Nobbling Afterpay would stifle competition and protect bank profits

There’s nothing new about buying now and paying later. You can do it with lay-by or a credit card. But the version of it invented by Afterpay, and copied by so many rivals, is so different and so hugely popular it’s not surprising it’s raised eyebrows.

The most obvious reaction is to see it as a new way of tempting young people, in particular, to overload themselves with debt and make their lives a misery. The government should be regulating its providers to limit the harm they do.

But to see Afterpay as purely a matter of “consumer protection”, as I used to, is to miss the way this prime example of “fintech” – the use of digital technology to find new ways of delivering financial services – is subjecting the banks and their hugely overpriced credit cards to strong competition from a product many users find more attractive.

And not just that. When you think it through – as I suspect the politicians and financial regulators haven’t – you see that this new approach to BNPL – buy now, pay later – is also threatening the big profits Google and Facebook are making from their stranglehold on online advertising.

The man who has thought it through is Dr Richard Denniss, of the Australia Institute. With Matt Saunders, Denniss has written a paper, The role of Buy Now, Pay Later services in enhancing competition, commissioned by ... Afterpay.

Normally, I’m hugely suspicious of “research” paid for by commercial interests, but Denniss is one of the most original thinkers among the nation’s boring economists.

Buying something via Afterpay allows you to receive it immediately, while paying for it in four equal, fortnightly instalments over six weeks. Provided you make the payments on time, you pay no interest or further charge. The fortnightly payments fit with most people’s fortnightly pay.

If you’re late with a payment, you’re charged a late fee that varies from a minimum of $10 to a maximum of $68, depending on how much you’ve borrowed. If you don’t pay the late fee and get your payments up to date, Afterpay won’t finance any more BNPL deals until you have.

If you never get up to date, you’re not charged interest or any further late fees. Eventually, Afterpay ends its relationship with you and writes off the debt.

The individual amounts people borrow are usually for just a few hundred dollars. You can have more than one loan running at a time, but only within the credit limit Afterpay has set, and only if your existing payments are up to date.

Afterpay sets a fairly low limit initially, but increases it as you demonstrate your payment reliability.

So, what’s in it for Afterpay? It charges the shop that sold you the stuff a merchant fee of about 4 per cent of the sale price. I used to suspect they made a lot from their late fees, but these remain a small part of their total revenue, almost all of which comes from merchant fees.

Despite its huge expansion, Afterpay has yet to turn a profit, putting it in the same boat as Uber, Twitter and other digital platforms. Of late, the BNPLs have had greatly increased bad debts and the sharemarket has fallen out of love with them. This doesn’t affect Afterpay, which has been taken over by a big American fintech, Square, which has many other irons in the fire.

Obviously, Afterpay and its imitators are offering a way to BNPL that’s an alternative to a conventional credit card, which involves charging merchants a fee of a couple of per cent, and offering interest-free credit - provided you pay your balance on time and in full each month.

If you can’t keep that up – as the great majority of credit-card holders can’t – you get hit with interest on your purchases of an extortionate 20 per cent-plus. These rates haven’t changed in decades while other interest rates have fallen. That’s a sign the banking oligopoly has huge pricing power in the provision of consumer credit.

It seems clear from the declining growth in credit-card debt and the amazing popularity of Afterpay and its imitators that people are jack of credit cards and keen to shift to a less onerous form of BNPL.

Many young adults, in particular, seem to have sworn off credit cards because they’re just too tempting. Behavioural economists call this a “pre-commitment device”. The best way to ensure you don’t end up deep in ever-growing debt is not to have a credit card in the first place.

These people regard Afterpay & Co as a much less risky way to BNPL, a ubiquitous practice economists sanctify as “consumption smoothing”.

Those who want to regulate the new BNPL by stopping providers from prohibiting merchants from charging users a surcharge – the way they stopped Visa and Mastercard from banning surcharging – see this as levelling the competitive playing field between the two different forms of BNPL.

But Denniss’ insight is to point out that the two merchant fees are quite different. The credit-card merchant fee can be regarded as a transaction fee – that is, merely covering administrative costs – but in Afterpay’s case it covers much more than that, to justify its much higher cost.

What Afterpay offers is something marketers understand, but economists have yet to: better “customer acquisition”. Being able to offer free credit is one aid to acquiring customers, but Afterpay does much more to attract customers to those merchants who offer its BNPL service.

Younger consumers like the new BNPL so much they search the internet for sellers of the item they want to buy that also offer Afterpay. Afterpay uses a directory of stores on its website – and also its mobile app – to direct potential customers to participating merchants.

Afterpay also sends messages to its users advertising its merchants’ special offers and the like.

So Afterpay’s merchant fee also provides its merchants with a new form advertising, thus reducing their need for online advertising through Google or Facebook.

Afterpay is genuinely disruptive, offering users what they may justifiably regard as a better product. Regulators should think twice before they seek to discourage it by presenting customers with a misleading comparison: a merchant fee of 4 per cent versus 2 per cent.

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Banking royal commission: much misconduct, not much follow-up

Can you remember as far back as three years ago? Scott Morrison and Josh Frydenberg are hoping you can’t. And fortunately for them, the media’s memory is notoriously short.

The media mostly live in the now. What’s being promised in this election campaign? Not much as yet on what promises were made last time and what became of them.

A big issue in the years before the election in May 2019 was the many complaints about people’s mistreatment by the banks, much of it brought to light by this masthead’s Adele Ferguson. There was growing pressure for a royal commission.

But the banks denied there was a problem, and then-treasurer Morrison repeatedly dismissed the need for an inquiry. Finally, when some government backbenchers signalled their support for a motion to establish a commission, the banks begged the government to take over and ensure the inquiry had appropriate terms of reference.

Former High Court judge Kenneth Hayne was appointed to inquire into misconduct in the banking, superannuation and financial services industry. For months, the public was shocked by the misbehaviour his hearings revealed.

People – even dead people – being charged for services they didn’t receive, signatures being forged, banks finding many ways to put their profits ahead of the fair treatment of their customers.

The government, too, professed its shock and utter disapproval of the banks’ behaviour. When the commission’s final report was submitted just a few months before the election was due, the government took three days to announce it was acting on all 76 recommendations and going further in “a number of important areas”.

“My message to the financial sector is that misconduct must end and the interest of consumers must now come first. From today the sector must change, and change forever,” Treasurer Frydenberg declared.

But the backdown began just five weeks later, even before the election. Frydenberg announced that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans, but rather review their operation in three years’ time”.

As Professor Richard Holden of the University of NSW observed at the time, Frydenberg offered nothing in its place.

Back in 2009, in the aftermath of global financial crisis, the Rudd government imposed “responsible lending obligations” making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments.

These have always irked the banks, and soon after the Coalition came to power in 2013 it attempted to wind them back, but was blocked in the Senate. The Hayne commission said they were fine.

But in September 2020, under cover of the “coronacession”, Frydenberg announced plans to dismantle the obligations because they’d become “overly prescriptive, complex and unnecessarily onerous on consumers”.

Professor Kevin Davis, of the University of Melbourne, a respected expert in this field, has argued that these justifications don’t make much sense.

By January last year, Davis found that the government was yet to implement 44 of the 76 recommendations it had accepted, and had “turned its back on five key reforms – including curbing irresponsible lending practices”.

“Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence,” Davis said.

The Hayne commission was highly critical of the Australian Securities and Investments Commission, saying it was too accommodating towards the bodies it was regulating, being too ready to negotiate and not keen enough to litigate.

In August last year, Frydenberg significantly changed his “statement of expectations” of ASIC from the one issued in 2018. The new directions start by saying the government expects the body to “identify and pursue opportunities to contribute to the government’s goals, including supporting Australia’s economic recovery from the COVID pandemic”. Hmmm.

Hayne recommended setting up a “compensation scheme of last resort”, funded by the industry, to ensure that victims of financial misconduct actually receive compensation that had been awarded where the firm was unable to pay because it had collapsed.

Hayne also recommended a “financial accountability regime” to hold finance leaders accountable for misconduct that occurs on their watch.

The two measures were finally recommended for passage by the relevant Senate committee in mid-February. But neither was passed before parliament was prorogued for the election.

It’s remarkable what miraculously winning an election can do to your determination to make the bankers behave.

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Banks: bad guys one minute; put-upon credit providers the next

With Scott Morrison hit by a seemingly unending series of headline-making problems, his standard techniques for dealing with them are getting easier to detect. He sees them not so much as policy deficiencies to be rectified as political embarrassments to be “managed” away.

One technique is to tough it out, hoping the media caravan will soon lose interest and move on. When that doesn’t work you give the appearance of responding to the outcry without actually doing much. Call an inquiry of some sort – maybe, if the pressure continues, even three or four different inquiries – then say you can’t act, or even discuss the matter further, until the inquiry has reported many months hence.

I’m finding it hard to avoid the suspicion this is how he’s dealing with the huge – and hugely expensive – problems in aged care. When Four Corners came up with (yet another) expose of the mistreatment of old people in institutional care as the election approached in 2019, he neutralised it as an election issue by promising a royal commission.

The commission’s hearings and interim report confirmed our suspicions that mistreatment was widespread. While releasing the interim report, Morrison announced that quite some millions would be spent on measures that sounded like they should help ease the problem – a bit.

When he released the commission’s final report early this month, he announced more millions of spending on this and that, promising the government’s full response to the commission’s multi-billion-dollar recommendations would be revealed in the May budget.

He seemed open to the idea of using an increase in the Medicare income-tax levy to cover the massive cost, but Treasurer Josh Frydenberg lost little time in hosing down that possibility. Aged care has hardly been mentioned again from that day to this.

Why do I have a terrible feeling that, should aged care not come back on the media agenda between now and budget night, what’s announced will be only a token response to the continuing and worsening problem?

You see a similar trickiness in the government’s response to the widespread complaints about the behaviour of the banks and other financial institutions. Those complaints led to repeated calls for a royal commission.

Malcolm Turnbull and his treasurer, Morrison, went for ages fobbing off these demands – denying there was a problem. But when some government backbenchers threatened to support an opposition motion for an inquiry, Turnbull had no choice but to relent.

The hearings by former High Court judge Kenneth Hayne revealed endless instances of financial “misconduct” and received months of media coverage.

Hayne’s final report lobbed just a few months before the 2019 election. Morrison’s successor as Treasurer, Frydenberg, immediately announced he was “taking action on all 76 recommendations” and “going further”. This apparently wholehearted acceptance of the recommendations defused bank misconduct as an issue in the election campaign.

It’s now two years since Frydenberg’s commitment. Professor Kevin Davis, of Melbourne University, says the government has yet to implement 44 of the commission’s recommendations, and has turned its back on five key reforms.

Frydenberg initially accepted the proposal to outlaw the practice of mortgage brokers being remunerated by the lending banks with a commission based on a percentage of the size of the loan. But, after industry lobbying, Frydenberg let it stand, replacing it with an obligation that brokers act in the best interests of their customers.

Hayne’s very first recommendation was that the existing “responsible lending obligation” – making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments – not be changed.

But, last September, Frydenberg announced that this obligation had been costly to lenders and was delaying the approval of loans. The present principle of “lender beware” would be replaced with a “borrower responsibility”. Legislation to bring this about is awaiting approval in the Senate.

It’s a “reform” that’s been welcomed by the banks, but vigorously opposed by Davis, various legal academics, consumer groups, the Financial Rights Legal Centre, Financial Counselling Australia – and my co-religionists at the Salvos, whose free Moneycare financial counselling service is offered at about 85 sites across Australia.

Like all the critics, the Salvos note the “asymmetry of knowledge and power” between consumers and the providers of financial services. The credit products offered have become increasingly complex and opaque. “Our experience is that understanding these products requires an above average level of literacy and financial literacy,” they say.

The proposed reduction in the scope of responsible lending obligations would reduce regulatory oversight and thus increase the risks for borrowers. “Our overwhelming evidence [from] delivering financial counselling in Australia for the past 30 years is that credit remains too easily accessible and that this has devastating consequences for the people we support . . .

“For people already experiencing, or at risk of, financial hardship, easier access to credit may mean they will get caught in a cycle of increasing debt. This has significant implications for physical and mental health.”

I fear the Salvos are right.

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No progress on wages, but we’re getting a better handle on why

In days of yore, workers used to say: another day, another dollar. These days they’d be more inclined to say: another quarter, another sign that wages are stuck in the slow lane. But why is wage growth so weak? This week we got some clues from the Productivity Commission.

We also learnt from the Australian Bureau of Statistics that, as measured by the wage price index, wages rose by 0.5 per cent in the three months to the end of December, and by just 2.2 per cent over the year - pretty much the same rate as for the past two years.

It compares with the rise in consumer prices over the year of just 1.8 per cent. If prices aren’t rising by much, it’s hardly surprising that wages aren’t either. But we got used to wages growing by a percentage point or so per year faster than consumer prices and, as you see, last year they grew only 0.4 percentage points faster.

It’s this weak “real” wage growth that’s puzzling and worrying economists and p---ing off workers. Real wages have been weak for six or seven years.

So why has real wage growth been so much slower than we were used to until 2012-13? Various people, with various axes to grind, have offered rival explanations – none of which they’ve been able to prove.

One argument is that real wage growth is weak for the simple and obvious reason that the annual improvement in the productivity of labour (output of goods and services per hour worked) has also been weak.

It’s true that labour productivity has been improving at a much slower annual rate in recent years. It’s true, too, that there’s long been a strong medium-term correlation between the rate of real wage growth and the rate of labour productivity improvement.

When the two grow at pretty much the same rate, workers gain their share of the benefits from their greater productivity, and do so without causing higher inflation. But this hasn’t seemed adequate to fully explain the problem.

Another explanation the Reserve Bank has fallen back on as its forecasts of stronger wage growth have failed to come to pass is that there’s a lot of spare capacity in the labour market (high unemployment and underemployment) which has allowed employers to hire all the workers they’ve needed without having to bid up wages. Obviously true, but never been a problem at other times of less-than-full employment.

For their part, the unions are in no doubt why wage growth has been weak: the labour market "reforms" of the Howard government have weakened the workers’ ability to bargain for decent pay rises, including by reducing access to enterprise bargaining.

But this week the Productivity Commission included in its regular update on our productivity performance a purely numerical analysis of the reasons real wage growth has been weak since 2012-13. It compared the strong growth in real wages in the economy’s “market sector” (16 of the economy’s 19 industries, excluding public administration, education and training, and health care and social assistance) during the 18 years to 2012-13 with the weak growth over the following six years.

The study found that about half the slowdown in real wage growth could be explained by the slower rate of improvement in labour productivity. Turns out the weaker productivity performance was fully explained by just three industries: manufacturing (half), agriculture and utilities (about a quarter each).

A further quarter of the slowdown in real wage growth is explained by the effects and after-effects of the resources boom. Although the economists’ conventional wisdom says real wages should grow in line with the productivity of labour, this implicitly assumes the country’s “terms of trade” (the prices we get for our exports relative to the prices we pay for our imports) are unchanged.

But, being a major exporter of rural and mineral commodities, that assumption often doesn’t hold for Australia. The resources boom that ran for a decade from about 2003 saw a huge increase in the prices we got for our exports of coal and iron ore. This, in turn, pushed the value of our dollar up to a peak of about $US1.10, which made our imports of goods and services (including overseas holidays) much cheaper.

This, of course, was reflected in the consumer price index. When you use these “consumer prices” to measure the growth in workers’ real wages before 2012-13, you find they grew by a lot more than justified by the improvement in productivity.

In the period after 2012-13, however, export prices fell back a fair way and so did the dollar, making imported goods and services harder for consumers to afford. So there’s been a sort of correction in which real wages have grown by less than the improvement in labour productivity would have suggested they should. Some good news: this is a one-time correction that shouldn’t continue.

Finally, the study finds that a further fifth of the slowdown in real wage growth is explained by an increase in the profits share of national income and thus an equivalent decline in the wages share.

Almost three-quarters of the increase in the profits share is also explained by the resources boom. It involved a massive injection of financial capital (mainly by big foreign mining companies, such as BHP) to hugely increase the size of our mining industry – which, as the central Queenslanders lusting after Adani will one day find out, uses a lot of big machines and very few workers. Naturally, the suppliers of that capital expect a return on their investment.

But harder to explain and defend is the study’s finding that more than a quarter of the increase in the profits share is accounted for by the greater profitability of the finance and insurance sector. Think greedy bankers, but also the ever-growing pile of compulsory superannuation money and the anonymous army of financial-types who find ways to take an annual bite out of your savings.

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It's official: too much banking is bad for you

When the newish boss of the International Monetary Fund, Bulgarian economist Kristalina Georgieva, contemplates the challenges of the new decade, she thinks of many things: increasing uncertainty, climate change and increasing inequality – particularly the role the financial sector in making it worse.

Georgieva foresees increasing uncertainty over geopolitical tensions, uncertainty that the trade truce between the US and China will last, and uncertainty that governments can fix the frustrations and growing populist unrest in many countries. "We know this uncertainty harms business confidence, investment and growth," she said in a recent speech.

On climate change, after observing that the "brush fires" blazing across Australia are a reminder of the toll on life that climate change exacts, she avoids saying that we are possibly the most vulnerable among the rich countries (something that might have surprised the she’ll-be-right Scott Morrison).

But she did note that it’s often the poorest and most vulnerable countries that bear the brunt of "this unfolding existential challenge". "The World Bank estimates that unless we alter the current climate path an additional 100 million people may be living in extreme poverty by 2030," she says.

The previous decade saw the rich world’s economists become much more conscious of the economic importance of inequality, with the IMF’s economists at the forefront of this realisation. "We know that excessive inequality hinders growth and hollows out a country’s foundations. It erodes trust within society and institutions. It can fuel populism and political upheaval," she says.

Many people think of using the budget to reduce inequality, which they should, "but too often we overlook the role of the financial sector, which can also have a profound and long-lasting positive or negative effect on inequality," she says.

"Our new staff research shows how a well-functioning financial sector can create new opportunities for all in the decade ahead. But it also shows how a poorly managed financial sector can amplify inequality."

"Financial deepening" refers to the size of a country’s financial services sector relative to its entire economy. Georgieva notes that, on one hand, developing countries benefit from the growth of their undeveloped financial sectors as small businesses and ordinary households gain access to credit and saving and insurance products.

The sustained growth in the financial sectors of China and India during the 1990s, for instance, paved the way for enormous economic gains in the 2000s. This, in turn, helped in lifting a billion people out of poverty.

On the other hand, the IMF’s latest research shows there’s a point at which financial deepening is associated with exacerbated inequality and less-inclusive growth. Many factors contribute to inequality, but the connection between excessive financial deepening holds across countries, she says.

Why is too much "financialisation" of an economy a bad thing? "Our thinking is that while poorer individuals benefit in the early stages of deepening, over time the growing size and complexity of the financial sector end up primarily helping the wealthy.

"The negative impact is especially visible where financial sectors are already very deep. Here, complicated financial instruments, influential lobbyists, and excessive compensation in the banking industry lead to a system that serves itself as much as it serves others."

The US has one of the most diversified economies in the world (it has a lot of everything). And yet, in 2006, financial services firms comprised nearly a quarter of the S&P500 share index and generated almost 40 per cent of all profits. (Read that again if it doesn’t amaze you.) Obviously, this made the financial sector the single biggest and most profitable part of the whole sharemarket.

Does that strike you as out of whack? What happened next – the global financial crisis and the Great Recession – tells us that excessive financial sectors increase the risk of financial instability and collapse.

The painfully slow recovery from that episode of financial crisis was the defining issue of the past decade. Research shows that, on average, a country’s financial crisis leads to a permanent loss of output (gross domestic product) of 10 per cent. This can cause a lasting change in the country’s direction and leave many people behind (as the Americans, with their opioid and middle-aged male suicide crises, know only too well).

The IMF’s latest research shows that inequality tends to increase before a financial crisis, suggesting a strong link between inequality and financial instability. But also, of course, the subsequent recession usually leads to a long-term worsening in inequality.

Much effort has been made since the global financial crisis to make the banks more stable and better regulated. But no one imagines this guarantees there couldn’t be another major crisis.

Georgieva says financial stability will remain a challenge in the decade ahead – for all the usual reasons, but also for "climate-related shocks". "Think of how stranded assets [such as now-unviable coal-fired power stations or coal mines] can trigger unexpected loss," she says. "Some estimates suggest the potential costs of devaluing these assets range from $US4 trillion to $US20 trillion."

The private sector and the banking industry, not just governments, have a critical role to play in making the financial system more stable, she says. That’s certainly the case when it comes to the climate’s effect on financial stability.

"The financial sector can play a critical role in moving the world to net zero carbon emissions and reaching the targets of the Paris agreement. To get there, firms will need to better price climate change impacts in their loans.

"Last year, climate change claimed its first bankruptcy of an S&P500 company. It is clear investors are looking for ways to adapt. If the price of a loan for an at-risk project increases, companies may simply decide the money for the project could be better spent elsewhere."

What has stopping climate change got to do with inequality? If we don’t, the consequences will fall hardest on the world’s poor (and Australians).

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Higher super: good for fund managers, not for workers

Do you have trouble understanding superannuation? Some government backbenchers are urging Scott Morrison to abandon or at least postpone the plan to phase-up the compulsory employer contribution from 9.5 per cent to 12 per cent of salary over the four years to July 2025. Good idea, or another attempt to cheat the worker?

One new backbencher has proposed that, since many low income-earners have a lot of demands on their budgets, super should be voluntary for everyone earning less than $50,000 a year. Whaddaya reckon?

You could be forgiven for being unsure. Super is complicated. You have to understand how it’s taxed and how it interacts with the age pension and its income and assets tests. I sometimes think that, with super, nothing is as it appears.

Take the notion of “employer contributions”. The government is forcing your boss to contribute to your retirement savings on top of the wage you’re paid. You beaut. Bring it on. The more the better.

Trouble is, economists believe that, in the end, it’s not the boss who pays, it’s the worker. How could that happen? Easy. Every time bosses are compelled to increase the rate of their contribution to their workers’ super, they compensate by granting ordinary pay rises that are smaller than they would have been.

After almost 30 years of playing the compulsory super game, that’s what the figures say has happened.

And ask yourself this: if employers really do foot the bill for their contributions to their employees’ super – if they come out of profits rather than wages – why isn’t business complaining loud and long about the plan to greatly increase those contributions?

Once you accept that employees end up paying for “employer” contributions, the question of whether they should be increased can be restated as: would you be happy for your pay to rise by about 2.5 per cent less than it would have over the four years to July 2025? And, ignoring other developments, stay that much lower every year for the rest of your working life?

The rational answer to that question is yes - provided the eventual improvement in my retirement income is sufficient to compensate me for the loss of the other things I could have done with all that money.

Before we consider answering that, here’s another thing that may not be as it appears. Compulsory super is a creation of Labor (and, if you hadn’t noticed, Paul Keating) and the unions. This was done in the belief that future generations would want more than the pension to live comfortably in retirement. Most people would live on a combination of age pension and super.

The Liberals opposed it from the start, saying they didn’t agree with compelling people to save. The Howard government scuttled Keating’s plan to increase compulsory contributions beyond the original 9 per cent.

Then, in 2013, the new Abbott government intervened to delay Kevin Rudd’s plan to get contributions up to 12 per cent by July 2019 – that is, now.

We’re asked to believe that the backbenchers are revolting because Morrison is refusing to abandon or further delay the already-legislated phase-up to 12 per cent by July 2025. But why would he reverse the Libs’ long-held opposition to compulsory super (which, by the way, delivers billions of dollars into “industry” super funds, in which half the trustees are union officials)?

I don’t believe it. Treasurer Josh Frydenberg is preparing to announce a wide-ranging inquiry into the interaction of super, the age pension and taxation. Since the next increase won’t happen until mid-2021, I think Morrison would simply prefer to announce a further curtailment of Labor’s plans in the context of the government’s response to that inquiry.

But why might an independent inquiry recommend against any further increase in the rate of compulsory contributions? Because, despite all the urging from the finance sector-types who make their high-paid living by taking a small annual bite out of every dollar the government forces us to leave in their care, in an unholy alliance with the union movement, the case for higher contributions is weak.

Recent detailed modelling by Brendan Coates, of the Grattan Institute – a non-aligned think tank that’s done much research into super – has found that the planned increase would leave many workers poorer over their entire lifetimes.

They would sacrifice a significantly increased share of their lifetime wages in exchange for little or no increase in their retirement income. Overall, and measured in today’s dollars, the typical worker would lose a cumulative total of about $30,000 over their lifetime, Coates estimates.

He finds that the lowest-paid 20 per cent of employees would be better off, the middle 50 per cent would be worse off, and the highest-paid 30 per cent would be better off.

Why? Partly because super tax breaks are still a lot greater for high income-earners, but mainly because, for workers in the middle, the operation of the age pension assets test would leave them sacrificing immediate income to increase their super payout, only to have their pension chopped back in consequence.

These results make me doubt the wisdom of making super voluntary for low income-earners. Many people are on low incomes not because they’re poor, but because their career is just getting started. It would work against the push for women to end their careers with more super than they do at present.

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Having stuffed-up deregulation, don't stuff-up re-regulation

As the banking royal commission finishes, the aged care royal commission begins investigating the mistreatment of old people by – taking a wild guess – mainly the for-profit providers. Surely it won’t be long before the politicians, responding to the public’s shock and outrage, are swearing to really toughen up the regulation of aged care facilities.

It’s not hard to see we’ve passed the point of “peak deregulation” and governments will now be busy responding to the electorate’s demands for tighter regulation of an ever-growing list of industries found to have abused the trust of economic reformers past.

But having gone for several decades under-regulating many industries and employers, there’s a high risk we’ll now swing to the opposite extreme of over-regulation. That could happen if politicians simply respond to populist pressures to wield the big stick against greedy business people.

It could happen if politicians yield to one of the great temptations of our spin-doctoring age: caring more about being seen to be acting decisively than whether those actions actually do much good.

And it could happen if our econocrats refuse to admit the shortcomings of their earlier advocacy of deregulation – including their naive confidence that the power of market forces would ensure businesses treated their customers well – and go into a sulk, washing their hands of responsibility for what happens next.

But against all those risks that, in seeking to correct the failures of the previous regime we introduce something that’s just as bad only different, there’s one cause for optimism: as the first cab off the re-regulatory rank, Commissioner Kenneth Hayne’s guiding principles for turning things around. (To be fair, those principles seem to have been influenced by Treasury’s submission to the commission.)

His first principle is that, since almost all the misconduct he uncovered was already unlawful, there’s no need for a raft of legislation to make them doubly illegal. The problem is more getting people to obey the existing law.

Blindingly obvious? Not to a politician who wants to be seen by an angry but uncomprehending public to be acting immediately and decisively. On the rare occasions when Australia is touched by a terrorist act, we see Parliament recalled to pass urgent legislation making terrorism quintuplely illegal.

Hayne’s second principle is that compliance will be increased by making the law simpler, rather than more complex, so no one can be in any doubt about what’s required of them.

The more complex and voluminous you make the law, the more scope you give well-resourced offenders to pay lawyers to find loopholes and argue the toss and string out court proceedings. In the process, increasing the cost to taxpayers of bringing them to justice, increasing the likelihood of them getting off and increasing the reluctance of the regulators to take them on in the first place.

Hayne says the whole body of law needs to be rewritten to simplify and clarify the legislators’ intentions. In the meantime, however, some changes should be made more quickly.

One is to get rid of exceptions, carve-outs and qualifications. Examples are the “grandfathering” (leaving existing arrangements unaffected by new rules) of certain commissions, and the exclusion of funeral insurance from rules affecting other insurance.

As two law professors from the University of Melbourne have pointed out, the rule of law requires like cases to be treated alike. To make exceptions you need powerful arguments – which haven’t been made.

“Instead,” they say, “exceptions and carve-outs reflect the lobbying of powerful industry groups concerned to preserve their own self-interest.” True. There’s no principle of deregulation that says it’s OK to look after your mates.

In highlighting the shortcomings of existing legislation, Hayne stressed that “where possible, conflicts of interest and conflicts between duty and interest [such as not acting in the best interests of your client] should be removed”.

But his final guiding principle is that existing laws must be enforced. “Too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished,” he said.

Just so. And it raises a mode of response to the electorate’s wider discontents, as governments set out on the path of “re-regulating” industries other than financial services: regulations may need improving, but we don’t need a lot more of them.

No, what we need a lot more of is regulators doing – and being seen to be doing – their job of enforcing existing regulations with vigour and effectiveness, and governments being unstinting in providing them with resources.

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Politicians, economists will decide if bank misbehaviour stops

In the wake of the Hayne report on financial misconduct, many are asking whether the banks have really learned their lesson, whether their culture will change and how long it will take. Sorry, that’s just the smaller half of the problem.

You can’t answer those questions until you know whether the politicians and their economic advisers have learned their lesson and whether their culture will change.

Why? Because the game won’t change unless the banks believe it has changed, and that will depend on whether governments (of both colours) and their regulators keep saying and doing things that remind the banks and others on the financial-sector gravy train that the behaviour of the past will no longer go undetected and unpunished.

One of Commissioner Hayne’s most significant findings was that almost all the misbehaviour he uncovered was already illegal. Which raises an obvious query: in that case, why did so much of it happen?

Hayne’s answer was “greed”. That’s true enough, but doesn’t tell us much. Greed has been part of the human condition since before we descended from the trees. But greed has been channelled and held in check by other factors – particularly by social norms that disapprove of it and find ways to censure people who aggrandise themselves are the expense of others. In old times, social ostracism was enough.

So, since banks and other financial outfits haven’t always been willing to exploit their customers the way they have recent decades, the question is: what changed?

One explanation is that the economy’s become a bigger, more complex, more impersonal place, where the exploiter and the exploited don’t know each other. Where the exploitation is carried out by four of the biggest, most sprawling and intricate computer systems in the country.

Where I can spend my obscenely large pay cheque without seeing the faces of the people I’ve ripped off flashing before my eyes. Indeed, in my suburb, all of us get huge pay cheques. And I don’t feel guilty; some of them get much bigger cheques than me.

But another part of the explanation must surely be that things started changing after the triumph of “economic rationalism”, the introduction of microeconomic reform, and the deregulation of the financial sector in the second half of the 1980s.

In the highly regulated world, there was less scope and less incentive to mistreat customers. Competition was limited and there was little innovation. Deregulation was intended to spur competition between the banks and give customers a better deal.

I’m not saying bank deregulation was a bad idea. It did bring innovation (we forget that banking and bill-paying are infinitely more convenient than they were) and you no longer have to live in a good suburb to get a loan from a bank.

And the banks do compete far more fiercely than they used to. It's just that they compete not on price (as the reformers assumed they would) but on market share and which of the big four achieves the biggest profit increase.

In this they’ve behaved just as you’d expect oligopolists to behave.

In the meantime, economic rationalism sanctified greed (the “invisible hand” tells us the market leaves us better off because of the greed of the butcher and the baker) and economists invented euphemisms such as “self-interest” and “the profit motive”.

Then, after economists got the bright idea of using bonuses and share options to align management’s interests with shareholders’, big business elevated “shareholder value” to being companies' sole statutory obligation.

Now, however, when Hayne says the banks gave priority to sales and profits over their customers’ interests, everyone’s rolling around in horror.

And politicians and econocrats are feigning surprise that financial regulators, long given a nod and wink to dispense only “light” regulation of the players (and denied the funding to give them any hope of successful prosecutions), did just as they were told.

Unless the econocrats and their political masters are willing to accept the naivety that marred bank deregulation, the harm ultimately done to bank customers – ranging from petty theft to life-changing loss – and the system’s susceptibility to political corruption, the banks’ culture won’t change because the will to change it won't last.

The existing prohibitions on mistreatment of customers need to be made more effective, as proposed by Hayne but, above all, the law needs to be policed with vigour – including adequately resourced court proceedings – so the banks realise they have no choice but to change.

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Bank royal commission the start of re-regulation

If you think the banking royal commission’s damning report means you’ll never again be overcharged or otherwise mistreated by a bank, you’re being a bit naive. If you’re hoping to witness leading bankers being dragged off to chokey, you’ll be waiting a while.

But if you think that, once the dust has settled, we’ll find little has changed, you haven’t been paying attention.

I think we’ll look back on this week and see it as the start of the era of re-regulation of the economy. The time it became clear our politicians were no longer willing to give big business an easy ride, to assume it would only ever act in the best interests of its customers and that nothing should ever be done to displease the big end of town, for fear this would damage the economy.

And I’m talking about a lot more than banking, superannuation and insurance. Many other industries have been treating their customers or employees badly, and they too will find governments getting tough with wrongdoers.

Why the change of heart? Because, in so many cases, the 30-year experiment with deregulation, privatisation and outsourcing is now seen to have ended badly.

Recent years have revealed many businesses breaking the law while government regulatory bodies fail to bring them to justice: firms paying their employees less than their legal entitlements, firms taking advantage of foreign students and others on temporary work visas, private providers of vocational education inducing youngsters to sign up for inappropriate courses, irrigators illegally extracting water from the Murray-Darling river system, private inspectors certifying high-rise apartment blocks later found to be seriously defective, and many more.

Big business may have power and money, but customers and employees have votes. And when voters experience mistreatment at the hand of business – or just read about the mistreatment of others – they tend to blame the politicians, who were supposed to ensure such things happened only rarely.

Commissioner Kenneth Hayne has found that almost all the misbehaviour by banks and other institutions he uncovered was already illegal.

He makes the point that “the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities”.

But, he adds, “too often, financial services entities that broke the law were not properly held to account.

“The Australian community expects, and is entitled to expect, that if an entity breaks the law and causes damage to customers, it will compensate those affected customers. But the community also expects that financial services entities that break the law will be held to account.”

And when the Australian community realises this hasn’t happened, who does it blame? Who does it seek most to punish? The government of the day. Even though the genesis of the policy problem lies in decisions made by governments long gone.

Do you see now why the worm has turned on deregulation?

Former Labor and Coalition governments’ naive faith that “market forces” would oblige businesses to do the right thing has proved badly misplaced. In their scramble for higher profits and pay, seemingly respectable businesses have taken advantage of their greater freedom, knowingly breaking the law whenever they thought they wouldn’t be caught.

And now the chickens have come home, who’s most at risk of losing their jobs? Not the bosses of offending businesses, not the regulators asleep at the wheel, but the government of the day. That’s the rough justice of democracies. Voters hit out at those they have the power to hit – those they elect.

It was business that had the fun, but it’s politicians in most immediate danger of paying the price. Do you really think they’ll be going easy on their former business mates who’ve been dudding them behind their backs?

But what’s a threat to the government is an opportunity for the opposition. Competition between the two parties will ensure the Hayne commission’s recommendations are acted on.

And, whichever side wins the election, the next term will see a tightening of the regulation of many industries beside financial services.

Commissioner Hayne was highly critical of the two main financial regulators, the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Why did they allow so much wrongdoing to get past them?

Partly because they succumbed to the ailment threatening all regulators: “capture” by the industry they were supposed to be regulating. They allowed themselves to become too matey with the industry, seeing its point of view more clearly than the interests of its customers.

But there’s more to it. During the decades in which politicians and some economists convinced themselves that the more lightly businesses were regulated the better they’d serve the rest of us, the regulatory authorities were left intact more for appearances than function.

They soon got the message that their political masters – from either side of politics – wanted them to go easy on business. Both sides went for years reinforcing the message by repeatedly cutting the regulators’ funding.

But all that’s changed. The politicians, claiming to be shocked by the regulators’ dereliction, are now pumping in taxpayers’ money as fast as they can go. Life won’t be the same for big business.

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How the banks lost our trust - and how they can get it back

Where to now for the big four banks, AMP and some other big businesses? They’ve abused the trust of their customers and the public, and it will be a long time before any side of politics wants to be seen as going easy on them.

Of course, the banking royal commission isn’t over. We’ve yet to see what punishments it recommends be imposed and what tightening of regulation, and then what the next government decides to do in response.

But if the nation’s chief executives have any gumption, they won’t wait for all that before turning their minds to why their customers’ trust was lost, and how they can go about getting it back.

This week the Academy of the Social Sciences in Australia held a symposium in Canberra on regenerating integrity and trust in Australian institutions. Professor Leon Mann, a psychologist from the University of Melbourne, and Associate Professor Nicole Gillespie, a management expert from the business school at the University of Queensland, spoke about trust from a business perspective.

Gillespie drew on a major study she conducted with three other academics, Designing Trustworthy Organisations, published by the MIT Sloan Management Review.

Although companies that suffer a loss of trust often blame “rogue employees” or “a few bad apples,” Gillespie and her colleagues’ research shows that major violations of trust are almost never the result of rogue actors.

Rather, they are predictable in organisations that allow dysfunctional, conflicting or incongruent elements of their system to take root. It’s the barrel that’s rotten.

Often the incongruence that led to the loss of trust was the development of a company strategy that favoured the interests of one stakeholder group while betraying those of others.

“This problem has often been defined as letting shareholder profits take precedence over core responsibilities to other stakeholders (such as employees, customers, suppliers or communities),” the study says.

And it’s not just favouring one stakeholder over the others, it’s doing so at the expense of the others, and even causing harm to them.

Bang on. How did those guys know about our banks?

They note that a US Senate committee investigating the global financial crisis was very critical of Goldman Sachs, whose stated values of client focus and integrity were at times overshadowed by a less formal culture that emphasised getting deals done with less than full disclosure (to the mugs on the other end of the deal).

Good point. Trustworthiness has to be embedded into every aspect of the business’s strategy, structure, processes and systems. But there are formal ideals and rules, and then there’s always an informal culture. The two must be “congruent” – they must fit together.

When the rules say one thing, but the pressure from your supervisor says something different, most employees soon realise what the boss, and the boss’s bosses, really want.

“Our research suggests that the key differentiator between companies that violate trust and those that sustain it is integrity and consistency within and across the organisation,” the study says.

So how can a company that’s lost its customers’ trust get it back? The good news is that when years of untrustworthy behaviour reach crisis point, this can create the impetus to really turn things around.

You need to start with a credible, rigorous and independent investigation of the weaknesses in the system that caused the problem.

“Companies are often so concerned with appearance and damage control that they are unwilling to engage in the degree of examination required to root out the entrenched causes of trust violations,” the study says.

For instance, BP allowed its Texas refinery explosion in 2005 to be followed by the oil spill in the Gulf of Mexico in 2010. News Corp had an employee jailed for phone hacking in 2007, but endured another phone-hacking scandal in 2011.

Next, since trust failures are typically systemic, the organisational reforms need to be systemic as well. Structures, systems and processes should be the first point of intervention because they’re relatively easy to design and change.

However, such interventions by themselves are unlikely to produce sustainable change. “The more difficult challenges involve making changes to the organisation’s culture, strategy and leadership and management practice.

“Indeed, adding training in ethical conduct probably won’t affect organisational behaviour in any meaningful way if supervisors, workplace norms and performance management objectives continue to encourage questionable activities,” the study says.

Finally, evaluation. Even when a trust crisis recedes, old habits have a way of returning. Reforms must be evaluated to ensure they are working as intended, and any shortfalls are addressed.

“Because it takes time to change systems and deep change is hard to realise, in some respects the most important part of trust repair is the ongoing assessment, learning and course correction required to build authentic, sustained trustworthiness.”

Wow. How easily Australia’s story fits into the academics’ generalised framework.

I think the main reason our banks ran off the rails is that they got locked into an utterly inward-looking game in which each of the four players competed to see who could raise their profits the most.

To this end, they gave their senior people incentive schemes and their junior people key performance indicators aimed solely at increasing profits. The targets set were so demanding they implicitly encouraged staff to ignore the company’s stated values and bend rules that stood in the way of achieving the target and pleasing the boss.

Bosses can’t have failed to notice the questionable practices this gave rise to, but they looked the other way for fear of falling back in the profits comp.

They attempted to justify this by claiming company law required them to put shareholders’ interests first. They failed to mention that, by exploiting and using up the trust of their customers, they were putting shareholders’ short-term interests ahead of their long-term interests – a short-sightedness company law never required of them.

The price bank shareholders are paying for the mistreatment of bank customers is now apparent.

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Long way to go to get banks back in their box

Have we learnt from the mistakes of the global financial crisis, now 10 years ago? Yes, but not nearly as much as we should have.

Of course, the answer is different for the Americans and the other major advanced economies to what it is for us, who managed to avoid bank failures and the Great Recession.

Globally, much has been done under the Basel rules to strengthen requirements for banks to hold more capital and liquidity, reducing the likelihood of them getting themselves into difficulties.

It would be naive, however, to imagine this has eliminated the possibility of any future financial crisis. Recurring financial crises are a feature of capitalist economies through the centuries.

All we can do is work on reducing their frequency and severity. On that score, the rich countries could have done a better job of rationalising the division of responsibility between the various buck-passing authorities supposed to be regulating their financial system.

The root cause of the GFC was ideological: the belief that the more lightly regulated the banks and other financial players were, the better they’d serve the wider economy’s interests, allied with the belief that their greater freedom wouldn’t tempt them to take excessive risks because that would be contrary to their interests.

Wrong. This badly misread the perverse incentives bank executives faced – heads I win big bonuses; tails my shareholders do their dough – and the way the heat of competition can induce business people to do things they know they shouldn’t, not to mention the “moral hazard” of knowing that, should the worst come to the worst, the government will have no choice but to bail us out.

As actually happened. In the North Atlantic economies, politicians and central bankers did the right thing in rescuing failing banks. Had they not, the whole financial system would have collapsed and the loss of wealth and employment would have been many times greater than it was.

But don’t try telling that to a public that watched governments racking up billions in debt to save banks and bankers, who then proceeded to turn out on the street people who could no longer afford the mortgages they should never have been granted.

The US authorities’ mistake was failing to draw a clear distinction between saving banks to protect their customers and stop the system collapsing, and punishing the failed banks’ managers and shareholders for screwing up.

Why didn’t they? In short, because the banks are too powerful politically.

Which brings us to Australia’s response to the GFC and how we escaped the Great Recession. Our big banks didn’t fall over because our econocrats never believed the banks wouldn’t be silly enough to take risks that could endanger their survival. Our banks didn’t buy toxic assets because our prudential supervisors wouldn’t let ‘em.

That didn’t stop the GFC dealing a blow to business and consumer confidence, such that real gross domestic product contracted by 0.5 per cent in December quarter 2008. That we avoided recession is thanks to the quick action of the Reserve Bank in slashing interest rates and the Rudd government in applying huge fiscal stimulus, which stopped the economy unravelling.

At another level, however, the econocrats did believe the banks should be lightly regulated in their relations with customers, and could be trusted not to mistreat them. Outfits such as the Australian Securities and Investments Commission had their funding cut and were given the nod not to be overactive.

The absence of a crash meant our governments didn’t learn that, in the non-textbook world, market forces can cause, as well as limit, the mistreatment of customers. Our own banks’ great political influence reinforced this naivety, prompting governments to wave aside the mounting evidence of bank misconduct and the public’s mounting disquiet and distrust.

So, in a sense, the banking royal commission is the product of our earlier failure to learn what we should have from the GFC.

But there’s a much broader lesson we’ve yet to learn from the crisis, one that applies to all the advanced economies. It’s that the banking and “financial services” sector is far bigger than we need, is bloated by rent-seeking, involves many times more trading between banks (a form of gambling) than trading between banks and real-economy customers, and is thus a waste of economic resources.

When financial services’ share of our economy (and most other advanced countries’) was expanding rapidly in the decades preceding the crisis, economists told us we were benefiting from financial innovation and advances in the management of financial risk.

The GFC revealed that rationale as about 95 per cent bulldust. To misquote Keynes, the economy would be better off if most of the people making big bucks in finance got useful jobs such as being dentists.

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Punishing wrongdoers won’t fix our problem with banking

The other day I noticed a column I’d written in 1990 saying the banks’ abuse of their customers’ trust was getting them a bad name, so they should desist.

That was almost 30 years ago. It tells you the banks started playing up not long after the Hawke-Keating government deregulated them in the mid-1980s.

I was complaining about the way they’d offer new customers a better deal than their existing customers, then make no effort to tell their unsuspecting suckers they should change.

They’re still doing it, of course. But as the banking royal commission has informed us in the most gruesome detail, they’ve graduated to much worse than exploiting their customers’ loyalty and inertia.

Their policy of buying into every dimension of “financial services”, particularly “wealth management” – running superannuation funds, and giving people advice on where to invest their retirement savings – has opened an Aladdin’s cave of opportunities to charge fees and commissions, plus temptations to exploit the conflict been their interests and their customers’.

“Why don’t I get you to agree to put your money into an investment that pays me a higher commission, or that’s offered by another part of my bank, even though it wouldn’t be the right thing for you?”

Financial services are particularly susceptible to overcharging, not just because the sellers know so much more than we do, but because ordinary mortals find financial details extraordinarily dull and have great trouble making themselves spend their precious leisure time examining statements, closing old accounts and checking up on businesses they should be able to trust.

And now, of course, we’ve had Westpac making an “out-of-cycle” increase in mortgage interest rates, and are waiting to see whether the other big banks will use the chance to raise their own rates.

Will they be game to add further offence while they’re at the height of their unpopularity? I fear they will.

If I’m right, this will tell us a lot about how banking got to be in its present sorry state and how likely the royal commission’s proposals for reform are to change the banks’ bad behaviour.

The commission’s inquiry is nearing its end. Its interim report is due by the end of this month, with its final report due by February 1. So we’re likely to know its recommendations – and what each side proposes to do about them – before the federal election.

Is it reasonable to hope it won’t be too long before the banks' bad behaviour is a thing of the past? Yes and no.

The commission's being conducted by a former High Court judge and a lot of barristers. If these lawyers interpret “misconduct” to mean breaking the law, they’ll be focused on referring suspect banks and individuals for further investigation, tightening up the law and making sure the bodies supposed to be regulating the banks, particularly the Australian Securities and Investments Commission, get more resources and try a mighty lot harder than they have been.

If this is the way things shape - and provided punishments extend to fining or jailing individuals, not just imposing fines on businesses with the deepest pockets in the land – I think we can hope for a marked reduction in rule-bending and outright lawbreaking.

The problem is that the big four banks have been so focused on the game they’re playing that they’ve lost touch with reality – with how many customers’ lives they’ve been ruining; with the way the rest us have come to despise them.

When the spouses of bank chief executives and board members realise their other half risks a trip to the slammer, just watch them pull their heads in.

Trouble is, most of us haven’t been victims of illegal behaviour. It’s no offence to take advantage of customers who aren’t paying attention. It’s not against the law to raise interest rates out-of-cycle.

In other words, there’s a big economic dimension to the banks’ misconduct. Neglect that and we’ll still have much to complain of.

The strange thing about banking is that it’s ruthlessly competitive and uncompetitive at the same time. The banks’ bosses are obsessed by a game in which they compete to achieve the highest percentage increase in their profits and share prices.

It’s this competition that’s kept bankers in their bubble of unreality, urging their minions on with KPIs and commissions and bonuses, and turning a blind eye to the rule-bending they lead to.

This is why Westpac has moved to protect its profit margin by passing a small increase in its costs on to customers, even though our banks are already among the most profitable in the world. And this is why its competitors are likely to follow suit, whatever their customers think.

It’s the lack of price competition at the retail level that makes it possible for the banks as a group to raise their prices whenever they see fit. The others could hang Westpac out to dry, but it’s a safe bet they won’t.

It’s only effective measures to increase price competition that will stop the banks overcharging us. There are no easy answers. But the banks are so influential that, to date, neither the two parties nor their bureaucratic advisers in Treasury, the Reserve Bank and the Australian Prudential Regulation Authority have shown much enthusiasm for the challenge.

That’s what we must hope all the voter anger generated by the royal commission is about to change.

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We could increase bank competition if we wanted to

Would you like to put your savings in a super scheme presently reserved for public servants? Would you like your bank account or mortgage to be with the Reserve Bank?

Impossible to imagine such a crazy idea? Well, that’s what the Productivity Commission thinks, but it’s neither as impossible nor as crazy as it may sound.

Everyone says they believe in innovation, but when we’re used to thinking and doing things one way and some bright spark argues we should be doing it the opposite way, they’re more likely to be dismissed than grappled with.

And our econocrats are no more receptive to innovative ideas than the rest of us, it seems.

The bright spark in question is Dr Nicholas Gruen, principal of consulting firm Lateral Economics. The Bank of England and Martin Wolf, of the Financial Times, think he’s worth taking seriously, but in the Productivity Commission’s final report on competition in the financial system his ideas are brushed off as though he’s a nut job.

So let’s have a look at them. In his submission to the commission’s inquiry, Gruen argued we needed to give a twist to a widely accepted principle of micro-economic reform, established in 1996, called “competitive neutrality”.

In those days there were a lot of (mainly state) government-owned businesses. Sometimes they had a natural monopoly over some network, sometimes it was an “unnatural” monopoly granted by legislation, sometimes it was a bit of both.

The reformers’ concern was that, being monopolies, these government businesses weren’t terribly efficient. They tended to be overstaffed and do “sweetheart” pay deals with their unions because they knew they could pass the cost straight on to their customers.

Clearly, it would be much better for customers if these outfits could be exposed to competition from private firms, to force their prices down. But this competition would emerge only if the public businesses were robbed of any special advantage arising from their government ownership.

Fine. Almost a quarter-century later, most of those businesses have been privatised – many of them with their anti-competitive advantages intact or restored, so as to boost their sale price.

Today, of course, the big problem is the lack of competition in, say, the oligopolised national electricity market or, as the commission’s inquiry acknowledged, in oligopolised banking. With super, the big problem is workers’ reluctance to engage with all those boring comparisons.

This is where Gruen’s twist on competitive neutrality comes in. If what we needed back then was to increase private competition with government businesses, surely an answer to our present problem of inadequate competition between private players is increased competition from public businesses.

In the case of banking, he asks why, in these days of online banking, the significant benefits of being able to bank with the central bank should be restricted to producers (the commercial banks) and denied to consumers (households and other businesses). What’s competitively neutral about that?

In the case of superannuation, why should savers be prevented from giving their money to funds managing the super savings of public servants? Surveys show public sector funds achieve returns to members even higher than the non-profit industry funds, let alone the for-profit “retail” funds run by banks and insurance companies.

Gruen notes that public sector funds would offer only modern, defined-contribution super and involve no subsidies – that is, they’d be competitively neural. (More radical reformers would say, so what if public providers had a government-related advantage they could pass on to customers? If the government can give the public a better deal, why shouldn’t it?)

Sometimes public providers would have an advantage because they were so big. But that’s not an unfair advantage. It’s exploitation of economies of scale that mean so many private industries are dominated by only a few firms. Only problem is insufficient price competition between them to ensure the cost savings are passed to customers, not owners.

In response to Gruen’s idea of opening up access to central banks, the commission raised practical objections that could be solved if you really wanted to.

In brushing off the idea of public super providers, the commission quoted the case of the Swedes doing something similar. Bad idea, apparently. More than two-thirds of new contributors defaulted into the public fund – perhaps because it earned better returns than the private sector funds.

Of course, you wouldn’t expect privately own banks or super funds to welcome reform that could cost them customers or force down their profit margins. Perhaps this explains the commission’s lack of interest in the idea – it knew the proposal wouldn’t appeal to a Coalition government.

But it's more likely the econocrats are just stuck in an ideological rut. Economic reform was always about reducing public and increasing private. Going the other way is so obviously wrong it doesn’t need thinking about.

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Business is busier dividing the cake than making it grow

The developed world’s economists have been racking their brains for explanations of the rich countries’ protracted period of weak improvement in the productivity of labour. I’ve thought of one that hasn’t had much attention.

Productivity isn’t improving as fast it could be partly because of the increasing number of our brightest and best devoting their efforts to nothing more productive than helping their bosses or customers game the system.

That is, helping them find ways around our laws – tax laws, labour laws, even officially supported accounting standards for how profits should be measured and reported.

What put this into my mind was all the kerfuffle a few months ago when Labor announced its plan to abolish refunds for unused dividend franking credits.

When Paul Keating introduced dividend imputation in 1988, unused credits weren’t refundable. Only in 2001 were they made so by John Howard. At first, the cost to the budget of this minor concession was tiny. Over the years since then, however, the cost has blown out extraordinarily.

Why? Because a small army of accountants, lawyers and investment advisers started advising their clients (many of whom can’t use their franking credits because they pay no tax on their superannuation payouts) on how to rearrange their share portfolios to take advantage of the new refund.

Thus did they turn a small concession into a hugely expensive loophole. Scott Morrison’s claim that Labor had overestimated the saving to be made by closing the loophole rested on his since-refuted assumption that it had failed to take account of the way the small army would respond by further rearranging their clients’ portfolios.

But that’s just one example. The truth is that helping their customers steal a march on the government is one of the main services the entire investment advice industry uses to justify its fees and commissions.

A particular favourite is helping people with loads of super turn the cartwheels necessary to frustrate the means-test rules and still get a part pension.

Some tax agents help their clients pad out their work-related tax deductions so the punters’ tax refunds are big enough to have the agents’ fee deducted without them feeling much pain.

For years, starry-eyed economists exulted in the phenomenal growth of the banking and financial services sector on the grounds of all the financial innovation going on.

Post the global financial crisis it’s clear much of the innovation was no more productive than finding new ways to minimise tax or get around financial regulations. And, of course, all the advances in “risk management” turned out to be more about slicing, shifting and hiding risk than reducing it.

It’s an open secret that our compulsory super system leaves employees open to hugely excessive fee charging, as layer upon layer of “advisers” clip each other’s tickets and send the bill to the mug savers.

The banks’ volume of trading of currencies, securities and derivatives in financial markets exceeds by many multiples the amount required to service the needs of their real-economy customers – or even to keep markets “deep” (able to process big transactions without shifting the price much).

The banks are just betting against each other - meaning much of the bloated financial sector’s activity isn’t genuinely productive.

And now there’s the “gig economy” – Uber, Airbnb, fast-food delivery services and all the rest.

They represent a strange amalgam of genuine innovation – using the internet and smart phones to bring buyers and sellers together much more efficiently than ever before – with a lot of terribly old-fashioned tricks to get away from the tax, labour and consumer protection laws faced by their conventional competitors.

"Oh no, the people who drive cars, ride bikes or do odd jobs at our behest aren’t our employees. Gosh no. So if they don’t pay their tax, make super contributions or insure themselves, it’s nothing to do with us."

Note that even if all the cost saving extracted from the hides of these poor sods was passed on to customers, it would still be less a genuine efficiency improvement than a mere income transfer from unempowered workers to consumers, most of whom are not in need of a free kick at other people’s expense.

Now, it’s true most of the practices I’ve described are perfectly legal. And many people have convinced themselves that if it’s legal it must be moral. But they can’t have it every way: it may be legal and even moral, but what it’s not is particularly productive.

For many years business people loved to lecture the rest of us about the need to grow a bigger pie, not squabble over how the pie was divided.

Turns out a surprising amount of business activity involves ensuring their slice is bigger than yours. If so, don’t be surprised productivity improvement is slow.

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Bank inquiry will change the course of politics and policy

The misbehaviour by banks and other big financial players revealed by the royal commission is so extensive and so shocking it’s likely to do lasting damage to the public credibility and political influence of the whole of big business and its lobby groups.

That’s particularly likely should the Coalition lose the looming federal election. If it does, that will have been for many reasons. But it’s a safe bet that pollies on both sides will attribute much of the blame to the weeks of appalling revelations by the commission.

With Labor busy reminding voters of how much effort during its time in office the Coalition spent trying to water down the consumer protections in Julia Gillard’s Future of Financial Advice legislation and then staving off a royal commission – while forgetting to mention the tough bank tax in last year’s budget – the Coalition will surely be regretting the closeness of their relationship.

Some Liberals may see themselves as having been used by the banks, notwithstanding the latter’s generous donations to party coffers. So, even if the Coalition retains office, it’s likely to be a lot more reluctant to be seen as a protector of big business.

A new Labor government is likely to be a lot less inhibited in adding to the regulation of business, and tightening the policing of that regulation, than it was in earlier times.

Should Malcolm Turnbull succeed in getting the big-company tax cut through the Senate, an incoming Labor is likely to reverse it (just as Tony Abbott didn’t hesitate to abolish Labor’s carbon tax and mining tax).

Many punters are convinced both sides of politics have been bought by big business, leaving the little guy with no hope of getting a fair shake from governments.

But that view’s likely to recede as both sides see the downside as well as the upside of keeping in with generous donors. This may be the best hope we’ll see of both sides agreeing to curb the election-funding arms race.

I’m expecting more customers for my argument that, in a democracy, the pollies care most about votes, not money. If they can use donations to buy advertising that attracts votes, fine. But when their association with donors starts to cost them votes, they re-do their calculus.

The abuse of union power during the 1960s and ‘70s – when daily life was regularly disrupted by strikes, and having to walk to work was all too common – left a distaste in voters’ mouths that lingered for decades after strike activity fell to negligible levels.

This gave the Libs a powerful stick to beat over Labor’s head. Linking Labor with the unions was always a vote winner. Every incoming Coalition government – Fraser, Howard, Abbott – has established royal commissions into union misbehaviour in the hope of smearing Labor.

But the anti-union card has lost much of its power as the era of union disruption recedes into history. The concerted efforts to discredit Julia Gillard didn’t amount to much electorally, nor this government’s attempt to bring down Bill Shorten.

From here on, however, the boot will be on the other foot. It’s big business that’s on the nose – being seen to have abused its power – and it is being linked with big business that’s now likely to cost votes.

All this change in the political and policy ground rules just from one royal commission, which may or may not lead to prosecutions of bank wrongdoers?

No, not just that. This inquiry’s revelations come on top of the banks’ longstanding unpopularity with the public and the long stream of highly publicised banking misbehaviour running back a decade to the aftermath of the global financial crisis.

And the bad story for banks, fund managers and investment advisers piles on top of continuing sagas over the mistreatment of franchisees and a seeming epidemic of illegal underpayment of wages to young people and those on temporary visas.

That’s not to mention the way fly-by-operators rorted the Vocational Education and Training experiment, ripping off taxpayers and naive young people alike, nor the mysterious way the profits of the three companies dominating the national electricity market at every level have blossomed at the same time retail electricity prices have doubled.

Times have become a lot more hostile for business, and only a Pollyanna would expect them to start getting better rather continue getting worse. Should weak wage growth continue, that will be another factor contributing to voter disaffection.

Why has even the Turnbull government slapped a big new tax on the banks, tried to dictate to the private owner of Liddell power station and now, we’re told, plans to greatly increase the petroleum and gas resource rent tax?

Take a wild guess.

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