Health insurance: paying to boost specialists' incomes

I think I could probably get to the end of the year just writing once a week about the many problems Scott Morrison faces, but doesn’t seem to be making any progress on. And that’s before you get to climate change.

Take private health insurance. The public is terribly dissatisfied with it because it gets so much more expensive every year and because, when you make a claim, you’re often faced with huge out-of-pocket costs you weren't expecting.

The scheme has such internal contradictions it’s in terminal decline, getting weaker every year. Neither side of politics is game to put it out of its misery for fear of the powerful interests that would lose income – the health funds, the owners of private hospitals and myriad surgeons and other medical specialists – not to mention the anger of the better-off elderly who have convinced themselves they couldn’t live without it.

But neither is either side able to come up with any way of giving private health insurance a new lease on life. Anything governments could do – and probably will do – to keep the scheme going a bit longer involves slugging the taxpayer or forcing more people to pay the premiums.

I’ll be taking most of my information from the latest report on the subject by the nation’s leading health economist, Dr Stephen Duckett, of the Grattan Institute, but drawing my own conclusions.

Private health insurance is caught in a “death spiral” for two reasons. First, because the cost of the hospital stays and procedures it covers is rising much faster than wages are. Duckett calculates that, since 2011, average weekly wages have risen 8 per cent faster than general inflation, whereas health insurance premiums have rise 30 per cent faster.

Why? At bottom, because the health funds have done so little to prevent specialists raising their fees by a lot more than is reasonable. Federal governments have gone for years meekly approving excessive annual price increases.

Second, as with all insurance schemes, those policy holders who don’t claim cover the cost of those who do. The government’s long-standing policy of “community rating” means all singles pay the same premium, and all couples pay about twice that, regardless of their likelihood of making a claim.

This means the young and healthy subsidise the old and ill. Which would work if health insurance was compulsory, but to a large extent it’s voluntary. So the old and ill stay insured if they can possibly afford to, while the young and healthy are increasingly giving up their insurance.

The Howard government spent the whole of its 11 years trying to prop up health insurance with carrots and sticks. These measures stopped coverage from falling for a while but, with premiums continuing to soar, have lost their effectiveness.

Over the year to last December, the number of people under 65 with insurance fell by 125,000 (particularly those aged 25 to 34), while the number with insurance who were over 65 increased by 63,000.

So here’s the bind the funds are in: the more healthy young people drop out, the greater the increase in premiums for those remaining. But the more premiums increase, the more youngsters drop out.

The funds’ talk of being in a death spiral is intend to alarm the public into insisting the government bail them out by imposing more of the cost on taxpayers or, ideally, on young people. But before we panic, we should ask why we need the continued existence of private insurance.

After all, our real insurance is Medicare and being treated without direct charge in any public hospital. If the taxpayer-funded public system is less than ideal, it could be a lot better if the $9 billion a year the federal government tips into private insurance and private hospitals was redirected.

To some people, the big attraction of private insurance is “choice of doctor”. But this can be illusory. It’s usually your GP who does the choosing – to send you to one of their mates or their old professor. In any case, if people want choice, why shouldn’t they be asked to pay for it without a subsidy from the rest of us?

Ah, but the real reason I must have private insurance, many oldies say, is to avoid the public hospitals’ terrible waiting lists for elective surgery. That’s a reasonable argument for an individual, who can do nothing to change the system.

But it’s not a logical argument for politicians, who do have the power to change the system. And when the health funds claim that, without them, the waiting lists would be far longer, they’re trying to hoodwink us.

Most specialists work in both the public and private systems, but do all they can to direct their patients to private, where their piece rate is much higher. Were the health funds allowed to die, many fewer patients would be able to afford private operations and would join the public hospital waiting list.

But what would the specialists do to counter the huge drop in their incomes? They’d do far more of their operations in the public system, probably doing more operations in total than they did before. It’s even possible the queues would end up shorter than they are now.

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Morrison hasn't noticed that economic times have changed

Apparently, if you think Scott Morrison's refusal to use the budget to boost the economy is motivated by an obsession with showing up Labor by delivering a huge budget surplus, you’re quite wrong.

No, he’s sticking to the highest principles of macro-economic management (which principles Reserve Bank governor Dr Philip Lowe doesn’t seem to understand).

We now know this thanks to the first speech of the new secretary to the Treasury, Dr Steven Kennedy, made last week. He explained to Senate Estimates the long-established orthodoxy among macro-economists in the advanced economies that "short-term economic weakness or unsustainably strong growth is best responded to by monetary policy" (interest rates) not fiscal policy (government spending and taxation).

Although the budget’s "automatic stabilisers" shouldn’t be prevented from assisting monetary policy in keeping growth stable, fiscal policy’s medium-term objective was to "deliver sustainable patterns of taxation and government spending".

Temporary fiscal actions should be taken only in "periods of crisis", which would be uncommon.

Now, I have to tell you Kennedy isn’t making these rules up. They did become orthodoxy in advanced-economy treasuries in the 1980s. They’re the reason John Kerin’s budget of 1991, delivered in the depths of "the recession we [didn’t] have to have" contained zero stimulus, meaning the stimulus, when it came in February 1992, came too late.

And it was the lesson he learnt from this stuff-up that prompted former Treasury secretary Dr Ken Henry to urge Kevin Rudd to "go early" after the global financial crisis in 2008.

These rules will have a familiar ring to those of us who each year study the fine print in budget statement 3 on the fiscal strategy. Particularly in the reference to the role of the budget’s automatic stabilisers, you see the fingerprints of Treasury’s leading macro-economist in recent decades, Dr Martin Parkinson.

Which is all very lovely. Just one small problem: the circumstances of the advanced economies – including ours – have changed radically since those rules were establish in the 1980s. They made sense then; they make no sense now.

For a start, how can you say, leave it all to monetary policy, when the official interest rate is almost as low as it can go? Has no one in the Canberra bubble noticed? Or do they imagine a switch from conventional to unconventional monetary policy tools would be seamless and involve no loss of efficacy or adverse consequences?

And since when did the orthodox assignment of roles between fiscal and monetary policies involve monetary policy resorting to unconventional measures?

The diminished effectiveness of monetary policy is a big part of the reason the world’s leading macro-economists have for some time been moving away from the old view that monetary policy was superior to fiscal policy as the main instrument for stabilising demand.

All those reasons are spelt out by Harvard’s Professor Jason Furman – a former chairman of President Obama’s Council of Economic Advisers – in a much-noted paper (summarised by me here). It was written as long ago as 2016, but doesn’t seem yet to have reached the banks of the Molonglo.

If there’s one thing macro economists know it’s that, these days, the economies of the developed world – including ours – don’t work the way they used to in the 1980s, or even before the financial crisis.

Interest rates are at record lows around the developed world not only because inflation is negligible but also because the world neutral real interest rate has been falling for decades and is now lower than it’s ever been.

This is linked to the fact – often referred to by Lowe, but not mentioned by Kennedy - that the supply of loanable funds provided by the world’s savers greatly exceeds the demand to borrow those funds for real investment.

Around the developed world – and in Australia – consumption is weak, business investment is weak, productivity improvement is low and real wage growth is low, while employment growth is stronger than you’d expect in the circumstances. Countries keep revising down their estimates of the "non-accelerating-inflation rate of unemployment" (that is, full employment), but no one really knows just how low it now is.

To give him his due, Kennedy’s speech reveals him to be just as puzzled as the rest of us about why the economy is behaving so differently.

But one thing seems clear: the private sector isn’t generating sufficient demand to get us out of "secular stagnation," so it’s up to the public sector to fill the void. And, sorry, but with monetary policy down for the count, that means using fiscal policy. They're the new, 21st century rules.

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Treasury explains why we shouldn't worry about the economy

There’s a lesson for Scott Morrison in new Treasury secretary Dr Steven Kennedy’s first public speech this week: put the right person at the top of Treasury and they’ll defend the government’s position far more eloquently and persuasively than any politician could. The econocrat’s greater credibility demands they be taken seriously.

I fear that time will show it's been a costly mistake by the government not to respond to Reserve Bank governor Dr Philip Lowe’s unceasing requests for budgetary stimulus to supplement the diminishing effectiveness of interest rate cuts. Costly in terms of lost jobs – perhaps even including the Prime Minister’s.

But that Kennedy’s opening statement at Treasury’s appearance before Senate Estimates is a robust defence of official policy should surprise no one (except politicians, who are prone to paranoia). In my experience, senior Treasury officers never gainsay the government of the day, in public or private. If it’s an independent view you’re after, try the Reserve.

However, since this is the most ably argued exposition of the government’s case for sitting tight, it deserves to be reported in detail.

Kennedy is clearly worried about the threat to us from events in the rest of the world, but is
"cautiously optimistic" that the domestic economy will pick up. According to the government’s long-established "frameworks" for the respective roles of the two policy arms used to manage the macro economy – monetary policy (interest rates) and fiscal policy (the budget) – the heavy lifting is done by monetary policy, with fiscal policy being used only during a crisis. As yet, there’s no crisis.

Over the past year, Kennedy says, global growth has slowed. As a result, the International Monetary Fund and the Organisation for Economic Co-operation and Development now expect world growth this calendar year to be the slowest since the global financial crisis in 2008. Even so, they expect growth next year to improve to about 3 to 3.4 per cent – "which is still reasonable".

Chief among the factors involved are the ongoing and still evolving "trade tensions" between the United States and China. "There is no doubt that trade tensions are having real effects on the global economy, which you see in trade data from the US and China," he says.

Combined with other problems – Brexit, Hong Kong, and concerns about the financial stability of some countries – trade tensions are leading to an increased level of uncertainty around the outlook for the world economy.

Many central banks have responded to slowing global growth by supporting their economies. And South Korea and Thailand have also provided more supportive fiscal policy.

Turning to the domestic economy, it slowed in the second half of last year, then grew more strongly in the first half of this year. This amounted to growth of just 1.4 per cent over the year to June.

Household consumption, the largest part of the economy, grew by 1.4 per cent, held down mainly by weak growth in wages. Linked to this is a fall in home building over the past three quarters, which is likely to continue in the present financial year.

Moving to business investment spending, mining investment fell by almost 12 per cent over the year to June, and non-mining investment was weaker than expected.

But, Kennedy argues, these problems are temporary and "there are reasons to be optimistic about the outlook". Recent figures have shown early signs of recovery in the market for established housing. Overall, capital city house prices have risen for the past three months. Auction clearance rates have picked up and more homes are changing hands.

Consumer spending will be supported by the government’s tax cuts and the Reserve’s three cuts in interest rates.

The substantial investment in mining capacity of past years is boosting exports, and mining investment spending is expected to grow this year rather than contract, as it had been since 2012.

Despite modest growth in the economy, employment has continued to be strong, increasing by more than 300,000 over the past year. The rate of unemployment has been "broadly flat" rather than falling because near-record rates of new people are joining the labour force and getting jobs.

The rate of improvement in the productivity of labour – output per hour worked – has averaged 1.5 per cent a year over the past 30 years, but slowed to just 0.7 per cent a year over the past five. This isn’t as bad as it looks because it’s exactly what arithmetic would lead you to expect when employment is growing faster than output. And even 0.7 per cent is higher than the G7 economies can manage.

Now to the question of whether the government should be applying fiscal stimulus to guard against a recession.

Kennedy says that, in an open economy such as ours, having a medium-term "framework" (set of rules) for the way fiscal policy should be conducted, in concert with a medium-term framework for the way monetary policy should be conducted, "has long been held to be the most effective way to manage the economy through cycles".

Under this view, fiscal policy’s medium-term objective is to deliver sustainable patterns of taxation and government spending [and thus a sustainable level of public debt].  A further objective is usually to minimise the need for taxation, as is the case in Australia.

This approach reflects an assessment that apparent short-term economic weakness or, alternatively, unsustainably strong growth, is best responded to by monetary policy, not fiscal policy.

Within this framework, however, the budget’s in-built "automatic stabilisers" will assist monetary policy in stabilising the economy. For instance, revenue will weaken, and payments will strengthen, when an economy experiences weakness.

The other exception to the rule that fiscal policy should be focused exclusively on achieving sustainable public debt is that there’s a case for "temporary [note that word] fiscal actions" in periods of crisis.

But "the circumstances or crisis that would warrant temporary fiscal responses are uncommon".

So, sorry, Phil. Application denied.

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Insincere, misguided displays of concern make the drought worse

Sometimes I think our politics has got into a vicious circle: the worse our politicians behave, the more of us give up and tune out. But the less we monitor their behaviour, the worse and more lackadaisical the politicians become.

Take the drought. Good politicians would see it as a recurring problem and try to find substantive ways of helping farmers cope with droughts in general; weak politicians settle for giving the impression of being very busy caring and helping – especially when the TV cameras are rolling – while they kick the problem down a country track.

Scott Morrison and his ministers keep announcing (or re-announcing) new measures to help, but the experts – including the National Farmers' Federation - keep lamenting that we don’t have a National Drought Policy and haven’t had one for years. We just keep knee-jerking and ad hocking every time another drought comes along.

So what would a decent national drought policy look like? It would start by reverting to an understanding the Hawke-Keating government established years ago, but has since been blurred: droughts aren’t a “natural disaster” in the way floods, cyclones and bushfires are. For a start, those others are sudden and short-lived, whereas droughts develop gradually, spread over huge areas and can last for years.

As Dorothea Mackellar realised more than a century ago, if you want to be an Australian, regular droughts are part of the deal. Always have been but, thanks to the two C-words we’re not supposed to say, are now likely to become more severe and more frequent. The day may come when not being in drought is the exception.

According to former top econocrat Dr Mike Keating, “the possibility of recurring droughts must therefore be planned for and not just treated as bad luck, for which farmers themselves bear no responsibility”.

The national drought policy of 1992 required farmers to be more self-reliant and absorb the impact of droughts as something to be expected. Many, many farmers have long been doing just that. Some haven’t bothered and they’re the ones getting most care and concern from fly-by-night journalists and politicians.

Everyone wants to “help those poor farmers”, but how should governments do it? John Freebairn, an economics professor at the University of Melbourne, says you can divide government drought support into three categories: subsidies for farm businesses, income supplements for low-income farm families, and support for better decision-making.

His message is that the main thing we should be doing is supporting programs to help farmers better manage the risk of drought and make their farms sustainable. Such support needs to come mainly between droughts – precisely when media and political interest in the topic evaporates.

Although income supplements for drought-stricken farmers raise questions about why they should get help other small-business people don’t, they’re a much more effective way of alleviating poverty than subsidising farmers’ loans, freight and fodder – which is just what federal and state politicians (and volunteer organisations) have been heaping on this time as the ad hockery has mounted.

As Professor Bruce Chapman, of the Australian National University, said this week, “the politics of drought is not only about helping farmers, [it’s] about showing the world – including city dwellers – that the government cares. It does that by giving money away and having lots of announcements.”

But here’s the less-obvious truth recognised by a considered drought policy: the too-ready availability of drought assistance helps create droughts.

How? By reducing “the risks associated with a bad year, and thus encouraging over-cropping and over-grazing. If farmers know that their mistakes will be bailed out, then they have an additional incentive to maintain their herds even when the risk of not having enough feed is quite high. They anticipate that the taxpayer will bail them out if it doesn’t rain, and that they will be able to buy in the additional (subsidised) fodder when they might need it,” Keating says.

Now get this: according to Lin Crase, an economics professor at the University of South Australia, “there is mounting evidence that farm businesses can actually benefit from drought in the longer term. This seems to occur because businesses that go through a drought develop coping strategies that, when invoked in good years, produce much greater profits.”

This doesn’t mean droughts are a good thing, of course, but it does mean that shielding farm businesses from drought runs the risk that they won’t adapt, Crase says. Changing climate suggests that a lot more adaptation – including bigger, more mechanised farms and many more farmers leaving the land – lies ahead.

Sensible drought policy long ago recognised that more dams don’t help, which is why so few have been built in recent decades. That politicians are popping up with plans for new dams is another sign they’re making it up as they go.

John Kerin, a minister for primary industry in the Hawke government, says that while you can fill new dams when you’ve eventually built them, “you can’t keep them full waiting for a drought, or empty waiting for a flood”. Increased stored water will be used to increase irrigation. And increased irrigation in a time of climate change means greater shortages of water in the next drought.

The expertise to respond to drought more sensibly is there. It’s just that our politicians find it easier pretending to fix the problem.

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Morrison’s hang-ups make him a bad economic manager

Scott Morrison’s problem is that he gets politics – and is good at it – but doesn’t get economics.

The Prime Minister doesn’t get that if he keeps playing politics while doing nothing to stop the economy sliding into recession, nothing will save him from the voters’ wrath.

Neither he nor Josh Frydenberg seem to get that if we endure another year of very weak growth before they pop up next September boasting about their fabulous budget surplus, no one will be cheering.

How could a second financial year of weak growth possibly leave the budget with a big surplus? Because of the miracle of continuing bracket creep and iron ore prices kept high by BHP’s dam disaster in Brazil.

If there was any doubt about the likelihood of continuing weakness in our economy – independent of any adverse shock from abroad – it was swept away last week. The International Monetary Fund forecast real growth in Australia's gross domestic product of just 1.7 per cent this calendar year, improving only to 2.3 per cent next year.

So the IMF isn’t buying even Reserve Bank governor Philip Lowe’s “gentle turning point”, much less the efforts of Treasury’s seemingly unsackable Italian forecaster, Dr Rosie Scenario.

Frydenberg’s response has been that giving top priority to achieving a budget surplus isn’t just “a vanity exercise” because “a strong budget position helps build the resilience of the economy for external shocks, whenever that may occur, and your ability to respond to those stocks with a fiscal response”.

Translation: we can’t afford to spend money staving off recession because we’ll need to spend that money once we are in recession. The absurdity of this argument that a stitch in time doesn’t save nine has been hidden by his unstated assumption that, since the domestic economy's going fine, it’s only some shock from abroad that could lay us low.

Remember all the hand-wringing about quarter after quarter of weak growth in real wages, made even weaker – as Lowe has reminded us – by exceptionally strong growth in income tax collections? It’s imaginary, apparently.

Weak consumer spending, weak growth in business investment spending, contracting home-building? More imagining.

Oh yes, employment’s still growing surprisingly strongly. “See, I told you everything’s fine.” These guys are in denial.

Frydenberg’s argument about the need to “reload the fiscal canon” ready for the next downturn makes perfect sense - provided you’re paying back public debt at a time when the economy’s growing strongly and, if anything, could use a bit of slowing to ensure inflation doesn’t get away.

That's not us, unfortunately.

The IMF says “monetary policy [changing interest rates] cannot be the only game in town. It should be coupled with fiscal [budgetary] support where fiscal space is available, and policy is not already too expansionary”.

Far from being too expansionary, our fiscal policy is contractionary (which is why the budget balance is improving even as the economy slows).

And throughout the time that both sides of politics have been so worried about “debt and deficit”, the IMF has kept telling us not to worry because we have loads of “fiscal space” – that is, our level of public debt is way below the point where we should become concerned.

My bet is Morrison and Frydenberg will eventually panic and take stimulatory measures (probably a lot of them), but they’ll come too late in the piece to stop confidence unravelling, with punters tightening their belts as businesses lay off staff.

But not yet. Frydenberg has let it be known the government will try to boost business investment by introducing a special investment allowance – but not until the budget next May.

Even so, Finance Minister Mathias Cormann has let it be known that they’re thinking about turning the December midyear budget update into a mini budget if it soon becomes apparent the present tax and interest-rate cuts haven’t made much difference.

But even when that bullet is bitten, Morrison’s effectiveness as an economic manager will still be inhibited by his various political hang-ups. For instance, neither he nor his Treasurer can bring themselves even to utter the offensive S-word – stimulus.

And his determination never to be seen helping the poor (whom those in the party’s base know to be utterly undeserving) stops him taking two stimulatory measures that are simple, quick-acting and highly effective, while yielding lasting benefits.

The first is simply increasing the Newstart allowance.

The other is a proposal worked up by Dr Peter Davidson for the Australian Council of Social Service for the feds to invest $7 billion over three years building 20,000 social housing dwellings. This would not only boost growth and jobs in the becalmed housing industry, but also reduce homelessness.

Sorry, makes too much sense.

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Traffic congestion will continue until we're game to tax it

The governments of NSW and Victoria lost zero time in rejecting the Grattan Institute’s proposal that all state governments introduce “congestion charging” in their capital cities. But don’t imagine this unpopular idea will go away. It will keep coming back until we buy it.

Australians and their political leaders have a record of trembling on the brink for decades before belatedly accepting the inevitability of upgrades to the tax system. Take value-added tax.

A full quarter century passed between the first official report recommending a VAT – which the Whitlam government rejected at the same time it made the report public - and its introduction by John Howard in 2000, rebadged as the more euphemistic goods and services tax.

Economists had lots of fancy economic-efficiency arguments for changing to a broad-based, single-rate tax on consumer spending but, in the end, it was quite pragmatic, revenue-protecting arguments that won the day.

The High Court had ruled various state government indirect taxes to be unconstitutional, and the growth in collections from the federal government’s ramshackle wholesale sales tax was falling further and further behind the growth of the economy, as more of every consumer dollar was being spent on (untaxed) services rather than goods.

An eventual move to charging motorists directly for using the roads could also be prompted by the declining effectiveness of the present tax system. As ever more of our car fleet moves from petrol-powered to electricity-powered, receipts from the nation’s main tax on motoring – the federal excise on petroleum – will wither away.

But that’s not an argument used in the Grattan Institute’s report – written by Marion Terrill – advocating a move to congestion charging. Indeed, Terrill makes it clear she’s not talking about a general road user charge – that is, charging that covers the cost of building new roads and maybe also the costs of wear and tear to roads, accidents and so forth. (Even though such a general charge for road use may well be what we end up with.)

No, Terrill is only on about charges designed to reduce excessive congestion.

So why might we get charges directed solely at reducing congestion? Because all of us hate it so much and because, even if it doesn’t increase in coming years as cities get ever bigger, you can be sure we’ll all believe it’s got a lot worse.

And, finally, because congestion charging is the most certain – and the cheapest – way to actually reduce congestion, not just promise to.

State politicians have gone for decades claiming to be reducing congestion by spending billions on new freeways (and a lot fewer billions on expanding public transport), but it hasn’t happened.

Why not? Partly because our cities keep getting bigger, but mainly because, in Terrill’s words, “most city-dwellers find car travel more appealing and convenient than other means of travel”.

Initially, a new freeway is much faster than the roads it replaces, but that just attracts more people who’d prefer to travel by car. They keep flooding in until the congestion increases the delay to the point where it’s about as bad as it was before.

By contrast, we know that congestion charging really works. You’d still have to build more freeways and railways as the city grew, but many fewer.

Terrill argues that congestion charges could be introduced in three stages. First is “cordon charging” where drivers pay to cross a boundary into a designated zone, such as a CBD. Next “corridor charging,” where drivers pay to drive along an urban freeway or arterial road. Then network-wide, distance-based charging, where drivers pay to drive within a designated network or area, on a per-kilometre basis.

She says there are three reasons why now’s the time to get started. First, many people say that congestion charging couldn’t be introduced without a big improvement in public transport. Well, that’s just what we’re getting.

In recent elections, the winning party promised spending on public transport of $72 billion in Victoria, $42 billion in NSW and $13 billion federally.

Specifically, Melbourne is getting the Suburban Rail Loop and the Airport Rail Link. Sydney’s getting Metro West, Metro City and rail to Western Sydney Airport.

Second, the technology for congestion charging is getting cheaper and better all the time. Third, there’s now enough global experience - not just Singapore, London and Stockholm, but also Malta, Gothenburg and Milan, with Jakarta and New York on the way - to show that congestion charging works and that, despite initial opposition, is soon accepted as a big improvement.

Terrill says that, in Sydney’s morning peak, for example, up to 21 per cent of trips are for “socialising, recreation or shopping”. A congestion charge wouldn’t raise much revenue. It wouldn’t have to be high to deter enough people to reduce road use in key parts of the city during peak hours. And remember, such charges are designed to be avoided.

It’s true that motorists with lots of money could easily afford to pay the charge, whereas people on modest incomes couldn’t. But the claim that a charge would be unfair is exaggerated.

If the charge was imposed on cars entering the CBD, only 3 per cent of Melbourne households would pay it on a typical day. And not many of those would be poor. The median income of full-time workers driving to work in the CBD is $1980 a week in Melbourne (and $2450 a week in Sydney). Sound poor to you?

But if you’re still not convinced by Terrill’s arguments, here’s a more radical proposal. The economists’ Coase Theorem implies it shouldn’t matter whether you impose the charge on workers required to start work in the CBD during peak hour or on their employer doing the requiring.

After all, workers have little or no ability to change the time they must start or leave work, but their bosses do.

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Politicians too poor at their jobs to fix poverty

You could be forgiven for not knowing this is anti-poverty week. The poor, as we know, are always with us – which is great because it means we can focus on our own problems and worry about the poor’s problems later.

We can fight to protect our tax breaks, then get around to wondering about how easy we’d find it to be living on $280 a week from the Pollyanna-named Newstart allowance.

But it’s not just our natural tendency to let our own problems loom larger than other people’s. It’s also that, as property prices make our cities ever more stratified, we so rarely meet people from the poorer parts of town.

We find it hard to imagine how hard they find it to make ends meet, and to lift themselves out of the hole they’ve fallen into. Why can’t they work as hard as I do? (Short answer: because they can’t find anyone willing to give them a job.)

Why can’t they budget as carefully as I would if I were in their position? (Short answer: you have no idea of how carefully they have to watch their pennies.)

The question we should be asking, but rarely do, is: why hasn’t their luck been as good as mine?

Why didn’t they choose their parents more wisely? Why didn’t they go to a better school? Why can’t they afford health and car insurance? Why don’t they have a few thou in the bank in case of emergency? Why don’t they have well-placed relatives and friends to help them find a job or talk their way out of a problem with the authorities?

One of the many things the Salvos (my co-religionists) do to help the disadvantaged is run a financial counselling service called Moneycare. I’ve been reading some of their recent reports, most of them prepared by the Salvos’ research analyst, Lerisca Lensun.

It probably won’t surprise you that the number of people seeking help has increased by more than 40 per cent over the past five years. Most are there because of an unexpected change in their financial circumstances – they’ve lost their job or lost income, they or a family member have acquired a serious illness, or they’re victims of domestic violence.

The main issues they present with are managing their debt, or managing their budget. More than a third of people in the sample had financial difficulties arising from health problems.

More than 60 per cent of those needing financial counselling are women. The median income was $535 a week, less than 40 per cent of an average Australian’s income and well below the poverty line.

A quarter are on Newstart and another fifth on the disability support pension.

Almost half rent privately and, of these, 45 per cent suffer housing stress (paying more than 30 per cent of their disposable income in rent), plus a further 26 per cent in severe housing stress.

The proportion of those over 55 who are in private rental has risen over a decade from 27 per cent to 42 per cent. Of these, almost 80 per cent experience housing stress.

Of those with debt, half have credit card debt, 30 per cent have personal loans and a quarter have electricity debt. Many have more than one type, of course.

Compared with average Australian households, clients spent at least 50 per cent less on essential items such as food and health. Try this story from a 41-year-old mother of three: “Go without the main meal and just provide for the children. Before payment arrangements were organised, I would put off paying electricity and gas bills to pay for other things due.”

Or this sick 26-year-old woman, living alone: “When I don’t have money I don’t eat and only get the medication I could not live without. Bills and debts get fines. The medical conditions get worse so I end up needing more medication and get admitted to hospital to fix that.”

The counsellors at Moneycare – who spend much time interceding with creditors on behalf of clients – say they see no sign on the ground of improved behaviour by lenders since the report of the royal commission on banking misconduct.

They worry a lot about the way unscrupulous payday lenders take advantage of people with pressing debts and no money, greatly deepening the hole they’re in. Legislation to crack down on such lenders was introduced to Parliament in March last year, but has yet to be passed.

It never ceases to surprise me that a prime minister so ready to proclaim his Christian faith is so hard of heart when it comes to people on benefits (age pensioners excepted). Presumably, he’s not prepared to “give them a go” because he’s not convinced that they “have a go”.

As the Australian Council of Social Service has said, increasing Newstart would be “the single most effective step to reduce poverty” – not to mention giving a much-needed boost to the nation’s retailers.

But Scott Morrison, so generous in his promises of big tax cuts to high-income earners like me, has steadfastly refused to oblige. Rather, he’s working on an unending list of torments for people on welfare.

It’s as if he’s seeking applause from all those who think anyone on welfare must be a lazy loafer.

If that’s how you imitate Christ, things have changed a lot since I grew up in the Salvos.

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Barring another financial crisis, it will be a long wait for QE

It’s amazing so many people are so sure they can see where the Reserve Bank is headed. Once interest rates are down to zero it will be on to QE - “quantitative easing” – and negative interest rates, they assure us. Don’t you believe it.

What’s surprising is how heavily the self-proclaimed experts are relying on their vivid imaginations. Or maybe lack of imagination, falling back on the lazy market dealer’s assumption that we should do – and will do – whatever the Americans have done.

What few in the financial markets and financial media are doing is their due diligence: carefully examining what the Reserve – particularly its governor, Dr Philip Lowe – has actually said about its attitude towards “unconventional monetary policy tools”.

Lowe had a lot to say when he appeared before the House economics committee in August. And in the Reserve’s written response to the committee’s questions. As well, Lowe had more to say when delivering a report on the topic by a Bank for International Settlements committee (BIS), which he chaired.

People assume the Reserve is hot to trot. It ain’t. It began the written response by saying “while at this point it is unlikely that the Reserve Bank will need to employ unconventional monetary measures, the [board] considered it prudent to understand the issues involved and has studied the experience of other countries”.

Prudence is the word. Since these are times when the unprecedented has become commonplace, Lowe is resolved to “never say never”. But don’t mistake this for enthusiasm. Read what he says -more in his remarks on his own behalf than as chair of the BIS committee – and you see how reluctant he is to start down the unconventional road.

He keeps repeating that the effectiveness of the various unconventional measures “depends upon the specific economic and financial conditions facing each economy at the time, as well as the structure of its financial system”.

That’s his way of saying, just because the Yanks did it, doesn’t mean we will.

His reference to the particular structure of a country’s financial system is especially relevant to the unconventional tool so many people assume is next: “purchasing government securities, so as to lower long-term risk-free interest rates”.

It’s a lot easier to believe this would stimulate private sector borrowing and spending in financial systems where home loans and business borrowing are geared to “the long end” – such as America’s – than in systems like ours, where lending for housing and small business is based on the short term and variable end of the interest-rate yield curve.

And Lowe’s reference to financial conditions at the time is also relevant: long-term interest rates are already at unprecedented lows. What would be gained by making them even lower?

If there’s one thing we ought to have figured out by now it’s that, whatever ails our economy at present, it ain’t that interest rates are too high.

People in the financial markets can fail to see this because, in all the trading of currencies and securities they do (many, many times more than would be necessary just to provide firms in the real economy with “deep” markets), so many of them make their living betting on the central bank’s next move.

When you’ve fallen into the habit of seeing the Reserve’s main role as holding regular race meetings, you see the conventional race days continuing until the official interest rate hits zero, obliging it to move to unconventional race days.

Trouble is, the Reserve thinks monetary policy is about the effect it has on the real economy of households and businesses, not about keeping money-market dealers in the luxury to which they’ve become accustomed.

For instance, it’s not at all clear that it will keep cutting until it hits zero. In its written response, the Reserve says that reducing the long-term bond rate “would involve reducing the cash rate to a very low level [my emphasis] and possibly purchasing government securities”.

Why get off at Redfern? Because there’s little point in cutting the official rate beyond the point where the banks are able to pass it on to their customers in the real economy.

Similarly, why would the Reserve engineer negative interest rates if the banks couldn’t get away with passing them on to their customers?

Lowe says the most clearly successful use of unconventional tools – buying private-sector securities - was at the height of the financial crisis when “the financial sector stalled and stopped doing its job, hamstrung by losses and drained of liquidity”.

However, security-buying policies aimed primarily at providing monetary stimulus were less obviously successful. So, should another financial crisis cause particular markets to freeze then, yes, sure, the Reserve would be in there taking whatever unconventional measures were needed to get them going again.

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Why surpluses aren't necessarily good, or deficits bad

According to the Essential opinion poll, only 6 per cent of people regard the size of the national surplus as the most important indicator of the state of the economy. I think that’s good news, but I’m not certain because I’m not sure what “the national surplus” is – or what the respondents to the poll took it to mean.

They probably thought it referred to the balance on the federal government’s budget. But the federal budget is not yet back to surplus and, in any case, it can’t be the national surplus because it takes no account of the budgets of the state governments that, with the feds, make up the nation.

Assuming respondents took it to be the federal budget balance, its low score is good news about the public’s economic literacy, but bad news for Scott Morrison and Josh Frydenberg, who are hoping to make a huge political killing when, in September next year, they expect to announce the budget finally is back in surplus.

The pollies are assuming that voters know nothing more about the economy than that anything called a surplus must be a good thing, whereas anything called a deficit must be very bad.

Actually, no economist thinks all surpluses are good and all deficits bad. Sometimes surpluses are good and sometimes they’re bad. Vice-versa with deficits. It depends on the economy’s circumstances at the time.

But the confusion doesn’t end there. There are lots of measures in the economy that can be in deficit or surplus, not just governments’ budgets. When I wrote a column some weeks back foreshadowing that the current account on the nation’s balance of payments would probably swing into surplus for the first time in 44 years, some people assumed I must be referring to the federal budget.

Wrong. The federal budget records the money flowing in and out of the federal government’s coffers – it’s bank account. The “balance of payments” summarises all the money flowing into and out of Australia from overseas – covering exports, imports and payments of interest and dividends in and out (making up the “current account”), and all the corresponding outflows and inflows of the financial payments required (making up the “capital and financial account”).

The trick is that, thanks to double-entry bookkeeping, the balances on the two accounts making up the balance of payments must be equal and opposite. So the longstanding deficit on the current account was always exactly offset by a surplus on the capital account.

And that means the (probably temporary) current account surplus was matched by the capital account swinging from surplus to deficit. Oh no.

Although Australia has been a net importer of (financial) capital almost continuously since the arrival of the First Fleet, for the June quarter we became a net exporter, lending or investing more money in the rest of the world than the rest of the world lent or invested in us.

If you tell the story of this change in plus and minus signs from the current account perspective, it’s mainly that the resources boom has greatly increased our exports, while the slowing in the economy’s growth means our imports of goods and services are also weak.

But there’s also a story to be told about why the capital account has gone from surplus to deficit. As Reserve Bank deputy governor Dr Guy Debelle explained in a speech at the time, the composition of the inflows and outflows of financial capital have changed a lot since 2000.

Since Australia has always been a recipient of foreign investments in our businesses, by June this year, the value of the total stock of that equity investment amounted to a liability to the rest of the world of $1.4 trillion.

But the value of our equity investments in the rest of the world amounted to assets worth $1.5 trillion. So, when it comes to equity investment, the latest figures show we had net assets of $142 billion.

The fact is, the value of our shares in them overtook the value of their shares in us in 2013. That’s a remarkable turnaround from the previous two centuries of being a destination for foreign investment.

Why did it come about? Mainly because of our introduction of compulsory superannuation. Our super funds have invested mainly in local companies, but they’ve also invested a lot in the shares of foreign companies.

For the most part, however, our seemingly endless string of current account deficits has been financed by borrowing from the rest of the world. By June, our debt to foreigners totalled $2.4 trillion. Their debt to us totalled $1.3 trillion, leaving us with net foreign debt of a mere $1.1 trillion.

There was a time when Coalition politicians carried on about that debt – owed more by our banks and businesses, than our governments - rather than the (much smaller) debt of the federal government, only about 55 per cent of which is owed to foreigners.

Why does our huge net foreign debt rarely rate a mention these days? Because it’s always made economic sense for a young country with huge development potential to be an importer of financial capital – it’s part of what’s made us so prosperous.

Because all the debt we owe is denominated in Australian dollars or has been “hedged” back into Aussie dollars – meaning a sudden big fall in our dollar would be a problem for our creditors, not us.

But also because, though our net foreign debt keeps growing in dollar terms, our economy is also growing – and hence, our ability to pay the interest on the debt. That’s a sign that, overall, the money we’ve borrowed has been put to good use.

Adding our net foreign assets to our net foreign debt gives our net foreign liabilities. Measured against the size of the economy (nominal gross domestic product), our net foreign liabilities reached a peak of about 60 per cent in 2009, but have since fallen to about 50 per cent.

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Why are the Viking economies so successful? They pull together

I’d like to tell you I’ve been away working hard on a study tour of the Nordic economies – or perhaps tracing the remnant economic impact of the Hanseatic League (look it up) – but the truth is we were too busy enjoying the sights around Scandinavia and the Baltic for me to spend much time reading the books and papers I’d taken along.

But since I always like telling people what I did on my holidays (oh, those fjords and waterfalls we saw while sailing up the coast of Norway to the Arctic Circle!), I’ve been looking up facts and figures in a forthcoming book comparing the main developed countries on many criteria, by my mate Professor Rod Tiffen and others at Sydney University (and me).

But first, the travelogue. Prosperous countries have a lot in common but Scandinavia is different. I have seen the future and, while some might regard it as political correctness gone mad, it looked pretty good to me.

One aspect in which the Nordics (strictly speaking, Finland isn’t Scandinavian because it’s a republic rather than a monarchy and because the Finnish language bears no relation to Danish, Swedish or Norwegian) are way more advanced is the role of women.

All of them have had female prime ministers or presidents, they have loads of female politicians and we were always seeing women out at business functions with their male colleagues.

Governments spend much more on childcare and they’re big on men actually taking paid paternity leave. They have “family zones” in trains and we were struck by how many men we saw by themselves pushing prams.

They’re much more relaxed on sexual matters. These days, any new building in Sweden will have unisex toilets, with rows of cubicles and not a urinal to be seen. Neat way of sidestepping debates about which toilet transgender people should use.

The Nordics are well ahead of us on environmental matters. They’re bicycle crazy (a big health hazard for tourists who don’t know they’re standing in a bike lane) and drive small cars.

They’re obsessed with organic food and even hotel guests are expected to recycle their paper and plastic. One hotel we stayed at in Copenhagen was so concerned to save the planet its policy was to make up the rooms only every fourth day.

The Norwegians have made and, unlike the rest of us, saved their pile by selling oil to the world but you get the feeling it troubles their conscience. So, like the other Nordics, they have ambitious targets to move to renewables and, to that end, are making more use of carbon pricing than most other countries.

The truth is, I’ve long wanted to see Scandinavia for myself. It’s a part of the world that most politicians and economists prefer not to think about. Why not? Because its performance laughs at all they believe about how to run a successful economy.

Everyone in the English-speaking economies knows big government is the enemy of efficiency. The less governments do, the better things go. The lower we can get our taxes, the more we’ll grow.

Just ask Scott Morrison. As he loves to say, no one ever taxed their way to prosperity. What’s he doing to encourage jobs and growth? Cutting taxes, of course. That’s Economics 101 – so obvious it doesn’t need explaining.

Trouble is, the Nordics have some of the highest rates of government spending in the world and pay among the highest levels of taxation, but have hugely successful economies.

The Danes pay 46 per cent of gross domestic product in total taxes, the Finns pay 44 per cent, the Swedes 43 per cent and the Norwegians 38 per cent (compared with our 28 per cent).

Measured by GDP per person, Norway's standard of living is well ahead of America's. Then come the Danes and the Swedes – at around the average for 18 developed democracies (as are we) – with the Finns just beating out the Brits and the French further down the list.

The Nordics are also good at managing their government budgets.

We all know unions are bad for jobs and growth and we’ve succeeded in getting our rate of union membership down to 17 per cent. Funny that, the Nordics still have the highest rates (up around two-thirds). So, do they have lots of strikes? No.

The four Nordics are right at the top when it comes to the smallest gap between rich and poor, with Canada, Australia, Britain and the United States right at the bottom.

Other indicators show that (provided you ignore the long snowy winters) the Nordics enjoy a high quality of life and not just a high material standard of living.

Note this: I’m not claiming that the Scandinavians are more economically successful because of their big government and high taxes. No, I’m saying that, contrary to the unshakable beliefs of many economists and all conservative politicians, there’s little connection between economic success and the size of government.

So how do the Scandis do it? I read this on the wall of an art museum in Aarhus, Denmark: “In a society we are mutually interdependent. Strengthening the spirit of community, we improve society for all of us as a group but we also provide each individual with better opportunities for realising his or her own potential.”

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Why we don't get more joy out of our super

When one of our top econocrats gives a speech about behavioural economics, you know we’re making progress. Take the ever-present problem of income in retirement. “BE” explains both why it’s a major area of government intervention in our lives and how that intervention can be made more effective.

One of the greatest limitations of conventional economics – based on the “neo-classical” model, which focuses on how prices are determined by the interaction of supply and demand – is its assumption that people are unfailingly “rational” – calculatingly self-interested – in their response to the prices they face.

Behavioural economics accepts that we’re not the financial automatons the model assumes us to be, and uses insights from the more empirical sciences of psychology and sociology to gain a much more realistic picture of the many non-monetary factors that also affect our behaviour in economic matters.

Behavioural economists draw on the long list of “heuristics” – mental shortcuts or biases in the way we think – developed by cognitive psychologists. In a recent speech, Dr David Gruen, top economics guy in the Department of Prime Minister and Cabinet, outlined the cognitive biases that limit many people’s ability to make adequate provisions for the income they’ll need in retirement.

For more than a century the government has provided the age pension, of course. But in the 1990s people began to worry that it wouldn’t be sufficient to meet the aspirations of the rising generation. So the Keating government introduced compulsory employee superannuation.

In those days before the spread of BE, most economists accepted the imposition of compulsory saving as a correction to the “market failure” of “myopia” – most of us are too short-sighted to save enough towards our retirement.

The BE way of putting it is that we suffer from “present bias” – we overvalue the present relative to the future. Gruen takes the idea further, noting that “while choosing a retirement plan is likely to influence literally decades of our lives, many of us spend little time – sometimes less than an hour – choosing our plan”.

Then there’s “confirmation bias” – we tend to remember events that confirm our existing views, but forget developments that cast doubt on those views. Gruen uses this to explain why many of us spend what little time we have set aside to choose a retirement plan looking for one with an investment strategy that supports our existing investing approach.

And “cognitive overload”. This occurs when people find it too hard to process a mass of information in order to make decisions. In the context of planning for retirement, it leads many of us to stick with choices we have arrived at by default.

“Together, these cognitive biases create a big gap between our intentions and our actions: although people intend to save for their retirement, they often don’t translate that into action. For most people, how much to save, and in what form, are difficult cognitive problems – because of both our limited calculation powers and the apparent enormity of the task,” Gruen says.

When the compulsory super system was first set up, the government adopted the conventional economics view that savers were rational economic agents who knew their own business best. So all it had to do was require the super funds to reveal relevant information about their investment options, and diligent savers would do the rest, ensuring they picked the option that best suited their circumstances.

Yeah sure. At the time of a review of super in 2009, 80 per cent of super fund members were invested in the default fund chosen by their employer. Of that 80 per cent, anecdotal evidence suggested that only about 20 per cent explicitly chose the default option, with the rest making no active choice whatsoever.

“When complicated decisions are required, people often stick with the status quo and take no decision at all. In that case, the default option becomes very important,” Gruen says. (This is actually one of the key “insights” of BE.)

So the review panel recommended creating a default option – called MySuper - with features that would promote the wellbeing of those who didn’t actively choose another option. MySuper funds must be simple and cost-effective, with a diversified portfolio of investment.

Of course, there are remaining challenges in the compulsory super system, which the latest review of retirement incomes, instigated by Treasurer Josh Frydenberg, will consider. Let’s hope it takes full advantage of the behavioural insights available to it.

As Gruen says, BE allows all government policymaking to be improved by starting with a richer understanding of human behaviour and building this into the design of measures.

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Governments are learning to nudge us down better paths

The world is a complicated place – partly because humans are complicated animals. One of the many things this means is that when governments try to influence our behaviour, their chances of stuffing up are surprisingly high.

Consider this. Say I’m an investment adviser telling you (or your parents or grandparents) where to invest your retirement savings. I warn you that, should you take my advice, I’ll be paid a commission by the managers of the investments I put you into.

How do you react?

Well, you should react by becoming a lot more cautious about following my advice. It’s clear I have a conflict of interest. Is my advice aimed at doing the best I can for you, or at maximising the commissions I earn?

When governments require investment advisers to disclose any conflict of interest to their clients, that’s how the pollies expect you’ll react. They also expect that this requirement will prompt advisers to eliminate or reduce any conflict so their advice is more likely to be trusted.

But research by Dr Sunita Sah, a psychologist at Cornell University in upstate New York, has found it often doesn’t work like that. Although such disclosures do indeed cause clients to have less trust, they can often lead people to feel social pressure to act on the advice anyway.

Clients may be concerned that refusing to follow the advice would be a signal of their distrust in the adviser, with whom they’ve often formed a personal bond. They may even interpret the disclosure as a request that the advice be taken, as a favour to the adviser who, after all, needs to earn a living like the rest of us.

Sah found that clients given advice they knew to be conflicted were twice as likely to follow that advice as were clients where no disclosure was made.

The lesson is not that we should stop requiring advisers to disclose their conflicts, but that government policymakers need to think carefully about the specific design of their policies.

It turns out you can reduce the undesirable effects of disclosure if they come from a third party – that is, someone other than the adviser. It also helps if clients’ decisions are made in private, or if there’s a cooling-off period before the decision is finalised.

Have you guessed where this is leading? It’s a plug for a relatively new tool that’s been added to the bureaucrats’ policy toolkit – “behavioural insights”.

In a speech he gave in Canada last week, Dr David Gruen, a deputy secretary in our Department of Prime Minister and Cabinet, explained that behavioural insights is an approach to policymaking that draws from psychology, cognitive sciences and economics to better understand human behaviour, help people make good choices more easily, and help improve the effectiveness of public policy interventions.

As the case of conflict-of-interest disclosures illustrates, people’s responses to government policy measures can be surprising. Politicians and bureaucrats need to be more conscious of the insights of behavioural insights when designing policies to fix problems.

And the behavioural insights tool can also be used for real-world testing of how policy measures are working – or not working – in practice.

The first government to establish a behavioural insights team was Britain in 2010, at the initiative of prime minister David Cameron, Gruen says. It’s since become a partly privatised joint venture.

By now, according to the Organisation for Economic Co-operation and Development, there are more than 200 public sector organisations around the world that have applied behavioural insights to their work.

In Australia, the federal government’s behavioural economics team – BETA – was set up to apply behavioural insights to public policy and to build behavioural-insights capability across the public service. It’s at the centre of a network of 10 behavioural insight teams across the federal government and alongside several state government teams.

These teams are also known as “nudge” units because they’re often trying to give individuals a nudge in the direction of making more sensible decisions, while leaving them free to do something else should they choose. You’re not forced, just nudged.

Gruen offered several examples of what the feds have been doing. BERT, the behavioural economics research team in the Department of Health, looked at the ballooning cost of reimbursements to doctors for providing after-hours care.

After-hours care considered urgent was remunerated at about twice the rate of that judged a non-urgent visit. Who judged whether the care was urgent? The doctor.

The department identified the 1200 doctors with the highest urgent after-hours claims, and ran a randomised control trial, sending each of them one of three alternative letters, with the letter a doctor received chosen at random.

One letter compared the doctor’s billing practices with their peers, showing they were claiming the urgent category far more often than others were. This drew on the behavioural insight that individuals are often motivated to change their behaviour when they are out of step with their peers.

The second letter emphasised the consequences of non-compliance, including the penalties and legal action. This letter drew on the behavioural insight that people tend to avoid losses more than they seek the equivalent gains.

The third letter was the control – the standard bureaucratic compliance letter, running to three pages.

All three letters were successful in reducing claims, but the peer-comparison one was far more effective than either the standard compliance letter or the loss-framing letter. The peer-comparison letter reduced claims by 24 per cent.

And it was just a nudge, not a threat of punishment for dishonestly claiming cases to be urgent when they weren’t.

In the six months after the letters were sent, the 1200 high-claiming doctors reduced their claims by more than $11 million (across all three letters), and 18 doctors voluntarily owned up to more than $1 million in previous incorrect claims.

So, as Gruen concludes, a simple and cheap nudge can yield big dividends.

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