Tag: The Conversation

How blockchain technology is about to transform sharemarket trading

From The Conversation.

Recently the Australian Securities Exchange (ASX) bought a $15 million stake in Digital Asset Holdings, a developer of blockchain technology. One of the main reasons is to upgrade its share registry system by using blockchain or distributed ledger technology.

And it’s been reported that JP Morgan Chase is also partnering with Digital Asset Holdings to trial the technology.

What is blockchain/distributed ledger technology?

Put simply, blockchain technology is a method of recording and confirming transactions where instead of a centralised platform, participants each hold a complete record of transactions through peer to peer verification of transactions. This means there is no central recording system, rather each participant keeps a record of all transactions ever made. This is the same system which allows Bitcoin to operate with no central body.

How would blockchain technology be adopted at the ASX?

Instead of the ASX clearing house settling trades, trades will be settled by participants confirming transactions through the peer to peer network. The network (likely made up of brokers) will record the buyer and selling participants, the number of shares traded, price of shares, time of exchange and the exchange of funds. The ASX will still provide a centralised electronic exchange for participants to place orders, only the settlement or back office function will be sourced to the network.

The benefits?

Blockchain has great potential to cut inefficiencies in the share settlement function. As trades are settled by peer confirmation, there is no need for a clearing house, auditors to verify trades and custodians to ensure a fund has the shares they say they hold. Essentially this is cutting out the middleman in the back office which means less costs in record keeping and in turn less costs to trading on the ASX. Given the high costs in getting a third party to audit, record keep and/or verify trades these costs are substantial.

The peer confirmation of trades also means settlement can be almost instantaneous. Compare this to the current settlement period of three working days (‘T+3’) as the ASX needs to make sure the participants have the money and shares on hand to exchange. This would make shares a far more liquid investment – almost as good as having cash on hand. Higher liquidity means more investment into ASX shares.

As all participants have the full record of transactions and therefore holdings of investors there is complete transparency in the equity market. This makes it almost impossible to falsify transactions or to alter prior transactions. If a false trade occurs, participants will find inconsistencies in their full ledger and reject the trade. For example an investor would be unable to sell stock that they did not own as all participants would know exactly how much stock the investor owns now.

The challenges?

First, implementing a clearing system using blockchain will introduce a new type of fee. In the Bitcoin blockchain, miners process Bitcoin transactions by solving optimisation problems and get rewarded by newly created Bitcoins and settlement fees offered by Bitcoin users who wish to have their transactions processed.

Miners prioritise the order of transactions to be cleared based on the fees offered and the difficulty of the problems to record the transaction in a block. This is what allows a blockchain to have no centralised clearing house.

If the ASX blockchain requires investors to include transaction fees in order for their transactions to be cleared, then the ASX is transferring the cost of maintaining the back office to the investors. If this is to happen, investors will have to compete against each other to have their transactions cleared faster than those of others. Alternatively, if the new system doesn’t allow such fees and relies on brokers or other entities to clear the transactions, then the ASX is again transferring the cost of maintaining back office to those entities.

The second concern is increased transparency. Under the proposed trading system, most of positions of the market participants could be exposed to the public as the trading ID can be identified. This could disadvantage many investors such as super, managed and hedge funds. For example, a super fund typically sells a large position on a gradual basis for a prolonged time period.

In this process, it is critical not to be noticed by other traders who may take advantage of such large-scale sales. With complete transparency such as in blockchain, such a sell-off could not be applied effectively. Potentially this may make investors leave the ASX and seek more opaque venues to trade such as dark pools.

Will it work?

Clearly a direct adoption of blockchain from Bitcoin technology would not be viable for the ASX. If the ASX is able to adopt blockchain technology and address privacy, security and trade transparency concerns then this would yield great cost savings to investors.

Authors: Adrian Les, Senior Lecturer in Finance, University of Technology Sydney; KIHoon Hon,  Assistant Professor, University of Technology Sydney

Connecting everyone to the internet won’t solve the world’s development problems

From The Conversation.

By 9.30am today I will have skyped Malawi, emailed Ghana, Facebooked Nepal, paid a bill online and used the satnav on my mobile phone. It feels a long time since we first got colour TV at home and, years later, when I accessed the internet using a dial-up modem. When I recalled these moments to my son he yawned. Aged, 19, he doesn’t remember a time before ubiquitous connectivity.

According to a new report from the World Bank, more than 40% of the global population now has internet access. On average, eight in ten people in the developing world own a mobile phone. Even in the poorest 20% of households this number is nearly seven in ten, making cellphones more prevalent than toilets or clean water.

Digital technologies are spreading rapidly in developing countries. Digital Dividends Report

There is no doubt that the world is experiencing a revolution of information and communication technology, bringing about rapid change on a massive scale. But despite great expectations for the power of digital technologies to transform lives around the world it has fallen short and is unevenly distributed, with the most advantages going, as ever, to the wealthy. The World Bank argues that increasing connectivity alone is not going to solve this problem.

Digital dividends

Around the world, digital investments bring growth, jobs and services. They help businesses become more productive, people to find better life opportunities and governments to deliver stronger public services. At their best, the report finds that inclusive, effective digital technologies provide choice, convenience, access and opportunity to millions, including the poor and disadvantaged.

For example, in the Indian state of Kerala the community action project Kudumbashree outsources information technology services to cooperatives of women from poor families – 90% of whom had not previously worked outside the home. The project, which supports micro-credit, entrepreneurship and empowerment, now covers more than half the households in the state.

The World Bank also emphasises that the poorest individuals can benefit from digital technologies even without mobile phones and computers. Digital Green, an NGO working with partners in India, Ethiopia, Afghanistan, Ghana, Niger and Tanzania, trains farmers using community-produced and screened videos.

Many governments are using the most of positive digital dividends to empower their citizens. In countries with historically poor birth registration, for example, a digital ID can provide millions of people with their first official identity. This increases their access to a host of public and private services, such as voting, medical care and bank accounts, enabling them to exercise their basic democratic and human rights.

Digital divides

For every person connected to high-speed broadband, five are not. Worldwide, around four billion people do not have any internet access, nearly two billion do not use a mobile phone, and almost half a billion live outside areas with any mobile signal. Divides persist across gender, geography, age and income.

Across Africa the digital divide within demographic groups remains considerable Digital Dividends Report

Those who are not connected are clearly being left behind. Yet many of the benefits of being online are also offset by new risks.

The poor record of many e-government initiatives points to high failure of technology and communications projects. Where processes are already inefficient, putting them online amplifies those inefficiencies. In Uganda, according to the World Bank, electronic tax return forms were more complicated than manual ones, and both had to be filed. As a result, the time needed to prepare and pay taxes actually increased. The report cites the risk that states and corporations could use digital technologies to control citizens, not to empower them.

The general disruption of technology in the workforce is complex and yet to be fully understood, but it seems to be contributing to a “hollowing out” of labour markets.

image-20160202-32227-19ydql2The labour market is becoming more polarised in many countries. Digital Dividends Report

Technology augments higher skills while replacing routine jobs, forcing more workers to compete for low-skilled work. This trend is happening around the world, in countries of all incomes, demonstrated by rising shares in high and low-skilled occupations as middle-skilled employment drops. The World Bank notes that:

The digital revolution can give rise to new business models that would benefit consumers, but not when incumbents control market entry. Technology can make workers more productive, but not when they lack the know-how to use it. Digital technologies can help monitor teacher attendance and improve learning outcomes, but not when the education system lacks accountability

Not surprisingly, the better educated, well connected, and more capable have received most of the benefits —- circumscribing the gains from the digital revolution.

A tremendous challenge

The report emphasises that investment in connectivity itself is not enough. In order to achieve the full development benefits of digital investment, it is essential to protect internet users from cybercrime, privacy violations and online censorship, and to provide a full set of “analogue complements” alongside. These include:

  • Regulations, to support innovation and competition
  • Improved skills, to enable access to digital opportunities
  • Accountable institutions, to respond to citizens’ needs and demands

Ultimately, while the World Bank continues to champion connectivity for all as a crucial goal, it also recognises the tremendous challenge in achieving the essential conditions needed for technology to be effective.

In my privileged home, digital technology brings me choice and convenience. It will be a long time before the digital revolution brings similar returns for everyone, everywhere.

Author: Anna Childs, Academic Director for International Development, The Open University

Three factors pushing Australian banks into a retreat home

From The Conversation.

History shows that successfully becoming a multinational bank operating in many countries is difficult.

While many banking skills are transferable across national borders, there are institutional and cultural impediments to overcome. And as ANZ’s strategy shift away from Asia announced last week might demonstrate, the regulatory barriers are significant, particularly for expansion into Asia.

First among these is the ASEAN Banking Integration Framework (ABIF) initiated at the end of 2014. This involves the designation of banks headquartered in the ASEAN region as Qualified ASEAN Banks (QABs).

Such a designation – not available to Australian banks – means that they will be able to operate in other ASEAN countries under exactly the same regulatory arrangements as domestic banks. While the specific competitive advantages this will provide over non-QABs are unclear (and may vary from country to country), this is in essence a barrier to entry for banks from outside the ASEAN region.

It remains to be seen whether the ABIF will succeed, given the vast differences in banking structure and development across the region, not to mention political factors. Nevertheless, the development is not conducive to an Asian expansion strategy for Australian banks.

A second factor is the regulatory arrangements driven by the Basel Committee, and implemented in Australia by banking regulator, APRA. Capital requirements associated with offshore subsidiaries or joint ventures can be higher than for purely domestic operations.

The Australian banks have complained about this in the past and given bankers’ aversion to higher capital, that also creates a disincentive to offshore operations. (Given generally poor experience with bank offshore expansion over the years, that may be a good result for bank shareholders arising from such regulation).

A related regulatory consideration is the imposition of higher capital requirements on banks which are regarded as systemically important. The major Australian banks are already subject to a higher capital charge for being Domestic Systemically Important Banks (D-SIBS), but offshore expansion could ultimately lead to a Global SIB categorisation and further capital imposts. In general, the thrust of post-crisis regulation is towards disincentives for banks becoming “too big”.

A final factor, virtually unique to Australia, arises from tax considerations. An increasing share of earnings generated offshore would reduce the ability of Australian banks to pay fully franked dividends. This is equivalent to banks facing a higher cost of capital for overseas activities than for domestic activities.

For shareholders (such as this writer) in ANZ or other Australian banks, this would mean that offshore expansion would need to be even more profitable than domestic activities to be value adding. Then, and it is an unlikely outcome, higher partially franked dividends could be paid to offset the reduction in franking.

So: the cost of capital is probably higher for overseas versus domestic activities of Australian banks (due to dividend imputation); capital requirements are a bigger problem; and the ASEAN region is putting some potential roadblocks in place which hinder ease of foreign bank entry and competitiveness.

And added to all that is the massive potential disruption to traditional banking being posed by innovation and Fintech, requiring a focused response to preserve competitive advantages in existing markets and products.

Retreat to Australia sounds like a sensible response for Australian banks.

Author: Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

Four key economic trends shaping society

From The Conversation.

The year is off to a turbulent start; both in the UK, and around the world. January saw oil prices plummeting, while Chinese growth slowed, spooking investors (but surprising none). But amid the turmoil and confusion of global stock markets, there are a few economic trends which look set to hold sway throughout 2016.

Here’s a wrap up of some of the key developments which will shape our society in the months to come.

Employment for women

Many developed economies are experiencing a rise in total employment. And in most cases, it comes down to one critical factor: the growing number of women joining the work force. This represents one of the biggest social changes of modern times. For example, in the UK, the employment rate for women is the highest since records began, at 68.8% – in part due to the ongoing equalisation of men and women’s retirement ages.

Of course, there are still huge discrepancies between the economic rights and opportunities available for women across the globe. But ultimately, nations where women do not work lose out. Research shows that women’s skills in the labour force add much value to a national economy. Granted, this is partly related to the low pay and promotion inequality facing women, and more progress is needed to address these issues.

Women at work. from www.shutterstock.com

Expect to see women’s employment continuing to rise, and to be associated with economic growth and wider social benefits, despite global economic challenges. In 2016, countries and organisations that give positive employment opportunities to women will have greater chances of doing better, even in tough times.

The debt trap

While women’s employment may inspire hope in today’s challenging economic environment, credit and debt trends offer less reassurance. After the financial crisis, governments and central banks busted a gut to pump money into the banks and get them lending. But there is currently a feeling of déjà vu – as though the world could very easily experience another credit crisis in 2016. There are two clear signs: one in the UK, and one abroad.

Carney’s conundrum. Pool/Reuters

The first one is that premier league central banker Mark Carney – who transferred from Canada to the Bank of England as the ultimate master of inflation – now has a curious problem. He cannot find any inflation to master.

A little inflation is good for the economy, a bit like one glass of wine a week for health. The UK economy currently gets nowhere near its target of 2%. Inflation would decrease the value of current debts, making them less of a burden. In a world without much inflation, it is hard to get wages up. The worse case scenario is that debt costs increase, as prices and wages stagnate.

Elsewhere, the small interest rate rise in the US has made credit more expensive for many. Businesses in rapidly developing countries, which borrowed when the dollar was cheap, look vulnerable. For countries tied into dollar-based lending, there’s cause to fear the appreciation of the dollar against their local currency.

Expect debt statistics to go on spooking commentators throughout 2016. Look for a different policy approach that tries to kick start credit via governments and central banks. New strategies will be needed to get money to the parts of the economy that can enhance productivity and pay real, long-term rewards, such as renewable energy. Better this, than for credit to inflate existing assets such as current housing stock, or company merges and acquisitions.

A transport boom

Speaking of productive growth – transportation has been a key growth area in the world economy, and looks set to continue on this path.

In the UK, the railways have been a growth area for two decades, with more investment planned, albeit not without political pitfalls. And China has seen extraordinary growth in high speed rail development and use.

Meanwhile, air transportation grew globally in 2015 and “hub” countries such as the UK and Gulf States benefit from this. Low oil prices make flights cheaper and encourage growth. Air transportation in the UK is ripe for expansion, but is linked to a difficult political decision over London’s runways.

Business is booming. from www.shutterstock.com

Global car sales continue to rise at a time when oil is cheap. And while the number of electric cars grew more rapidly in 2015, they still represent a small proportion of the total.

This productive growth in transportation has to be debated alongside the need for the uptake of greener technology. Many governments know the ultimate prize will be getting ahead with the production of electric cars and the infrastructure they require, in order to reduce pollution and improve health.

For example, the UK government just financed four UK cities to provide better charging and parking facilities for electric vehicles. In London, the mayoral candidate, Zac Goldsmith, has clearly linked electric cars with a sustainable environment and proposes financial incentives to encourage their use. Tesla in the US has invested huge amounts gambling that the electric car will become more popular. Fortune favours the brave.

Expect to see continuing growth in rail and air travel. Meanwhile, the countries and companies that invest to get ahead with electric cars and other green transport options are likely to see the biggest long term returns. Oil will not stay at $30 a barrel forever.

Young people in poverty

Another key trend is the increase in the poverty experienced by young adults. A growing number of students in the UK are exiting with greater long term debt, while Australia is implementing measures to ensure student loans are paid. In the US, student debt now stands at $1.3 trillion.

Where’s my piece of the pie? www.shutterstock.com

As well as debt, housing will be a major issue for this group. The price of property is increasing in major cities such as Sydney, Vancouver, London and New York: these markets require high deposits, and rents are rising. In the UK, this is making the generation gap worse, when it comes to wealth: those aged 50 and over own most of the UK’s asset wealth, including housing.

And in this age of austerity, these factors will work against governments seeking to reduce the welfare bill. Recent data shows that, in UK cities, growing numbers of low paid jobs have led to rising claims for welfare such as housing benefits, defeating the government’s aims to reduce spending.

These major challenges for young people prevail across most developed countries. Expect young adults to be increasingly dependent on wealth transfers from their parents to clear university debt and secure housing, while those without such support face increasing disadvantages. Only major changes in policy can prevent further inequality for this generation.

Politicians are prioritising the needs of the growing older population who are living longer. But the young are paying the price in lost opportunities and look vulnerable to further economic and social change.

Author: Philip Haynes, Professor of Public Policy, University of Brighton

Ex machina: are computers to blame for market jitters?

From The Conversation.

Recent turbulence in the share markets has caused some experts to point the finger of culpability at computerised High-Frequency Trading (HFT). There are few complaints about HFT when computers push share markets up, but in the ebbing tide of today’s markets, it’s blamed both for exaggerating the share market dive as well as for the heightened volatility.

The logic behind the fears is this: algorithms and software do not muse about global economic events; they merely chase mechanical patterns that they are programmed to find, such as movements in trend or momentum. They do not make decisions based on real-world eventualities, such as political events.

Can the algorithms express a view on Chinese consumer confidence? The economic impacts of Middle-Eastern sectarian conflicts? These real world factors aren’t taken into account in the programming of algorithms.

Yet the computers hold substantial sway and can execute a barrage of trades that create unprecedented volatility at a rate that human reactions simply cannot match.

What is truly problematic is that the algorithms are not cognisant of when to stop or change a trade and thus can continue to pile money and exaggerate a trade well beyond what the market would consider a correct response. The computers do not have the ‘affirmative obligation’ to keep the markets orderly.

In fact, this sort of financial competition has been described as ‘a new world of a war between machines’.

Research has explained that stock prices tend to overreact to news when HFT activity is at a high volume, and that this can have ‘harmful effects’ for capital markets. Additionally, financial experts have found that HFT “exacerbates the adverse impacts of trading-related mistakes”, while also leading to “extremely higher market volatility and surprises about suddenly-diminished liquidity”, which in turn “raises concerns about the stability and health of the financial markets for regulators.”

Officials at the Australian Securities and Investment Commission have described the possible impact of HFT as “sometimes manipulative or illegal”, but “often predatory”.

In Australia HFT has made significant inroads into the market. In 2015 it accounted for nearly one-third of all equity market trades, a level similar to Canada, the European Union, and Japan.

ASIC estimates that HFTs in Australia are collectively earning an not inconsequential $100 million to $180 million annually.

Securities regulators have tolerated HFT so far, but as we may be entering a “new normal” of higher volatility and with algorithms helping exert a downward pressure on the markets, the regulators may find themselves revisiting the HFT issue.

Australian financial traders may also be put in jeopardy by the sheer magnitude of large foreign-funded HFT players. In recent times, the incursion of HFT into other asset classes such as interest rates futures has shown that local traders are being forced out by the computing power of internationally-funded “flash boys”.

Nonetheless, the track record of Australian regulators has been very positive and they have been proactive about creating mechanisms such as ‘kill switches’ to mitigate potential losses.

From a theoretical standpoint, the proponents of HFT have argued that it provides the most up-to-date information and thus facilitates price discovery. However, if the algorithms are merely exaggerating sentiments by moving large sums at instantaneous speeds – then they are not facilitating price discovery but in fact preventing that goal from being achieved.

The movie, The Big Short, based on the book by Michael Lewis, (who also wrote about “flash boys”) has infused narratives of the financial world with a “human element”. They have put faces to the names we read about in financial scandals.

However, if HFT grows in size and share markets continue to perform negatively, it may be that the computerised antagonists of finance’s future, the diaboli ex machina, may have no face at all.

Author: Usman W. Chohan, Doctoral Candidate, Economics, Policy Reform, UNSW Australia

If you want Google to pay more tax, change the law

From The Conversation.

Globalisation – and the global economic crisis – have contributed to the erosion of national tax bases and in recent years some of the biggest multinationals, among them Apple, Vodafone, Amazon, Google, Starbucks and Microsoft, have been scrutinised for their aggressive tax planning practices. Using (among other techniques) transfer pricing, inter-company lending, royalty payments for licensing agreements, cost-sharing agreements and offsetting group losses, multinational groups can achieve very low effective tax rates.

The ability to shift profits into low or no-tax jurisdictions with little corresponding change in business operations has also been criticised. Fuelled by media attention the reporting of these practices has in some countries led to public outcry and politicians seem to have jumped on this bandwagon.

Google’s £130m tax deal with HMRC is the latest instalment in a “UK vs Google” saga. Google’s encounters with the UK’s parliamentary public accounts committee had already been recorded in a report: “Tax Avoidance – Google. At the time, the committee questioned how Google, which generated US$18 billion (£12.6 billion) in revenue from the UK between 2006 and 2011, could only pay the equivalent of just US$16m (£11.2m) of UK corporation taxes in that same period.

The company used the now-defunct “double Irish” structure to achieve these low effective tax rates. Central to Google’s tax planning was the position that sales of advertising space to UK clients took place in Ireland. The public accounts committee found this “deeply unconvincing” back in 2013. But arguments against Google’s position relied on concepts of morality and fairness rather than clear tax rules – and this is the problem.

Google has now agreed to pay £130m in back taxes. To put this into context, consider that Google made more than £3 billion in UK sales in 2013 alone. Some (mainly the chancellor of the exchequer and HMRC) see this as a big success, while others have labelled it as “derisory” and “a sweetheart deal”.

These stories provide fertile ground both for the government and the opposition to raise the stakes: the government is arguing that it is doing more to curb tax avoidance than previous (Labour) governments and the opposition is arguing that this government is not doing enough.

Letter of the law

What underpins the whole anti-Google, anti-Starbucks, anti-Vodafone rhetoric is the idea that multinationals should follow the spirit and not just the letter of the law – and pay taxes accordingly. This is buttressed by an overriding concept of “tax morality” or “tax justice” which trumps the actual legislation.

Facebook is thought likely to strike a similar deal to Google’s. Reuters/Dado Ruvic

By contrast, what underpins the comments of those who defend the tax planning practices of these multinationals is the idea that legality and illegality is determined according to whether or not they complied with the law. If people disapprove of tax planning practices, whether perceived to be aggressive or not, but still legal, then they should press their governments to change the relevant tax laws.

You can understand why words like “morality”, “fairness” and “justice” are attractive in this context, but the reality of the situation is that most of these instances of aggressive tax planning (or stateless income, as coined in the US) are not technically illegal. In other words, current domestic tax laws and the vague non-binding principles of international tax law seem to facilitate such tax planning – some might even say, encourage it.

New initiative

What has clearly emerged in the last few years of “tax crusades” is the inadequacy and unsuitability of existing principles of international tax law to deal with the internationalisation of business. Some argue that existing tax rules on jurisdiction in particular need to be adapted to new business models such as digital. Others argue that existing principles are sufficient but there is discord as to how tax authorities ought to apply them.

The OECD/G20, in the context of its Base Erosion and Profit Shifting (BEPS) project, has tried to find solutions to some of these issues through consensus – something initially thought of as nearly impossible.

The OECD launched its BEPS action plan on multinational tax minimisation in 2015. OECD

However, to the surprise of some, the OECD did meet its deadlines and produced recommendations for the issues raised in an action plan. These recommendations were set out in the final reports it published in October 2015. Whether the BEPS project will make it easier (and more transparent) for tax authorities to tackle aggressive tax planning remains to be seen. However the international tax community, through the OECD/G20, is making an effort to address existing problems and should be at the very least congratulated for its efforts and encouraged to continue.

The European Union has also been at the forefront of these developments. While most associate the European Union with open borders and market liberalisation – with member states’ budgetary concerns of secondary importance – the European Commission has seized on this unique political momentum to further its agenda. The various commission action plans and recommendations evince the inception of a strong EU policy against international tax avoidance. The recent state aid actions, also spearheaded by the commission – which prevent national governments from giving corporations “an unfair competitive advantage” – seem to corroborate this.

Whether or not one agrees with the EU’s – some would say slightly overkill – approach, it should nevertheless remain a priority for those working in tax to address the inadequacy of the existing rules with new or refined rules and principles – not with the injection of vague notions of morality and fairness. The UK has made a valiant attempt to (partially) address the problems with its Diverted Profits Tax also known as “Google Tax”. This legislation broadly allows HMRC (under certain circumstances) to tax the profits of multinationals arising from business activities taking place in the UK when there is no taxable presence, because of contrived arrangements diverting these profits from the UK.

While this unilateral stance has been criticised for going against the spirit of multilateralism in the BEPS project, it is a welcome example of rules – some would say imperfect rules – filling in the gaps of the international tax system. The enemy is not just complacency – it is also uncertainty and vagueness.

Author: Christiana HJI Panayi, Senior Lecturer in Tax Law, Queen Mary University of London

Why so bearish? How hidden bias is sinking global stocks

From The Conversation.

It’s been a shaky start to 2016 for global stock markets, with substantial falls across all international markets, followed by some weak rallies.

The overall decline has been partly blamed on the price of crude oil, which is hovering around US $30 a barrel down from $100 over a year ago, along with market fears on the overall health of the Chinese economy.

The headlines tell us markets are sinking in the sea of oil. A measure of fear in the stock market, the widely quoted Chicago Board Options Exchange volatility index, is also closely tracking the oil price, adding to the gloomy picture.

However the most likely driver of further market deterioration is not a further decline in oil prices, but the negative sentiment itself. This is due to a flaw in the way analysts ascribe value in markets that behavioural economists call “anchoring bias”.

This is the idea that people tend to start from what they know and then attempt to make appropriate adjustments based on this. Over 40 years of research has found that these adjustments tend to be insufficient.

Everyone can be prone to this bias, there are a few studies that demonstrate this. For example, when people were asked which year George Washington became the first US President, most would start from the year the US became a country (in 1776). They would reason that it might have taken a few years after that to elect the first president so they add a few years to 1776 to work it out, coming to an answer of 1778 or 1779. George Washington actually became president in 1789.

Similarly, most people would know the freezing point of water (0 degrees celcius) as compared to vodka. So if they were asked what the freezing temperature of vodka is, they would tend to start from 0 and adjust downwards. The freezing temperature of vodka is around -24 degrees celcius, much lower than what people usually answer.

Both these examples demonstrate how the reasoning associated with anchoring bias leads to people falling significantly short of the right answer.

In the case of the stock market, analysts look to the performance of blue-chip stocks linked to commodities like oil because they are associated with large, well established companies with time-tested business models. There are large data sets available with which to analyse these stocks.

However less than 4% of companies are classified as blue-chips globally. What about the remaining 96%? To value them, analysts may start from the payoffs of blue-chips and then attempt to make appropriate adjustments for size and other differences.

The overreaction of the market in relation to oil prices is further exposed by the fact that lower oil prices aren’t all bad news. Low oil prices can be good for countries that import oil as well as their consumers, retailers and industry because higher production of goods drives cheaper prices leaving more money in the pockets of consumers to spend.

Other economic indicators also tell a very different story to the oil price. Job numbers are good both in the European region and US, and growth seems to be picking up.

In fact, based on encouraging data, Fed has recently raised interest rates for the first time after nine years. The slowdown in China is not the giant collapse that some were fearing.

If analysts and investors continue to display anchoring bias and the oil price drops, it could become a self fulfilling prophecy where a prolonged market slump cuts off investment, reduces consumption, and pushes the global economy into a recession. Central banks will do what they can to prevent this from happening by talking of quantitative easing. However, the interest rates are already near zero so they do not have much room to move.

Author: Hammad Siddiqi, Research Fellow in Financial Economics, The University of Queensland

How basic income can solve one of the digital economy’s biggest problems

From The Conversation.

At a time of global economic insecurity, an insightful commentator identified the existential threat that technology poses to work:

We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come – namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

These words by John Maynard Keynes in 1930 remind us that contemporary anxiety over jobs being taken from us by robots is not so far removed from fears of a greater vintage.

Indeed, the more these fears are periodically recycled and perennially assuaged, the less potent they appear to those who are sensitive to the long arc of human history. Nonetheless, this has been one of the major themes of discussion by world leaders at Davos.

John Maynard Keynes.

The exponential growth of digital technology since the 1990s has brought us to the “fourth industrial revolution”. Advancements have reached the point where highly skilled jobs are as susceptible to replacement by automation as ones which do not require much education or training. This is vividly exemplified by Silicon Valley entrepreneur Martin Ford’s contrasting of the radiologist’s vulnerability to automation with that of a housekeeper, whose decision-making processes are less easily replicated.

This is compounded by the concern that this new type of economy does not provide enough compensating positions for the jobs automated out of existence. As an illustration of how the most innovative digital companies can generate huge wealth on the back of the toil of relatively small numbers of people, look at how Google’s market value of US$377 billion is supported by just 53,600 global employees. Contrast this with General Motors‘ market value of US$60 billion and 216,000 employees.

This divergence would not be significant in an economy where the business of each company was completely separate. Now, though, the tech giants’ operations have seeped into other spheres of business, such that Google’s driverless cars makes the company a direct competitor of General Motors.

Martin Wolf, the Financial Times’ chief economics commentator, argues that these tectonic shifts should open up a space for a rethinking of our attitudes towards work and leisure. Rather than lamenting what automation robs us of, why not use it to generate greater opportunities for leisure and education, as well as liberate us from our constant anxiety that we will not be able to support our families in this unstable environment?

Technology has come a long way. Alexander Svensson, CC BY

An age-old idea

An obvious way to do this is by way of a basic income – redistribute wealth and give all citizens a flat, unconditional income. The idea is grounded in decades-old ideas and experiments. The Democratic candidate in the 1972 US election, George McGovern, for example, proposed a “Demogrant” of US$1,000 a year for every American.

Robert Reich, the labour secretary in Bill Clinton’s first presidential term has also advocated a combination of minimum income, earnings insurance and a US$60,000 nest egg for each citizen to cushion against the violent vicissitudes of the modern global networked economy. And, as Wolf advocated, Swiss campaigners for a basic income framed their arguments around the notion of improving citizens’ work-life balance.

Libertarian economist Milton Friedman. The Friedman Foundation for Educational Choice

It might surprise the reader to discover that ideas for a basic income come from figures on the right too, including the libertarian economist Friedrich Hayek. They were manifest in proposals for a negative income tax, first advocated by Milton Friedman in 1962, and which almost came to fruition during the Richard Nixon presidency in the form of the Family Assistance Plan.

The failure of this plan to get off the ground was accompanied by a series of negative income tax pilot schemes in a number of US cities with less than stellar results. Despite this, Conservative thinkers like David Frum argue that introducing a basic income would cut bureaucracy by eradicating the thicket of anti-poverty programmes currently in place. A number of new schemes – most recently in the Dutch city of Utrecht – might give us a better indication than their 1970s forebears of how these experiments might work in our highly automated economies.

Something that the head of the World Economic Forum, Klaus Schwab, has been keen to emphasise is the increasing tendency for benefits of the digital revolution to accrue to the many not the few. “As automation substitutes for labour across the entire economy, the net displacement of workers by machines might exacerbate the gap between returns to capital and returns to labour,” he said.

Keynes prediction in 1930 that within a hundred years people in the richest nations would be working only 15 hours a week might not come to pass. But given the potential of automation to confound economists’ employment projections, those gathering at Davos would be remiss to not consider a basic income as a credible policy response to contemporary anxieties about our role in the modern workplace.

Author: Andrew White, Associate Professor of Creative Industries & Digital Media, University of Nottingham

FactCheck: is job growth in Australia the greatest it’s been since 2006?

From The Conversation.

If you look at the latest unemployment numbers down to 5.8%, we have seen extremely strong job growth, over 300,000 jobs in the last year and that’s the greatest level of job growth since 2006. So I am very confident in the strength of our economy overall. – Josh Frydenberg, Minister for Resources, Energy and Northern Australia, interview with Fran Kelly on Radio National Breakfast, January 18, 2016.

With shakes in the global stock market and uncertainty abroad, politicians are understandably keen to reassure voters that Australia’s economic fundamentals are strong.

Employment data produced by the Australian Bureau of Statistics (ABS) is one way we can test Australia’s economic waters, and resources and energy minister Josh Frydenberg said recently that the latest employment figures show extremely strong job growth.

Is he right?

Checking the numbers

The ABS’ December Labour Force survey release showed that over the course of 2015, total employment was up by 301,300 people (adjusted for regular seasonal fluctuations and rounded to closest 100 people). Of those 301,300 jobs, the majority (187,200) were full time.

In the last three months of 2015, growth compared to same time the previous year has fluctuated between 2.6% and 3%. That’s above the average annual growth in employment since 2000 of around 1.9%. In short, employment growth recently has been strong.

Is it the greatest level of job growth since 2006?

Table 1 of the release shows that this growth is indeed the strongest of any calendar year since 2006.

Employment-Fact1However, one could also look at changes over the 12 months to any month. Doing that, you could say, for example, that November 2010 with a figure of around 314,300 had a stronger level of job growth than the latest employment figure show. It was also stronger in November of 2015, when it was at about 344,900.

In other words, if you look only at changes for calendar years (between the beginning and the end of any given year), Frydenberg is right to say it’s the greatest level of job growth since 2006.

That said, comparing the recent data to particular points in the past is less important than what the data tell us about the current trends in the labour market.

Trends

While the ABS devotes considerable resources to undertaking the survey, it is worth remembering that published employment growth is an estimate. The survey is only a sample of the population. The ABS reports on page 40 of its release that the standard error of monthly employment growth is 29,300 people, so, while employment growth recently has been strong, considerable uncertainty surrounds the numbers.

More generally, monthly movements in these data are volatile. For example, in December employment actually fell marginally, although this followed two months of strong growth and therefore was still a good outcome.

Due to this volatility in the monthly series, the ABS’ trend series may provide a better guide about the extent to which recent growth is likely to persist in the future.

Over the last three months of 2015, growth in trend employment averaged around 30,300 people, compared to 43,000 based on the data adjusted only for regular seasonal fluctuations.

In other words, the data show us that the underlying trends in the job market recently have been pretty good.

Other, unofficial, data point to an improvement in the labour market. The December 2015 ANZ Job Advertisement Index showed growth compared to the same time in 2014 in their trend estimate at 11.4%, compared to around 10% in the middle of 2015.

The unemployment rate

The unemployment rate, which is also produced by the ABS in the labour force survey, has improved over the last three months. At 5.8%, it is down from 6.2%, where it had fluctuated around since mid 2014 (see Table 1 of the release). Similarly, the trend unemployment rate has also improved and in December reached 5.8%.

Unemployment-Fact2Is 5.8% a good outcome for the unemployment rate? A simple benchmark is that average unemployment in Australia since 2000 is 5.5% – so it’s still currently a little above average.

Another way to judge the level of the unemployment rate is to look at developments in wages. If the unemployment rate was too low, growth in private sector wages would pick up. However, in the September quarter (which predates the recent drop in the unemployment rate) wages growth was soft.

To put Australian unemployment in a global context, the average unemployment rate of the Organisation for Economic Co-operation and Development (OECD) nations was 6.6% in November 2015. However, we need to caveat this comparison. Many countries, such as some in Europe, have unemployment rates that are, on average, higher than Australia’s, reflecting the different structure of their labour markets.

Australia’s unemployment rate has shifted down and that has persisted for three months, which gives greater confidence that it might not be temporary. However, given the volatility of these data and the uncertainty presently surrounding the outlook for the global economy it will be important to see whether these gains are maintained in coming months.

Verdict

Josh Frydenberg was right. Employment growth in 2015 was the strongest of any calendar year since 2006, although comparable growth also occurred over the 12 months to November 2010. It is also fair to say Australia has recently experienced strong jobs growth. – Tim Robinson

Review

This FactCheck is excellent in its comprehensive review and interpretation of the Labour Force Survey data. It is pointed out that labour market statistics, such as the unemployment rate and the number of people employed, are only estimates not the actual numbers in the population.

The statistics are based on the Labour Force Survey, which is a sample of 0.33% of the population about the employment status of everyone in the household aged 15 years and older. Because they are based on a sample of the population, the statistics have errors. In its monthly report the ABS publishes these “sampling errors” and clearly says that the estimate of the monthly change in the employment has a “95% confidence interval”. The media and the government rarely, if ever, report the range of estimates.

It is well known among economists that “you don’t trust one month’s figures” – the trend in labour force statistics is what’s important in understanding what’s going on in the labour market.

This FactCheck does a good job of explaining that the ABS “trend estimates” are much more reliable than the actual raw estimates. Again, the media (and politicians, when it suits them) tend to concentrate on the actual number, particularly whether it has risen or fallen. As the author also pointed out, the start and end date of the change usually makes a difference to the estimate of the change.

As the above states, although the minister’s assertion can be questioned somewhat by adopting a different start and end date, the overall conclusion that jobs growth is reasonably strong is correct. – Phil Lewis

Author: Tim Robinson, Research Fellow, Melbourne Institute, University of Melbourne; Reviewer: Phil Lewis, Professor of Economics, University of Canberra.

Should Davos delegates live in fear of the ‘Fourth Industrial Revolution’?

From The Conversation.

The World Economic Forum Meeting at Davos, Switzerland this year is all about navigating a path through the “Fourth Industrial Revolution”. Preceding industrial revolutions were centred on machinery, electrified mass production, and computers. The fourth is premised on emerging breakthrough technologies based on artificial intelligence, nanotechnology, brain research, robots, the internet of things, and much else.

Beneath the branding and the hype, major technological changes are happening that will have enormous implications for the organization of business, the pattern of work, daily life, and the future of capitalism. The rapid pace of change is set to continue, and the world will be very different in 30 years from now.

The publicity for the Davos meeting portends a world of joblessness, low productivity and inequality. But are these inevitable, and haven’t we heard such warnings before? It would be a mistake for delegates to assume that technological changes lead automatically to one set of possible socio-economic outcomes.

Getting it wrong

There is not a one-way causal relationship between technology and socio-economic arrangements. Causality works in both directions.

Financial, corporate, research and other institutions are necessary to finance, facilitate and nurture technological innovation. Furthermore, the diverse institutional arrangements that exist in modern global capitalism – compare the US, Japan, Germany, the UK and China, for example – show that similar technologies can be hosted by quite different financial, legal and business institutions. Consequently, technology alone is not the predictor of the kinds of socio-economic arrangements that may emerge in the next 30 years.

No one finds it easy predicting the outcomes from rapid change. Holger Wirth, CC BY-SA

When considering the future impact of technology, two great economists got it very wrong in the past. In Capital, Karl Marx argued that new technology under capitalism would lead inevitably to the deskilling of the workforce. But as Alfred Marshall pointed out, machines first replace the most monotonous and muscular labour. Other forms of work, involving adaptive skills and judgement, are less-readily replaced by machines.

Marx’s prediction of widespread deskilling has failed to materialise. Historical evidence shows that machines can enhance skills rather than reduce them. But this does not mean that extensive deskilling is ruled out: it is a possible scenario for the future.

Information economy

In another prediction, John Maynard Keynes predicted in 1930 a dramatic shortening of the average working day. He argued that his hypothetical grandchildren might have to work only 15 hours a week to satisfy their material needs. It is true that the average number of working hours has decreased in developed countries, but to nowhere near the levels envisaged by Keynes. Another prediction that has failed to materialise.

Both Marx and Keynes over-stressed the material aspects of production and underestimated the way in which economies entail the processing of information as well as the making of things. Any technology has to be organised, with effective communication between those involved. Specialist organisational, administrative and communication skills are required.

Making connections. A Health Blog, CC BY-SA

With the growing complexity of capitalism, this facet and type of work has increased relentlessly over the last 200 years. It has now reached the point that the majority of work in developed economies involves the processing of information, rather than the production of material things.

Real risks

But we are told that the Fourth Industrial Revolution may change all this, and that is why the Davos delegates are being asked to gravely consider the implications.

The World Economic Forum’s take on the Fourth Industrial Revolution.

One of its key features is that artificial intelligence will develop to the point that it can replace humans in making judgements and in the administration of complex systems. It is also suggested that artificially intelligent systems will soon be able to learn and innovate.

Given this, then, both Marx’s and Keynes’s scenarios become more feasible. We can now, just about, imagine a world run by robots and computers. Humans would be consigned to a life of enforced leisure, a world where humans have no need to learn productive skills.

But this is not necessarily the outcome of the new technology. While artificial intelligence may become capable of sophisticated judgements, it is likely that a number of intuitive human skills will be irreplaceable for a long time to come. Furthermore, it would be both difficult and dangerous to program decisions concerning moral judgement into a machine. These factors leave an important and potentially large space for human intervention.

But within that debate over the future of our information economy lies a genuine, and palpable risk. There are large inequalities in the distribution of wealth, and these will remain unless the high concentration of ownership of capitalizable assets is reduced. Crucially, much capitalizable wealth owned by corporations now consists of immaterial, information-based assets. There is a concomitant danger that monopoly control of key information will also stifle the innovation that allows us to manage this transition.

The outcome of the Fourth Industrial Revolution will depend as much on political and other developments as on technology itself. What is certain, as both Paul Mason and I have discussed in recent books, is that the 21st century will bring massive changes to economic systems and our patterns of work.

Author: Geoffrey M. Hodgson, Research Professor, Hertfordshire Business School, University of Hertfordshire