Childcare costs

An excellent editorial in the AFR today (unfortunately paywalled, buy yourself an AFR!) identifies the core problem with childcare subsidy policies in Australia.  The $6.7b from the Commonwealth and the $800m by the states that gets channelled into such subsidies should be skewed much more heavily towards low income earners.  Parents earning $160,000 plus annually will still have 60% of their childcare costs covered by taxpayers, those earning $200,000 will get 20% subsidies - these are after the reforms suggested by the Productivity Commission are implemented.  Indeed I would go much further than the AFR and look for very substantial cuts in the level of assistance provided across the board.

This childcare aspect of our entitlement society is absurd.   The prevailing belief is that even if you earn high incomes the fact that you are a parent gives you a net claim over the incomes of those who are not parents.

People don't have a right to have children that they cannot afford to make a substantial contribution to supporting. Those earning high incomes should obviously pay their own childcare costs.  Mothers (or fathers) who find that their incomes are too low to cover childcare costs should either stay at home and look after their children or delay having children until they can afford to by-in-large support their own children.  People need to understand that their parenting decisions have consequences that they must bear.

Subsidizing children and having an active immigration program creates high child-raising costs in Australia by driving, in particular, high housing prices.  We do not need to have an ever-increasing population - there are plenty of people - and, with less demand for housing, the cost of raising children would fall in accord with reduced market pressures.  We would also experience lower infrastructure costs and less unpriced congestion in our urban centres.
 

Price of beer

I bought a schooner of draft beer in a pub bar in Carlton at lunch today. It was $11 for 425 ml.  Yesterday I bought a dozen long-necked Coopers Sparkling Ale for $56 from Dan Murphy. That is $4-68 per bottle and each bottle contains 750 ml.  The cost of 425ml of the Coopers would be (425/750)*$4-68 or $2-65.

The costs are not directly comparable. The beer in the pub was a draft beer and was not a Coopers but was a good local brand.   But the Coopers bottle is a pretty good brand itself and hence a plausible substitute so the price comparison is not that misleading.

I wonder if it is the size of the price markup on beer - it was 415% - that might be the reason that almost no-one patronises pubs these days.  There were 4 clients in the pub I entered today and none were drinking alcohol - they were eating cheap counter lunches.

Australia has high alcohol taxes, particularly on full strength beer, but the tax is lower per unit quantity on the beer sold in the large containers that hotels buy.  Taxes create absolutely high priced beer but cannot account for these differentials.  Consumption of alcohol creates road death "externalities" but these are better addressed by heavily penalising those who drink-and-drive rather than innocent economics professors seeking a beer with their pork and stir-fried. Finally health costs are real consequences of drinking excessively but not of having a beer with your lunch.

Low patronage due to the enforcement of "drink driving" laws might encourage high prices of pub-provided beer to cover high fixed costs and maybe this is part of the story.  People drink most of their beer at home. I'd be interested to get more evidence on this.  For sure, institutions such as golf clubs are recording low revenues from bar sales and fear on the booze bus is pervasive.

Beer consumption in Australia is at an all time low.   A beer at lunch - part of the traditional Australian life style is also disappearing.  While the health Nazis will applaud this those of us who enjoy a beer do not. Australia does not want to be swamped in an alcoholic culture but nor do we want to become a nation of wowsers. 

Go solar!

I got a pleasant surprise from my $15,000 investment in solar last October. Power charges for the first quarter it has operated were $266 down from $887 the previous quarter or savings this quarter of $621. Naively assuming this trend will continue over the year (it might be more than this since the previous quarter is a low consumption quarter for my household) gives me annual savings of at least 4*$621 or $2484 per year which amounts to a tax free return of 17% on my investment. Interestingly a large part of the reduced bill was electricity sold back (at relatively low rates*) into the grid - around $367 in value for the quarter although our overall paid daily consumption fell considerably too - from an average of 28.5kWh last year to 20.3kWh in the last quarter. We are significant power suppliers!

I always assumed the solar vendors would exaggerate the economic case for their system. They did but only by a very small amount - in fact they were very accurate. If I continue with these savings this will be a great financial deal.

Why are households still buying power from the grid?

* We sold back into the grid 1501kWh and used 1889kWh. We sold back 80% of what we used.

Australian stock market cheap in US dollar terms

The recent strong rally in the Australian stock market has been near-universally attributed to a 25 basis points drop in the overnight cash rate to 2.5%.  I don't buy this.  In fact, since September last year, the Australian dollar has depreciated much faster than stock market indices so the Australian stock market, valued in US dollars has got cheaper for US investors*.  Real after-tax interest rates have barely changed and are not driving investment trends at present.

At the same time those Australian mining and agricultural exporters faced with declining commodity prices but selling their outputs in US dollars will now start to do much better than would have been thought possible even 6 months ago.

My guess is that foreign investors withdrew from the Australian market fearing capital losses associated with an expected devaluation of the Australian dollar - one that was even promoted by the RBA - but that now the Australian dollar has depreciated the foreign funds are rolling in**.

With the usual caution that goes with all my forecasting - for over a decade in the 1990s I said the Australian dollar was undervalued! - I am reasonably confident that the ASX will do well in the remainder of 2015, particularly starting in the 4th quarter. I also think the economy will do much better than expected from late 2015 with falling unemployment and moderate economic growth.

One of the most irritating things about Australian economics discussions is the overwhelming sense of dread and pessimism concerning the disaster around the next corner.  To the extent we can talk ourselves into a bad outlook we do our best to do so.  But even regarding such adverse impacts I think the Australian economy is strongly placed to recover as we move through 2015 and beyond.


* The Aussi dollar has fallen from 93 to 78 cents or by about 16% (here). The ASX100 has wobbled quite a btt from mid-September 2014 to today it has grown from about 4500 to 4850 or by about 8% (here).

** The correlation between Australian and foreign stock market indices is revealing - Australia's stock market health is driven by that internationally (here). 

Population & the environment

I've spilt a lot of printer's ink on the topic of the connection between population size and environmental quality. Indeed 24 years ago I co-wrote a book on the topic.  At a Productivity Commission Workshop on "Sustainable Populations: Key Policy Issues" a few years back I was asked to summarise my bottom line.  I immodestly think its one of my better contributions.

http://www.pc.gov.au/__data/assets/pdf_file/0015/111057/17-population-discussant-clarke.pdf

Low oil prices to continue?

This argument (here) that $50US/barrel oil might be a ceiling price not a floor impresses me as sensible. The Saudi's are involved in a war with the US unconventional oil producers and the most sensible thing for them to do is to keep prices below a level that allows the unconventional oil producers to be profitable. That price seems to be about $50US/barrel. Moreover, the policy seems to be working.

According to the AFR page 9 this morning (unfortunately paywalled) drilling rigs are going out of business now in the US.  Over the last 3 months oil rig numbers in the US have fallen from 1591 to 1366 while gas rigs have fallen from 330 to 310.  One forecast is that 800 rigs will close by the end of 2015.  This does not necessarily indicate a proportionate drop in oil production given the "flight to quality" rigs that will occur.

It will be interesting to see this Wednesday what BHP-Billiton says of the effects of the recent oil price collapse has on its $20b US shale oil investments.  A fair bit of its production is low cost (around $40/barrel) but the outlook for returns will at least be disappointing.

IKEA

I have only shopped in IKEA twice and was impressed with the quality of the merchandise once it is assembled.  It is an interesting experience for me because you can choose how much effort you want to put into the purchase and that determines your costs.

Last week I ordered two sets of bookshelves with height extensions for about $200 - amazingly cheap for what look like quite elegant shelving.   You take the order to a warehouse where you select the disassembled items and take them on a trolley to the cashier. For $40 they will do this for you so you only need to go the cashier but I didn't pay that - this involved trivial effort.  The price for assembling the shelves and disposing of the packaging was $140 - a two part tariff consisting of a fixed $35 charge and a variable $90 charge for the assembly of the two units.  I felt some guilt about my laziness in this respect but I my experience is that idiot proof assembly often defeats me so I paid up including the $15 fee for the assembler to remove the boxes. Delivery cost another $92 so all up my $200 shelves cost me $440.  Still fairly inexpensive for what seem to be high quality units.

There were time costs of waiting for delivery of the items and for the arrival of the assembler cost me a whole working day. This was expensive in terms of at least one foregone golf game.  In addition, as far as I can see, you cannot order from IKEA online so the shopping expedition through Melbourne traffic added to my user costs.

Update: This was written before the assembler came.  Nice guy put the thing together in two hours plus - two simple bookshelves. It wasn't simple and very pleased I had it assembled rather than do myself.  It would have taken me (at least) a day of frustration.