Recommended reading: This is Marketing by Seth Godin

Last month, at the ESA-Griffith-QUT-UQ Economics Summer School held at O’Reilly’s Rainforest Retreat, Griffith University Senior Lecturer Andreas Chai gave a fascinating presentation on his research on consumption patterns. Here are the important points from Andreas’s report for UNIDO on Household Consumption Patterns:

While low- and middle-class households tend to spend in a relatively similar manner, spending patterns among affluent households differ considerably, likely due to the greater discretionary power these households enjoy in terms of spending…

…Differences in spending patterns between households tend to grow as household income rises, creating new opportunities for niche markets and higher quality goods.

So some rich households will divert large parts of their income to luxury travel, others to haute couture; while the obscenely rich will buy properties in central London or Manhattan, Lamborghinis, and super yachts. How are we to make sense of what is driving consumption patterns as households get richer? One answer could be found in one of the best books I’ve read recently: This is Marketing by Seth Godin, arguably the world’s number one marketing expert. Indeed, Seth Godin could help us understand consumption behaviour across most households, with the exception of those at subsistence levels. His mantra is simple but compelling: “People like us do things like this.” For example, people like us eat sushi and do Bikram yoga; or people like us send our children to private schools and holiday at Noosa.

This_is_marketing_cover

As the late Harvard economist John Kenneth Galbraith argued many years ago, our consumption preferences are not exogenous, but are subject to peer influences and can be manipulated by marketing. Once upon a time, during the age of the New Industrial State as Galbraith called it, when families sat down together to watch the Brady Bunch, Charlie’s Angels or Family Ties, advertisers could, in Seth’s words, “sell average stuff to average people” by buying enough TV ads. But that pre-internet world is long gone. We’re not willing to pay more than a commodity price for average stuff, and we’ll ignore all the spam and pop-up ads. We’re now more sophisticated and demand goods and services that can set us apart from the average person and can help us identify with our tribe; as Seth says, “people like us do things like this”.

Seth, therefore, sees a great mission for the marketer, catering to the smallest viable audience (p. 33):

…find a corner of the market that can’t wait for your attention. Go to their extremes. Find a position on the map where you, and you alone, are the perfect answer. Overwhelm this group’s wants and dreams and desires with your care, your attention, and your focus. Make change happen. Change that’s so profound, people can’t help but talk about it.

That Seth Godin can make marketing sound like a noble vocation shows he is indeed the world’s greatest marketer, but I do think there is a lot of truth in his book. And it’s likely to yield a high return on investment to anyone purchasing it, given the large number of marketing insights that can be readily applied, no matter what good or service you’re selling, even if it’s your own labour you’re selling to your current employer.

As QEW is an economics blog, I should note that in a section titled “The myth of rational choice” Seth writes on p. 23 “Microeconomics is based on a demonstrably false assertion” (i.e. rational choice). Of course, many economists now accept that the standard microeconomic model needs to be supplemented with an understanding of psychology, and that is where behavioural economics is making important contributions. I should also add that a model of rational economic agents does have substantial value as a guide to rational decision making when it comes to consumption, saving and investing. But economics probably went wrong in the 1940s and 1950s due to the incredibly influential contributions of Paul Samuelson and Milton Friedman.

Both Samuelson and Friedman made multiple important contributions to economics, and both deserved their Nobel Prizes, but they arguably set economics, particular in the US, heading in the wrong direction, so that many leading US economists, with notable exceptions such as Paul Krugman and Brad DeLong, were thoroughly unprepared for the 2008 financial crisis. Samuelson and Friedman, due to the power and elegance of their reasoning and expression, were too influential among their students, who should have been more skeptical.

Economists will recall that Samuelson showed them how to express consumption and production decisions as mathematical optimisation problems, using first-year college calculus; and Friedman persuaded economists they should model the actual behaviour of consumers and businesses as if they were solving those optimisation problems. But we’ve learned since then that, while our models are extremely useful as benchmarks for what the rational consumer or business person should do as market conditions change, we made a mistake by assuming the real world would work exactly as those models predict. As with artists, and to their detriment, economists fall in love with their models.

If this book from Seth Godin on marketing can make a mainstream economist like me question the progress of economics since the 1940s, it must be extremely good. And it is; it is highly thoughtful and practical, and I cannot recommend it highly enough.

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Coal, climate change, solar & batteries – why Qld Treasury wanted to offload the state’s energy assets

The recent Financial Times report Development bank halts coal financing to combat climate change, reprinted in this morning’s AFR, should prompt some serious long-term thinking from the Queensland government and local governments with regional economies heavily dependent on coal mining, particularly Mackay’s (also see this Reuters report which isn’t pay-walled). While two-thirds of coal production in Queensland is of coking coal (see chart below), there is no doubt there would be a large adverse shock to regional economies if there was a big shift worldwide away from thermal coal for energy generation.*

Coal production x owner x region

The FT report reminded me of the potentially major implications the worldwide shift against coal and related developments in solar PV and battery technologies could have for the Queensland state budget. Indeed, this issue is discussed in my new book Beautiful One Day, Broke the Next: Qld’s Public Finances since Sir Joh and Sir Leo. Comments regarding the government-owned corporations (GOCs) in energy generation and distribution from former Under Treasurer Mark Gray, reported on p. 167 of the book, are revealing as to why the Treasury was very supportive of the Newman government’s Strong Choices privatisation program:

According to former Under Treasurer Mark Gray, senior Treasury officials considered that the future income streams from GOCs were seriously at risk from technological change and possible policy responses to climate change. The energy assets were seen as particularly vulnerable, due largely to developments in solar and battery technologies which could reduce the reliance of households on electricity generated by the state-owned CS Energy and Stanwell and distributed by Energex and Ergon Energy, now Energy Queensland.

Furthermore, according to Mark Gray, in late 2014, at presentations on the Strong Choices privatisation program to potential investors, such as superannuation and sovereign wealth funds, Queensland Treasury officials were already being asked about the impact of technological change on the future profitability of GOCs and the risk of assets being stranded.

For more revelations and insights into Queensland’s recent state financial history, please consider reading my new book. The official book launch is next Wednesday evening at the Connor Court Book Room on Boundary St, West End, Brisbane:

Connor Court Christmas Party and launch of Gene Tunny’s Beautiful One Day, Broke the Next

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* I prepared this chart for a Lytton Advisory report on Extended Payment Terms for the Resource Industry Network that I co-authored wrote Craig Lawrence.

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ABC radio interviews on Beautiful One Day, Broke the Next & Qld Gov’t MYFER

Earlier today I spoke with Steve Austin on his 612 ABC Brisbane Drive program about the Queensland Government’s Mid Year Fiscal and Economic Review and my recently published book Beautiful One Day, Broke the Next.

While the state government today reported a $677 million surge in royalty revenue this financial year owing to higher than expected coal prices, it still projected more-or-less the same trajectory of increasing state debt, which is on its way to over $83 billion in total by mid-2022. And the MYFER highlighted a substantial fiscal risk to future state budgets, the impending High Court decision in the Timber Creek case regarding native title compensation (see p. 16 of the MYFER).

You can listen to my views on MYFER as well as my responses to Steve’s questions regarding my new book from 2:02:10, but please note this audio will be taken down from the ABC site after it’s been up for a week:

Steve Austin’s 612 ABC Brisbane Drive program, Thursday 13 December 2018

Topics discussed included Sir Leo Hielscher’s fine fiscal legacy, how Queensland’s fiscal situation deteriorated after Terry Mackenroth left the Treasury portfolio in the mid-2000s, how Queensland lost its once much vaunted position as the low tax state, and why we shouldn’t be complacent about the debt. We discussed the fiscal trouble Queensland found itself in during the last financial crisis and how it would be a good insurance policy to pay down debt in case we face another one, with Steve noting predictions of a global recession and possible financial crisis in 2020.

This was the second ABC radio interview on the book I had this week. On Tuesday, I was lucky enough to speak with Pat Hession at ABC North Queensland, who broadcasts from the ABC’s well-positioned site on Wickham St, Townsville, just a short walk from both Flinders St and the Strand:

Is Qld’s government debt ever going to reduce in size

GT at PH

From the archives: Steve Austin and me chatting about the fiscal challenges facing the newly-elected Palaszczuk government on its first day of Parliament in 2015, from the stately chamber of the Legislative Council (i.e. Qld’s upper house which was abolished in the 1920s).

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Joe Branigan’s award winning paper on the correct use of CBA and economic impact analysis

Congratulations to my old friend and fellow Queensland economist Joe Branigan of SMART Infrastructure Facility for his award-winning paper on assessing the value of regional public infrastructure (see photo below). In his paper, published in the Australasian Journal of Regional Studies, Joe and his co-author Fariba Ramezani nicely explain the distinction between a cost-benefit analysis (CBA) and an economic impact analysis (EIA).

JB_award

For instance, Joe’s paper has an excellent summary of the importance of CBA:

Importantly, CBA provides a solid, comparable framework for estimating the strengths and weaknesses of alternatives by comparing the potential changes in society’s wealth due to the project with that of the relevant alternatives (which may include doing nothing, deferring or otherwise varying the project, or proceeding with an alternative project).

For this reason, economists tend to see CBA as having primacy over EIA, but alas economists are not usually the ultimate decision makers, and EIA is typically given a large weight by decision makers who may have regional economic development objectives in mind.

Broadly speaking, an EIA tells us how much value added and employment a project creates, while a CBA tells us whether it’s worth investing in the project in the first place, recognising there are alternative uses of society’s resources.

That said, a well done EIA should report on the economy-wide impacts of a project (i.e. also modelling any offsetting reductions in activity in other regions or industries as a new project draws workers and capital away from them). But this is not always done, and we too often see incredible estimates of regional jobs being created by particular projects, both directly and indirectly.

Alas, the two distinct though complementary techniques of CBA and EIA are often badly applied by analysts or confused in the minds of decision makers. For an example, see Joe’s 2016 QEW guest post on the Townsville Super Stadium, in which he discussed how regional EIA and CBA were in conflict for that project.

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My book launch at Connor Court Christmas party, Wednesday 19 December at Boundary St, West End

My new book Beautiful One Day, Broke the Next covers Queensland’s state finances over the last thirty years, during which time Queensland went from being the exemplar of sound public finance in Australia to a cautionary tale of the dangers of fiscal extravagance. In the book I discuss what went wrong, how much we really should worry about the $80+ billion of debt we are tracking toward, and what the state government should do to correct the course. While already available for purchase, the book will be officially launched next week on Wednesday evening 19 December during the Connor Court Christmas party at the Connor Court book room, upstairs at 146 Boundary St, West End, Brisbane, across the street from the well-known Avid Reader bookstore. You can book to attend via this link:

Connor Court Christmas Party and launch of Beautiful One Day, Broke the Next

Come and celebrate Connor Court Publishing’s Christmas Party as well as the launch of Gene Tunny’s new book “Beautiful One Day, Broke the Next”.

The evening will include, wine and cheese, great speeches, a book launch, the big book raffle, as well as the opportunity to purchase last minute gifts from the book room.

BODBTN_cover

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Qld economy continues to disappoint

Queensland’s economic under-performance, which I’ve been commenting on regularly (e.g. see Deloitte’s weird definition of “strong employment growth”), is a major part of the reason why Australia’s GDP growth for September quarter came in lower than expected yesterday. The ABS has estimated national economic growth in September quarter at 0.3% and through-the-year growth at 2.8%, in seasonally adjusted terms. Queensland’s State Final Demand (SFD) fell by 0.4% in September quarter compared with growth of 0.3% across all states and territories (see the ABS summary). NSW’s SFD increased at the strong rate of 1.1% while Victoria registered only 0.2% growth (see chart below).

SFD_quarterly_growth_Sep18

My colleague Nick Behrens at his QEAS blog nicely summarised the disappointing September quarter National Accounts data for Queensland as follows:

Latest ABS data confirms Queensland’s domestic economic growth has now peaked and is falling away which has considerable implications for future employment growth in the Sunshine State…

…Quarterly domestic economic growth for Queensland peaked in the December quarter 2017 following a strong two year period that generated considerable employment growth. However our domestic economic growth has progressively eased across 2018 which is now actively influencing our State’s employment growth at present.

The decline in Queensland’s SFD is primarily related to declining capital investment, particularly in non-residential construction (and more precisely heavy/engineering construction), which forms a large part of business capital investment (see chart below and my post Industry groups right to say Qld economy failing to create the number of jobs needed). This of course is a volatile component of SFD and should rebound somewhat over the next few years as major projects (e.g. Queen’s Wharf, Brisbane Live, Adani Mega Mine, Cross River Rail PPP) ramp up. So I’m not panicking yet, but I would like to reiterate my suggestion that the state government urgently review the full range of regulations and legislation that could be impinging upon business activity and job creation.

SFD_decomposition_Sep18

Also on the disappointing September quarter National Accounts figures, see Mission Beach-based economist Pete Faulkner’s post GDP disappoints.

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Deficient Qld state public administration is a major theme of my new book

Sadly, Queenslanders are getting accustomed to regular stories of failures of state public administration, with two major stories this week. We have learned about the $250 million digital hospitals program cost blow out and the results of the inquiry into the botched $4.4 billion procurement of the New Generation Rollingstock (NGR) trains. Yesterday the Courier-Mail reported:

AN INQUIRY into the State Government’s botched delivery of new trains worth $4.4 billion could end in a lawsuit.

Commissioner, retired judge Michael Forde said yesterday that his four-month inquiry into the project’s flaws found no evidence that successive ministers or top officials had been told the train design breached disability access legislation.

But he said the inquiry exposed a lack of consultation with the disability sector.

The design issues were not raised with Transport director-general Neil Scales until 2016 – three years after the contract for 75 new trains was signed with a consortium led by manufacturer Bombardier.

It’s pretty hopeless and rather incredible that senior public servants were unaware of the major issues involved in a multi-billion dollar procurement. They need to be accountable for either the lack of proper stakeholder consultation conducted by their department or for what may be a “she’ll be right” culture of dismissing and not conveying bad news up the chain of command. I’m surprised there aren’t loud calls for mass sackings of senior Transport and Main Roads bureaucrats.

Queensland’s sub-standard public administration is a major theme of my new book Beautiful One Day, Broke the Next, now available for pre-order from the Connor Court website. This is a state in which we’ve had a water crisis, health crisis, electricity crisis, health payroll debacle, fake Tahitian prince scandal, hospitals cost blow out, rail fail and the NGR procurement snafu, among other public administration stuff ups.

There is something deeply wrong with Queensland’s public administration. Partly this is due to the lack of an upper house, which was abolished in the 1920s, although I’m not necessarily advocating for one to be restored. We need to strengthen the role of parliamentary committees in overseeing government business and also we need to improve the quality of the state public service. It’s been widely observed that successive governments have politicised the public service and we now have very few long-term career public servants with the skills to administer high quality policy development and program delivery.

On Queensland’s recurrent failures in public administration, in addition to my book, I recommend Ken Wiltshire’s excellent 2016 Courier-Mail opinion piece Take the politics out of policy.

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