How two economists got themselves more say in government policy

By MILLIE MUROI, economics writer

For all the havoc it has wreaked, some good things were born from the pandemic: widespread hybrid working for one. Another was the emergence of e61: a novel name – not for a virus or robot – but for a factory for economic findings.

“What’s new about that?” you might ask. Well, it’s breaking a decades (perhaps centuries) old habit of people sticking to their lanes. Despite the important work done by academics and policymakers, the two rarely join forces.

Part of that is because some of our best academic talent gets sucked overseas to places like the US or UK. It’s also because academics and policymakers don’t tend to go out of their way to engage with one another, and because rigorous research skills and policymaking passion and practice don’t often manifest in a single person.

There are politicians such as federal Labor MP Dr Andrew Charlton with a doctorate in economics from Oxford University, who have put themselves through the wringer of high-level research – but few who are tuned into both the cutting edge of research and the front line of policymaking.

Charlton, who stepped down as director of the non-partisan, not-for-profit think tank when he was preselected to run as a Labor candidate in 2022, teamed up with University of Chicago economics professor Greg Kaplan when the two found themselves back in Australia during the pandemic.

Together, they founded the e61 Institute to attract and develop Australian economists, including those who have lived overseas, and pair academic rigour with a policy focus right here in Australia (hence the “61″ in its name: the number you dial from abroad when calling Australia).

Its economists have released a raft of work in the past three years which has fed into policy decisions and debate. Their approach includes using microdata (anonymised but detailed information about people, households, and businesses from surveys, censuses and administrative systems), to offer insight – not just to policymakers, but to the broader public.

From the way non-compete clauses are slowing down wage growth, to putting a number on the costs of caregiving, and identifying consumer inertia as a barrier to stronger supermarket competition, e61 has shed light on many of the issues facing the country.

Their work has fed into top decision-making processes, appearing in House of Representatives economics committee inquiries, meetings and submissions.

But funded by the Susan McKinnon Foundation, the Macquarie Business School and the Becker Friedman Institute, e61’s work is also freely available to the public. And the things you can learn from them are fascinating – providing insight into how economics applies in the real world – beyond the abstract, and beyond the bookish or theoretical.

Matthew Elias, for example, looked at the role we – as consumers – play in the highly concentrated supermarket sector.

As you know, Coles and Woolworths control about 67 per cent of supermarket retail sales nationally, and they’ve been under the scrutiny of the competition watchdog which is due to release its final supermarket inquiry report this year. While the supermarkets have copped some heat from frustrated consumers convinced that the lack of competition in the sector has led to excessive price growth, Elias found part of the problem was that customers don’t tend to shop around.

Shopping around, and the threat of customers leaving, is an important way to put pressure on businesses to deliver the best prices and quality they can. But looking at consumer shopping data, Elias found even in areas with several providers, shoppers tended to exhibit inertia: that is, they don’t tend to change their shopping habits over time, instead returning to certain supermarket brands – especially Coles and Woolworths.

Why? The answer is unclear, but some possibilities include costs including time spent learning the layout of a different store, the effort needed to compare the costs of various items, proximity to certain stores and brand loyalty promoted by schemes like Flybuys or Everyday Rewards.

Jack Buckley, Ewan Rankin and Dan Andrews meanwhile looked at non-compete clauses: where an employee agrees not to compete with their employer by, for instance, working in a similar industry, for some time even after their job ends.

About one in five of us are tied up in a non-compete clause, and it’s coming at a cost – not just to our economy (people switching to better-suited jobs can help improve innovation and lift productivity), but also to our pay.

The researchers found evidence that the fall in job mobility (people moving between jobs) was linked to lower wage growth for workers with non-compete clauses. On average, they found, people with non-compete clauses earn 4 per cent less than similar workers with just a non-disclosure agreement (aimed just at preventing employees from sharing trade secrets).

Then there’s research by Rachel Lee, Dan Andrews and Jack Buckley which sounded a warning for policymakers looking to tweak their payroll tax settings. When South Australia bumped up the payroll tax-free threshold (which also sharply increased the marginal tax rate for firms over that limits), it led to a phenomenon called “bunching.”

Basically, e61’s analysis of business income tax data found lots of new businesses in South Australia were ending up just below the new payroll tax threshold. Since firms with an annual wage bill of less than $1.5 million could be exempt from payroll tax, there was a jump in the number of firms just under that size – despite a lot of those businesses being productive and growing firms which you’d expect to continue growing.

The conclusion? That little tweak in the payroll tax settings may have stunted the growth of many businesses, which cut back on their workers in an effort to slash their payroll tax. Sure, it benefited some smaller firms which were able to grow within that threshold, but the costs of businesses shrinking their payrolls was bigger.

Kaplan says he wants to see e61 be at the forefront of major policy movements over the next debate: both avoiding bad policy mistakes and guiding good policy. It might take a while for the new kid on the economics block to become a hard-hitter, but linking some of the brightest academic economists with crucial policy problems is helping to inject rigour into our understanding of economics – and that of our policymakers.

e61 supported the reporter’s travel from Canberra to Sydney.

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Oligopolists gouge power and gas prices, Albanese cops the blame

If, as seems likely, Anthony Albanese and his government lose seats at next year’s federal election, one thing we can be certain of is that the nation’s economists and econocrats won’t be admitting to their not insignificant contribution to Labor’s setback.

Economists have such a limited understanding of how the behaviour of the real-world economy differs from the economy described in their textbooks and measured in their econometric models, and are so woefully bad at predicting where the economy is headed, that their profession has become hugely defensive. And so, like Peter Dutton, they never ever admit to getting anything wrong.

It seems a safe bet that, should Labor’s vote be down, it will be for one overwhelming reason: the voters’ ire at what they call the “cost-of-living crisis” – the sudden surge in retail prices in the aftermath of the pandemic.

Many factors have contributed to that surge, but the Reserve Bank attributes much of the responsibility to the authorities’ excessive stimulus of the economy during the lockdowns. This, by causing the demand for goods and services to outstrip the economy’s ability to supply them, allowed businesses everywhere to get away with whacking up their prices.

Economists regard such price rises as completely normal and unexceptional, part of the God-ordained mechanism by which market forces return the economy to equilibrium. The public, however, sees such rises as utterly opportunistic and illegitimate, condemning them as “price gouging”.

But while the Reserve has frequently offered this “demand-pull” explanation as justification for its protracted increase in interest rates, it’s been much less willing to acknowledge that it was among the “authorities” who stuffed up.

Of course, the retail prices of some goods and services have made a much bigger contribution to the higher inflation rate than others have. And a prominent role has been played by the prices of electricity and gas. Over the three years to June this year, electricity prices rose by 20 per cent and gas prices by more than 30 per cent.

We’ve been told the leap in energy prices has been caused by Russia’s invasion of Ukraine in February 2022. But as new research by the Australia Institute’s David Richardson reveals, that’s just a tiny part of the story.

The truth is that electricity and gas prices have been rising much faster than the overall consumer price index since at least the end of 2007, with prices really shooting up over the past four years.

Richardson has used the latest annual reports of AGL and Origin Energy to derive some astonishing figures for what consumers are paying for electricity and gas. On average, he calculates, AGL’s electricity costs households $377 a megawatt hour, while Origin households pay $343 a MWh.

So what are the costs that cause those electricity prices to be so high? He says the total retail price consists of five components. First is the cost of the generation of electricity by power stations, including the cost of the coal and a bit of gas used to power the generators.

Second are the “network costs” of moving the electricity from the power stations to homes, businesses and offices, first transmitted across the countryside by high-voltage power lines, then distributed by “poles and wires” at the local level.

The third component is an annual allowance for the depreciation of all the equipment, which must eventually be replaced. Fourth is “other costs” incurred by the electricity retail companies – most of it being the cost of advertising – and fifth is the retailers’ profit before interest payments and tax.

Now get this. Richardson calculates that, for every $100 paid by a retail customer of AGL, a mere $12 goes on generating the electricity. So much for the evil Russian invaders being the cause of the problem.

Next come network transmission and distribution costs of $34, $4 for depreciation and $15 for advertising and other retailing costs. Which leaves AGL’s retail company with a profit before interest and tax of a measly $35.

What! About 35 per cent of our bill goes on profit to the retailer? Woolies and Coles eat your heart out. Qantas – you’re not really trying.

According to Richardson’s calculations, Origin’s retail profit share is a bit lower at 29 per cent. Turning from electricity to gas, he puts AGL’s retail profit margin at 36 per cent, and Origin’s probably a bit higher.

Richardson’s conclusion that consumers are being gouged in the electricity market is consistent with the findings of Professor Allan Fels in his report for the ACTU earlier this year. Fels made the economists’ point that every company’s electricity is identical. It’s also something that every home must have.

So why do retailers need to spend so much on advertising, “inappropriate door-to-door marketing activities” and other forms of “obfuscation”, Fels asked.

And Richardson’s figuring reveals something else. The overcharging of household customers of electricity and gas involves requiring them to cross-subsidise AGL and Origin’s business customers. They pay prices for electricity and gas that are about half what household customers pay. And the profit margins extracted from business customers are tiny.

But why should economists and econocrats share the blame for all the inflationary price gouging that’s helped make the Albanese government so unpopular? Because all the malfunctioning we’re seeing has occurred under the National Electricity Market that the econocrats designed and still regulate, and assured us would be a great reform.

The wonder-working NEM has turned five state-government-owned monopolies into a national oligopoly dominated by just three huge operators – AGL, Origin Energy and the foreign-owned and tight-lipped EnergyAustralia. The three are highly “vertically integrated”, meaning they each own big slabs of the market’s three levels: generation, transmission network and retail provision.

The NEM is owned by the five state governments plus the feds – that is, by everyone and no one – and regulated by two separate government authorities using a rule book running to thousands of pages. But it seems to have been captured by the oligopolists.

The economists have done little to stop consumers across the nation from being grossly overcharged for electricity and gas. But not to worry. It’s only some politician that will be left carrying the can.

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We owe more than we realise to our best econocrats

If you believe, as all of us do, that governments need to be accountable to the voters who elect them, then someone has to care about the way those governments account for all the money they raise in taxes and charges, plus all the money they borrow. Governments spend this money on myriad services they provide and the huge array of infrastructure they build for us, ranging from police stations to grand spaghetti junctions.

Our politicians are meant to care about how – and how well – money is raised and spent, but the control of all that money and the recording of where it comes from and goes to is the responsibility of bureaucrats in federal and state treasuries and finance departments, not forgetting the central bank.

The budgets and financial statements they produce are intended to account publicly for all the money that passes through the governments’ hands, but the econocrats know that the system of accounting must also help ensure that governments and their departments and agencies are well managed. That the money they spend actually achieves its intended objectives, with little waste.

Whereas political journalists spend much of their time talking to the politicians we read about, as an economic journalist, I spend most time talking to the technocrats standing in the shadows behind them.

The pollies are never keen for the econocrats to take much of the media limelight, and that usually suits the bureaucrats fine. But while they all work hard in the voters’ interests, some of them do an outstanding job in protecting and advancing those interests.

One such person was Percy Allan, who died at 78 last month. He was secretary of the NSW Treasury for about 12 years under three premiers – Labor’s Neville Wran, the Liberals’ Nick Greiner and Labor’s Bob Carr. Allan was a contact of mine who later became a friend.

You may think of economists and accountants as being as boring as the work they do. But that’s not the way they think of themselves, and no one who knew Allan ever thought of him as dull.

As we were reminded during the pandemic, whereas the federal government raises most of the taxation, it’s the state governments that are responsible for delivering most of the government services we rely on.

The six states and two territories have much autonomy. They compete against and copy each other. But usually, it’s the biggest states, NSW and Victoria, that initiate change.

If you want boring, try this: Allan led the way in getting federal and state governments to adopt the accounting profession’s general accounting principles and also the public sector’s budget reporting and financial statistics standards.

It helps make governments’ budgets and financial statements more accountable and transparent if all governments follow the same set of rules, rather than them each doing things their own way. And for the rules to make sense.

Governments provide many figures for publication by the Australian Bureau of Statistics. It helps if those figures are calculated on the same, consistent basis, and if government figures fit with all the statistics provided to the bureau by the private sector.

Similarly, it helps if all the world’s governments use the same internationally agreed standards laid down by the International Monetary Fund and the United Nations Statistical Commission.

Private businesses have long been required to report their annual profit or loss, and their balance sheet of assets and liabilities on the last day of the year, on an “accrual” basis. That is, to make a great effort to ensure that the income reported for a particular period was earned during that period.

Likewise, to ensure the expenses reported for the period didn’t relate to other periods. Accountants call this making sure the income and expenses reported for a period actually “match”.

If that sounds obvious, it wasn’t the way federal and state government budgets and financial statements were prepared until Allan and others led the way in conforming to private sector and international accounting and statistical standards.

Until then, federal and state budgets and financial statements were calculated on a “cash” rather than accrual basis. Revenue was any money that hit the government’s bank account during the period, even if some of the money was people paying last year’s tax late or others paying next year’s early. Similarly, all money that left the government’s bank account during the year was counted regardless of the year to which it applied.

Has the penny dropped yet? Compared to the cash basis, the accrual basis makes it much harder for the company or the government to fudge their annual figures by switching incomings and outgoings between years.

Now get this. The federal government has used accrual accounting since the start of this century. But to this day, federal budget documents are written in a confusing mixture of the two accounting languages – cash and accrual. The budget deficit or surplus the treasurer tells us about is always the “underlying cash” balance.

Treasury will tell you cash is the more appropriate basis from a macroeconomic perspective. That is, when you want to judge the budget’s effect on the economy, or the economy’s effect on the budget.

Maybe. But what’s undeniably true is that, unlike the states, the feds’ retention of the cash basis makes it a lot easier for the government of the day to engage in creative accounting – which it often does.

Another reform Allan was proud of was the “corporatisation” of various businesses the state government owns: the railways, the buses, water and sewerage, electricity generation and distribution, the ports and so forth.

Allan wanted all government-owned businesses to run, and be accounted for, as though they were commercial undertakings. When so many of them are natural monopolies, this has its dangers.

But when state-owned businesses aren’t run like businesses, they’ll tend to be run for the convenience of employees rather than customers, with overstaffing and other wastefulness.

So, better to have transparent accounting, leading to greater efficiency and higher profits going back to the government, to be spent on additional services without the need for higher taxes.

Linked to this was Allan’s role, during the term of the reforming Greiner government, in setting up the NSW Independent Pricing and Regulatory Tribunal to ensure the prices charged by government-owned businesses rose by no more than could be justified.

But one of Allan’s greatest achievements was achieved long after he’d left NSW Treasury. He founded and ran the Evidence Based Policy Research Project, in which a right-leaning and a left-leaning think tank have been commissioned to examine more than 100 federal or state bills to assess whether they stack up.

Most have been found not to. Allan had a big win when the NSW upper house passed a standing order that all government bills answer a public interest questionnaire. The project has been taken over by the Susan McKinnon Foundation.

My mate Percy Allan devoted his life to trying to make the world work better. We all owe him thanks.

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Treasury's advice now back in favour with the government

The Coalition’s practice of sacking a bunch of government department heads whenever it gets back to office is clearly calculated to discourage bureaucrats from giving frank advice. Fortunately for us, the Albanese government is not as arrogant.

In my experience, weak managers surround themselves with yes-persons, so their brains – and, as they see it, their authority – aren’t challenged.

Strong managers want frank advice from their experts, so they’re less likely to stuff up. They’re confident of their ability to sift through conflicting advice and pick the best way forward.

This Liberal policy of frightening bureaucrats into keeping their opinions to themselves began when they returned to power in 1996 under John Howard. It was repeated when Tony Abbott got back in 2013, sacking then Treasury secretary Dr Martin Parkinson and various other Treasury-related department heads (narrowly missing Treasury’s incumbent, Dr Steven Kennedy).

Their crime, it seemed, was that they actually believed in the Rudd-Gillard government’s policy of using an emissions trading scheme to limit carbon emissions. Guilty as charged. Like almost all economists, Treasury accepted the scientists’ advice on the science, and believed the best tools for fighting climate change were economic instruments such as “putting a price on carbon”. Labor’s Department of Climate Change was staffed manly by Treasury people.

But the Libs’ peak disdain for the public service came under Scott Morrison who, upon attaining the top job, told the bureaucrats he wanted no advice from them, just diligent implementation of the policy decisions made by Cabinet.

What gave this bunch of not-so-super men (and the odd woman) the arrogance to believe they could govern wisely without the bureaucrats’ policy advice? Mainly, their ability to fall back on the small army of taxpayer-funded, but unaccountable ministerial staffers, mainly youngsters with political ambitions and the willingness to interpose themselves between the minister and the department.

These young punks, who think they outrank the most senior public servants, are generally big on politics, but weak on policy. Which, you’d have to say, was the Coalition cabinet’s “revealed preference”.

The apotheosis of this decadence was revealed in evidence to the robo-debt royal commission last week. Advice sought from an outside law firm, which found that the government’s cost-cutting scheme was unlawful, was paid for but not passed up the line to the minister – presumably because the bureaucrats judged it would not be welcome.

But in a little-noticed part of a recent speech by Treasurer Jim Chalmers, he left no doubt that, under Labor, Treasury’s advice would be sought, and used to improve the government’s decisions. What’s more, Treasury’s ability to convey its views to the public would be enhanced.

Chalmers noted that, even after the government had dealt with the inflation challenge, “we will have to manage a budget weighed down by persistent structural spending pressures”. Doing this required new thinking and deeper thinking, he said.

“It requires us rebuilding the evidence base for policymaking. Because, to get better, more-forward-looking economic policies, we need better, more-forward-looking policy foundations.”

Chalmers revealed six ways in which he will be “rebuilding the evidence base for policymaking”. One was “putting Treasury back at the centre of climate modelling again”, to build on “the new approach to climate risks, costs and opportunities” revealed in last month’s budget papers.

Second, Treasury’s annual statement on “tax expenditures” would be made “more accessible, more useful analysis of what tax concessions are costing the budget” and their effect on the distribution of income between high and low earners.

Economists have long believed that such “tax expenditures” are equivalent to actual government spending in their effect on the budget balance, and should be subject to just as much critical reassessment as actual spending.

But the Libs didn’t agree. Since taxes are evil, anything you do to reduce them must be a good thing, even if the concessions go to some (usually higher-earning) taxpayers and not others. They sought to play down the tax expenditure statement – which hugely annoys the interest groups receiving concessions on such things as superannuation savings, and the 50 per cent discount on taxing capital gains – by renaming it the “tax benchmark and variations statement”. Not anymore.

The third, even more significant change will be the appointment of an “evaluator-general” to regularly and publicly examine the effectiveness of government spending programs. Many programs don’t do much to achieve their stated objectives, but ministers and their department heads are notoriously reluctant to have them rigorously examined, for fear of embarrassment.

But, as first proposed by economist Dr Nicholas Gruen, such a person and their agency would have similar powers and independence to those of the much-feared Auditor-General. This should work, provided governments couldn’t do what Morrison did to the Auditor-General: cut his funding.

The appointment of an evaluator-general is official Labor policy, and has been championed by the assistant assistant treasurer, Dr Andrew Leigh, whose outstanding economic expertise is negated by his failure to align with any Labor faction.

No doubt Leigh will be keen for the evaluator to make use of the latest in evidence-based decision-making, randomised controlled trials.

The point is that one thing Treasury (and the Finance department) should be hugely knowledgeable about – but aren’t – is what policies work, and what policies don’t. An evaluator-general will fill this vacuum.

Fourth, Treasury will work with Finance Minister and Minister for Women Katy Gallagher to “ensure gender considerations are at the core of our work”, building on last month’s “gender-responsive budgeting”.

Fifth, Treasury will produce Australia’s first “national wellbeing statement” next year, which will be “a hard-headed way to gauge progress by recognising that a robust and resilient economy relies on robust and resilient people and communities”.

And finally, Chalmers will step up production of the Intergenerational Report from five-yearly to three-yearly, in the middle year of each parliamentary term. He promises the document will be “depoliticised”.

It’s true that former treasurer Joe Hockey trashed this exercise by turning it into a blatant attack on his Labor predecessors. It was hard to take subsequent reports seriously, especially when they imposed an artificial cap on tax collections over the next 40 years, while letting government spending run wild.

We need the report to be a much more balanced assessment of future budgetary challenges, not just a Treasury tract on the supposed evils of runaway government spending. We need more acknowledgement of the possible effects of climate change on the budget over the next 40 years – a start to which was made in last month’s budget.

And it would be nice if the report lived up to its name by having much more to say about intergenerational equity issues and trends, such as the effect of ever-rising house prices, and the longer-term consequences of the way the Howard government kept stacking the odds in favour of the old at the expense of the young, particularly favouring the self-proclaimed “self-funded retirees” (who never mention the huge superannuation tax concessions they’ve been given, nor that many of them also get a part-pension).

So, well done, Jim. With better advice and a better “evidence base”, now all Labor needs is the courage to stand up to a few powerful interest groups, including those industries that get the relevant union to plead their case in the new-look Canberra.

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