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How do we build a political castle in the sky?

In our last post, we began to sketch a political vision for an ideal government founded squarely in the national interest, in serving the interests of citizens, and realised that the possibilities for brilliance were so vast – if we were governed well – that we could afford to make economic sacrifices to pursue the social and cultural ideals we cherish.

This castle in the sky we acknowledged appeared to be an idealist’s dream. Our real world is messy. Complex. Politicians are not unyielding guardians of the national interest. They are fickle, corruptible. They are lobbied by men serving high priests to fair Mammon. They have an interest in getting elected. They act in a populist manner. They make commitments they do not believe are right, yet are compelled to act on when they publicly commit to it. The list is long.

Nor are our other institutions beyond reproach. Business is not a guardian. Special interest groups are not a guardian.

This is all to say that the foundations to the castle in the sky are missing. This post explores how to put the foundations in place.

Understanding the problem

In the race of life, always back self-interest – at least you know its trying” – Jack Lang

There is a belief among sections of the general populace that politicians are these nefarious people. Dishonest, lying, useless, backstabbing etc. As if politicians were a particularly bad group of people consciously choosing a path of corruption. As if the problem were with these people (mostly men). As if, if you could put your candidate in, things would be fixed. As if these men were evil, and our woes lie on their shoulders, and would be lifted if we could receive an electoral deliverance and ‘drain the swamp’.

I am the first to say that the calibre of people matters.

But this concept of portraying evil and then destroying it is rotten. This idea that whenever something evil happens someone particular can be blamed and punished for it, in life and in politics is hopeless.

The truth is much more nefarious. Policy is made within a collection of self-interested and self-perpetuating systems with overlapping interests. These systems – banking institutions, military institutions and their vendor companies, governments, unions, special interest groups, manufacturers, retailers, real estate developers, entertainment companies, media conglomerates and so on – struggle to survive in a Darwinian world. They are all made up of managers trying to advance their careers or protect their professional fiefdoms or maybe just keep their employees from getting fired. They are made up of normal people looking out for themselves. Big and small businesses trying to grow. Managers of departments trying to justify their budgets. People with various interests asserting them.

This is not malice. This is not some cackling villain who we can smite. This is a symptom of the systems of incentives at work. You don’t have to believe that regulatory capture or public choice theory rule human beings – they do not, people are still human. You just have to believe that people are interested in what is best for themselves. Is that so ignoble?

Research in social psychology clearly reinforces this view. Behavioural economist and psychologist Dan Ariely’s work on dishonesty is a fascinating read. Ariely’s work thoroughly disproves the view that humans will decide whether to cheat based on a rational cost-benefit analysis. Instead decisions our are greatly influenced by the degree to which decisions affect our ability to still see ourselves in a positive light. As Ariely says:

“On one hand, we want to view ourselves as honest, honourable people. We want to be able to look at ourselves in the mirror and feel good about ourselves (psychologists call this ego motivation). On the other hand, we want to benefit from cheating and get as much money as possible (this is the standard financial motivation). Clearly these two motivations are in conflict. How can we secure the benefits of cheating and at the same time still view ourselves as honest, wonderful people?

This is where our amazing cognitive flexibility comes into play. Thanks to this human skill, as long as we cheat by only a little bit, we can benefit from cheating, and still view ourselves as marvellous human beings.’” [emphasis added]

You see, when this conflict arises, we experience cognitive dissonance between our image of ourselves and the action we want to take. If the dissonance is too large, it is extremely confronting to ‘cheat’. And this explains a lot. In our lives, we don’t face moral obstacles with a great big sign up ahead that says MORALLY EVIL ACT. Rather, we face seemingly innocent steps away from the garden path. And so we, and politicians, can rationalise away changes to our lives slowly. The man who first accepts a lunch out with a ‘business associate’ is easily enough able to rationalise it as discussing involving industrial projects. Then, when he is taken out socially, and his expenses paid for, he is ‘with a friend’. Then, when his friend asks for him to put in a good word to a person, or to vote for a policy, the minister can easily rationalise this. ‘That project will create jobs’ he says, not bothering to run an NPV driven cost-benefit analysis. ‘That subsidy for miners will keep them internationally competitive’ he thinks when asked to justify his continued support of subsidies for coal, gas and petroleum. ‘That negative gearing policy really is putting downwards pressure on housing prices by stimulating supply’ he says, ignoring the Grattan Institute’s report and the public cries to the contrary.

Of course, it does not help that the ‘favours’ asked are so very abstract. We find it extremely difficult to physically steal a wallet from a person on the street, yet much easier to add an hour to our timesheet “for that extra time I must have spent”. And yet, politicians are making what seem like very abstract decisions.

Nor are these favours ever quite so horrible. There is a very simple reason Barry O’Farrell was given a $3,000 bottle of Penfolds Grange, and not a million dollars. A million dollars would have been very clearly seen by O’Farrell as a bribe. It would have been very easy to refuse – O’Farrell’s cognitive dissonance would surely have triggered, for Ariely’s research also shows that most people are fundamentally honest and only cheat a little bit. But, even if he did accept the bribe, it would have been a very transactionary decision. “I will vote on X bill in Y manner, in exchange for a million dollars.” That’s a very economic perspective. It is also much less persuasive than being a small gift which generates social norms of reciprocity and compels the politician to repay the favour. It also doesn’t help that the gift feels much more like a voluntary choice to accept – generating a feeling of autonomy which compels us to honour a commitment – than the bribe.

But these are natural forces of nature. The tragedy is that we let them fester and grow to be a cancer on our body politic.

Why would we imagine that our politicians would stand firm when faced with over a 1000 lobbyists in Canberra? Why would we expect them to righteously stand with honour against lobbyists when the lobbyists are often not registered and seemingly invisible to the eye? Why would we imagine that a party would use the Speaker position impartially when they could use it to eject their opposition from the chamber and gain power? Why would we expect that moving the offices of department heads away from politicians and replacing them with ‘political staffers’ would do anything but improve politicians’ inclination to play politics?

Why would we expect to have good governance when the incentives are so twisted against good governance? Why would we expect people to not follow their own self-interest?

We would not. That is the sad truth. I started this section on the devil’s advocate assumption that politicians were inherently malicious people. I have shown this to be false. But what I haven’t said is that I actually think politicians start out nobler than most of us. Hear me out. I am friends with many wise, eloquent and noble friends who are student politicians across the political aisle. They are not malicious, power scheming fiends. Perhaps I just pick my friends well. But the truth is really that, far from being the deplorable dregs of society, our political class in waiting are actually often shining paragons of hope.

And yet, our paragons are the politicians who stand before us today. Our shining saviours… sullied in the mire of incentives. This is the work of failed institutions.

This is a story of human failing. But it is not one we can accept.

If I am to bow my head and declare allegiance to a leader, I want a leader whose qualities I can kneel before. Paragons with the honour and unwavering service of Donaldson’s Haruchai. Men of the verve and calibre of Teddy Roosevelt. Leaders with the unstinting effort of John Rockefeller. Leaders who care so greatly for their country that they have Brutus’ sleepless nights, yet project the public confidence of a hero.

I demand of our politicians the inhuman wonders of our greatest, backed by the ironclad standards of the best institutions we can build.

These are the changes for us to examine for our institutions – the planks that shall lay our path to the castle in the sky.

The pragmatist’s garden path

Reforming our political institutions is not so hard a problem to think of a solution to.

In parliament, the speaker should be an impartial government appointee – like a high court judge, like an RBA governor… anybody but a member of a political party.

All lobbyists should be required to promptly, publicly and accurately disclose the meetings and discussions they have with ministers, shadow ministers and public servants. This should also apply to significant lobby groups who lobby on their own behalf (e.g. Minerals Council of Australia).

All proposals by special interest groups should be accompanied by a public interest impact prepared by an independent and professional body. The statement must be released publicly. Private consulting firms should largely be excluded from the process due to obvious conflict of interest issues.

Tax benefits for ‘think tanks’ like the IPA should be denied.

No minister or senior government official should be allowed to work with any vested interest group in any capacity for at least 5 years after their retirement or resignation.

A federal ICAC should be established. Electoral funding reform should be reviewed.

Crucial areas of government policy should be within the purview of independent, professional bodies. A good example is the RBA – one of the shining lights in our modern governance. This should be replicated in other areas – improve Infrastructure Australia, radically alter health governance arrangements in Australia, set up an education funding authority with… actual power etc.

Institute four year political terms. Eliminate question time. Enhance the resources of the Parliamentary Library. Locate senior government officials with actual roles – like treasury officials – in offices next to minister; force political chiefs of staff etc. away from being proximal to ministers be mere office allocation!

There is our tip of the iceberg of political solutions. Some of the more mainstream solutions. Lets have some fun and be a little more radical.

We should put pictures of eyes / photos of watching figures on all walls and offices in Canberra. Proven to reduce dishonesty in psychological experiments by Ariely.

Politicians should swear short, televised daily oaths reaffirming their commitment to various things –> strengthen commitment etc.

Politicians should be required to recite noble speeches in public, especially Teddy Roosevelt’s ‘Citizenship in a Republic’. (Okay… this one is slightly in jest!)

Oh, and politicians who betray the national interest should we publicly executed as traitors to their country. You read that right. We used to court martial deserters to the army. We killed deserters who were conscripts in WWI.

Politicians who waste $50 billion on a poorly negotiated submarine contract should be held accountable for the lives they lost because of the opportunity cost (and what we could do with billions). Politicians who accept favours from foreign powers (Sam Dastyari) should be expelled from the senate. Politicians who betray their citizens by embezzling funds should be executed just as deserters are for betraying their country.

Let me tell you a story of Romans and honour. There was a battle in which the Romans were defeated. A Roman from the battle carried this news to another general. He told him of the battle and the Roman defeat. The general called him a coward. A liar. He refused to believe the impending threat. So what did the solider do?

He turned his sword on himself to prove his message was true.

That is the dedication I expect from politicians to their country. Unwavering devotion. And I expect the social norms and laws to back this up. In Rome the policy of decimation – destroying 1 in 10 men from large groups of deserters – was used for a reason.

Remembering Ariely’s work, we know that it is easy to punish men for such visible faults like desertion. It is much harder to see the wrong in (clearly) addled policy. So perhaps politicians should be excused from such ‘barbaric’ practices…

But these are not low levels insubordinates from the terrors of the trenches. These are our paragons. Our best and brightest. Our knights in shining armour whose armour blazes a path of hope amidst the world. They are the leaders on which we place the hopes of our lives and country. They are the people we rightly demand greatness of.

That is why we must do our utmost to get the incentives right for these people. Since we cannot stop the incentive of bribery – though we can mitigate it through the measures above – we must look to a deterrent. The stronger the deterrent, the more we can help our country.

The strongest deterrent is death. The strongest weapon for our country is death – for high treason.

I confess this would be a bold step to take. I am not sure it would be perfect. I am not sure how to draft every nook and cranny of the legislation. Maybe it is not death that we must choose. Perhaps it is exile, or dishonour. I do not know. But I do know that the value of a honour culture is strong, yet missing in today’s world. That the inculcation of strong virtue by example would help the populace.

I would close by asking you a few simple questions:

Do we know that the first form of self-government is governing ourselves – not through indifference or rigidity, but through respecting our fellows and wanting to play an honourable part in the world? Do we derive our notions of respect and our definitions of honour from our ideas of right and wrong? Do we teach our principles and honour those who uphold them?

Do we have the strength and heart to make them real?

What role does a government serve?

Recently I’ve had the pleasure of a few dinners with some (eloquent) friends of mine from across the Australian political aisle. I enjoyed these conversations, but I found that even the most passionate of these student politics leaders and intellectuals were often blinded as to what matters in government. This is an attempt to piece together my discordant beliefs, and show others the beginnings of a framework for approaching politics.

What limiting political labels shall I adopt? I am an idealist with forlorn hopes for the capacity of politics to improve our lives. But, disillusioned by reality, I have recourse to pragmatic, empiricist, realist ideals of policy making. The empirics come from a wide array of fields, from social psychology to economics, and to wherever reasoned ‘evidence’ may suggest we benefit. This is the basis for the vast majority of my views.

I eschew political labels. Take ‘left’ and ‘right’. These labels originate from the French Revolution whereupon the aristocrats sat on the right, and the commoners sat on the left. The question is though, how useful are labels from the French Revolution in describing our politics today? The answer? Very little. But let us be generous, and speak of more modern terms ‘liberal’ and ‘conservative’? Are we referring to classical liberalism or a form of progressivism? Are conservatives war hawks or far right libertarians? Of course, these broad churches exist to give political movements power, but it also undermines the value of labels as descriptive.

Nevertheless, labels are insidiously poisonous for a far greater reason. Labels represent the subjugation of evidence for ideology.

This is an empirical fact rooted in our psychological processes.

Anyone who knows anything about social psychology is no doubt aware of the concept of consistency. People will seek to appear consistent. More specifically, when our thoughts are inconsistent between a commitment we make – such as subscribing to a label – we experience cognitive dissonance between our thoughts and actions. We seek to resolve this by fulfilling the commitment. When are these commitments strongest? Commitments are stronger when they are active, public, and effortful. Most of all, commitments are strongest when we feel autonomy over the choice. With political labels, every time we identify ourselves as a given label, we are making an active commitment. In public, when asked, our answers reaffirm our commitment to the ideology. When challenged, we will seek to reassure ourselves of our position. Over time, we expend effort to support our beliefs. Finally, we are convinced we are responsible for our own ideological label. Put together, it is very hard to overturn somebody’s political beliefs when they labels themselves so. It takes a sledgehammer to break through. Anyone interested in this accepted wisdom should read Cialdini’s Influence.

In essence, our psychological processes mean that we will attempt to resolve dissonance between our ideology and reality in favour of ideology because of commitments we make to the label. Ask yourself this – is this the optimal way to approach politics? No, it is not. Subscribing to a label for the sake of resolving our own internal cognitive dissonance is not the goal of politics.

That is why I refuse to be drawn into labels. My values and beliefs come first, and if they so-happen to fall within a general label, then so be it, but I will not identify myself as a said label.

But this leaves us with a very fine question. If attaining the purity of a label is not our goal, what is? How do we evaluate government policies?

The Idealist with Forlorn Hopes

In approaching all government policies, one question should shine alone in our minds. Is the government policy in the national interest? What is this ‘national interest’? This is the interest of the state. Whose interests should a state’s represent? Its people – its citizens. How do we best serve this interest? That is more complex.

Of course, only an idealist could believe that political parties are attempting to act in the national interest. What about incentives? Donations? Power struggles? Put that to the side for a moment. The framework is still very useful. Let us run through a series of examples.

Asylum seekers. The typical argument against offshore processing and detention is that it is inhumane. Is this persuasive? No. How ‘humane’ our government is to asylum seekers is irrelevant. What matters is whether the citizens of a country benefit. So, is a humanitarian progressive arguing against the national interest? Not necessarily. They could argue that cruel treatment of asylum seekers harms Australia’s international reputation and this has further repercussions. I don’t find this a persuasive argument, but it is an argument at least. More compelling is that offshore detention is expensive. Methods of deterrence that we use are also often not the most effective. Spending on more expensive methods for no additional deterrence capacity is, of course, against the national interest.

Immigration. The tenor of the age is to be extremely multiculturalist and accepting towards immigration. There is some merit to this idea. Government reports have repeatedly found that immigration has slight long term economic benefits, but often short term economic costs. This suggests a controlled immigration policy is best. It does not benefit the citizenry to absorb a larger degree of short term economic costs which exert budgetary pressures on governments. This also ignores the tendency of first generation immigrants to commit crime at higher rates. Of course, this rate lowers for second generation immigrants. Why? They integrate. But this further suggests controlled immigration as an optimal policy. Also note that when immigrants of a similar background come at once, they are likely to form enclaves of their own background, preventing the social integration which is beneficial. Is this conservative, xenophobic speaking points you say? Not at all. People are proven to like people similar to them more than others, and thereby associate with them more. Denying obvious mental heuristics, we use to support a political message of unrestrained multiculturalism is a classic subjugation of facts to ideology. The facts being research into social psychology. Note that I am talking about benefits to current citizens. Research universally shows that immigrants benefit the most, but under our framework, this is irrelevant.

The argument on immigration is a lot more complex than what is outlined above. Firstly, immigration makes a lot more sense in some circumstances than others. Consider Australia’s ‘Populate or perish’ policy. Survival precedes economics. But, secondly – and this is where it becomes hard to justify an argument – what are the cultural impacts of immigration? Put aside the issue of integration and issues of multiple cultural backgrounds promoting discords in the values which underlie a society, and the breakdown of traditional honour cultures. Even if we assume immigrants have identical values to those in the country, and are economically beneficial, there is the impacts of an increasing population to consider. Where do people go? Mostly to major cities. Do we want more crowded cities?

This leads to a second heuristic for policy making. What is the world we want to live in? What is our vision of paradise in our nation?

A world of towering metropolises jutting towards the sky is not paradise. Beauty should be a necessity, not an afterthought. And that is not some sentimental environmentalist’s ignorant cry.  That is merely the theatrical flourish behind the truth – the quantifiable, tangible benefits of nature, of walking, of designing cities for citizens. The profound health benefits, the better than prescription drug antidepressant effects.

So, even though immigration and its benefits is decidedly complex, I oppose it because Australian governments do a torrid job providing the infrastructure to support population growth, with growth merely bloating our cities.

Okay, enough assaults on the ‘left’ side of society. What I wrote above is a simple thought exercise, not necessarily an outline of my entire thoughts on the matter. Lets have some fun with some issues on the ‘right’ of politics.

Negative gearing… lets try to keep this short. Negative gearing represents a tax deduction on interest incurred as an expense managing an investment property. It’s a tax deduction. What does a tax deduction do? A tax deduction distorts investment. It reduces the cost of investments into given activities; it encourages it. How do governments decide what is a tax deduction? The general rule is that an item is tax deductible if it is incurred to earn income. Lets leave aside the technicalities for now. Why does this benefit the national interest? Activities which lead to income increase the output of citizens and build prosperity, which benefits citizens and their nation. Note that this is an important assumption – that income generating activities are in the national interest. Back to negative gearing. Of course, interest is incurred to earn income. So, it should be a tax deduction, right?

No. Money invested into housing is a colossal waste of money. The investment is into a fundamentally non-productive asset. Lets reframe this. We all know housing prices have risen above inflation in recent decades, so they have risen in real value (even after adjusting for house size, no. bedrooms etc.) Why is this? Is it because the soil quality has improved? Is it because house quality and materials are better? On the latter, a little bit, yes. But, fundamentally, we are throwing money into the ground – into the land homes are built on. Everyone want a nicer home. When everyone tried to do this simultaneously though in the 1990s, house prices rose because… the no. of homes on scarce land was finite. Of course there’s a litany of other factors driving housing prices growth – the two-income trap, foreign investment restrictions, interest rates, CGT changes, legal differences between the treatment of the family home and an investment property – and, ironically, negative gearing is actually not that big a deal compared to other tax arrangements, but its fundamentally useless. Now, a better arrangement was Labor’s proposal to grandfather in existing arrangements, let limit negative gearing only to the construction of new properties. This means the tax deduction is restricted to the service of the construction of new property which increases supply, puts downward pressure of housing prices, and increases rates of home ownership. That is in the national interest.

We could go on and on of course about problems. But I have saved to last the most galling incompetence. The spurned panacea that could outweigh all the benefits of tackling the above issues. The golden opportunity sullied and defiled by our politicians

Debt and deficit. Scary words… right? No. Debt is not something to be feared. Debt is a tool. Debt is an extremely powerful tool to build national wealth. While governments of all persuasions have been eager to appear fiscally prudent in recent years in Australia, this has been nothing short of profoundly idiotic. Bond rates have been historically low since the GFC. Peter Hartcher wrote this profound article last week. But one fact amazes me most – international bond rates were at 1.8% in 2016 and we did not borrow. Or, as Peter Martin has long argued, consider that in 2015 the Australia government could buy 10 years bonds at a 2.5% interest rate, and inflation was 2.3%. This meant that the Australian government could have borrowed money at scarcely above the inflation rate. And, if this investment earned over a 2.5% nominal return (or, a 0.2% real return, approximate), the national wealth would have been increased.

It is absurd to believe that no infrastructure project or other government initiative in all of Australia could generate a 2.5% return. This is utter madness! Company discount rates are 15%, and their WACC is 8%. I’m sure all the combined intelligence of government could come up with a useful proposal (although, I do note that Infrastructure Australia is a body which needs major reform; there have been damning reports into it). But, lets pretend we are stupid and can find not even one project in Australia to invest in. Is this a problem? No! The government could – I kid you not – borrow, say, $300 billion, invest in overseas stock markets, watch the returns exceed 2.5%, and revel in money rolling in! This is basic personal finance – why work for money when your assets (e.g. capital) can earn money for you? Oh wait, Norway has only accumulated over $1 trillion dollars using a similar investment strategy and averages a 3.7% real return. That’s higher than 0.2%! And, we could do a lot better… (Caveats: 1. Norway’s is a sovereign wealth fund from oil reserves… we didn’t even get a good mining tax 2. Lots of borrowing can see interest rate rises as lenders reappraise creditworthiness 3. Borrowing still has to be directed to productive investment 4. Yes, equity investments do not produce guaranteed immediate returns, but its reasonable to believe the Australian government will exist in a few years, and so can ride out short term volatility). NB: I think there is very clear empirical evidence suggesting we can do better than stock market returns on certain projects in Australia, but at the very least, our politicians squandered what will become hundreds of billions* of dollars in potential real returns thanks to a failure to borrow under low bond rates. And if you use the corporate WACC rate over a long enough (40 year) time frame we’re talking $2.5 trillion foregone…

*My very rough calculations suggest if we borrowed $300 billion, within 10 years our real return would be $115 billion (using values from Norway’s fund returns, with the bond rate etc.). Of course, if you extend compounding returns to a 20 year time frame, we could have gained $274 billion. And, if this policy were implemented for a 40-year time frame? The real value of the gain – again, this is after the $300 billion principal has been repaid – is $800 billion.

The Australian people could do with $800 billion.

We don’t need to compromise ideals if we govern well

I hope the last example was instructive. It raises a broad point. If we truly governed well, the possibilities for our growth are profound. In fact, these opportunities for prosperity in our society are so abundant that we can compromise our economic growth for the maintenance of our social ideals.

We can eschew large scale immigration’s economic benefits, if we believe there is something culturally valuable to keep isolated. We can preserve the sanctity of the weekend even if it reduces GDP. We can reduce hours worked to foster stronger community bonds (notwithstanding how shorter working hours often increases productivity). We can spend government resources on modern day 1950 Coronet-esque social guidance videos to instill a strong sense of civic duty. We can waste time for ‘productive’ knowledge gains in school and instead focus on the revival of honour groups. We can pay the cost to add stability to the lives of our people. We can greatly reduce domestic violence.

We can do so much if we but govern well.

I am always struck by the issue of the budget deficit as an example of interminable debate. You would think we face grave trade-offs and there is not any possibility to improve the budget. This is baloney. Lets take some ideas from some experts in the eminently readable Fairness, Opportunity and Security: Filling the Policy Vacuum, and some of my own ideas. Its very quick to start adding up:

Scrap private health insurance + make other health reforms (detailed in book) = $15 billion annually. Cut all subsidies for coal, gas and petroleum use. The IMF estimated in 2015 this was $41 billion annually, though since $25 billion was attributable to air pollution and global warming, we could estimate the cost as only $16 billion annually. Adopt a proper cost-benefit analysis procedure and stop wasted road spending – at least $10 billion annually. Reform superannuation tax arrangements, which reduce government tax revenue by $25 billion annually (Treasury). Introduce a tax crackdown on multinational companies (mechanism are complex).

This is a (rapidly lengthening) article, not a tome. So we will not solve the world’s problems all in 1 go. But it should be beginning to be clear that we have it within ourselves to radically improve our lives. We have it within our capacity to do great things, magnificent things.

But an idealist must face reality. Wonders are not realised. Beauty flowers in spite of bureaucracy. The gleam of hope is but a naïve flickering of optimism amidst a world imbued by reality.

As Thoreau once said “If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.” We have sketched a castle in the sky. But where are the foundations? Where is the plan to turn dreams into reality?

That is where we turn next time.

 

 

Reflections on a by-election

 

Working at government elections as a member of the polling staff – the people taking and counting votes, not political volunteers – is always an interesting day. Just yesterday the North Sydney by-election occurred, and I got to have a good bit of fun as a polling official. I also got to learn a bit, and have some humorous exchanges. Lets go through them.

Arriving a little early, I had a chat to some of the political volunteers early in the morning. By and large, a lot of the volunteers are friendly, good people… except at each other. There was a very curious incident when the main Greens volunteer arrived, and saw that two Liberals volunteers had already taken most of the prime advertising space. The Greens volunteer wanted to put one sign along a fence rail that would only barely obstruct a Liberal sign, which of course made the Liberal lady quite irate. She was of the view that if he wanted the advertising space he “should have got there earlier”… apparently the lady had turned up about 5am.

This is, though a very little thing, actually really representative of the political philosophy of both parties! The lady’s approach to property rights one could say stems from a Lockean concept of homesteading, whereas the Green’s volunteer’s conception comes from fairness and a conception almost of ‘public space’. The funny thing here, to me, is that since the actual electoral venue was owned by a charity organisation and the footpath was a public space, the idea of homesteading seemed ridiculous…

On a sidenote, apparently state and federal elections have different guidelines for where posters can be replaced – eg. can’t cover fences with banners in state elections, yet can do in federal. I get that the idea is to prevent arms races in state elections… but the inconsistency is annoying.

Also, throughout the day, there must have been up to 9 political volunteers at our single polling booth. Why so many? Because it was a by-election, not a general election. At general elections, parties recruit volunteers to help out based on their branch /electorate. But, in by-elections, because most seats aren’t up for grabs, parties instead issue a statewide call on branch members, like all NSW Liberal members, and get them all to assist. Thus, parties that would normally not have volunteers at all polling stations, especially smaller ones like ours, were able to field volunteers. We had, for instance, a Greens volunteer from Blacktown helping out.

By-elections also act as a magnet to trial lots of things. This was one of the first times that computers had been used by the AEC to search for voters. I didn’t even have it 8 months ago in the state election to use. Of course, by-elections are a great time to trial things… that’s why we had about 7 AEC monitors – including the state managers for the NT, WA and some other state, along with deputy state managers visit us – plus AEC visitors from consulting firms… and we had 3 scrutineers from the Liberals counting our votes. 3. All this attention stems from the fact that by-elections are disproportionately important public relations wise to the power they actually confer – getting a member of parliament elected. By-elections drive media speculation. If Zimmerman had got a low majority, it could have dampened Turnbull’s standing. By-elections represent a real poll in action.

Of course, by-elections are expensive and often largely unnecessary, and I think you could rejig the system to just have the party in charge replace their candidate… this is especially so with lower house by-elections like for Zimmerman. Occasionally in the Senate elections, minnows can get elected based on ridiculous preference streams, and thus smaller party volunteers are crucial, but not for the lower house… Of course, for all the costs of by-elections, at least as a young man it’s a good day’s pay!

In terms of voting, we were rather a small booth. We had only 3 polling officials, 1 declarations officer, and an officer in charge. When you realise that AEC guidelines require a ballot box guard and normally a queue controller, you realise we had a small staff! In fact, we didn’t have a queue controller due to our small numbers (though we rarely had queues, so we could just say ‘no queue’). But having only 2 polling officials to take votes at a given time when 1000 come through during the day (we had 800 projected only) keeps you a little occupied. The good news about only having 1000 votes is that is makes it quicker to pack up. Working only 13 hours at an election is a short day. Of course, the fact that we had a sharp officer in charge, and it was a by-election – so no massive, ridiculous upper house ‘tablecloth’ voting papers! – also helped. This was counterbalanced by having to run a series of 2nd preferences as Zimmerman got a slight minority at first.

Now lets talk about the actual running of the election. By and large most polling officials at decent people, and generally well meaning. Citizens who get irritated at officials are… often misguided (though you do get some very strange circumstances). That most citizens do not care about their vote is fairly obvious. Most people see elections as a hassle. If you make a jest about “you didn’t want to vote a 2nd time?” people will react “Gosh no!” rather than care about their vote. Most people are not decidedly political. A large number of people do not follow instructions. Nearly 10% of votes were listed as informal, and did not count. Perhaps half of this came from not following the instructions to ‘number from 1 to 13’ (though you could get away with only numbering the first 12). If we stress it to you twice before you vote, it can be wise to listen (though informals are easy to count later!). Perhaps half of the informals simply placed a ‘1’ next to their first preference, which is often allowed in state elections but not federal… which, of course, raises the point that the actual voting should be streamlined between state and federal levels!

Now, in terms of listening to polling staff, it is true that we have to ask curious questions. We are mandated by the AEC to ask for your name, address, and whether you have voted in the election. Of course, when the booths open at 8 am and you asked at 8:01am, “have you voted before in this elections?” you’re bound to get confused responses. You get that confusion all day long. But, generally people get the message.

However, I got a curious exception yesterday! There was a fellow who I had identified from his address and name. The computer had no records of him having voted. But, when asked if he had voted, he claimed a right to silence. Repeatedly. Even when I showed him my AEC instructions that basically said “you must ask 3 questions [including if they have voted] and… the voter must answer ALL questions”. This fellow’s claim was there was no legislative requirement to answer the question.

Now this isn’t politics, but more a general life point. There’s sometimes no point in getting into fusses over small details as a citizen. This fellow, I have no idea what he was trying to accomplish. I would be breaching my electoral duties if he did not answer the question, and he knew that once I showed the sign… and he quite clearly knew that when I had to bring the officer in charge to further reinforce my position. In the end – he didn’t want a fine for not voting… despite refusing to comply with instructions – we let him write a long explanation on a piece of paper. And he departed.

Now here is a really silly example of futile principle. I am 95% certain he hadn’t voted in the election when he came to me. I’m not sure about the legislative requirements for elections, but he might be right. But you simply have to be reasonable when asked questions. Why waste 5-10 minutes of your life on such a minute trivial detail? If you don’t want to vote, its very easy to just get someone to sign you as being absent and unable to vote. Very easy. But if you want to vote and don’t comply with requirements the AEC mandates for staff to enforce, even after those staff have shown you that they are legally required to comply with those requirements, you’re simply fighting a futile battle. Even victory would be empty.

These few curiosities that I have mentioned and more go into any election. But all around it’s a good experience, with fine staff to work with, and a generally understanding public. As one citizen remarked to us about his brother’s experience in Venezuela, our ‘ballot box guard’ is unlikely to be threatened by armed parties of mercenaries actually stealing ballot papers. So, all in all, we ought to put the mild irritations of elections out of our mind. They’re a very minor blight on our freedom and free time.

A Debate on Housing Affordability

At the moment, a pressing social issue has arisen in the cities of many developed and developing cities – rising asset prices, especially rising housing prices. This is, as I will argue, a matter of concern for policy makers and the citizens of those countries.

Such concerns can often be seen in the media, and many points are raised in such discussions. But rarely is a full analysis given.

Today I’d like to try my amateur hand at discussing the multitude of causes affecting housing affordability, then assess whether rising housing prices are a good thing, while simultaneously discussing the ramifications of any solutions posited to the problem, before then giving you some short advice on what to do if you need to buy property. While doing this I will try to avoid a deluge of statistics at you, dear reader. The views in this article are the product of reading hundreds of articles over the year, and tidbits in books. As you can imagine, I haven’t given you every single link in this article.

Like any rational discussion of such a complex topic, this post is a little long, but I hope its well worth it. I’ll be focusing my discussion on Sydney and Australia, but these points often cross apply to many other countries and cities.

Why is the price of housing rising?

During the past 60 years in, the price of housing adjusting for inflation and for changes in the quality of the housing stock, has risen at an annual average rate of around 2.5%; in contrast, real per capita disposable incomes have increased just 1.6%. Furthermore, the median dwelling price in 1985 was 3.2 times a household’s income, now, it is 6.5 times the median incomes.

Of course, this doesn’t measure the true cost of home ownership. For that you need to consider resale costs, interest rates, maintenance outlays etc. In particular, low interest rates mean housing is still somewhat affordable despite the median dwelling price doubling as a % of household income over the past 30 years.

What figures you use may vary the information, but the broad principle is the same. So, why are prices rising?

Tax and policy system incentives

Inherently, changes to the taxation system have spurred the development of rising housing prices.

The financial deregulation of the late 1980s in Australia was a strong microeconomic reform, that increased the liquidity of money supplied to households. Like any increase in supply, this drove down the cost of finance for borrowers.

On the taxation side, many government reforms make investing very favourable. Negative gearing, for instance, in effect acts as a tax subsidy for any *loss* made on an investment. Of course, thanks to the government introducing an allowance for depreciation, this loss can be higher, thus, the tax benefits are increased. This tax subsidy is an even more significant factor now because bracket creep slowly pushes people into higher tax brackets, thus the tax benefits of property investment – depreciation allowance, interest payments being tax deductible etc. are so significant.

This change to negative gearing was also accompanied by a halving of the capital gains tax rate in the late 1990s. In effect, for assets held over a year, the tax payable is now half what it used to be. Thus the benefits of any investment return are higher than what they used to be.

We could go on about tax at length, but the basic point is that taxation rules have shifted to (even more than they used to) favour investment spending over either consumption or leaving it in a bank.

For instance, if you spend $100,000 on a round the world trip, you have nothing. If you get a 5% return on $100,000, the ATO then tax you on the $5000 you earn, reducing it to an after tax benefit of $3500 which then has to outpace inflation. If inflation is 3%, then your net return is 0.5%. Not much! By contrast, if you invest in a property, you get the ATO subsidising any losses you make, you aren’t taxed until you actually sell the property – which can be whenever you choose to minimise your tax… – and, being a higher risk investment, you’re likely to get a higher return. And, if you’re using borrowed money to fund a property, say you only have 20% of the money down, then you’re rate of return on your equity is (before interest costs and etc.) 500% magnified. That is, your 5% return is magnified to a 25% return as its 5% on the whole investment, which, even if you have 10% investment loan costs quickly adds up… remembering that those loan costs are tax deductible!

Oh, and if you’re a renter, tough luck! There’s no tax breaks, and any payments you make for rent come out of after-tax income. So, its not like you can put yours earning into superannuation to dodge tax, or shares. You have to pay from after tax dollars.

Without writing a book about tax and personal finance, the tax system REALLY HEAVILY rewards investors into assets. That includes property investors. The net effect has been to increase the flow of funds going into housing stock. That has greatly increased demand, increasing housing prices.

This massive flow of funds by investors into profits looking for rental returns from tenants has been accompanied by record low interest rates following the GFC. These rates reduce the cost of borrowing further. Reducing borrowing costs increases investor’s ability to borrow funds to leverage and acquire property. Remember, negative gearing (as distinct from positive or neutral gearing) actually means your cash flow from a property is a net negative, but is offset by (unrealised) capital gains. This is all fine and all, but too many properties and people get a short term cash crisis / don’t want to give up their standard of living. Lowering interest rates massively increases the demand for borrowings. The effect of this has been to seen first home buyer and owner-occupier buyer rates plummet against the % of properties bought by investors.

The net point of all this is that 30 years ago investing in property was FAR less favourable, so investors didn’t invest. They also couldn’t access funds before financial deregulation. Times have changed, and now there is a tonne of money going into property.

A very quick sidenote – a bit of this money comes from self-managed superfunds investing into the property market.

Now, another policy factor that drives rising house prices is immigration and foreign investments.

On immigration, increasing the size of Australia’s population inherently creates greater demand for housing stock. Since, as I’ll discuss more below, most housing stock demand concentrates in cities as Australia becomes ever more urbanised, demand pushes prices up. Increasing the no. people in the population fundamentally increases housing prices because the supply of land is finite. People talk about rezoning land for development, and there’s potential scientific developments that can open up parcels of formerly arid land… but, at the core, the size of NSW is fixed. We can’t create land. We can’t ever change the amount of land we have (short of building artificial islands). That means, to my mind, the housing debate is fundamentally a demand size equation. Immigration can only perpetually increase demand for housing, so long as their remains a desire to live in cities and we don’t decentralise. Food for thought. That’s why I think a large part of the solution to any housing problem must come with building new hubs of development – Western Sydney, Newcastle etc. – with enough glamour to discourage further populations flows into Sydney, assuming we don’t want upwards pressure on house prices.

Just a quick aside, but a fundamental issue with the supply of land is also Sydney’s geographic boundaries – the blue mountains to the west, the sea to the east, plains and some marshland (if memory serves) to the South, and limited northern development limit the potential for Sydney’s borders to expand.

Now, as to ‘foreign investment’, that’s an external factor. Arguably this is being caused by a multitude of factors – the corruption crackdown in China causing capital flight, international attractiveness of Australian property, rising middle class with disposable income worldwide, greater capital mobility etc. – but the basic point is that foreign investment = capital inflow. Capital inflow = more capital for demand, raising prices.

That’s where you get shrill media cries like “ban foreign investment so Aussies can afford a home!” And yes, foreign investment does have an impact… but its much less than people think. Earlier this year, when there was a huge media storm about foreign buyers, and buying was at a beak, only 19.5% new housing demand was from overseas buyers; making up just 11.2% of overall housing demand. That’s not nothing, but it clearly implicates developers and investors as the cause of approximately 80% of demand – first home buyers are like a piddling 5% of the market.

Furthermore, being more Machievellian, we’re happy to accept foreign investment… for the right price. In a really cool instance of “did you know?”, did you know that, for all our anti-immigration stances and such, we’ll just let anyone come in on business migration… if they bring us $5 million dollars! http://www.industry.nsw.gov.au/live-and-work-in-nsw/visas-and-immigration/business-migration/state-nominated-visa-categories

Let me amend that. If you give $1.5 million to the Treasury upfront and then continually invest, we’ll also let you in. And if you’re okay to live in regional areas, we’ll let you in for just $750,000! What a bargain!

It may seem terribly cruel, but so long as we charge a high enough entry price on these ‘business migration’ programs, we get enough money that can be used to benefit Australia that more than offsets any tiny impact on housing prices any individual migrant has.

I should mention, just for your edification, that the NSW government is often condoning criminal behaviour in doing this! In China, for instance, its illegal to bring the amount of money out of the country as is required for this business migration scheme. So, basically every time the NSW government accepts a $5 million paycheck, its condoning the breaking of Chinese laws on capital movements.

Who knew property investment had so many cool “did you know?” trivia facts?

If you’re still reading right now, we’re about to go into the murky waters of social causes of rising house prices, which add more complication to the story of housing demand. To give the TL;DR version so far:

Tax and other stuff has made property a really attractive thing for investors. They are the big bad people pumping in the majority of money driving demand, all in the name of rent seeking. Foreign investment is a sideshow, though an interesting one.

Onto part 2!

The Social Causes of Rising House Prices!

Reading what I wrote above, you could be forgiven for thinking that the housing crisis is all about faults in government policy. But in truth, many of the government policies outlined above were sound. The fault lies in part in social trends, and some of our own actions

Take shifting patterns of the workforce, for instance. Australia has increasingly shifted towards an urbanised environment as the % of workers in services industries has increased. Urbanisation drives housing process, as cities become more populated, yet city boundaries hardly increase. But more than this is the development of a process called agglomeration. As Herald economics writer Matt Wade has described many times: http://www.smh.com.au/comment/better-public-transport-makes-for-a-smarter-sydney-20140422-zqxsi.html

As cities across the world wrestle with globalisation and the advance of technology, effective mass transit systems are proving valuable. Fast-growing knowledge industries are clustering together rather than spreading out. Individuals, businesses, cities and nations stand to gain from this process which economists call “agglomeration”. Knowledge workers rely heavily on face-to-face communication in order to share information, generate ideas and cut deals. So agglomeration fosters innovation. It also offers deeper labour markets which improve job matching and enhance skills. This results in higher productivity.”

What Wade discusses is the need for public transport to create an environment that allows us to reap the benefits of agglomeration. But at the core of this proposition is that as our financial services sector, our legal sector, our technology sector –our number of professionals – rises, their productivity is only maximised by the centralisation of human capital. But this creates a problem. If all the knowledge workers get plum apartments in the inner city, then where does the rest of society live? And, just because knowledge workers  might ‘need’ to live near the city, that’s not going to change the general demand for inner city life, is it?

Tied into this argument is that people generally have preferences for city living. Jobs are in cities, people like shopping, people like the beach, people aren’t country fans etc. You’ve got a lot of sociocultural factors that make city living very attractive to a vast segment of the population. That increases demand again.

Now, let us move onto a more controversial argument. Some conservative commentators, and indeed many in the community, would argue that young people expect too much far too quickly, and buying a home as your first property is ridiculous. Others would argue that housing demand is driven by people wanting ‘McMansions’ and not smaller homes. Indeed, there even articles in the Sydney Morning Herald ominously almost implying that a failure for older people to downsize was a cause of housing prices rising http://www.smh.com.au/federal-politics/political-news/housing-crisis-report-says-backyards-for-children-vanishing-as-oldies-stay-put-20151028-gkl3eh.html

These commentators say people expect too much. Are they right?

The first thing to say is that a heat graph analysis of Sydney suburbs finds that a full time minimum wage worker can only afford rents in 0.1% of Sydney suburbs within 40km of the CBD. That is, only 1 in one thousand homes are suitable for the poorest in society. Whatever may be said about people earning higher incomes and excessive demands for housing, to me our long term goal should be to foster housing for all. As I’ll discuss later, I think housing affordability is an important thing to retain.

Now, as to the argument that young people shouldn’t move into a home at first, I totally agree. The idea should be to rent a cheap place in a slightly distant Sydney suburb, and then slowly move up either the rental scale, or property scale as incomes rise, if you desire better property. For any university graduate to expect to have the capital to invest in property is a questionable notion. Consider human history. For thousands of years very few have actually owned land. Only as resources have increased have people actually earnt the buying capacity to own land in their own right. You’ve gone from communities owning tracts of land to families creating wealthy estates, to now every individual wanting land. That’s been driven by rising prosperity, but it has limits. You can’t demand a house at first, so moderating expectations is advised.

But, when expectations are discussed, ‘moderating expectations’ inherently has a different meaning today. In the old days, to read some columnists, your young man saved hard, and then bought somewhere like Paddington, a quiet suburb – nothing ritzy. Yet now, suburbs like Redfern – just less than 10 years ago with a median house price about $500,000 and not perceived as a very… stylish area – now command a median price over $1 million. Student rents in the area are many hundreds of dollars. So, the quiet suburb like Paddington near the city is not an option. You’ve got to moderate your expectations, and move further afield, which has its own problems…

Fundamentally, a cause of rising housing demand is that everyone wants better homes in better suburbs, simultaneously. Which, of course, rapidly raises prices. This phenomenon is given an interesting discussion in Elizabeth Warren’s book The Two Income Trap, of which a nice summary and discussion is give in an article by Warren here http://www.yale.edu/law/leo/052005/papers/Warren.pdf Though the article is dated (2005) , Warren did in effect predict the GFC, and here the point broadly applies.

The Two Income Trap

Warren discusses bankruptcy in the US. Warren goes on a discussion of why, despite incomes rising as we now have two income families, there is such problems with bankruptcy, and housing prices. Surely, with all the extra money, even if women are paid significantly less, we must be far better off?

The issue in this case is that the mother’s income is not actually much of a gain – its not like a 50% pay rise. The mother has to pay taxes. Because the mother needs to get to work, a second car is often needed. This second car increases debt. Furthermore, because the mother not being means domestic work isn’t done, costs like preschool and domestic services rise. But, generally, there is a small incremental gain, so why the struggles?

Is it consumption? NO, Warren finds that consumption broadly speaking hasn’t risen. In fact, Warren recommends spending on frivolous consumption! Why? So long as you can scale a cost back, like frivolous consumption, you’ve got buffer room. Such is not the case with fixed expenses like a mortgage, which you can’t scale back…

The actual cause, Warren speculates, is that people are trying to buy property in better neighbourhoods to get access to better schools. Thus, they use the second income for their kids – using a second income to leverage a larger mortgage for better property – but since everyone is doing this, it simply stretches the budget, pushing up housing prices. As housing prices rise, sucking up the income from second income earners, it can actually seem necessary to have the second family member work, because house prices have risen.

Of course, this promotes instability. In the old system if one person’s income fell or a job was lost, the second partner could step in to bridge the loss of money. But that can’t be done with a second income, if its depended on to meet costs. The flexibility drops. That’s why Warren found that bankruptices often very highly related with having a dependent child. The cause of bankruptcy was not overconsumption. It was driven by medical expenses, one parent losing their job, or divorce. All three link to this dependence on two incomes. Lose the job, and you’re too heavily mortgaged. Divorce, and there aren’t two income earners anymore. Medical expenses, or having to stop work, and the family fractures.

And as to the sizes of all these houses, are they much larger, with ‘media rooms’ and all sorts of extravagances? Well, yes, homes are slightly bigger. Warren found the no. rooms had increased from 5.7 to 6.1 over 2 decades to 2005, this increase most often being for a second bathroom or third bedroom… what luxury indeed.

Thus, rather than being due to increased size of homes, rising houses prices represent us all trying to move to ‘better’ homes simultaneously. The problem is, housing supply is highly inelastic – that is, if everybody wants to move into a better home, it takes us awhile to increase the no. houses. Building a house takes years, and redeveloping communities so they are ‘better’ is a long term project. No wonder, then, that if there is an increase in demand and supply is inelastic that you have rising prices.

The bitterly sad irony of all this about schools and neighbourhoods is that the impact of a given school is not that significant, rather, the individual teacher is what impacts how well a student does. The actual choice of school has a fairly minimal impact on academic achievement. And yet… it has such an impact on house prices – which has a big effect on everyone.

Why rising house prices are a really bad thing

Rising house prices are an absolutely horrible thing for everyone except property owners and landlords.

As discussed above, the two income trap has seen gains in incomes eaten up by housing prices. The dependence on more income makes people more fragile to the vicissitudes of life, increasing stress and volatility. Even if you’re doing fine, you’re loan repayment being larger means less money for other things in life. While Warren, and myself and many others would say that only one income should be used on housing, and another for savings, the problem is when society as a whole dictates that house prices rise.

A second argument for why rising house prices are bad has to do with wealth inequality. As the largest asset anyone ever owns, homes represent an equalising factor for wealth inequality when home ownership is high. When people rent, by contrast, we are simply seeing a transfer of wealth from renters to owners. Rent seeking exacerbates inequality. This is in contrast to 1960s and 1970s Australia wherein higher rates of home ownership made Australia one of the most equal societies on earth.

But why is inequality a bad thing, you ask? Surely, if we wanted equality, we’d just go communist?

The first answer to that is that this is about wealth inequality, not income inequality, and thus doesn’t directly affect the incentive to work. But, more significantly, new evidence in economics studies, including from the IMF, finds that rising inequality harms economic growth, contra to traditional mantras. Its not hard to see why. More inequality means more people need welfare. More inequality means low income earners spend less, when they actually have a higher marginal propensity to consume. More inequality also results in social division. When the Gini Coefficient rises above 0.4 we see social and class divisions, which fracture a country’s politics and inhibit its unity. This has flow on effects, and is generally unpleasant. So, fundamentally, in exacerbating inequality, the practice of rent seeking is deleterious. And when the only way to prevent inequality – by minimising rents – is to move away from the city centre, you are in effect shifting longer commuting times onto low income earners, who are the most time poor – the ones who can’t afford to outsource domestic tasks for money. Longer commutes correlate with worse health outcomes, and in spending more time on trains and buses, commuters spend less time with families. Such a cycle harms the lower class viciously.

Now, I consider the above arguments as significant. And that’s not to mention the stress, bankruptcy and issues Warren raises with home payments. The effects of defaulting on fixed incomes, and missed conspicuous consumption and not having the secuiryt of your own home, or not meeting up to cultural expectations of the ‘Great Australian dream’ can all also be considered. But, I’m no sentimentalist. If all these sacrifices were being made for some noble enterprise, it would be worthwhile. If for this stress and struggle, like a person saving so they can invest in shares and make a long term return, we were to actually get something worthwhile out of it, then of course I would support it as supporting the national interest.

But that’s just the thing – rising house prices do nearly nothing for society. Housing and land is inherently a non-productive investment. Building a new house doesn’t do anything for society. Refurbishing a house doesn’t do anything for society. That new coat of paint? Nothing. At least, not like building a road, or investing in hospitals does… you know, something with a return on investment.

Pushing up the price of houses is like pushing up the price of art. If the Mona Lisa sells for $1 million, but then later sells for $10 million, you’ve still only got the one artwork. No value has been created for society by raising the price. But, some poor chap has just spent $9 million that could have been spent on something productive. Its classic personal finance for a society – prefer income producing assets rather than things which give no value. Like housing.

But surely, you say, these more expensive houses are actually better  than those built 50 years ago? That represents the cost. Surely?

As discussed earlier, the supply of land is finite. And most of what you buy is the price of land, not the house. And I can tell you, you aren’t paying hundreds of thousands of dollars more because the soil quality of land has improved over the past 50 years. You are paying more because there is a space to build something on. But lets be charitable. There are improvements to houses, and money spent on houses. In accounting, we consider spending on assets as either being expensed or capitalised. If you make something better than it was originally, you can capitalise the cost and add it to the value of your asset. Like adding solar panels or better insulation. But if you’re just repairing the roof, adding a coat of paint to cover cobwebs etc. that’s just a regular expense of maintenance. Now… just try to tell me that on a 40 year house you spend less on maintenance than you capitalise…

Of course, even if we were to dreamily say it was capitalised, we forget that buildings are a depreciating asset! An asset forever going down in value. Forever experiencing wear and tear. So, even in the best case scenario, any investment into housing is like ploughing money into assets that depreciate… as opposed to income producing assets that increase in value. As any personal finance book will tell you, that’s the height of stupidity.

The only thing worse thing, after all, is spending money which doesn’t even depreciate afterwards, but instead leaves you with nothing. And you know what? That’s EXACTLY what bidding up the price of land does – nothing! No land is created, no soil quality improved! The land supply is inelastic (barring building into the sky) . So when, for all these things we bid up house prices, we are pushing our savings, the fruits of Australian workers and the nation, into a bottomless pit of nothingness, a pit that can never be filled, can never produce anything.

Now as a nation, that’s just plain incompetent to recommend as a policy position.

Solving the Housing Crisis

Having discussed the causes of the housing crisis for awhile, the question is how do we solve it? How do we take action? How do we turn this problem around?

For the most part, there is no quick solution. As discussed ad nauseum, the supply of land is finite. The development of new land is a very long process. Rezoning takes time. Building apartments to increase housing stock is a possibility, but this backfires insofar as apartments need infrastructure on the ground to support them… which requires land. Furthermore, demand is also price inelastic. People want to live in homes and need accommodation. That people view homes as assets is great for asset holders, yet doesn’t change fundamental beliefs in getting homes.

In the long run, the development of multiple city centres and decentralising the city population is the best way to reduce housing prices. Building away from the centre where demand is strongest, and creating jobs in more remote regions eventually stems the flow towards the centre. More centres like Newcastle, Bathurst and Western Sydney need to be developed. Ideally, new settlements along the Sydney-Canberra corridor could progress. Long term decentralisation is the ideal solution.

Now, since this is a demand side problem mostly, we must act to lessen demand. So, before we attack solutions, let me saying that housing subisidies, first home buyer grants, and letting superannuation retirement savings be allowed to be spent on housing – heaven forbid – should not be countenanced. Onto solutions.

In the short term, there are policy levers. Foreign investment could be reduced, but for the reasons I gave earlier, I don’t see this as a significant driver of housing prices, and we can actually use the funds we generate from business migration to good effect. Rather, the main issue is investment owners driving the bulk of demand. This could be significantly reduced by eliminating negative gearing – though this would have to be phased in – as well as potentially looking at the tax deductibility of interest repayments. While tax deductible interest could be axed as a tax loophole, it actually serves a genuine purpose – to encourage investment – so I would be hesitant. But negative gearing? Yes. I would also try to stop self managed super funds investing into property (or limit investment) , to reduce demand.

Cutting immigration is another big policy lever that could be used, but, like many levers, dangerous to utilise. Fundamentally, a rising population puts pressure on housing prices, and requires supporting infrastructure. I think there’s a need for a population debate of actual significance in Australia, and its an overlooked policy debate, but the issue is that immigration supposedly counters our aging population and fills the gap for skilled workers (arguments I find faulty). Also, completely cutting out immigration is bound to earn international ire, popular cries of racism and popular disdain.

The RBA could raise the cash rate, and decrease the attractiveness of investment loans – this would be perhaps the biggest lever that we could pull. But this risks harming any recovery in the Australian economy. Also, the RBA’s independence from central oversight is a boon, which I would not alter.

Finally, we could introduce a land tax. For all the talk about the GST being an efficient tax by economists, its very hypocritical that we hear no talk of a land tax replacing stamp duty. Stamp duty is a stupid, distorting tax that causes economic inefficiency, where land tax is the perfect tax that impedes absolutely no economic activity, and can’t be dodged, unlike any other tax. You can move capital, but land is rather fixed in place. Taxing land would discourage some property investment. We could also add another tax – death duties – into the mix for high income earners to try an reduce the accumulation of wealth through property.

All these measures are good. Further measures would require the use of rather authoritarian measures. Changes to social expectations and such could make a difference, but fundamentally, I think the problem is not in people’s expectations, but in policy decisions, and the society I think is ideal isn’t a developers paradise.

Buying Property

I love a good policy discussion as much as the next 19 year old, but I know that some people are slightly less esoteric. They simply want to know if they can buy a house.

My advice is to go read lots of personal finance books for help. Start with books by Noel Whittaker. Reads lots of books. These books will help you fundamentally shift your mindset on spending and saving, and encourage you to develop a mindset conducive to wealth accumulation. That’s going to make things a lot easier.

My advice is to start young and focus on accumulating savings and assets. You want to start investing in income producing assets. To invest, your income must exceed expenditure, which is then saved and invested. Maximising income while cutting spending will allow you to begin investments. With the magic of compound interest, so long as you leave your money to the side, your long term wealth prospects are pretty much guaranteed, so long as you invest in the right asset class. I would recommend an exchange traded fund diversified across a stock index, with a minimum time horizon of 5 years as promoting the greatest capital growth to build your wealth.

The ultimate goal here is to expand your control of assets and slowly generate either passive income, or the capital gains sufficient to help put down a deposit. Once the deposit is acquired, your best advice is to strongly pay down the loan. The way mortgage loans are structured, you pay an awful lot of interest at first, but very little principal. If you have to pay $1000 a month on your mortgage, for instance, you can bet that maybe $900 of that is interest. By increasing payments by 20% to $1200, you’d actually pay back the principal thrice as fast, cutting hundreds of thousands of dollars in interest. It’s a tough short term cash problem, but well worth it in the long run. The numbers in this example are hypothetical, of course.

As a young man, for instance, if you earnt $30000 a year – not impossible while studying full time – then even if you had to pay 50% of your income as board to your family, you have $15000 in potential savings. Assuming you spend $7500 socialising and such, you still have $7500. Over 5 years, that’s going to be $40000 with even moderate returns. If you decide to get rather more creative and know what you’re doing, you could put down the $7500 as equity in a margin loan to gain control of $15000 of assets. With 5 years, you may control nearly $100000 in income producing assets, especially if you cut expenditure and only spent $5000 socialising. If your family doesn’t make you pay a 50% board rate, you could do much better. And yes, these numbers are based on personal experience, for a person whose name shall not be disclosed.

You must act now, however, as once your disposable income begins to wilt away and you get trapped, such plans wither to dust.

All this is to say that with a bit of short term sacrifice you can get a long way on the road to wealth rather quickly. I urge every reader now to go and read personal finance books today. What you can learn will change your life, properly applied. At some point, I may make a post about the subject, so vital is it for every person to know about. A proper understanding of finance is essential for eveyr citizen. Even as we face scary house prices, as individuals opportunity awaits us if we are willing to act.

The world beckons even as housing affordability dims. Yes, there is much you can do in the policy debate for housing. But for yourself, there is far more to do. I urge you today to go learn about personal finance.

If you’re still reading, let me thank you for getting this far, and do tell me what you think. I’d hate to think nobody read this long post.

The National Interest, Realism, Refugees and Pathological Altruism

Previously, I discussed some curious issues arising in the Middle East. One of the foremost issues arising at the moment is the refugee crisis arising from the Syrian civil war, and how Europe decides to deal with Syrian refugees.

This is an extremely interesting issue, both in and of itself, but also as a brilliant chance to discuss a concept fundamentally misunderstood– the national interest.

I’ll set out, in 2 sections, to prove / make a case for two claims:

  1. Governments must make their actions based on how they benefit the national interest
  2. The number of refugees some European nations are taking in is against their national interest, and an example of pathological altruism

Without further ado, lets begin.

For the national interest

Recently there was a fascinating article by Uthman Badar in the Sydney Morning Herald http://www.smh.com.au/comment/the-muslim-bogeyman-is-a-tool-for-the-cheap-politics-of-fear-20151101-gkny43.html. It wasn’t that Badar was a great critical analyst but his article has interesting rhetoric on Islam, terrorism and the national interest.

First Badar attacks the ‘romanticised history’ of Australia’s hospitality towards refugees. He says: [emphasis mine]

The romanticised view of Australia’s gracious hospitality ignores the fact that the motivation of increasing immigration was primarily economic, not humanitarian. More significantly, it turns a blind eye to the fact that the conditions in the Muslim world from which people escape – economic hardship, war and conflict, political persecution – are a direct result of the foreign policy of western states, to which Australia is party.

Badar then goes on to discuss how Western states propagate values of free speech and such, while attempting to instill its own values through its own institutions. Attempting to force children to sing the national anthem is nationalist. Our attorney general says coming to Australia means adopting Australian values. Deradicalisation is ‘nothing more than forced assimilation justified by fears of an exaggerated security threat’.

And so Badar thunders “In other words, it is not enough that you obey the law. You must also adopt our values”, conjuring up the force of an authoritarian government from protectionist times. And isn’t he right? How frightening, how wrong to force values down the throat of the law abiding citizen. How ignoble. Tolerance, diversity, freedom – isn’t that what we must stand for?

Only if it benefits the national interest.

Listen to what Badar says, and query if it matters. Did we take lots of refugees for non-humanitarian reasons? Absolutely. And… why is that bad? Was it a bad idea to support our economy and ‘populate or perish’ in the post-WWII era? Why this is implied to be a ‘bad’ thing needs to be proven. Maybe it was bad because it drove social discord. Maybe it increased unemployment. Maybe it sowed cultural disharmony. Maybe the population outgrew existing infrastructure, resulting in unplanned urban sprawl, inefficiently laid, which is costing us now. Those are bad things. I’d be amenable to such arguments if they were evidenced – proof that our actions harmed our own interests.

But the idea that what we did was wrong because it was in our interest? No.

I expect the leaders of Australian to pursue Australian national interests. Any other course of action is incompetent.

I detest incompetence in a government. Government is designed to benefit the citizens of a nation, or else we would advocate anarchy as the ideal social model.  Government is a tool to advance societal interests. When we talk of the ‘natural interest’, we must be broad. I have never liked political labels or ideologies, for they restrict our views.

If its in the national interest for Australia to institute every recommendation on a tax white paper and limit the deadweight loss from tax then it should be done. If the economic strength of the nation requires better city planning then radical steps should be undertaken. If a carbon tax is required, then it should be implemented. Where the public benefits from positive externalitie created by green spaces, the government should repossess improperly zoned land. It was in the national interest to have a tax on super profits in the mining industry. It was absolutely not in Australia’s national interest for the Howard government to lead 7 tax cuts in a row, creating a structural budget deficit.

Of course, assessing what is ‘in the national interest’ is not easy. Some people say balancing the budget or ‘debt and deficit’ are scary things. Some say we need to care for the more. What the only real test should be is “are we borrowing to invest in infrastructure, or to build income producing assets?”

Or, what about the claim that the national interest forgets individuals? Well, I would disagree. Firm evidence from the IMF shows the dangers of income inequality as weakening economic growth, which harms the nation.

All in all, the national interest is an amorphous beast. Just like I ascribe to no set political ideology, being part Romantic, part Machievellian realist, Keynesian economics endorser with caveats, socially traditional yet an arch progressive in other ways, conserver of the past, yet supporter of research and development spending, so to the national interest is never a simple thing to pin down.

And that’s okay. We can disagree about what is exactly in the national interest, so long as we are clear that that is the only metric which counts.

So when Badar says that problems in the Middle East are a direct cause of Western meddling – which is a decent point to raise – the response should not be “the horror!” Rather, we must ask, does that mean we, as citizens, should pressure our political leaders to effect a change in our national policy? Maybe. What if we were to say that our national interests are served by keeping the Middle East divided and fractured, so no other  major power can rise as a competitor in the region? What if we were to say that wars in the Middle East foster demand for arms sales, and this strengthens the US economy? I’m not saying our national interest is served by a divided Middle East – its not – but that’s the sort of questions that matter, not our guilt in the matter.

Now, what Badar does raise, rightly, is issues of non-intervention and such potentially being better courses of action. And… if they serve the national interest, which I think they do, then of course we should adopt them.

Now, I want to be very, very clear about something before we move on. ‘Pursuing the national interest’ does not mean you intend to go around trashing everything in your path. Pursuing the national interest through economic reform does not mean obliterating a class of people as a ‘national sacrifice’ – that is completely counterproductive. Of course in international relations people have overlapping interests, and to pursue those interest simultaneously will just as surely lead to misery, as it leads to the Tragedy of the Commons in economics. Of course multilateral solutions must be consider in economics with regard to potential free rider problems, and intergenerational equity. Pursuing the national interest can’t be boneheaded and ignore every externality that one’s actions take. The national interest must account for those externalities.

For the national interest, calculating and hard nosed a concept as it is, is also a concept that, properly studied, can bring about the greatest kindness and benevolence to a society. The national interest may be the tool used to destroy underperforming economic industries, or conduct high risk diplomatic talks. But fundamentally, at the heart of the national interest, lies a society for our benefit. Achieved properly, the national interest creates stunning verdant fields for Romantic sensibility, peace and stability for the merriment of everyday life, prosperity for citizens one and all, character and community relations among neighbours, cultural wonders to bequeath a legacy that will last a thousand years… and an endless list of benefits.

Refugees and Pathological Altruism

“Let me say at once that I am no advocate of a foolish cosmopolitanism. I believe that a man must be a good patriot before he can be, and as the only possible way of being, a good citizen of the world. Experience teaches us that the average man who protests that his international feeling swamps his national feeling, that he does not care for his country because he cares so much for mankind, in actual practice proves himself the foe of mankind” – Theodore Roosevelt

“A pathological altruist then might be a person who sincerely engages in what he or she intends to be altruistic acts but who (in a fashion that can be reasonably anticipated) harms the very person or group he or she is trying to help; or a person who, in the course of helping one person or group, inflicts reasonably foreseeable harm to others beyond the person or group being helped; or a person who in reasonably anticipatory way becomes a victim of his or her own altruistic actions (2). The attempted altruism, in other words, results in objectively foreseeable and unreasonable harm to the self, to the target of the altruism, or to others beyond the target.” – Barbara Oakley, http://www.pnas.org/content/110/Supplement_2/10408.full.pdf [emphasis mine]

As I stated near the start of this article, I consider government, in its ideal form, to be a vehicle to advance societal interests, whatever that may be. And for any given government, those interests are those of its people first and foremost. Not to the world around them, except where it suits their people’s interest.

Such a statement seems callous and harsh – ignorant of a ‘duty’ to help those in need. But let us compare this to a client and lawyer. The lawyer has a duty to their client as the government has a duty to its people (ideally). Let us say there are higher duties – the truth in the courtroom, and the world interest for the world.

Now, if you were the client, you would not be happy if your lawyer started arguing for truth, or the other side, right?

In considering the Syrian refugee crisis from the perspective of a European nation, we must consider a government’s actions through the prism of the national interest, not some perceived duty to be altruistic.

Peter Hartcher, in an excellent article (http://www.smh.com.au/comment/refugee-intake-is-cold-hard-common-sense-20150914-gjmcvi.html) , makes the potential case for refugee intake. A 2011 report by Professor Graeme Hugo commissioned by the Department of Immigration found that in the past 2 generations:

  1. Refugees were the youngest group of immigrants to Australia. Thus, they help lower Australia’s aging population more, work longer, contribute more to the Australia community (taxes etc.), and are more likely to bear children.
  2. Refugees are more likely to stay in Australia than other immigrants.
  3. While first generation immigrants have trouble fitting into the workforce, second generation immigrants have a higher participation rate in the labour force than the regular population.
  4. Refugees put a higher emphasis on education than other immigrants
  5. Refugees are more likely than anyone else to start a business. As one might read in a business textbook, SMEs are important drivers of innovation, employment and new technology.

The point of all these findings is that taking in refugees, not just skilled workers, can be a very rational move from the point of view of the national interest. Hartcher makes the point that Merkel’s decision to bring in so many refugees is in part an attempt to moderate Germany’s aging population.

In addition to the points raised above, we can attempt to consider other arguments. Firstly, other countries in the Middle East who are taking in refugees – like Lebanon – are less able to take in these refugees, and their failure to handle refugees could exacerbate violence and instability in the region, harming Western nations in the long term. Secondly, its good PR for Western nations to look to be responding to the crisis. This includes PR to their own citizens. Thirdly, not acting to bring in refugees will simply make them targets for extremism, harming national security in the long run.

For these reasons, former immigration minister Scott Morrison, not the most refugee loving fellow, still holds that integrating refugees is in Australia’s national interest.

However, the above argument has one gaping hole in it. It deals with refugee data mostly from small scale refugee intakes as a percentage of a given population. Such small intakes allow a society to effectively assimilate immigrants. This process of assimilation is of course two way – the host society takes something from the immigrants, and the immigrants adopt the host’s culture. For instance, Sydney has had a change of culinary taste over the paste 50 years, but there is still, arguably, an ‘Australian’ nature to the city.

Such an argument is key. In the findings listed above, it was found that 2nd generation immigrants were harder working than the population, but, 1st generation workers had difficulty integrating into the workforce. This represents a short term economic cost. With more refugees, this cost becomes larger. Eventually costs become large and begin to carry significant opportunities costs. These are costs that prevent the nation from pursuing its national interest.

As to the argument that refugees lower the age of the population, while true, I don’t find it persuasive. The idea that the only way to keep a nation’s population age down is to bring in younger migrants is, I think, deeply flawed. This suggestion requires ever increasing numbers of immigrants to deal with ever increasing numbers of former immigrants becoming part of the aging population. Such a cycle creates pressure on resources, and, for reasons best discussed in a separate article, promotes an urbanisation and potential overpopulation that I find is not the path for an ideal society to travel.

Thirdly, in the case of the Syrian refugee crisis, there is the issue that lots of refugees may not be refugees. This nullifies the benefits specifically ascribable to refugees found by Hugo above. Furthermore, in taking in refugees indiscriminately and swiftly, you lose the potential to properly identify security risks in refugees. It is possible for enemy hostiles to invade your territory. Think about it. You would never allow one million people to cross your border in wartime against a foreign power, for fear the foreign power would send their own spies and operatives across. This refugee crisis provides a perfect cover for operatives of ISIS to cross borders and initiate attacks.

This further relates to worrying trends that refugees to Europe, often Muslim, have higher rates of crime than other citizens. This, no doubt, arises from socioeconomic conditions, racial persecution, anti Muslim views and such, but it is still crime, and still not in the national interest. Normally, through a process of integration and assimilation, such crime is reduced. But, too many people from populations where crime is likely to arise from – poor socioeconomic backgrounds, violent civil wars, no education etc. – will lead to crime. Consider if you were to take in a million refugees, as Germany might end up doing. If even 2% of these people are likely to commit crimes, you suddenly have 20000 extra criminals in your midst. Considering that these refugees are likely to be settled in groups – they will tend to congregate together, if only by virtue of wanting to stay with ethnic groups or relatives – and you have the development of ethnic enclaves, but more than that, potentially high crime rate enclaves. Look at stories in England of ‘no-go’ zones, and you can begin to consider this… Its simply not advisable to have so immigrants when you know their crime rates are higher come in at once. I’ve often held – as Hugo’s research bears out – that often it takes till the second generation for immigrants to assimilate into a society. Immigration needs to be controlled and orderly.

Fourth, its important to remind ourselves of the national interest. Undoubtedly many studies often find that immigrants benefit from the education they receive, or that immigrants standard of living increases, but often these same studies show no net improvement for the pre-immigration citizens of a country. While a country can strengthen itself by taking in immigrants or refugees, that strengthening should be based on benefitting its citizens, national security reasons being the only exception.

Getting to here, I just want to reiterate that, so far in all these counterarguments, we’re not actually saying that refugees are bad. They are not. Morally, we may be doing well to help them, and it may well be in the national interest. But, what I have been saying is that the rate of refugee influx into some areas (like Germany) can be more problematic, insofar as I think controlled refugee intakes avoid some potential issues. And fundamentally, the cure is to not get into these international crises in the first place; the time to fight fires is when they are embers, not infernos. The firefighter can save children trapped in a fire. But there comes a point where even a courageous firefighter, daring to help innocents trapped in an inferno, will fail, and possibly burn themselves. Whether Europe is near that point is far beyond my powers to tell. But, for reasons I’m about to explain, I prefer not to take chances.

Last of all, let me say that a nation must stay united. In saying that refugees leave countries because of persecution, we are acknowledging that they were almost forced to leave. Forced. Inherently, we would expect at least some immigrants to be closely bonded with their homelands. Its madness to suggest that people have no sense of belonging to their homeland, their family, and their disrupted lives. Even though many will look to the future with hope, we would be naïve to say that none lamented their loss.

So when refugees enter a new country, it is often a welcoming presence to see kin or ethnic brothers and sisters in their village. Looking across Sydney, you can see where ethnic groups congregate in enclaves. Australian ethnic composition is not uniform across Australia, but rather, it varies suburb to suburb, reflecting how ethnic groups congregate. Over time, properly integrated into society, these boundaries will break down.

But, what is absolutely not in the national interest is for these enclaves to become self-reinforcing. It is in the national interest that society be cohesive and unified. There must not be so many refugees at once that conclaves form and they create competing value systems. When Badar lanced his criticism at the notion “it is not enough that you obey the law. You must also adopt our values”, this is what he did not grasp. A nation state that is not unified is akin to a state in civil war. States in civil war are torn by strife and destruction. By contrast, stability leads to peace, order, and is in the national interest. Furthermore, stability is created by hegemony within a given system. Internationally, Pax Romana, Pax Britannica, then Pax Americana brought peace because of hegemony. Within a country, unity brings strength.

Whenever a country voluntarily brings in outsiders, it is entailing the possibility that those outsiders could rebel against the state. The state only allows this possibility as not being a threat to its survival because it knows that its resources are so overwhelmingly superior that the rebellion cannot destroy it or harm it substantially. But, if too many are brought in, a traditional culture can be fractured, and factions arise, with waves riven of distrust developing, across a nation, sure as the morning sun shall rise. In the case of Germany, I think they have moved far too fast. And for Europe, their intentions are noble, but pathological altruism is still, at heart, like pathology, like disease.

And that’s the thing with immigration. You only get one roll of the dice. You can’t just ship millions of immigrants away. Your society is forever changed once you change its composition by bringing in immigrants or refugees, for good or worse. Any traditional culture that exists that is subsumed amidst change is gone. Forever.

One roll of the dice. You better be using a loaded die to get the right result.

That’s why, like any matter of governance, we must act prudently, and carefully. But more than that, we must assess any given action by whether it is in the national interest.

Dual Verses – The Volatility of a Mind

Do you ever stop to wonder if our grandest delusions, our philosophy is not some fickle creature, swayed by the winds of our own minds?

I often think so. And that’s why today I offer up 2 sets of free verse. I dare not call it poetry, for it is but the ramblings of myself at a point in time. So please, don’t approach today’s post with any sort of rational analysis, for I’m not offering it, not today. Consider the origins of the poems. For the first poem, Free verse, composed on a train, the clock ticking by, as the assignment draws near.

For the second, scarred wonder amidst the scabs of today.

Read what you wish into the above verse. Perhaps I’m being overdrawn and theatrical. It happens when you write freely in under 10 minutes. Whatever. If my writing does wander by my mood, by whether I can taste the joy of the shining sun, or the refreshing cool blast of breeze on an evening walk, then forgive me if the above words are too poetic.

Some poems, for your consideration:

Light on the horizon

Man in the chrysalis

His eyes wide, his arms open to the world

Passion, hope, endless possibilities

Sun shining, radiant as paradise

Suffocated by illusions, the man looks at the horizon

How radiant, how radiant it gleams! He walks closer.

Ever closer, ever closer, but the horizon never nears.

Blinded by the dazzle, walk he does,

On and on, his bones turning to dust, his breath failing him.

Turning his head to the sun, he sees the horizon.

Here be a man who has walked and walked

Ever towards the false dawn of paradise, a horizon away,

Never to stop and soak in the sun where he stood

And now he stands, so far from where he started

So far from friends, family and joy

But he cannot weep, cannot repent and make amends,

For with that his breath dies.

There goes the man suffocated by illusions.

There go we, but for the choices we make.

—.

Over and Over

Scholar by the book, eyes dazed

Scholar by the dishes, the day long

Scholar at work, his eyes bleeding with monotony

Scholar in life, rarely a scholar

For here be someone climbing a mountain

An endless ‘to do’ list

Of effort and pain lies the continual step-step up the mountain

But of views and hills, what sight is there?

For is this not no mountain, but a concrete prison?

An anonymous city, its eyes open, yet blind

Its demands impersonal, implacable

Responsibility and duty laden with weight upon wearied shoulders.

But then, the sweetest sensations come flooding in

Hope, yes hope! Joy, oh joy, come to serenade us with wonder!

Friends, old acquaintances, give up their time to express interest in you

Concrete fading away, the call of the night with the moon shining

Achievement, accomplishment. Pride.

Shackles, self-imposed, falling from our own limbs.

Realisation, satisfaction – burning bright as the sun!

Behind the glamour of the illusion of our own responsibilities lies a golden mountain

With toil, reward. With struggle, joy.

With wonder, bliss.

Some Musings on Virtue

‘Tis been awhile since I wrote, as I’ve been rather busy for quite a long time, and still am. (The perfect time to write 2500 words must be when assignments are due) But, without further adieu, I give you some scattered, off the cuff , entirely normative, and highly erroneous (perhaps) musing on a variety of matters, often relating to virtue.

On marketing

There are perils in marketing. In many a business textbook I have been told that the purpose of marketing is said to be to add value. That’s a lie. Marketing does not add value. Rather, it adds the perception of value to a product. Yet, the creation of that perception oft involves devaluing other perceptions, and is thus pretty much a zero-sum game. However, it’s a zero-sum game that to uses resources to create perceptions. Thus, marketing fundamentally is an inefficient use of resources. It uses up resources to create perceptions worth nothing, which are as shallow as a glamour.

But more so than that, marketing is normatively questionable insofar as it propagates poor values. Marketing is most often centred around individualism, consumerism, and consumption; it may serve corporatist needs. If we are what we see, hear and listen to, then marketing does not propagate a world of honour, respect, virtue, or responsibility, but rather one designed to serve the self-interest of business. That’s a moral ill. And in a positivist sense, its inefficient too.

Imagine if instead of advertising on every street, every TV channel, in all our media – including vaunted newspapers – if all this advertising was dedicated to something noble. If those millions of types of marketing would propagate notions of honour, respect, and doing good by one’s fellow man. Consider just exactly what all this marketing leads to – ‘tis all a trivial waste.  If our social conscious, or public will is tinged with thoughts of triviality, then our very public discourse shall be tinged with triviality.

You have to consider what you’re striving for, and whether you’re actually striving for it. If I say to you ‘do you value your friends more than surfing the internet’, but you actually spend more time surfing the Internet, then… aren’t you valuing the Internet more? Similarly, when we think of all the powers that are behind marketing, you have to wonder whether all those powers could be put towards something else.

Food for thought.

‘Economics is a positive science’

Economics is a positive science. That’s what I was told at a business class very briefly introducing economics. A very curious statement. I love my empirical economics findings as much as the next reasonable economist, but there’s a certain pretension in the claim. Economics can’t quite replicate the hard sciences in terms of their methodological accuracy, because, no matter what Granger causal relationship you find, or multivariate analysis you use – or whatever it may be – economics is complicated by the enduringly fascinating, and yet eternally changing environment of human affairs.

But putting that to the side, is economics really – ideally – conceived as a positive science? Are we looking to this factual, scientific view as some sort of paradise? This idea that positive economics tells us what is, and normative economics gets all stuck up with what we ought to do… and we somehow get a place like Investopedia saying “A clear understanding of the difference between positive and normative economics should lead to better policy making, if policies are based on facts… and not opinions.”

Query, dear reader the assumption that the ‘facts’ can lead to better policy making if we shouldn’t consider what is ‘better’.

Better how? The only time you might be able to make a decision without any sort of normative analysis would be if ceteris paribus some variable like income rose. But since when does just about any variable like income change ceteris paribus in reality? Oh, you might find a nice isolated increase, but it might ignore social issues or something similar.

The point is, anyone who wishes to find facts is doing a great service to us in informing us how to build a ‘better’ outcome. But its cowardly to stand back with no normative judgement. To use the old phrase, either you swing the sword, or you must pass it to someone else. You must use the facts to back a reasonable normative judgement, knowing that the facts on a pragmatic basis lend themselves to certain preferable normative outcomes.

And don’t you know, this whole article is rather normative. You should just disregard it, I suppose.

 

Why most places get ethics instruction horribly wrong

I remember the ‘ethics’ component of my introductory business course earlier this year. It was laughable. Laughably stupid. Its idea of ethics is you teach a bunch of random philosophical theories, and, suddenly, everyone is ‘ethical’.

This wondrous idea that teaching ethical theories and make people more ethical is foolish. If you teach people about deontological and utilitarianism, that’s all fine and dandy, but do you think the average person going about their day will in the heat of the moment say “I do wonder whether I ought to apply a deontological view of ethics to this situation, and whether…”

Jack London once said that ‘philosophy goes glimmering’ the moment people have the impulse ‘I like’. Its true. These grand philosophical ideas are very useful, and can provide noble foundations for a principled ethical stand.

But, if you want to’ teach’ ethics, then the power of example is far stronger than that of words. Do good, even if you cannot make an ethical case for it. Follow instructions on ethical behaviour of ‘help thy neighbour’ and the like. Practice smiling at others, assisting others… by practice you shall become a better person, till your actions have positive consequences. In practice (following consideration of principle) there lies the good for moral instruction. In throwing around moral theories inconclusively to no end, little is obtained.

Of course, this brings us to the issue of whether we can determine anything ‘good’ for moral instruction, and questions of cultural relativism. Lets turn there now.

Postmodernism and the good

When one considers ‘ethics’, the question inevitably becomes ‘what ethics?’ , and what ethic is ‘right’ or ‘just’ or ‘correct’. The premise here being that there is some objective truth.

And, of course, its very easy to shoot such an idea down. Ethics is subjective, there are only cultural truths (relativism), there are many competing ethical frameworks that can’t be objectively preferred over one another as we can only argue from emotionally founded premises etc. Very quickly, one can argue that determining what is ‘right’ and ‘wrong’ is a fool’s game – its impossibly difficult. And, undoubtedly, it is a difficult task.

There used to be honour systems in Western cultures, which were amoral, insofar as any honour system’s values determined whether it was a moral system. These systems meant that deviation from a ‘code’ of honour brought punishment, and exceeding the minimum standards of a code gained one honour. The point is, the judgement of one’s peers was powerful and it was definite. There was an idea that there was an honour system. But as you enter the 19th century, and see industrialisation, urbanisation, the rise of psychology, nationalism, and into the 20th century, the continuation of these trends, you see both the fragmentation of the intimacy that honour requires to operate under, the rise of the individual over the collective, and into the 20th century, you see waves of multiculturalism and immigration in many Western cultures that brings previously fairly monocultural populations into contact. Of course, this is all a very broad brush oversimplification, but the point is that all these events brought many competing views to light, and suggested that there was no one truth, no one conception of what was right or wrong. From there, it became very easy to conclude that teaching any moral system would be wrong insofar as it wouldn’t be objectively true, and to teach would be to unduly preference one moral system over another. And that’s where you start to see these ideas of listing a whole list of ethical theories from these business classes from, because if no system is superior then what is there to teach? Your values might be equality, tolerance, multiculturalism and pluralism, but those values say little except that other values should exist. It seems to leave a vacuum.

My view is that proving a moral system is objectively ‘right’ or a proper analysis of behaviour is a fool’s game. Its pointless, timewasting, and fruitless. However, I firmly believe that we can all agree on a conception of ‘good’ behaviour in society that we ought to encourage and practice.

This conception sounds odd – it sounds like a restatement of objective truth, but its not. What I mean is that we’re never going to solve moral quandaries like ‘should we push a fat man onto the train tracks to save 5 others?’ or the exact cut-off time for abortions or many other issues. But, we don’t need to solve such quandaries. When are we ever going to have to push the overweight man onto the train tracks? What use does all this posturing over ethics do for us? Sure, we can’t agree on perfect moral responses to these tricky issues. But that’s because we’re asking questions designed to try and make any possible common sense idea of ethics fall over. If I ask “have you stopped beating your wife?” both yes and no are incriminating answers. But, both don’t answer the question satisfactorily, just like our train tracks question. But, crucially, it doesn’t matter – the question is useless. The question does nothing but confuse the situation in the case of the husband and wife, or the train tracks; all the question does is bring up a problem with no basis in reality that’s designed to twist any reasonable answer out of proportion so as to be wrong. The question about the husband and wife does nothing useful like stop the husband beating the wife, or improve matrimonial harmony; it simply smugly smiles upon any attempt to answer it.

By contrast, I suggest that we ought to judge ethical systems not by how they handle absurd questions like the above, but in how they actually help society function and live with meaning, happiness and satisfaction.

Helping a friend when they are in need, keeping family ties positive, not launching slurs at people in the street, being friendly to your neighbour in discourse, and so many other things in everyday life are simply ‘good’. It might be as simple as a smile, a kind word, a sincere compliment that makes a massive difference to someone. I know it has happened many times to me where a single word can change the tune of a day. Just a few weeks ago I was stressed out and in a foul mood, but a bus driver’s salutation of ‘sir’ in greeting gave me a bit of pride, made my smile, and completely changed my day. Such things as manners are like the grease that make society function well, and a respectful politeness goes a long way.

That’s not to say one has committed a ‘crime’ if one forgets to say ‘sir’. But it is simply to say that in practicing these little actions we’ll make a significant difference to others. By contrast, I have very real doubts that a smorgasbord of abstract ethical theories taught simultaneously can do much good.

There is objective good, if not an objective moral system. We have an ethical intuition as to what that is. We should practice the actions that lead to good till they are instinctive.

Myths and legends of virtue

These tales of virtue and the implication that the past was full of virtuous paragons is undoubtedly analogous to a myth. Indeed, there are sociocultural influences which make the idea of virtue and honour groups prominent in the past, but in part its simply a rose coloured view of the past – as if the past were a golden age – and a fabrication.

Like any myth, there’s some truth and some falsehood. But like many myths, the facts that its not historical fact is not the point. Myths have, for generations, inspired people, honoured the dead, creations rites of passage, fostered social bonds and more. The myth of virtue serves a purpose – it can inspire people to greater action and kindness, even if you have a Hobbesian view of the world.

Of course, even a myth does not make people perfect, nor will it ever do so. But like many myths virtue in part becomes a self-fulfilling prophecy. Believe something to be achievable, and you may achieve it. Look at Nathan Hale, the American Spy in the Revolutionary War, and his brave dying words “I only regret that I have but one life to give to my country” – look to his bravado. Look at Captain Lawrence Oates, who when he was slowing down Robert Falcon Scott’s doomed Antarctic expedition due to a leg injury, yet wouldn’t be abandoned by his comrades, said as his dying words “I am just going outside. I may be some time.” What stoicism, self-sacrifice, and altruism! Then look at Wallace Hartley, bandmaster on the Titanic as it sank. Hartley and his band members kept playing music as the Titanic sank, to calm the passengers, all the while knowing that any lifeboats being loaded were not taking them away. There is sacrifice, and consideration of others, even in circumstances that were literally life-threatening. ‘Tis said that Hartley’s final words were to farewell his band members before he was swept overboard. His last thought in life – one of camaraderie, consideration and kindness.

Those actions are not fundamentally ordinary, and owe a good deal to virtue as an ideal taught. Whether the ideal is ever likely to be attained is irrelevant. If we reach for the stars and only ascend a mountain s, then are we not a mountain higher than we were before?

Every man and his battle

Whenever I consider virtue, I often get images like Hartley, or Oates in their dying words, or heroes of a grand nature like Theodore Roosevelt, George Washington, or the profound wisdom of Seneca. In short, figures of such grandeur that anything short of perfection seems hollow. Next to saints, we all seem like sinners.

But I think its worth remembering the phrase ‘every man is fighting a hard battle’. All of us are fighting a great many battles just to hold station in life, let alone advance. James Joyce held the average person to be a figure of greatness in his book Ulysses. I think its important to give credit to such figures.

Even those who often seem to ‘have everything’ – to be these mighty figures – are frazzled. I ran into a friend recently who many would esteem to be doing exceedingly well, yet she was struggling with many things. That is not to impugn her abilities, and I consider her a most capable young lady. But as we chatted we both realised that we both had let some things slide – seemingly of necessity. And not always of necessity, but simply challenging situations – I know I’ve made a questionable decision or two from sheer difficult circumstances in recent times.

The point of this rambling is that people are not perfect, and beneath a glamour or serenity and calm are facing a great many challenges.  For there is no easy way from the earth to the stars, no easy path to become the paragons we hold out in myth and ideal. But if we can honour and esteem these people for their efforts, and understand their challenges, we shall go a long way to helping them.

And such efforts would also lie at the heart of many a virtue.

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