We need less fancy financial footwork, not more

Attention conspiracy theorists: see if you can detect a pattern in this. Tony Abbott wants to review the renewable energy target, so he appoints self-professed climate change "sceptic" Dick Warburton, who feels qualified to explain to the scientists where they're going wrong.

Abbott wants to review the financial system, so he appoints a former boss of a big four bank, David Murray, who feels qualified to explain to economists where they're going wrong.

So, which industry sector stands the better chance of getting what it wants from its review?

Can you imagine how many proposals Murray's committee will receive aimed at making the financial system bigger and better - and all in return for just a little more help from taxpayers?

I read that the Australian Bankers Association's submission proposes abolition of interest withholding tax, so as to support offshore fund-raising by local banks and to encourage overseas banks to lend more in Australia. It also calls for the removal of "tax disincentives" on bank deposits. All to increase this financial sector's contribution to economic growth and jobs, naturally.

The government's terms of reference say "the inquiry is charged with examining how the financial system could be positioned to best meet Australia's evolving needs and support Australia's economic growth".

Fine. But if it's to be more than just an industry sales pitch, the inquiry needs rigorously to examine the industry's convenient assumption that the bigger it gets the more it benefits the rest of us.

In a brief submission that deserves more attention than it's likely to get, Professor Ron Bird and Dr Jack Gray, of the Paul Woolley centre at the University of Technology, Sydney, summarise the growing evidence that the developed economies' much expanded financial systems have been a bad investment from the perspective of the wider economy. (Both are former fund managers.)

The growth in America's financial sector has been amazing, with its share of gross domestic product rising from less than 3 per cent in 1950 to about 5 per cent in 1980 and more than 8 per cent in 2006. Its share of total corporate profits grew from 14 per cent in 1980 to almost 40 per cent by 2003.

Salaries in US financial services were similar to other industries until 1980, but are now on average 70 per cent higher than those elsewhere. This remarkable growth is referred to as the "financialisation" of the economy. One test of the inquiry's thoroughness will be whether it works out comparable figures for Oz.

The first warning that this growth might be making economies more risky came from Professor Raghuram Rajan, of the University of Chicago, at a central bankers' conference in 2005. They told him not to worry. He has since argued that the financial system's big rewards for risk-taking (with other people's money) result in the economy proceeding from bubble to bubble.

Since the mid-2000s, an increasing amount of analysis has questioned whether the growth of the financial system has worked to the betterment of anybody other than those working in the industry, Bird and Gray say.

One study for the Bank for International Settlements concludes that "big and fast-growing financial sectors can be very costly for the rest of the economy ... drawing essential resources in a way that is detrimental to growth at the aggregate level". A British minister has said: "We need more real engineers and fewer financial engineers."

Other research has found that real (physical) investment is being crowded out by the increasing size and profitability of financial investment. Even our Reserve Bank governor, Glenn Stevens, has questioned "whether all this growth [in finance] was actually a good idea; maybe finance had become too big (and too risky)".

The huge advances in information technology could have been expected to result in lower costs for financial services, but unit costs have actually increased over the past 30 years.

All the trading on financial markets is supposed to lead to better "price discovery" and thus improved efficiency in the allocation of resources, but a study found no evidence of financial market prices becoming more "informationally efficient".

Adair Turner, former chairman of Britain's Financial Services Authority, sees "no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 or 30 years has driven increased growth or stability".

Bird and Grey conclude that the starting point of the Murray inquiry's analysis should be to assess the financial system's effectiveness and highlight where it is falling short and why.

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Your guide to business entitlement

With the Abbott government's close relations with big business, we're still to see whether its reign will be one of greater or less rent-seeking by particular industries. So far we have evidence going both ways.

We've seen knockbacks for the car makers, fruit canners and Qantas, but wins for farmers opposing the foreign takeover of GrainCorp and seeking more drought assistance, as well as a stay on the big banks' attempt to water down consumer protection on financial advice.

The next test will be the budget. Will the end of the Age of Entitlement apply just to welfare recipients (especially the politically weak, e.g. the unemployed and sole parents, rather than politically powerful age pensioners) or will it extend to "business welfare"?

With Joe Hockey searching for all the budget savings he can find, there's a lot of business welfare or, euphemistically, "industry assistance" to look at. The Productivity Commission measures it every year in its Trade and Assistance Review.

Government assistance to industry is provided in four main ways: through tariffs (restrictions on imports), government spending, tax concessions and regulatory restrictions on competition. Although much rent-seeking takes the form of persuading governments to regulate markets in ways that advantage your industry, the benefit you gain is hard to measure, so it's not included in the commission's figuring.

Assistance through tariffs is far less than in the bad old days before micro-economic reform, but there's still some left. However, its cost is borne directly by consumers in the form of higher prices. So it's not relevant to Hockey's search for budget savings. Even so, I'll give you a quick tour.

The commission estimates that, in 2011-12, tariffs allowed manufacturing industries (plus the odd rural industry) to sell their goods for $7.9 billion a year more than they otherwise would have.

In the process, however, this forced up the cost of goods used by manufacturers and other industries as inputs to their production of goods and services by $6.8 billion a year. About 30 per cent of this cost to inputs was borne by the manufacturers themselves, leaving about 70 per cent borne by other industries, largely the service industries.

(This, by the way, shows why import protection doesn't help employment as non-economists imagine it does. It may prop up manufacturing jobs, but it's at the expense of jobs everywhere else in the economy.)

So now we get to budgetary assistance to industry. On the spending side of the budget it can take the form of direct subsidies, grants, bounties, loans at concessional interest rates, loan guarantees, insurance arrangements or even equity (capital) injections.

On the revenue side of the budget it can take the form of concessional tax deductions, rebates or exemptions, preferential tax rates or the deferral of taxation. In 2011-12, the total value of budgetary assistance was $9.4 billion, with just over half that coming from spending and the rest from tax concessions.

Often people will virtuously assure you their outfit doesn't receive a cent of subsidy from the government, but omit to mention the special tax breaks they're entitled to. Think-tanks that rail against government intervention and the Nanny State, hate admitting they're sucking at the teat because the donations they receive are tax deductible (causing them to be higher than otherwise, but at a cost to other taxpayers).

This is why economists call tax concessions "tax expenditures" - to recognise that, from the perspective of the budget balance and of other taxpayers, it doesn't matter much whether the assistance comes via a cheque from the government or via the right to pay less tax than you otherwise would.

Of the total budgetary assistance in 2011-12 of $9.4 billion, 15 per cent went to agriculture, 7 per cent to mining, 19 per cent to manufacturing and 45 per cent to the services sector (leaving 14 per cent that can't be allocated to particular industries).

To put that in context, remember that agriculture's share of gross domestic product (value-added) is about 3 per cent, mining's is 10 per cent and manufacturing's is 8 per cent, leaving services contributing about 79 per cent.

Within manufacturing, the recipients of the most business welfare are motor vehicles and parts, $620 million, metal and metal fabrication, $270 million, petroleum and chemicals, $220 million, and food and beverage processors, $110 million.

Within services, the big ones are finance and insurance, $910 million, property and professional services, $610 million, and arts and recreation, $350 million.

But if you combine tariff and budgetary assistance, then compare it with the industry's value-added (share of GDP), you get a different perspective on which industries' snouts are deepest in the trough. The "effective rate of combined assistance" is 9.4 per cent for motor vehicles and parts, 7.3 per cent for textiles, clothing and footwear, and 4.7 per cent for metal and metal fabrication.

Get this: outside manufacturing, the most heavily assisted goods industry relative to the size of its contribution to the economy is forestry and logging on 7.2 per cent. We pay a huge price to destroy our native forests.

Within services, the most heavily assisted industry is the one where incomes are so much higher than anywhere else: financial services. Virtually all the assistance picked up in the commission's calculations comes via special tax breaks, such as the tax concession for offshore banking units and the reduced withholding tax on foreigners receiving distributions from managed investment trusts.

But that ain't the half of it. These calculations don't pick up two big free kicks: the benefit to the industry because the government forces almost all workers to hand over 9.25 per cent of their pay to be "managed" by it, and the benefit it gains from having one of its main products, superannuation, so heavily subsidised by other taxpayers.

Cut these fat cats? Naah, screwing people on the dole would be much easier.

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How we can do better on Aboriginal imprisonment

You don't need me to tell you that in a country such as America, with all its history of racial conflict, the rate of imprisonment for African-Americans is far higher than the rate for whites. Twelve times higher, in fact. But you may need me to tell you we make the Yanks look good. Our rate of indigenous imprisonment is 18 times that for the rest of us.

Aborigines make up 2.5 per cent of the Australian adult population, but account for 26 per cent of all adult Australian prisoners.

If you want me to give you some economic reasons we should care about this, it's not hard. On average it costs $275 a day to keep an adult in jail. So it's costing taxpayers about $800 million a year just to keep that many Aborigines in prison. And this takes no account of the cost of juvenile detention centres, police costs in responding to offending, the cost of investigating and prosecuting suspected offenders and the health costs in responding to and treating victims.

Obviously, for every Aborigine who was in a job and paying tax rather than in jail and costing money, there'd be a double benefit to taxpayers, as well as a gain to the economy.

But the far more important reason for caring about the high rate of indigenous imprisonment is moral. As the criminologist Dr Don Weatherburn argues in his new book Arresting Incarceration, the consequences of European settlement have been truly calamitous for Aboriginal Australians.

"The harm might not have always been deliberate and it may not have been inflicted by anyone alive today, but it is no less real for that," Weatherburn says. "An apology for past wrongs would be meaningless without a determined attempt to remedy the damage done."

The trouble is, particularly in the case of Aboriginal imprisonment, we've been making such an attempt, but getting nowhere. If not before, the problem was brought to our attention by the 1991 findings of the Royal Commission on Aboriginal Deaths in Custody.

The commission found that Aborigines were no more likely to die in jail than other prisoners. The reason so many died was that they constituted such a high proportion of the prison population.

The Keating government accepted all but one of the commission's recommendations and allocated the present-day equivalent of almost $700 million to put them into effect. State and territory governments committed themselves to a comprehensive reform program.

But get this: rather than declining since then, the rate of Aboriginal imprisonment has got worse.
"It is hard to imagine a more spectacular policy failure," Weatherburn says.

It would be easy to blame the problem on racism in the justice system but, though there may be some truth in this, it's not the real reason. Similarly, Weatherburn argues it's not good enough to blame it on "indigenous disadvantage".

If that were the case, virtually all Aborigines would be actively involved in crime and they aren't. Most are never arrested or imprisoned.

The plain fact is that more Aborigines are in jail because more Aborigines commit crimes, particularly violent crimes. In NSW, for example, the indigenous rate of arrest for assault is 12 times higher than the non-indigenous rate. The rate of indigenous arrest for break and enter is 17 times higher.

Measures taken after the royal commission failed to reduce crime because they assumed this would be achieved if indigenous Australians were "empowered". Much of the money and effort was devoted to legal aid and land acquisition.

Weatherburn argues that if you want to understand indigenous offending, you need to look at the factors likely to get anyone involved in crime, regardless of race.

"The four most important of these are poor parenting (particularly child neglect and abuse), poor school performance, unemployment and substance abuse," he says. "Indigenous Australians experience far higher rates of drug and alcohol abuse, child neglect and abuse, poor school performance and unemployment than their non-indigenous counterparts."

The first and most important thing we need to do, he says, is reduce the level of Aboriginal drug and alcohol abuse. This is key, not just because drug and alcohol abuse have direct effects on violence and crime, but also because they have such a corrosive effect on the quality of parenting children receive, which greatly increases the children's risk of involvement in crime.

Weatherburn's second priority is putting more resources into improving indigenous education and training. As the mining boom in the Pilbara has shown, it's much easier to find jobs for Aborigines when they have the degree of education and skill employers are looking for.

His third priority is investing in better offender rehabilitation programs. Efforts to divert serious and repeat offenders from prison have been a dismal failure. But small changes in the rate of indigenous return to jail have the potential to produce large and rapid effects on the rate of Aboriginal imprisonment.

Much existing spending on Aboriginal affairs is ineffective. Were it not for Tony Abbott's special affinity with Aborigines in the Top End, we could expect the coming federal budget to really put the knife through it.
But this would save money without reducing the problem.

It will be a great day when the advocates of smaller government abandon the false economy of not wasting money on the routine, rigorous and independent evaluation of the effectiveness of government spending programs. Then we might make some progress.

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Abbott's red tape play-acting hides rent-seeking

The world of politicians gets deeper and deeper into spin, and so far no production of the Abbott government rates higher on the spin cycle than last week's Repeal Day.

Hands up if you believe in red tape? No, I thought not. So how about we package up a huge pile of window dressing with some worthwhile but minor measures, slip in a few favours for our big business supporters and generous donors, and call it the most vigorous attack on red tape ever? This will give a veneer of credibility to our claim it will do wonders for the economy.

In the process, of course, we'll have changed the meaning of "red tape". It's meant to mean bureaucratic requirements that waste people's time without delivering any public benefit. In the hands of the spin doctors, however, it's being used to encompass everything from removing dead statutes to the supposed deregulation of industries.

Repealing redundant laws and regulations dating back as far as 1900 is mere window dressing. By definition they don't waste anyone's time - if they did they'd have been repealed long ago. Their primary purpose is to allow Tony Abbott to quote huge numbers: today I announce the abolition of more than 1000 acts of Parliament and the repeal of more than 9500 regulations. A trick you can pull only once.

Somewhere in there is some genuine, time-wasting red tape we're better off without, but it doesn't add up to much - hence the need for so much padding. Governments of both colours are always promising to roll back red tape, mainly because it gives people such an emotional charge.

But while it's true there are examples of mindless, unreasonable bureaucratic rules and requirements that could be eliminated or greatly simplified at no loss to anyone, much alleged red tape is in the mind of the beholder: it's red tape if you don't like it and good governance if you do.

There are plenty of small business people who'd try telling you supplying information to the Bureau of Statistics was "pointless red tape", maybe even filling out tax returns. In an era when big business is going overboard on "metrics", it's whingeing about the "reporting burden" the government imposes so it - and the rest of us - can know what's going on in the economy.

When business isn't complaining about "compliance costs" it's demanding greater transparency and accountability from governments. Guess what? They're opposite sides of the same coin. The world is and always will be full of compliance costs. The sensible questions are whether they're higher than they need to be and whether the benefits of compliance outweigh the costs.

The notion that all so-called red tape comes from power-crazed bureaucrats is a delusion. Most excessive regulation comes from politicians. Sometimes they act at the behest of lobbyists for particular industries, sometimes they're merely trying to create the appearance of action (an old favourite is laws to make illegal something that's already against the law) and sometimes they pass an act to impress the punters while carefully leaving loopholes and escape hatches for the industry pros.

But the most objectionable feature of the whole red tape Repeal Day charade is the way it has been used as cover for rent-seeking by the Coalition's industry backers. It's an open secret the protections for investors provided by the Future of Financial Advice legislation are being watered down at the behest of the big banks, which want to be freer to incentivise unqualified sales people to sell inappropriate investment products to mug punters.

Then there's the strange case of the Charity Commission,which was set up only recently to reduce inefficient regulation and red tape. It's to be abolished despite the objections of most charities, presumably because the Catholic Church doesn't like it.

It's being claimed all these dubious doings will "drive productivity, innovation and employment opportunities", not to mention "creating the right environment for businesses of all sizes to thrive and prosper and to drive investment and jobs growth".

Yeah sure. The claimed savings of $700 million a year (don't ask how that figure was arrived at) are equivalent to 0.04 per cent of GDP, and yet they'll work wonders. Must be an incredible multiplier effect.

We're told we'll be getting at least two Repeal Days a year, with the goal of achieving savings worth $1 billion a year. Really, a minimum of six Repeal Days in Abbott's first term? What's the bet that promise will be quietly buried?

But for as long as this pseudo reform lasts it seems it's intended as a substitute for genuine deregulation.

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We own as much of their farm as they own of ours

Did you know that, at the end of last year, the value of Australians' equity investments abroad exceeded the value of foreigners' equity investments in Australia by more than $23 billion?

It's the first time we've owned more of their businesses, shares and real estate ($891 billion worth) than they've owned of ours ($868 billion).

These days in economics there's an easy way to an exclusive: write about something no one else thinks is worth mentioning, the balance of payments. We'll start at the beginning and get to equity investment at the end.

Before our economists decided the current account deficit, the foreign debt and our overall foreign liability weren't worth worrying about, we established that, when measured as a percentage of national income (gross domestic product), the current account deficit moved through a cycle with a peak of about 6 per cent, a trough of about 3 per cent and a long-term average of about 4.5 per cent.

Those dimensions were a lot higher in the global era of floating exchange rates than they'd been in the era of fixed exchange rates (which ended by the early '80s). This worried a lot of people, until eventually economists decided the new currency regime meant there was less reason to worry.

This explains why economists haven't bothered to note that for four of the past five financial years, the figure for the current account deficit as a percentage of GDP has started with a 3. And, as we learnt earlier this month, the figure for the year to December was 2.9 per cent.

So it seems clear that recent years have seen a significant change in Australia's financial dealings with the rest of the world. And the consequence has been to lower the average level of the current account deficit.

The conventional way to account for this shift is to look for changes in exports, imports and the "net income deficit" - the amount by which our payments of interest and dividends to foreigners exceed their payments of interest and dividends to us.

The first part of the explanation is obvious: over the past decade, the world's been paying much higher prices for our exports of minerals and energy. This remains true even though those prices reached a peak in 2011 and have fallen since then.

On the other hand, the prices we've been paying for our imports have changed little over the period. So, taken in isolation, this improvement in our "terms of trade" is working to lower our trade deficit and, hence, the deficit on the current account.

Next, however, come changes in the quantity (volume) of our exports and imports. Here, over the full decade, the volume of imports has grown roughly twice as fast as growth in the volume of exports. Until the global financial crisis, we were living it up and buying lots of imported stuff. And maybe as much as half of all the money spent on expanding our mines and gas facilities went on imported equipment.

The more recent development, however, is that the completion of mines and gas facilities means enormous growth in the volume of our mineral exports - with a lot more to come. At the same time, as projects reach completion there's a big fall in imports of mining equipment. That's a double benefit to the trade balance and the current account deficit.

Turning to the net income deficit, it's been increased by the huge rise in mining companies' after-tax profits, about 80 per cent of which are owned by foreigners. Going the other way, world interest rates are now very low and likely to stay low.

Put all that together and it's not hard to see why current account deficits have been lower in the years since the financial crisis, nor hard to see they're likely to stay low and maybe go lower in the years ahead.

The current account deficit has to be funded either by net borrowing from foreigners or by net foreign "equity" investment in Australian businesses, shares or real estate. This means the current account deficit is the main contributor to growth in the levels of the national economy's net foreign debt, net foreign equity investment and their sum, our net foreign liabilities.

Historically, our high annual current account deficits worried people because they were leading to rapid growth in the levels of our net foreign debt and net total liabilities.

But looking back over the past decade, and measuring these two levels relative to the growing size of our economy (nominal GDP), there's no longer a clear upward trajectory. Indeed, it's possible to say our net foreign debt seems to have stabilised at about 50 per cent of GDP, with net total liabilities stabilising a little higher.

Over the decades, the level of net foreign equity investment in Australia has tended to fall as big Aussie firms become multinational by buying businesses abroad and Aussie super funds buy shares in foreign companies, thus helping to offset two centuries of mainly British, American, Japanese and now Chinese investment in Aussie businesses.

But the net total of such equity investment is surprisingly volatile from one quarter to the next, being affected not just by new equity investments in each direction, but also by "valuation effects" - the ups and downs of various sharemarkets around the world as well as the ups and downs in the Aussie dollar.

Between the end of September and the end of December, net foreign equity investment swung from a net liability of $27 billion to a net asset of $23 billion. This was mainly because of valuation effects rather than transactions, so I wouldn't get too excited.

What it proves is that, these days, the value our equity investments in the rest of the world isn't very different from the value of their equity investments in Oz.

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More to infrastructure problem than spending money

We get bombarded with economic and political news. Some of it is worth knowing, some isn't. Some gets much attention, some gets little. Sometimes we give too much attention to things that aren't worth knowing and too little attention to things that are. The Productivity Commission's draft report on public infrastructure is one of the latter.

Ostensibly, it's a report advising Tony Abbott on how to achieve his dream of becoming the "infrastructure prime minister". In fact, it's an urgent warning to Australia's voters and taxpayers: we've wasted a lot of money on infrastructure and, if we're not careful, we could waste a lot more.

The point is not that all infrastructure is a waste of money, but that we tend to get too emotional about the topic and not sufficiently hard-headed. We need to think a lot more carefully, demand that our politicians - on both sides - lift their games, and insist on a lot more information being made public.

Almost all of us believe the country is suffering a serious infrastructure deficit, that there's a huge backlog of essential public infrastructure waiting to be built and our top priority must be to get on with clearing it as soon as possible.

I believe there's some truth to this perception. There most certainly are categories where we have an infrastructure problem. Big-city traffic congestion is a glaring example.

But to say we have an infrastructure problem is not to say we have an infrastructure deficit. To say we have a backlog is to presuppose the answer to the problem: just get out there and build a lot more ASAP.

It never occurs to us that, when we jump to that conclusion, we are, first, rewarding the lobbying efforts of the infrastructure industry and, second, making life too easy for our political leaders. We're doing just what the radio shock-jocks make their not-inconsiderable living encouraging us to do: use our hearts not our heads, react emotionally rather than intelligently.

Remember, we live in the age of rent-seeking - of big business interests using public opinion to extract favours from governments. Favours that, one way or another, you and I end up paying for.

It has suited the pockets of the infrastructure lobby - big developers, engineering construction companies and associations of engineers - to give us the impression we have an infrastructure crisis that's getting bigger by the minute and needs fixing by yesterday.

Much less effort has gone into checking out the existence of this backlog and its precise whereabouts than into spending like fury. Although these figures probably understate the full extent of spending on public infrastructure, it's true that, measured as a proportion of national income, spending on engineering construction work for the public sector fell to a low of just more than 1 per cent in 2003.

By 2012, however, it had doubled to more than 2 per cent. In present-day dollars, that's more than $30 billion a year being spent on new infrastructure.

Ever seen a headline screaming we've more than doubled our infrastructure spending in a decade? No, didn't think so. It suits too many people to have us go on thinking the backlog's getting bigger by the day.

One problem with the not-spending-enough approach to the infrastructure question is that it rewards politicians - particularly state politicians - merely for spending more of our money which, as we've seen, they've been doing like crazy for up to a decade.

Another problem is we have too little assurance the money is being well spent. In our concern about the backlog, we seem to have forgotten how prone politicians are to pork-barrelling - spending money disproportionately in marginal or National Party electorates - and how tempting it is to spend on those projects that happen to be the forte of generous corporate donors to party funds.

And not just that. Politicians of all stripes are terribly prone to favouring big-ticket, showy, popular projects over smaller, technical, hidden, boring projects that would actually do more good. They almost invariably favour projects where there's a ribbon they can cut.

They tend to underspend on boring repairs and maintenance then, when the infrastructure has gone to wrack and ruin, make heroes of themselves by building a brand new replacement.

For reasons I don't understand, the present crop of Coalition governments - federal and state - seem biased against public transport as the answer to traffic congestion and have reverted to the 1960s notion that more tollways will fix everything.

As the Productivity Commission has outlined, the answer to this is much more rigorous evaluation of the costs and benefits of projects - taking account of social factors, not just financial ones - by genuinely independent infrastructure authorities, with all their findings made public and no exceptions for bright ideas such as the national broadband network.

As well, the commission makes the obvious but easily forgotten point that we should make sure existing infrastructure is being used efficiently before we rush off and build more. Often this will involve smarter charging for infrastructure. This failing explains much of the rise in electricity prices being blamed on the carbon tax.

In infrastructure, as in everything, there's no free lunch. One way or another you and I end up paying for it. That's an argument for thinking it through.

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Ending the mining tax will hurt jobs

Don't be misled by last week's better-than-expected figures for employment in February. If you peer through the statistical haze you see the problem is the reverse: employment is weaker than you'd expect. Follow that through and it takes you to - of all things - the mining tax.


The job figures were better than expected for two quite silly reasons. First, because economists are hopeless at predicting month-to-month changes in employment and unemployment. Their guesses are wrong most months.

Second, because it suits the vested interests of the financial markets and the media to ignore the Bureau of Statistics' advice and focus on the volatile seasonally adjusted estimates rather than the more reliable trend estimates.The markets like volatility because it makes for better betting; the media like it because it makes for sexier stories.

If we put understanding ahead of thrills and spills and use the trend estimates, they show total employment grew by a paltry 58,000 over the year to February, an increase of just 0.5 per cent. Worse, within that, full-time employment actually fell by 24,000.

This doesn't fit with the news we got the previous week that real gross domestic product grew by a not-so-bad 2.8 per cent over the year to December. (Comparing employment to February with economic growth to December isn't a problem because employment responds with a lag.)

Economic growth of 2.8 per cent is only a bit shy of our medium-term trend growth rate of 3 per cent, which Treasury estimates is consistent with annual employment growth of 1.5 per cent, or 170,000 extra jobs.
So the real question we should be asking is why employment has been weaker than you'd expect.

The answer isn't hard to find: it's because "net exports" (exports minus imports) account for 2.4 percentage points of the overall growth of 2.8 per cent. And most of that is explained by the resources boom's shift from its investment phase to its production and export phase.

On one hand, construction workers are losing jobs as the building of new mines and natural gas facilities winds up while, on the other, few extra jobs are required to permit a huge increase in mining production. All this is fine for growth in production (real GDP), but bad for growth in employment.

Fact is, mining's so hugely capital-intensive that though it now accounts for an amazing 10 per cent of GDP, it still accounts for a mere 2.4 per cent of total employment.

Now, I've never had any sympathy for those who argue an expansion in mining isn't worth having because it generates so few extra jobs. This reveals a fundamental misunderstanding of how economies work (via the "circular flow of income").

The size of an industry's economic contribution is determined not by the number of jobs it creates directly, but by the amount of income it generates. And even with falling coal and iron ore prices, our miners are still highly profitable because their efficiency, plus the quality and accessibility of our mineral deposits, mean their marginal cost of production is far lower than that faced by miners in most other countries.

In other words, our miners earn huge economic rents.

What the mining bashers miss is that when all the income generated by an industry is spent, it generates jobs throughout the economy. This includes the income the industry pays in tax, which generates jobs when it's spent by governments.

In the case of mining, however, there's a weakness in this argument. For the income earned by an industry to generate jobs in Australia, it has to be spent in Australia. And our mining industry is about 80 per cent foreign-owned.

Got the message yet? For our economy and our workers to benefit adequately from the exploitation of our natural endowment by mainly foreign companies, our government has to ensure it gets a fair whack of the economic rents those foreigners generate.

This, of course, is the justification for the minerals resource rent tax. And the fact that, so far, the tax has raised tiny amounts of revenue doesn't mean mining is no longer highly profitable, nor that the tax isn't worth bothering with.

Because Labor so foolishly allowed the big three foreign miners to redesign the tax, they chose to get all their deductions up-front. Once those deductions are used up, the tax will become a big earner. Long before then, however, Tony Abbott will have rewarded the Liberal Party's foreign donors by abolishing the tax.

This will be an act of major fiscal vandalism, of little or no benefit to the economy and at great cost to job creation.

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Many economists don't get the labour market

The world is full of economists who, though they know little of the specifics of labour economics, confidently propose policies for managing the labour market based on their general knowledge of the neo-classical model. All markets are much the same, aren't they?

I fear this is the best we'll get from the Productivity Commission's inquiry into regulation of the labour market. So a test of the commission's report will be whether it displays knowledge of advanced thinking on how labour markets actually work or is just another neo-liberal rant about free markets.

In their efforts to bone up on the topic, the commissioners could do worse than start with a quick read of Nobel laureate Robert Solow's 90-page classic, The Labor Market as a Social Institution.

Since the book was published in 1990, it should be old hat to economists, but I doubt it is. If so, it shows how little effort most economists - even academic economists - have put into studying the labour market.

Solow starts by reminding economists of a glaring problem they prefer not to think about: if the market for labour is just a market like any other market, and so is capable of being adequately analysed by the economists' standard tool kit of demand and supply - prices adjust until demand and supply are equal and the market "clears" - how come the labour market never clears?

How come we always have high unemployment, which shoots up during downturns and stays very high for years before falling only slowly?

To put the puzzle another way, if the labour market works like any other market, making wages just a price like any other price, why don't wages fall and keep falling as long as the supply of labour exceeds the demand for it?

Why do nominal wages almost never fall? Why is it the closest we ever get is nominal wages not rising as fast as ordinary prices, so wages fall a bit in "real terms"?

In a country with Australia's history of many minimum wages, carefully specified in awards and agreements, it's easy for economists to claim wages can't fall because they're being held up by legal minimums. But this doesn't wash. In reality, many if not most wages are well above the legal minimum, meaning the minimum isn't "binding" and so isn't stopping actual nominal wages from falling back to the minimum. But they don't - and nor do they in the US, where the minimum wage is kept so low it's almost never binding.

Overseas, some extreme neo-classical economists have tried to escape this problem by arguing most unemployment is voluntary rather than involuntary. It just so happens that, when economies turn down, a lot of people decide now's the time to take unpaid holidays and stay on them for many months. Yeah, right.

Solow says a more credible line of explanation is to admit the obvious: there must be something about labour markets that makes them different from other markets (such as the market for cars, or the market for bank loans) and so renders economists' usual analytical tools inadequate.

And it's not hard to think of what that something could be. Other markets are for the purchase and sale of inanimate objects, whereas every unit of labour bought or sold comes with a real live human attached. Every human is different - some are smart, some aren't; some work hard, some don't; some are co-operative, some aren't - and bosses turn out to be humans, too.

The thing about humans is they have egos and feelings and moods. One apple doesn't care about the other apples in the barrel, but a human cares about how they're being treated by their human boss, as well about how they're being treated relative to all the other humans working for the boss.

Hence the title of Solow's book. Unlike other markets, the labour market is also a social institution. Only an economist could imagine you could analyse the labour market successfully without taking account of the human factor.

So maybe it's the social dimension of labour that explains why wages are inflexible and the labour market doesn't clear. Solow uses the work of some woman whose name seems vaguely familiar, a Janet Yellen, and her Noble-prize-winning husband, George Akerlof to outline one possible explanation of the conundrum, "the fair-wage-effort hypothesis".

The "efficiency-wage theory" says that in the modern economy workers often have some control over their own productivity. They produce more when they are strongly motivated to do so. "One way for an employer to provide more motivation is by paying more than other employers do; another is to threaten to fire the excessively unproductive if and when they are detected," Solow says.

If that sounds obvious, note the radical implication: a firm's physical productivity depends not just on how much labour (and capital) it uses, but also on how well the labour is paid. If so, wages won't fall just because unemployment rises.

Yellen and Akerlof's version of efficient-wage theory says workers who believe they're being paid "a fair day's wage" feel a social obligation to deliver "a fair day's work" in return.

A different approach is "insider-outsider theory". This says the people already working for a firm (the insiders) are likely to be more productive than those who aren't (the outsiders) because they understand how the firm works. If so, the insiders are helping to generate "economic rent" for the firm and thus are able to share this rent by negotiating higher wages.

An outsider may be prepared to work for the firm for a smaller wage, but the boss won't want to risk reducing his productivity by switching from insiders to outsiders.

Whichever of those theories you find more persuasive, the point is the workings of real-world labour markets are far more complicated than most economists realise. Let's hope the Productivity Commission does.

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A REVIEW OF CURRENT AUSTRALIAN ECONOMIC POLICY

The main reason for reviewing the present state of economic policy is, of course, the election of the Abbott government in September 2013. Often a new government will introduce a new approach to economic policy, with the rationale for the changes spelt out in the first set of budget papers following the election. But the explanatory material in this year’s budget papers was little different from previous years. From this I deduce that, at the level of macroeconomic policy, the differences between the old and new governments are more rhetorical than actual.

If this judgement surprises you, it’s probably because you’re thinking not about macro policy as such but about the nature of the measures announced in the 2014 budget and who they would affect. The Year 11 course tells us all budgets affect the economy in three different ways: first, the effect on demand (ie macro management), second, the effect on the allocation of resources (ie microeconomic policy) and, third, the effect on the distribution of income (ie fairness or equity). This year’s budget was the classic example of a budget that needed to be analysed by dividing issues into that three-part framework to make sure people’s reactions to the budget didn’t get muddled up. Teaching your students to discipline their thinking about the budget in this way is good training in how to analyse issues logically.

Looking beyond straight macro management, the Abbott Coalition government’s policy preferences are obviously quite different from the Labor government’s in various respects, and those differences are now far clearer than they were before the election. They’re the preferences you’d expect of a Coalition government, though the measures proposed in the budget were harder-line than anything from the Howard government. Some may be tempted to regard this as an ‘ideological’ government, but all politicians (and all economists) have ideology in their kitbag and it’s not a label I’d apply.

If this was a highly ideological government there would be far more written expositions of that ideology than there have been. I certainly wouldn’t accuse the government of being dominated by the doctrines of economic rationalism. Some of its proposals may seem to fit that label but, as we will see, many don’t. No, I think this is a prime minister and government more of strong likes and dislikes, friends and foes. So many of its actions depart from the principles of economic rationalism to benefit particular big businesses - the miners, the banks, the coal-fired power generators. And the government is not above a little agrarian socialism at the behest of its National Party colleagues.

MACROECONOMIC POLICY

Monetary policy

The Abbott government has affirmed its commitment to the existing ‘framework’ for monetary policy. Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. It has been assigned the objective of achieving internal balance. The 2012 budget papers said monetary policy plays ‘the primary role in managing demand to keep the economy growing at close to capacity, consistent with achieving the medium-term inflation target’. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over the cycle. The primary instrument of monetary policy is the overnight cash rate, which the RBA controls via market operations.

Fiscal policy

Similarly, the 2014 budget papers give no reason to believe there has been any change to the framework in which fiscal policy operates. Fiscal policy - the manipulation of government spending and taxation in the budget - is conducted according to an unchanged medium-term fiscal strategy: ‘to achieve budget surpluses, on average, over the medium term’. The 2012 budget papers nominated a new and different role for fiscal policy: ‘the primary objective of fiscal policy is to maintain the budget in a sustainable position from a medium-term perspective’. That is, the primary objective of fiscal policy is now maintaining ‘fiscal sustainability’.

However, it has also been made clear the budget retains an important role in assisting monetary policy achieve internal balance. How? By allowing the budget’s automatic stabilisers to be unimpeded in doing their job of helping to stabilise demand as the economy moves through the business cycle. The stabilisers bolster aggregate demand when private demand is weak and restrain aggregate demand when private demand is strong. The latter process is known as ‘fiscal drag’ - which is, of course, a helpful thing when you’re trying to keep the growth rate stable. You would never hear Mr Hockey using those Keynesian terms, but it’s still how fiscal policy is expected to work under this government. And the 2014 budget is clearly consistent with it.

This year’s budget papers do set out a Budget repair strategy, which is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023-24, consistent with the medium-term fiscal strategy.

The repair strategy sets out that:

• new spending measures will be more than offset by reductions in spending elsewhere within the budget;

• the overall impact of shifts in receipts and payments due to changes in the economy will be banked as an improvement to the budget bottom line, if this impact is positive; and

• a clear path back to surplus is underpinned by decisions that build over time.

The Budget repair strategy will stay in place until a strong surplus is achieved and so long as economic growth prospects are sound and unemployment remains low.

The 2014 budget

 Mr Hockey’s first budget was quite remarkable and absolutely fascinating for a connoisseur of budgets like me. So I’m going to describe it as it was delivered and intended to be enacted, even though we know that various of its more controversial measures have been abandoned or modified in their passage through the Senate, while some - the $7 GP co-payment, the changes to university fees - remain in limbo.

The most notable feature of the budget as planned was that it was our first ‘decadal’ budget. The government continued Labor’s recent practice of publishing not just the figures for the budget year and the forward estimates for the following three years, but also projections of the budget balance out 10 years on the assumption of unchanged policies. The projection to 2024-25 showed that the measures announced in the budget could be expected to return the budget to balance in 2018-19 and to an ever-growing surplus of more than 2.5 pc of GDP by 2024-25. However, this assumed 10 years of unrelieved bracket creep. If instead the growth in tax collections was capped at 23.9 pc of GDP from 2019-20 by means of tax cuts, the surplus would still reach a healthy 1.4 pc in 2024-25.

So, the budget announced measures which, though many didn’t take effect until the 2017 budget following the next election, and others would take years before their effect on the budget became significant (eg the restoration of indexation of fuel excise), would get the budget firmly back on track over the coming decade and do it in just one go. Our first ever ‘decadal’ budget. It was the budget of an incoming government, confident of its ability to stay in office for ages. A budget with high political costs up front, but a big payoff way into the future.

How was this remarkable feat to be achieved? Mainly through fiddling with indexation arrangements, adjusting them in any way that favoured the budget. Few people noticed how obsessed this budget was with indexation. It proposed to change the indexation of pensions from average weekly earnings to the CPI, it reduced the indexation of grants to the states for public schools and public hospitals, it paused the indexation of certain family benefits, it changed the indexation of overseas aid from gross domestic income to the CPI, it changed the indexation of HECS debt from the CPI to the long-term bond rate and it restored the indexation of fuel exercise.

As well as all these indexation adjustments the budget proposed to increase the user charges for pharmaceuticals and university students, plus the new $7 co-payment for GP visits and tests. So the budget isn’t about cost cutting so much as cost-shifting: to people on pensions, to the young jobless, to university students, to the sick and, to the tune of $80 billion, to the states. Some opponents of the GP co-payment are referring to it as the ‘GP tax’. This is simply wrong, but it gives you the opportunity to make sure your students understand the difference between a tax and a user charge.

Budget’s effect on demand

From a macro management perspective, the budget had three key features:

1) A slow pace of fiscal consolidation. The new measures and revisions to forecasts were expected to improve the budget balance by just $4 billion in the budget year and by $7 billion in each of the following two years, but by $26 billion in 2017-18. This slow start was intended to avoid the budget having a dampening effect on growth while the economy was expected to be growing at a below-trend rate.

2) A switch in the composition of government spending. While spending on transfer payments leading to consumption was reduced, spending on infrastructure investment was increased by $12 bil. Half of this was spent on an ‘asset recycling initiative’ intended to encourage the states to increase their own infrastructure spending. The goal was to help fill the vacuum left by the fall in mining investment.

3) Headroom for tax cuts. The government’s 10-year budget projections assume that tax revenue is capped at 23.9 pc of GDP (the average level between 2000 and 2008) after 2019-20, with spending cut so hard that budget surpluses are still projected to reach 1.5 pc of GDP in 2024-25. The cap is intended to make room for tax cuts to counter the effect of bracket creep.

So, clearly, this was not a highly contractionary budget. Indeed, in terms of the first two or three years it wasn’t contractionary to any significant degree. The contraction was designed to come only after the economy was expected to have returned to above-trend growth. Thus no matter how much people may object to some of its measures, it’s quite wrong - quite ignorant - to describe the budget as pursuing a policy of ‘austerity’. Austerity doesn’t mean acting to improve the budget balance (the term for which is ‘fiscal consolidation’), it means doing so while private demand is still very weak and thus running a high risk that efforts to reduce the deficit backfire and actually make it worse. This is just what Mr Hockey tried not to do.

When the mid-year review is published in December, we will see the effect on the projected budget balance of those budget measures the government has been obliged by Senate opposition to modify or abandon (although those it has yet to put up to the Senate may remain in the forward estimates). We also know that greater-than-expected falls in export commodity prices and low wage growth will necessitate a continuation of the downward revisions to budget revenue estimates than became so frequent under the previous government. We also know that, consistent with his rejection of austerity policy, Mr Hockey will not announce further budget savings intended to offset the effect of the downward revisions to revenue. So the budget’s return to surplus will now be even later than projected at budget-time.

It’s clear that, despite all the Coalition’s criticism of Labor while in opposition, and its various promises to get the budget back to surplus much earlier than Labor could, it’s not having much success, and this does not seem to worry it greatly. The measures it proposes may be very different to those Labor would propose, but its approach to fiscal policy turns out to be remarkably similar to Labor’s.

Budget’s effect on allocation

Viewed as an instrument for raising allocative efficiency - as a vehicle for microeconomic reform - the budget was not an impressive document. Its proposed measures did a lot to shift costs from the federal budget onto state budgets and household budgets, but little to raise the efficiency of government spending. Far from increasing spending on preventive health programs (with beneficial effects on employment, wellbeing and the budget) it cut such spending.

The budget could have done a lot to reduce distorting subsidies to business (‘business welfare’) but, apart from eliminating subsidies for the production of ethanol, it didn’t. Its real cuts to public school funding and eventual discontinuation of spending on the Gonski equity program may well have the effect of reducing the employability, skills and productivity of disadvantaged young people. While many economic rationalists believe imposing a $7 user charge on previously ‘free’ (bulk-billed) doctor visits and tests would reduce their unnecessary use, empirical studies suggests it would do more to discourage poor people from seeing a doctor when they needed to than to discourage frivolous visits.

Many economic rationalists believe that deregulating university fees would eventually do a lot to force greater efficiency on universities. But this is debatable because the market in which the universities would operate is far from perfect. They would remain government-owned and regulated and they enjoy a degree of monopoly in granting access to the best jobs in the labour market.

Budget’s effect on distribution

The budget was widely judged by the public to be unfair, even by people who themselves weren’t greatly affected by it. It was seen that poor people would be hit a lot harder than the better-off. This was, in fact, an almost inevitable consequence of the government’s unusual decision to return the budget to surplus largely by cuts in spending rather than increases in taxes. This is because our system of tightly means-tested transfer payments comes on the spending side, whereas various questionable ‘tax expenditures’ - such as the superannuation tax concessions, negative gearing, family trusts and the 50 pc discount on capital gains - heavily favour high income-earners.

The plan to withhold access to the dole to people under 30 for six months would clearly have hit low income-earners. The $7 co-payment would be regressive. Because we measure relative poverty, the plan to index age, invalid and sole-parent pensions to the CPI rather than average earnings, would cause the rate of pension payment to fall over time below the poverty line.

Even without any increase in the level of university fees, the proposal to index HECS debt to the government bond rate rather than the CPI - that is, to impose a real interest rate on the debt - would leave people who didn’t complete their degrees and those with breaks in their full-time employment (particularly married women) with significant levels of debt and interest charges. The HECS scheme was designed to allow students to be required to pay a proportion of the cost of their tuition in an equitable way, but this would rob the scheme of much of its fairness.

By contrast, I believe the proposal to deregulate uni fees, which would no doubt permit significant increases in those fees over the years, while being highly unpopular, would be a progressive rather than regressive measure. Why? Because the great majority of uni students come from well-paid homes and go on to themselves have well-paid jobs. Those who attended the higher-status sandstone universities would be obliged to pay a lot more for that status.

It’s important to note that, though the government’s rhetoric focused on getting savings from the spending side, in truth a high proportion of the projected improvement in the budget balance would come from the revenue side. That’s not just because of the temporary ‘deficit levy’ imposed on high earners nor the restoration of fuel excise indexation, but because the budget projections imply six years without another income-tax cut and thus six years of bracket creep. And it’s worth remembering that the particular shape of our tax scale at present means bracket creep is regressive, hitting low income-earners proportionately harder than high earners.

Over the years I’ve seen incoming Coalition governments bring down some pretty unfair initial budgets without drawing much public outcry over that unfairness. Why was the reception to this budget so different? Partly because the treatment of the young unemployed was so obviously excessive. But also because I never expected to see a government of any colour getting so tough with age pensioners. When a Coalition government gets tough with the aged it’s getting tough with its own heartland. The same goes for its plan to permit big increases in university fees and debts. Remarkable politics.

MICROECONOMIC POLICY

One of the ways the Coalition kept itself a ‘small target’ in the 2013 election campaign was to avoid promising controversial reforms in key economic policy areas by promising to establish inquiries and take any reform proposals arising from those inquiries to the next election. There is a belief among politicians that it’s easier to bring about reforms from government than from opposition. As yet, few of those inquiries have delivered their final reports and had the government announce which of their recommendations it was accepting. So it is too soon to have a clear picture of how reformist the Abbott government has proved to be, how rationalist it is and how brave it is. Although the initial signs haven’t been encouraging, it’s not yet clear whether it is pro-market or just pro the interests of influential industries.

Even so, while it waits for the many inquiry reports the government has been getting on with keeping its election promises. It has succeeded in abolishing the minerals resource rent tax and the carbon tax/emissions trading scheme. It has claimed that this will lead to faster economic growth, but it’s hard to take such claims seriously. It has sought considerable publicity for its red-tape-cutting ‘repeal days’, but though some of these measures are genuine, much is window-dressing.

Throughout its term the Labor government had been negotiating free-trade agreements with South Korea, Japan and China, without much sign of progress. The new trade minister was given the task of completing those agreements within his first year, and he completed it within about 14 months. The agreements with Korea and Japan will deliver modest gains in market access to certain categories of Australian agriculture, but the surprise agreement with China involves wide-ranging cuts in Chinese tariffs and other trade restrictions, making it a far more significant advance.

The interim report of the inquiry into competition reform, chaired by Professor Ian Harper, implied than various competition-promoting changes would be recommended, but we have yet to see his final report and the government’s response to it.

The interim report of the inquiry into financial regulation, chaired by David Murray, drew a favourable reaction from economists but, again, it’s too early to be confident of what will finally emerge from it. In the meantime, the government has sought to water down the consumer protections in the Labor government’s Future of Financial Advice legislation in response to pressure from the big banks and insurance companies, but the Senate has reversed its initial support for the government’s changes.

The Coalition has yet to initiate its promised inquiry by the Productivity Commission into industrial relations. The delay reinforces suspicions Mr Abbott has little enthusiasm for radical reform, particularly anything his opponents could portray as an attempt to restore Work Choices. And, assuming he will take proposals for controversial reform in some policy area into the 2016 election, by this stage he may be keen to ensure he isn’t fighting on too many fronts.

Mr Abbott is also yet to initiate the promised inquiries into tax reform and federalism, which he has linked. In a recent speech on federalism he raised the possibility of tax reforms, ‘including changes to the indirect tax base’, calling for ‘mature debate’ and ‘rational discussion about who does what’. He wants to reverse the creeping centralisation, reaching a rational division of roles that would make each level of government ‘sovereign in its own sphere’. I find it hard to believe the federal government could ever reach an agreement with the premiers on a more rational division of responsibilities.

And though Mr Abbott’s remarks imply that, as part of a wider tax reform package, he’d support a joint plan to increase collections from the (withering) GST and give all the proceeds to the states, such joint agreement - virtually all premiers supporting a more onerous GST - is hard to imagine. Apart from that, the arithmetic isn’t adding up. Mr Abbott has stressed that any reform package including a higher GST would not involve any increase in the tax burden overall. Mr Hockey says in the context of reform that the government ‘wants taxes that are lower, simpler and fairer’. In which case, it’s hard to see how raising GST collections could solve the budget-balancing problems of both the federal and state governments. And that’s before you remember that the Business Council and other vocal business advocates of tax reform have been hoping the proceeds from a higher GST would be used to cover cuts in the rate of company tax and/or the top personal tax rate. The path to a tax reform package that even the government and influential lobby groups could agree on, to then put before voters, at an election is long and rocky.

We will have a clearer idea this time next year, but it won’t surprise me if, in practice, the Abbott government proves to be much less radical than its rhetoric to date has led many to expect.

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I’M OK - REFLECTIONS OF AN OFFICERS’ KID

Talk to Salvation Army Eastern Territory Historical Society, Bexley North, Thursday, March 13, 2014

I suppose before I head off down memory lane I should start by giving my testimony - testifying to my present state of grace (or lack of it). I’m no longer a practicing Salvationist, in fact I have to confess to being a backslider. I’d be lucky to get to one meeting a year, though I did go to the Commissioning a few Sunday mornings back.

But my beliefs and values remain heavily influenced by my Army upbringing, and I think this influence isn’t hard to detect in my work at the Herald. The social values you find reflected in my columns are, I hope, Christian moral values. I suppose in some ways what I am is a Christian fellow-traveller. I have a lot of Christian friends. The evangelicalism of the Sydney Anglican diocese means there are a lot more active Christians in positions of power around this town than a Sally may imagine (though the governor of the Reserve Bank, Glenn Stevens, is a devout Baptist). I feel at home in the company of Christians, I feel I know where they’re coming from, and I can trust them. I have high expectations of honesty and decency from people who profess to be Christians, and I rarely feel let down. It never ceases to amaze me that people who have no experience of professing Christians have no expectation of them being any more truthful or trustworthy than anyone else - that is, not very. ‘I tell the odd lie to get myself out of trouble, doesn’t everybody?’ Well, not anyone brought up by my parents.

One noteworthy Anglican layman who’s had a big influence on my thinking in recent years is Michael Schluter, founder of Britain’s Relationships Foundation. Schluter believes his emphasis on the importance of the ‘relational dimension’ of every aspect of our lives - our working lives, our business lives, even government policy - to be deeply scriptural, as I tried to demonstrate in a column I wrote last Easter Monday. In recent years Easter Monday has become the time when this backslider/fellow traveller offers a little sermon to his readers. What I do know is that the effect of their actions on people’s relationships is often the last thing on the minds of our business people, economists and politicians, even those pollies prone to making speeches about The Family.

Another Christian who’s had a big influence on my thinking is an American preacher called Ched Myers, an exponent of ‘sabbath economics’. I wrote about sabbath economics the Easter Monday before last. I can boil it down to this: when you look at all the things Jesus is quoted as having said in defence of the poor, and all the things he said in criticism of the rich - when you go right through the New Testament adding up all the quotes - maybe, just maybe, he meant what he said. Maybe those who follow Jesus are required to be just as manically pro-poor and tough on the rich as he was. Maybe, as Myers alleges, the ever-more comfortable Christian church has spent most of the past 2000 years ‘reading down’ all Jesus’ anti-rich statements for fear of giving offence to too many well-off people in the congregation.

One of our songs says ‘the rich and poor as well, it doesn’t matter who’, but if you take Jesus at his word, he seems to be saying it does matter who, that there are different standards for the rich and the poor. In its early days, of course, this wouldn’t have been a problem for the Army. It worked among the poor, was largely composed of the poor, and was quite clearly pro-poor. But one of the consequences of righteous living - when you don’t waste money on drinking and smoking, don’t spend your life in pubs, don’t mistreat your wife and kids - is that you don’t stay poor. You give your kids a decent education and eventually your descendants become middle-class and respectable, even disapproving of all those poor people who don’t work as hard as they should and don’t spend their money wisely.

But I’d better get on with the reflections of an OK. The first thing to say is that I’m proud to have been an OK, proud of my parents and the lives they lived, and happy for the world to know where I come from. I think the advantages of being an OK far outweighed the disadvantages. In fact, I can’t think of any significant disadvantages. It’s true we had to move every two years, and that this meant I ended up going to five primary schools and three high schools but, apart from it meaning I retain few if any friends from my school days, I don’t think my continual changing of schools - including a shift from the NSW school system to the Queensland system and back again - did me any harm. And I don’t know of any OK who does believe they were disadvantaged by all the moving. The attitude of modern parents that changing their kids’ school would a terribly damaging thing to do leaves me nonplussed. Admittedly, the Army always moved us before the start of the new school year, never in the middle of the year, so that would have helped reduce disruption. It did, however, mean I had to spend most of every second Christmas holidays packing, and I didn’t much enjoy that. Of course, OKs don’t know anything other than the peripatetic life and so take all the moves in their stride, whereas moving homes and schools would come as a shock to a lot of normal kids.

In my job at the Herald I did spend about 15 months in Canberra before I was married, but I’ve never wanted to move from Sydney, never hankered after a foreign posting as so many journos do. Once married, we stayed in our ‘ideal first home’ at Redfern for seven years, before moving to our present home in Glebe, where we’ve lived for almost 30 years, even though we could have afforded to trade up to a better one, as so many people do. Sometimes I wonder if my desire to stay anchored in the same place - and know a lot of the people in my suburb - is a reaction against all the moving I did as a boy. On the other hand, my father stayed ‘working’ for the Army for 45 years before he retired, and I’ve stayed working for the Herald for 40 years and counting, never really wanting to change papers. That bit I guess I get from my father.

If I can’t think of any great disadvantage of being an OK, what were the advantages? Well, obviously, my Christian upbringing and, though you could argue every soldiers’ kid got the same Army upbringing, I’d argue officers’ kids got an extra-strong dose. As the children of corps officers we probably attended a wider range of meetings and missed fewer of them than many solders’ kids. Because the corps my father commanded were so pathetically small, my siblings and I had to play a much bigger part than many of the comrades’ kids. Every Army kid learns to speak in public, but I did a lot more public speaking than most, giving my first speech when I was eight. Being a confident public speaker has helped me a lot in my job, and I do a lot more speaking than most journos do.

Because our corps were so small, we had to help in the family business, so to speak, just as shopkeepers’ children have to help in the shop. I remember many times standing in open air meetings in the suburbs of Newcastle with just my mother, my sister and me - singing, speaking, praying - while my father collected from the nearby houses. Whenever my father called for a volunteer to pray in the morning meeting, I’d open my eyes and look at Dad, knowing that if no one volunteered, he’d nod to me and I’d pray. Loyalty was a very big thing in my family. When I was in my last year at Newcastle University, I remember thinking that, even if I’d become an atheist, I’d still have come along to meetings and backed up my father whenever he needed it.

In a small corps we’d sometimes have a ‘social’ (what other people would have called a dance) on a Saturday night. Everyone would have a great night and go home. After they’d gone, someone would have to stay behind and sweep out the hall ready for the meeting next morning. That someone would be my father and his kids. What I learnt from being the kid of officers of a small corps was to accept ultimate responsibility for keeping the show - any show - on the road. Not a bad thing to learn.

I think I learnt a lot from my father’s attitude to his boss, the divisional commander. My father never questioned his boss’s orders, never questioned his judgment, never doubted his good intentions. My father was pro-boss. I’m not quite so unquestioning, but I’m pro-boss, too. I’ve always trusted the long succession of editors I’ve worked for to give me a square deal, to speak to me honestly and to keep their promises. I can think of only one occasion when I was let down. In contrast, many journos will tell you editors aren’t to be trusted and will promise you things without any intention of keeping their promise. My theory is that bosses, like children, tend to conform to your expectations of them. If they can see in your eyes that you trust them, they won’t disappoint you; if they can see in your eyes you don’t believe them, your expectations will be self-fulfilling. As an OK I’ve tried to be scrupulously honest with my bosses (and with those working for me), with one exception: because pay rises tend to be so dependent on job offers from rival employers, I’ve sometimes professed to be keener to take up an offer than I really was.

Although I know I’m not still a real Salvationist, I am a cultural Salvationist and I’d never think of putting myself down on the census as anything but Army. Actually, with its uniforms and ranks and other aspects of the military metaphor, as well as its open air meetings and brass bands it’s more of a sub-culture. The Army with all its meetings and sections also takes over a large part of your life, not leaving much room for other interests. It has all the hallmarks of a sect - save for the fact that its doctrines are so much a part of the protestant mainstream, apart from its rejection of the sacraments. If you’re an officers’ kid you get an extra strong dose of the sub-culture, so strong it never leaves you. You can take the boy out of the Army, but you can’t take the Army out of the boy.

As a boy I was very conscious that I came from a weird religion. Whenever my own kids complained about being embarrassed by their parents I’d say, until I turn up at your school wearing a uniform from the Crimean war, you don’t know what embarrassment means. Once I was at the airport seeing off my daughter, whose school orchestra was embarking on what it called an ‘international tour’ of New Zealand. She pointed out a girl and her father who, she said, was an Army officer. He was in civvies. My father’s uniform was his witness; except when he was on furlough, he wouldn’t leave his front door except in uniform. And I never went on school excursions. I knew my parents couldn’t afford them, so avoided embarrassing them by never asking. That morning at the airport it was all I could do to stop myself going over to the officer and asking him if he needed any help paying for his daughter’s trip. I give almost all my donations to overseas aid - including a few Army projects, such as those of the amazing Nesan Kistan - but I realised that day that OKs were my favourite charity. If you know of officers with that problem, put us in touch.

My perception of the Army’s weirdness could have left me with a burning desire just to be normal like everyone else. It didn’t. Perhaps because of my father’s personal eccentricities, it left me with a desire to be a lot more interesting than normal. Paddy McGuinness, of the Financial Review, who always dressed in black, taught me that an ambitious economics editor uses his clothing to draw attention to himself. I haven’t hesitated to follow his example. I guess I have been more ambitious than the average journo. Where did I get that from? It certainly wasn’t from my father: to the unending disappointment and frustration of his DCs, he wasn’t the tiniest bit ambitious. Nor was my mother. So where did it come from? I suspect it came from me attending divisional functions in Newcastle. The corps I came from were so small there were no boys of my age, so at divisional functions everyone had mates except me. I think I determined then that one day I’d show them I was a somebody, not a nobody.

A few years ago I attended a conference at Sydney University put on by the political economy department. They were a lot more left wing than me and I wasn’t very comfortable. There was an old gent sitting up the back and eventually he got up and aired his novel views on how to fix the economy. The others were a bit embarrassed by this oddball, and dispensed with him pretty curtly. Later my conscience smote me. I knew who the old codger was, he was perhaps the only surviving specimen of the same genus as my father, Major Ivan Unicomb - Joy Inglis’ dad - and I’m pretty sure he knew who I was. I should have stood beside him and made him feel welcome, but I didn’t.

What does much to make the Army a sub-culture, one you never really escape, is the music. The bands, of course, the songsters and all the old songs and choruses. When you spend the first 24 years of your life singing them in meetings and prayer meetings before the benediction, they never leave you. And they never lose their power to move me - often almost to tears. I have a lot of Army CDs, of which my favourite is one with the songs of Albert Orsborn. My favourite website is SalvoAudio. Many’s the night I sit up writing my column, listening to Tom Quick from Canada’s latest program of Army band music. I keep a copy of the old song book on my desk so I can check the words of a song and sing along.

Some years ago I spoke at a pre-election meeting of ACOSS - the Australian Council of Social Service - peak body for organisations doing social work, including the Army. Two officers from THQ were there, but they didn’t know who I was. For some reason I referred to John Stone’s contemptuous reference to ACOSS and its members as ‘the compassion industry’. I thought I’d make the officers sit up by adding that, where I came from, we used to sing: ‘Except I am moved with compassion, how dwelleth thy Spirit in me?’ But I didn’t say it because I knew I couldn’t have without getting emotional.

These days only the old would look at my surname in the paper and say I had to be some kind of Sally, just as every musician whose first name is Bram - or last name is Terracini - has to have an Army background. But, for the record, let me tell you that of my father’s 13 siblings, three of his brothers and three of his sisters also became officers, and six of my cousins are officers.

It may have changed but, in my day, the Army was into managing by ‘metrics’ long before it became fashionable in big business. Corps officers’ performance was judged primarily by their statistics - by the number of people attending meetings. Usually lacking a sergeant-major, my father would count and record the number of people over 12. Every year or two the DC would hold an inspection, when the statistics were reviewed. Oversimplifying it, if your figures were up on your predecessor’s you were likely to be moved to a bigger corps; if they were down, you were likely to be moved to a smaller one, preferably in another division.  My father’s figures were almost always down; his successive corps were smaller and smaller. There were ways to massage the stats by holding extra meetings, or inviting a band to visit, but my father neither knew nor cared about these tricks. A successful CO knows how to keep his meetings entertaining, with good music and lots of emotion, happy singing and clapping, hallelujah windups and so forth. My father - who was the most saintly person I ever expect to meet - wasn’t musical and didn’t know how to jolly people along. I remember George Carpenter doing an inspection at the quarters in New Lambton. My father’s attendances were down and he couldn’t make his bank reconciliation statement balance. George - who was hardly more numerate than my Dad - couldn’t make it balance either. It went on for hours, George got angrier and angrier and ended up tearing strips off my father. Dad hardly slept for the next week. I’m sure my father soon forgot and forgave George, but I didn’t.

I understand that officers aren’t shifted as often as they were when I was an OK, but that makes me wonder why the Army persisted with the practice for so long. My father never for a moment doubted the Army’s contention that all the ‘farewell and marching orders’ he received were the will of God. But after I left home I could see a far more humanistic interpretation. Once a year all the DCs in the territory would hold a meeting that was like a kind of poker game in which they tried to keep their most successful COs, while palming off on another DC their least successful COs, starting with my father. This explains why my father was so often moved from division to division.

In recent years, however, another, happier thought has occurred to me. I see now that every time my father asked his DC for special consideration, he got it. My mother, a North Queenslander, hated the winter cold of inland country towns. This was why we were moved from Albury and, later, Bathurst, after only a year. My father was allowed to stay at Cessnock for three years so my brother could do the Leaving at the same school. When he won a bursary for Sydney University we were moved to Sydney and kept there until he graduated. When we returned to Newcastle, the city of my birth, I went off to Newcastle Boys High and decided that three high schools were enough. I asked my father to ask the DC to let us stay around Newcastle so I could complete my schooling at Newcastle Boys. As it happened, we stayed in the Newcastle division long enough for me also to spend four years at Newcastle University.

My teenage years in Newcastle were my most devout. I became leader of the Inter School Christian Fellowship at school and was active in the Evangelical Union at uni. I helped set up a branch of the Salvation Army Students Fellowship in Newcastle, and then became secretary of the StudFlip (as my mother call it) in Sydney. For some years my ambition was to become an officer. I’d become an accountant partly because my father was in awe of those officers who didn’t have to struggle with their bookwork like he did. But eventually I realised my reason for wanting to be officer was hardly what could be called a calling. I’d been watching my father’s performance closely and critically for some time. I wanted to become an officer to prove that, though he hadn’t figured out what you had to do to be a successful CO, I had.

Later, in 1972, when I’d finally become qualified as a chartered accountant but also had become disillusioned with it, and just before I embarked on the path that led me to the Herald, I wrote to the Commissioner, Hubert Scotney, offering to become an accountant at THQ, with little concern about how much I was paid. Scotney lost no time in declining my offer. The last thing he would have wanted was one of those trouble-makers from the Students Fellowship inside the headquarters tent. My past 40 years may have been very different had he accepted that offer.

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