Our politicians aren't acting their age. That's a good thing

By MILLIE MUROI, Economics Writer

If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.

But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.

Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.

The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.

A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.

Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.

What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.

If our economy is a board game, the rules have changed. So has the starting point for our newest players.

Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.

To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.

Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”

We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?

But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.

Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.

While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.

If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.

And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).

But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.

A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.

Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.

Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.

In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.

At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.

The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.

And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.

While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.

It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.

Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.

If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.

It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O

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Take heart! Australia is still better and fairer than most

Don’t be disheartened by recent events. Things in the Land of Oz are far from perfect, and we have our share of problems. But don’t be tempted by the thought that if America’s going to the dogs, we won’t be far behind. No, we’re holding things together much better than the Yanks are.

With the US reverting to its traditional practice of taking shots at presidents and presidential candidates, this week of all weeks is the time to say, “Only in America”. Thanks to the courage and quick thinking of John Howard after the Port Arthur massacre in 1996, our access to guns is well controlled.

Of late, it’s been tempting to think that the goal of every generation being better off than their parents has been lost. It’s not true. Not yet, anyway. And there’s still time to ensure that Gen Z – youngsters in their teens and early 20s – get a fair shake.

It’s not easy to compare generations with statistical accuracy. But lately, statisticians have made progress in linking information from the census and official surveys with banks of data held by government departments. And last week, the Productivity Commission used this advance to publish a much more authoritative study on economic mobility.

It confirms that, on average, each generation earns more than its parents did at the same age. That’s because the economy has grown almost continuously over the decades, raising material standards of living. This would be true of all the developed economies.

Of course, it’s also true that it’s easier for children born into poorer families to do better than their parents than it is for children born into well-off families.

However, living standards haven’t grown much over the past decade or so. Were this to continue for a further decade or more, it could become true that Gen Z isn’t doing better than its parents.

A different question as to whether overall living standards are continuing to rise in real terms over the years is how easy it is for people to change where they stand in the distribution of incomes as their lives progress.

How easy is it for people starting out towards the bottom of the ladder to climb to a higher rung?

This is the meaning of income mobility. Can you better yourself if you try hard enough?

Now, this is where the Americans keep telling themselves they’re the land of opportunity. Log cabin to the White House and all that. Well, it may have been true in Abraham Lincoln’s day, but it hasn’t been true for decades. As a general rule, the more unequal incomes are, the harder it is for people’s positions on the ladder to change.

America’s incomes are highly unequal, and it’s one of the countries where changing your income status is hardest.

But this is where the Productivity Commission’s research brings good news. On income inequality, Australia is in the middle of the pack of rich countries. But when it comes to income mobility, we do what Australians love to think of themselves as doing: punching above our weight.

We pride ourselves on being the land of the fair go. Or, as dear departed Scott Morrison preferred to put it: if you have a go, you get a go. Well, guess what? We now have documentary evidence that it’s still true. According to the commission’s calculations, Australia is among the most income-mobile countries, scoring better than even the fabled Scandinavians.

Two qualifications. First, people in the middle 60 per cent of the distribution enjoy the most opportunity to move. If you start in the bottom 20 per cent of personal incomes, you have less ability to improve. And if you’re already in the top 20 per cent, it’s harder to go higher.

Second, although the commission doesn’t spell this out, mobility cuts both ways. Remember, we’re talking about relative incomes, not absolute incomes. So, if it’s easier for me to pass you on the ladder, it’s easier for you to fall below me.

How do people seek to improve their earning potential? The obvious way is to get a better education. On average, people with a uni degree or higher earn 23 per cent more over their lifetime than those who only complete year 12. And those who complete high school earn significantly more than those who don’t.

Mobility is adversely affected by significant life events, such as unemployment, serious health problems and relationship breakdowns.

So far, we’ve been focusing just on income. But wealth – the assets you own – also affects your mobility. Unsurprisingly, the less wealth you have, the harder it is to move up, and the more wealth you have, the easier it is to stay up.

The rich have always been with us, but I think the inordinate rise in the cost – and value – of homes, which is already handicapping young people without access to parental help, will also make inheritance a bigger influence on people’s income mobility.

As Australians, we have a lot to be pleased about and proud of. But we have no cause for complacency.

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Paying for the cowpat sandwich Morrison handed Albo

It never pays to be too sorry for politicians. They’re all volunteers, they’re well paid for what they do, and even the nicest of them have thrust themselves ahead of many others to get as far as they have.

But I can’t help feeling a bit sorry for Anthony Albanese. He got himself elected by promising not to change much, but I doubt he expected to be handed quite such a cowpat sandwich from the smirking Scott Morrison.

As part of his efforts to prove he could keep taxes lower than Labor, Morrison avoided fixing anything much and allowed waiting lists to build up. Now everywhere Albo and his ministers look, they find problems.

These problems will be expensive to fix. This week it’s Education Minister Jason Clare’s turn in the spotlight. The final report on the Universities Accord, which was released on Sunday, reveals plenty that needs fixing.

For openers, the previous government’s job-ready graduates scheme has been a disaster. Under the guise of encouraging students to pick courses that left them job-ready, it cut fees for teaching and nursing, while more than doubling the fees for such courses as arts and humanities, including economics and law.

As the experts predicted, this had little effect on the courses chosen. But it did have its intended effect: saving the government money. One expert suggests that returning tuition fees to something more reasonable could cost the government about $1 billion a year.

The report recommends that the fees for particular courses be set according to the expected lifetime earnings of someone with that degree. Good idea.

I’ve always been happy to defend the HECS-HELP debt scheme as a way of getting people to contribute towards the cost of their education. With repayments geared to the size of their income, and an interest rate far below commercial levels, it should not deter youngsters from poor families from attempting to better themselves.

But unsympathetic governments have fiddled with the scheme incessantly, and with the (hopefully brief) return to high inflation, it’s not surprising Gen Z is so dissatisfied. But Clare seems disposed towards the tweaks the report proposes.

Annual indexation of the debt would occur after deducting the year’s repayments, rather than before. The debt would be indexed to the lower of the rise in consumer prices or the wage index. And the rates at which repayments were required would be applied to successive slices of your income, just as income tax is applied.

There are shortages of workers with various tertiary qualifications at the moment, and the report sees the demand continuing to grow. At present, about 60 per cent of workers have trade or degree qualifications, and we need to reach at least 80 per cent by 2050, the report says. This would involve more than doubling the number of Commonwealth-supported students each year to 1.8 million.

Clare worries that not enough disadvantaged young people are making it to – and through – uni. (Let me tell you, people have been worrying about this at least since Gough Whitlam’s day. And even making university free didn’t help much.)

At present, people from poor families – those of “low socio-economic status” in academic-speak – account for about 17 per cent of enrolments, compared with 25 per cent of the population. Other target groups are First Nations peoples, people with a disability and people living in regional and remote areas.

The report proposes that uni students’ places be funded on a needs basis, similar to Gonski’s scheme for schools. Unis would receive a base amount per student, plus further loadings according to the particular students’ disadvantage.

This would mean regional and outer-suburban unis got a lot more funding per student than the sandstone central-city Group of Eight. But the extra money would be used to reduce the chances of disadvantaged students failing to complete their course for monetary or other reasons.

There would be fee-free courses to prepare chosen students for the rigours of university learning, and financial support for students required to undertake presently unpaid work placements.

It all sounds a big improvement. Quite apart from fairness, it’s clear that the higher the proportion of young people the government wants with a uni degree, the more it will need to include people from disadvantaged backgrounds.

But note this: none of these good ideas has been costed, let alone accepted by the Albanese government. We don’t know whether those that are accepted will start in this year’s budget or in 10 years’ time.

As for Gonski-like arrangements, the real Gonski needs-based funding for schools has still not been fully implemented more than 12 years later.

Let me quote Clare back at himself: “We’re not going to tackle this problem if we think that we can solve all the problems at the door of the university when someone turns 18.”

Just so. With education, it’s best to start at the bottom and work up. But we won’t solve many of our multitude of problems until some pollie has the courage to say maybe we need taxes to be higher, not lower.

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Two-class school system a great way to entrench low productivity

In 2011, the Gonski report recommended that government funding of schools be needs-based and sector-blind. More than 12 years later, it still hasn’t happened. And it’s by no means certain it will happen any time soon.

The idea of sector-blind schooling – funding all students according to their needs, rather than their religion – fell at the first hurdle. Sectarianism has bedevilled attempts to ensure all our kids get a decent education since the introduction of compulsory schooling in 1880.

And so fearful of the religious vote are both major parties that this time’s been no different. Providing adequate funding for the more disadvantaged kids congregated in public schools could have been a simple matter of redistributing money from privileged private schools, but no.

Former prime minister Julia Gillard was straight out of the blocks, promising that private schools would be left no worse off. That is, disadvantaged kids would be helped only to the extent that extra money could be found for education, at the expense of all the government’s other responsibilities.

So the private schools – almost all of them professing some religious affiliation – have retained their funding priority. It used to be a matter of Catholics and Protestants but, thanks to the Howard government’s introduction of a new education priority – giving parents greater choice of which school to send their kids to – it’s now also a matter of Jewish schools, Muslim schools, “Christian” schools (code for the smaller non-conformist Protestant denominations) and soon, no doubt, Hindu schools and Buddhist schools.

If you wonder why the eternal enmities of the Middle East are echoed in faraway Australia, that’s part of the reason. “Choice” is a nice idea but, from the taxpayers’ perspective, it comes at a cost. Public schooling used to be part of the way we could be multicultural and still socially cohesive.

Now we’re paying more for it to be less so. Now, if you choose to have your kid grow up never having rubbed shoulders with people of other religions, that’s another service the taxpayer provides.

Except that it involves a monetary cost we’re reluctant to pay, and our politicians are reluctant to make us pay. How to square the circle? I know, let’s short-change the (majority of) kids still going to public schools.

But not to worry. The more things keep going the way they are, the fewer kids will be left going to public schools and the less the pollies will have to worry about the raw deal they’re getting.

We’ll have more kids leaving education with inadequate numeracy and literacy, of course, but who’ll notice that – or the extra cost to the budget – when we’ll all be so busy listening to the Business Council giving yet another sermon on the pressing need to reverse our declining productivity by cutting the company tax rate.

The beauty of a new plan to have most kids going to private schools – whether their parents can afford it or not – while only the kids of the rock-bottom poor are still going to public schools is that it’s self-reinforcing.

The more the better-paid and better-educated shift their children to private schools, the more those who are left will scrimp and save to join them.

And don’t forget this: public schooling is the default setting. One of the ways private schools maintain their reputation for greater discipline is to decline students with special needs, and expel students who cause too much trouble.

The public schools have no choice but to pick up the rejects. This wouldn’t be such a problem if they were given the extra funds needed to cope with the extra problems. But depend on it: they won’t be. This will give parents even greater incentive to get their kids out of there.

The plan does have a big drawback, however. No parent ever wants to admit it but, for many of them, a great attraction of private schooling is the greater social status it confers on the parents, as well as the old-school-tie benefits it confers on the kids.

Economists see education as a prime example of a “positional good” – a product that advertises to the world your high position in the pecking order. Trouble is, social status requires exclusivity. The more kids pile into private schooling, the less exclusive it becomes.

Economists say the demand for a good or service is “inelastic” if a rise in its price does little to deter people from buying it. As a positional good, the demand for private schooling is highly inelastic.

This explains why, not content with the big government subsidies they receive, the oldest and most famous private schools can charge parents huge fees on the top. Their fees rise faster than the inflation rate year after year, even in years of a cost-of-living crisis.

It may be that, the more parents pile into the cheaper Catholic systemic and other private schools, the more the elite private schools have to raise their fees to retain their exclusivity – their status as a positional good.

And, of course, the higher their fees, the more desirous status-seeking parents are to be seen paying them. Only the Reserve Bank’s ability to print its own money beats that. Remind me, why exactly is the taxpayer subsidising elite private schools?

Economists also say education is a “superior” good, meaning that the higher people’s real incomes rise, to more of that income they’re willing to spend on the product. In theory, people are buying more education or higher quality education.

But I have a theory that two-income families are more likely to choose private school education to prove to themselves their kids aren’t missing out. If so, they’re victims of a rarely remarked economic fallacy: anything that costs more must be of higher quality.

Fallacious though such thinking may be, the rise of the two-income family helps explain the shift to private schools and suggests it has further to run. Yet another reason to question why the federal government is propping up private schools at the expense of public schools.

Since Gonski, the feds have calculated the “schooling resource standard”, an estimate of how much total government funding a school needs to meet its students’ educational needs. The previous federal government’s agreement with the states required it to contribute 80 per cent of the private schools’ standard, with the states contributing the remaining 20 per cent.

For public schools, it was the reverse: the states pay 80 per cent, while the feds pay 20 per cent. Since the feds’ taxing powers are far greater than the states’, this deal had an inbuilt bias in favour of private schools.

As it’s worked out in practice, almost all private schools are fully funded, with many being overfunded, whereas almost all public schools are still underfunded, more than 12 years since Gonski.

The Albanese government’s Education Minister Jason Clare is renegotiating the funding agreement with the state education ministers, who met with him on Friday. They’re demanding that he hasten the public schools’ achievement of full funding by raising the feds’ contribution to 25 per cent.

You’d expect a Labor government to care about public school students getting a decent education. We’ll soon find out if it does.

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Starving the unemployed shames us all

I wouldn’t want to be Treasurer Jim Chalmers, as he puts the finishing touches to next week’s budget. Everywhere he looks he sees problems – problems that need solving by spending more taxpayers’ money. But the budget deficit must be kept low if we’re to get inflation down without even more rises in interest rates. Which raises what is, for any politician, a horrifying thought: perhaps we should be paying more tax, not less.

However, to any person with a shred of conscience, any belief in decent treatment of the less-fortunate, any care about maintaining Australia’s pride in being the land of the fair go, one issue towers above all others: our shameful treatment of the unemployed.

For years, we’ve gone on allowing the unemployment benefit – these days called the JobSeeker payment – to fall further and further below what the rest of us get, and further below the poverty line.

Get that? Since the mid-1990s, we’ve had – not as an unfortunate oversight, but as a conscious choice – a policy of starving the unemployed. Keeping them on a payment so low that, by the time they’ve paid rent and other inescapable costs, they often have to skip meals.

Late last year, the independent senator for the ACT, David Pocock, forced the Albanese government to introduce the biggest budget reform in ages. It had to set up a committee of experts to review the adequacy of welfare benefits, which would report its findings to the government every year, no less than two weeks before the annual budget.

The government released the Economic Inclusion Advisory Committee’s first report about two weeks ago. It made 37 recommendations, but stressed that one recommendation trumped all the others: that the government commit to a “substantial increase” in the base rate of the JobSeeker payment.

Specifically, it wanted the JobSeeker payment raised from 70 per cent of the age pension rate to 90 per cent.

Some unemployed people told their stories to the committee. “You can buy a tray of sausages and bag them up in the freezer for the fortnight,” one person said. “But yeah, you rarely get to have any meat. Fruit and vegetables are absolutely shocking. You can’t afford to eat healthily, that’s for sure. So, they’re killing us, basically.”

Another said, “I needed to manage my budget strictly. This included going for cheaper items in the supermarket, having smaller meals (i.e. an orange for lunch, soup at dinner time), only filling up petrol when I really needed to, using public transport or walking where I could to save on the cost of fuel, managing health appointments around how much money I had left in the bank that week.”

Think of it. Every year, just before the budget, this committee will pop up to remind us what a mean-spirited people we are, and how much worse it’s become since last year – until we do something to get it off our conscience.

But here’s what sticks in my gullet: when the government released the committee’s report, its spin doctors did all they could to play down the report and stress the absurd notion that the government could possibly afford to do anything about it when times were so tough.

They made 37 recommendations, which would cost $34 billion. Are you kidding? Where could we find that kind of money? And what about the report of the Women’s Economic Equality Taskforce (which the government just happened to release at the same time) and all its expensive recommendations?

Get real. We can’t do everything. So, what’s it to be – the unemployed or the women? (Never mind that half the people on JobSeeker are female, including the sole parents who got pushed off the parenting payment onto the dole.) And, some helpful journos have relayed, just between you and me, there’s no votes in increasing unemployment benefits.

I fear that’s true. It may even cost a few votes. There’s a lot of “downward envy” among Labor’s working-class voters. And both sides of politics are well aware of the electoral benefits of pandering to the worst side of the Australian character – resentment of boat people and supposed dole bludgers.

It’s easy to exaggerate the cost of raising the dole. As former Treasury secretary Dr Ken Henry points out, the annual cost of the committee’s proposal is $6 billion, less than 1 per cent of total government spending. “No more than an adjustment at the margin,” he says.

Among rich countries, we have the third-lowest unemployment benefits. If, as usual, you set the poverty line at half the median disposable income, the single JobSeeker payment has fallen from 14 per cent below the poverty line in 2000 to 68 per cent below in 2022.

Is that a record we’re happy to live with? Is Anthony Albanese, who’s always telling us how hard he and his pensioner mother did it, willing to let the jobless continue to suffer because there are no votes in doing the right thing? Is that all modern Labor stands for?

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In politics and the economy, Christianity is increasingly suspect

A question for Easter Monday: would Australia be better governed if our political leaders were practising Christians? Would the economy work any better?

One thing that’s changed since last Easter is that we’re no longer led by a prime minister happy to let his Christian faith be known. By contrast, I wouldn’t know what Anthony Albanese’s religious views are, if any.

Another thing that’s changing is the decline of adherence to Christianity in its many denominations. This is partly the immigration of many people of other religions, but mainly the growing indifference of many from formerly churchgoing families. And, perhaps, the growing number of university graduates.

According to the 2021 census, the proportion of people identifying as Christian has fallen from 61 per cent to 44 per cent in a decade, with those reporting “no religion” rising from 22 per cent to 39 per cent.

So, it’s no exaggeration to say we now live in a post-Christian society. Nor that a growing number of people have a low opinion of those who profess to be Christians. They’ve said or done something bad – well, what would you expect?

Actually, that’s a good question: what do we expect of Christians? How differently would a professing prime minister behave to one who kept their religious opinions to themselves?

I think the main expectation of most people – certainly, most young people – would be for Christians to be always on about their opposition to abortion, same-sex marriage and gender-changing.

Plus, their God-given right to discriminate against those in their churches, schools or hospitals who don’t conform to these views.

Is this the view of themselves and their mission – and their God - that Christians and their leaders are happy to convey to the rest of the nation? That Christ died on the cross to preserve a narrow view of sexual morality?

To be fair, it’s only when clergy speak on such controversial matters that the media take much notice of what they say. An archbishop preaching a sermon on Love One Another gets a headline only on Good Friday.

But I suspect it’s only on matters of (their view of) sexual morality that the churches go out of their way to attract media publicity. By default, this is the churches’ burning message to the nation.

If that’s all Christianity has left – if it now sees itself as an oppressed minority fighting to protect its right to discriminate on religious grounds – then whether our prime minister is an out-of-the-closet Christian is of little consequence for the governance of the nation and the health of the economy.

As we saw with Scott Morrison, such a prime minister won’t prevail against the weight of the nation’s support for sexual freedom and opposition to discrimination on sexual or religious grounds.

The worst we could expect is feet-dragging on the goal of increasing women’s role in politics and the paid workforce.

But this is not the Christianity I grew up with, nor does it fit with the values and behaviour of the many Christians I still mix with. Everything I know about the church and its Saviour tells me sex is just a small part of its definition of what it means to live a “moral” life.

The imitation of Christ is about loving your neighbour as yourself – and defining “neighbour” very broadly. It’s about honesty and meticulous truth-telling, about justice tempered by mercy, about forgiveness and fairness.

And, from what I read in the New Testament, it’s about Jesus’ preoccupation with the poor and strictures on the rich: “Sell everything you have and give it to the poor.”

When I heard a secret recording of Morrison speaking at a prayer meeting, the sentiments and phrases reminded me of my parents and all the prayer meetings I had attended.

But in watching Morrison’s words and actions as prime minister, my recurring feeling over the four years was that nothing about them reminded me of Jesus.

He was not the only prime minister to pander to, and play on, the worst features of the Australian character. Punishing boat people who arrive without an invitation. Telling the underprivileged that “those who have a go, get a go”.

Ignoring the law to use robo-debt to falsely accuse people the mean-spirited regard as dole bludgers. And insisting on keeping unemployment benefits well below the poverty line.

If we could get a prime minister who acted in a less un-Christian way, it wouldn’t matter much who or what he believed in. The economy would be fairer, and we could all enjoy our prosperity with a clearer conscience.

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Handle with care: Productivity Commission's advice on getting richer

If you accept the Productivity Commission’s assumption that getting richer – “advancing prosperity” – is pretty much the only thing that matters, then the five priority areas it nominates in its five-yearly review of our productivity performance make a lot of sense.

But when you examine the things it says we should do to fix those five areas, you find too much of its same old, same old, preference for neoclassical ideology over empirical evidence.

And you find no acknowledgement that part of our claimed failure to improve the productivity of the “government-funded non-market services sector” has occurred because, over recent decades, governments have acted on the commission’s advice to keep the public sector small and taxes low by outsourcing the provision of human services to profit-motivated businesses.

Which, if anything, has made matters worse rather than better. As witness: the mess we’ve made of aged care and vocational education and training, and the ever-growing cost of the National Disability Insurance Scheme.

The report is quick to explain that improving productivity does not mean getting people to work harder. Perfectly true. It’s supposed to mean making workers more productive by giving them better training and better machines to work with.

Except that when you see the commission recommending a move to “modern, fit-for-purpose labour market regulation” – including, no doubt, getting rid of weekend penalty pay rates – you realise the commission has learnt nothing from the failure of John Howard’s Work Choices, nor from the failure of the reduction in Sunday penalty payments to lead to any increase in weekend employment, as had been confidently predicted.

So, what the commission is really advocating is that the balance of power in wage bargaining be shifted further in favour of employers and away from workers and their unions. Which probably would lead to people working harder for little or no increase in pay.

What the commission should have said, but didn’t, is that workers would be more co-operative with bosses’ efforts to improve the productivity of their firms if they were more confident they’d get their fair share of the benefits.

At present, they have good reason to doubt that they would.

What’s conspicuously absent from all the bemoaning of the slowdown in our rate of productivity improvement, is any acknowledgement that there’s also been a huge fall in the rate of the flow-through to real wages of what improvement we are achieving.

Until that’s fixed – until the capitalist system goes back to keeping its promise that the workers will get their fair share of the benefits of capitalism – Australia’s households have no rational reason to give a stuff about what’s happening to productivity.

Back to the point. Productivity improves when you produce the same things with fewer inputs of labour or capital, or produce more – either more quantity or better quality – with the same inputs.

And the report is exactly right to say that steadily improving our productivity is the key to improving the nation’s material standard of living. The rich world has more than two centuries of proof of that truth.

The first of the report’s five priority areas is achieving a “highly skilled and adaptable workforce”. Dead right. This is economics 101. Economists have known for yonks that investing in “human capital” is the obvious way to increase productivity.

(And it’s the better-educated and trained workers who can most easily adapt to the changing demand for labour that the digital revolution and other technological advance will bring.)

But the commission long ago stopped pointing this out, while state and federal governments put their efforts into quite different objectives. The Howard government, for instance, spent hugely on expanding parents’ choice of private school.

“I’m a Callithumpian, and I’d like to send my kid to a Callithumpian school, where they won’t have to mix with sinners.” Next, we had the limited success of the Gonski-inspired push to fund schools based on student need rather than entrenched privilege and religion.

And then we wonder why school results have got worse and so many kids leave school with inadequate numeracy and literacy. How they’ll be advancing our prosperity in an ever-changing world I hate to think.

Which raises a recent “learning” by economists, that doesn’t seem to have reached the commission: if you ignore what your “reforms” are doing to the distribution of income between the top and the bottom, don’t be surprised if your productivity goes off.

For some inexplicable reason, growth in the number of the downtrodden makes the average look worse.

Meanwhile, with universities, the highest priority of successive federal governments – Labor and Liberal – over the past 30 years has just been to get them off the budget.

The feds have made them hugely dependent on attracting overseas students and charging them full freight. One way they’ve coped is by making university teaching by the younger staff part of the gig economy.

Apart from putting the public unis (but not the few private unis) on a starvation diet during the lockdowns, the Morrison government’s last effort to punish what it saw as a hotbed of socialism was a hare-brained scheme to encourage students to choose courses that made them “job-ready” by, among other things, doubling the tuition fees for a BA.

Fortunately, this failed to discourage the students, but did make the humanities a far more profitable product for the unis to push.

To be fair, another recent “learning” does seem to have got through to the commission. It’s third priority for attention is “creating a more dynamic and competitive economy”.

Research by Treasury has found strong empirical evidence that our economy has become less dynamic – less able to change and improve over time. Fewer new firms are being created, and fewer workers are being induced to change their jobs pursuing higher pay.

Our industries have become more oligopolised – allowed by our permissive takeover laws - and, not surprisingly, their profit margins (“markups,” in econospeak) have been creeping up.

No official will admit it, but it seems pretty clear that the reason the Reserve Bank has been raising interest rates so far and so fast – despite falling real wages – is the part that oligopolistic pricing power is playing in our high inflation rate.

And now further Treasury research has confirmed that our high degree of industry concentration (markets dominated by a few huge firms) has given employers greater power to limit the rise in wages.

All this makes it unsurprising that our rate of productivity improvement has weakened. It also helps explain why, over the past decade, virtually none of what improvement in the productivity of labour we have achieved has been passed on to real wages.

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RBA inquiry should propose something much better

The inquiry into the Reserve Bank, due to report this month, will be disappointing if it does no more than suggest modest improvements in the way it does its job. The question it should answer is: should we give so much responsibility to an institution with such a limited instrument – interest rates – and with such a narrow focus?

In Reserve Bank governor Dr Philip Lowe’s lengthy appearance before the House of Representatives Economics Committee last month, he spent much of his time reminding critics that he only has one tool, so he can’t do anything to resolve the problems they were complaining about.

He’s right. But if the problems are real, and he can’t do anything about them, why should the central bank be the top dog when it comes to managing the economy, and Treasury’s job be limited to worrying about debt and deficit?

Shouldn’t the greatest responsibility go to an institution with more instruments, and ones capable of doing more tricks?

By the way, if you’re wondering why I’ve had so much to say recently about the limitations of monetary policy and the questionable convention of making it dominant in the management of the macroeconomy, it’s because it’s the obvious thing to do while we’re holding an inquiry into Reserve Bank’s performance.

Frenchman Olivier Blanchard, one of the world’s top macroeconomists, recently caused a storm when he tweeted about “a point which is often lost in discussions of inflation and central bank policy”.

“Inflation,” he wrote, “is fundamentally the outcome of the distributional conflict between firms, workers and taxpayers. It stops only when the various players are forced to accept the outcome.”

Oh, people cried, that can’t be right. Inflation is caused when the demand for goods and services exceeds the supply of them.

In truth, both propositions are correct. At the top level, inflation is simply about the imbalance between demand and supply. At a deeper level, however, “distributional conflict” between capital and labour can be the cause of that imbalance.

Businesses add to inflation when they seek to increase their profit margins. Workers and their unions add to inflation when they seek to increase their real wages by more than the productivity of labour justifies.

But this way of thinking is disconcerting to central bankers because – though there may well be a way of reducing inflation pressure by reducing the conflict between labour and capital – there’s nothing the Reserve can do about it directly.

Central banks’ interest-rate instrument can fix the problem only indirectly and brutally: by weakening demand (spending) until the warring parties are forced to suspend hostilities. So distributional conflict is the first thing monetary policy (the manipulation of interest rates) can’t really fix.

Then there’s inflation caused by other supply constraints, such as the pandemic or wars. Again, monetary policy can’t fix the constraint, just bash down demand to fit.

The next things monetary policy doesn’t do are fairness and effectiveness. When we’re trying to reduce inflation by reducing people’s ability to consume goods and services, it would be nice to do so with a tool that shared the burden widely and reasonably evenly.

A temporary increase in income tax or GST would do that, but increasing interest rates concentrates the burden on people with big mortgages. This concentration means the increase has to be that much greater to achieve the desired slowing in total consumer spending.

A further dimension of monetary policy’s unfairness is the way it mucks around with the income of savers. Their interest income suddenly dives when the Reserve decides it needs to encourage people to borrow and spend.

In theory, this is made up for when the Reserve decides to discourage people from borrowing and spending, as now. In practice, however, the banks drag their feet in passing higher interest rates on to their depositors. But it’s rare for the Reserve even to chivvy the banks for their tardiness.

Governments need to be free to encourage or discourage consumers from spending. But where’s the justification for doing this by riding on the backs of young people saving for a home and old people depending on interest income to live on?

The next thing monetary policy doesn’t do is competition. What’s supposed to keep prices no higher than they absolutely need to be is the strength of competition between businesses. You’d think this would be a matter of great interest to the Reserve, especially since there are signs that businesses increasing their “markups” are part of the present high inflation.

But only rarely does the Reserve mention the possibility, and only in passing. It gives no support to the Australian Competition and Consumer Commission’s efforts to limit big firms’ pricing power.

The final thing monetary policy doesn’t do is housing. The Reserve is right to insist that its increases in interest rates aren’t the main reason homes have become so hard to afford.

The real reason is the failure of governments to increase the supply of homes in the places people want to live – close to the centre of the city, where the jobs are – exacerbated by their failure to provide decent public transport to outer suburbs.

But the ups and downs of mortgage interest rates must surely be making affordability worse. To this, Lowe’s reply is that, sorry, he’s got a job to do and only one instrument to do it with, so he can’t be worried about the collateral damage he’s doing to would-be young home buyers.

Well, he can’t be worried, but his political masters can. And if they’re not game to fix the fundamental factors driving up house prices, they should be willing to create an instrument for the short-term management of demand that doesn’t cause as many adverse side effects as using interest rates does.

The one big thing going for monetary policy as a way of keeping the economy on track is that the Reserve’s independence of the elected government allows it to put the economy’s needs ahead of the government’s need to sync the economy with the next election.

But, as various respected economists have pointed out, there’s no reason the government can’t design a fiscal instrument, giving another body the ability to raise or lower it within a specified range, and making that body independent, too.

It’s the Reserve Bank inquiry’s job to give the government some advice on why and how it should make a change for the better.

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Stuck with crappy aged care because Morrison won’t ask us to pay

I’m sorry to be so pessimistic but I fear that, in just its first week, the likelihood of the aged care royal commission’s report leading to much better treatment of our elderly has faded.

Within a day or two, Scott Morrison and his Treasurer, Josh Frydenberg, made it known they had “little appetite” for the commission’s plan to use an “aged care improvement levy” of 1 per cent of taxable income to cover the considerable cost of the reforms it proposed.

Morrison wants to be seen as delivering lower – not higher – taxes. I suspect the pair have realised that announcing an increase in tax on all income earners wouldn’t fit well with the costly third stage of their tax cuts, due in 2024, which will go mainly to high income-earners (like my good self).

Rather, the pair are murmuring about making the elderly contribute more from their own retirement savings towards the cost of their care by tightening the means-testing of aged care benefits. Maybe there’d be more and bigger “refundable accommodation deposits”.

Making the better-off old cover more of their own costs – including by taking account of the much-increased value of their homes – would be very fair. Too fair, you’d have thought, for the Liberal Party and its heartland.

Remember how the party’s “base” revolted against Malcolm Turnbull’s measures to restrict tax concessions to just the first $1.6 million of superannuation balances? Remember how hard well-off retirees fought against Labor’s plan to limit dividend franking credits at the last election, with the Libs egging them on?

Can you imagine how keen Morrison would be to have the tables turned in the coming election? He’d be the one seeking support for what Labor would quickly label his “retirement tax”.

Implementing the commission’s report would cost a minimum of $10 billion a year and probably a lot more. It’s impossible to imagine this government having the courage to raise anything like that much by tightening the means-testing of its own well-off supporters.

The commission’s report has been pushed aside before we’ve had time to understand what it’s proposing and why it would be so expensive. Whereas the present Aged Care Act was designed to help the government limit its spending, the report goes the opposite way, proposing a new act which enshrined every person’s statutory right to aged care of decent quality, with reasonable choice.

This would remove the government’s ability to limit the number of people receiving care, making access to free aged care “universal” – just as access to free public schooling has long been universal and, since Medicare, access to free care in public hospitals is universal.

In this context, “free” means the cost is covered by general taxation, not by user charges or means-tested charges. (Note that the freedom from direct charging would apply only to aged care proper. People’s food and accommodation costs would be means-tested. But refundable accommodation deposits would probably go.)

The report found that the root cause of the (often literally) crappy treatment of people in age care was the inadequate number, training and pathetic pay of aged care workers (almost all of them women). Properly done, almost all the increased cost of aged care would end up in the hands of these women.

In principle, it would be perfectly fair to cover the cost of better, universal aged care with a tax levy paid by all income-earners. We’d be paying for aged care the way we’ve always paid for the age pension and much else – by a “generational bargain”.

It’s fair to ask the present generation to pay for the retirement costs of the older generation because the present generation will be old themselves soon enough. When they are, their retirement costs will be paid for by the generation coming behind them. In the end, every generation pays and every generation benefits.

But that’s just in principle. In practice, the Grattan Institute has shown that successive governments – particularly the Howard government – have reneged on the intergenerational bargain by changing the tax and welfare system in ways that favour the old and penalise the young.

Tax concessions on super are now so generous that few retirees pay any income tax, no matter how well-off. As my colleague Jessica Irvine has shown, tax and welfare concessions to existing home owners have made homes such a desirable investment that a growing proportion of the young will never be able to afford to join the charmed circle.

The young bear the brunt of our willingness to live with high unemployment and underemployment and our unwillingness to regulate the gig economy. And the young pay far more for their higher education than earlier generations (and now those with the temerity to do an arts degree pay double).

In the face of this unfairness, the Grattan Institute’s Brendan Coates has sensibly proposed that the cost of fixing aged care be covered by reducing super concessions to higher income-earners, but I doubt Morrison’s game to try that one on his base – or the voters.

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For this to work, we must really be 'all in this together'

There are two ways Scott Morrison can play this coronacession: he can spread the pain as fairly as possible, or he can yield to all his political instincts and play favourites. You know: lifters get looked after, leaners take their chances. Those my tribe judge to be not "having a go" won’t be given a go.

Fortunately, Sunday’s second, $66-billion assistance package suggests Morrison’s trying hard to overcome his instincts, be more statesman-like and not exclude unpopular groups from assistance. He’s got further to go, however.

The poor are the biggest losers in every recession and that will be just as true in the coronacession. Those who are able to keep working will be the least affected; those who lose their jobs will be the most affected.

The strongest reason for Morrison to take steps to spread the pain more fairly is that it’s the right – you could almost say the Christian – thing to do. But he has extra, more pragmatic reasons for doing so. One is that it's easier to get everyone to cop their share of the burden – and to pull their weight – if they believe the burden’s being shared fairly. If they know that "we’re all in this together" is more than an empty slogan.

A special reason in this virus-induced recession is that if you leave the poor – the unemployed, the casual workers, the sick and the homeless – feeling ignored and excluded, you rob them of both the motivation and the financial and physical ability to play their part in not spreading the virus to others. If you’re not caring, they become the weak link in your efforts to lower the infection rate.

One fairness principle Morrison adopted from the start is to avoid assisting big business (with the exception of the airlines), but rather ask them to do the right thing by their employees and customers.

Despite the cheap money the banks are getting from the Reserve Bank, it’s clear they’ve gone further with their concessions to small business borrowers, people with mortgages and even term-depositors.

Their profits and shareholders will take a big hit – the first big hit since the recession of the early 1990s - which raises a broader fairness question: if you can’t afford to keep paying your workers, how can you afford to keep paying dividends?

For big businesses, including banks and energy retailers, to move against customers who get behind on their payments in the normal way would make this recession even deeper, and help no one – as the government seems to be making clear to them in private.

The same principle holds for landlords, even though these are mainly what you’d class as small businesses. Evicting tenants at a time like this gets you nowhere. No one gave landlords a guarantee that negatively geared property was one-way bet.

The second package has used a temporary "coronavirus supplement" to effectively double the Newstart allowance for six months. Good move. It’s also a tacit acknowledgement of the truth of the almost universal criticism that the present dole is impossible to live on.

At first the government thought to pay the higher allowance to newly unemployed people but not the existing jobless, but fortunately has thought better of the idea. Now it needs to make sure the infamous Centrelink (since renamed Services Australia – irony, I presume) understands its political masters no long require it to hassle people more than help them.

It would also help to avoid saying that those newly on the dole were there "through no fault of their own", thus implying that those already on it were there through some fault of their own.

The new package’s doubled cash-flow support payments to small and medium businesses should help keep more employees in jobs, though the use of payments based on employers’ remittances of their employees’ pay-as-you-go tax instalments (intended to prevent firms from taking the payment but dismissing the staff) is biased in favour of firms with highly paid (and taxed) employees and against those with poorly paid employees, including casuals.

Many firms will fall back on the new $20,000-over-six-months minimum rebate, which is unlikely to stop many low-paid and casual workers being let go.

A quarter of all employees are casuals, and adding the pseudo self-employed (including those in the "gig economy") takes to 37 per cent the proportion of workers who have no paid sick leave. The second package’s failure to improve on the earlier arrangement for those people to be eligible to apply for the little-used "sickness allowance" will leave many still tempted to keep working when they should be at home in bed.

And the failure of either package to do anything to help the homeless leaves a gaping hole in our efforts to protect their lives from the virus, or to slow its spread.

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The price we pay for funding schools based on religion

You can tell we’ve had generational change among our federal leaders when the latest prime minister through the revolving door knows to pronounce the “d” in congratulations. No doubt he’ll have many impordant things to say to us.

So far, the message seems to be that he’s just an ordinary, fair dinkum, baseball cap-wearing, pie-eating, beer-swilling kinda guy. Egalitarianism is back and Jack is as good as his prime minister.

Or maybe not. A great disappointment with the Coalition government is the failure of its attempt to have a second run at the Gonski reforms proposing needs-based, sector-blind funding of schools.

Gonski was our chance to do something other countries did decades ago: remove sectarianism from federal and state funding of schools. To stop determining how much government funding a child receives according to the religious affiliation (or lack of it) of the school attended. Need should be the only criterion, regardless of religion.

Julia Gillard threw a lot of taxpayers’ money at the reform to avoid conflict with non-government schools, but couldn’t pull it off. She ended up doing side deals with the Catholic schools and other groups.

Malcolm Turnbull’s reworking of Gonski seemed to be more principled, but the Catholic hierarchy kept the pressure up – we want to share the money our way, not your way – and the government buckled. The Catholics got their special deal and the (mainly Protestant) independent schools got something similar to stop them kicking up.

What a country we live in. We can happily agree to same-sex marriage, but when Catholics put the frighteners on, politicians on both sides get weak-kneed.

Some relevant information has just arrived from Paris. A report from the Organisation for Economic Co-operation and Development has used its PISA worldwide testing of 15-year-olds on maths, reading and science to assess progress on Equity in Education.

Prime ministers love boasting about our economy’s high standing in the world, so how about this: Australia now has the equal-fourth most socially stratified education system among the OECD’s 35 member-countries.

Only Mexico, Hungary and Chile can claim to have a more social class-segregated school system than ours. For a country that still likes to think of itself as class-free, that’s quite an achievement.

The report classifies students according to their parents’ socio-economic status, taking account of economic, social and cultural factors. Socio-economically disadvantaged students are those in the bottom 25 per cent of students in their country. Socio-economically advantaged students are those in the top 25 per cent.

Similarly, socio-economically disadvantaged schools are those in the bottom 25 per cent of the distribution of schools, based on the average status of their students.

If all schools perfectly reflected the socio-economic composition of the total population, each school would have 25 per cent of students in the disadvantaged category, 25 per cent in the advantaged category and the rest in between.

Of course, no country’s schools are anything like that lacking in social stratification. In Australia, however, the proportion of disadvantaged students attending disadvantaged schools is not 25 per cent, but double that: 51 per cent.

By contrast, the proportion of disadvantaged students attending advantaged schools is not 25 per cent, but 4.6 per cent.

The report also measures the change in the proportion of disadvantaged kids in disadvantaged schools between 2006 and 2015.

On average, it fell a fraction, with 22 countries improving and 13 getting worse. Another international distinction for Morrison to boast about: we won silver with a worsening of 5.2 percentage points. Only the Czechs did worse.

But why does it matter if our schools become more socio-economically stratified?

It matters because, on average, disadvantaged students attending disadvantaged schools don’t do as well as they would if they attended advantaged schools.

Such students face a double disadvantage: one coming from their parents’ circumstances and another from the less conducive learning environment at school.

Trevor Cobbold, of Save Our Schools, says information published by the OECD in June shows disadvantaged schools (95 per cent of which happen to be public schools) have more students per teacher, more teacher shortages, more teacher absenteeism and more poorly qualified teachers.

It matters because it helps show the price we’re paying for decades of funding schools on the basis of religion rather than need. The Kiwis stopped doing that ages ago, and they have the fourth lowest proportion of disadvantaged students at disadvantaged schools.

It matters if you don’t want what we’ve got: a yawning gap between our strongest students and our weakest.

It matters because it has broader implications for society. “Social segregation in schools breeds social intolerance in communities and workplaces and undermines social understanding and cohesion,” Cobbold says.

“Schools segregated by class make it more difficult for children to develop a real understanding of people of different backgrounds and to break down barriers of social intolerance.”

And then we wonder why politics is getting more polarised.

Of course, many factors besides schools are contributing to the growing social stratification of our cities. But schools are something we can influence by adopting better policies.

And if you believe in equality of opportunity, the first thing you fix is schooling. As the OECD says, “children from poor families often have just one chance in life, and that is a good school that gives them an opportunity to develop their potential.

“Those who miss that boat rarely catch up.”

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Inequality not as great as claimed, worse than others admit

This week the Productivity Commission issued a “stocktake of the evidence” on inequality in Australia. Its findings will surprise you. But it wasn’t as even-handed as it should have been.

Its report forcefully dispels the myths of the Left – that inequality is great and rapidly worsening – but is much more sotto voce in telling the Right there’s still a problem and that the reason it’s not as bad as some think is that governments have taken corrective actions the Right usually disapproves of.

This has allowed the conservative commentators of the national press to greet the report with great glee. One in the eye for their ideological opponents. Inequality? Nothing to see here.

The report looks at three different measures of economic inequality – the distribution of income, consumption and wealth – over a long period: the 27 years from 1988-89 to 2015-16. It focuses on the experience of households rather than individuals, and eliminates the effect of inflation.

The report concludes that inequality has risen only slightly over the period. Measured by the Gini coefficient – where zero means perfect equality and 1 means one household has everything – the distributions of both income and consumption have risen slightly.

The distribution of household wealth (mainly owner-occupied housing and superannuation savings) is most unequal of the three. It, too, has become a bit more unequal over the period.

But, particularly for income, inequality increased during the resources boom of the mid-noughties, then decreased in the years following the global financial crisis of 2008.

Over the 27 years, the disposable income of all households rose at an average rate of about 2.2 per cent a year in real terms.

The annual incomes of households in every decile (10 per cent group), from the bottom to the top, increased. It won’t surprise you that average incomes in the top two deciles rose by more than the economy-wide average. The top decile’s average income rose by more than 2.5 per cent a year.

It will surprise you that average incomes in the bottom decile rose at the same rate as the economy-wide average. So it was households between the bottom 10 per cent and the top 30 per cent whose incomes rose by less than the national average.

Many people would be surprised by all this. Why? Because they hear what’s happened in America and assume it must be pretty similar here. Wrong.

The report notes that our progressive income tax and highly means-tested welfare payments do a lot to equalise household incomes (as I’ve written recently in this column).

Our income inequality in 2015 was about average for the rich countries. In 2017, our wealth inequality was eighth lowest among 28 rich countries.

Australians’ chances of moving between higher and lower income groups – a rough measure of equality of opportunity – “compare favourably with many other developed countries”, the report says.

It tells us that, at 9 per cent of Australians – 2.2 million people – our rate of poverty (measured as people with incomes below half the median income) is no higher than it was 27 years ago.

But if all these truths tell you we don’t have much to worry about, you’ve been misled. The report is much less up-front in reminding us of the qualifications to its findings.

It leaves the strong impression that, if inequality hasn’t increased much, and isn’t as great as in some other countries, there’s no great problem. This implies the inequality we started with was fine.

As Professor Peter Whiteford, of the Australian National University, has noted, the report does too little to remind us that all the averaging involved in Gini coefficients and decile groups rolls households who’ve gained together with households who’ve lost and tells us little has changed.

For instance, the report downplays the issue of the huge increase in the incomes of the top 1 per cent of households. Their extreme gains are averaged with the more modest gains of the next 9 per cent to give a rise in the incomes of the top decile that’s high compared with the rest of us, but not greatly so.

Since the increase in inequality occurred during the resources boom, the report notes quietly that, contrary to what conservative politicians keep telling us, “[economic] growth alone is no guarantee against widening disparity between rich and poor”.

True. Then we’re reminded that this increase in inequality went away in the long period of weak growth following the financial crisis.

So what does the Productivity Commission want us to conclude? Let nature take its course? Don’t worry about increasing inequality because the next recession will fix it?

The report’s fine print acknowledges the truth that a country’s degree of inequality is greatly influenced by its economic institutions (such as its tax system and the rules of its welfare system), by government policy changes, and by the public’s attitudes to inequality.

I happen to agree with the commission’s value judgement that the growing gap between the top 1 per cent of incomes and middle incomes isn’t of as great concern as the gap between the bottom and the middle.

But I don’t accept another implicit value judgement that not much more could be done to reduce income and wealth inequality (presumably, for fear the rich would stop wanting to get richer) and that, at the bottom end, the government should limit its intervention to assisting those poor people whose disadvantage has become “entrenched”.

In other words, don’t acknowledge that poverty is being kept high by successive governments’ refusal to lift the freeze on real unemployment benefits.

The report proudly informs us that the bottom decile’s income has kept pace with the economy-wide average, but does little to explain how this amazing truth came about.

The chief suspect is the Rudd government’s increase in the base-rate of the age pension, a boost so big it seems to have more than offset the adverse effects of the real dole freeze and the bipartisan policy of moving disabled and sole-parent pensioners onto the much lower dole.

Still think there’s nothing to see here?

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Morrison's tax cuts aim well above the middle

One thing to be said in favour of Scott Morrison’s complex three-step, seven-year tax plan is that his small tax cuts for the deserving middle income-earners are more likely to actually happen than the huge tax cuts for the undeserving high income-earners.

For the latter to eventuate, Malcolm Turnbull will have to be re-elected at least twice before July 2024. By contrast, the smaller cuts will start in six weeks’ time. For once it’s the rich who’re being promised pie in the sky (hopefully) before they die.

This means it’s wrong to simply compare the $530-a-year saving for people on middle incomes with the $7225-a-year saving for all of us struggling to get by on more than $200,000 a year.

Why? Because by the time the people on such big incomes are due to get their tax cut, the others will already have had their much smaller cuts every year for six years.

The thing about money is that the sooner you get your hands on it, the better. Economists call this “the time-value of money”.

But that about exhausts the good points of ScoMo’s tax plan. His claim that it would make income tax “lower, simpler and fairer” is debatable.

Even his claim that the first step in his cuts is aimed a “low and middle income-earners” is misleading. People accept such claims only because they have no idea where the middle is.

ScoMo wants to overstate the level at which the middle is situated because his tax cuts are designed to favour the better-off.

He quotes the average weekly earnings of full-time employees – about $85,000 a year – as his indicator of the middle. But way more than half of full-time workers earn less than this.

That’s because the super-high salaries of a relative handful of employees push up the arithmetic average (the mean), making it a misleading measure of “central tendency”.

No, the better measure is the median – the income that’s higher than half the other incomes and lower than half the others. That is, the one dead in the middle. A high proportion of all full-timers will be clustered in roughly equal proportions a bit above and below the median.

The median income of adult full-time employees is about $76,000 – almost 11 per cent lower than the mean. But this measure ignores almost a third of workers who are part-time. Don’t they pay tax?

The median income of all employees is about $57,000 – which is a much better indicator of “the middle of the middle”.

ScoMo’s full tax saving of $530 a year (about $10 a week) will go to the 4.4 million taxpayers earning between $48,000 and $90,000 a year. That range goes from 16 per cent below the all-employees median to 58 per cent above it. Touch of asymmetry there. But there’s more.

On the upside, the 1.5 million taxpayers earning between $90,000 and $125,000 get a saving that starts at $530 and slowly reduces until it reaches zero at the top of this bracket.

On the downside, the 1.8 million taxpayers earning between $37,000 and $48,000 a year get a saving of $530 at the top, which then falls to $200 at the bottom of the bracket, while the 2.4 million taxpayers earning between $18,000-odd and $37,000 get nothing at the bottom, rising to $200 at the top.

Now, what would be a good indicator of a low income? Well, the minimum full-time wage is about $36,000 - meaning these people get a saving of about $185 a year or $3.60 a week. Wow. That much?

And what about all the under-employed workers who can’t get as many hours as they need. Aren’t they low income-earners? Their saving could be as little as zilch.

Still think ScoMo’s first step is aimed at “low and middle income-earners”? The truth is it’s aimed at middle and upper-middle earners. Anyone well below the middle gets peanuts.

Morrison’s claim that his plan would make income tax simpler is based on his second and third steps, in July 2022 and July 2024, finally eliminating the 37¢-in-the-dollar bracket, reducing the rate scale from five brackets to four.

But his changes would make the system more complex by introducing a new “low and middle-income tax offset”, to go on top of the existing low-income tax offset.

The effect of both offsets could have been incorporated into the rate scale, but hasn’t been. Why not? Because leaving them separate stops people seeing the extra tax rate (1½¢ in the dollar) they pay as their eligibility for the tax offset is clawed back to zero.

The Australian Taxpayers Alliance has demonstrated that, far from reducing the tax scale from five brackets to four, in truth the plan increases them from eight to 10. That’s simpler?

Our income tax is “progressive” because successive slices of your income are taxed at progressively higher rates. It would stay progressive under ScoMo’s plan, because it would still go from a first bracket where the tax rate is zero, to a top bracket where the rate is 45¢ in the dollar.

But it would, in a sense, be less progressive in that, after step three, almost three-quarters of taxpayers would end up in a huge bracket running from $41,000 to $200,000, all with a “marginal” tax rate of 32.5¢ on the last part of their income.

A better way to put it, however, is that ScoMo wants to put a big kink in the progressive scale. As your income rose above $200,000, your marginal tax rate would suddenly leap from 32.5¢ to 45¢.

Why is every country’s income tax scale progressive? Because making people contribute a higher proportion of their income according to their “ability to pay” is considered fairer.

When Morrison claims his changes would make the system fairer, he’s turning the meaning of the word on its head. He thinks the system would be fairer if high income-earners had to pay a smaller proportion of their incomes in tax.

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How Treasury lost its way on economic reform

From the almost stony silence of the nation's economists, you'd never know that Malcolm Turnbull's successful move to needs-based funding of schools is the most significant economic reform in many a long year.

It's notable, too, that this reform seems to have been achieved with little or no involvement by the high priests of economics at Treasury and the Productivity Commission.

Only a few economic reform projects are more important than raising the efficiency and effectiveness of federal and state spending on primary and secondary education.

Allocating that spending according to student need is the necessary first step towards the ultimate goal of reducing the shockingly high proportion of students who leave school without an education sufficient to go on to further study – in a trade course, for instance – or even to a life in which the normal state is employment, not recurring periods of unemployment.

The Australian economics profession's slowness to see the economic – not just the equity – significance of "Gonski" is a sign it's yet to learnt the lessons leading economists in America and Britain are drawing from the populist revolt against the way developed countries' economies have been managed during the era of "neo-liberalism" – better called economic fundamentalism.

Consider how well needs-based funding fits with former US Fed chairman Ben Bernanke's list of the economic managers' "errors of omission" in recent decades:

They failed "to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase the access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like."

It needs to be said that the first decade or so of "micro-economic reform" in Oz – floating the dollar, financial deregulation, eliminating protection, reforming the tax system, decentralising wage-fixing and reducing intervention in a host of highly regulated industries – was necessary, often unavoidable given what was happening in the rest of the world, and on balance, of great benefit to the populace.

It's impossible to imagine returning to the bad old pre-reform economy. Treasury and the Productivity Commission's predecessor body must be given most of the credit for promoting and designing these reforms.

But it's equally impossible to avoid the thought that, sometime been then and now, Treasury lost the plot, allowing the reform push to degenerate and be captured by business rent-seekers, politicians with ulterior motives and other government departments that didn't understand what they were doing.

To a fair extent the present populist revolt is explained by Bernanke's errors of omission: governments' failure to help the victims of the structural change their policies promoted and to ensure most of the cost of that assistance was borne by the winners from the change.

How could Treasury forget such an obvious way to minimise popular resistance and resentment of government-promoted change in the structure of industry?

Because it was misled by the mistaken notion that economic efficiency and distributional fairness are always at daggers drawn, and by the dubious ethic that economists should stick to promoting efficiency in the allocation of resources and leave fairness for others to worry about.

But also because Treasury allowed itself to be seduced away from strictly economic objectives to the essentially political objective of "smaller government".

We've got an economy heavily affected by multiple forms of market failure – including huge areas with public goods characteristics – but our overriding goal must be less government intervention in markets, less government spending and lower taxes, particularly on high income-earners.

There's little empirical evidence that economies with large public sectors perform worse than those with small ones, and no evidence that high marginal tax rates do much to discourage economic activity among high-paid full-time workers.

But Treasury's embrace of the smaller government objective does much to explain the Abbott-Turnbull government's loss of interest in budget repair (because cutting government spending turns out to be politically impossible), the neglect of measures to assist the losers from structural change (because they would add to government spending) and the lack of interest in reform of spending on education (because the need to go easy on the losers from spending reallocation means greater spending during the transition to more rational, cost-effective arrangements).

In the new era of populist backlash against the mounting evidence of stuff-ups in the later years of micro-economic reform, Treasury will continue to flounder and its influence wane until it switches its goal from smaller government to more effective government.

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Fixing disadvantaged students key to fairer, better economy

We have a big problem in Australia that has been happening for so long we hardly notice it. It's that far too many of our young people leave school with an inadequate education.

According to Victoria University's Mitchell Institute, 26 per cent of students fail to finish school or a vocational equivalent.

I'm sure some of these people catch up in later life, while others lead rewarding lives without benefit of further education. But I fear most of the 26 per cent lead lives of economic insecurity and limited personal fulfilment. They are the shockingly high proportion of students our school system has failed.

The hardest question I'm asked as an economics writer is why when, until the mid-1970s, economists defined full employment as an unemployment rate of less than 2 per cent, today they say it's about 5 per cent. My explanation is that the economy has changed, but our schools haven't kept up.

The great majority of unemployed people are unskilled.

And many of these are people who left school early. They didn't understand what teachers were attempting to teach them, they hated school with a passion, and left the moment they were permitted to.

My theory is that, until about the mid-'70s, the economy generated plenty of unskilled jobs, sufficient to absorb all the children who left school without being too hot at the three Rs.

These days, there are proportionately far fewer unskilled, brawn-not-brain jobs available, but just as many under-educated children quitting school.

Our schools seem to accept their high failure rate as inevitable. This may be partly because the ever-greater socioeconomic segregation of our schools – church schools serving those from better-off families, public schools serving everyone who can't afford a church school – has concentrated the failures into government schools in outer suburbs.

Certainly, school authorities seem to have given little attention to explaining why the failure rate remains so high, and which modes of classroom operation and teaching methods have been shown to get better results.

As a nation, the inadequate education of so many of our children is an issue that just hasn't registered on our radar.

One part of the greater influence of the nation's "rich and powerful" is that we worry far more about the problems of the brightest and best than the problems of those at the bottom, struggling to keep their seat on the tram of prosperity.

Economists spend far more time worrying about whether the rich are overtaxed than why the poor are being under-educated.

Most people see this as a matter of fairness. Many profess to believe in "equality of opportunity", but if you're genuine about that it means ensuring everyone at least starts the adult race with decent education, if nothing more.

And when you remember how much better-off children inherit – not just money, but brains and socialisation – that means governments devoting more resources to helping the bottom end keep up than to helping the top end excel.

But I see all this as just as much a matter of economic efficiency. What's efficient about allowing a large minority of our young people to emerge from school without sufficient education to ensure they can attain regular employment?

If we could get the "natural" rate of unemployment down from 5 per cent and closer to 2 per cent – if we could increase by 2 or 3 percentage points the proportion of the available labour that's actually put to work – this would do far more to increase "jobs and growth" than cutting the rate of company tax.

The first step in ensuring all our children get a decent education is better early childhood learning – a vital issue I'll leave for its own column.

The next step is ensuring the money governments spend on schools is biased in favour of those students needing more help, not those schools that have managed to screw better deals out of the politicians over the years.

That's why my heart leapt in 2011 when David Gonski recommended a way of rising above our anachronistic division of government funding on a sectarian basis, sharing it purely on the basis of student need and in a way that was "sector blind".

The plan Julia Gillard delayed producing until not long before the 2013 election was a big spending, but heavily compromised version of what Gonski recommended. Labor was desperate to get the states and sectors to sign up, so some of them bargained better deals than others.

Tony Abbott wasn't genuine in his professed support for needs-based funding and abandoned it immediately after the election, proposing utterly unrealistic cuts in grants to schools.

That's why it's so encouraging to see Malcolm Turnbull and his hard-working Education Minister, Simon Birmingham, advancing their own improved but less expensive version of needs funding.

You'd expect anyone genuinely committed to a better deal for disadvantaged students to seize this rare chance for bipartisan agreement, locking in better policy for possibly decades to come.

If Labor thinks we should be spending a lot more on schools, it can promise to do so at the next election.

But for Labor and the teachers' unions to oppose Senate approval for the Birmingham plan invites us to wonder if they're putting their own interests ahead of the disadvantaged students they profess to care so much about.

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Australians of the Year utterly out of step with the rest of us

How moving it was to watch Malcolm Turnbull presenting the Australian of the Year awards last week. What impressive people they were. Made me proud to be an Aussie.

I can't help liking Turnbull. At a show like that he's all we could hope for in a Prime Minister. He looked the part and spoke it well. He was completely at ease, someone we can be proud to have represent us to the world.

In his introduction he said all the right things. The "extraordinary finalists" for the various awards – Young Australian, Senior Australian, Local Hero and Australian of the Year – "light the way for us – shining examples of our best selves".

"Generous and compassionate, selfless, never daunted by seemingly impossible odds, brilliant, curious, entrepreneurial, innovative, building bridges to reinforce the mutual respect which secures our harmony and diversity.

"They include First Australians and those who have dedicated their lives to working with them" – such as the wonderful Sister Anne Gardiner, who's spent her life serving the Tiwi people on Bathurst Island.

"They include migrants and refugees who have fled horrors barely imaginable ...

"Yet, however much we celebrate the remarkable, peaceful and diverse nation that we have built together, we always strive to be better. Our Australians of the Year have always shown us how ...

"Respect for women, respect for each other, in all our magnificent diversity, is the foundation on which our harmonious society depends, is the platform which enables every Australian to realise their full potential."

And yet I confess that in the days since that proud night I've suffered a bad hangover. It seems our One Day of the Year has moved from April 25 to January 26.

We celebrate these "shining examples of our best selves" for one night and day before we revert to being far from our best selves for the rest of the year. We hunt up a handful of people who remain "selfless" so we don't feel so bad about the self-seeking lives the rest of us lead?

Far from retaining a strong sense of community, of helping each other and working for the greater good, we live in an era of every person for themselves, where the material almost always gets priority over the social, where our ambitions centre on personal advancement rather than making the world a better place.

If our politicians – of both stripes – are so keen for us to be "generous and compassionate" as well as "respectful" and part of a "harmonious society" why aren't they setting a better example?

What's generous and compassionate about sending social security recipients bills for "debts" owed to Centrelink that you haven't checked properly, then making them prove they don't owe that much with payslips and other documents from past years that you hadn't warned them to retain?

What's "respectful" about treating invalids, the aged, and young workers down on their luck in such a way? What's Australian about denying point blank there's any problem with what you're doing?

Why when you've gone out of your way to honour the place of First Australians do you, the very next day, curtly brush aside their request that the white majority run to the huge inconvenience and expense of changing the date of Australia Day? Respect, eh?

Do we honour the work of the Sister Annes because they salve our consciences? Thank God they're willing to put themselves out, because the rest of us ain't.

Some of us – including many in Turnbull's own electorate – are the children or grandchildren of "refugees who have fled horrors barely imaginable".

Much worse, apparently, than the way we've been treating refugees on Nauru and Manus Island.

Turnbull is right to say we've built a highly successful multicultural society.

Lately it's been fraying at the edges, however, with intolerance of people with unfamiliar religious practices – women's head coverings; halal – fears that all Muslims are terrorists, fears we're being overrun by Asians, and downward envy of government help for disadvantaged Indigenous people.

But it's not just that our political leaders fail to set an example, it's that too often they seek partisan advantage from our moral weaknesses. Rather than seeking to calm our fears of foreigners they compete to pander to them. Let's protect ourselves from the resurgent One Nation by aping its rhetoric, even its policies.

As for respect being "the platform which enables every Australian to realise their full potential" it's sentimental claptrap – especially coming from a government that seems to have set its face against funding the nation's schools on the basis of student need rather than established privilege.

It's schools and pre-schools that should be "the platform which enables every Australian to realise their full potential".

The most worrying message we got from the latest bad news on NAPLAN and PISA testing of students is the wide gap between our best and worst students and the large minority of kids the system is failing.

As Peter Goss, of the Grattan Institute, has demonstrated, we can go most of the way to needs-based funding quickly and without extra spending, provided we're prepared to shift funding from the less-needy to the more-needy.

But that would require Turnbull to exhibit the undaunted, entrepreneurial and bridge-building character traits he so admires in others.

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