Find parenting tough? Be glad you're not American

I have a news flash: being a grandad beats being a parent. Parenting is now a much tougher gig, whereas grandparenting is all care and no responsibility. And it’s a lot cheaper.

These thoughts are prompted by an article in the New York Times, in which Claire Cain Miller writes that parenthood in the United States has become much more demanding than it used to be.

“Over just a couple of generations,” she writes, “parents have greatly increased the amount of time, attention and money they put into raising children. Mothers who juggle jobs outside the home spend just as much time tending their children as stay-at-home mothers did in the 1970s.”

(How does she know how much time mothers spend on their kids? Because the US government conducts regular surveys of how people use their time. We used to do so too, but have since decided we can’t afford to keep it up. Great decision, guys.)

“The amount of money parents spend on children, which used to peak when they were in high school, is now highest when they are under 6 and over 18 and into their mid-20s,” she writes.

The most momentous social change in my lifetime came sometime in the 1960s when Australia’s parents decided (as did parents in most advanced economies) that their daughters were just as entitled to a good education as their sons.

That simple attitudinal change has had huge economic and social ramifications, to which we and our governments are yet to fully adjust.

These days, most kids go to year 12, and most of those go on to uni. But girls outnumber boys in year 12 and at uni. When girls (and their parents and the taxpayer) have invested so much time and money in attaining a good education, it’s hardly surprising most of them want to put that education to work, so to speak, to gain the monetary reward but also to gain more intellectual (and social) stimulation than they would staying at home.

This “economic emancipation of women” has greatly increased the rate at which women participate in the (paid) labour force, making Australians a lot more prosperous, including by creating a lot of jobs for women performing services most women formerly performed for themselves at home, such as childcare.

The rise of the two-income family is one factor contributing to higher house prices. Governments have had to do a lot of work (and spend a lot of money) renovating the institutions of the labour market which, over the centuries, were designed exclusively to meet the needs of male breadwinners.

They’ve had to spend a lot more on high school and university education, legislate to ensure women (and later men) keep their places when they go on parental leave, receive at least some payment while on that leave, and receive big subsidies for a greatly expanded and heavily regulated system of childcare – in which childcare workers are better trained and much better paid.

Now there are strengthening efforts to ensure women get a much bigger share of the top jobs (with pay equal to the top men) – including in parliament.

Meanwhile, however, the nature of parenting has changed. Two-income families have more money to spend on fewer kids, and spend it they do – partly, I suspect, because mothers feel guilty about the time they don’t spend with their kids (I’m not saying they should, just that many do).

Parents, mainly mothers, put much time and money into taking their kids to after-school sporting and cultural training and (particularly in NSW) exam coaching. Many imagine sending their kids to expensive private schools will buy them a better education.

We’ve entered the era of “intensive parenting”, which brings us to Miller’s point that modern American mothers spend just as much time parenting as their stay-at-home mothers or grandmothers did. They just do different things.

As yet, however, it’s not nearly as bad in Oz as it is in the US. The gap between rich and poor has widened so much in America (with a bigger cost and status gap between government-funded universities and private Ivy-League colleges), that parents worry their kids won’t be able to live as well their parents did. In the States, parenting has become a lot more competitive.

Nor is it nearly as true here that children are most expensive before they get to school and after they leave it and head to uni. Our childcare is much more heavily subsidised than America’s. And our HECS-HELP “income-contingent loans” for uni tuition fees are much more concessional than what the Yanks do.

We have no need to worry about our kids being loaded up with HECS debt.

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Indigenous small business is on the rise

It’s the season of good cheer, so let me give you some good news: we’re not making the progress we should be in Closing the Gap between Indigenous and non-Indigenous Australians, but when it comes to increasing the ranks of Indigenous small-business people we’re doing surprisingly well.

The number of Indigenous owner-managers is conservatively estimated to have increased by 32 per cent between 2006 and 2011, and by 30 per cent between 2011 and 2016.

That’s coming off a low base but, even so, the number increased from 10,400 to 17,900 over the decade to 2016. This took the proportion of Indigenous owner-managers in the over-15 population from 3.2 per cent to 3.4 per cent.

This may not seem much, but it occurred while the proportion of non-Indigenous owner-managers actually decreased from 10 per cent to 8.6 per cent – a fall that probably reflects the difficulties affecting the economy since the global financial crisis in 2008.

It says Indigenous small businesses are making headway in the economy despite its relatively low growth over the past decade.

The figures have been derived from census data in a paper by Siddharth Shirodkar and Dr Boyd Hunter, of the Centre for Aboriginal Economic Policy Research at the Australian National University, and Professor Dennis Foley, of the University of Canberra.

The authors note that the historical exclusion of Indigenous Australians from mainstream economic life has led to low accumulation of wealth across many Indigenous communities. Only a relative few gained formal business experience before the past decade.

The result is that the vast bulk of entrepreneurially inclined Indigenous Australians probably lack the key preconditions to start a business and prosper in our capitalist economy, they say.

Today, however, things are improving – to some extent as a result of government policy. In 2015, the Indigenous Procurement Policy established targets for federal government departments to buy what they needed from Indigenous suppliers.

The value of successful tenders by Indigenous business owners has grown from about $6 million in 2012-13 to more than $1 billion in the policy’s first two and a half years to the end of 2017. Today, more than 1000 indigenous businesses are contracting with the feds.

This year the government also announced the Indigenous Business Sector Strategy, which includes measures to provide greater business support, improved access to finance, stronger connections to business networks and better sharing of information about commercial opportunities.

But all of that is insufficient to explain the rise in Indigenous enterprise over the past decade. And get this: official analysis of the register of Indigenous businesses suggests that Indigenous-owned firms are between 40 and 50 times more likely to hire Indigenous employees than are non-Indigenous firms.

So the establishment of Indigenous businesses is an important mechanism to deliver economic development and increased Indigenous participation in the workforce. And this, the government tells us, is shifting the narrative from welfare and dependence to aspiration, empowerment and independence. (A lovely thought – if only it had more substance.)

Certainly, “Indigenous entrepreneurs offer their community an avenue for greater and long-overdue economic self-determination, create positive role models within families and communities, and can serve as mentors to young, entrepreneurial Indigenous Australians,” as the authors say.

The businesses these owner-managers run are spread across Australia, but the vast majority of owner-managers are located on the east coast, particularly in greater Sydney and the rest of NSW. Large numbers also live in Brisbane, the rest of Queensland and in Melbourne.

The growth in capital cities over the past decade has occurred at double-digit rates except in Darwin, where the number of Indigenous businesses fell over the five years to 2016.

But the pattern in the regions was mixed. In regional parts of NSW, Queensland and Victoria there was double-digit growth over the decade, with the number in regional NSW doubling to more than 2700.

In regional South Australia, Western Australia and Tasmania, however, numbers remained flat between the censuses of 2011 and 2016. And they actually fell by 44 per cent in regional Northern Territory.

This could partly reflect the reduction in business opportunities following the end of the resources boom, though the same effect isn’t apparent in regional Queensland, probably because its business activities are more diverse.

But mining doesn’t fully explain the falls in the NT. Here the feds’ NT “intervention” may be to blame.

The largest declines in the number of owner-managers were in remote regions of the NT and very remote parts of WA. This reinforces the story that remote areas, where about 20 per cent of the Indigenous population lives, are underdeveloped in terms of access to markets. Clearly, it’s getting worse.

Abolition of the Community Development Employment Projects scheme may be another part of the explanation. These involved local community-run organisations creating work experience for participants and opportunities to work in communities and meet community needs through small-scale activities not otherwise funded.

Funding provided for the scheme was used to support the on-costs for these community organisations. Its abolition led to the closure of many of them. Even if they were unlikely to have owner-managers associated with them in the census, they may have supported other local enterprises by providing them with low-cost or subsidised labour.

You can argue that, by giving people subsidised jobs and solutions to community needs, the scheme robbed them of the incentive to find real, better-paid jobs and start unsubsidised businesses but, as the decline in owner-managers suggests, that doesn’t justify simply pulling the plug without providing a better substitute.

Smacks to me of controlling the growth in government spending at the expense of the most disadvantaged people in the most remote parts of the country, where opportunities to lift yourself up by your bootstraps are even rarer than in comfortable middle-class electorates.

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Does gift-giving make sense? Silly question

It’s the season of the year when the bylaws of the economists’ union require me to issue the stern admonition that the medieval practice of gift-giving should cease and desist forthwith. And the fact that I’m a bit late won’t stop me.

Perhaps more people - recipients of socks and handkerchiefs and other wondrous surprises - will be receptive to the profession’s utterly disinterested (look it up) advice and see the wisdom of my words.

Gift-giving is an irrational act, one where sentiment and emotion triumph over good sense. Since it’s hardly possible for the giftor better to know what the giftee would like to be given than the giftee themself, the success rate of the practice is abysmally low.

So low, in fact, as to justify economists using one of their worst pejoratives to brand the practice as involving a “deadweight loss” – one where the benefit to the giver and the benefit to the receiver are insufficient to justify the cost of the transaction, thereby creating a loss to the community.

(And please, please don’t ruin my Boxing Day by arguing that the commercialisation of Christmas at least creates jobs. The economists’ union’s Christmastide message is that any mug can create jobs, all you have to do is spend money – your own or someone else’s. The whole point of economics is to help the community spend money in ways that yield it greater benefit than other ways.)

But fear not. Go back to eating your leftovers in peace (and goodwill). I’m not actually a member of the economists’ union, but an adherent to a dissident sect known as behavioural economists (people who, too late in life, realised psychology made more sense than economics).

This bunch of heretics delights in pointing to the glaring weaknesses in the oversimplified model conventional economists carry in their heads.

But you need only to have gone to Sunday school to see the weakness in all the nonsense about the deadweight loss of Christmas. I think it was the little chap himself who said it was more blessed to give than receive.

And there is, in fact, plenty of what a deranged economist would call “giver’s surplus”. How do I know? Because psychological experiments have demonstrated it – many of them conducted by Professor Elizabeth Dunn, a psychologist at the University of British Columbia.

But just last week came new research by Ed O’Brien, of the University of Chicago Booth School of Business, and Samantha Kassirer, of Northwestern University Kellogg School of Management, showing that “the joy of giving lasts longer than the joy of getting”.

One of the great limitations of human nature is “hedonic adaptation”. The happiness we feel after a particular activity or event diminishes each time it’s repeated. It’s likely this phenomenon is “adaptive” – we’ve evolved to react that way because it increases our ability to survive and reproduce; it keeps us striving.

But the researchers find that giving to others may be an exception to the rule. In two studies they found that participants’ happiness did not decline, or declined more slowly, if they repeatedly bestowed gifts on others versus repeatedly receiving those same gifts themselves.

Separate research by Dr Vera te Velde, a lecturer in economics at the University of Queensland, has found evidence for the existence of “beliefs-based altruism” – concern about other people’s emotions and other psychological experiences, beyond any material measure of their wellbeing.

This means “we don’t give gifts only because we want people to have something that they want; we also give gifts because we want them to feel cared about, experience joy or a pleasant surprise when receiving it. Or to prevent them from feeling disappointed if we fail to give anything,” she says.

This kind of altruism can apply in many other situations. “When girl guides come to our doors to sell cookies, we buy them not only to support the group and because we like cookies, but also because we want the girls to feel successful and valued,” she says.

But how can we be sure that a pure concern for others’ feelings is the motivation for these behaviours, instead of – or maybe, as well as – concern about our own reputations? After all, I may not only want girl guides to feel good, I may also want to be known as someone who supports them.

To help answer this question Velde experimented with a sharing game. One person is asked to share $10 with another person. But the bank handling the transfer occasionally makes a mistake and transfers exactly $1 to the other person. So if that person receives $1, they don’t know if it’s a bank mistake or the first person’s selfishness.

Asked whether they thought the recipients would prefer to know about giver’s true intentions, many participants thought they would. Even so, when they played the game themselves, the participants were more likely to give either exactly $1 (thereby hiding their selfishness) or exactly $5 (thereby revealing themselves to be perfectly fair).

But get this: even the people who tried to hide their selfishness were demonstrating their concern about the emotions of the other person. Economics makes a lot more sense with a bit of psychology thrown in.

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How to get more bang from your bucks

They say people who think money doesn’t buy happiness just don’t know where to shop. Sorry to have left it so late in your preparations for Christmas and summer, but on this score I have breaking news.

It’s a funny thing that, though economists hold consumption to be the “sole end and purpose” of all economic activity, it’s not a subject that greatly interests them. They’ll help you maximise how much you’ve got to spend, but they’ll give you no help in deciding how to spend it in a way that yields the most happiness – or, as they prefer to say, “satisfaction”.

No, for advice on how to get the biggest bang from your bucks, the experts are social psychologists.

For the past 15 years, their prevailing wisdom has been that spending on experiences – from an overseas holiday to a trip to the movies – yields more happiness than buying more stuff.

The pleasure you get from buying a new CD or pair of shoes or car or even a new home falls off surprisingly quickly, whereas the enjoyment you get from what the US psychologist Tom Gilovich has dubbed “experiential consumption” tends to be longer-lasting.

Subsequent research has found three reasons why experiences provide greater happiness. First, experiential purchases enhance our social relationships more readily and effectively than do material goods.

That is, a lot of the enjoyment comes from our interaction with the people we share the experience with. (This, BTW, gets closer to what I really believe about all this: deep satisfaction comes from our human relationships, not from what we buy.)

Second, experiential purchases form a bigger part of a person’s identity. We are the sum of our life’s experiences – pleasant and otherwise – much more than the sum of our material possessions.

Third, experiential purchases are evaluated more on their own terms and evoke fewer social comparisons than material purchases.

Good point. A lot of our spending goes on keeping up with the Joneses or on buying “positional goods” – goods that demonstrate to the world how well we’re doing in the battle for social status. Trouble is, my delight in my new Volvo is punctured when the chap next door arrives home with his new Beemer.

We make sure our house is as well-appointed as the others in the street, the lawn’s always mown, the car in our driveway is late-model European, and the kids go to private schools. But the one thing the neighbours can never see is how your total debt compares with everyone else’s.

If keeping up with the neighbours has required you to rack up a crippling debt, you’re unlikely to be enjoying a care-free life. Ditto if your financial commitments keep you chained to a well-paying job you hate.

But, as the researchers say, when you’re spending money on experiences, you do it much more for your enjoyment of that experience than to impress the neighbours – unless, of course, you’re into matching their skiing trip to the Snowies with yours to Aspen.

Actually, I think there’s more to it even than those three points. Major experiences such as overseas touring holidays yield pleasure in expectation of them, pleasure while you’re doing it, and pleasure while you’re reliving them and recounting your adventures to family and friends.

And the great beauty of thinking about past holidays is that you remember the highlights, laugh about the bad bits, and forget the boring bits – such as the trouble you had trying to find a public toilet.

Sorry, I promised you breaking news on the experiential front. Research out this year, by Lee, Hall and Wood, finds it’s not as simple as experiences good, stuff bad.

Turns out, which of the two yields the higher happiness count depends on your social class, with class being measured according to income, education or self-assessment.

Dividing people into two categories – higher or lower – the researchers found that “experiential advantage” held for the top half, whereas the bottom half either rated experiences and material purchases equally or rated goods more highly than experiences.

It seems people of higher social class have an abundance of resources, meaning they can afford to focus more on their internal growth and self-development.

In contrast, people who have fewer resources are likely to be more concerned about making wise purchases of the stuff they still needed.

I think it’s probably a gradient: as your material affluence rises you pass through the point where experiences and things deliver roughly equal satisfaction, until eventually your material needs are pretty much satisfied and its experiences that do most to make you happy.

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How we killed off Australia's inflation problem

Before we let 2018 go, do you realise it’s the 25th anniversary of the introduction of the Reserve Bank’s target to achieve an inflation rate of between 2 and 3 per cent? It’s a milestone worth celebrating.

Why? Because it’s worked so well. For the past quarter century, we’ve had inflation that has fallen within the target range “on average, over time” and hence been low and stable.

This week the Reserve Bank issued a volume of papers from its conference to discuss inflation targeting, and whether it needed to change. (Conclusion: it didn’t.)

In that 25 years we haven’t had a serious worry about inflation – which certainly can’t be said of the 20 years before the target was unveiled in 1993.

In those earlier years we were continually worried about high inflation. It reached a peak of 17 per cent in the mid-1970s, averaged about 10 per cent for that decade and 8 per cent during the 1980s.

All the other advanced economies had high inflation rates at the time, but ours was higher and took longer to fix.

Our problem was usually linked with excessive growth in wages, and the “wage explosions” of the mid-1970s and early 1980s prompted the authorities to jam on the brakes, leading inevitably to severe recessions.

Even though inflation remained high, a third and more severe recession in the early 1990s was more the consequence of the authorities’ overdone attempt to end a boom in commercial property prices.

It’s not by chance that this year we reached 27 years of continuous growth since that recession. Before it, we had recessions about every seven years, all of them caused by the authorities jamming on the brakes – and then, when we crashed into recession, stepping on the accelerator, a “stop/go policy”.

The first reason we haven’t needed to worry much about inflation since then is that, as part of the adoption of the inflation target, responsibility for setting interest rates was moved from the politicians to the econocrats running an independent central bank.

They’ve been a much steadier hand on the interest-rate lever, moving rates up or down according to the needs of the business cycle, not the political cycle.

Another reason we’ve stopped worrying about inflation is that this year is also the 35th anniversary of the floating of our dollar in 1983. A floating exchange rate – which, remarkably, has almost always floated in the direction needed to keep the economy on an even keel – has made it a lot easier for the Reserve to keep inflation low and stable.

A third reason is the extensive program of “micro-economic reform” begun by the Hawke-Keating government in the 1980s – including the deregulation of many industries and the decentralisation of wage-fixing – which has made our economy much less inflation-prone than it used to be.

Yet another factor was the realisation at the time the inflation target was adopted – informally by the Reserve in 1993, and then formally by the incoming Howard government in 1996 – that the key to lower inflation was to get “inflation expectations” down to a reasonable level.

Why? Because there’s a strong tendency for the expected inflation rate in the minds of shopkeepers and union officials to become a self-fulfilling prophecy. If they expect prices to keep rising rapidly, they get in first with their own big price or wage rises.

We’ve spent the past 25 years demonstrating that if you can get everybody expecting inflation to stay low, you have a lot less trouble ensuring it actually does.

The hard part was how to get from the high expectations of the late-1980s to the low expectations we’ve had for most of the past 25 years.

Bernie Fraser, Treasury secretary turned Reserve Bank governor, the man who introduced the target, knew what to do: define what was an acceptably low inflation rate – between 2 and 3 per cent, on average - and keep the economy comatose until you actually achieved the target, then keep it low until everyone had been convinced that “about 2.5 per cent” was what today we’d call “the new normal”.

How did Fraser achieve this? He did the opposite of what his predecessors did whenever they realised they’d hit the economy harder than they’d intended to. Despite knowing we were in for a bad recession, he let the interest-rate brakes off only slowly, and didn’t hit the accelerator.

In other words, he made the recession of the early ‘90s longer and harder than it could have been. I think he decided that, since we were in for a terrible belting anyway, he’d make sure we at least emerged from the carnage with something of value: a cure for our inflation problem that wasn’t just temporary, but lasting.

And that’s what he delivered. With low inflation expectations embedded, he was able to stimulate the economy to grow faster and get unemployment down. It went from 11 per cent after the recession to 5 per cent today.

At the time the inflation target was adopted, some people worried it meant the Reserve didn’t care about unemployment. As events have demonstrated, that was wrong. To Fraser, low inflation was just a means to the ultimate end of low unemployment.

I rate him the best top econocrat we’ve had in 50 years. He was wise and caring, with the best feel for how the economy worked. Peter Costello gets the credit for formally adopting Fraser’s inflation target, pursued by an independent Reserve Bank.

But another person also deserves credit – Dr John Hewson. It was Hewson who, as Coalition shadow treasurer, made the most noise about the need for an independent central bank with an inflation target.

Fraser decided he’d better get on with specifying his own target before “some dickhead minister” tried to impose a crazy one on him.

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How to keep the news coming

If you thought the Australian Competition and Consumer Commission’s latest report on “digital platforms” was about the debatable ways Google and Facebook treat their users, you’re a victim of the news media’s reluctance to bother their audience with the worrying state of their own finances.

The report was really about the effect of digital disruption on what it calls “news and journalistic content”. So great has the disruption been that the day may come when most newspapers cease to exist.

That wouldn’t be quite so terrible if their companies continued to publish news on the internet. But unless they can find a way to make their digital products adequately profitable, it’s possible even this could cease.

At present we get news from two sources almost wholly funded directly by the federal government, the ABC and SBS. But most of the rest of our news comes from commercial businesses: free-to-air radio and television, plus two or three big former newspaper chains, now producers of what the report calls “print/online news”.

We’re so used to this we don’t see how anomalous it is. At one level, the commercial news media are just selling news to make a profit for their shareholders (who, these days, turn out to be mainly everyone with superannuation).

At another level, however, the news they sell us isn’t an ordinary product like soap or cornflakes. We consume news because we find it interesting – even entertaining – but we also need it to keep us informed about what’s going on in the world: what’s happening overseas, what’s happening in the economy, what’s happening about schools, universities, hospitals, law and order, roads, transport and 100 other areas of government responsibility, and what’s happening in the community.

Knowing about all this is of private benefit to you and me, but the fact that we know it is also of social or public benefit to the community as a whole. Each of us would suffer if we were surrounded by people who knew nothing about what was going on.

And imagine how well governments would perform, and elections would work, if we didn’t have the media telling us what the politicians were up to and holding them to account.

I like to say the commercial media also have a “higher purpose”. Journalism academics speak of “public interest journalism”. Fortunately, such anomalies are well understood by economists, including those at the ACCC. They see that news and journalism have the characteristics of a “public good”.

Another strange thing about commercial journalism is that, historically, its customers paid for it mainly indirectly, via the advertising costs built into the prices of the things they buy. That’s obviously true of free-to-air radio and TV, but it’s been almost as true of newspapers, with subscriptions and the cover price covering only a fraction of production costs.

This, however, is what’s disrupted the production of news. First classified advertising moved online, then display advertising and many former newspaper readers. Now about half of all Australian advertising spending has moved online, with Google and Facebook capturing more than half of it and the news media getting just some.

The legacy media used to sell their news in packages, called newspapers or bulletins. But the internet has “atomised” news, with most people searching for news story by story. About half the people coming to news sites do so via Google and Facebook.

The report says news has the two characteristics of a public good: it’s “non-excludable” (you can’t stop people who don’t pay from getting it) and “non-rivalrous” (me knowing about the budget doesn’t stop you knowing about it, in the way me eating an apple stops you eating it).

Public goods are an instance of “market failure”, in that they’re susceptible to “freeriders” (people who leave it to others to pay) and – significantly, in the commission’s mind – because private providers can’t capture enough profit, there’s a high risk they won’t produce as much of the product as would be in the public’s interest.

Sometimes this means governments take over the production of public goods (as they do with public schools and hospitals) or they subsidise the cost of privately produced public goods (as they do with visits to doctors).

The report explores the possible ways the federal government could subsidise news and journalism to ensure its supply is optimal. One way would be a tax incentive scheme, as is done to support local content for film and television.

Or the government could make grants for journalism projects it wished to encourage. But newspaper companies have long rejected any offer of government assistance that could threaten their independence by being withdrawn should they publish news that offended a government.

A better idea would be for private subscriptions to news services to be made tax deductible, just as are donations to charities and even to politically aligned think tanks.

Canada has already taken up the idea. Since deductibility would go to all news outlets that had signed up to industry codes of journalistic standards, and would go directly to customers rather than businesses, it would be hard for politicians to punish individual news organisations.

It’s an idea that could help secure the future of news and journalism.

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The truth behind the mid-year budget update

Wow. Under Scott Morrison’s inspired leadership, the budget is almost back to surplus and the economy is ticking over nicely. And having brought home the bacon, Santa ScoMo can deliver our reward, scattering little presents from now until the election.

It’s a lovely thought, but the truth is less heroic. An old saying would assess the position outlined in the midyear budget update as: good things come to those who wait. Or, franker: better late than never.

To be boasting about how much better the budget balance is looking is a bit rich, coming from a government that, five long years ago, talked its way into government by claiming we faced a "budget emergency" of debt and deficit that only the Liberals could fix because they had good economic management in their DNA.

After the disastrous political reception to its first budget in 2014, the government made no further serious attempt to reduce the budget deficit, instead quietly resolving to wait until the passage of time caused the economy to strengthen and tax collections to recover.

That’s where it finds itself now. Tax collections have strengthened in the past year or so because heavy infrastructure spending by the state governments and the rollout of the national disability insurance scheme have boosted employment and the number of people paying income tax.

As well, company tax collections are stronger because export prices have recovered a bit, businesses have finally used up their deductions from accumulated losses incurred during the downturn, and because the crackdown on multinational tax avoidance initiated by the previous government is paying off.

Even so, the government’s net public debt has doubled from the $175 billion it inherited in September 2013 to $355 billion this October.

Initially, the government resolved not to cut taxes until the budget was back to significant surplus. Malcolm Turnbull ditched that in his first budget and the government has proposed tax cuts in every budget since.

Had it held the line it could have been back to actual (rather than foreshadowed) surplus today. And it could have shown us a net debt that had already fallen a little, rather than telling us its projections see the debt peaking in June next year.

The first politician to show us a projected return to surplus in the next few years was Julia Gillard in 2010. Since then, the Coalition has had to revise down its own projections countless times. We’ve learnt the hard way not to believe any budget number that’s not an "actual".

The Coalition’s budgetary performance has been ordinary in all respects bar one: over the five years to June 2017, it limited the average real growth in its spending to 1.5 per cent a year.

Very few governments can better that restraint – certainly not the previous Labor government which, despite all the dodgy figures Wayne Swan showed us at the time, ended up with real spending growth averaging 5 per cent a year.

As for Morrison’s claims about how well the economy’s doing, Josh Frydenberg has had to revise down the budget’s forecasts for growth in wages and the economy.

With luck the economy will keep growing reasonably strongly in the coming year or two, but only if it negotiates the housing downturn without mishap and only if wages return to reasonable growth.

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ACCC wins watchdog of the year, as others lick their wounds

It’s been an infamous year for Australia’s economic regulators. Most ended it with their lack of vigilance exposed, their reputations battered and their ears stinging from judicial rebuke.

The biggest loser is the Australian Securities and Investments Commission, followed by the Australian Prudential Regulation Authority. But the mismanagement of the national electricity market became more apparent. And neither the Reserve Bank nor Treasury emerged unscathed.

Just one regulator had a good year, the Australian Competition and Consumer Commission. It worked hard, discharging its duties with vigour and initiative, taking on powerful business interests, seeking and being granted hugely increased maximum penalties, and fighting to make up for the negligence of its fellow regulators.

As the others have been found wanting, its role has been expanded. And as next year we see the government’s response to this year’s seemingly endless revelations of regulatory failure, it’s role may well be further widened. That’s what tends to happen when rival regulators’ failures become apparent.

It’s been a watershed year. From now on, life will never be the same for regulators found wanting under the microscope of public scrutiny.

Much of that scrutiny came from the banking royal commission, of course. Its interim report in September criticised ASIC for "rarely" going to court "to seek public denunciation of and punishment for misconduct," and being too accommodative when negotiating penalties with the companies it polices.

APRA faced criticism for a "lack of action" in response to widespread misbehaviour in superannuation, including cases where thousands of members were kept in higher fee accounts, rather than being moved into no-frills MySuper products.

But the royal commission wasn’t the only critic of economic regulators this year. I’ve said plenty elsewhere about the failure of the national electricity market’s three (and now four) official operators and regulators to prevent the massive blowout in retail power prices.

One of the many things the Turnbull government did in its vain attempt to fend off pressure for a royal commission was to get the Productivity Commission to report on competition in the financial sector.

The commission confirmed competition in banking was weak and made one eye-opening revelation: part of the problem was that, in their concern to ensure the stability of the banking system, APRA and the Reserve Bank weren’t too worried about ensuring this did as little as possible to inhibit price competition between the big banks.

The commission noted that when APRA had imposed limits on new interest-only lending, it and the Reserve had looked the other way while all four big banks used this as an excuse to jack up interest rates on new and existing interest-only loans.

It recommended that a “consumer champion” be appointed to join APRA, ASIC, Treasury and the Reserve on the co-ordinating Council of Financial Regulators. No prize for guessing the ACCC was the champion the commission had in mind. Nor for reading between the lines that the commission suspected the Reserve and Treasury had been “captured” by the bankers they were supposed to be regulating.

The ACCC has done what little it could over the years to oppose the misregulation and oligopolisation of the national electricity market, and its reports this year revealed what went wrong.

Last week it acted on three fronts. Its preliminary report on digital platforms took on Google and Facebook, greatly expanding our understanding of the questionable ways they operate and working on ways they could be regulated.

ACCC boss Rod Sims has long worried publicly about the state governments privatising their electricity businesses and ports in ways that maximised their sale price by inhibiting price competition. The banker-led Baird-Berejiklian government in NSW is the worst offender.

Last week Sims announced the ACCC was taking the Botany port operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

And last week the ACCC released its final report on factors influencing residential mortgage prices, commissioned at a time when the banks were threatening to pass the new “major bank levy” straight on to their customers.

The report covered similar territory to the earlier Productivity Commission report, noting again the way the banks had used APRA’s move on interest-only loans as an opportunity for “synchronised pricing”.

But the ACCC’s analysis of pricing dynamics in an oligopolistic market like banking revealed far more realism (and advanced economics) than the Productivity Commission’s trademark introductory textbook neo-classicism. The more I see, the more I like.

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Trump's mad trade war has a hidden logic

Simple economics tells us Donald Trump’s stated reasons for starting a trade war with China make no sense. But more advanced economics tells us it’s no surprise he’s 'P’d off' over China’s economic rise.

Trump complains that the United States buys more from China than China buys from the US, meaning his country runs a trade deficit with China. He sees this as an obvious injustice and a sign China is cheating.

But economics teaches that bilateral trade imbalances are natural and normal, the inevitable consequence of countries’ differing “comparative advantage”. (Australia’s strength is rural and mineral commodities, for instance, whereas China’s is manufacturing.)

What matters is a country’s trade with all its trading partners. But, even here, economics teaches it’s not necessarily bad for a country to run an overall trade (or, strictly, current account) deficit.

Why not? Because a country runs a current account deficit when its investment in new homes, business equipment and public infrastructure exceeds its ability to fund this investment with its own saving by households, companies and governments, thus requiring it to call on the saving of foreigners.

Conversely, a country runs a current account surplus when it saves more each year than it needs to fund that year’s investment spending, thus allowing it to lend some of its saving to foreigners.

Because some countries (such as China, Germany) save more than their profitable investment opportunities can take up, they run current account surpluses most years.

On the other side of the coin are countries (the US, Australia) that have more profitable investment opportunities than their savings can cover, so they run current account deficits most years.

Put the two groups together and – at least in theory – the world’s annual saving flows to the most profitable investment opportunities to be found on the planet, thus leaving everyone in the world better off.

But a deputy secretary of the Department of Prime Minister and Cabinet, Dr David Gruen, noted in a recent speech that, at a more advanced level of analysis, some of the recent tension over trade is a consequence of the strong and sustained growth of Asian economies, including China.

“As economies in our region have grown and moved up the value-added chain, they have increasingly competed with more entrenched, influential and valuable industries in advanced countries [such as the US],” Gruen says.

When rapidly developing countries embrace some new technology, the consequent increase in their productivity constitutes an increase in their real income (because they’re producing more output per unit of input).

This should also help raise the income of the developed countries with which they trade, since the rich guys are usually getting access to imports that are cheaper than they can produce themselves.

“While some advanced-country industries [and their workers] have undoubtedly been harmed by a rising Asia-Pacific, a rising Asia-Pacific has also meant more demand for other goods and services from advanced countries [as the developing countries spend some of their higher income on imports from the rich world],” Gruen says.

So better technology and increased trade between the rich and poor countries don’t reduce the real incomes of the advanced countries, but they are likely to change the distribution of income.

More income is likely to flow to the owners of capital and to highly skilled workers, while some lower skilled workers’ real incomes stagnate or fall.

“Such disruption is likely to continue as technology makes it easier to trade services across borders, and economies in the Asia-Pacific become increasingly sophisticated. Some of these newly threatened advanced-economy jobs rely on intellectual property or skills premiums, providing an economic rent worth protecting.

“It is no surprise that the generally open-trade stance of those in places like Silicon Valley sits alongside [Trump’s] demand for strong enforcement of intellectual property rights,” Gruen says.

And, although the rich world is better off with free trade, as technology continues to bring down natural barriers to trade in sectors previously considered “non-tradeable” – particularly services – politically influential opposition to free and open trade is likely to continue, he says.

But there’s a second implication of the economic rise of Asia I bet you haven’t thought of. “It makes less sense for the largest economy in the world to bear the costs of maintaining an open trading system as its economy becomes a relatively smaller share of global output.

“Free trade is a 'public good' – we all benefit from it, but each country has an incentive to shift the cost of maintaining it to others.

“The United States shouldered that burden when it was the world’s largest economy. When you are half the global economy you tend to benefit wherever in the world trade is occurring.

“The logic of [it] continuing to do so is now less compelling. The rules-based [trading] system, including the World Trade Organisation, emerged at a time when the US was the dominant global superpower."

Small or medium-sized economies with limited bargaining power in global markets (such as us) are better off with free trade – even when other countries are being protectionist. Why? Because protecting a few of your industries against imports hurts the rest of your industries more than it hurts the countries whose imports you don’t take.

But that’s not always true for large economies with significant market power, such as the US. They can sometimes use tariffs to drive down the prices other countries charge them for imports.

How? Their market is so lucrative the country supplying the imports absorbs some of the cost of the tariff to keep its retail prices competitive. The lower price of imports across the docks improves the big country’s terms of trade, increasing its real income.

Get it? The US has less to lose from an outbreak of protectionism than do smaller countries like us. That’s why the rest of us have to put more effort into preserving and abiding by the WTO’s “rules-based system” and Trump isn’t quite the madman he seems.

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Privatisation has been a disaster in many cases

If you’ve always doubted the sense of privatising government-owned businesses, vindication is now flowing thick and fast. In many – but not all - cases it’s turned out to be bad idea. One that’s costing consumers a pretty penny. Unscrambling the egg, however, is proving a frustrating and painful process.

Many people feared that if private businesses were allowed to buy government businesses, the first thing they’d do would be to jack up their prices. Politicians and supposed experts told them not to worry. Sorry, experts wrong, doubting punters right.

In some cases, the businesses privatised were natural monopolies – electricity transmission and distribution networks, and geographic monopolies, such as federally owned airports and state-owned ports.

It the case of the electricity networks, the experts told us not to worry. The prices the private owners are allowed to charge would be tightly regulated. Wrong. In no time the monopolists found ways to rort the system.

One of Scott Morrison’s biggest problems at the coming federal election is voter anger over the huge increase in electricity prices and his government’s limited progress in getting them back down.

Morrison was so rattled he made the most un-Liberal-like threat to use a “big stick” to force the three big companies that have come to dominate the national electricity market to be broken up if they didn’t cut their prices before the election.

He’s since had to replace his big stick with a small one – suggesting he won’t get far in lowering power prices.

The blowout in power prices is the direct result of a decision to take five state-owned electricity generation, transmission and retailing monopolies and turn them into a national electricity market of competing privatised businesses.

But although the feds are now carrying the can for this giant national stuff-up, it was all the doing of the state governments who did the privatising.

How did they get is so badly wrong? They sabotaged it. While you and I were being told not to worry – that vigorous competition would prevent the businesses from raising their prices unduly – the state governments were busy selling their businesses to the highest bidders.

The highest bidders turned out to be companies putting together a vertically integrated business of power stations at the bottom and power retailers at the top. In some cases, governments tightened reliability standards in a way they knew would make it easier for potential purchasers to game the price regulation rules.

If you wonder why parking is so expensive at airports – and catching a taxi home comes with an extra fee – it’s because the Keating government privatised these geographic monopolies without price controls.

With the state governments’ privatisation of their ports, some private lessees have been allowed to fatten their profits in ways too diffuse for us to see how we’re being got at.

For scheming behaviour by premiers and treasurers, there’s no case more appalling than the way the NSW government privatised its ports of Botany, Port Kembla and Newcastle.

Botany is the state’s one big container port, with Port Kembla specialising in bulk commodities and Newcastle the biggest coal port in the world.

In 2013, Botany and Kembla were leased to a single operator and the sale price was enhanced by a “confidential” agreement that the state government would compensate the operator for each additional container handled by the Newcastle port beyond a minimal level.

The Newcastle port was leased to a separate operator with a confidential agreement requiring it to compensate the government – to the tune of about $100 a box, it’s said - for any money it has to pay the other operator if Newcastle increases its handling of containers.

Trouble is, five years on, this deal the public wasn’t supposed to know about is a classic “seemed like a good idea at the time”. Newcastle’s future as a coal port is all decline (the more so if the Adani mine in Queensland goes ahead), but it’s well placed to diversify by building a big new, state-of-the art container terminal.

It has the land, it could build a single ship-rail-road interchange and its port is deep enough to take the next generation of much bigger container ships that will otherwise be accommodated by only one other Australian port, Brisbane.

But the confidential deal makes a container port in Newcastle uneconomic.

Meanwhile, routing all the state’s inward and outward container movements through Botany is a crazy idea. It’s a long way from the Moorebank intermodal terminal, meaning a huge amount of heavy trucks lumbering through Sydney.

New modelling by AlphaBeta economic consultants for the Port of Newcastle claims a new container terminal would allow businesses in the northern part of the state to divert about 16 per cent of the state’s two-way container traffic through Newcastle, cutting their freight distance by 40 per cent, putting competitive pressure on Botany’s container handling prices, taking many trucks off Sydney roads, boosting the NSW economy and cutting the freight costs hidden in the prices consumers pay.

On Monday the Australian Competition and Consumer Commission announced it was taking the Botany operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

Just another skirmish in what will be a long-running battle to undo the not-so-unintended consequences of privatisation.

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Budget Office finds the bigger picture is looking OK

There’s a weakness in the way we think about the government and its effects on the economy that economists and politicians usually don’t see. We draw macro conclusions from micro data because we forget the need for what accountants call “consolidation”.

The problem arises because we keep forgetting that the responsibility for governing Australia is divided between the federal government and eight state and territory governments – not to mention any amount of local councils.

Yet most of us focus only on the federal government’s budget when we want to know what’s happening at the “macro” (national or economy-wide) level, and on our own state government’s budget when we when want to know what’s happening at the “micro” (individual component) level.

Because we think – correctly – that responsibility for managing the macro economy rests with the federal government, and also that the feds’ budget is one of their main instruments for influencing the economy, we study the federal budget in great detail and forget that the eight state budgets also have big economic effects.

It’s when you remember this that you realise the federal budget is micro (part of the total picture) not macro (the whole picture).

We’re bamboozled by the existence of different legal entities, each producing their own accounting statements, even though the economy – a common market between eight states and territories – recognises no legal barriers between its components.

Sometimes this causes us to mislead ourselves, other times it gives the politicians from each level of government much scope for misleading us.

For instance, a federal treasurer bent on showing that our public debt isn’t high by international standards, shows us a graph which compares our federal public debt with other countries’ total public debt.

Similarly, a premier whose state is growing faster than others will claim all the credit. If it’s growing more slowly than the national average, they’ll find some reason to blame it on the feds.

Although it’s true that each state has a different combination of industries, and some states are a bit better governed than others, because Australia is a common market the greatest influence on the economic performance of any state is usually the performance of all the other states.

And, at any point in time, the government whose policies are having the greatest influence on a particular “state economy” is usually the federal government.

It’s partly because we focus on bits of the national economy rather than the whole that politicians – federal and state – put so much effort into shifting costs to the other level of government. (The bigger reason, of course, is that it saves them money.)

Or appears to. A less-remarked flaw in Tony Abbott’s reviled first budget in 2014 was that much of its cost savings involved shifting unchanged costs to other budgets: massive cuts in grants to the states for public schools and hospitals. Abbott’s successors have been backpedalling on those supposed savings ever since.

By contrast, most big listed companies consist of a group of many (mainly wholly-owned) separate legal entities. This is why company law has long required them to publish their financial statements on a “consolidated” basis.


When you combine the accounts of, say, 20 companies into one, you have to eliminate the overlap between them, ensuring nothing’s counted more than once. Money transferred between subsidiaries “washes out”.

The closest we come to a consolidated financial statement for our nine governments – showing us the full picture - is the federal Parliamentary Budget Office’s recent innovation of an annual “national fiscal outlook” using the nine governments’ latest budgets. The report for 2018-19 was published last week.

It’s not a full consolidation because it doesn’t show us total government spending by function. So it doesn’t correct the misperception that spending is dominated by social security payments.

Combine federal and state spending and you see the big ones are health and education.

Because the states use accrual accounting, whereas the feds keep the focus on cash accounting, a federal budget balance can’t be compared with a state budget balance.

Putting them on the same accrual basis (but taking government projections at face value), the consolidated budget balance (the "net operating balance") reached zero last financial year and over this and the next four years is projected to reach a surplus of $46 billion.

Consolidated annual net capital investment is projected to peak at $32 billion this financial year and fall to $28 billion by 2021-22 (though this misses the feds' creative accounting on new airports and inland railways).

Consolidated net public debt is projected to grow by $51 billion to $414 billion in June 2022.

Even so, by then our consolidated net public debt should be about 20 per cent of gross domestic product, compared with Britain’s 75 per cent and America’s 80 per cent.

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Why more expressways don't fix traffic jams

When Marion Terrill, of the Grattan Institute, set out to find out how much commuting times had worsened in Sydney and Melbourne, she discovered something you’ll find very hard to believe. But it would come as no surprise to transport economists around the world.

Everyone is sure traffic congestion has got much worse in recent years. This is only to be expected since Sydney’s population grew at the annual rate of 1.9 per cent, and Melbourne’s rate grew even faster, at 2.3 per cent, between the censuses of 2011 and 2016.

Both cities have grown much faster than the Australian population overall. People are crowding into our big cities, much to the disapproval of many people already living there.

Why are they piling into already-crowded cities? For reasons economic geographers call “economies of agglomeration”. One way for countries to get richer is for their businesses to pursue economies of scale; another way is for businesses and their workers to pursue the gains from agglomeration – a fancy word for piling things together.

There are three kinds of agglomeration economies. They come from matching (in a big city, people are more likely to find a job, while businesses are more likely to find the particular workers they need; there can be greater specialisation), sharing (less idle capacity in, say, car parks, or waiting around for customers), and learning (more workers for you to see and imitate; knowledge and know-how shared face-to-face).

Sharing, matching and learning can occur in two ways. When a lot of firms in the same industry gather in the same city, or just because a lot of people and firms are located together, making the city large enough to justify, for instance, heart and lung transplant centres.

Of course, along with the great benefits of crowding together go the costs of crowding together - such as feeling terribly crowded.

There are more people per square kilometre living in the centres of our big cities than there were five years ago. Sydney’s population density has increased by 23 per cent – and Melbourne’s by a mere 46 per cent.

And surely more crowding means more traffic congestion. But this is where Terrill and the co-author of her report, Hugh Batrouney, found their first strange fact. Between the last three censuses, from 2006 to 2016, there’s been virtually no change in the distance between where people live and where they work, measured as the crow flies.

Next surprise came from the HILDA survey – household income and labour dynamics in Australia – which, among other things, asks people how long they spend commuting.

In the four surveys between 2004 and 2016, for both Sydney and Melbourne there was no change in the fact that a quarter of workers had one-way commutes lasting no longer than 15 minutes. One half of workers had commutes no longer than 30 minutes.

When you take it up to the experience of three-quarters of workers, there was some increase over the years in Sydney, but only a small increase in Melbourne. Other figures, from Transport for Victoria, tell a similar story.

So, we all think the increasing traffic volume is leading to greater delay and, hence, longer commute times, but the best available actual measures of commute times say they’re little changed.

Find that hard to believe? Well, as I say, few transport economists would. Why not? Because it fits well with what they call “Marchetti’s constant”. Marchetti was an Italian physicist credited with discovering the empirical truth that the average time spent by a person on commuting is about an hour a day – 30 minutes each way.

The amazing truth of this “constant” has been shown by many studies of many cities around the world.

And it fits with another empirical regularity known as the “Lewis-Mogridge position”, formulated by those gents in 1990: “traffic expands to meet the available road space”.

The government notices that traffic is particularly congested on a certain road, so it builds a big new expressway. When it opens, the time taken to get from A to B falls dramatically. But when people realise this, more of them stop travelling to work by public transport and start going by car.

So many people do this that the speed gain disappears within months, even weeks. The time taken to get from A to B goes back to about what it was before the expressway was built.


The only change is that a higher proportion of workers are able to go by car. The traffic jam is often just shifted to another place on the road network.

Getting back to road congestion in Sydney and Melbourne, how can the gap between what we think has happened and what actually happened be explained?

One possible part of the explanation is that although the traffic really is heavier, making trips less pleasant, this doesn’t prolong the time of the trip as much as we think it has.

But the main explanation – both in Oz and in other countries – is that commuters adapt to the greater congestion.

They take evasive action by moving to a job that’s closer to home, or moving to a home that’s closer to the job. Or they stop going by car and start using public transport.

One thing that really has changed with our bigger cities is more crowded trains and buses.

It’s as though each of us has our own internal, unconscious regulator that draws the line at 30 minutes and, when that limit is exceeded, prompts us to take steps to get travel times back down to where they should be.

Terrill and Batrouney are clear on this: in neither city was enough new infrastructure built between 2011 and 2016 to explain why the huge population growth didn’t lengthen commute times.

The government didn’t fix it, you and I did. Which says we ought to be wary of thinking the obvious – and only - solution to greater crowding is greater spending on transport infrastructure.

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