, means it also returns competition to the industry.

More importantly, insurance contracts are more comparable. During the late 1990s, airfares dropped by a huge amount for one reason – expedia. Websites like these let people quickly compare airfares without having to call ten different airlines. Insurance contracts, which stretch into hundreds of pages of non-comparable terms. Now, under law, the contracts are restricted to 4 pages of plain English.

A public option is no use if you do not have a realoption to switch to that insurer. By fixing competition policy in the industry, now you can. Regulating insurance by banning existing unfair practices is no use because the insurance industry can just dream up new unfair ractices. But with a more competitive industry, if your insurer only provides only unfair contracts then switch insurers.

The competition need not be other corporations. They can be the new government contracts under the Reid bill. The government chooses the terms and (to some extent) the prices for these contracts. Or it could be from a non-profit insurer. True believers can set up their own health care co-ops. Or perhaps unions can provide members with health insurance as well as superannuation. We can finally put those luddites to good use.

On the other hand, a public option may not have done all the good that was promised. As I said, without the changes allowing easy switching between insurers it would have done no good at all. Furthermore, if health care costs blow out the government must foot the bill if there is a public option. If there is no public option, then if insurance companies fail then they are reinsured by other corporations. There is no case for bailing them out because there is no systemic risk to the economy (like the banks) or huge job losses (like the auto companies).

Choosing between a public option and a wholly private insurance system is about balancing risk and control. With a public option, the goverment totally controls what policies are issued by the government insurance company. But it also places all the risk from those insurance contracts onto it’s own balance sheets. Insurance, at it’s heart, is risk management. The insurer, in exchange for a fee (your premium), takes the risk of high medical fees away from the patient and onto the insurance company which is better placed to manage that risk. The government is not better placed to manage that risk. It has much bigger bqlance sheet to absorb that risk, but that balance sheet is already doing something- it’s paying for schools, roads etc. It’s reckless to gamble with taxpayer money like that.

The government contracts are a perfect balance of risk and control. The government maintains only total control whilst the insurance companies hold the risk on their balance sheets. I’m not across all the details of the government contracts, but I don’t see a way for that risk to spread to the government.

And on the right, the Reid bill achieves much of your aims as well. It lowers costs through competition policy. Systemic risk is reduced because medical loss ratios have been raised- insurance companies are forced to keep more capital on hand to deal with unanticipated large payouts.

And yes, you are right. The bill could have had less regulation – the goal in making legislation should be to minimise regulation. But minimising regulation is not the same as having no regulation – if you regulate one part of the industry, then you have to ensure you have consistent regulation elsewhere. The mortgage market is a perfect example – you have government interference in the form of Fannie and Freddie, but excessive deregulation elsewhere in the industry. As a result, incentives are not aligned, information asymmetries are amplified and the market cannot autocorrect itself.

The health care industry is exactly the same. Universal health care is by definition a form of government regulation – you are forcing people to buy health care. You are handing the insurance companies a monopoly. The laws of statistics ensure that there are a limited number of insurers (a law called the Law of Large Numbers says that you need a very large number of insured people for your company to be sustainable). From this limited pool of insurers, the laws of economics ensure that there are only a few dominant players in the market – the economies of scale are massive, whether from diversification of risk, advertising etc. The industry is necessarily anti-competitive. Therefore, you need appropriately targeted regulation to stop abuse of this monopoly. It is no different from allowing an infrastructure company to build a road – that is a monopoly, but you regulate how much of a return on equity that company is allowed to take from operating the road.

Could more have been done? Sure. I would have preferred more explicit competition policy – for example, forcing the industry to upload their policies into a central database which makes comparing contracts easier. Or creating an industry ombudsman to ensure that companies provide adequate levels of service when you do lodge a claim. I would have preferred less focus on regulation targetted at equity and redistribution of wealth and more on controlling costs. I would have liked to have seen tort reform as a way of controlling costs. I would have liked to have seen Congress take on the very powerful pharmaceutical lobby and the doctors union (the AMA) which have an equal part to play in exploding health care costs. I would have liked to have seen more steps being taken to address the problem of the aging population (one of the biggest future drivers of health care cost blow-outs).

But so what? This is progress, its better than nothing. And frankly, if the Republicans had realised that they were in the minority in Congress and made real efforts to be bipartisan then perhaps these changes could have been incorporated. Instead the Democratic leadership had to collect the votes of every single Democrat. And that required pork-barrelling. It required pandering and caused all those terrible things in the bill that Republicans will whinge about in the next few months. If you had genuinely tried to negotiate on the bill, you could have changed it.

I caught a taxi home today. Over the radio chatter, I heard that there was a customer in Potts Point wanting to go to Campbelltown. Talk about bridging the divide!

It is quite well-established that the politics of climate change are quite polarising – the left believes it is happening, the right is sceptical. Ignoring the truth of it, this makes sense in a way – those who describe themselves as ‘left-wing’ will be more likely to listen to left-wing MPs, who tell them global warming exists, and the opposite for the right.

This factor, I had thought, would have accounted for these yawning gaps in the opinion polls between the left and right on whether climate change is real. In other words, there should be no inherent linkage between climate change and your ideology – only your adherence to a particular side of politics. Apparently, I’m wrong.

The Australian published the following editorial by Andrew Norton, a right-wing classical liberal, who I don’t always agree with but who faithfully follows the evidence. He conducted an opinion poll of self-identifying ‘right-wingers’ (those who rated themselves between 7 and 10 on a left-right spectrum from 0-10). He then correlated ideology (classical liberal, libertarian, conservative, and social conservative and economic liberal) with belief in climate change.

A more detailed analysis shows the divisions partly reflect differences of opinion between conservatives on the one hand and liberals and libertarians on the other. A plurality of classical liberals and libertarians think climate change has human causes, while a majority of conservatives think it has natural causes. Following from these beliefs, most conservatives oppose policy action while most classical liberals and libertarians support it, but without agreeing on a policy mechanism.

This is fascinating to me, because I can see no difference between classical liberals in terms of ideology that distinguishes them from conservatives in terms of climate change. Sure, conservatives vociferously hate greenies, but libertarians are hardly in favour of the environment. Libertarians would just give their usual blithe answer that if the environment is worth saving, private individuals will choose to save it. And they don’t. So the environment is useless.

The answer may lie in the fact that classical liberals identify less with the Liberal Party than conservatives (ironic, no?):

While more than three-quarters of respondents accepting one of the conservative labels support the Coalition, that is so for only half of classical liberals and a third of libertarians. Nearly one-in-five classical liberals say they usually vote Labor.

Does this mean that classical liberals tend to be more independently minded than conservatives? Or do liberals merely feel alienated by the Howard government’s authoritarian approach to government? The former answer makes a great deal of sense, though that doesn’t preclude the latter also being true. Liberalism grew out of the Enlightenment, and appeals to rationality. On the other hand, conservatism believe in strong leaders, following institutions etc. They don’t like upsetting the status quo, which is the logical conclusion of climate change. This means that liberals are more likely to follow the evidence, and conservatives to blithely believe their leaders when the Right tells us tha climate change is a terrible practical joke.

All in all, its a very interesting survey. Norton does a lot of statistical analyses of his survey and dribbles them out over time.

You can see them here:

Australia is about to get its first Saint. Mother Mary Mackillop’s post-mortem application for Sainthood has quietly progressed along the path to canonisation and enlightenment. It’s an elegant bureaucratic system of delegation. First a formal application must be made, appropriate documentation tendered that the requisite miracle has been performed and cleared by a subcommittee of experts (formally, the Congregation of the Causes of Saints). Mother Mary still must be approved by the full Commission of Cardinals, and then a Papal Declaration must be made but these are seen as just a matter of rubber stamping. The process works beautifully, and God’s involvement is not required at all. He doesn’t even need to get up off his throne, or sacrifice another of his bastard sons.

The process is really a proof of the power of God and belief. Unlike other bureaucratic queues, Mary Mackillop’s canonisation application has progressed rather quickly. Mackillop, who died in 1909, performed her first miracle in 1961. This miracle was accepted by the Full Church Committee in 1993, without any need whatsoever for that annoying woman who keeps repeating “your call has progressed in the queue; your call is important to us. We thank you for your patience.”

Her second miracle progressed even faster thanks to the privatisation of the Congregation of the Causes of Saints. The Congregation is now structured as a joint venture between the most Holy Catholic Church and external consultants, including non-believers (see SMH article, last paragraph). The miracle, performed in the mid-1990s was recognised just yesterday a mere 15 years later. Commentators were ecstatic that the process moved so swiftly, saying that moving any faster would have “required a miracle.” By comparison, Galileo, who was condemned by another errant Church subcommittee in 1633, was pardoned on appeal in 1992 – some 359 years later.

Whilst seen by some as unwieldy, the Church insists the process is necessary to maintain the rigour of the definition of ‘miracle’ which is strictly proscribed by Canon law. In a formal statement, the Church said

“We don’t want people to redefine the word  ‘miracle’ redefined like they redefined marriage. The whole church is still reeling from shock that marriage now includes interracial marriage. The case is now on appeal, we expect an official determination and proclamation by 2050.”

‘Miracles’ usually involve the great unwashed praying for the future Saint to intercede on their behalf with God. Cardinal Pell, the Archbishop of Sydney, exhorted that all Australians should act more like Mother Mary:

“Probably the best thing we can do to preserve Mary MacKillop’s memory is to try to act like she did. Try to serve and help people and try to be charitable, calm, and forgiving when we are in the midst of a few hassles.”

And I would certainly agree with those sentiments. More Australians should get involved in the political process and lobby God – not to gain benefits for ourselves, but to gain benefits for others. As Premier Kristina Kenneally, a devout Catholic, said,

“Mary Mackillop does not lobby God on behalf of those who donated to her Church. Whether those people might have donated money to her church is not relevant. These miracles helped not only those individual cancer sufferers, but all the people of New South Wales.”

Wise words indeed.

I think today, a great many people were disappointed by the failure of the sum total of all the world’s governments to create a global Emissions Trading Scheme (ETS) in Copenhagen. Oh woe, they say, our governments have failed us. Now the sun shall burn us all to a crisp and there is nothing we can do.

Or is there? As a classical liberal, I believe in the power of the individual to achieve great things, and I have found the secret to creating our own Emissions Trading System without needing to rely on our useless politicians.

It’s actually quite simple. Failure to pass an ETS (assuming global warming is real) is an example of government failure. Government failure creates economic distortions, inefficiencies which siphon money away from workers and into a bottomless black hole. But fortunately, whenever there are economic distortions, that also creates ‘arbitrage opportunities’ – ways for intelligent investors to enact clever trading strategies to profit from this government failure.

In this case, there are some quite obvious strategies. If the government fails to pass an ETS, that means that solar power companies are undervalued. Buy shares in them, because you as a true global warming believer know that in a few years the sun will beat down upon us like a Southerner beats his wife, and everyone will turn to those selfsame solar power companies for our salvation. It also means that coal companies are grossly overvalued because if global warming does happen then a hoarde of pitch-fork wielding greenies will descend upon their local power plants and destroy them. Fortunately there is a way for you to profit off this as well – a process called short-selling. You can sell the shares of Coal Co now (when they are overpriced), then buy them in a year or so time (when their share prices are as low as their morals) and make a tidy profit off the whole process.

But think about what effect this has on the two companies. If everyone buys shares in Solar Power Co, then its share price goes up, and the share price of Coal Co goes down. It’s basically imposing a cost on Coal Co and transferring that money to the Solar Power Co. In other words, you’ve created your own ETS. But this is just one of an infinity of other strategies, some of which can be quite complex. For example, climate change will also cause extreme weather phenomenon. There will be vast, unpredictable storms destroying our agricultural land and causing famine everywhere. Normally, this is a bad thing.

But fortunately, you are an enterprising investor and know how to profit from this. There is a market for “weather derivatives”, its like buying shares in the weather. Clearly, if the weather is going psycho, the prices in this market are going to be wildly volatile. Prices will go waaaay up every time there’s a monsoon, and waaaay down because there’s a drought. Fortunately, you can use a strategy called a straddle – it lets you make money if the price of the underlying stock (in this case, a weather derivative) goes up or down. You only lose money if the price stays the same, or only moves a tiny bit.

The great advantage of a grassroots ETS is that it can tackle any kind of climate change consequence. Oh, climate change will destroy barrier reefs? I’m sure there’s an innovative investing strategy that can fix that. It takes all the best parts of the market and uses them to fix the environment by placing costs on polluters and transferring benefits to environmentally friendly companies.

Yes, I can see it now. A great grassroots uprising against politician incompetence and inability to pass climate change legislation. It’s a very civilised form of rebellion really – all you need to do is sit at your desk and call your stock broker. It’s all very British, like drinking tea. Imagine it, a hundred tea parties across the nation, capable of changing government policy and the very way we approach global problems.

<b>PS:</b> To those on the Left, if you don’t start investing you don’t believe in climate change. <i>You are a skeptic</i>! :O To those on the Right, if you don’t start investing, you don’t believe in market forces, socialist scum that you are.

It is now received wisdom that the crux of the problem with US Health Care is the insurance industry, whether you’re on the left and believe it must be fixed with a public option insurance plan or on the right and believe it must be fixed by reducing the regulatory burden on the insurance industry.

I’m going to come out here and state the obvious: The insurance industry doesn’t set the prices for that treatment – they just pay the bills afterwards. Think about it. What is insurance? If you get sick and have to pay for medical treatment then the insurance company just pays for that treatment (or doesn’t, depending on what plan you have and how evil your insurer is). They are not responsible for the sky-rocketing cost of health care nowadays, just for the shitty treatment you get when you try to claim your insurance.

Don’t get me wrong, insurance companies are indeed evil. But they are just one part of a much wider multi-faceted problem, which is why I’m so frustrated with the US health care debate. It’s focussing on just one issue – universal health care and the public option to the almost total exclusion of all other things. Even if you had a perfectly functional set of insurers, you still have massive problems with your health care system.

What about the pharmaceutical industry which massively jacked up the cost of drugs? Why aren’t they being targetted in this health care splurge? What about the trial lawyer’s associations whose continual vexatious lawsuits have frightened doctors into giving people MRIs for the common cold?

I have two responses when I see a political story. One is laughter. The other is curiosity. I’m a puzzle-solver, I like to solve difficult puzzles. So far, my reaction to the US health care debate has been just laughter at the ridiculous reaction of the Right in calling Obama a Nazi. That was a failure, I should have been exercising my brain to think of solutions and encourage my friends to do the same. Recently, I’ve been thinking about it a fair bit and have reached a few conclusions. Right now I’m trying to put them into a form which won’t bore the fuck out of my remaining readers. Hopefully I’ll have time to actually write down some of these conclusions (I also have plans in the pipeline for long posts about IR reform, libertarianism, Indian reservations and sovereignty, plus two half-written posts about internet censorship and unionism)>

Health care is a very complex topic. It’s a travesty more people don’t realise it.

Today I was taught an interesting lesson about financial incentives at work. For those uncognisant, I work at an investment bank which are famed for having ridiculously long hours, though it’s not too bad right now leading up to Christmas when the markets are fairly quiet.

So, today most of my team has gone to Melbourne for a presentation to some twobit company, or otherwise on leave. The associate I work with is therefore the highest ranked person in the entire division. He has no urgent pressing work, since we have no pitches due in the next few months. We have some work flowing on from a meeting, but nothing directly delegated to us.

This is the situation when someone from another division (and hence not subject to ridiculously long hours) comes up to our floor. She sees me, an analyst and a grad plus the associate still tapping away at our keyboards despite the rest of being completely empty. It is now 4:00. She comes up to the analyst. “I will give you $10 if you leave within the next 10 minutes.” He refuses. She goes to the associate. “I will give you $100 if you leave within the next 10 minutes.” I stayed back at the office with him till 8pm.

So, apparently financial incentives are not enough to make investment bankers work less.

What a crazy world we live in.

Time after time, bright starry eyed graduates have gone forth into job interviews only to have been stopped by HR hacks. We pause halfway through eloquent diatribes about the drying up of private label securitisation, only to gaze upon pig-eyed stares of utter confusion. Needless to say, we didn’t get the job. No ‘communication skills’ – unlike the graduate who succinctly proclaimed that the property market was going ‘up’ and not ‘not up’.

Having attained the job, the graduate enters the dark world created by HR. First come to annual self-assessment questionnaires. How do I adhere to the values of my company? How do I demonstrate self-actualisation and team focus in my daily activities?

The entire process might lead some – not I, and others who wish to keep their jobs – to believe that HR are nothing more than an incompetent bunch of management majors who couldn’t make the cut with a real degree, like Arts, and hold on to the pretension that they are good with words like ‘demonstrates adaptability to new work cultural environments’.

That is why Westpac’s recent decision to increase interest rates 45 basis points (20 bp higher than the official 25bp rise sanctioned by the Reserve Bank) is such a travesty. It provides positive confirmation of such heretical beliefs that HR is a dying ground for managers too stupid for any other position. After approving the now infamous ‘banks are like bananas’ ads/emails, Peter Hanlon was demoted from Westpac’s retail head to head of HR and technology.

For those of you who are unaware that IT is just as evil as HR, here is a Dilbert comic:

But for those of us who know that the market always gets it right, we have a much simpler explanation. If you’ve been recently fired or demoted, then you have direct personal experience. You can empathise better with the graduate you are about to horizontally transfer to the Antarctica division of the Bank. It takes one to know one.

The SMH’s completely unethical conduct notwithstanding, people will be wondering if it is a good idea to have a recall election. I can see the reasons behind wanting it, after all why should the people of NSW continue to suffer the incompetence of state Labor? Why should politicians elect the premier and not the People? These are very admirable sentiments with which I wholly agree (though, I should add that technically the People don’t elect the premier, they elect their MPs who then choose the premier, and continue to choose their premier over their four year terms).

But it is not a good idea to enact a constitutional amendment to remove one government unless there is a good reason to create such a constitutional mechanism. The recall election mechanism can be used against all future governments, including those which are both bona fide and competent. And a recall election is not a good idea. The reason always advanced is that “governments can’t make hard decisions”, but it is hard to visualise why this is a very terrible consequence until you look more carefully at what this consequence means.

You can tell a recall election is not a good idea, because it originated in California, which I have continuously maintained has the worst constitutional system in the world. The recall election is one of these. It is true that it was used against the incompetent governor, Gray Davis, a few years back to bring in Arnold Schwarzenegger, who in my opinion at least is a competent governor. The problem is, there are those on both the extreme left and right who consider him a terrible governor. They constitute at least 1% of the population, so they can easily dredge up enough petitions to launch a recall election.

In the current budget crisis, with his hands constitutionally tied, Arnie has just a few options in front of him. He can make budget cuts – particularly to the bloated California education system, which will infuriate teachers unions and student associations. If there weren’t already an election coming up, you could bet there would be. Alternatively, he could raise the debt further, which would infuriate the right. You could be there would be a recall election. The result? There is no way to resolve the budget crisis without sparking an election, creating even more uncertainty during a time when government should be providing certainty.

In effect, what this does is create a tyranny of the minority – just 1% of the population can force the other 99% to hold an election, removing the four year mandate that the other 99% gave to the current government. The problem is that 1% of the population is both too small a number and too large a number. It is too large a number because the only forces which can raise the petitions necessary in a short time span are very well-funded organisations, for instance media companies like Fairfax, large lobby groups like the Mormon Church and others who funded the California Constitutional gay marriage ban, corporations and unions. It provides these groups power that true grassroots organisations can’t organise. That is not democratic. But it is, as I said earlier, also too small of a number because 1% of the population is not representative of the whole population. 1% is the number of people who vote for One Nation, or believe that Freemasons run our government.

The argument that a recall election prevents governments from making hard decisions sounds like a throw-away line. It sounds patronising – that the People are so foolish that they would arbitrarily remove a government, or that governments can’t govern during election times. But its not that – its that the system itself is easily open to abuse from corporations and lobby groups. Far from making our system more democratic, allowing a recall election gives more power to small extremist minorities. If there are such groups on both sides of a particularly difficult policy issue, it makes it impossible to pass any sort of comprehensive reform without a recall election. It is a very bad idea.