A REVIEW OF CURRENT AUSTRALIAN ECONOMIC POLICY

The main reason for reviewing the present state of economic policy is, of course, the election of the Abbott government in September 2013. Often a new government will introduce a new approach to economic policy, with the rationale for the changes spelt out in the first set of budget papers following the election. But the explanatory material in this year’s budget papers was little different from previous years. From this I deduce that, at the level of macroeconomic policy, the differences between the old and new governments are more rhetorical than actual.

If this judgement surprises you, it’s probably because you’re thinking not about macro policy as such but about the nature of the measures announced in the 2014 budget and who they would affect. The Year 11 course tells us all budgets affect the economy in three different ways: first, the effect on demand (ie macro management), second, the effect on the allocation of resources (ie microeconomic policy) and, third, the effect on the distribution of income (ie fairness or equity). This year’s budget was the classic example of a budget that needed to be analysed by dividing issues into that three-part framework to make sure people’s reactions to the budget didn’t get muddled up. Teaching your students to discipline their thinking about the budget in this way is good training in how to analyse issues logically.

Looking beyond straight macro management, the Abbott Coalition government’s policy preferences are obviously quite different from the Labor government’s in various respects, and those differences are now far clearer than they were before the election. They’re the preferences you’d expect of a Coalition government, though the measures proposed in the budget were harder-line than anything from the Howard government. Some may be tempted to regard this as an ‘ideological’ government, but all politicians (and all economists) have ideology in their kitbag and it’s not a label I’d apply.

If this was a highly ideological government there would be far more written expositions of that ideology than there have been. I certainly wouldn’t accuse the government of being dominated by the doctrines of economic rationalism. Some of its proposals may seem to fit that label but, as we will see, many don’t. No, I think this is a prime minister and government more of strong likes and dislikes, friends and foes. So many of its actions depart from the principles of economic rationalism to benefit particular big businesses - the miners, the banks, the coal-fired power generators. And the government is not above a little agrarian socialism at the behest of its National Party colleagues.

MACROECONOMIC POLICY

Monetary policy

The Abbott government has affirmed its commitment to the existing ‘framework’ for monetary policy. Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. It has been assigned the objective of achieving internal balance. The 2012 budget papers said monetary policy plays ‘the primary role in managing demand to keep the economy growing at close to capacity, consistent with achieving the medium-term inflation target’. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over the cycle. The primary instrument of monetary policy is the overnight cash rate, which the RBA controls via market operations.

Fiscal policy

Similarly, the 2014 budget papers give no reason to believe there has been any change to the framework in which fiscal policy operates. Fiscal policy - the manipulation of government spending and taxation in the budget - is conducted according to an unchanged medium-term fiscal strategy: ‘to achieve budget surpluses, on average, over the medium term’. The 2012 budget papers nominated a new and different role for fiscal policy: ‘the primary objective of fiscal policy is to maintain the budget in a sustainable position from a medium-term perspective’. That is, the primary objective of fiscal policy is now maintaining ‘fiscal sustainability’.

However, it has also been made clear the budget retains an important role in assisting monetary policy achieve internal balance. How? By allowing the budget’s automatic stabilisers to be unimpeded in doing their job of helping to stabilise demand as the economy moves through the business cycle. The stabilisers bolster aggregate demand when private demand is weak and restrain aggregate demand when private demand is strong. The latter process is known as ‘fiscal drag’ - which is, of course, a helpful thing when you’re trying to keep the growth rate stable. You would never hear Mr Hockey using those Keynesian terms, but it’s still how fiscal policy is expected to work under this government. And the 2014 budget is clearly consistent with it.

This year’s budget papers do set out a Budget repair strategy, which is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023-24, consistent with the medium-term fiscal strategy.

The repair strategy sets out that:

• new spending measures will be more than offset by reductions in spending elsewhere within the budget;

• the overall impact of shifts in receipts and payments due to changes in the economy will be banked as an improvement to the budget bottom line, if this impact is positive; and

• a clear path back to surplus is underpinned by decisions that build over time.

The Budget repair strategy will stay in place until a strong surplus is achieved and so long as economic growth prospects are sound and unemployment remains low.

The 2014 budget

 Mr Hockey’s first budget was quite remarkable and absolutely fascinating for a connoisseur of budgets like me. So I’m going to describe it as it was delivered and intended to be enacted, even though we know that various of its more controversial measures have been abandoned or modified in their passage through the Senate, while some - the $7 GP co-payment, the changes to university fees - remain in limbo.

The most notable feature of the budget as planned was that it was our first ‘decadal’ budget. The government continued Labor’s recent practice of publishing not just the figures for the budget year and the forward estimates for the following three years, but also projections of the budget balance out 10 years on the assumption of unchanged policies. The projection to 2024-25 showed that the measures announced in the budget could be expected to return the budget to balance in 2018-19 and to an ever-growing surplus of more than 2.5 pc of GDP by 2024-25. However, this assumed 10 years of unrelieved bracket creep. If instead the growth in tax collections was capped at 23.9 pc of GDP from 2019-20 by means of tax cuts, the surplus would still reach a healthy 1.4 pc in 2024-25.

So, the budget announced measures which, though many didn’t take effect until the 2017 budget following the next election, and others would take years before their effect on the budget became significant (eg the restoration of indexation of fuel excise), would get the budget firmly back on track over the coming decade and do it in just one go. Our first ever ‘decadal’ budget. It was the budget of an incoming government, confident of its ability to stay in office for ages. A budget with high political costs up front, but a big payoff way into the future.

How was this remarkable feat to be achieved? Mainly through fiddling with indexation arrangements, adjusting them in any way that favoured the budget. Few people noticed how obsessed this budget was with indexation. It proposed to change the indexation of pensions from average weekly earnings to the CPI, it reduced the indexation of grants to the states for public schools and public hospitals, it paused the indexation of certain family benefits, it changed the indexation of overseas aid from gross domestic income to the CPI, it changed the indexation of HECS debt from the CPI to the long-term bond rate and it restored the indexation of fuel exercise.

As well as all these indexation adjustments the budget proposed to increase the user charges for pharmaceuticals and university students, plus the new $7 co-payment for GP visits and tests. So the budget isn’t about cost cutting so much as cost-shifting: to people on pensions, to the young jobless, to university students, to the sick and, to the tune of $80 billion, to the states. Some opponents of the GP co-payment are referring to it as the ‘GP tax’. This is simply wrong, but it gives you the opportunity to make sure your students understand the difference between a tax and a user charge.

Budget’s effect on demand

From a macro management perspective, the budget had three key features:

1) A slow pace of fiscal consolidation. The new measures and revisions to forecasts were expected to improve the budget balance by just $4 billion in the budget year and by $7 billion in each of the following two years, but by $26 billion in 2017-18. This slow start was intended to avoid the budget having a dampening effect on growth while the economy was expected to be growing at a below-trend rate.

2) A switch in the composition of government spending. While spending on transfer payments leading to consumption was reduced, spending on infrastructure investment was increased by $12 bil. Half of this was spent on an ‘asset recycling initiative’ intended to encourage the states to increase their own infrastructure spending. The goal was to help fill the vacuum left by the fall in mining investment.

3) Headroom for tax cuts. The government’s 10-year budget projections assume that tax revenue is capped at 23.9 pc of GDP (the average level between 2000 and 2008) after 2019-20, with spending cut so hard that budget surpluses are still projected to reach 1.5 pc of GDP in 2024-25. The cap is intended to make room for tax cuts to counter the effect of bracket creep.

So, clearly, this was not a highly contractionary budget. Indeed, in terms of the first two or three years it wasn’t contractionary to any significant degree. The contraction was designed to come only after the economy was expected to have returned to above-trend growth. Thus no matter how much people may object to some of its measures, it’s quite wrong - quite ignorant - to describe the budget as pursuing a policy of ‘austerity’. Austerity doesn’t mean acting to improve the budget balance (the term for which is ‘fiscal consolidation’), it means doing so while private demand is still very weak and thus running a high risk that efforts to reduce the deficit backfire and actually make it worse. This is just what Mr Hockey tried not to do.

When the mid-year review is published in December, we will see the effect on the projected budget balance of those budget measures the government has been obliged by Senate opposition to modify or abandon (although those it has yet to put up to the Senate may remain in the forward estimates). We also know that greater-than-expected falls in export commodity prices and low wage growth will necessitate a continuation of the downward revisions to budget revenue estimates than became so frequent under the previous government. We also know that, consistent with his rejection of austerity policy, Mr Hockey will not announce further budget savings intended to offset the effect of the downward revisions to revenue. So the budget’s return to surplus will now be even later than projected at budget-time.

It’s clear that, despite all the Coalition’s criticism of Labor while in opposition, and its various promises to get the budget back to surplus much earlier than Labor could, it’s not having much success, and this does not seem to worry it greatly. The measures it proposes may be very different to those Labor would propose, but its approach to fiscal policy turns out to be remarkably similar to Labor’s.

Budget’s effect on allocation

Viewed as an instrument for raising allocative efficiency - as a vehicle for microeconomic reform - the budget was not an impressive document. Its proposed measures did a lot to shift costs from the federal budget onto state budgets and household budgets, but little to raise the efficiency of government spending. Far from increasing spending on preventive health programs (with beneficial effects on employment, wellbeing and the budget) it cut such spending.

The budget could have done a lot to reduce distorting subsidies to business (‘business welfare’) but, apart from eliminating subsidies for the production of ethanol, it didn’t. Its real cuts to public school funding and eventual discontinuation of spending on the Gonski equity program may well have the effect of reducing the employability, skills and productivity of disadvantaged young people. While many economic rationalists believe imposing a $7 user charge on previously ‘free’ (bulk-billed) doctor visits and tests would reduce their unnecessary use, empirical studies suggests it would do more to discourage poor people from seeing a doctor when they needed to than to discourage frivolous visits.

Many economic rationalists believe that deregulating university fees would eventually do a lot to force greater efficiency on universities. But this is debatable because the market in which the universities would operate is far from perfect. They would remain government-owned and regulated and they enjoy a degree of monopoly in granting access to the best jobs in the labour market.

Budget’s effect on distribution

The budget was widely judged by the public to be unfair, even by people who themselves weren’t greatly affected by it. It was seen that poor people would be hit a lot harder than the better-off. This was, in fact, an almost inevitable consequence of the government’s unusual decision to return the budget to surplus largely by cuts in spending rather than increases in taxes. This is because our system of tightly means-tested transfer payments comes on the spending side, whereas various questionable ‘tax expenditures’ - such as the superannuation tax concessions, negative gearing, family trusts and the 50 pc discount on capital gains - heavily favour high income-earners.

The plan to withhold access to the dole to people under 30 for six months would clearly have hit low income-earners. The $7 co-payment would be regressive. Because we measure relative poverty, the plan to index age, invalid and sole-parent pensions to the CPI rather than average earnings, would cause the rate of pension payment to fall over time below the poverty line.

Even without any increase in the level of university fees, the proposal to index HECS debt to the government bond rate rather than the CPI - that is, to impose a real interest rate on the debt - would leave people who didn’t complete their degrees and those with breaks in their full-time employment (particularly married women) with significant levels of debt and interest charges. The HECS scheme was designed to allow students to be required to pay a proportion of the cost of their tuition in an equitable way, but this would rob the scheme of much of its fairness.

By contrast, I believe the proposal to deregulate uni fees, which would no doubt permit significant increases in those fees over the years, while being highly unpopular, would be a progressive rather than regressive measure. Why? Because the great majority of uni students come from well-paid homes and go on to themselves have well-paid jobs. Those who attended the higher-status sandstone universities would be obliged to pay a lot more for that status.

It’s important to note that, though the government’s rhetoric focused on getting savings from the spending side, in truth a high proportion of the projected improvement in the budget balance would come from the revenue side. That’s not just because of the temporary ‘deficit levy’ imposed on high earners nor the restoration of fuel excise indexation, but because the budget projections imply six years without another income-tax cut and thus six years of bracket creep. And it’s worth remembering that the particular shape of our tax scale at present means bracket creep is regressive, hitting low income-earners proportionately harder than high earners.

Over the years I’ve seen incoming Coalition governments bring down some pretty unfair initial budgets without drawing much public outcry over that unfairness. Why was the reception to this budget so different? Partly because the treatment of the young unemployed was so obviously excessive. But also because I never expected to see a government of any colour getting so tough with age pensioners. When a Coalition government gets tough with the aged it’s getting tough with its own heartland. The same goes for its plan to permit big increases in university fees and debts. Remarkable politics.

MICROECONOMIC POLICY

One of the ways the Coalition kept itself a ‘small target’ in the 2013 election campaign was to avoid promising controversial reforms in key economic policy areas by promising to establish inquiries and take any reform proposals arising from those inquiries to the next election. There is a belief among politicians that it’s easier to bring about reforms from government than from opposition. As yet, few of those inquiries have delivered their final reports and had the government announce which of their recommendations it was accepting. So it is too soon to have a clear picture of how reformist the Abbott government has proved to be, how rationalist it is and how brave it is. Although the initial signs haven’t been encouraging, it’s not yet clear whether it is pro-market or just pro the interests of influential industries.

Even so, while it waits for the many inquiry reports the government has been getting on with keeping its election promises. It has succeeded in abolishing the minerals resource rent tax and the carbon tax/emissions trading scheme. It has claimed that this will lead to faster economic growth, but it’s hard to take such claims seriously. It has sought considerable publicity for its red-tape-cutting ‘repeal days’, but though some of these measures are genuine, much is window-dressing.

Throughout its term the Labor government had been negotiating free-trade agreements with South Korea, Japan and China, without much sign of progress. The new trade minister was given the task of completing those agreements within his first year, and he completed it within about 14 months. The agreements with Korea and Japan will deliver modest gains in market access to certain categories of Australian agriculture, but the surprise agreement with China involves wide-ranging cuts in Chinese tariffs and other trade restrictions, making it a far more significant advance.

The interim report of the inquiry into competition reform, chaired by Professor Ian Harper, implied than various competition-promoting changes would be recommended, but we have yet to see his final report and the government’s response to it.

The interim report of the inquiry into financial regulation, chaired by David Murray, drew a favourable reaction from economists but, again, it’s too early to be confident of what will finally emerge from it. In the meantime, the government has sought to water down the consumer protections in the Labor government’s Future of Financial Advice legislation in response to pressure from the big banks and insurance companies, but the Senate has reversed its initial support for the government’s changes.

The Coalition has yet to initiate its promised inquiry by the Productivity Commission into industrial relations. The delay reinforces suspicions Mr Abbott has little enthusiasm for radical reform, particularly anything his opponents could portray as an attempt to restore Work Choices. And, assuming he will take proposals for controversial reform in some policy area into the 2016 election, by this stage he may be keen to ensure he isn’t fighting on too many fronts.

Mr Abbott is also yet to initiate the promised inquiries into tax reform and federalism, which he has linked. In a recent speech on federalism he raised the possibility of tax reforms, ‘including changes to the indirect tax base’, calling for ‘mature debate’ and ‘rational discussion about who does what’. He wants to reverse the creeping centralisation, reaching a rational division of roles that would make each level of government ‘sovereign in its own sphere’. I find it hard to believe the federal government could ever reach an agreement with the premiers on a more rational division of responsibilities.

And though Mr Abbott’s remarks imply that, as part of a wider tax reform package, he’d support a joint plan to increase collections from the (withering) GST and give all the proceeds to the states, such joint agreement - virtually all premiers supporting a more onerous GST - is hard to imagine. Apart from that, the arithmetic isn’t adding up. Mr Abbott has stressed that any reform package including a higher GST would not involve any increase in the tax burden overall. Mr Hockey says in the context of reform that the government ‘wants taxes that are lower, simpler and fairer’. In which case, it’s hard to see how raising GST collections could solve the budget-balancing problems of both the federal and state governments. And that’s before you remember that the Business Council and other vocal business advocates of tax reform have been hoping the proceeds from a higher GST would be used to cover cuts in the rate of company tax and/or the top personal tax rate. The path to a tax reform package that even the government and influential lobby groups could agree on, to then put before voters, at an election is long and rocky.

We will have a clearer idea this time next year, but it won’t surprise me if, in practice, the Abbott government proves to be much less radical than its rhetoric to date has led many to expect.

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I’M OK - REFLECTIONS OF AN OFFICERS’ KID

Talk to Salvation Army Eastern Territory Historical Society, Bexley North, Thursday, March 13, 2014

I suppose before I head off down memory lane I should start by giving my testimony - testifying to my present state of grace (or lack of it). I’m no longer a practicing Salvationist, in fact I have to confess to being a backslider. I’d be lucky to get to one meeting a year, though I did go to the Commissioning a few Sunday mornings back.

But my beliefs and values remain heavily influenced by my Army upbringing, and I think this influence isn’t hard to detect in my work at the Herald. The social values you find reflected in my columns are, I hope, Christian moral values. I suppose in some ways what I am is a Christian fellow-traveller. I have a lot of Christian friends. The evangelicalism of the Sydney Anglican diocese means there are a lot more active Christians in positions of power around this town than a Sally may imagine (though the governor of the Reserve Bank, Glenn Stevens, is a devout Baptist). I feel at home in the company of Christians, I feel I know where they’re coming from, and I can trust them. I have high expectations of honesty and decency from people who profess to be Christians, and I rarely feel let down. It never ceases to amaze me that people who have no experience of professing Christians have no expectation of them being any more truthful or trustworthy than anyone else - that is, not very. ‘I tell the odd lie to get myself out of trouble, doesn’t everybody?’ Well, not anyone brought up by my parents.

One noteworthy Anglican layman who’s had a big influence on my thinking in recent years is Michael Schluter, founder of Britain’s Relationships Foundation. Schluter believes his emphasis on the importance of the ‘relational dimension’ of every aspect of our lives - our working lives, our business lives, even government policy - to be deeply scriptural, as I tried to demonstrate in a column I wrote last Easter Monday. In recent years Easter Monday has become the time when this backslider/fellow traveller offers a little sermon to his readers. What I do know is that the effect of their actions on people’s relationships is often the last thing on the minds of our business people, economists and politicians, even those pollies prone to making speeches about The Family.

Another Christian who’s had a big influence on my thinking is an American preacher called Ched Myers, an exponent of ‘sabbath economics’. I wrote about sabbath economics the Easter Monday before last. I can boil it down to this: when you look at all the things Jesus is quoted as having said in defence of the poor, and all the things he said in criticism of the rich - when you go right through the New Testament adding up all the quotes - maybe, just maybe, he meant what he said. Maybe those who follow Jesus are required to be just as manically pro-poor and tough on the rich as he was. Maybe, as Myers alleges, the ever-more comfortable Christian church has spent most of the past 2000 years ‘reading down’ all Jesus’ anti-rich statements for fear of giving offence to too many well-off people in the congregation.

One of our songs says ‘the rich and poor as well, it doesn’t matter who’, but if you take Jesus at his word, he seems to be saying it does matter who, that there are different standards for the rich and the poor. In its early days, of course, this wouldn’t have been a problem for the Army. It worked among the poor, was largely composed of the poor, and was quite clearly pro-poor. But one of the consequences of righteous living - when you don’t waste money on drinking and smoking, don’t spend your life in pubs, don’t mistreat your wife and kids - is that you don’t stay poor. You give your kids a decent education and eventually your descendants become middle-class and respectable, even disapproving of all those poor people who don’t work as hard as they should and don’t spend their money wisely.

But I’d better get on with the reflections of an OK. The first thing to say is that I’m proud to have been an OK, proud of my parents and the lives they lived, and happy for the world to know where I come from. I think the advantages of being an OK far outweighed the disadvantages. In fact, I can’t think of any significant disadvantages. It’s true we had to move every two years, and that this meant I ended up going to five primary schools and three high schools but, apart from it meaning I retain few if any friends from my school days, I don’t think my continual changing of schools - including a shift from the NSW school system to the Queensland system and back again - did me any harm. And I don’t know of any OK who does believe they were disadvantaged by all the moving. The attitude of modern parents that changing their kids’ school would a terribly damaging thing to do leaves me nonplussed. Admittedly, the Army always moved us before the start of the new school year, never in the middle of the year, so that would have helped reduce disruption. It did, however, mean I had to spend most of every second Christmas holidays packing, and I didn’t much enjoy that. Of course, OKs don’t know anything other than the peripatetic life and so take all the moves in their stride, whereas moving homes and schools would come as a shock to a lot of normal kids.

In my job at the Herald I did spend about 15 months in Canberra before I was married, but I’ve never wanted to move from Sydney, never hankered after a foreign posting as so many journos do. Once married, we stayed in our ‘ideal first home’ at Redfern for seven years, before moving to our present home in Glebe, where we’ve lived for almost 30 years, even though we could have afforded to trade up to a better one, as so many people do. Sometimes I wonder if my desire to stay anchored in the same place - and know a lot of the people in my suburb - is a reaction against all the moving I did as a boy. On the other hand, my father stayed ‘working’ for the Army for 45 years before he retired, and I’ve stayed working for the Herald for 40 years and counting, never really wanting to change papers. That bit I guess I get from my father.

If I can’t think of any great disadvantage of being an OK, what were the advantages? Well, obviously, my Christian upbringing and, though you could argue every soldiers’ kid got the same Army upbringing, I’d argue officers’ kids got an extra-strong dose. As the children of corps officers we probably attended a wider range of meetings and missed fewer of them than many solders’ kids. Because the corps my father commanded were so pathetically small, my siblings and I had to play a much bigger part than many of the comrades’ kids. Every Army kid learns to speak in public, but I did a lot more public speaking than most, giving my first speech when I was eight. Being a confident public speaker has helped me a lot in my job, and I do a lot more speaking than most journos do.

Because our corps were so small, we had to help in the family business, so to speak, just as shopkeepers’ children have to help in the shop. I remember many times standing in open air meetings in the suburbs of Newcastle with just my mother, my sister and me - singing, speaking, praying - while my father collected from the nearby houses. Whenever my father called for a volunteer to pray in the morning meeting, I’d open my eyes and look at Dad, knowing that if no one volunteered, he’d nod to me and I’d pray. Loyalty was a very big thing in my family. When I was in my last year at Newcastle University, I remember thinking that, even if I’d become an atheist, I’d still have come along to meetings and backed up my father whenever he needed it.

In a small corps we’d sometimes have a ‘social’ (what other people would have called a dance) on a Saturday night. Everyone would have a great night and go home. After they’d gone, someone would have to stay behind and sweep out the hall ready for the meeting next morning. That someone would be my father and his kids. What I learnt from being the kid of officers of a small corps was to accept ultimate responsibility for keeping the show - any show - on the road. Not a bad thing to learn.

I think I learnt a lot from my father’s attitude to his boss, the divisional commander. My father never questioned his boss’s orders, never questioned his judgment, never doubted his good intentions. My father was pro-boss. I’m not quite so unquestioning, but I’m pro-boss, too. I’ve always trusted the long succession of editors I’ve worked for to give me a square deal, to speak to me honestly and to keep their promises. I can think of only one occasion when I was let down. In contrast, many journos will tell you editors aren’t to be trusted and will promise you things without any intention of keeping their promise. My theory is that bosses, like children, tend to conform to your expectations of them. If they can see in your eyes that you trust them, they won’t disappoint you; if they can see in your eyes you don’t believe them, your expectations will be self-fulfilling. As an OK I’ve tried to be scrupulously honest with my bosses (and with those working for me), with one exception: because pay rises tend to be so dependent on job offers from rival employers, I’ve sometimes professed to be keener to take up an offer than I really was.

Although I know I’m not still a real Salvationist, I am a cultural Salvationist and I’d never think of putting myself down on the census as anything but Army. Actually, with its uniforms and ranks and other aspects of the military metaphor, as well as its open air meetings and brass bands it’s more of a sub-culture. The Army with all its meetings and sections also takes over a large part of your life, not leaving much room for other interests. It has all the hallmarks of a sect - save for the fact that its doctrines are so much a part of the protestant mainstream, apart from its rejection of the sacraments. If you’re an officers’ kid you get an extra strong dose of the sub-culture, so strong it never leaves you. You can take the boy out of the Army, but you can’t take the Army out of the boy.

As a boy I was very conscious that I came from a weird religion. Whenever my own kids complained about being embarrassed by their parents I’d say, until I turn up at your school wearing a uniform from the Crimean war, you don’t know what embarrassment means. Once I was at the airport seeing off my daughter, whose school orchestra was embarking on what it called an ‘international tour’ of New Zealand. She pointed out a girl and her father who, she said, was an Army officer. He was in civvies. My father’s uniform was his witness; except when he was on furlough, he wouldn’t leave his front door except in uniform. And I never went on school excursions. I knew my parents couldn’t afford them, so avoided embarrassing them by never asking. That morning at the airport it was all I could do to stop myself going over to the officer and asking him if he needed any help paying for his daughter’s trip. I give almost all my donations to overseas aid - including a few Army projects, such as those of the amazing Nesan Kistan - but I realised that day that OKs were my favourite charity. If you know of officers with that problem, put us in touch.

My perception of the Army’s weirdness could have left me with a burning desire just to be normal like everyone else. It didn’t. Perhaps because of my father’s personal eccentricities, it left me with a desire to be a lot more interesting than normal. Paddy McGuinness, of the Financial Review, who always dressed in black, taught me that an ambitious economics editor uses his clothing to draw attention to himself. I haven’t hesitated to follow his example. I guess I have been more ambitious than the average journo. Where did I get that from? It certainly wasn’t from my father: to the unending disappointment and frustration of his DCs, he wasn’t the tiniest bit ambitious. Nor was my mother. So where did it come from? I suspect it came from me attending divisional functions in Newcastle. The corps I came from were so small there were no boys of my age, so at divisional functions everyone had mates except me. I think I determined then that one day I’d show them I was a somebody, not a nobody.

A few years ago I attended a conference at Sydney University put on by the political economy department. They were a lot more left wing than me and I wasn’t very comfortable. There was an old gent sitting up the back and eventually he got up and aired his novel views on how to fix the economy. The others were a bit embarrassed by this oddball, and dispensed with him pretty curtly. Later my conscience smote me. I knew who the old codger was, he was perhaps the only surviving specimen of the same genus as my father, Major Ivan Unicomb - Joy Inglis’ dad - and I’m pretty sure he knew who I was. I should have stood beside him and made him feel welcome, but I didn’t.

What does much to make the Army a sub-culture, one you never really escape, is the music. The bands, of course, the songsters and all the old songs and choruses. When you spend the first 24 years of your life singing them in meetings and prayer meetings before the benediction, they never leave you. And they never lose their power to move me - often almost to tears. I have a lot of Army CDs, of which my favourite is one with the songs of Albert Orsborn. My favourite website is SalvoAudio. Many’s the night I sit up writing my column, listening to Tom Quick from Canada’s latest program of Army band music. I keep a copy of the old song book on my desk so I can check the words of a song and sing along.

Some years ago I spoke at a pre-election meeting of ACOSS - the Australian Council of Social Service - peak body for organisations doing social work, including the Army. Two officers from THQ were there, but they didn’t know who I was. For some reason I referred to John Stone’s contemptuous reference to ACOSS and its members as ‘the compassion industry’. I thought I’d make the officers sit up by adding that, where I came from, we used to sing: ‘Except I am moved with compassion, how dwelleth thy Spirit in me?’ But I didn’t say it because I knew I couldn’t have without getting emotional.

These days only the old would look at my surname in the paper and say I had to be some kind of Sally, just as every musician whose first name is Bram - or last name is Terracini - has to have an Army background. But, for the record, let me tell you that of my father’s 13 siblings, three of his brothers and three of his sisters also became officers, and six of my cousins are officers.

It may have changed but, in my day, the Army was into managing by ‘metrics’ long before it became fashionable in big business. Corps officers’ performance was judged primarily by their statistics - by the number of people attending meetings. Usually lacking a sergeant-major, my father would count and record the number of people over 12. Every year or two the DC would hold an inspection, when the statistics were reviewed. Oversimplifying it, if your figures were up on your predecessor’s you were likely to be moved to a bigger corps; if they were down, you were likely to be moved to a smaller one, preferably in another division.  My father’s figures were almost always down; his successive corps were smaller and smaller. There were ways to massage the stats by holding extra meetings, or inviting a band to visit, but my father neither knew nor cared about these tricks. A successful CO knows how to keep his meetings entertaining, with good music and lots of emotion, happy singing and clapping, hallelujah windups and so forth. My father - who was the most saintly person I ever expect to meet - wasn’t musical and didn’t know how to jolly people along. I remember George Carpenter doing an inspection at the quarters in New Lambton. My father’s attendances were down and he couldn’t make his bank reconciliation statement balance. George - who was hardly more numerate than my Dad - couldn’t make it balance either. It went on for hours, George got angrier and angrier and ended up tearing strips off my father. Dad hardly slept for the next week. I’m sure my father soon forgot and forgave George, but I didn’t.

I understand that officers aren’t shifted as often as they were when I was an OK, but that makes me wonder why the Army persisted with the practice for so long. My father never for a moment doubted the Army’s contention that all the ‘farewell and marching orders’ he received were the will of God. But after I left home I could see a far more humanistic interpretation. Once a year all the DCs in the territory would hold a meeting that was like a kind of poker game in which they tried to keep their most successful COs, while palming off on another DC their least successful COs, starting with my father. This explains why my father was so often moved from division to division.

In recent years, however, another, happier thought has occurred to me. I see now that every time my father asked his DC for special consideration, he got it. My mother, a North Queenslander, hated the winter cold of inland country towns. This was why we were moved from Albury and, later, Bathurst, after only a year. My father was allowed to stay at Cessnock for three years so my brother could do the Leaving at the same school. When he won a bursary for Sydney University we were moved to Sydney and kept there until he graduated. When we returned to Newcastle, the city of my birth, I went off to Newcastle Boys High and decided that three high schools were enough. I asked my father to ask the DC to let us stay around Newcastle so I could complete my schooling at Newcastle Boys. As it happened, we stayed in the Newcastle division long enough for me also to spend four years at Newcastle University.

My teenage years in Newcastle were my most devout. I became leader of the Inter School Christian Fellowship at school and was active in the Evangelical Union at uni. I helped set up a branch of the Salvation Army Students Fellowship in Newcastle, and then became secretary of the StudFlip (as my mother call it) in Sydney. For some years my ambition was to become an officer. I’d become an accountant partly because my father was in awe of those officers who didn’t have to struggle with their bookwork like he did. But eventually I realised my reason for wanting to be officer was hardly what could be called a calling. I’d been watching my father’s performance closely and critically for some time. I wanted to become an officer to prove that, though he hadn’t figured out what you had to do to be a successful CO, I had.

Later, in 1972, when I’d finally become qualified as a chartered accountant but also had become disillusioned with it, and just before I embarked on the path that led me to the Herald, I wrote to the Commissioner, Hubert Scotney, offering to become an accountant at THQ, with little concern about how much I was paid. Scotney lost no time in declining my offer. The last thing he would have wanted was one of those trouble-makers from the Students Fellowship inside the headquarters tent. My past 40 years may have been very different had he accepted that offer.

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Compulsory super without protections is a rip off

A few weeks ago, when I offered my list of our top 10 economic reforms of the past 40 years, I was surprised by the number of people arguing I should have included compulsory employee superannuation in the list. Really? I can't agree.

It is, after all, merely a way of compelling people to save for their retirement. That's probably no bad thing in principle, countering our all too human tendency to worry excessively about the here and now and too little about adequate provision for our old age.

But compulsory saving hardly counts as a major reform. I suspect some of my correspondents see it as a boon for workers because it extracts a benefit from employers over and above the wages they're paid.

If so, they've been misled by appearances. Economists are in no doubt it all comes out in the wash: that when the government obliges employers to contribute to workers' retirement savings, the employers eventually make up for it by granting smaller wage rises than they otherwise would have.

It's true that compulsory super contributions - and the subsequent earnings on them - attract tax concessions, being taxed at a flat rate of just 15 cents in the dollar. But while upper income-earners do disgracefully well out of these concessions, people on incomes around the average gain little advantage, and those earning less than $37,000 a year gain nothing. Hardly sounds fair to me.

My other reservation about compulsory super is the way it compels employees to become the victims of the most shamelessly grasping, overpaid industry of them all: financial services. These are the people who made top executives and medical specialists feel they were underpaid.

Compulsory super delivers a huge captive market for the providers of investment services to make an easy living from and for the less scrupulous among them to prey upon. The pot of money the government compels us to give these people to manage on our behalf has now reached $1.6 trillion.

Most of us have little idea how much these people appropriate from our life savings each year to reward themselves for the services we're compelled to let them provide to us - and little desire to find out.

We should be less complacent. For many workers it's more than we pay for electricity each year. Think of it: we put so much energy and passion into carrying on about the rising price of power - and Tony Abbott used our resentment to get himself elected - while the men in flash suits dip into our savings without most of us knowing or caring.

To be fair, industry super funds dip into our savings far more sparingly than the profit-driven "retail" funds backed by the big banks, insurance companies and firms of actuaries. Since most workers do have a choice, you'd need a very good reason not to have your money with an industry fund.

But even this worries me. It means the union movement - the people whose job is to protect workers by being full bottle on the tricks the finance industry gets up to - has divided loyalties. Those who should be holding the industry to account are also part of it.

For years the industry campaigned for an increase in the super levy of 9 per cent of salary, arguing it was insufficient to provide people with an adequate income in retirement. This is a dubious argument, rejected by the Henry taxation review.

But look at it another way: here is a hugely profitable industry arguing the government should increase the proportion of all employees' wages diverted to the industry for it to take annual bites out of before giving us access to our money at age 60 or later.

This is classic rent-seeking. The Howard government was never tempted to yield, but as part of the Labor government's mining-tax reform package, it agreed to boost compulsory super contributions to 12 per cent by 2019. Why? I don't doubt Labor was got at by the union end of the financial services industry.

Contributions increased to 9.25 per cent last July, but the Abbott government came to power promising to defer the phase-up for two years. I'd lay a small bet this deferral will become permanent - though probably not before contributions rise to 9.5 per cent on July 1.

I wouldn't be sorry to see the phase-up abandoned. The Henry report recommended against it, arguing that action to reduce the industry's fees could produce a similar increase in ultimate super payouts. And it's doubtful that low income earners are better off being compelled to save rather than spend their meagre earnings.

The government's policy of compelling workers to hand so much of their wages over to the finance industry surely leaves the government with a greater-than-normal obligation to ensure the industry doesn't exploit this monopoly by misadvising and overcharging its often uninformed customers.

This - along with the millions lost by investors in Storm Financial and other dodgy outfits - prompted Labor's Future of Financial Advice reforms, which focused on prohibiting or highlighting hidden commissions and requiring advisers to put their clients' interests ahead of their own.

But now Senator Arthur Sinodinos is seeking to water down these consumer protections in the name of reducing "red tape". The financial fat cats live to rip us off another day.

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More privatisation will help fix the economy

I have no sympathy for those who take an ideological approach to the privatisation of government-owned businesses, whether they support all selloffs because governments are always inefficient or oppose all selloffs because the private sector can never be trusted.

No, each proposal should be judged on its merits - with a lot of boxes to be ticked before privatisation is justified.

Even so, it seems likely we'll see a fair bit of privatisation in coming days - particularly at the state level - as part of Joe Hockey's efforts to get his budget back in the black while avoiding having a contractionary effect on economic activity and, indeed, while ensuring the economy accelerates to the point where we get unemployment down again.

What squares this circle is staggered savings in the recurrent budget combined with increased spending on public infrastructure. Though it's getting late, a surge in infrastructure investment would also be a good counter to a possible collapse in mining investment over coming years.

While only Hockey's former scaremongering about supposedly soaring federal debt stands in the way of the feds stepping up their own infrastructure spending, they prefer it to be done by the states.

Trouble is, those state governments that haven't already lost their triple-A credit ratings are on the edge of doing so should their debt grow. In an ideal world, the (discredited) ratings agencies could be ignored and told to do their worst. But in our imperfect world it's probably not such a bad thing that politicians worry so much about their ratings.

So how can the states do a lot more infrastructure investment without increasing their debt levels? By privatising existing businesses and reinvesting the proceeds in new infrastructure. This is what Hockey hopes to encourage.

One disincentive the states face is that, as well as paying them dividends, the businesses the states own in effect pay company tax to their state owners, whereas privatised businesses pay company tax to the feds.

Although he's yet to spell out the details, Hockey has signalled his willingness to overcome this disincentive by passing that tax revenue back to the states.

On the face of it, the prospect of more state privatisations suffered a setback last week when the ACCC effectively vetoed the NSW government's plan to sell Macquarie Generation, the state's largest power producer, to AGL, one of the state's three largest power retailers. The commission judged that the deal would have resulted in a substantial lessening of competition in the electricity market.

This brings us to the first test of whether a proposed privatisation is in the public interest: it ought to involve an increase in competition within the relevant market and certainly shouldn't lessen competition.

Governments should resist the temptation to enhance the sale price of a business by adding to its pricing power, or sell off a natural monopoly without adequate regulation of its prices.

So it's a good thing the commission put its foot down. But, equally, it's a good thing NSW Treasurer Mike Baird expressed his intention to press on with plans to build up his privatisation recycling fund, and do so without selling any asset for less than its "retention value" to state taxpayers.

This raises the second test to be passed. The stream of dividends governments receive from the businesses they own (and are about to forgo) could easily exceed the saving in interest payments to be made from using the sale proceeds to repay government debt, unless the sale price is sufficiently high.

This is the main factor determining the business's retention value. To sell assets for less than that value is to put ideology ahead of the public interest.

Polling shows privatisation is greatly disapproved of by voters. But this is the punters wanting to have their cake and eat it. They demand better infrastructure, but don't want to pay higher taxes for the privilege, nor give up government services, nor see government deficits and debt build up.

Well, they can't have it both ways. And an obvious compromise is for governments to sell businesses for which there's no good reason for continued public ownership and use the proceeds to get on with meeting new needs.

It's notable that polling suggests such recycling deals attract significantly less voter disapproval. Note to diehard rationalists: hypothecation is the key to escaping the budget impasse.

But there's one last test to be passed to make such deals good economics: the new infrastructure's social benefits have to exceed its social costs. And public transport projects are more likely to do that than yet more motorways.

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Clear signs the economy is picking up

At last some good news on the economy. This week's national accounts for the December quarter show the economy speeding up and, in the process, starting its fabled "transition" away from being driven largely by mining investment.

The economy's medium-term "trend" rate of growth in real gross domestic product - the rate that holds unemployment constant - is thought to be 3 per cent a year. For much of last year the economy was seen to be travelling at only about 2.5 per cent, thus leading to a slow but steady rise in unemployment.

But this week's accounts from the Bureau of Statistics show real GDP growing by 0.8 per cent in the December quarter and by 2.8 per cent over last year. Applying a bit of judgment, we can say the economy is probably now growing at an annualised rate of about 2.8 per cent.

This isn't enough to stop unemployment rising - and we really need a period of growth well above 3 per cent to get the jobless rate heading back down to its own trend level of about 5 per cent - but it beats 2.5 per cent.

And, as I say, the accounts show reasonably convincing evidence the "rebalancing" of the economy - away from mining investment and towards the other sectors of the economy and sources of growth - is finally under way.

After quite a few quarters of weakness, consumer spending grew by 0.8 per cent in the quarter and by 2.6 per cent over the year. This strengthening is a bit of a surprise when you remember household disposable income is only crawling ahead, with no growth in employment and very low rises in wages.

Arithmetically, the explanation is a fall in the household saving rate from 10.6 per cent of disposable income to 9.7 per cent. But this ratio is volatile, so I wouldn't take it too literally. It's possible households have shaved their rate of saving - say, from the high 10s to the low 10s - but I doubt it signals a return to the low saving rates we saw in the couple of decades before the global financial crisis.

The second sign of rebalancing was long-awaited real growth of 1 per cent in spending on home building, including renovations. This is not unexpected considering the rises in established house prices and in the issue of local government building permits.

More recent "partial indicators" for the month of January confirm that consumption and home building have picked up. Nominal retail sales grew by a strong 1.2 in the month to be up 6.2 per cent on a year earlier. And residential building approvals rose strongly in the month to be up 34 per cent on a year earlier.

Public sector spending rose by 1.1 per cent in the quarter, contributing 0.3 percentage points to the overall growth of 0.8 per cent in real GDP. Most of this came from public infrastructure spending.

But now we get to the bad news. Most of the growth I've outlined so far was offset by a sharp fall in business investment spending, which dropped by 3.6 per cent.

Most of this decline is explained by a drop in mining investment as the investment phase of the resources boom comes to an end. It's now clear mining investment peaked about a year ago.

It was our knowledge that mining investment was about to fall back from the dizzying heights it reached that caused us to see the need for "transition" or "rebalancing" in the economy (plus a few other buzzwords I've forgotten).

But this brings us to the weak part in the transition so far. Although most of the fall in total business investment is explained by mining, it's clear investment spending in the non-mining sector also fell - which is not what the doctor ordered. Rough estimates by Kieran Davies, of Barclays bank, suggest it fell by 1.2 per cent in the quarter and by 7 per cent over the year.

So if most of the growth in domestic demand in the quarter was cancelled out by the fall in business investment, where did the overall growth in aggregate demand of 0.8 per cent come from? From the one place left: net external demand, otherwise known as "net exports" - exports minus imports.

The volume (quantity) of exports grew by 2.4 per cent in the quarter and by 6.5 per cent in the year, whereas the volume of imports fell by 0.6 per cent in the quarter and by 4.6 per cent in the year.
Put the two together and net exports made a positive contribution to overall growth of 0.6 percentage points in the quarter and 2.4 points over the year.

Why are exports growing so strongly? Mainly because of rapid growth in our exports of minerals and energy as new mines come on stream. Why are imports so weak? Partly because domestic demand has been weak, but particularly because of the fall off in mining investment, which involves a lot of imported equipment.

So the investment phase of the resources boom is coming to an end and leaving a hole in the economy, but the production and export phase of the boom is helping to fill the hole - helping to tide us over while the non-mining economy is getting back on its feet (to mix a few metaphors).

The resources boom's now favourable effect on net exports translates into a much lower current account deficit on our balance of payments. Whereas it used to get as high as 6 per cent of GDP in the old days, and averaged about 4.5 per cent, for the December quarter it was just 2.6 per cent.

Maybe the economy has a future after all.

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Job prospects not as gloomy as you may think

I can always tell when people are getting anxious about unemployment - including their own. It's when a journalist thinks they'll be increasing the sum of human knowledge by adding up the number of redundancies announced in recent weeks.

The latest list is Qantas 5000, Holden 2900 (by 2017), Toyota 2500 (by 2017), Forge Group 1470, Alcoa 980, Sensis 800, WA hospitals 250 and BHP Billiton Mitsubishi Alliance 230.

That's more than 14,000, we're told, and doesn't count the expected job loss among the makers of car parts, which "experts" put at between 25,000 and 50,000. To this you can add declining job opportunities among public servants - though no one seems to worry much about them.

There are two tricks in exercises such as this. The first is that although 14,000 or even 64,000 may seem huge numbers, they're not. Most people have no feel for just how big our economy is. Those figures have to be seen in the context of a total workforce of 11.5 million people, which grows by 170,000 in an average year, or more that 14,000 a month.

Most people have no idea how much turnover there is in the jobs market. Every month tens of thousands of people leave their jobs and a similar or bigger number take up new jobs. The economy is in a continuous state of flux.

The second trick is that the media only ever show us the tip of the iceberg. We're told about only a fraction of the things that happen. Only a fraction of them are announced to the media, so most of what happens goes unreported. And among all the things that are announced, the media select just a few of the juicier items to tell us about.

The items they select tend to be the bigger and badder ones. News that a new business has just hired 100 workers may get reported somewhere - probably in the local rag - but it won't get the trumpeting Qantas' announcement did.

So we're told about the big job losses but not the small losses and almost nothing about the job gains, big or small - even though we know from the official statistics that the gains usually outnumber the losses.

When people hear news reports about redundancies at this factory and that, many conclude we must be heading for recession. This time it ain't that simple. After a record 21 years since the severe recession of the early 1990s, we're overdue for another one and, with the economy quite weak at present, it wouldn't be impossible for us to slide into recession this year.

But the explanation for the planned job losses we're hearing so much about isn't a downturn in the economy, it's continuing change in the structure of the economy - the size of some industries relative to others.

Much of the pressure for structural change is coming from advances in technology, particularly the digital revolution. It's this that's turning the newspaper industry inside out - no one seems to shed many tears over us - and is in the early stages of cutting a swath through retailing.

In Qantas' case, it's still making the painful adjustment to the deregulation of airlines initiated by Jimmy Carter in the 1970s, combined with management incompetence and union intransigence.

But the biggest source of structural change is the resources boom and the likely permanent rise in the dollar it has brought about. People tell you it's all behind us, but when the mining industry's share of the economy doubles to 10 per cent in the space of a decade, the adjustment this imposes on the rest of the economy is profound and protracted.

Clearly, these forces for structural change are beyond the control of any federal government, Labor or Coalition. The truth so many people find so hard to accept is that there isn't a lot we can do about them except ride them out.

In its impotence, the Abbott government is claiming its plans to remove the mining and carbon taxes will be a great help. Only the one-eyed would believe that. Labor has sunk to the depths of attacking the government for its failure to protect Australian jobs and demands to see its "jobs plan". What's Labor's jobs plan? Maintain the handouts to crumbling industries.

It's seeking to exploit the fears of people who are uncertain about where it's all going to end. Well, last week Dr David Gruen, of Treasury, published projections of the various industries' shares of total employment in 16 years' time, 2030.

I must warn you these figures come with zero guarantee. Just because you're smart enough to turn the handle of an incomprehensible econometric model doesn't mean you know any more about what the future holds than the rest of us.

Surprisingly, the projections suggest manufacturing's share of total employment will decline by only a further 1 percentage point. Similar declines are projected in transport and warehousing, construction and (thankfully) financial services. The biggest relative employment decline would be in wholesale and retail trade.

Utilities, media and telecommunications, and, surprisingly, mining are projected to experience minor declines in their shares of total employment. Agriculture's share may rise by a percentage point, while that of education and health may rise by more than 1.5 points, and professional and administrative services by almost 3 percentage points.

We won't all be dead.

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We’ve become a nation of rent-seekers

In political economist Mancur Olson's pathbreaking book, The Rise and Decline of Nations, published in 1982, he argued that a country's economic stability ultimately leads to decline as it becomes increasingly dominated by organised interest groups, each seeking to advance their interests at the expense of others.

By contrast, countries that have a collapse of the political regime, and the interest groups that have coalesced around it, can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. Examples are the rapid growth of postwar Germany and Japan, as Wikipedia reminds us.

Professor Ross Garnaut has argued that Australia is unlikely to see another era of extensive micro-economic reform because of the growth in rent-seeking behaviour since the days of the Hawke-Keating government.

What these days passes for the political debate seems to be dominated by ''distributional coalitions'', in Olson's phrase, arguing for ''reforms'' from which the chief beneficiaries would be their good selves, or desperately opposing government reforms that would impose even the most modest sacrifice on their members.

What gets me is how blatantly self-seeking our lobby groups have become. It is as if the era of economic rationalism - with its belief that the economy is driven by self-interest - has sanctified selfishness and refusal to co-operate for the common good.

Another explanation may be the growth of a lucrative rent-seeking industry. These days far more people make their living lobbying for interest groups than did so in the 1980s.

When your livelihood depends on convincing your clients their money is well spent, it's hardly surprising these ever-multiplying industry groups, corporate ''government relations managers'' and freelance lobbying firms make so much noise and are so untiring in their efforts to extract concessions from government.

The relationship between elected governments and bureaucrats, and the professional lobbyists, is unhealthy. In an ever more complex world, governments seek to consult ''stakeholders'' before implementing policy changes.

But some stakeholders - those that spend most on lobbyists - are more equal than others. And too many politicians, private-office advisers and bureaucrats retire as gamekeepers to become poachers. The fact that ex-Coalition lobbyists do better under Coalition governments, while ex-Labor people do better under Labor governments is a sign that this is not an innocent, arms-length, information-gathering exercise.

Meanwhile, the business of opposition has degenerated into automatic opposition to any and every unpopular government decision, even though this requires parties to turn their rhetoric on its head when they move from opposition to government.

Labor's attempt to exploit public anxiety over the Abbott government's inability to solve the deep-seated and long-running commercial challenges faced by hard-pressed manufacturers and airlines, while advancing not a shred of credible alternative policy, is despicable. Just as despicable as when Tony Abbott did it to Labor.

It's finally dawning on people that major and genuine reform requires a degree of bipartisanship at the political level and a spirit of give-and-take on the part of powerful interest groups. But these prerequisites are further away than ever.

Instead what we get is lowest-common-denominator politics from the pollies and rent-seeking posing as ''reform'' from the interest groups. This is particularly true of business lobby groups - the big miners, the financial services sector, the hotels and the registered clubs, for instance - because they have the most money to invest (and I do mean invest) in rent-seeking.

There does seem to be one spark of potential progress, however. Perhaps because of its organic links to big business, the Abbott government seems to have realised something Labor never did: giving in to rent-seekers doesn't make you any friends, it just makes things worse.

Yielding to my pressure for a concession never satisfies me, it just shows me you're an easy touch and prompts me to think of something else I want. Meanwhile, giving me a lolly just makes my rivals envious and prompts them to demand theirs. Bad inevitably leads to worse.

Joe Hockey and Abbott have been courageous in ignoring the begging bowl of the least competitive end of manufacturing and, it seems, Qantas. It's too early to say whether this constitutes a consistent attempt to turn back rent-seeking or just prejudice against certain industries but not others - though it would be idle to expect absolute consistency of principle from any flesh-and-blood government.

The way Arthur Sinodinos has been cutting back investor protections at the behest of the greediest industry of them all - financial services - under the guise of reducing ''red tape'' raises the possibility that rent-seeking via the budget is verboten, but not rent-seeking via regulation. We shall see.

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Who's paying the rent are are you getting any?

What is rent? You don't make it past the elementary economics class unless you know that's a trick question. In economics there are two kinds of rent: common or garden rent and "economic rent".

Obviously, ordinary rent is what you pay for the use of a building or land. By contrast, economic rent (also called quasi rent) is the amount paid for any "factor of production" - land, labour or capital - in excess of the amount it needs to be paid to keep it in its present use (which is its "opportunity cost").

If you think you've never heard of economic rent before, you're probably wrong - unless you haven't heard of the minerals resource rent tax or of "rent-seeking".

It doesn't get talked about a lot, but economic rent is widespread in every real-world economy, making it something worth talking about. You never know, you may be getting a bit yourself (I'm getting loads).

Economic rent isn't a cost of production that contributes to the selling price of the factor - the land, the physical capital or the labour. Rather, it's earnings to the owner of the factor determined by the selling price.

Economic rent is equivalent to "producer surplus" in the market for goods and services. When it's received by a business it's also known as "above-normal profits" or "super profits" (does that term ring a bell?).

Economists define profit differently to accountants. To an accountant, profit is sales revenue minus actual costs. To an economist, costs involve actual costs plus the opportunity cost of the financial capital invested in the business - that is, the most the capital would earn in a different industry with an equivalent degree of risk. (For unincorporated businesses, the opportunity cost also includes the highest wage the proprietor could earn in a different job.)

The opportunity cost of the capital invested in the business is what economists call "normal profit". Any actual profit in excess of actual costs plus normal profit is above-normal profit and likely to be the consequence of economic rents.

What is it that allows some factors of production to earn economic rent - higher returns than those needed to keep them in the business? Scarcity or, better, exclusivity. The factor possesses some highly desirable characteristic that means there's not enough of it to go around, so people fight over it and, in the process, bid up its price.

In a textbook economy such a situation wouldn't last long because the market would have an incentive to increase the supply of the desirable factor to meet the high demand. In real-world economies, economic rents can persist because they're not easily replicated. The supply of harbourside land, for instance, is fixed.

The exclusivity of factors may be natural or contrived. Governments often create economic rents by limiting the number of licences they're willing to issue to participants in particular industries - taxi plates, for example.

Patents and copyright are designed to allow creators to enjoy economic rents for a fixed time. This implies monopoly profits are a form of economic rent, although rents can be enjoyed by multiple firms in an industry.

And don't forget many workers benefit from rents. Unions may be able to limit the supply of a particular occupation and so force wages above what they would otherwise be. In this, however, trade unions are amateurs compared with the colleges of medical specialists.

But some rents aren't contrived. If I were prepared to do my job for $60,000 a year but my boss paid me $100,000, I'd be enjoying economic rent of $40,000 a year. Why would he pay me more than my "reservation wage"? Because if he didn't, a rival employer would.

Of course, the people who do best in the rent stakes are film stars, sports stars and the like. Such people have far more talent than the rest of us, but they also have a name - are a brand - that attracts more customers than other actors or players do.

The point of all this is that, from a social (community-wide) point of view, economic rent is a waste. It's a price customers pay that does nothing to increase the production of goods and services. If we could eliminate it - say by taxing it away - it wouldn't reduce production, just the incomes of the owners of scarce resources.

This, of course, is the justification for the minerals resource rent tax. There is a lot of economic rent associated with the exploitation of mineral deposits, particularly in Australia, because world reserves of certain minerals are relatively limited and because much of our supply is high quality and easily won.

Since these resources belong to us, not the mining companies we permit to extract them, we'd be mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.

I hope by now you understand why the Abbott government's talk of all the damage the mining tax is doing to the economy is tosh, intended to mislead the economically undereducated. (Which is not to say Labor's tax was well designed - it wasn't.)

It is rational for workers to be "rent-seekers" in the sense that they equip themselves with scarce skills and work hard at being the best in their field. Similarly, it is rational for firms to seek out niches where prices far exceed costs.

But that's not what the term "rent-seeker" - which comes from the libertarian "public choice theory" - is usually taken to mean. It refers to groups that lobby the government for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers, or their rivals.

As The Economist magazine puts it in its business dictionary, it means "cutting yourself a bigger slice of the cake rather than making the cake bigger".

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Pollies' bad behaviour & dishonesty worsening all over

We are witnessing history being made. Unfortunately, it s a history-making decline in standards of political behaviour. At least it proves we 're not merely imagining that things were better in the old days.

Tempting though it is, one of the things incoming governments don' t do is delve into the affairs of their predecessor. The papers of the old government aren 't made available to the new masters.

But all that is out the window with the Abbott government 's decision to establish a royal commission into the Rudd government' s handling of the home insulation program and provide it with Labor' s cabinet documents.

It takes innocence greater than I can muster to believe the motive for the inquiry is to bring justice to the program 's victims rather than to embarrass the Coalition 's political opponents by raking over one of their more celebrated stuff-ups.

Labor can take its lumps. The real pity is that a long standing convention seeking to limit political vindictiveness has been cast aside. One thing we can be sure of is that when next Labor returns to power it will lose no time in retaliating, as will that government 's eventual Coalition successor. Advantage-seeking retaliation will become a bigger part of the political debate.

The man who set new lows in negativity and obstructionism in opposition is now taking us to new lows in government. In a more godly world, Labor would resist the temptation to sink to the level of misbehaviour set by its opponents, thus giving substance to its repeated claims of moral superiority.

But so intense is the competition between the parties that this seems unlikely. Last week Bill Shorten promised to lead a constructive opposition and not oppose everything for the sake of it. It 's a wonderful resolve - one which, if lived up to, many voters would find attractive - but I fear it' s another take from Tony Abbott: almost tearful promises to sin no more, followed by an immediate resumption.

The great likelihood is that Labor in opposition will model its behaviour on Abbott in opposition, in conformity with that great moral precept: tit for tat. The sad truth is that, for politicians as for most of us, the moral compass that guides us asks: what' s everyone else doing?

We take our ethics from our perception of the behaviour of those around us, particularly our competitors.
We all see ourselves as more moral than the next person, but when challenged our defence is always: I' m no worse than he is. After all, he started it.
Thus are our politicians locked in a race to the bottom.

Rather than trying to counter our fear of foreigners, politicians have preferred to pander to it, vying to be the side whose mistreatment of asylum seekers goes so far it discourages any more from coming - all intended to dissuade them from risking their lives on a dangerous sea voyage, naturally.

So far have our standards sunk that we must now suffer the indignity of being lectured on human rights by the Chinese government.

Declining standards at federal level have been matched by bad behaviour at state level. For an example of state politicians willing to blatantly mislead their electorates, look no further than the Victorian and NSW governments' dishonest explanation for the looming jump of about 25 per cent in the price of household gas.

The true reason for the rise is that the building of natural gas liquefaction plants in Gladstone will soon allow gas producers on Australia' s east coast to export their gas and obtain the much higher prices paid on the world market. The east coast will go from being outside the world market to inside it.

The price rise is thus inevitable unless governments were to prohibit the companies from exporting their gas, forcing them to continue accepting below-world prices. There has been no suggestion of penalising the gas producers in this way.

Rather, state politicians have taken up the dishonest claim of the gas companies that permitting them to build new and controversial coal seam gas plants would somehow prevent gas prices from rising or force them back down.

But as any student of economics could tell you, there' s no way NSW and Victoria could ever produce enough natural gas to significantly affect the world price of gas.

The price of gas in NSW and Victoria would stay below the world price only if the new producers were compelled to sell their gas to local users at below the world price. Again, there s been no suggestion of this.

Last week the gas companies' illogical argument was taken up by the new NSW Minister for Energy and Resources, Anthony Roberts. I' m prepared to believe Roberts may be economically illiterate, but I don' t believe his advisers are - nor that they don t read the papers, where the scam has been exposed.

Although Roberts has replaced a minister who left the cabinet under a cloud, he seems uninhibited in his efforts to mislead the electorate.

It' s hard to know whether he is simply seeking to advance the gas industry' s vested interests or is setting up an alibi which allows the government to blame the inevitable jump in gas prices on those terrible people opposed to fracking.

Either way, his only crime is seeking to deceive voters. And these days that 's the way everyone plays the political game, isn 't it?

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Abbott's anti-union push not what it appears

If you were a conspiracy theorist it would be easy to see Tony Abbott's actions against unions as revealing his true dastardly intentions despite all his soothing statements before the election.

But I see it just as standard Coalition behaviour, motivated more by a search for political advantage than by a desire to free the economy from the scourge of unionism. Indeed, when the union movement finally expires - which can't be too many years off - I'd expect the Coalition to shed a private tear at the loss of such a useful whipping-boy.

When you contemplate the royal commission into union corruption, remember that, since the days of Malcolm Fraser, all Coalition governments set up such commissions. We know they sometimes backfire against the government or employers, and rarely lead to the conviction of many unionists. Royal commissions are about raising a hue and cry, not getting wrongdoers into jail.

As politicians on both sides well know, unions have long been on the nose with the public. This is partly because it's always easy for proprietors of the established order to portray unions as troublemakers and partly because of the public's race memory of the way the unions were always staging disruptive strikes in the decades up to the mid-1980s (yes, that long ago).

The Coalition wouldn't still be so keen to press the public's anti-union button, however, if the unions weren't still so closely associated with its political opponent, the Labor Party - a linkage that, if anything, strengthened as Julia Gillard sought to shore up her leadership against the ever-present threat from Kevin Rudd.

This is not to imply there's no corruption in the union movement. There is, just as there is among businesses - and politicians, for that matter. Just how widespread corruption is in the union movement is hard to know and the royal commission is unlikely to tell us, though you can be sure the relatively few instances it uncovers will be highly publicised.

A second ulterior motive is the Coalition's resentment of the way the unions channel big donations to Labor, but never to it. By contrast, business will donate to Labor rather that the Liberals whenever it thinks Labor's likely to win.

And, of late, we've seen signs of a third level of political prejudice against the unions. How is it the "end of entitlement" seems to apply far more to manufacturers than to farmers or formerly government-owned airlines?

Could it be because highly protected manufacturing tends to be highly unionised, with the unions playing a leading role in fighting for continued government assistance, particularly when Labor is in power?

It's worth remembering that manufacturing is the traditional base of the union movement. Manufacturing's declining share of total employment is part of the explanation for the movement's decline.

Manufacturing's further decline will hasten the eventual demise of the unions - or perhaps their relegation to the public sector. Just 13 per cent of private-sector workers are union members, compared with 43 per cent of public-sector workers, making 18 per cent overall. But note that only 19 per cent of manufacturing workers are members.

You may think the public's strong reaction against WorkChoices contradicts the idea that unions are on the nose. Not really. The unions' advertising at the time rightly alerted part-time and casual workers to the greater scope for unreasonable employer behaviour under WorkChoices, but while this made many anxious it led few to conclude the answer was to join a union. For many workers, unions are a relic from a bygone age.

Remember that the Coalition's attempt to extract political mileage from the unions, bad employers' attempt to blame the unions for their poor relations with their own staff (e.g. Qantas) and the national dailies' attempt to suck up to big business, all involve leaving the public with the impression the unions are a much bigger bogyman than they actually are.

What the people with the hidden agendas will never tell you is that more than 80 per cent of enterprises don't have a union presence. Only about 40 per cent of employees are covered by collective agreements, some of which have been drafted by employers without union involvement.

If the government really did stamp out union corruption, or prompt Labor to cut its ties with the unions (thus depriving many union leaders of an attractive career path), or shame union leaders into giving up their lucrative fees as trustees of industry super funds, it would get the union leadership back to its knitting, giving their movement a better chance of surviving.

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Why the success of the G20 matters

It's easy to be cynical about the G20. Will the meeting of finance ministers and central bank governors in Sydney this weekend, and the leaders' summit in Brisbane in November, amount to anything more than talkfests?

People say the Brisbane summit will be the largest and most important economic meeting ever held in Australia. That's true, but it just means it will be bigger than the Sydney APEC leaders' summit in 2007 - which is remembered mainly for The Chaser boys' Bin Laden stunt.

But though it's easy to be cynical, it's a mistake. It's possible the two meetings this year will prove no more than talkshops, but that would be a great pity. And, since Australia is this year's chair of the group, it's up to Joe Hockey and Tony Abbott to make sure they're worth more than that.

The G20 began in 1999 as a group for finance ministers and central bankers, in the aftermath of the Asian financial crisis, which revealed the need for greater co-operation and co-ordination between governments in responding to crises in the global financial system and, better, making changes to the global financial "architecture" (rules and institutions) that reduced the frequency and severity of financial crises.

The formation of the G20 was a recognition that the G7 (compromising only Europe, North America and Japan) wasn't truly global, particularly because it excluded the emerging BRICS economies - Brazil, Russia, India, China and South Africa.

For a decade or two most of the growth in the global economy has come from the BRICS, and the developing economies now account for more than half gross world product. For a better global spread, the G20 also adds Argentina, Indonesia, Mexico, Saudi Arabia, South Korea, Turkey, the European Union and, of course, Oz. With just these 20, it accounts for 85 per cent of gross world product.

In 2009, in the aftermath of the global financial crisis, the G20 was upgraded from just finance ministers to include summits of presidents and prime ministers, an acknowledgment of the way economic power had spread beyond the North Atlantic. But why do we need these get-togethers?

Because, as Christine Lagarde, boss of the International Monetary Fund, said recently: "The breakneck pattern of integration and interconnectedness defines our times."

It has become unfashionable for the media to talk about globalisation, but it's continuing apace. As Mike Callaghan of the Lowy Institute said last week: "If there is one lesson from the [global financial] crisis, it is the interconnectedness between financial markets. Events in US financial markets had worldwide consequences. We need co-operation to deal with globally operating financial institutions."

These days, global integration is being driven less by deregulation and more by advances in technology, particularly the information and communications revolution. One part of this is the way the internet has globalised the media.

News of an economic calamity in one country is now conveyed to the rest of the world almost instantly. Financial traders in New York or other centres can start moving money out of the affected country in no time. They can then take a set against neighbouring countries they merely fear may have a similar problem, giving rise to a big problem called "contagion", where trouble spreads like a communicable disease.

And TV news that a few banks are tottering in Europe can scare the pants off consumers and business people in countries around the world, prompting them to stop spending until their confidence returns.

But it's not just crises. As Callaghan reminds us, more and more businesses now operate globally. Goods are more likely to be "made in the world", with inputs from many countries rather than just one. So the trade policies agreed by the international community have to adapt to the new reality that such "value chains" are increasingly driving world trade.

Then there's tax. The more businesses that operate globally, the more businesses that are able to exploit loopholes between different countries' tax laws, shifting their profits to countries with low tax rates. This is eroding the tax base of many countries - including ours - so their taxes aren't raising as much revenue as they should be.

In other words, technology-driven globalisation - the ever-reducing barriers separating particular economies - is throwing up problems that can't be solved by individual countries acting individually.

So we need greater communication, co-operation and co-ordination between countries, first, to discourage countries from pursuing "beggar-thy-neighbour" policies - I attempt to fix my problems at your expense, which usually provokes retaliation, so we all suffer - and, second, to find group solutions to the various problems.

The first couple of G20 leaders' summits in 2009 were quite effective in ensuring the Great Recession wasn't as bad as it could have been. But the truth is the G20 has been running out of momentum, resorting to high-sounding rhetoric while getting bogged down in excessive detail.

Considering how crisis-prone the global economy has become, it's important merely for world leaders, treasurers and central bankers to know each other, have face-to-face meetings and phone each other.

But we also need more joint action, and if the G20 doesn't lift its game the big boys will stop coming to meetings and eventually shift their interest to a smaller, more cohesive group which includes China and a few others, but excludes Australia.

Clearly, it wouldn't be in our interests to lose our seat at the top table. That's why it's so important we use our position as this year's chair to get the G20 back on the rails. Many pre-meeting phone calls need to be made by Hockey and Abbott to their counterparts, to gather support on the directions to be taken.

Then they need to chair the meetings effectively, discouraging set-piece speeches and encouraging interchange that improves mutual understanding and makes progress on a limited range of key issues.

We have a lot to gain or lose.

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Drawing a line between the market and the social

The hard part of economics, politics and public policy is deciding where to draw the line. It's as easy as pie to take a position at one extreme or the other. To buy the whole Liberal or Labor package - which, after a change of government, will often involve supporting things you opposed six months ago. To oppose virtually all government regulation or to think more regulation is never enough. Doing it this way always feels good - so neat and tidy.

But though it's easy and neat, it's not satisfactory. It's pretending the world is either black or white when in fact it's a quite unsatisfying shade of grey. To say I agree with the Libs on this and that, but with Labor on that and the other. To accept that some regulation is good, but too much is bad. It takes more effort, leaves you under attack from both sides, and it's messy.

It involves doing your own thinking, which is hard work. I've been thinking lately that, while I want very much to live in a market economy, I definitely don't want to live in a market society.

In a market economy, you and I are pretty much free to make our own decisions about what we'll consume, what occupation we choose and where we'll work - all within the limits of what's available, of course - while the great majority of decisions about the goods and services - and jobs - we're offered are made by private businesses.

You and I are motivated by the desire to get the most satisfying deal we can - to buy what appeals to us and not buy what doesn't - while businesses big and small are motivated by a desire to make profits by successfully catering to our wants (which aren't necessarily our needs).

Their desire to make more profit than they did last year is what drives our economy on, making it ever bigger and creating more jobs, but also contributing to its continuously changing structure.

Fine. But it's not that simple. Anyone who didn't know before the global financial crisis must surely know now that if you let businesses do whatever they want in their search for greater profits, the system will run off the rails and cause horrific injuries.

So we do have to ensure profit-obsessed businesses work within government-imposed guardrails designed to protect them and us from their greedy excesses.

We also need to understand that, if we left it to profit-seeking business people - and their public-policy consultants, economists - they'd gradually turn every aspect of our lives into a marketplace, with everything commercialised. Everything changed into a profit-making opportunity.

Where there was some legal barrier preventing the market from spilling over into some part of our lives, businesses would pressure governments to remove it in the name of "reform". And because, in this hyper-materialist era, business is on top - and the unions are pariahs, subject to regular besmirching royal commissions - the politicians are usually keen to give business what it demands.

This is why I've been thinking I want to live in a market economy, but not a market society. I like the commercial to be commercial, but I don't want the non-commercial made commercial just because business people imagine it would increase their profits (and the economists' model tells them it would be more "efficient").

An example is penalty rates. Until relatively recently in our history, weekends and public holidays were social institutions largely outside the market economy. They were essentially commerce-free zones, where as few people as possible worked and we were free to socialise with our kids, other family and friends.

Fools that we were, we thought we worked five days a week so we could relax and enjoy the other two together.
Weekends were kept largely commerce-free by two legal institutions: restrictions on trading hours and industrial award provisions that sought to discourage employers from instructing staff to work at "unsociable" hours by requiring them to pay a penalty, which rose according to the degree of unsociability.

Most restrictions on trading hours were removed in the 1980s and '90s in the cause of "micro-economic reform". And now employers have renewed their attack on penalty payments, portraying them as some kind of hangover from the dark ages of socialism, which are preventing businesses creating more jobs (note they never mention profits).

Thus are we being pressured to shift the line separating the commercial from the non-commercial, the economic from the social. Already that line is blurred and the temptation to remove the last legal barrier is great.

It's tempting because, in this more materialist, less religious age, almost all of us like the idea of being able to shop and patronise commercial sport and entertainment on the weekend. Naturally, we'll take the kids and meet our friends there.

Trouble is, what we want is for us to be able to shop and be entertained, but not be required to work ourselves. We'd like to be part of the upper class that doesn't have to work, served by a lower class that can't afford not to.

When you turn a social institution over to market forces, those with money do well and those without don't. We'd raised our material standard of living, but do it by lowering our quality of life.

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Hockey risks scaring off consumers

You can never be sure what a fall in the measures of consumer confidence actually proves, but if I were Joe Hockey I'd be a bit worried. If he keeps on playing tough guy he may frighten people into clamping their purses shut.

We learnt last week that the Westpac-Melbourne Institute index of consumer sentiment fell by 3 per cent this month, down 9.5 per cent from its election-time high. Optimists now barely outnumber pessimists, the worst result since July.

I'm a great believer in the central role of business and consumer confidence - their alternating moods of optimism and pessimism - play in driving the ups and downs of the business cycle. As the Rudd government demonstrated with its remarkably deft response to the global financial crisis, managing psychology is probably more important that actual stimulus spending.

Trouble is, we don't seem able to measure consumer confidence with any accuracy. The index of consumer sentiment is an unreliable predictor of consumer spending. And there's reason to fear it tells us more about the state of politics than the state of the economy.

People who intend voting for the government of the day are invariably far more optimistic about the economy than people who intend voting for the opposition. This could mean people's views on how well the economy is being managed determine whether they intend to vote for government or opposition.

But Labor voters switched from pessimistic to optimistic and Coalition voters from optimistic to pessimistic the moment Kevin Rudd won the 2007 election, then the positions were reversed when Tony Abbott won in September. Seems clear it's people's political loyalties that drive their views about the state of the economy.

Even so, the fall in confidence since the election does seem to be explained by people's growing worries about losing their jobs. The related Westpac-Melbourne Institute unemployment expectations index worsened by 2.3 per cent this month, and by 9.2 per cent since September.

In a rational world people would judge their risk of unemployment from the monthly labour force figures, which, although they show unemployment worsening marginally to 6 per cent last month, aren't so frightening.

In the real world, however, the punters judge their risk of joblessness from the frequency of stories about factory layoffs on the TV news. All the fuss about the successive decisions of Ford, Holden and now Toyota to cease car-making in Australia, plus bad news about other manufacturers, Telstra and Qantas seems to have put the wind up a lot of people.

An Essential opinion poll shows respondents nominating unemployment as their greatest economic concern. Add all Hockey's efforts to soften us up for a tough budget and it's hardly surprising pessimism is spreading.

Note that, as part of this non-rational response, news that factories will close in three years' time is coded as jobs lost this week. Job losses in manufacturing get three times the publicity of jobs lost elsewhere, and jobs losses in the public sector worry no one in the private sector.

The Reserve Bank believes rising house prices are a helpful development, spurring people to get on with their housing plans before prices rise further, and also making home owners feel wealthier and so willing to lower their rate of saving and increase their rate of consumption spending.

This ''wealth effect'' would boost consumption even though incomes won't be rising strongly because growth in employment and wages will be weak.

But the proportion of consumer sentiment respondents believing it's a good time to buy a dwelling has fallen 10.8 per cent from its September peak. And Saul Eslake, of Bank of America Merrill Lynch, differs with the Reserve by believing house price rises are unhelpful.

He points out that renters are significantly less optimistic than mortgagers and outright home owners according to the consumer sentiment index, with tenants' confidence falling harder over the past year.

While it was true in the pre-GFC world that households responded to their rising (paper) wealth by slashing their rate of saving, Eslake doubts it will happen this time, mainly because household debt remains very high as a proportion of disposable income.

In the end, you can ''monetise'' rising paper wealth only by borrowing against it. And people with a lot of debt who are starting to worry about whether they'll keep their jobs are much less likely to resume borrowing.

This is something Hockey should remember when the econocrats tell him retail sales are growing more strongly since the election and that stronger home building approvals presage a rise in dwelling construction.

If Hockey's budget toughness - rhetorical and otherwise - adds to the punters' anxieties, his big political vindication could delay the return to strong employment growth.

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