Drought: a choice between sympathy or lasting help

What a good thing elections are. Were it not for the looming federal election – not forgetting those in Victoria and NSW – we city slickers might by now have forgotten the drought that continues to damage much of eastern Australia. Collections taken, donations given, end of.

Not so our tireless Prime Minister. Scott Morrison’s put the drought at the top of his to-do list of problems to be sorted before the election. And having fixed high electricity prices earlier in the week, on Friday he held a national drought summit, announcing a $5 billion Drought Future Fund.

From July 2020, the fund will provide grants worth up to $100 million a year for community services and research, and to assist the adoption of technology to support long-term sustainability in periods of drought.

Details yet to be decided. What it amounts to is anybody’s guess. It could be something that really would improve our farmers’ resilience to future droughts, or it could be just another slush fund for spending in National Party electorates.

The thing about droughts is that when the media eventually find out about them and start making a fuss, there’s an outpouring of concern and everyone wants to help. Individuals reach for their purse; governments want to be seen taking charge and doing the right thing by our poor stricken farmers, the salt of the earth (to quote a red-headed prince).

It’s always assumed that farmers have been hit by some unpredictable natural disaster beyond their control, the worst in years. They’ve all been hit hard, and so are desperately in need of our sympathy and support.

The trouble with this familiar, feel-good ritual is that it isn’t true. There’s nothing more predictable than that this drought will soon enough be followed by another, and one after that.

What’s more, though the Nats deny its existence, climate change means droughts are becoming more frequent and more severe, thanks to higher average temperatures – up about 1 degree since 1950 – and higher rates of evaporation.

It is possible for farmers to prepare for drought. And the truth is, most – yes, most – farmers have prepared, and as a consequence aren’t doing as badly as some. In their efforts to whip up our sympathy, the media give us an exaggerated impression of the drought’s severity, showing us the least-prepared farms rather than the best.

This matters because, as two economists from the Australian Bureau of Agricultural and Resource Economics and Sciences have written recently, “in our rush to help, we need to make sure well-meaning responses don’t do more harm than good”.

“Drought support could undermine farmer preparedness for future droughts and longer-term adaptation to climate change,” they say.

They argue that, to remain internationally competitive, our farmers need to increase their productivity, both by adopting improved technologies and management practices, and by shifting resources towards the most productive activities and the most efficient (that is, bigger) farmers.

“Supporting drought-affected farms has the potential to slow both these processes, weakening productivity growth,” they say.

Professor John Freebairn, of the University of Melbourne, notes that government drought assistance usually falls into three categories: income support for low-income farm families, subsidies for farm businesses and support for better decision-making.

The existing policy of making the equivalent of means-tested dole payments available to farmers is justified on social grounds.

But farm subsidies on loans, freight and fodder – all of which we’ve seen this time – can have unintended side effects. “Knowing that subsidies will be provided during drought . . . reduces the incentives for some farmers to adopt appropriate drought preparation and mitigation strategies,” Freebairn says.

By contrast, providing meteorological information on seasonal conditions, or hands-on education and support to individual farmers in developing more appropriate decision-making strategies, actually makes farming more robust and self-sufficient.

Suspending justified scepticism, at its best Morrison’s proposed drought future fund could go a step further and finance water infrastructure and drought resilience projects.

So, what can farmers do to make their farms more resilient to drought? Professor David Lindenmayer and Michelle Young, of the Fenner school of environment and society at the Australian National University, have plenty of ideas.

They say a key approach is to invest in improving the condition of natural assets on farms, such as shelter belts (tree lanes planted alongside paddocks), patches of remnant vegetation, farm dams and watercourses.

This increases the land’s resilience to drought, with collateral benefit to the health and wellbeing of farmers.

“When done well, active land management can help slow down or even reverse land degradation, improve biodiversity, and increase profitability,” they say.

Restored riverbank vegetation can improve dry matter production in nearby paddocks, leading to greater milk production in dairy herds and boosting farm income by up to 5 per cent.

Shelter belts can lower wind speeds and wind chill, boosting pasture production for livestock by up to 8 per cent, at the same time as providing habitat for animals and birds.

Their work with farmers in NSW who invested in their natural assets before or during the Millennium drought suggests these farmers are faring better in the present drought, they say.

“The need to invest in maintaining and improving our vegetation, water and soil has never been more apparent than it is now. We have a chance to determine the long-term future of much of Australia’s agricultural land.”

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Sensible electricity rules await the next government

You can call it populism or you can call it desperation. In the case of Scott Morrison’s recent problem-solving efforts, desperation fits better. And wouldn’t you be?

Morrison is probably right in concluding it’s too late in the piece to be worried about carefully considered, long-lasting solutions to the many problems contributing to his government’s unpopularity.

We’ll know soon enough whether his flailing efforts to apply quick fixes will be sufficient to secure his government another term in office.

But only after whichever side wins is facing a clear run of years before the next election will we see how our political class responds to the bipartisan – and world-wide – loss of faith in neoliberalism and its use of deregulation and privatisation to pursue the nirvana of Smaller Government.

Only then will it be clear whether flawed ideology has been replaced by unthinking populism as advocated by the shock jocks, or by a more realistic, more nuanced approach to intervention in markets that aren’t serving consumers well.

Meanwhile, Morrison has an election to avoid losing. If Tony Abbott hadn’t greatly compounded the problem by abolishing the carbon tax, you could feel a bit sorry for Morrison. The monumental stuff-up of the move to a national electricity market, with its price blowouts at every level – generation, transmission and distribution, and retail – was decades in the making.

Only with the doubling of retail prices over the past decade has realisation dawned that the federal government can’t escape ultimate political responsibility for a “national” market run by a squabbling committee of state and territory energy ministers.

But Morrison’s announcement last week of a desperate collection of good, bad and indifferent measures to get retail prices down in a hurry – or at least appear to be getting them down – seems no better than a crude attempt to bludgeon some quick retail price cuts out of the three oligopolists that have come to dominate the market.

As was powerfully demonstrated by the events leading to the overthrow of Malcolm Turnbull, no government whose members can’t agree that the threat of climate change is real is capable of achieving a policy regime that restores a stable future for the energy industry.

Don’t be fooled, however, by the industry apologists claiming the only real problem is the uncertainty about future governments imposing a price on carbon emissions, and the rises in the wholesale price this is now causing as coal-fired power stations die of old age without adequate replacement.

That relatively new problem accounts for little of the retail price doubling over the past decade – which is the underlying reason for the public’s anger over the cost of electricity.

Putting the blame on the inability of the two federal political sides to agree on a response to global warming sweeps under the carpet the oligopolists’ gaming of the wholesale market, the distribution industry’s gaming of its price-setting formula, and the blowout in retail margins following the state governments’ deregulation of retail prices.

Companies at the distribution and retail levels are earning rates of profit far higher than they need to cover their cost of capital and risk-bearing.

The public has every right to be up in arms, and the federal government every right to step into the mess in search of ways to reduce profitability and prices at the retail level. Particularly because what the feds would be doing is correcting years of misregulation by dysfunctional state governments.

It’s not a question of deregulation versus regulation. Electricity has always been more highly regulated than other industries and always will be. The national electricity market is, after all, a creation of government, which from day one has been (not very well) regulated by public authorities.

Rather, it’s a question of how and why you intervene to correct the mess. Whether you act carefully and reasonably to get the industry moving towards a future that’s sustainable financially and environmentally.

Any changes need to be fair, although in this the balance should err in favour of fairness to consumers (and business users) who’ve been overcharged for years. The industry can’t be allowed to use the trade union argument that their present rates of profitability are “hard-won gains” that must remain sacrosanct.

When something shouldn’t have been allowed to happen in the first place, it’s no crime to belatedly reverse it. Talk of “sovereign risk” is self-interested bulldust. You can’t have a democracy in which governments are forbidden to change course.

But none of this seems to describe Morrison’s motivations. He want price cuts, he wants them now, and he doesn’t much care what stick he waves to get them.

A word of free advice, Scott: claiming to have achieved bigger price cuts than the punters see in their quarterly bills will only make them angrier.

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Growth in world economy will take a toll on the environment

If the world’s population keeps growing, and the poor world’s living standards keep catching up with the rich world’s, how on earth will the environment cope with the huge increase in extraction, processing and disposal of material resources?

It’s a question many people wonder and worry about – without much sign it’s even crossed the mind of the world’s governments.

Until now. The Organisation for Economic Co-operation and Development is about to publish a Global Material Resources Outlook, which uses much fancy modelling to make an educated guess about what’s likely to happen in the future.

The report projects that, over the 50 years to 2060, annual global use of materials – including metals, fossil fuels, biomass (food and fibres) and non-metallic minerals (mainly sand, gravel, limestone and other building materials) – will more than double, from 79 gigatonnes in 2011 to 167 Gt in 2060. Gosh.

So how did the report reach that figure? It started by estimating the likely growth in the world’s population. Although its rate of growth is expected to slow, the world population could increase from 7 billion to 10 billion by 2060.

At the same time, material living standards in the developing countries are expected to continue converging on those of the developed countries.

Gross domestic product per person is expected to continue growing at a much faster rate in the poorer countries than the rich ones. So much so that, by 2060, the global level of real GDP per person is expected to have reached where it was for just the (richer) OECD countries in 2011.

This implies a tripling in global income per person to about $US40,000 a year – after adjusting for PPP, purchasing-power parity, to allow for one US dollar buying a lot more in a poor country than it does Stateside. The fastest catch-up will be in China and, to a lesser extent, India and south-east Asia.

That’s good news for the world’s non-rich. It would be a bit rich for the well-off countries to expect the poor countries to stay poor just to reduce pressure on the natural environment in a way we’re not prepared to.

Multiply world population by world income per person and you get world GDP. It’s expected to quadruple.

Even so, its rate of growth may slow. Whereas at the turn of the century world GDP was growing at an average rate of about 3.5 per cent a year, it’s expected to stabilise at a rate of less than 2.5 per cent well before we reach 2060.

(Why? Partly because of arithmetic. It’s much easier for a small number to grow by a high percentage than for a big number to. But also because, when you’re way behind, it’s relatively easy to catch up with the world’s technological frontrunner, the US, by adopting its better existing technology. Once you’ve done the easy bits, however, it gets harder to grow as fast. China will account for much of the global slowing.)

But hang on. If world GDP is expected to quadruple, how come materials use is expected only to double?

It’s because other things – helpful things – will be going on at the same time. The first is that the world economy is “dematerialising”.

Machines and gadgets are getting smaller and using less metal, but more to the point is the “servitisation” of the world economy (there’s a new ugly buzz word to add to your collection) – the tendency for more of each dollar we spend to go on services rather than goods.

Services have lower materials “intensity” – materials use per unit of output - than goods. The shift in the mix from goods to services is a function of economic development. When you’re poor the main thing you want is more goods, but as you get richer there’s a limit to how much you want to eat or wear and how many cars and TV sets you need. But there’s no limit to how many things you’d like to pay other people to do for you.

This shift is already well advanced in the rich countries, but the poor countries have a lot of infrastructure and housing to build (and a lot of cars and TV sets to buy) before they begin to approach material satiation.

The share of services in world GDP is projected to rise from 50 per cent to 54 per cent over the 50 years.

A second helpful factor is that technological advance should increase the efficiency with which materials are used. The two factors are projected to reduce the materials intensity of world GDP at the faster average rate of 1.3 per cent a year.

So, the report finds, were materials use to keep up with economic growth, annual use would increase by 283 Gt to 362 Gt. But the shift to services will reduce that increase by 111 Gt and technological advance will reduce it by 84 Gt, meaning materials use rises to just 167 Gt in 2060.

Note, however, that this is growth in “primary” materials extraction, not “secondary” use of recycled materials, which the report says is likely to become more competitive and grow at the same rate. So increased recycling is another factor helping to explain the lesser growth in primary extraction.

With GDP growing faster than materials use, the report is expecting a partial “decoupling” of the two.

Of course, there’ll still be a big increase in pollution. Greenhouse gas emissions, but also acidification, freshwater aquatic ecotoxicity, terrestrial ecotoxicity, human toxicity via inhalation or the food chain, photochemical oxidation (smog), ozone layer depletion, and not forgetting increased land fill to dump the materials when we’re done with ’em.

Final point: this “baseline scenario” assumes no change in government policy. That’s the point: it’s intended to show the world’s governments how great is the need for them to make a policy response.

Such as? I’d like to see a tax on materials use, with the proceeds used to reduce the tax on labour income. Similar to a price on carbon, this would do much to encourage recycling, repair and renovation, and economising in the use of materials.

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Tax reform is pushed by rich males, for rich males

I know it’s a shocking thing for an economics writer to confess, but I’ve lost my faith in the Search for the Golden Tax System. I no longer believe that reforming our tax system is the magic key to improving the nation’s economic and social wellbeing.

As we start to review the modest achievements of the Abbott-Turnbull-Morrison government over the past five years, business people, economists and accountants are lamenting its lack of progress on tax reform.

It raised expectations of sorely needed reform, then wilted at the first hint of political difficulty. The Rudd-Gillard-Rudd government did little better in its six years.

So, the zealots are telling us, the tax system remains unreformed, a millstone around our economy whose threat to our future becomes ever-more urgent. Every so often, one of the big four firms of chartered accountants comes up with its own plan to fix everything.

Sorry, not buying. It’s true our tax system is far from ideal, but if after decades of trying we’re still no closer to nirvana, it’s doubtful we ever will be.

Meanwhile, other aspects of the economy just as important to our present and future wellbeing, and just as in need of “reform”, languish while we obsess about taxes.

Such as? Education and training. Health. Cities with long commute times. “Sorry, we’ll get on to it as soon as we’ve increased the GST.”

The never-ending quest for tax reform is being promoted partly by econocrats, tax economists and tax accountants who specialise in the topic and have little to contribute on other issues.

But the biggest push is coming from rich white males in big business. Their goal is to “reform” the tax system so that they and their company pay less and others pay more. No matter how long it takes, they won’t “move on” until they’ve got what they want.

She didn’t put it this way, but the truth that tax “reform” has long been pushed by well-off men for their own benefit – and at the expense of less well-paid women – was demonstrated in a paper given at a tax conference last week by one of our leading tax economists, Professor Patricia Apps, of the University of Sydney Law School.

She showed how the Productivity Commission’s recent report finding there’d been no increase in inequality in recent decades rested on lumping couples’ incomes together, ignoring the difference in contributions by each partner and, in particularly, assuming that “home produced goods and services” - such as childcare, cooking or cleaning - make no contribution to the family’s standard of living, so can be ignored when they have to be bought in because both partners are working.

To be fair, the commission did its analysis the way it’s usually done. But that’s because such analysis is mainly done by men, to whom it never occurs to take account of home production.

Apps used samples of more than 2400 households from the official household expenditure surveys in 2004 and 2016 to divide their income between that contributed by the “primary earner” (mainly male) and the “secondary earner” (mainly female). Primary earners were aged between 20 and 60.

She found that over 12 years, the incomes of primary earners’ in the bottom decile (group of 10 per cent) rose by 53 per cent, increasing to a 78 per cent rise for those in the eighth decile and 124 per cent for the top decile. Look like rising inequality to you?

Then she estimated the income tax those primary earners paid, after adjusting for inflation. Comparing the last year with the first, those in the bottom decile got a real tax saving of $1450 a year, whereas those in the top decile got a saving of $12,340 a year.

So, high income earners benefited most. But get this: after the bottom decile the tax saving fell to a low of $200 for the fifth decile and $370 for the sixth. It then started rising slowly until it leapt for the top decile.

See what’s happened? Very low income earners have done OK, earners at the very top have done brilliantly, and people around the middle have got peanuts. Guess where the (mainly female) secondary earners are likely to be congregated?

Of course, the high income-earners keep telling us their tax rates need to be cut to encourage them to work harder. But Apps has calculated the workers’ “labour supply elasticity”. In effect, she finds it’s very elastic (price-sensitive) for part-timers, but quite inelastic for full-timers, particularly those who’re highly paid.

Looking at primary earners in the top decile, she found that, despite their huge pay rise over the 12 years, and their generous tax cuts, the average number of hours they were working was virtually unchanged.

The various tax changes we’ve had – which aren’t nearly enough to satisfy the tax reformers – have favoured (mainly male) high income-earners, without any sign it’s made them work more.

The people whose decisions about whether to leave the home to do paid work, or to move from part-time to full-time, are those most likely to be affected by the tax they have to pay, but are no better off and probably worse off.

No prize for guessing these are mainly women with children. All this is long known by true tax experts – but just as long ignored. Tax reform is a game for well-off men on the make. Wake me when the women take over.

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Not sure what the economy's up to? Nor are the experts

There are times when the rich world’s macro-economists think they’ve got everything figured, and times when they know they haven’t. The latter is where we are now, with the entire profession scratching its head and wondering what’s causing the economy to behave as it is.

The last time economists thought they had it tabbed was between the mid-1980s and the mid-2000s. The world economy was growing so smoothly they decided we’d entered the Great Moderation and began patting themselves on the back.

Always a bad sign. Next thing we knew the global financial crisis had arrived and with it the Great Recession.

But it’s now a decade since the start of that recession, and it’s clear the advanced economies aren’t back to anything like what they were – even, despite appearances, the American economy.

The problem has various symptoms, but it boils down to slow economic growth, which boils down further to much slower rates of productivity improvement than we’ve been used to. This is surprising when you consider how much digital disruption we’re seeing. Isn’t that aimed at improving productivity?

So why is it happening? That’s anybody’s guess. A host of possible explanations is being advanced and debated. It could be another decade before a new conventional wisdom emerges.

I’ve written before about the thesis that the digital revolution won’t boost productivity the way earlier waves of general-purpose technologies did, about the thesis of “secular stagnation” and yet another idea that the main trouble is decades of weak business investment.

But last week Dr Luci Ellis, a Reserve Bank assistant governor, offered her own thoughts on yet another possible piece in the jigsaw puzzle. Productivity is generated by firms, but Ellis notes that, both in Australia and abroad, the evidence suggests that levels of productivity vary widely between firms, even within the same narrowly defined industry.

“Firms that are highly productive – so-called superstar firms – tend to grow faster, grow employment faster, and pay better than firms that are a long way from the frontier of productivity”, she says.

But there’s a problem. Because these superstar firms are more productive than average, they gain market share at the expense of less-productive competitors.

The leading firms could start moving further and further ahead of the pack.

Those that lag behind would then find it harder and harder to catch up. The result could be that markets become more concentrated.

“The market leader begins to reap monopoly profits, which isn’t good for consumers and might not be good for long-run innovation and [society’s] welfare”, she says.

But must the laggard firms never catch up? That may depend on why so many firms are lagging. If it’s because they lack managerial ability, it ought to be possible for them to copy the leaders’ superior approach or even poach their rival’s managers. If so, this would lift the whole industry’s – and the nation’s – productivity.

But what if the laggards have lower productivity because they aren’t adopting the latest technology the way the superstars are? There’s evidence this is the case in other advanced economies, but Ellis says we don’t yet know if it’s true in Australia.

If this superstar pattern has arisen only recently, it could be something to do with the nature of developments in digital technology and their ease of adoption.

Previous waves of general-purpose technologies, such as electricity or the earlier round of computerisation, had the benefit of reducing the level of skill needed to operate them, whereas innovations such as machine learning and artificial intelligence seem to have a very different character, she says.

“Using machine learning and other emerging techniques to automate routine business processes seems to involve specialist skills and, often, PhD-level training in statistics or computer science. These skills are much rarer and take longer to develop than those required for the jobs that are thereby replaced.

“That doesn’t mean it’s impossible, but it could take a long time,” she says.

And get this: if leading-edge technologies are (at present, anyway) unusually costly or difficult to adopt, they become a kind of barrier to entry protecting the firms that are already using those technologies.

That would be a worry if lagging firms never caught up. And if incumbents never face rivals, they’re more likely to become complacent. “Innovation could slow down, and growth in living standards with it”, she concludes.

So, is this the big reason productivity improvement has slowed throughout the advanced economies? Far too soon to say.

But it makes an important point: the problem, and the solution, lie in the hands of our big companies.

Governments may have a role in spending more – and more wisely – on education and training, but giving up a lot of revenue to cut the rate of company tax isn’t likely to make much difference.

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Sorry, small business has no special sauce for jobs

Scott Morrison is surely on a winner with his decision to step up pursuit of jobs and growth by bringing forward the time when small and medium businesses have their company tax rate cut to 25 per cent.

Certainly, it’s likely to be a popular decision, not just with the owners of the more than 3 million businesses who’ll be paying a bit less tax, but also with a lot of ordinary voters.

After all, as everyone knows, small business is the backbone of the economy and its engine room. It’s where most of the economy’s jobs are.

How does everyone know it? Because that’s what politicians – and the small business lobby – keep telling us.

This is why Morrison is so confident of getting the bring-forward passed by the Senate.

Cutting the smaller-business company tax rate to 25 per cent by 2021-22 rather than 2026-27 will have an additional cost to revenue of $3.2 billion over four years.

Only about $1.3 billion of this would be offset by the government’s abandonment of its plan to cut the tax rate for bigger businesses. The rest would be covered by repaying government debt more slowly than previously projected.

There’s likely to be enough cross-benchers keen to push the fast-tracking through – big business may not be judged worthy of a tax cut, but smaller business is - even if Labor isn’t playing ball.

But it seems Labor will be. Why? Because it, too, professes to believe small business is what the economy revolves around.

According to its official policy: “Small businesses make a huge contribution to national prosperity and supporting Australian jobs. Small businesses play a central role in the economy.”

There’s just one problem with all this stuff. It ain’t true.

When you study the facts and figures, there’s no reason to believe small business has any economic virtue not possessed by businesses of any other size. If anything, the reverse.

I’ve spent my whole career as an economic journalist refuting the delusional claims of this or that part of the private sector to be more worthy than the rest of it.

If it’s not small business claiming to be the economy’s engine room, it’s farmers claiming to be the bedrock on which the rest of the economy is built, or manufacturing claiming that making things is more virtuous than doing things (providing services).

There are all those ads telling us it’s mining the country most depends on. (They’re trying to draw attention away from the truth that mining is hugely profitable, about 80 per cent foreign owned, avoids as much tax as possible and employs surprisingly few workers.)

Then there are the exporters claiming that producing things for sale to foreigners is more important than producing things for sale to locals.

Plus, of course, the common delusion that the private sector is “productive” whereas the public sector is unproductive and even parasitic. Do you really think curing the sick or teaching the young – or even directing the traffic – is unproductive? That people in the private sector pay taxes, but workers in the public sector don’t?

It’s all economically illiterate hype. And it’s used to try to justify demands that the government give my bit of the economy a special deal not available to other bits. Economists’ name for it is “rent-seeking”. (Though, as recent events remind us, no one does rent-seeking better than the Catholic schools.)

But back to measuring against the facts the claims that small business has a special sauce when it comes to jobs. It’s complicated by the fact that the usual way of measuring the size of businesses is according to the number of their employees, whereas eligibility for the lower company tax rate is determine by the size of a business’s turnover (sales, not profits).

Morrison says there are more than 3 million businesses with turnover of less than $50 million a year, employing “nearly 7 million Australians”.

If so, that’s more than half of our total “employed persons” of 12.6 million. But about a third of those 7 million would be in medium-size businesses, not small.

According to the latest figures from the Australian Bureau of Statistics, for 2016-17, small business (defined as firms with fewer than 20 employees) has 4.8 million workers, medium-size business (20 to 199 employees) has 2.6 million workers and large business (200 plus) has 3.5 million.

That means small business employs just 44 per cent of the private sector workforce and about 40 per cent of the total workforce.

But just because a sector employs a lot of workers, that doesn’t necessarily mean it's creating jobs faster than other sectors.

Over the two years to June 2017, small business may have had 44 per cent of the existing private sector jobs, but it accounted for only 18 per cent of the growth in jobs.

Overall, private sector employment grew by 2.3 per cent, but small business employment grew by just 0.9 per cent. Combine small and medium and they grew by 2.3 per cent, about the same rate large-business employment growth.

And this during a period when smaller businesses were paying a lower rate of tax, supposedly to encourage them to create more jobs.

Actually, the lack of apparent response shouldn’t be a surprise. The typical tax saving is small. Morrison himself says that an independent supermarket or a pub that makes a $500,000 annual profit would save $12,500 in 2021-22 “to invest back into the business or staff, or help to manage cash flow”.

That doesn’t buy many jobs, nor many pay rises. And since businesses are free to use their tax saving however they see fit, there’s no reason to think they’ll favour more jobs or higher wages. No more than big businesses would.

If Morrison’s on a winner, it’s a political winner, not an economic one.

But if there’s nothing special about small business, why do politicians on both sides keep spreading the sector’s propaganda that it is special?

Because the many more owners of small businesses have far more votes than the relatively few bosses of big businesses do. It's politics, not economics.

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Want a more capable nation? Start younger

The older I get, the more unimpressed I become with both sides – all sides – of politics. And the more disdainful I become of people who let loyalty to a particular party determine their support or opposition to particular policies. Don’t think for yourself, just follow your herd of choice.

On the other hand, since I do care about policy, I shouldn’t be slow to give a tick to whatever side is first to come up with a good one. So, two cheers for Bill Shorten for promising to extend universal access to preschool to three-year-olds.

The Coalition government and its predecessors, together with the state governments, have done a good job of ensuring almost all four-year-olds are now attending preschool for the equivalent of two days a week during the school year (though, for reasons I can’t fathom, the feds have insisted on guaranteeing funding for only a year at a time).

Trouble is, getting four-year-olds to preschool takes us only halfway to catching up with most other advanced economies, even New Zealand. So, with any luck, Scott Morrison won’t be too proud to match Labor’s promise to extend it to three-year-olds.

Why is an economics writer getting so excited about preschools? Because I can’t think of any other single initiative more likely to benefit us socially and economically.

And to do so at a relatively modest cost to taxpayers – particularly when you remember that the kids you help most will end up working more and paying more tax, while costing the government less in welfare benefits and accommodation courtesy of Her Maj.

For anyone who’s been living under a rock for the past 25 years, perhaps the most important and useful scientific discovery of our times is that the human brain develops rapidly in the first five years of life, and both the nurturing and the intellectual stimulation a child receives in that time has huge influence over their wellbeing during their lives.

An independent report prepared last year for state and territory governments by Susan Pascoe, of the Australian Council for International Development, and Professor Deborah Brennan, of the University of NSW, found “extensive and consistent” research evidence of the benefits of quality early childhood education.

The years before school are “the period when children learn to communicate, get along with others and control and adapt their behaviour, emotions and thinking".

“These skills and behaviours establish the foundations for future skills and success. They are provided in most, but not all, homes”, the report says.

Quality early childhood education gives all children the best chance of establishing these capabilities. Without these foundations in place, children often struggle at school, and then often go on to become adults who struggle in life, it says.

This is why the measured benefits of early education are greatest for vulnerable or disadvantaged children, including Indigenous children. “Support for these children is vital – children who start school behind their peers stay behind. Quality early childhood education can help stop this from happening, and break the cycle of disadvantage,” the report says.

It finds that quality early childhood education makes a significant contribution to achieving educational excellence in schools. There’s growing evidence that participation in early education improves school readiness and lifts NAPLAN results and scores in international tests.

“Children who participate in high-quality early childhood education are more likely to complete year 12 and less likely to repeat grades or require additional support."

It also has broader impacts: it’s linked with higher levels of employment, income and financial security, improved health outcomes and reduced crime. It helps build the skills children will need for the jobs of the future.

These days, childcare and early childhood education overlap, which explains why childcare is now called ECEC – early childhood education and care. Ordinary childcare for the under-threes now involves a higher proportion of TAFE-trained early childhood educators.

The two years of preschool we’re considering would occur in a range of settings: long daycare centres, community preschools and kindies, and schools. For parents with children already in care, 15 hours a week would be funded by the government, cutting costs to families.

But all this talk of “education” doesn’t mean hothousing young minds. As Professor Alison Elliott, of Central Queensland University, explains, learning is “play-based” – meaning children learn through play, both self-directed (“free play”) and guided by a trained adult following the official “early years learning framework”.

Preschool gives children access to a four-year degree-qualified early childhood teacher. Elliott notes that one problem in expanding preschool to three-year-olds is the present extreme shortage of early childhood teachers and educators.

But for those who’ve wondered “where will the jobs come from?” – especially after the robots arrive – what’s a problem for some is an opportunity for others. Such skilled jobs are likely to be full-time and permanent; they won’t be in the “gig economy”.

And those jobs will be created by bigger government – greater provision or subsidisation of public services, paid for by our higher taxes. In this and other areas, government will be a key source of additional employment.

Pascoe and Brennan point out that the linking of childcare and early childhood education allows governments to deliver us a “double dividend”: if they do it right, they can subsidise childcare to encourage parents’ participation in the paid workforce, while also promoting children’s wellbeing, learning and development. Sounds good to me.

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The long run is now, and bills are arriving

It’s easy to take Keynes’ dictum that “in the long run we’re all dead” out of context. When you do, you can come badly unstuck - as the banks and insurance companies are discovering.

In case you’ve ever wondered, economists see the short term as being for a year or two, the medium term as about the next 10 years, and the long term as everything further away than that.

See the point? If the long run is only 10, 15, 20 years from now, you won’t be dead. Nor will most of the people around you at work. The economy will still be alive and kicking in 20 years’ time and, in all probability, so will your company.

In which case, spending too many years making short-sighted decisions could leave you looking pretty bad if you haven’t had the foresight to skip town.

For many years people have bemoaned “short-termism” – the tendency to favour quick results over longer-term consequences. To go for the flashy at the expense of patient investment in future performance. To do things where the benefits are upfront, and the costs much later, even when the initial appearance of success actually worsens the likely outcomes down the track.

Short-termism seems particularly to have infected big business. Listed companies are under considerable pressure to ensure every half-year profit is bigger than the last.

This pressure comes from the sharemarket, from “analysts”, but more particularly from institutional investors – the super funds, banks and insurance companies that manage the savings of ordinary people, invested mainly in company shares.

Although the “instos” don’t actually own many of the shares they control, they represent the shares’ ultimate owners (you and me) by continuously pressuring companies to get higher and higher profits – which will lead to ever-higher share prices.

It’s long been alleged that the short-termism the sharemarket forces on big business – to which companies have responded by trying to align executive pay with profits and the share price – has led firms to underinvest in projects with high risks or long payback periods.

If so, this fits with former senior econocrat Dr Mike Keating’s thesis that the advanced economies’ weak growth in activity, productivity and real wages is explained mainly by a protracted period of weak investment.

But the banking royal commission is a stark reminder to a lot of companies, the sharemarket and shareholders that after years of short-sighted, corner-cutting, even illegal behaviour, the long run has arrived, we’re all still alive and there are bills to be paid.

Those bills will take many forms. It’s likely some of the borderline customer-harming behaviour will become illegal, and so won’t be available to keep profits heading onward and upward every half-year.

Banks and insurance companies found to have mistreated their customers in ways that are outright illegal, will face big bills for restitution.

But probably the biggest bill comes under the heading of “reputational damage”. As Australian Competition and Consumer Commission boss Rod Sims reminded us in a speech, most companies spend much time and money promoting and protecting their “brand”.

A highly-regarded brand is money in the bank to the firm that owns it – as you see just by comparing the prices of branded and unbranded goods on a supermarket shelf. Brands engender trust – that the product is of consistently good quality and will do what it promises to do – and often social status.

But, as Sims says mildly, “bad behaviour by a company can undermine its brand reputation”.

“A key value of the royal commission has been to expose the poor behaviour of financial institutions to public scrutiny. The evidence about the conduct of AMP was particularly damning. The resulting damage to AMP’s brand reputation has been substantial.”

Sure has. And that damage to AMP’s reputation and likely future profitability has seen its share price fall by 35 per cent since its first day in the witness box in April.

Sims says one way to discourage misbehaviour by companies is to “identify and shine a light on bad behaviour”.

“The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours,” he says.

Get it? The regulators are wising up, and in future will do more to name and shame offenders – to diminish brand reputation – so as to discourage short-sighted, take-no-thought-for-the-morrow behaviour. To move firms from the short run to the long run.

So far, the big four banks’ share prices have fallen only a per cent or two since the release of the commission’s interim report. But my guess is they have a lot further to fall once we see the full price they’ll be paying for past short-run profit-maximising behaviour, and how much less scope there’ll be for such behaviour “going forward”.

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Why so many businesses are behaving badly

While we digest the royal commission’s evidence of shocking misconduct by the banks and insurance companies, there’s another unpalatable truth to swallow: they have no monopoly on bad behaviour.

It seems almost everywhere you look you see examples of companies behaving badly. In a major speech he gave a few months ago, the chairman of the Australian Competition and Consumer Commission, Rod Sims, offered a remarkable list of business household names the commission was taking proceedings against, as I noted at the time.


Commissioner Kenneth Hayne has given us a lawyer’s explanation of why the banks misbehave, but Sims’ speech offers an economist’s explanation.

It’s an important, though sensitive, question for economists since their simple “neo-classical” model of markets predicts firms won’t mistreat their customers because, if they did, they’d lose them to a competitor.

Sims offers seven reasons for this evident “market failure” – a term economists use to acknowledge when real world markets fail to deliver the benefits the textbook model promises.

First, he says, meeting customer needs may not be the main way companies succeed.

On the supply side, markets and economies are driven by the desire of firms to earn and grow profits. (On the demand side, markets are driven by the self-interest of consumers seeking the best deal they can get.)

Nothing wrong with that. Indeed, it often means that those businesses best at meeting the needs of consumers over the longer term do best and survive longest.

“However”, Sims concedes, “being the best at meeting the needs of consumers is not the only, or even the dominant, way firms succeed. Staying ahead of rivals through continual improvement is a difficult task for most companies; eventually, someone [else] works out how to do things better and cheaper.”

“Commercial strategy therefore is largely about building defences against the forces of competition. To make it more difficult for other firms to develop a better product. Or, if they do, to limit their access to customers.” Much of this is perfectly legal.

Michael Porter, the doyen of corporate strategists, from Harvard Business School, demonstrated that firms can best attain commercial success by reducing the number of competitors, by erecting high barriers to new firms entering the market, by keeping suppliers dispersed and weak, by using brands or the bundling of products to create strong consumer loyalty, and by reducing the likelihood of other firms being able to offer your customers products those customers see as substitutable for your product (that is, by “product differentiation”).

Sims’ second reason customers may not get treated well is that executives are under considerable sharemarket pressure to increase short-term profits, so as to increase share prices. Executives’ bonuses are often geared to achieving this.

Many companies set a sales or profit target higher than the growth in nominal gross domestic product, meaning not all of them can achieve it. This can induce some executives to push the boundaries and ignore the risk of reputational damage over the longer term.

Third, in some markets poor firm behaviour goes unpunished by customers. This can be so because customers don’t see what’s been done to them – that they’re being misled, or that firms have formed an (illegal) cartel to keep prices high.

Or it can happen because customers don’t have viable alternative products to turn to. Or switching to another provider may be too difficult or costly. Firms may deliberately make it hard to compare their product with their competitors’.

Fourth, competition can become a race to the bottom rather than the top if firms gain a competitive edge through poor behaviour that goes undetected and unpunished. Stay pure and you lose business. A firm can know it’s bad practice, but not be game to be the first to stop doing it.

Fifth, companies may give their staff financial incentives without adequate safeguards to prevent mistreatment of customers.

Companies can establish poor business models, such as arrangements that leave franchisees little room to achieve a return on their investment while paying their workers award wages.

Sixth, customers can consider themselves badly treated when firms (including banks and power companies) engage in “price dispersion” – charging new customers a lower price than existing customers – which is a common practice and perfectly legal.

Economists have often judged this to be a good thing - “welfare enhancing”. But Sims notes that such behaviour imposes extra search costs (spending leisure time checking to see that companies you deal with aren’t taking advantage of you) which are a loss to society.

(He could have added than the economists’ simple model assumes away all search costs – an example of “model blindness”, by which economists mislead themselves.)

Finally, customers can suffer if executives’ loyalty to their company leads them to sail closer to the edge of what’s legal than they would in their private lives. If some lawyer tells you it’s not illegal, does that make it honest?

Not surprisingly, the economist’s explanation of why businesses behave badly is very different to the judge’s. But when it comes to what we can do about it, Sims and Hayne aren’t far apart.

Commissioner Hayne’s answer is not to pass new laws outlawing conduct that’s already illegal, but to increase penalties so as to make them a realistic deterrent to big businesses whose size means their misconduct in just one area can earn them huge sums, and then police the law with far more vigour and diligence that so far shown by the financial regulators, including Treasury.

Sims has several suggestions. Increase the "private cost" of bad behaviour by identifying and shining a light on bad behaviour, increasing penalties and continually looking for new ways to increase regulators’ ability to identify and pursue bad behaviour.

Markets will never be as competitive as the textbook model assumes, but Sims says governments should ensure they’re as competitive as possible.

And they should bolster competition on the consumer side by taking measures to lower customers’ search costs – the time and effort needed to find the best deal.

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How a better business culture is within reach

Last week must have been a terrifying wake-up call for Australia’s ruling class – not just our politicians, but also the chief executives and directors of our big corporations, both publicly and privately owned.

If they’re half as smart as they’re supposed to be – after all, we’re told they got their jobs on merit – their performance of their duties will be much improved “going forward”.

The problems at the ABC – managing director sacked and chairman resigned in the same week – and the problem behaviour of our banks are very different, but they have one thing in common.

Members of the ABC board were made aware, if they hadn’t already known, of the chairman’s alleged interference in the day-to-day running of the corporation in a way that endangered its independence from the elected government, but chose to do nothing. Until that knowledge became public and the public’s horrified reaction obliged them to act.

The directors of our big banks presided for many years over a system of remuneration incentives – from the chief executive down – that rewarded staff for putting profit before people.

If the directors didn’t know this was leading to bank customers being mistreated, regulators misled and laws broken, it can only be because they didn’t want to know.

Well now, thanks to the royal commission’s shocking revelations, all of us know the extent of the banks’ misconduct. And the directors have nowhere to hide.

See the link between the two cases? When you’re on a board, it’s easy to see how things look from the viewpoint of the insiders – the people in the room, and on the floors below. What’s harder to see, and give adequate weight to, is the viewpoint of outsiders.

But that’s the board members’ duty, statutory and moral: to represent the interests of outsiders, including the shareholders, but also other “stakeholders”. To view things more objectively than management does. To avoid falling into groupthink. To rock the boat if it needs rocking.

A good question is: how would it look if what’s now private became public? Because that’s what happened last week. And now a lot of executives and directors are viewing the consequences of their acquiescence with fresh eyes and are not proud of what they see.

The ABC’s governance problems, we must hope, will be fixed relatively quickly. The misconduct of the banks is a much tougher problem.

The interim report of the banking royal commission carried a wake-up call also for the financial regulators – particularly the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, but also the Reserve Bank and Treasury.

Allow yourself to be captured by the people you’re supposed to be regulating, and one day your failure to do your duty according to law will be exposed for all to see. How good will you feel?

Get too cosy and obliging, and the banks take advantage of you behind your back. Conclude from things they say - and the way they keep cutting your funding – that your political masters want you to go easy on their generous-donor mates in banking and, when the balloon goes up, the pollies will step aside and point at you.

Since you did neglect your duty to protect the public’s interests, you won’t have a leg to stand on.

Some people were disappointed the interim report contained no recommendations – no tougher legislation, no referrals to the legal authorities – but I was heartened by Commissioner Kenneth Hayne’s grasp of the root cause of the problem and the smart way to tackle it.

Too often, he found, the misconduct was motivated by “greed - the pursuit of short-term profit at the expense of basic standards of honesty . . . From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales”.

Just so. But what induces seemingly decent people to put (personal) profit before people? That’s a question for psychologists, not lawyers. We’re social animals with an unconscious, almost irresistible urge to fit in with the group. A tribal urge.

Most of us get our sense of what’s ethical behaviour from the people around us in our group. If what I’m doing is no worse than what they’re doing, that’s ethical. Few of us have an inner moral compass (set by our membership of other tribes – religious or familial) strong enough to override the pressure we feel under from what our bosses and workmates are saying and doing.

Sociologists call this “norms of acceptable behaviour” within the group. When regulators first said that banks had an unhealthy corporate “culture”, business leaders dismissed this as soft-headed nonsense. Now, no one’s arguing.

But, we’re told, how can you legislate to change culture? Passing laws won’t eliminate dishonesty.

Fortunately, that’s only half true. Rationality tells us people’s behaviour flows from their beliefs, but psychologists tell us it’s the other way round: if you can change people’s behaviour, they’ll change their beliefs to fit (so as to reduce their “cognitive dissonance”).

Hayne says “much more often than not, the conduct now condemned was contrary to law”, which leads him to doubt that passing new laws is the answer.

So what is? His hints make it pretty clear, and I think he’s right. Make sure everyone in banking knows what’s illegal, then police the law vigorously with meaningful penalties. Fear of getting caught will override greed, and a change in behaviour will be reinforced by an improvement in the banking culture.

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Digital disruption is changing us for better and worse

The rise of the internet and other aspects of the digital revolution has changed our working and private lives – mainly for the better. But all technological advance has its downside.

We tend to soon take the benefits for granted and are only starting to understand the costs.

To start with the latest, how many of us watched every moment of either or both grand finals, compared with how many of us actually attended the grounds?

If many of us did neither, it’s because digitisation has greatly multiplied the range of rival entertainments available to us – including while we’re supposed to be working.

Of course, the televising of sport – which has commercialised almost every (male) comp – began long before the internet. But it’s now digitally enhanced.

Trouble is, we seem to be watching more sport, but playing less. Is this a net plus?

Staying with leisure, who hasn’t passed many pleasant hours watching YouTube? Or spent hours on Facebook – still the only commercially significant social medium – thinking how much more exciting their friends’ adventures are compared to their own, or how better-looking or happier their grandkids are.

Mobile phones and social media have given us much more frequent contact with family and friends – although I agree with social commentator Hugh Mackay that digital contact is greatly inferior, in terms of emotional satisfaction and effective communication, to face-to-face contact.

We spend so much of our lives staring at screens, which seem to get smaller when we’re on the go, and ever bigger when we’re at home.

Indeed, I sometimes think there can be few white-collar jobs left – from chief executive to office kid - that don’t consist mainly of sitting at a desk in an office, staring at a screen. As a consequence, many jobs have become more office-bound.

Reporters, for instance, use up far less shoe leather. They “attend” a media conference without leaving the office. The hearings of the banking royal commission occurred mainly in Melbourne, but my colleague Clancy Yeates listened to almost every word by staying stuck to his desk in Sydney.

The internet has revolutionised banking, bill paying and how we pay for things in shops or repay a friend – and there’s a lot more to come. You need to be very old to think it noteworthy that these days we rarely darken the doors of our bank branch.

In the day, city workers devoted much of their lunch hours to walking a few streets to pay an electricity bill at the power company’s office. These days, you pay bills via the internet – or set up an arrangement to have them paid automatically.

(Lunch hours are disappearing, too. Eat something at your desk. But while you’re eating, it’s OK to switch from doing spreadsheets to catching up with the news on your favourite newspaper’s website.)

Some people find it harder to manage their money because it’s now less tangible and more conceptual. Pay envelopes stuffed with notes were long ago replaced by direct credits to your bank account. You pay for things with a plastic card (meaning many young people have trouble learning to manage their credit card). We now wave a card – or a phone – to pay the tiniest of amounts in stores.

When the Reserve Bank’s “new payments platform” – allowing you to move money from one account to another if you know, say, the other person’s mobile phone number – is fully adopted, it will be one of the last nails in the coffin of cheques, and bank notes will be a step closer to being used only by people up to no good.

Digital disruption – which has much further to run – almost always brings pain to conventional producers and their workers, but benefits to consumers. Digitised products are always more convenient and usually cheaper. They bring wider choice and easier comparison.

Online shopping is in the process of eliminating the “Australia tax”, whereby Australians pay higher prices for many items than consumers in America and elsewhere, but are sometimes blocked from accessing the cheaper foreign sites.

The digital revolution is changing the structure of our economy (as well as all the other advanced economies) in ways we don’t yet know about, don’t fully understand and don’t even know how to measure properly.

While the punters bang on about the cost of living, the Reserve Bank says one reason consumer price inflation stays so low is that heightened competition in retailing – most of it related directly or indirectly to digitisation – is forcing down prices, or holding them down.

Now we’re told that weak growth in wages is explained partly by the slowness with which advances in technology are spreading from the leading firm in an industry to the rest of them.

If so, that’s another downside from the digital revolution.

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