No hiding the cost of emissions reduction

6 Replies

In today’s Sydney Morning Herald, Ross Gittins has an opinion piece entitled Mealy-mouthed pollies see voters as a bunch of suckers. In it he argues that politicians are not to be believed when they start talking about taxes: they are more interested in playing issues for their electoral effect than actually saying what they believe about a tax. After all, if Labor really believed all their arguments against the goods and services tax (GST) back in the days of Kim Beazley‘s 2001 “Rollback” campaign, wouldn’t you expect to hear something from the current Labor government about the GST?

Perhaps this goes some way to explain why no politician in Australia is brave enough to enunciate the unavoidable fact that if, as a nation, we want to reduce carbon emissions, there will be a cost.

This is true regardless of whether your scheme of choice be Labor’s proposed emissions trading scheme (ETS), a carbon tax or the latest offering from the coalition, an emissions reduction fund. The reason is simple. The bulk of Australia’s power generation is sourced from coal-burning power-stations and this is because coal is cheaper than any other source, including natural gas, solar, wind or geothermal. Achieving a meaningful reduction in Australia’s carbon emissions will require a gradual phasing out of coal-burning power stations, replacing those reaching the end of their life with generators using more expensive alternative sources. Ultimately someone, somewhere must bear this cost if the shift is to occur.

Some would argue that “the big polluters have to pay”. That is easier said than done: these polluters would want to preserve their profit margins and so in practice any additional costs imposed on power generators and other industrial polluters would be passed directly on to their customers anyway.

Others would prefer to rely on people opting to reduce their own emissions. One avenue for this currently open to Australians is provided by the GreenPower program. Established by Commonwealth Government in 1997, GreenPower allows energy retailers to provide their customers with an accredited “green” option. This allows households and businesses to buy some or all of their power from lower emission generation sources. Needless to say, these options cost more than the standard offering. According to the 2008 GreenPower audit, 947,268 customers were using a GreenPower product, representing around 10% of Australian households. While this may appear at first glance to be an impressive take-up in 10 years, digging into the figures a little deeper gives a different picture. For many of the retailers, close to 90% of the retail customers have elected to buy the cheapest GreenPower product which only sources 10% of the householder’s power from alternative sources. For businesses the number using the 10% option is even higher. So, relying on customer choice alone, the GreenPower program has only resulted in a shift to lower emission sources of about 1 or 2%.

Both emission trading schemes and carbon taxes aim to provide a far bigger shift by closing the price gap between cheap but carbon-intensive power sources and the more expensive alternatives. Economically the key difference between a tax and a trading scheme is that the cost of carbon imposed by a tax is fixed by the government, while the price imposed by a trading scheme would vary with supply and demand.

Most economists are attracted to trading schemes, pointing out that the problem with a tax aimed at reducing emissions is that you do not know how high to set the tax to get a desired reduction in emissions. While government can progressively tweak the tax to get to the target, it still requires significant guesswork. In contrast, under a trading scheme, the emissions target can be set in advance and then an appropriate number of “emissions permits” are issued (at which point, some environmentalists get queasy at the thought of providing business with the right to pollute, but that is an emotional distraction). These permits can be bought and sold, so any polluters unable to reduce their emissions to the level of the number of permits they have can purchase additional permits from others who can achieve greater reductions. In the process, the price should automatically adjust (thanks to the famous–or infamous–invisible hand of markets) to a level that achieves the desired reduction target. Any emissions not backed by permits are subject to punitive financial penalties set at a sufficiently high level to make the purchase of permits preferable.

For carbon taxes the price is known in advance, but the amount of reduction achieved is unknown. For a trading scheme, the reduction is known in advance, but the price is not.

That is the theory at least. In practice, both approaches have enormous practical complexities, not least the challenges of monitoring compliance. Furthermore, the trading scheme proposed by the Labor government, known as the Carbon Pollution Reduction Scheme (CPRS), is not quite as pure a trading model as economists would like since it comes with a price cap. This means that, while the market is allowed to determine the price of carbon, the price cannot trade above a pre-determined level. Under the proposal, the cap would be set at $40 per ton of carbon for the first few years. This means that if the market price of emissions was in fact higher than $40 per ton, the CPRS scheme would in fact operate more like a fixed-price carbon tax.

As for the coalition’s reduction fund, it resembles a carbon tax approach to some extent in that it does not impose a particular emissions target. But the key difference between the reduction fund and either a carbon tax or a trading scheme is that it would be up to the government to determine the most promising approaches to reducing emissions and offering financial inducements to pursue these approaches. So it involves the government “picking winners”, to use a phrase favoured by free-market enthusiasts who consider markets far more efficient than governments at making decisions about allocation of scarce resources and, presumably, the best approach to dealing with climate change. To see the Labor government advocating a market solution and the Liberal/National Party coalition advocating a government-led approach is perhaps the most peculiar aspect of the current climate change debate.

While there are many reasonable discussions that could be had about the relative merits of all of these schemes, sadly the debate driven by the politicians is far more likely to be which scheme is or is not a “great big new tax”. The fact that a trading scheme is not a carbon tax does not somehow mean than taxpayers and other consumers will not end up paying for the emissions reductions. Equally, the money in a reduction fund has to come from somewhere and, since the scheme is being advocated by a party with a deep-rooted fear of government deficits, it is safe to say that it will come from increased taxes, reduced public spending elsewhere or a combination of the two. Again, someone will pay.

The last Federal election and opinion polls held before and since then all suggest that, recent visits by Lord Monckton notwithstanding, the majority of Australians want something to be done about reducing our country’s emissions. Is it too much to ask of our politicians to stop shouting “It’s a tax!”, “No it’s not a tax, yours is!”? I hope it is not, but in the process, everyone else has to accept the fact that reducing our emissions will come at a cost and do not believe any politician who tries to claim otherwise.

Carly’s Law

6 Replies

Fifteen-year-old South Australian Carly Ryan was murdered in 2007. The 50-year-old man found guilty of her murder had used fabricated online identities to attempt to seduce the girl and, when she ultimately rejected his advances, he used another identity to lure her to a beach-side town where he bashed and drowned her.

Independent South Australian senator Nick Xenophon now intends to introduce a private member’s bill which would make it an offence for an adult to misrepresent their age online for the purpose of meeting minors. Carly’s mother, who plans to establish a foundation to promote awareness of the risks children face online, has said she supports the bill.

The story of Carly Ryan is terrible. Just hearing the story triggers a shiver of disgust and horror and those who are parents themselves may well be worrying about the risks posed to their own children by shadowy online stalkers. Politicians are human too and react the same way. Indeed Nick Xenophon’s reaction follows a common pattern that has emerged around the world in recent decades.

The pattern starts with a terrible crime committed against a child. This is followed by extensive and sometimes lurid media coverage. A politician will then call for new laws to “prevent this happening to others”. It would be a brave politician who would argue against such a law and thereby risk appearing insensitive to the plight of the victim and the grief of their distraught family. So they do not oppose it and new laws are passed. The pattern is clearest in the United States. The archetypal example is Megan’s Law. In 1994 seven-year-old Megan Kanka was raped and murdered by a repeat sexual offender. Her name has since been attached to laws introduced across the country requiring a public register of sex offenders. Other examples fitting the pattern include Jessica’s Law in Florida which imposes a minimum 25-year sentence on sex offenders. Nick Xenophon’s “Carly’s Law” could well be another in this sequence.

But, how effective are laws like this in curbing the criminal behaviour they are targeting? Continue reading →

Rethinking the basis for the Australia Day holiday

14 Replies

In anticipation of tomorrow’s Australia Day holiday here in Australia, this guest post by John Carmody examines whether or not 26 January is really the most appropriate date for Australia Day. John Carmody is a Sydney-based writer on medical and cultural history and (in the interests of full disclosure) is closely related to the Stubborn Mule.

January 26 is a nettlesome date for the official celebration of the Australian nation and as a commemoration of our colonial foundation. Apart from the significant nuisance that it falls so close to the end of the holiday season when our minds and emotions are trying to deal with more pressing obligations, it really asks a serious philosophical and moral question.

For indigenous Australians, conscious of their fraught history since 1788, it is no cause for celebration at all. Understandably, they consider that it was the beginning of an invasion and see no reason to rejoice in it. White Australians and, indeed, all immigrants can only respect that attitude; but we must do that reflectively. The fact is that there are several distinct reasons to discard 26 January as that festive occasion.

The first point is that the date is not when the founding fleet arrived in Terra Australis: that was, rather, at Botany Bay on 19-20 January, 1788. It was only because the officers were so disillusioned by how little resemblance that coast bore to Joseph Banks’s glowing descriptions and because of an indifferent water supply, that Governor Arthur Phillip made a reconnaissance to Port Jackson (which Captain Cook had not entered) that the venture was transferred to Sydney Cove. Even then, in the afternoon of 26 January there was little time for formalities or any grander celebration than hoisting a flag and drinking the health of the King and the success of the colony with a few glasses of Porter, followed by the flourish provided by a round of rifle fire.

Continue reading →

Left, Right and Climate Change

23 Replies

In the wake of the singularly unproductive COP15 Climate Change conference in Copenhagen, I have been reflecting on the polarisation of views on climate change along political lines. Whether or not human activity is leading to climate change is a question of scientific fact: it is either happening or it is not. So knowing someone’s politics should not help to predict their attitudes towards climate change, and yet it does.

It is not conclusive of course. Most people do believe that climate change is occurring and this includes people of a full range of political views. But, climate change skeptics seem to sit overwhelmingly on the right side of the political spectrum, while those most concerned about the effects of climate change are largely left of centre. Why is this?

Some would offer conspiracy theories to explain the dichotomy. The Australian Liberal senator Nick Minchin is an outspoken critic of climate change and in November last year he claimed that the left has been intentionally stirring up fears about global warming. While his comments elicited a storm of angry responses, including from his then party leader, Malcolm Turnbull, these views are widely held among skeptics. Indeed the controversy about climate change within the Liberal Party and its coalition partner the National Party was an important contributing factor to the downfall of Turnbull from his leadership position a few weeks later. For another conspiratorial slant, Ian Plimer regularly argues that academics are pushing the idea of climate change simply to help boost their research grant money.

Continue reading →

Banks, Central Banks and Money

7 Replies

One misconception about the mechanics of money that I mentioned in my last post is the idea that banks can hoard their reserves at the central bank* rather than lending them out.

Here I will explain why this idea simply does not make sense, but no more casinos and gaming chips. No more senior croupiers and casino cashiers. I will dispense with the metaphor and instead stick to a more prosaic explanation, looking at interactions between banks and central banks.

All banks have their own accounts with the central bank. Often these are called “reserve accounts”, although in Australia they are called “exchange settlement accounts” (ESAs). As the Australian terminology suggests, the primary function of these accounts is to facilitate settlement of transactions that take place between banks. To keep it simple here, I will stick to the terminology of “reserve accounts”.

To see how this works, imagine I make a $100 purchase from a shop on my credit card. If the shop banks with the same bank as I do, all that happens is that our bank increases the balance of my credit card by $100 and also increases the balance in the shop’s bank account by $100. With a couple of simple accounting entries and no movement of any physical currency, the transaction is complete. In fact, as was discussed in the casino money post, this simultaneous $100 loan advance to me and $100 deposit raising for the shop has effectively “created” an additional $100 of money in the economy that was not there before.

Continue reading →

How Money Works

31 Replies

Over the last couple of years as the global financial crisis unfolded, a subject I have spent a lot of time thinking about is the nature of money. I have been planning a blog post on the topic and the time has finally come.

The catalyst for finally writing this post was attending last week’s 16th national conference on unemployment at the University of Newcastle, hosted by the Centre of Full Employment and Equity (CofFEE). I found myself there because the centre’s director, Professor Bill Mitchell, is the author of billy blog, which I read regularly. Bill’s research and advocacy in the area of unemployment and underemployment is firmly rooted in a detailed understanding of how money works in a modern economy (hence the appeal for me) and the implications these mechanics have for government spending policy. This theme also underpinned many of the talks at the conference and the program included a panel discussion on the subject of “Modern Monetary Theory”. The panel comprised Bill Mitchell, Randy Wray and Warren Mosler, all strong advocates of what is sometimes referred to as “chartalism”. Along with another billy blog regular, Ramanan, I was invited to participate by providing a brief wrap-up at the end of the discussion.

But how hard can it really be to understand how money works? You earn it and you spend it or save it. Or, as the textbooks would have it, money serves as both a medium of exchange and a store of wealth. Is there anything more to say?

In fact there is. Most people and, indeed, many economists have not given very much thought to the mechanics of money and this leads to a number of misconceptions, all of which have made frequent appearances in the press and in political debate around the world over the course of the financial crisis. One example is the suggestion that the UK government could run out of money, an idea given further credence by the decision of rating agency Standard & Poor’s to put the UK’s rating on “negative outlook”. Even Barack Obama seems to be saying that the US is running out of money. The fact is, governments in many developed countries simply cannot run out of money. China could (but it is very unlikely) and so could member states of the European Monetary Union, but the US, UK, Japan and Australia could not. I will explain why here. In later posts I will continue the theme of the mechanics of money and will look at other misconceptions such as the idea that banks can “hoard” their reserves at central banks or that government deficits inexorably lead to high interest rates (the short answer to this one is: look at Japan).

In this post I will start with the basics of how money works and cover the following points:

how lending can “create” money
the limits to money creation
the difference between “fiat” money and money that is convertible on demand

A useful parallel to money in a real economy can be found in gaming chips in a casino. So, imagine a fairly standard sort of casino. You walk in, James Bond-style, hand over a thousand dollars to the cashier and get a pile of chips in return. The chips are marked with various denominations and total one thousand. This is an old-fashioned sort of casino: every game is played on a green felt table, there is not a poker machine in sight and, of course, you need your chips to play. To make your stay easy, you can also use your chips to buy drinks and snacks. When you have finished your evening’s play, you can redeem any chips you have not gambled away for cash.

There might be hundreds of thousands of dollars worth of chips circulating around the casino, but so far behind every chip is a corresponding amount of money sitting in the cashier’s safe. If we call this money the casino’s “reserves”, then the chip supply in circulation around the tables is equal to the casino’s dollar reserves. Of course, there might be a few cases of chips in the croupier’s office and even a chip-pressing machine in the basement, but these chips are not yet in circulation. They are just waiting to be handed over to the next patron who walks in the door with a full wallet. Under this regime, every gambler can be completely certain that they will be able to redeem their winnings at the end of the night.

While your thousand dollar stake might seem like a lot, there are a few high-rollers who frequent the place who like to play with much larger sums. Rather than producing chips with very high denominations, this casino has introduced convenient “smart chip cards”. High rollers can pay the cashier as much money as they like and the cashier will add it to the virtual chip balance on their smart cards. At every gaming table, the croupier has a card reader which can be used to debit the balance on the card in return for actual chips. This means that the total chip supply in circulation is the sum of actual chips and virtual chip balances on the smart cards. But still, this chip supply is matched by money in the cashier’s safe.

Now suppose you are a trusted regular at the casino and one night you turn up short of cash. No problem, the casino is happy to advance you your thousand dollars in return for a quickly scribbled IOU with your signature. Your credit is good. You take your $1,000-worth of chips and walk to the Blackjack table. But now something has changed. The total chip supply in the casino is $1,000 higher than the money in the cashier’s safe. In theory this could be a problem. You could immediately lose the $1,000 in chips and walk out. Then if everyone in the casino wanted to redeem their chips, there would not be enough money to go around. But, it isn’t likely to be a problem in practice. The casino operates 24 hours a day and so there are always far more than $1,000 in chips in circulation. On top of that, the house takes a decent cut on the tables, so it would not take very long for the casino to win back over $1,000-worth of chips and then $1,000 can be held back from the profits that the cashier regularly sends up to the manager’s office. In fact, the credit seems so safe, the casino decides to offer credit more widely. While they are at it, they introduce a few other innovations, like offering lucky door prizes in chips, which also adds to the supply of chips in circulation without a corresponding increase in money in the cashier’s safe.

These loans that the casino has introduced give it the ability to “create” an additional supply of chips. But not all lending creates new chips. If instead of borrowing from the house, you had offered your IOU to a high-rolling friend you would still get your $1,000 in chips for the evening, but you got them from your friend so the chip supply does not change.

The new lending arrangements are working well, but the system is limited by the fact that the cashier does not know all of the patrons very well, and is naturally being very cautious about who to lend chips to. To manage this bottleneck, the casino decides to allow senior croupiers to provide loans to gamblers they know well as long as they take responsibility for the credit-worthiness of the borrower. So now getting credit is simply a matter of providing an IOU to the senior croupier who knows you best and he or she will charge up your smart chip card. If you need actual chips, that is not a problem either as the senior croupier has a stash under the table borrowed from the cashier. Of course, the croupier is taking a bit of a risk providing you with this advance since the house expects him or her to make good any amounts you do not repay. So to make it worth their while, you give the croupier a few chips for their trouble each time you need an advance. This works so well that the cashier no longer offers loans directly to anyone other than the senior croupiers.

As successful as the new arrangements are, the casino does have to be very careful about putting strict limits on the number of chips that the senior croupiers can create through lending. Otherwise, the day may come when there are simply too many chips and not enough money in the safe and a successful gambler may walk up to the cashier to cash in their chips only to find that the cashier does not have enough money in the safe. Word will spread and everyone will want their money back, but the casino will be unable to oblige. It would be bankrupt. So while there may be no limit to the number of chips that the casino could physically manufacture (and of course it has complete control of smart chip card balances), there is a constraint on the number it can put into circulation. This constraint is a direct consequence of the fact that chips are redeemable for cash.

The analogy to the real economy should be clear here. The cashier operates like a central bank and government treasury combined. The senior croupiers are the banks. Chips are money and smart chip card balances correspond to bank account balances. In the same way that senior croupier lending effectively creates new chips, so bank lending adds to the money supply in an economy. But what is the analogy to the money in the cashier’s safe? While central banks around the world do maintain reserves of gold and foreign currencies (think of all the US dollars that the central bank of China has), for many countries the analogy breaks down in one important respect.

The casino made a commitment to redeem your chips for cash. Some central banks do make similar commitments. In the days of the gold standard, central banks in Australia, the US, the UK and elsewhere would exchange currency for gold. Of course there were times, as in war, when this convertibility was suspended, but in those days having something backing money was seen as just as important as having money backing chips in a casino. The gold standard system was abandoned after the second world war and instead, under the Bretton Woods system, domestic currencies could be exchanged at the central bank for a fixed number of US dollars. This system collapsed in turn in the 1970s. Today, some countries such as China do maintain currencies pegged to the US dollar (or some other currency) and so still make a commitment of convertibility. However, most countries have adopted so-called “fiat” money. The word fiat is Latin for “let it be” and fiat money does not derive its value from any form of backing. It is declared to be money, and so it is. Many people still assume that Australian dollars are in fact backed by something, but if you tried to take a $10 note to the Reserve Bank of Australia, you would be lucky to get two $5 notes in return. You could certainly not be assured of getting any particular amount of gold or US dollars.

Some people find the entire concept of fiat money deeply disturbing and pine for a return to the “real” money days of the gold standard. But fiat money is in fact an extremely powerful innovation. In the casino analogy, the cashier must always be careful about how many chips are put into circulation to avoid the crisis of being unable to convert chips back to cash. However, in a country with fiat money, the central bank makes no convertibility commitments, so this risk simply does not exist. It has monopoly power in the creation of currency. So, the government simply cannot run out of money. There may be very good reasons for a government to curb its spending. For example, it may not want to add too much to demand in the economy because it is concerned about inflation. But running out of money is not one of those reasons, whatever the president of the United States may think.

I will leave it there for now, as this post is long enough already. But, stay tuned for more on the macroeconomic implications of a modern fiat money system.

Which countries work the hardest?

11 Replies

Last week over dinner with friends, a debate arose as to whether Australians worked harder than Americans or not. The case for the affirmative argued that many Australians were very successful overseas and indeed Australians working abroad were highly sought after by employers. The case for the negative drew on experiences working with large US firms which exhibited far more aggressive, high-pressure work-practices than Australian firms.

Since we had more wine than data, the argument did not last very long and we instead moved on to the question of whether China now more closely resembles a fascist regime than a communist one (this debate was quickly mired in definitional issues and became rather animated). Reflecting later on the first discussion, I decided to dig up some data on hours worked and attempt to determine a winner for the debate. According to the OECD, Australia and the United States drew very close in 1979 when workers in both countries put in an average of 35 hours per week. But apart from that, over the last forty years US workers have fairly consistently worked an average of 1 to 1.5 hours more each week than Australian workers.

Total Hours Worked per head of Workforce (1950-2008)

And what of the rest of the world? Among the countries covered in the 2008 OECD data, Korea* was by far the most industrious country. Employed Koreans laboured an average of 44.5 hours each week. From there, hours worked fell quickly to Greece on 40.8 hours and then down to the Czech Republic on 38.3 hours. Australia and the United States are in a tightly packed group, ranging from Iceland in seventh place overall on 34.8 hours per week down to Australia in 16th place on 33.1 hours per week. The United States is towards the top of this group, working an average of 34.5 hours and sitting in ninth place overall. The Hanseatic League is not what it once was as Germany, Norway and the Netherlands are clustered at the bottom of the league table, all putting in around 27 hours of work each week.

National Ranking of Hours Worked in 2008*

One shortcoming of these figures is that they do not give an indication of the total effort contributed to each country. This is because the averages are calculated per head of the workforce and ignores children, the unemployed, the sick and the retired. It is conceivable that in countries with fewer workers, those workers may have to work harder to support everyone else. Indeed, recalibrating the numbers based on total hours worked per head of the total population does change the rankings somewhat. Korea still puts in a good showing, but surrenders first place to Luxembourg. Australia climbs a few places to 11th place and in the process pulls one place ahead of the United States, reflecting in part the higher unemployment rate in the United States. Coming in last place is France, which puts in an average of only 13.5 hours of labour per capita.

Two Measures of Hours Worked in 2008*

But is this data enough to resolve the debate? Unfortunately not. There are too many things that this kind of broad data does not capture. For instance, underemployment is a significant concern in many countries, including Australia and the United States. If there are many people not working as many hours as they would like to, actual hours worked may not be a good indication of the relative industriousness of different countries. Segmentation is another problem. Before our dinner-table debate moved on to China, speculation arose about possible differences in work patterns in US firms based in large cities on the East and West coasts compared to workplaces around the rest of the country. Again, aggregate statistics cannot capture any such differences.

So next time this particular group of friends meets, I will have some data to bring to the table, but not enough to carry the argument.

* Only 2007 data is available for Korea. All other data is for 2008.

Deceptive Charts #2

4 Replies

Last month I wrote about the dangers of secondary axes, but even charts with a single axis can be deceiving. I have been reflecting on this after reading Jon Peltier’s critique of Microsoft’s “professional” charting tutorials earlier this week. One of the charts Peltier takes issue with is a column chart which has the value axis starting at 100 rather than zero. He writes:

This is a major chart fail. The value axis on a column or bar chart should always include zero. Always. If you want to expand the scale to help resolve the values, then a column chart is not the right chart type.

In today’s Silicon Alley Insider chart of the day I saw exactly the same chart fail. The chart, which I have reproduced below, shows the ranking of various magazines and newspapers by the wealth of their readers (the data is taken from a report by B to B Media Business).

Median Income of Readers – Silicon Alley Version

This chart may do a good job of highlighting the Wall Street Journal leading position, thereby supporting Silicon Alley’s headline “The Journal Has The Richest Readership Among Print Pubs”. But it also gives a distorted impression of just how solid the Journal’s lead is. Starting the income axis at zero, shown in the chart below, gives a rather different impression. The Wall Street Journal still sits at the top, but the variation across the titles is much less significant than the original chart suggested.

Median Income of Readers – Zero-based Version

Nevertheless, precisely because it displays less variation in the data, the zero-based chart does seem less useful and it is harder to read the values. Commenting on Peltier’s post and musing on my posterous Extras blog, I wondered whether starting axes with zero should be considered an inviolable rule of charting. One of the gurus of data visualisation is William S. Cleveland. In his book “The Elements of Graphing Data” he gives this advice: “Do not insist that zero always be included on a scale showing magnitude”. He goes on to make this argument:

For graphical communication in science and technology assume the viewer will look at the tick mark labels and understand them. Were we not able to make this assumption, graphical communication would be far less useful. If zero can be included on a scale without wasting undue space, then it is reasonable to include it, but never at the expense of resolution.

At first glance this would seem to get the Silicon Alley Insider out of chart jail. But the story does not end there. Cleveland’s book focuses on scientific charts, particularly line and scatterplots (also known as X-Y plots) and there is scarcely a bar or column chart to be found. Furthermore, in his paper “Graphical Methods for Data Presentation: Full Scale Breaks, Dot Charts, and Multibased Logging” (The American Statistician, November 1984), he makes the following observations:

The bar of a bar chart has two aspects that can be used to visually decode quantitative information—size (length and area) and the relative position of the end of the bar along the common scale. The changing sizes of the bars is an important and imposing visual factor; thus it is important that size encode something meaningful. The sizes of bars encode the magnitudes of deviations from the baseline. If the deviations have no important interpretation, the changing sizes are wasted energy and even have the potential to mislead (Schmid 1983).

Cleveland’s solution to showing data variation without having bar lengths deceive was to invent a new type of chart: the “dot plot”. Dot plots, which I have used here on the Stubborn Mule to illustrate statistics on asylum-seekers and universities, use position alone to encode the data. This means that it is much safer to drop zero from the axis. Although rather tricky to produce using Microsoft Excel (I use the R package), they are a good substitute for bar and column charts. This BeyeNetwork article goes into more detail about dot plots, including the use of multi-panel plots, which I will look at in a future post.

So, here is a dot plot version of the newspaper and magazine rankings by reader income.

Median Income of Readers – Dot Plot Version

Now you know to be vigilant against the deceptive use of axis scales.

Mahalo 3.0: my new mechanical Turk

Hot and Dry Days Ahead for Australia

9 Replies

Earlier this month, the Australian Bureau of Meteorology released the October figure for the Southern Oscillation Index (SOI). It showed a precipitous plunge of almost 20 points down to -14.6. Just how significant a drop this is can be seen in the chart below, which shows the distribution of monthly changes in the SOI going back to 1876 (-14.6 is at the lower 5% quantile, which means that a fall as big as this, or bigger, has only occurred 5% of the time).

Distribution of SOI changes (Jan 1876-Oct 2009)

But what exactly is the SOI and what is the significance of this decline in the index? The index is the standardised anomaly of the monthly average difference in sea-level air pressure between Tahiti and Darwin. “Standardised anomaly” means that the index measures the deviation of this pressure difference from the long-term average and is scaled by the standard deviation of the pressure difference and then multiplied by 10. The significance of the index lies in its relationship to the El Niño weather phenomenon. According to the Bureau of Meteorology:

Sustained negative values of the SOI often indicate El Niño episodes. These negative values are usually accompanied by sustained warming of the central and eastern tropical Pacific Ocean, a decrease in the strength of the Pacific Trade Winds, and a reduction in rainfall over eastern and northern Australia. The most recent strong El Niño was in 1997/98, although its effect on Australia was rather limited. Severe droughts resulted from the weak to moderate El Niño events of 2002/03 and 2006/07.

The chart below gives a historical perspective of the SOI over the last ten years. To get a better sense of the trends in the index, I have overlaid two different types of curve smoothing: a lowess (“locally-weighted scatterplot smoothing”) curve and a spline curve. The two give very similar results and make the 2002/03 and 2006/07 SOI downturns clearly visible. The timing of these downturns suggest that the corresponding droughts follow with something of a lag.

Southern Oscillation Index (Jan 2000-Oct 2009)

Over the last couple of years, the SOI has been solidly in positive territory and, again with a lag, there has followed an improvement in drought conditions. Indeed, New South Wales recently replaced the tight water restrictions which had been in place for a number of years with the less onerous “Water Wise” rules. Unfortunately, this change may turn out to have been premature. If the downward trend in the index seen over the last few months persists, Australia may face a return to severe drought conditions.

For anyone who is interested in how these charts were created, here is the R code. It is also available from the Stubborn Mule files section.

UPDATE: at the request of singingfish, here is a chart showing the full recorded history of the SOI back to 1876. The blue line is a spline smoothed curve.

Southern Oscillation Index (1876-2009)