Chris Styles

I sat in a hotel room in Kuala Lumpur the night before a UNSW graduation ceremony and watched the lPO of Jack Ma’s Alibaba. Sitting in the shadow of the extraordinary Petronas Towers, it was strangely gripping TV.

Ma was interviewed on CNBC and was treated like a rock star. In his interview he repeated his mantra – customers are #1, employees are # 2 and shareholders are #3. But he still wants to make sure shareholders (or those soon to be shareholders) make money.

While at that point he didn’t have investors’ money, he said what he did have was trust. That seemed to be his key selling point for the company. One of the interviewers said he was feeling particularly uncynical about the whole thing. Ma has a vision to empower entrepreneurs through his e-commerce website and be the champion of small and medium-sized business in China.

“We want to be bigger than Walmart,” Ma says. He wants people to say that Alibaba is like Microsoft and Walmart – it changed the world.

Before the bell, the price was set at US$68. At that price this IPO should raise almost the total amount raised in IPOs so far this year. The scale – like all things in China – is immense. It will be the biggest IPO ever.

Masayoshi Son, CEO of SoftBank, biggest shareholder of Alibaba and now Japan’s richest man, followed Ma on TV and sang his praises. According to Son, money is not the goal, it’s about passion and vision. And Ma has both. Politics is not an issue. One is from China, the other from Japan.

When the stock went on the market, there was no indication of a selling price. There were hundreds of thousands of orders but no sellers. Indications were that the first sellers would come to market at around US$84-US$87.
Could this be the perfect IPO? Even with the uncertainties that come with the China market?

The stock finished the day at US$93, valuing the company at US$230 billion. More than Facebook.

In the heart of capitalism – the New York Stock Exchange – China could once again be changing the (economic) world order. Along with the Petronas Towers out my window, it is another reminder of the shifting centre of gravity to Asia.

The ticker for the company is BABA. “Ba” means 8 in Mandarin – a lucky number in Chinese culture. Ma and a bunch of investors got very lucky. Perhaps so too did global capitalism.

Let’s see if the luck holds.

Chris Styles is a professor of marketing and dean of UNSW Business School.

Professor Richard Holden

A “yes” vote to Scottish independence on September 18 would mean a great many things for Scotland, and also for the remains of the UK. But what would it mean for Australian business and financial markets?

It’s tempting to say “very little” — what do internal politics half a globe away have to do with us? Yet the Australian dollar strengthened markedly against the pound last week, almost surely due to a poll suggesting that the “yes” vote was ahead 47% to 45%.

To begin to understand what Scottish independence might do to Australian firms and markets, it’s important to understand what it would do to Scotland and the remains of the UK. The key economic question here is what currency the Scots would use.

The pro-independence team has been pretty clear about this. They’ll keep using the pound. And it’s true that the UK can’t stop them — just as Australia can’t stop New Zealand from using the Aussie dollar.

At first this sounds sensible — the pound is a big, liquid currency. The haggis — or whatever a Scottish currency would be called — would not be. Case closed, right?

Actually, no. Having a common currency without economic and political integration is a very, very dangerous thing. Monetary policy would be set by the Bank of England, presumably without reference to Scottish economic conditions. So if there was a recession in Scotland one would want lower interest rates, but unless the UK was also in recession of a similar magnitude the Bank of England would be unlikely to cut rates.

Worse, losing control of the ability to print money means that if Scottish debt got out of control it could not be inflated away. Ask Spain how that works out.

Worse still, Scottish banks would no longer be implicitly guaranteed by the UK. This is a huge deal.

The events of 2008 taught us how quickly modern-day bank runs can happen, how devastating the effects can be, and how only overwhelming credibility can prevent disaster. Scotland wouldn’t have that — and the remains of the UK would have no incentive to help out. Even if it wanted to, markets would have to believe it, and that’s far from a sure thing.

So it’s clear Scotland would be in a dangerous economic position — not obviously in trouble right away, but without any macroeconomic fire extinguishers if trouble arose.

This is a potential worry for major Australian exporters to Scotland — but there just aren’t very many of those. Australian companies with operations in Scotland could be affected.

A notable example is National Australia Bank (NAB), whose subsidiary Clydesdale Bank is located in Scotland and could face higher borrowing costs under independence. NAB has said it would seek to shift Clydesdale bank’s corporate registration to England in the event of a “yes” vote. But even in that case it’s a small part of the NAB.

The bigger concern would be if independence affects the remains of the UK in a significant way, since this is a bigger trading partner for Australia. As we saw last week, markets have rightly been concerned. At the very least there would be an 18-month-plus process of “demerging”, a process that would be complicated and distracting.

Yet, whatever the impact on the remains of the UK, it’s hard to see how it would materially impact Australian business. The pound might weaken relative to the Australian dollar, potentially hurting Australian exporters. Having said that, we would all do well to heed former treasury secretary Ken Henry’s advice on Tuesday to be less focused on the real exchange rate in this country. The impact of a modest devaluation of the pound just won’t make much difference.

Could independence lead to a major blow-up of the UK’s economy? As we learnt in 2008, a major problem in any significant economy can quickly reverberate around the world. We are all interconnected now. A big problem in the remains of the UK could be a big problem for world financial markets, Australia’s among them.

This is possible, but it seems highly unlikely. The UK is a very large economy with its own currency and a broad web of international economic connections. Scotland is close, historic, and important – but independence is not likely to lead to an economic meltdown in the remains of the UK.

Perhaps it could change politics in the UK in a big way and this could have an effect. Perhaps a more conservative Tory leader would emerge. And perhaps that would lead to different economic policies. But that’s a lot of perhapses.

Demerging Scotland from the UK would be wrenching. It would affect both entities — especially Scotland — in lots of ways, including economically.

Whatever the pros of a “yes” vote for Scotland, it would bring with it huge economic risks. And some for the remains of the UK, too. For Australia and Australian businesses, the risk is small.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Richard Holden

In his victory speech on election night last September, Prime Minister Tony Abbott declared Australia was “under new management and … once more open for business”.

There were, of course, specific promises such as repealing the carbon and mining taxes, balancing the budget, and building lots of new roads. But the “open for business” line foreshadowed a broad increase in confidence in the economy.

In terms of confidence since then, there has been little good news about the economy – and some bad, especially regarding unemployment. The Westpac-Melbourne Institute consumer sentiment index is 10.8% below its post-election peak.

Treasurer Joe Hockey has told us there is an imminent debt crisis, but can’t persuade parliament to pass all of his budget. Minister for Trade and Investment Andrew Robb has said budget blocking puts Australia’s credit rating in jeopardy.

The confidence of those receiving family tax and other benefits has been shattered, as has the confidence of those of us who are happy to see our tax dollars spent to make real the promise of opportunity for those less fortunate – a promise that has always been at the core of Australia’s social compact.

I get it: the first step to recovery is recognising that you have a problem. But so far the government seems to have scared global financial markets a fair bit, but not scared the Australian public and their representatives enough to do anything about it.

And that’s largely because we don’t have an imminent debt crisis. We have a long-term structural budget problem caused by an ageing population — a problem shared by most OECD countries.

Yet, despite the dramatic rhetoric, nothing has been done to address the structural problems. To say the least, this is not great “expectation management”.

A major election promise was to repeal the carbon tax – legislation that was passed last month. It remains to be seen whether the so-called “direct action” policy on climate change will be implemented, but this is one area where business is certainly happy.

And why not? Under a carbon tax or emissions trading scheme businesses pay if they pollute. Under direct action they get bribed not to pollute. It is, however, clearly bad policy for the economy as a whole — a fact that everyone except hardcore climate change deniers acknowledge.

Abbott aspires to be known as “the infrastructure PM”. But investments of the type Abbott promised take a long time – even to start – so it’s too early to tell whether he will be remembered as he wishes to be in this respect.

If we can glean anything, it comes from the yet-to-be-passed federal budget with nearly A$60 billion in infrastructure projects. Abbott has pledged that these and other projects will be subject to “rigorous cost-benefit analysis”.

If so, that’s exactly why some of them might not happen. As an economist I can hardly be against weighing up costs versus benefits. But costs are usually pretty easy to quantify (how much will it cost to build “X”); benefits, not so much.

Projecting how much traffic flow there will be on a road is not so hard, though tell that to AMP which is suing its consultants over forecasts of Lane Cove Tunnel traffic flows. Projecting the benefits of genuinely new types of infrastructure is much harder.

What’s the economic benefit of really fast internet access? It’s tough for even the most seasoned consultant to know what to put in the line in the spreadsheet that reads “stuff we never even knew it could be used for”.

So, paradoxically, Abbott’s legacy as “the infrastructure PM” may actually involve not being so wedded to standard cost-benefit analysis, but being prepared to take an educated guess about what a country such as Australia will need to face the economic challenges of the coming years.

On the mining tax, unlike many economists, I give the government some credit. Although there are intelligent arguments that those who benefit from digging up Australia’s natural resources should pay a good chunk for it, the mining tax was designed as a “super profits tax”.

If that sounds like the last refuge of banana republics that’s because it basically is. “You foreigners are stealing our future.” That is, at best, a cheap caricature of the Australian mining sector.

I’m still yet to hear a coherent definition of what a “super” profit is and how exactly it differs from an “acceptable” profit. Oh, and the mining tax didn’t raise any money, either. It was a bad idea, poorly executed. It’s good to see the back of it.

The Abbott economy at year one doesn’t look terrible. But it doesn’t look great, either. Unemployment is up, growth is flat, and confidence is down.

For Australia to really be “open for business” at year two will require a year ahead with: less scaremongering about non-existent debt crises; fewer ad hoc taxes such as the so-called debt levy and the 1.5% tax on the top 3000 companies; and no more draconian cuts to lower-income families struggling to raise kids and get ahead.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Tim Harcourt

We get a lot of free advice from billionaires on how to deal with Australia’s largest trading partner, China. First, we had gaming mogul James Packer saying we didn’t “bow enough” or treat our trading partners with sufficient deference. At the other end of the spectrum is Mineralogy owner Clive Palmer.

The two billionaires’ remarks, especially Palmer’s reference to “mongrels” and “bastards”, created ripples in Beijing and Canberra. Palmer has since apologised. But do either Packer or Palmer really have an impact on the long-term trading relationship between China and Australia? And what’s the future of Sino-Australian trade ties?

While iron ore and coal are a big part of the story, Australia will move from the mining boom to the dining boom, as its food exports grow rapidly and it sees more agricultural delegations visiting China to build up domestic farm capacity.

But will the trade relationship move beyond rocks and crops? It won’t and probably doesn’t have to.

Primary industry brings with it associated services in mining equipment, agricultural technology, human capital and education resources that China needs. In this regard, the proposed China-Australia free trade agreement (FTA) should help reduce agricultural tariffs and subsidies and smooth away tight services regulations.

According to the latest DHL survey, most exporters would welcome an FTA with China. Up to 61% of exporters think an agreement would benefit their business, 31% think it would be neutral and only 8% think it would have a negative impact.

In some ways, China’s development is as much about urbanisation as it is about globalisation, and Australia will play a big role in servicing China’s second and third-tier cities, such as Chongqing, Chengdu, Wuhan and Qingdao, which my Chinese friends tell me are “country towns” with more than or close to 10 million residents.

This means opportunity for Australian architects such as Place Design, which has moved its office from Brisbane to Chengdu to meet the insatiable demand for landscape gardening in Sichuan province, and Sunshine Coast horticulture company Bassett Barks, which has found China to be a happy hunting ground.

But the story of China’s structural reform is not only about rural-urban migration; it is also about transforming itself from being a nation of shippers to a nation of shoppers. It wants to rely less on exports and more on domestic consumption and investment.

Middle-class incomes are on the rise along with the demand for consumer goods, which were once considered a luxury in China. That’s why water-heater manufacturer Rheem is now based outside Chengdu to service the domestic market and BlueScope Steel is based outside Shanghai to transfer steel locally, free of tariffs.

Add to this the opportunities in the professional services sector, such as architecture, landscape design, education and financial services and the win-win picture becomes clear.

In fact, Australia’s export relationship with China is more broadly based than people think at first glance. According to Australian Bureau of Statistics data, more than 5,600 Australian small and medium-sized enterprises (SMEs) now export to China (plus another 4,900 via Hong Kong) and more than 3,000 are based in China and are flourishing.

More Australian businesses lose money in the US than in China, and more SMEs export to China than to the whole of Europe. Australian SMEs have battled their way into China and over time many have forged a reasonable business through enduring relationships.

Maybe we should listen more to the little Aussie battlers in the SME sector and less to our billionaires on how to succeed in China in the long run.

Tim Harcourt is the J.W. Nevile fellow in economics at UNSW Australia Business School. A version of this post appeared in China Daily.

Peter Swan

Many highly distinguished economists such as my friend Geoff Harcourt come from what is commonly known as the post-Keynesian school. This means they believe the theory of economics and fiscal policy applied to the nation bears little if any resemblance to the brand of economics that you and I as individuals are subject to.

Writing for The Conversation’s recent series on the language of economics, Geoff finds that when treasurers use phrases such as “you are using taxpayers’ money” they are confusing affairs of state with decisions that should be left to individual households.

But every treasurer should be aware each dollar of expenditure must come out of the pockets of taxpayers eventually, even if they borrow to finance the outlay in the short term. Exactly the same is true for you and me. We cannot borrow indefinitely to fund our consumption.

Geoff believes it is fallacious to “balance the budget over the cycle”. But if the government fails to do this, then undoubtedly the outcome is eventually the Greek and Spanish solution. This means more bailouts, massive rises in unemployment, a collapsed economy and departures of the able-bodied to work in economies such as Germany that have displayed better fiscal discipline.

Yes, if on average the economy were growing sufficiently fast, and the government borrowed during recessions and repaid the debt with a sufficient surplus in booms, then perhaps balancing the budget over the cycle could be relaxed slightly.

Of course, what we have seen is massive borrowing when the economy was doing quite well during the global financial crisis (GFC) due to China, and even more borrowing during the subsequent post-GFC period. Now there’s little chance of balancing the budget over any foreseeable period.

Geoff is closer to the mark when it comes to hypothecation – matching specific government expenditures with particular tax sources. For example, if police patrols are rewarded based on fines imposed on speeding motorists, they may become excessively zealous. Medical research funding is more properly determined by its social contribution – not based on a Medicare co-payment.

Countries with as good or better healthcare systems than ours, such as New Zealand and Singapore, rely far more on co-payments. The insurance aspect of Medicare requires subsidies to life-threatening and expensive medical intervention and not to regular GP visits.

Cynically, would the AMA have been more amenable to co-payments if all the revenue raised were to be paid to doctors rather than medical researchers?

Geoff points out that government expenditure has a significant impact on the efficiency and productivity of the nation. Not always beneficial, I might add. He indicates that this may be especially true of capital expenditures.

Geoff then goes on to make the remarkable claim that domestic borrowing to fund such deficits entails no real burden since both the taxpayers and the interest recipients are Australians. I agree, it is true they could in part overlap.

So the government borrows a dollar, perhaps to fund more welfare benefits. I, as the taxpayer, lend a dollar to the government instead of investing it in (say) advances in technical know-how to raise our future living standard. Activities other than welfare suffer in the Australian economy.

The government then raises the tax on me in order to pay the interest it owes me. I now work less hard because leisure and idleness remain untaxed. Taxes are then raised again in order to repay the principal as well as the interest on the loan I have made to the government. I consume more idleness and the Australian economy suffers yet again.

The burden is no different if foreign borrowing funds it. Geoff points out that repayment of principal and interest must come out of export earnings. These additional export earnings have to come at the cost of lower domestic consumption and investment, that is, lower non-welfare related activities. The tax burden is the same as in the case of domestic borrowings.

All borrowing, whether domestically or foreign, entails a tax burden with the burden increasing in the size of the deficit. Only if the borrowing is to fund long-lived public goods that I, and others, benefit from collectively is the borrowing justified. Most federal borrowing is to fund current expenditures and interest payments, not infrastructure.

Geoff concludes that “the end result has been the use of scare tactics over a wide range of issues, tactics which have no foundation in proper economic logic”. Yes, I agree scare tactics have been tried. Not very successfully so far because senators fail to see that in one way or another taxes have to be raised or outlays slashed to fund the repayment of principal and interest.

Are these tactics contrary to the laws of economics when applied to deficits? No. In fact, these laws are rigid and ultimately are little different from that faced by you and me as individuals.

Peter Swan is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Read Geoff Harcourt’s Why treasurers should go back to economics school

Richard Holden

Last Tuesday, the minutes of August’s Reserve Bank of Australia (RBA) board meeting were released. Market participants speculated about what they would say, currency and bond markets responded to what they did say about house prices and future interest rates, and the precise wording was dissected in great detail by the Australian press.

The words of central bankers such as Glenn Stevens attract a huge amount of attention. In the US, analysts have scrutinised even the body language of successive US Federal Reserve (Fed) chiefs.

It’s not surprising that what central bankers do is closely followed. After all, interest rates have a big effect on economic activity, a range of different markets and investment strategies.

But what is, at first glance, surprising, is that what central bankers say is perhaps as closely scrutinised as what they do. Of course, what they say is informative about what they might do in the future — but there’s more to it than that.

Perhaps the most striking feature about how central bankers communicate is that they are typically quite vague. This is so widespread and has become such an art form that it has been dubbed “Fedspeak”.

For example, former Fed chairman Alan Greenspan in 2005 told the US House Committee on Financial Services:

“Risk-takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. But long periods of relative stability often engender unrealistic expectations of it[s] permanence and, at times, may lead to financial excess and economic stress.”

Even the RBA’s comparatively plain-spoken Stevens said recently to the Australian House Standing Committee on Economics:

“At some point, if these responses start to gather pace, the sorts of forecasts we are setting out at the moment will very likely prove to be conservative. The frustrating thing is that no one can say when that will happen, or just what might be the proximate trigger.”

Why are central bankers so abstruse? Surely it would be better for them to communicate clearly. Actually, no.

Central banks have all sorts of information about the economy that investors and the general public do not. They use that information to inform future policy. So wouldn’t it be best if they could credibly communicate that information so the market could incorporate it into their decision-making as soon as possible?

Yes, but the key word here is “credible”. Imagine for a moment that a central bank could make a pronouncement that was both credible and precise. Being credible, markets would believe it. And being precise, markets would have no doubt what it meant about future policies.

But this very fact would give the central bank a reason to lie. Why? Because there is a trade-off between inflation and output (or unemployment). Different central bankers will have different appetites for how much unemployment they are willing to tolerate in order to keep inflation low.

So, as Nobel laureates Finn Kydland and Edward Prescott noted long ago, policy-makers (such as central banks) suffer from an inherent time-consistency problem. In this setting, all central bankers want to be seen to be “tough on inflation”, but then bankers with less tolerance for unemployment will still want to mimic bankers with more tolerance — so they can be believed to be tough and enjoy low inflation expectations.

But that’s a logical contradiction. So central banks cannot be credible and precise at the same time.

If you think this logic sounds complicated, airy-fairy and academic, then you are right. And wrong. It is exactly the reasoning laid out by a Harvard University economics professor in a paper in 1989 in the world’s leading economic journal, the American Economic Review. That Harvard professor, Jeremy C. Stein, later went on to become a governor of the Fed. So he’s seen theory and practice.

And his argument is perhaps more pertinent today than ever before – a time where central bankers are trying to balance multiple competing objectives with just one concrete policy instrument: short-term interest rates.

Poor Stevens is trying to juggle inflation, growth, unemployment, the exchange rate and housing prices all at the same time. He needs more than just the cash rate to do that. And to influence expectations at all he must balance the precision and credibility of his language.

What central bankers say communicates a lot more information than the interest rates they set. That’s why central bankers are so careful in their language, and masters of the art of Fedspeak.

Personally, I think Fedspeak sells the immutable economic logic behind it a little short. I prefer to think of it as “Greenspan’s uncertainty principle”. You can either know what he’s saying, or whether he really means it. But you can’t know both at the same time.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Geoff Harcourt

Although money and financial factors are integrated in complex ways in the workings of the economy, ultimately it is real resources – work forces (sizes and skills), capital goods and natural resources – that set the upper limit at any moment in time on the size of the community’s standard of living.

And yet that hasn’t stopped successive Australian federal treasurers, and their counterparts in other advanced capitalist economies, from increasingly using terms that reflect misunderstandings of the role of fiscal policy in economic policy.

When used by treasurers, phrases such as “we cannot afford it financially” or “where is the money to come from?” or “you are using taxpayers’ money”, confuse affairs of the state with what should be left to the workings of individual households.

Obsessed with the relationship of government expenditure and taxation, many treasurers suffer from deficit size fetishism, and fall victim to the “balancing the budget over the cycle” fallacy. Many also get caught up with hypothecation – matching specific government expenditures with particular tax sources.

Some confuse the significance of the national debt to income ratio for the present and future operations of the overall economy, especially the supposed link between them and the welfare of future generations relative to the welfare of the present generation. The “we’ll all be ruined” fear.

Deficit size fetishism reflects the view that government expenditure and taxation are always bad, regardless of the absolute sizes and compositions of the two and the overall state of the economy – for example, the rate of unemployment, the rate of growth, the rate of inflation (or deflation, as Japan has experienced in recent decades). Both the sizes and compositions of government expenditure and taxation need to be assessed by other criteria.

The composition of taxation, the contributions to the whole of indirect, direct and other forms of taxation and their incidence on different groups in the community, ought to reflect equity (fairness) – for example, which groups can least or most afford to pay particular forms of tax and taxes overall.

The total tax take should reflect the impact required on overall levels of spending in the economy, these in turn determining the levels of output, income and employment both prevailing and what the government would like to see prevail.

The composition of government expenditure is made up, first, of current expenditures, the salaries of parliamentarians, public servants and government employees generally; transfer payments from taxpayers to recipients of social services such as unemployment benefits, old-age pensions and so on; and interest payments to domestic holders of government bonds.

Second, there is government (public) capital expenditures on social infrastructure, the creation of new railways, roads, hospitals, schools and so on. Ideally, the level and composition of capital expenditure should be determined by the perceived medium- to-long-term needs of the community for the services they ultimately will provide.

As these expenditures have a significant impact on the efficiency and productivity of the nation, there is no reason why they should not be financed, at least in part, by borrowing, even by borrowing from overseas.

The latter does entail a real burden because interest and principal repayments mean higher levels than otherwise of exports to service them would be required. Nevertheless, if the borrowings are used wisely, this burden may be met and the economy can still be better off than it otherwise would have been.

There is no equivalent burden associated with internal debt (owed to lenders within the country) for, as noted, this involves a transfer from taxes to interest payments. The impact on overall demand depends upon the differences in the consumption and saving behaviour between taxpayers, on the one hand, and interest receivers, on the other. They may, of course, overlap. Any fairness considerations associated with such transfers may be tackled through the composition of the structure of tax rates.

So government expenditure and taxation, especially taken in isolation, are not interesting numbers. Certainly not numbers to have a fetish about, even if you are not just an ordinary Joe (Hockey), or an earthbound (Wayne) Swan, or a surplus-lover (Peter) Costello that hands out tax cuts to friends.

The criterion of balancing the budget over the cycle (or, preferably, creating a surplus) is based on a fallacy that the economy is not growing, that it will remain at the same level of activity forever.

At least since the 1940s it has been known that if economies on average grow from cycle to cycle, it is possible always to have deficits (within reasonable limits) without annual deficits exploding; for specific rates of growth, the deficit approaches particular limiting values that are livable within a wide range of values.

One outcome of this discussion is that hypothecation is a fallacy – particular forms and amounts of taxes should not be attached to particular forms of expenditure.

Citizens should pay taxes according to their overall ability to pay and they should receive government payments according to their particular characteristics as citizens – unemployed, aged, disabled and so on. The total of these government expenditures will be financed from the total funds raised by taxation and borrowing.

“Treasurer speak” in recent decades reflects serious conceptual misunderstandings of how economies work and how the functions of the state should be integrated with the workings of the private sector. The end result has been the use of scare tactics over a wide range of issues, tactics that have no foundation in proper economic logic.

Geoff Harcourt is a visiting professorial fellow at UNSW Australia Business School. A version of this post appeared on The Conversation.

Nitika Garg

Both research and popular media tell us that emotions and eating are intrinsically related. How many times have we seen a character in a TV show reaching for the ice-cream tub when feeling particularly down or after a break-up?

What is it about sadness that leads to such behaviour?

Feelings of loss and helplessness spurred on by sadness are what drives the unhealthy behaviours, whether it’s overeating or overspending. Research has shown sad people consume significantly more fatty, tasty food products, such as chocolate or buttery popcorn, than those who are feeling happy. They are also willing to pay a higher price for ordinary products such as a bottle of water.

This tendency to compensate and reward by engaging in unhealthy albeit pleasurable behaviours in the short run, has serious consequences in the long run especially with rising concerns about obesity in most developed countries.

Unlike “retail therapy”, which involves a more conscious decision to engage in a behaviour seen as rewarding and mood-uplifting, these behaviours operate at a more non-conscious level.

Interestingly, much as sad individuals crave a reward, recent research found that merely engaging in rewarding, hedonic activities, such as eating fatty foods, is not sufficient to break the sadness-overconsumption link.

This is troublesome as it suggests that in spite of engaging in unhealthy behaviours to alleviate their mood, people still do not find respite. The research suggests this might lead to a vicious cycle where engaging in such behaviours further induces guilt and dampens mood.

So, if engaging in compensatory behaviours is not an answer, then what is? Researchers have been looking for the answer.

Apart from the sense of loss, the theme that dominates sadness is that of helplessness or lack of control over the situation. And so researchers have begun to explore the issue of control.

An important way to gain a sense of control is via choice. When people make a choice, even a trivial, potentially meaningless one, they feel more in control.

New research implemented this idea and found that when sad individuals were given a choice between two common objects (a chocolate bar versus a ballpoint pen), regardless of what they chose (and most of them chose the chocolate bar), they were significantly less likely to engage in indulgent consumption.

This same effect was not obtained when sad individuals were simply given the chocolate bar as a gift (no choice). This established that rather than getting the chocolate bar, it was the manner in which it was obtained that mattered.

Should marketers of tasty and fatty food products start marketing these products as feel-good options that boost consumers’ mood? Although on the surface it might make sense, this is a short-sighted strategy.

It is possible for marketers to create strategies that improve consumption habits as well as profits. One such initiative was the 100 calorie (~400 Kj) packs that let consumers indulge but still stay in control.

In the same vein, research findings suggest it would make sense for product managers to market products that may be low-fat, low-energy versions of products as direct choices in contrast to the unhealthy choices the consumer may be drawn to, making the former more attractive.

Consumers can also learn from these findings and develop strategies for the way they shop, especially when they may not be feeling their best.

Rather than looking at purchases in isolation (such as, need to buy soft drink), they can teach themselves to build choices around such purchases (such as, need to buy something to drink – soft drink or juice) which would give them a greater sense of control and, in turn, help them move away from indulgent consumption.

The same idea can be used for impulse purchases where most of us usually give in to buying things that are pleasurable and hedonic in the immediate, but guilt-ridden and adverse (sometimes) in the longer run.

The real issue is not “to choose or not to choose”, but rather to have a real choice.

Nitika Garg is a senior lecturer in marketing at UNSW Australia Business School. A version of this post appeared on The Conversation

Gigi Foster

The Economics of Just About Everything is the latest contribution by ex-ANU economics professor Andrew Leigh MP to the bookshelf of the intellectually curious Australian. The book is a long-overdue Antipodean interpretation of the global wave that took off in 2005 with Freakonomics: a sharing with the smart layperson of “the economist’s lens” on diverse issues from across society.

Along the way, the reader learns that far from being a dismal science, economics is a compassionate yet pragmatic discipline that proposes particular ways of viewing situations in order to understand better where behaviour comes from, and hence how to change it to achieve better outcomes.

Re-branding economics is no mean feat, particularly in this country where arguably most non-economists operate under the delusion that economics is mainly concerned with money, not welfare.

Leigh confronts this misguided view with a raft of citations to research by economists, including himself and many other authors from Down Under and around the world, offering guidance on topics that carry significant implications for social welfare, individual welfare, or both.

Perhaps Leigh’s most uniquely Australian example relating to social welfare documents the effects of the different incentives facing the Second and Third Fleets sent to Australian shores in the late 1700s.

The same firm financed both voyages, but for the Second Fleet it was compensated based on the number of convict heads taken on board in England, whereas for the Third Fleet it was compensated based on the number of convict heads alighting in Australia. With the monetary incentives that previously supported over-crowding now shifted towards survival, the death rate plummeted.

While this example is riveting, such uplifting stories about how incentives can be used to increase aggregate welfare might not be enough to retain the attention of many self-interested readers for 187 pages plus references, and Leigh – as an economist after all – knows that.

Hence, he cleverly includes plenty of examples of how the reader can personally benefit from economic insights, organising his material thematically into creatively titled chapters such as Fit for Tomorrow, which highlights the implications for individual welfare of economic thinking on matters such as obesity (how do I lose weight?) and smoking (how do I quit?).

If you want to know how to behave in the dating market, see chapter one, For Love or Money; if you want to know how to plan your child’s birth so she/he has a leg up in the trials for national sports teams, see chapter three, Starting Lineup.

But true to what is arguably the main agenda of the economics discipline, Leigh also addresses some of the big social welfare questions of our time: how to reduce violence (examining recidivism, firearms access, and terrorism through an economist’s lens); how to understand the persistent gender gap in wages; how to help people in the developing world. He also confronts head-on economists’ famously inaccurate forecasting, using an apt quote from Treasury’s David Gruen: “Economic forecasters aren’t stupid; what we are trying to do is hard!”

Indeed, while it has been said that social scientists are prone to “physics envy”, wishing to be but not quite being the hard scientists of their fantasies, Leigh’s presentation is more in line with the claim that economics is harder than physics since economists have no laws to lean upon, but only best guesses.

And Leigh is unafraid to propose some of his own best guesses, such as that Australia would be better off if we paid prisons a bonus for every released prisoner who does not re-offend; and that the rest of the world would be better off if we Aussies concentrated our foreign aid efforts in activities where he argues we have a comparative advantage – namely, assistance in dry-land farming, natural resource management, and security provision in unstable states.

The book is terrific airplane reading, but it stops short at times from a full exploration of what is being revealed. For example, the fact that births dipped before, and peaked just after, expectant mothers became eligible for the baby bonus in mid-2004 implies that there were fewer earlier-term inductions and C-sections in that cohort of births, which in turn should have implications for the health outcomes of that cohort of babies; yet this is not pursued.

It is observed that Australia is comparatively good at keeping the peace in unstable places; but why is this, and how might we teach others to mimic our success?

Obesity is described mainly as a problem of eating too much of the wrong things, and partly as a problem of time-inconsistency. Yet becoming truly obese brings such a dramatic reduction in quality of life that it is hard to believe that most obese people really got to where they are through mindless present-biased munching, correctable via a properly designed array of little nudges: something more must be going on.

In sum, The Economics of Just About Everything manages to be at once a call to action for Australian policy-makers, a fascinating introduction to some of Australia’s most entertaining applied economic research, and a supreme source of cocktail-party banter.

Read it for what it can teach you about economics and ideas, and use it to help make your world a better place.

Gigi Foster is a senior lecturer in the school of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Poke a Russian bear with a stick and he will retaliate. That’s the lesson facing Australian exporters today.

When Australia announced it would join the US and Europe in placing trade sanctions on Russia in response to Malaysia Airlines MH17 being shot down in Ukraine, it could do so realising there wasn’t much trade to talk about.

Australian-Russia trade is only worth A$1.8 billion – Russia is our 28th-largest export destination and 30th-largest import source. In fact, Russia’s main export destinations are – wait for it – The Netherlands, Turkey and the Ukraine.

It imports mostly from China (like everyone else), Germany and the US. Australia only accounts for 0.3% of Russian imports as Russia’s 44th-largest import source and we are Russia’s 99th-largest export destination (barely registering on the trade accounts).

But now Russia’s counter sanctions could hurt agricultural exports, particularly in wheat, dairy, beef and kangaroo meat (Russia is our main export market for kangaroo meat). In most cases Australian exporters will be able to sell items such as beef to Japan, Korea (thanks to the new FTAs) or Indonesia.

In any case, Russia had already reduced beef imports from Australia (due to alleged concern over growth hormones). These would be the only sectors adversely affected assuming no further Russian retaliation over energy or financial sector sanctions placed on them by the West.

So how will the trade sanctions play out? Russia’s actions could hurt Russia most of all. A government putting on tariffs or other forms of trade protection is a like a government shooting its own people during peace time. Or as the legendary Cambridge economist Joan Robinson used to say, trade bans are like “putting rocks in your own harbour”.

Putin might well be bringing food shortages back to Russia like the bad old days of the Soviet Union and tsarist regimes – something the poor Russian populace has been used to historically. For a democracy it would be unbearable, but at an 87% approval rating, Putin won’t worry about that.

As he told me at the APEC meeting in Sydney in 2007 when John Howard allowed then Opposition leader Kevin Rudd to speak: “How nice to allow your leader of the opposition to speak. I would do so also, except I don’t have one.”

So will trade sanctions work? In economic history the record is patchy. The evidence shows economic sanctions against South Africa were more “psychologically hurtful” to the apartheid regime than economically damaging, though there is evidence that disinvestment by major institutions such as Chase and Barclays had more of an impact than trade sanctions.

As in the case of Cuba and Southern Rhodesia (now Zimbabwe), trade sanctions did not have as much impact as restrictions to foreign investment. And, in any case, the economic distortions in the domestic economy (like South Africa’s apartheid labour market distortions) were as damaging as external sanctions.

Ironically, the collapse of the old Soviet Union was the key factor in enabling the white minority government to start negotiating with Nelson Mandela and the African National Congress, making South Africa a “special case” in terms of effectiveness of sanctions.

In a well-functioning economy sanctions can bite quickly, but as in South Africa (due to apartheid) and Myanmar (due to having a ludicrously large army for a country of its size) they can have mixed effects.

Russia has an oligopolistic, or we could say “oligarch-istic”, anti-competitive economy so the oligarchs will choose to absorb the sanctions or distort the effects. The West has tried to target Russian funds abroad (in the UAE and London’s Chelsea) as that’s where the Russian oligarchs keep their capital, but that’s going to be a difficult target.

The MH17 Russia–Ukraine crisis has a long way to go in terms of geopolitics, and trade is likely to be just one weapon of choice in the skirmish.

Tim Harcourt is the J.W. Nevile fellow in economics at UNSW Australia Business School and author of The Airport Economist. A version of this post appeared on The Conversation.