Tax cuts would have cons and pros

Yippee! It's almost Christmas and Malcolm Turnbull has dropped a big hint that tax cuts are coming. Good old rich Uncle Mal has been to see his bank manager, got the overdraft extended, and is determined we'll all have a great Chrissie, no matter what.

Actually, it's all a bit vague at this stage. We don't yet know whether the cuts will even be announced before Christmas, let alone when they'll be delivered. Nor do we have any idea whether they'll be large, small or indifferent.

Wouldn't surprise me if they were on the small side, nor if we got them only as a reward for voting Turnbull back into office at the next election, to be held late next year or in the middle of 2019.

All we actually know is what Turnbull dropped into a speech to the Business Council after affirming his intention to press on with the hugely expensive company tax cuts for big business.

"In the personal income tax space, I am actively working with the Treasurer and my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus," he said.

It wouldn't surprise me if even Turnbull doesn't yet have a clear idea about the size and timing of the cuts. That will depend partly on Treasury's grudging willingness to make it seem they can be afforded "while also meeting our commitment to return the budget to surplus", but just as much on the calculations of his spin doctors.

Will they decide to announce the cuts soon, using them as an attempt to break the circuit of negative media discussion of some problem the government's having, or keep them under wraps until much closer to the time when voters are asked to show their gratitude at the polls?

That Turnbull has dropped the big hint this early in the piece is a sign they're more likely to be chewed up in a desperate but futile attempt to give the government some "clear air", than carefully preserved as part of a grand re-election strategy.

But though uncertainty abounds, there are three iron laws of tax cuts.

The first is that a government's motive in making them is always mainly political. It either fears that if it doesn't cut it will lose votes – because voters are starting to resent how much tax they're paying on any pay rises or overtime – or it hopes if it does cut this will win votes in thanks for its magnanimity.

The second law is that, despite their political motivation, tax cuts always come colourfully wrapped in wonderful economic justifications. By taking this political gift, we're assured, we'll be creating jobs, reducing unemployment and making the economy grow.

It's almost our economic duty to accept the offer of the bloke selling tax cuts for votes.

The third law, however, is that voters' gratitude for being given a little of their own money back is faint to non-existent. A tax cut announced is soon forgotten; a tax cut delivered before an election has next to no influence on the outcome.

But can the budget afford tax cuts? Not if you accept the government's preferred way of measuring the deficit. It says we're still a long way from returning the budget to balance.

The government's prediction we'll be back to budget surplus by 2021 rests heavily on its forecast that wages will soon start growing strongly, much faster than inflation. Maybe.

If Treasury finds a way to maintain that trajectory while paying for tax cuts, it will be by stepping up its over-optimistic forecasts of wage growth. With circular logic, the "bracket creep" such forecasts imply would then be used to justify the tax cuts themselves.

For years we've been told a government that needs to borrow each month to keep itself afloat can't possibly afford to give aid to poor people overseas. But borrowing to cover tax cuts to big business isn't a problem nor, apparently, is borrowing to give voters a tax cut.

The sad truth is that this Abbott-Turnbull government has got neither the conviction nor the honesty to stick to a consistent line on debt and deficits.

In opposition they told us the debt was a frightening crisis, but easily fixed by them. In government they had one go at fixing it at the expense of everyone but their own supporters, but lost public support from that moment, and since then have abandoned any serious attempt at budget repair, merely waiting like Mr Micawber for something (bracket creep) to turn up.

Now it's decided it can't wait even for that, but must give some of it back on the assumption it will turn up – eventually.

But whatever their political motivation, tax cuts do have effects on the economy, so what would they be?

At a time like this, tax cuts would have a similar effect to a decent pay rise, making it a little easier for households to keep spending, giving consumer spending a modest boost and, indeed, creating a few more jobs.

And if you defy federal Treasury and measure the budget balance more sensibly, stripping out investment in infrastructure, you find the recurrent deficit has already been largely eliminated. A small tax cut wouldn't set it too far off course.

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Labor plans further blow to Treasury power

It's a process that's gone on for so long few people have noticed it: the waning influence of the once-mighty federal Treasury.

There was a time, 40 years ago, when Treasury sought to monopolise the economic advice going to the federal government. But those days are long gone.

The peak of Treasury's influence came with the sweeping micro-economic reforms and opening up of the economy in the 1980s and 1990s. It first convinced its minister, John Howard, of the need for widespread reform, but he made little progress under Malcolm Fraser.

Under a much more sympathetic Bob Hawke, Howard's successor as treasurer, Paul Keating, delivered on Treasury's reform agenda beyond its wildest dreams.

Since 2000, after Howard as prime minister won Treasury's 25-year battle to introduce a broad-based consumption tax, it's been largely downhill all the way on micro reform, with its loss of momentum, direction and purity of motive.

This is what's so significant about the Productivity Commission recently seizing the initiative to Shift the Dial and revive and redirect the reform agenda. Its "new policy model" could never have come from a tired and hidebound Treasury.

When Fraser sought to punish Treasury in 1976 by dividing it in two, Treasury and Finance, the initial judgment was that he'd succeeded only in doubling its vote in favour of budget rectitude at the cabinet table.

Forty years on, I now doubt that. Its bifurcation has diminished Treasury's effectiveness in the endlessly recurring task of "fiscal consolidation" (getting the budget deficit down) by robbing it of both the expertise and the motivation to find innovative, politically sustainable ways to limit the growth in government spending.

This trickier side of the budget has largely been left in the hands of the Finance accountants, whose vision rarely extends beyond this year's budget task, and who know more about creative accounting than the wider economic consequences of their crude spending cuts.

On the revenue side, Treasury shares the Business Council's unending obsession with tax reform. Why? To a surprising extent, for the simple, institutional reason that tax policy still lies within its own ministerial responsibility.

Treasury's become more inward looking and less concerned to oversee ("co-ordinate") the activities of other departments.

With one glaring exception. Treasury's greatest loss of influence came with the recognition of Reserve Bank independence in the mid-1990s.

From that time, the day-to-day management of the macro economy moved to the Reserve, with Treasury merely retaining a seat on the bank board and the ear of the treasurer.

Yet there's been great reluctance on Treasury's part to acknowledge this loss of power. It pretends nothing's changed, devoting far too many of its shrinking human resources to second-guessing the Reserve.

The Reserve devotes many resources to "liaison" (gathering businesses' views on the state of the economy), so Treasury must do it too.

The Reserve has an extensive forecasting round each quarter, so Treasury must do its own – but half-yearly, because its only actual forecasting need is for a set of macro-economic "parameters" to plug into its budget estimates of spending and revenue.

The Reserve regularly investigates the latest macro puzzle – say, why non-mining business investment is so slow to recover – so Treasury must do its own. Its new Treasury Research Institute focuses on macro management issues.

What gets neglected is Treasury's oversight of the big micro reform issues. Think health, education, infrastructure. Without an institutional understanding of the detail of these areas, Treasury simply isn't up to speed on either micro reform or budget sustainability.

So its recent establishment of a "structural reform" division seems a step in the right direction – until you learn that the group's first big project was to inquire into non-mining business investment's slowness to recover.

Another part of Treasury's decline is its politicisation, particularly Tony Abbott's decision to sack the Treasury secretary, Dr Martin Parkinson, and replace him with someone whose views he felt more comfortable with, John Fraser.

Recent Coalition governments have preferred Treasury and other departments to be less the fearless policy advisers and more the handmaidens to the minister and their office.

This politicisation makes it ever-harder to believe Treasury's persistently over-optimistic economic and budget forecasts are the product of forecaster fallibility rather than political interference.

Trouble is, the more your influence and authority decline, the more people want to take a crack at you.

Should Labor win the next election, it says it will shift responsibility for budget forecasting and the five-yearly intergenerational report (whose credibility Joe Hockey destroyed by turning it into a political tract) from Treasury to the more independent Parliamentary Budget Office.

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Unis should never be allowed to set their own fees

The Productivity Commission has changed its ideological tune, shifting away from the slavish adherence to an idealised version of the "neoclassical" model of the economy for which it and its predecessors became notorious.

It's moved to a more nuanced approach, recognising the many respects in which real-world markets differ from those described in elementary textbooks.

This shift has been underway since the present chairman of the commission, Peter Harris, succeeded Gary Banks in 2012.

You could see it in the commission's 2015 report on the Workplace Relations Framework, which acknowledged, readily and in detail, the factors that made the simple neoclassical, demand-and-supply model unsuitable for analysing the labour market.

But it's even more apparent in the commission's blueprint for a very different approach to economic reform, Shifting the Dial. Consider this.

Remember the plan in the Abbott government's first budget, of 2014, to deregulate the fees universities are allowed to charge students doing undergraduate degrees?

It was a logical next step following the Gillard government's decision some years earlier to deregulate the number of undergraduate places each university was permitted to offer.

The unis had responded by hugely increasing the number of government-funded places, at greatly increased cost to the federal budget, after successive governments had spent decades trying to quietly privatise the unis and get them off the budget.

The economic rationale was that "market forces" – competition between the unis – would prevent them for using their new fee-setting power to overcharge students.

It was a reform that all right-thinking people should support, and those terrible popularity-seekers in the Senate should never have blocked.

Get this: as part of its plan to improve the teaching of uni students, and in the course of explaining how some students are being charged higher fees than they should be, the commission also shows why deregulating fees would have been a crazy idea.

At the same time as it allowed unis to set their own fees, the government's intention had been to cut its funding of places by 20 per cent. It wasn't hard to see that, as unis continued to raise their fees each year, the government would keep cutting its own funding contribution until it was no more.

The commission argues (on page 109) that government "regulation" of the maximum fees unis may charge for particular undergrad courses "is necessary because price competition [between universities] is difficult to establish in the domestic university market.

"This is primarily because the vast majority of domestic students have access to income-contingent HELP loans and consequently have a low price sensitivity, which was a necessary by-product of enabling university access on merit, rather than family income."

Get it? The elementary model's promise that "market forces" – competition between sellers, plus the self-interest of buyers – will stop firms overcharging rests on an assumption that customers have to pay the price upfront.

In the case of uni fees, however, the upfront price is paid by the government, and students incur a debt to the government, which they don't have to start repaying until their income reaches a certain level at some uncertain time in the future.

How long they'll be given to repay the debt is also uncertain, though it's certain their repayments will be geared to their ability to pay, and the only interest they'll pay is the rate of inflation. Cushiest loan you'll ever get.

With the cost of university tuition to a student so far into the future and so uncertain, it's unrealistic to assume students will shop around to find the lowest-charging uni. (Actually, they all charge the maximum allowed.)

Remember, too, that the fee is less than the full cost of the tuition, meaning the unis are "selling" a product whose retail price has been heavily subsidised by the government.

The commission notes that price competition is further limited by the geographic immobility of students. Because more than 80 per cent of commencing students live at home, and moving out would add greatly to their costs, you might get competition between the unis in a particular capital city, but that's all.

But even that's unlikely. The elementary model assumes "perfect knowledge" – both buyers and sellers know all they need to know about the prices and qualities of the products on offer.

In reality, knowledge is far from complete, and is often "asymmetric" – sellers know far more than buyers, usually because the sellers are professionals, whereas the buyers are amateurs.

The commission explains why all unis – big-name or bad-name, city or country – charge the maximum fees allowed.

"In the absence of good information, lower prices may undermine the prestige of a university and its capacity to attract good students," the commission says.

This is an admission of a weakness in the elementary model that affects far more than uni fees. The assumption of perfect knowledge leads to the further assumption that the prices market forces allow a firm to charge fully reflect the quality of its products relative to the quality of rival products.

As behavioural economists have pointed out, however, quality is something that's often very hard for buyers to know in advance. Only after they've bought it and tried it will they know. Think bottles of wine.

So whereas economists assume buyers' foreknowledge of differences in quality is what determines differences in the prices of similar products, buyers who don't know the differences in quality assume they can use prices as a quality indicator. Higher price equals higher quality.

So why don't lesser unis seek to attract more students by charging lower fees than the big boys? Because it would be taken as an admission of their inferior quality, and could lose as many customers as it attracted, maybe more.

The assumption that market forces would prevent unis from abusing their freedom to set fees as they chose was extraordinarily naive, as the commission is now happy to explain.

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What we can do to cure affluenza

If our grandparents could see us now, what would they think? They'd be amazed by our affluence, but shocked by our wastefulness.

You'd never know it to hear us grousing about the cost of living, but most of us are living more prosperous, comfortable, even opulent lives than Australians have ever lived.

We live in a consumer society, surrounded by our possessions. We're always buying more stuff, more gadgets, an extra car, more TVs for other rooms, more laptops, iPads and smartphones.

We update to the latest model, even though the old one's working fine, and make sure our car is never more than a few years old.

We buy new clothes all the time – a lot on impulse – filling our wardrobes with stuff we wear rarely, if ever.

We buy more food than we can eat, chucking it out when it's no longer fresh so we can buy another lot.

Why do we keep buying and buying? Short answer: because we can afford to. Long answer: because, for a host of reasons, we've become addicted to consumption, whether or not it provides lasting satisfaction. We suffer from "affluenza".

Many of us engage in "conspicuous consumption" so as to impress other people with our wealth – with how well we're doing in the materialist race. Can't have the neighbours thinking we can't afford the latest model.

Other people use their hairstyles or the clothes they wear to express their individuality or, paradoxically, to signal their membership of a particular tribe.

I heard about a partner in a law firm remarking with disapproval that whenever any young person was made a partner they immediately went out and bought a black Volvo. But, someone asked, don't you have a black Volvo yourself? Oh, no, he said, mine's blue.

In his new book Curing Affluenza, Richard Denniss, chief economist of The Australia Institute, observes that, these days, much consumption is done for symbolic, signalling reasons, not because we actually need the stuff.

And then there's retail therapy – stuff we buy purely for the fleeting thrill we get from buying some new thing.

If something's telling you all this needless consumption can't be a good thing, you're not wrong. What's less obvious is why: because of the damage it does to the natural environment.

Not only the extra emissions of greenhouse gasses, but also excessive use of natural resources – both non-renewable and renewable, when usage exceeds the rate at which they can be renewed (think fish in the sea).

The richest 15 per cent of the globe's 7.6 billion population can continue living the high life only for as long as we have the wealth to commandeer more and more of the other 85 per cent's share of the world's natural resources.

But as the world's poor, led by India and China, succeed in raising their material living standards towards ours, this will get ever harder. It is not physically possible for all the world's population to live the wasteful lives we do. Nothing like all the world's population.

How can we stop using more than our fair share of the globe's natural resources? Denniss says we can start by distinguishing between consumerism, which is bad, and materialism, which isn't. Huh?

He defines consumerism as the love of buying things, whereas materialism is just the love of things. Meaning the latter is a cure for the former. The more we love and care for the stuff we've already got, repairing it when it breaks, the less we're tempted to buy things we don't need.

It's true the capitalist system invests heavily in marketing and advertising to con us into believing we need to buy more and more stuff.

But we're free to resist the system's blandishments. Indeed, I often think the people most successful in the system are those who most resist.

Unusually for an economist, Denniss argues that much of what we do – and buy – we do for cultural reasons. Because it's the normal, accepted thing to do.

But, just as our grandparents weren't as spendthrift as we are, culture can change. And you need less than a majority of people changing their behaviour to reach the critical mass that prompts most other people to join them and, by doing so, cause an improvement in the culture.

If we all stopped buying stuff we don't need, however, wouldn't that cause economic growth to falter and unemployment to shoot up?

Yes it would – if that's all we did. The trick is that every dollar we spend helps to create jobs. So we need to keep spending, but we don't need to keep spending wastefully.

There are a host of things we could spend on – better health, better education, better public infrastructure, better lives for the disabled and the elderly, less congestion, less pollution – that would yield us more satisfaction while doing less damage to the environment.

I have a feeling, however, that the cure to affluenza will require more than just changed behaviour by enough individuals. We replace rather than repair many things because the cost of repairers' labour greatly exceeds the cost of the material parts we throw away.

We need to rejig the tax system so we reduce the tax on "goods" – labour income – and increase the tax on "bads" – use of natural resources.

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Econocrats are giving up on smaller government

You may not have noticed, but the Productivity Commission's search for "a new policy model" for reform, in reaction to the breakdown of the politicians' "neoliberal consensus", offers better prospects for finally getting the budget under control.

That's because, although the commission doesn't say so, its reformed approach to reform represents a retreat from a central tenet of neoliberal doctrine for the past 30 years: the goal of Smaller Government.

The retreat makes sense for three reasons. First, because attempts to reduce government's role in the economy – think privatisation, deregulation and cuts in government spending – are central to the populist revolt against neoliberalism.

Second, because the smaller-government push has had little success and, particularly in recent times, some spectacular failures – think the attempt to reform TAFE by making vocational education and training "contestable" by for-profit providers, which the commission now admits was a "disastrous intervention".

Third, because, paradoxically, abandoning the goal of smaller government offers a better prospect of budget repair and a return to "fiscal sustainability" (low public debt) via greater control of government spending over the medium term and a lifting of the fatwa against explicit tax increases.

That's partly because, as we've learnt since the ill-fated 2014 budget, the electoral opposition to significant cuts in spending on social security (read the age pension), healthcare and education actually exceeds the resistance to hypothecated tax increases (those linked to worthy spending programs).

But it's also because, as we've known for decades, but chosen to ignore, there's little empirical evidence of a correlation between the size of a country's public sector and its rate of economic growth or macro-economic stability.

Nor has there ever been much empirical evidence that the willingness of high income-earners to work hard - as opposed to "secondary earners" (mainly married women choosing between part-time and full-time work) – is greatly diminished by high rates of income tax.

If there's little evidence favouring smaller government, why's it been central to the neoliberal project? Because a presumption against government intervention is built into the assumptions of the economists' neoclassical model, and because limiting the size of government minimises the taxes and maximises the freedom of the rich and powerful.

The Productivity Commission's new reform agenda unconsciously reveals how much the old agenda of the past 30 years was influenced – and constrained – by the goal of smaller government.

If you're trying to improve productivity, there are two broad approaches. One is to reduce the role of government by privatising government-owned businesses (including natural monopolies), outsourcing the provision of government services, reducing government regulation and reforming taxation in ways believed to improve incentives to work, save and invest.

The alternative approach is to focus on ensuring the nation's education and training system delivers the best skill formation possible – including those skills most useful in the digital economy – and on ensuring spending on public infrastructure is both sufficient and sufficiently well directed to maximise the private sector's productivity, particularly in the big cities.

Get it? The commission's new reform agenda approaches productivity improvement more directly, accepting that the old agenda is well into diminishing returns. In the process it's shifted the goal from smaller government to better government.

The great side benefit of the commission's new policy model is that, as well as seeking to give micro-economic reform a new direction, it improves governments' chances of regaining control over their spending.

As successive federal and state intergenerational reports have shown, by far the greatest source of future growth in combined federal and state spending will be healthcare. The second biggest area of combined spending is on education and training.

The standard, Treasury and Finance-promoted approach to restraining these two spending areas adopted in the Abbott government's first budget was simply to shift a big chunk of spending off the federal budget and on to the budgets of households (the co-payment for GP visits) and the states (slashed federal grants for public hospitals and schools).

The vehemence of the public's opposition to these cuts not only rendered them impossible, it warned off governments of either stripe from trying such an approach again. Malcolm Turnbull's surprise embrace of needs-based school funding covered his retreat from cuts in grants for schools.

The alternative approach to controlling the rate of growth in spending on health and education over the medium term is to get deep into the nitty-gritty of what the respective systems do and how well they're doing it.

It's not hard to believe that improving the quality of service they deliver to patients and students could also reduce waste and inefficiency, thus slowing the rate at which their costs are growing.

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We need better teaching at every level

It's taken an eternity, but the econocrats have finally twigged that the big problem with the nation's education and training system isn't its high-cost to budgets, but its failure to provide enough of our youth with the skills they need to get and keep a decent job.

When the Productivity Commission set out to find a "new policy model" that could "shift the dial" on productivity improvement, the penny dropped. It decided that "if we had to pick just one thing to improve ... it must be skills formation".

That's because the adoption, use and spread of new technology – the long-run drivers of productivity – require people with the right skills.

As befits its obsession with productivity, the commission doesn't bother to acknowledge that knowledge is valuable for its own sake. Humans value knowing things about their world.

But the more prosaic role of education and training is to equip people with the skills that help them earn a living.

As economists go, however, the commission's more broad-minded than most: "There is additional value in improving skills formation – from foundational to advanced – because it gives people better job security, income and job satisfaction.

"These effects are not well measured in the official statistics, but have major implications for prosperity and quality of life more broadly."

Trouble is, the commission finds our present education and training performance – from schools to vocational education and training, to universities – is falling well short of what it should be.

"A good school system ensures that people have the key foundational skills – numeracy, literacy, analytical skills – and the capacity to learn so that they can easily acquire knowledge throughout their lives," the commission says.

What shocks me most about our schools' performance is their high failure rate. Evidence the commission doesn't quote is the Mitchell Institute's estimate that 26 per cent of students fail to finish school or a vocational equivalent.

It seems so many kids have been getting behind and dropping out for so long that schools and their teachers have come to accept this as part of the natural order, not as a sign something's going badly wrong with teaching.

The commission notes that, while the regular testing under the Organisation for Economic Co-operation and Development's PISA program shows Australian school students' academic achievement is still above the OECD average, our average scientific, reading and mathematical ability is falling in absolute terms.

We've gone for decades underpaying teachers relative to other graduates, so we shouldn't be surprised our brightest people don't go into teaching.

We have a growing proportion of lower performers and a falling share of high performers. Other evidence shows our rates of participation in year 12 physics and advanced maths fell by about a third between 1992 and 2012.

One of the worst inhibitors to  gains in learning is "learner [dis]engagement" – being inattentive, noisy or anti-social. About 40 per cent of our students are involved in such unproductive behaviour.

The commission fears our youth may now be less capable than earlier cohorts. For example, an Australian 15-year-old in 2015 had a mathematical aptitude equivalent to a 14-year-old in 2000.

"Australia's growing group of low performing students will be increasingly exposed to unemployment or low participation in the future world of work," the commission says.

Its review of the evidence on school performance concludes we need to focus on improving the quality of the teaching workforce and on methods of teaching that have been proved to be more effective.

We've gone for decades underpaying teachers relative to other graduates, so we shouldn't be surprised our brightest people don't go into teaching.

Many teachers are teaching "out of field" – subjects for which they have no qualifications.

We've done too little testing of the effectiveness of different ways of teaching, and too little dissemination of the results of what testing we've done. It's obvious our classroom teaching isn't as effective as it needs to be, but we've done little about it.

The commission has less to say about the failings of VET – vocational education and training – except that it's a "mess" and still recovering from a "disastrous intervention".

This was the utterly misguided attempt to drag TAFE into the 21st century, not by doing the hard yards with the teachers union, but by applying the magic answer of "contestability" – allowing private businesses to sell taxpayer-subsidised training for profit. Many rorted the system and cheated students until the government belatedly woke up.

Turning to universities, their performance is also falling short. In 2014, more than 26 per cent of students had not completed their degree within nine years of starting – a significant loss of time, effort and money for the students, as well as taxpayers.

And this is before we see any effect from the leap in uni admissions following Julia Gillard's (misguided) decision to provide government funding for any students the unis choose to enroll.

The proportion of recent graduates finding full-time employment is falling, with the under-employment rate among recent graduates rising from 9 per cent in 2008 to more than 20 per cent.

But the fact that graduate full-time starting salaries have fallen from 90 per cent of average weekly earnings in 1989 to about 75 per cent in 2015 suggests this has more to do with the weak state of the labour market than with a decline in the quality of degrees.

Which ain't to say quality hasn't fallen. More than a quarter of recent graduates in full-time jobs believe their roles are unrelated to their studies, with their degree adding nothing to their employability.

Australian unis continue to perform poorly on student satisfaction measures relative to unis in Britain and America.

There's a lot more to the commission's critique of the unis' performance, but I'll leave that for another day.

Sufficient to say the commission has convincingly demonstrated the case for putting the quality of the nation's teaching at the top of our list of things needing urgent improvement.

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Sorry, but Medicare needs to change

The apparent success of Labor's scare campaign on the Coalition's alleged plans to "privatise Medicare" at last year's election tells us many things – how much we care about the good performance of our healthcare system, how much we like the way healthcare is paid for under Medicare, and how suspicious we are of politicians' plans to change things.

But Medicare is showing its age. It was designed by health economists in the 1960s, implemented by Gough Whitlam in the 1970s, dismantled by Malcolm Fraser, then reinstalled by Hawke and Keating in the 1980s.

Our health has changed a lot since then. Whereas the system is designed to cope with acute illnesses – you catch a bug or have an accident, so you go to your GP, who fixes the problem or refers you to a specialist or, in the extreme, rushes you to hospital – these days we're more likely to suffer from chronic conditions, such as diabetes, mental illness, lung cancer or cardiovascular disease.

That's because higher living standards, improvements in public health and advances in medical technology have reduced the incidence of accidents and infectious diseases, leaving us living lives that are longer, but more anxious and overweight, while suffering from conditions that will stay with us until we drop off.

If you don't have a chronic illness yet, you probably will.

Trouble is, the ageing Medicare system isn't well-suited to this change. GPs are paid according to the number of patients they see for a few minutes – "fee for service".

They're not rewarded for helping patients change their behaviour in ways that prevent the onset of chronic diseases, nor for helping patients manage their conditions in ways that stop them getting worse over time, or needing to go to hospital.

As healthcare has become more expensive, it's clearer that visits to GPs and other frontline health professionals are relatively cheap, whereas visits to specialists are much dearer. Operations and stays in hospital are hugely expensive.

Get it? We could improve people's health and happiness and reduce expense if we made sure the "primary care" provided by GPs and others was as effective as possible in preventing and managing chronic conditions, reducing the need to call on specialists and hospitals.

All this is the thinking behind the Productivity Commission's advocacy of a "new policy model" that shifts tax changes, deregulation and privatisation onto the backburner, and shifts healthcare (and education and cities) to the forefront of economic reform.

The health system suffers from its division of responsibility between federal and state governments, with the states responsible for public hospitals and the feds for most of the rest.

Lack of co-ordination between the parts of the system generates much wasted time and money, not to mention inconvenience and frustration for patients.

So the commission wants a renewed effort to achieve an integrated system.

"The international and Australian experiences with integrated care indicate that, if properly implemented, it leads to gains in health outcomes for patients, improvements in the patient experience of care, reductions in costs, and improved job satisfaction for clinicians," the commission says.

The place for this integration to occur is at the local, regional level. There are about 30 regions in Australia. The commission wants regional health authorities to have freedom to modify national arrangements to suit local conditions.

Public hospitals have already been organised into "local hospital networks" but, after protracted disagreement between Labor and the Coalition, the feds are only now setting up private "primary health networks" contracted to co-ordinate patient care in their locality, including by working collaboratively with the local hospital network.

It's almost inevitable that big outfits like hospitals – but even doctors' surgeries – tend to be run for the convenience of the outfit, rather than the patient.

But the commission wants changes that encourage the system to focus on patients rather than suppliers.

"Patient-centred care gives prominence to the preferences, needs and values of consumers. In a better system, patients' time would be recognised. Patients would be given the information and power to be co-contributors to treatments and disease management," the commission says.

"Medical records would be owned by patients and they would be able to add comments. The commission sees such rights to data as a broad requirement across many public and private services. Where choice was feasible, it would be facilitated."

The digital age has largely eliminated the excuse for different parts of the system – including different doctors – not keeping each other fully informed, and doing so via the patient's own, digitised and portable medical record.

This idea isn't new, but doctors have been dragging their feet and governments need to renew their determination to make it happen.

Using fee-for-service as the main way of paying doctors encourages activity (more visits) whereas it would be better to reward outcomes – successful efforts at preventing chronic conditions or stopping people from needing to go to hospital.

Fee-for-service would continue under a regionally based integrated care model, but its role would diminish as primary health networks and local hospital networks found other ways to remunerate GPs for clinical outcomes.

Little of all this is new, and governments are unlikely to do it all next week. Rather, it's the commission setting priorities for economic reform in general, and healthcare in particular, and urging governments to get on with bringing it to pass.

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Economic rationalists regroup under populist attack

Reading the Productivity Commission's grand plan to "shift the dial" on micro-economic reform gives me a feeling of deja vu all over again.

When I started in this business in the mid-1970s, macro-economics had become a pitched battle between Keynesians and monetarists. It took years for a resolution of that conflict to emerge.

The monetarists didn't win the war, but they did win a lot of battles, and management of the macro economy was changed forever.

Today's great conflict in economics comes in the aftermath of the global financial crisis, as politicians in all the advanced economies abandon the "neoliberal consensus" under pressure from the populist revolt against privatisation, deregulation, austerity and all the rest.

You could say the global rethink of economics began immediately after the crisis, but it's just in the Productivity Commission's latest report proposing a "new policy model" for future change that we see our local "thought leaders" among economic rationalists shifting to an agenda that responds to the criticism of the old approach and proposes a new set of reforms aimed at improving productivity while giving voters far less cause to object.

Why so few commentators have perceived the significance of this "dial shift" is hard to fathom.

Read the report and it sticks out like organ stops. For some years since the crisis, the bosses of the International Monetary Fund, the Organisation for Economic Co-operation and Development, and even the Bank of England have said we need economic growth to be more "inclusive".

Now the Productivity Commission agrees and has reshaped its reform agenda accordingly.

The old agenda accepted the conventional wisdom that economic efficiency and equity (fairness) were in conflict. Since the crisis, however, economists at the fund and the OECD have been producing evidence that increasing inequality inhibits economic growth.

Now our commission agrees, arguing that its proposed shift in the reform dial will avoid "too great a dispersion in incomes, given evidence that this can, in its own right, adversely affect productivity growth".

In shifting reform priorities from changing tax incentives, moving the balance of wage-setting power in favour of employers, deregulating and privatising, to reforming healthcare, education and cities, the commission is attempting to humanise reform.

In setting its main priorities as improving the quality of services delivered to patients, students and commuters, the commission has made ordinary punters the main beneficiaries. What's that if it's not more "inclusive"?

Low and middle-income earners would be the chief winners because the better-off are better able to buy their way out of bad medical treatment, bad teaching and long commutes.

And get this: more efficient and effective healthcare, teaching and cities bring intrinsic benefits to the lives of ordinary people, whether or not they ever "shift the dial" of the measures of productivity that the commission takes so literally (which they quite possibly won't).

The commission's "new policy model" is far better fitted to an economy ever-more oriented to the services sector, and to an economy where the value of knowledge becomes more apparent as each year passes.

What seems to have bamboozled the commentators is the notion that nothing on the commission's new reform agenda is particularly new.

True, but silly. In economics, there's not much that's new under the sun. Sure economists have been rabbiting on for years about the need to reform healthcare and education and – much more recently – "urban economics".

What's new is not the topics but the priority and emphasis they've been given. What's new is sorting through a list of old potential reform topics to find those that tick the efficiency box and the fairness box.

Another uncomprehending reaction has been that many of the specific reforms the commission advocates – road-use charging, for instance – would be politically difficult, and most unlikely to be taken up by the Turnbull government.

True, but beside the point. What's significant is the radical change in thinking about the nature and direction of economic reform, not how long it will take for those reforms to be made.

I've been around long enough to see plenty of politically impossible reforms come to pass.

A more perceptive critique of the "new policy model" is that it takes us straight into territory where the states have as much say as the feds, if not more. No easy country.

And while it's true ordinary voters have much to gain from the new agenda, it's equally true that vested interests in the health, education and city industries have much to lose.

One further lesson from economic rationalism's poor record in recent times is that if you're not game to take on powerful rent-seekers, you won't get far.

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We're Closing the Gap, but far too slowly

The latest report on government spending on Indigenous people makes shocking reading. So let me explain it to you before some One Nation-type gives you her version.

The report estimates that federal and state spending on Aboriginal and Torres Strait Island Australians was more than $33 billion in 2015-16, a real increase of almost 24 per cent since 2008-09.

That amounts to spending $44,900 a year per Indigenous Australian, twice the equivalent spending per person on the rest of the Aussie population.

See? Proof positive of what many radio shock jocks and One Nation supporters have always said: Aborigines get a host of government benefits the rest of us aren't entitled too.

After the nation's vow to Close the Gap between Indigenous and non-Indigenous Australians on health, education and employment, it's hardly surprising Indigenous spending has grown.

Trouble is, there's little likelihood this apparently massive spending will see the Closing the Gap targets reached.

Bad, eh? Waste on a grand scale.

Fortunately, however, all is not as it seems. As associate professor Nicholas Biddle, a fellow of the Centre for Aboriginal Economic Policy Research, at the Australian National University, has explained in an article on my second-favourite website, The Conversation, a closer look at the figures shows there's no reason to swallow the rubbish peddled by the downward-envy brigade. ("Oh, Aborigines get it so much easier than we do.")

First point is that the $44,900 in annual spending per Indigenous person covers more than 150 spending categories, including social security payments, but also government spending on health, all levels of education, law and order, housing, community welfare, transport and even a share of the cost of the public service and defence.

So most comes in the form of services provided, rather than cash in hand. A bit over half of the spending comes from state and territory governments, leaving a bit less than half from the feds.

The report divides the $44,900 into "mainstream services" – services available to all Australians regardless of ethnic origin – and "Indigenous-specific services".

The latter account for just 18 per cent of the total – about $8000 a year per person. This proportion is down on earlier years.

But this still leaves the annual cost per person of mainstream services for Indigenous Australians exceeding the equivalent cost for other Australians by about $14,500. How's this explained?

Mainly by the greater intensity of Indigenous people's use of mainstream services. For instance, their rate of unemployment is higher. And, rightly or wrongly, a disproportionate share of law and order spending is devoted to Indigenous people.

As well, the Indigenous population is, on average, younger – meaning disproportionate spending on education.

The rest of the difference between the levels of spending on mainstream services is explained by the higher cost of providing those services in remote locations. Biddle says that 22 per cent of Indigenous Australians live in remote and very remote areas.

And remember this. While real spending on Indigenous Australians seems to be rising rapidly in absolute terms, so too is the Indigenous population. It's up by almost 16 per cent over the seven years to June 2016, compared with a little more than 11 per cent for the non-Indigenous population.

Biddle calculates that while real Indigenous spending per person has risen by 6.9 per cent over the seven years, real gross domestic product per person has risen by 7.5 per cent.

Sadly, it's true that the Closing the Gap targets set by the Council of Australian Governments in 2009 look unlikely to be achieved.

That's because progress to date has been so modest. The targets were worthy, but unrealistic. At this stage it's probable that setting revised, more achievable targets would do more to motivate governments to keep trying.

But this isn't to say we're making no progress. Biddle and a colleague at the Centre for Aboriginal Economic Policy Research, Francis Markham, have been examining last year's census for evidence on how we're going with the gap.

On employment they find no noticeable improvement since the previous census in 2011. On education, however, the news is more encouraging.

"Indigenous people are getting into the education system earlier and staying for longer," they say. "This is likely to lead to improved socio-economic outcomes in future."

The proportion of three to five-year-olds attending preschool is up from 43.5 per cent to 48.5 per cent. The proportion of 15 to 18-year-olds at high school is up substantially from 51.2 per cent to 59.7 per cent.

The proportion of Indigenous people who've completed year 12 has risen from 28 per cent to 34.6 per cent. And the proportion of 15 to 24-year-olds in tertiary education is up from 14.1 per cent to 16.2 per cent.

But let's get real in another sense. Checking the figures to see what's been happening to government spending on Indigenous people is fine, but it tells us nothing about whether that spending is efficient, effective or even adequate.

What's more, looking at how we've been going on the various indicators of progress during the same period tells us little about whether that money is being spent well or badly.

Why? Many reasons. Because spending in one year may take many years to have an effect. Because spending in one area can affect multiple outcomes. Because outcomes in one area can be influenced by spending in many areas.

We know we're spending more but not achieving the improvement we'd hoped for. What we don't know is whether we're wasting our money or need to be spending a lot more.

Why not? Because we know too little about the effectiveness of particular spending programs. We haven't done nearly enough research to see what works and what doesn't.

We won't get as far as we should in Closing the Gap until we do our homework. That includes making more data held by government departments available to researchers.

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Report heralds big change in economic reform priorities

Government reports come and go with great rapidity. Some are acted on, most are quickly pigeonholed. Last week Scott Morrison tabled a report from the Productivity Commission called Shifting the Dial, but it was soon lost amid all the excitement about raids on a union and politicians being thrown out of their jobs.

Despite this inauspicious beginning, let me make a fearless prediction: when the history of the economy in the early decades of the 21st century is written, this report will get prominence.

Why? Not because this government or the next will rush out to implement its recommendations, but because it will be seen as a turning point in the thinking of the nation's economic advisers.

The populist revolt against the doctrines of "neoliberalism" – or economic rationalism, as we've called it in Australia – has been apparent for most of this year. It's been apparent since the middle of the year that the long-running bipartisan consensus in support of neoliberalism in the advanced economies has collapsed.

But where to now? The economy and its apparatus are far from perfect and there's always something that needs working on. The econocrats need something to be working on to justify their existence, so what are they to do now that so many citizens are jack of deregulation and privatisation?

Well, now we know. Ostensibly, the commission's report is just the first of many five-yearly reports on ways to improve the economy's "productivity" – its ability to increase its outputs of goods and services faster than the increase in its inputs of land, labour and capital – the magic that's made us so much richer than our great-grandparents.

The Productivity Commission, would you believe, is preoccupied with productivity. Same old, same old.

Don't be deceived. The commission – formerly a leader of the economic rationalist charge – has taken the initiative in proposing an agenda for economic improvement that's quite different to what we've had so far.

Its new agenda attempts to restore public support for economic "reform" (a word it tries to avoid) by responding to popular criticism of the push that, while well-intentioned and necessary when it originated in the Hawke-Keating years, has since seemed to degenerate into "bizonomics" – what's good for big business is good for the rest of us.

Gone is the unending obsession with tax reform (cutting the rates of tax on companies and high-earning individuals) and industrial relations (cutting penalty rates and shifting bargaining power in favour of employers).

In their place, the commission focuses on three big issues: healthcare, education and cities.

On health, it argues there needs to be more emphasis on preventing and managing the growing incidence of chronic illnesses, such as diabetes. This may involve less reliance on paying doctors according to fee-for-service.

The health system – state-run public hospitals in one box, most doctors in another and pharmaceuticals in a third – needs to be better integrated so as to make it more centred on the needs of patients rather than the suppliers of health care.

This greater co-ordination should happen at the local level.

On education, too many students are being let down at every level.

The commission finds that school results are deteriorating, vocational education and training is "a mess" and universities are more concerned with publishing research papers than improving teaching standards.

As for cities, they produce a growing portion of our gross domestic product – about 80 per cent, with Sydney and Melbourne accounting for half of that.

By the time we reach 2050, almost 11 million extra people will be squeezed into our capital cities, according to Morrison.

The social costs of congestion in our capital cities will grow from almost $19 billion a year in 2015 to more than $31 billion a year by 2030, we're told.

See how different all this is to the economic reform talk we're used to?

It's shifted the focus from business to the "non-market economy" run mainly by government bodies. It's less concerned with mining, farming and manufacturing, and more with the services sector.

Its approach to reform is bottom-up – concentrate on the needs of patients and students, on getting to work – not trickle down.

Putting it another way, it's people-friendly, not business-friendly.

The three issues are two-sided: they directly affect the wellbeing of individuals, but also the nation's productivity, as a healthier, better-skilled workforce gets to work more easily.

This means the "reform agenda" ought to be a lot more relevant and appealing to ordinary voters. It also means it can be pursued by either side of politics.

One of the great objections to the old agenda was fear that it benefited the better-off at the expense of the rest of us.

Rest easy – the commission has got the message.

"A key issue will be to ensure that future economic, social and environmental policies sustain inclusive [note that word]growth – by no means guaranteed given current policy settings, and prospective technological and labour market pressures ...

"One of the advantages of better healthcare, education systems and cities is that they provide strong prospects for improving lifetime outcomes for people from all backgrounds.

"Indeed, improvements in these areas have the potential to decrease health inequalities, and reduce job insecurity and wage risks for those whose skills are at most risk from technological change," the commission concludes.

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Lure of globalisation battles our instinctive tribalism

What has caused the rise in populism that's threatening the mainstream political parties around the developed world, including here?

Economists tend to explain it essentially in economic terms – the bottom has been given a rough deal for years, and finally is rising up – but other scholars see it much more in social and cultural terms: people objecting to being overrun by incomers. Immigrants, asylum seekers, Mexicans, Muslims, Asians.

In his new book for the Lowy Institute, Choosing Openness, Parliament's most accomplished economist, Dr Andrew Leigh, also Labor's shadow assistant treasurer, readily acknowledges the role of xenophobia in explaining why "openness makes us uncomfortable".

He sees our fear of foreigners as part of our evolutionary make-up, and I don't doubt he's right.

Drawing on the work of British anthropologist Robin Dunbar, he argues that "for most of history, humans lived in groups of about 150 people" – a figure known as "Dunbar's number".

Such groups were big enough for some specialisation, but small enough for everyone to know and trust everyone else. People were born, mated, hunted and died within their small community.

"In this environment, there were two kinds of people: those in your tribe and those not in your tribe," Leigh says.

"It made sense to take care of your tribal members. You shared a lifelong relationship with them. Thanks to inbreeding, the rest of the tribe probably looked a lot like you and you certainly all dressed alike.

"Conversely, outsiders were likely to look a bit different and were probably dangerous. While some groups traded, killing was extremely common."

One in seven people in these kinds of societies met their end as a result of violence by another person, he says.

For about 99 per cent of the time that homo sapiens have been on the planet, most of us have lived in small groups. As a species, that is what we evolved to do.

"Each of us is here today because our primitive ancestors were skilled at either fighting outsiders or avoiding conflict. The rule that 'different equals dangerous' kept our forebears alive."

But while hunkering down in the face of difference might have been a useful evolutionary strategy in the past, the growth of cities changed the equation, Leigh argues.

Cities are bound together by not by familial relationships, but by rules and norms of acceptable behaviour.

For hundreds of years, the most productive cities have been those that welcome visitors. In a primitive tribe, a dislike of difference can keep you alive. In a city, it's likely to just make you poorer.

"In this sense, a distrust of diversity is a bit like wisdom teeth – an evolutionary vestige that once helped us grind up plants, but now are more likely to take us on a trip to the dentist's chair."

Today's backlash against openness, Leigh argues, shows how humans' natural discomfort with difference can be exploited for political gain.

In a seminal study of the politics of hatred, the Harvard authority on urban economics Edward Glaeser noted that the key to building a powerful coalition around hate is to focus voters' anger on an "out group" that is sufficiently large to be taken seriously as a threat, but too small to be electorally decisive.

Remind you of any redheads you know?

So Leigh says that populism – the idea that politics is a conflict between the pure mass of people and a small vile elite – is the product of four main forces.

First, slow growth in living standards when the proceeds of economic growth haven't been shared.

"In societies where prosperity is broadly shared, a cosmopolitan outlook steadily replaces traditional values of religion, deference to authority, and an exclusive focus on the security of our family and tribe," he says.

Second, populism is fostered by the pace at which society and technology are changing. Voters may turn to extreme politics as a way of saying "Stop the world – I want to get off."

Third, populism has benefited from canny political entrepreneurs – Duterte, Erdogan, Trump – able to generate massive free media coverage by attacking rivals and breaking taboos.

Fourth, populism has grown because of a loss of faith in mainstream centrist parties. (Their ever-declining standards of behaviour would have nothing to do with this, of course.)

In the late 1960s, seven out of 10 Australians said they always voted for the same party. Today, the share of party loyalists is down to four in 10.

Seems to me that, though much of the problem is manifest in fear of foreigners, the best way to strengthen cosmopolitan values is to ensure the benefits of globalisation and technological change are shared more fairly.

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Our bulldust detectors are on the blink

The world has always been full of bulldust, which is why everyone should come equipped with a bulldust detector.

Trouble is, we're living in a time of bulldust inflation. Some of the things we're being told are harder and harder to believe. But a lot of people's detectors seem to be on the blink.

Part of the reason for the step-up may be that there are so many people shouting that anyone else hoping to be heard has to start shouting too.

These thoughts are prompted by the runaway success of the claim that 40 per cent of jobs in Australia are likely to be automated in the next 10 to 15 years.

This is a fantastic claim in the original, dictionary sense: imaginative or fanciful; remote from reality.

And yet it seems many thousands of people have accepted its likelihood without question.

Similar predictions have been made about America, and are just as widely believed.

As I've written before, two economists, Jeff Borland and Michael Coelli, of Melbourne University, who didn't believe it – because they could find no evidence to support it – traced the origins of the claim and the flimsy assumptions on which it was based.

Which led them to ask the question I'm asking: why do people so readily believe propositions they should find hard to believe?

The authors found a quote from a leading American economist, Alan Blinder, of Princeton University, in his book, After the Music Stopped.

"The consequences of adverse economic events are typically exaggerated by the Armageddonists​ – a sensation-seeking herd of pundits, seers and journalists who make a living by predicting the worst.

"Prognostications of impending doom draw lots of attention, get you on TV, and sometimes even lead to best-selling books . . .

"But the Armageddonists are almost always wrong," Blinder concludes.

What? Journalists? Bad news?

Blinder is right in concluding we take a lot more notice of bad news than good. Borland and Coelli observe that "You are likely to sell a lot more books writing about the future of work if your title is 'The end of work' rather than 'Everything is the same'.

"If you are a not-for-profit organisation wanting to attract funds to support programs for the unemployed, it helps to be able to argue that the problems you are facing are on a different scale to what has been experienced before.

"Or if you are a consulting firm, suggesting that there are new problems that businesses need to address, might be seen as a way to attract extra clients.

"For politicians as well, it makes good sense to inflate the difficulty of the task faced in policy-making; or to be able to say that there are new problems that only you have identified and can solve," the authors say.

I'd add that if you're a think tank churning out earnest reports you hope will be noticed – if only so your generous funders see you making an impact – it's tempting to lay it on a bit thicker than you should.

By now, however, it's better known that there are evolutionary reasons why the human animal – maybe all animals – takes more interest in bad news than good news.

It's because we've evolved to be continually searching our environment for signs of threat to our wellbeing.

All of us are this way because we've descended from members of our species who were pretty nervy, cautious, suspicious types. We know that must be true because those of our species who weren't so cautious didn't survive long enough to have offspring.

In ancient days, the threats we were most conscious of were to life and limb – being eaten by a wild animal. These days we keep well away from wild animals, but there are still plenty of less spectacular, more psychological threats – real or imagined – to our wellbeing.

This instinctive concern for our own safety is no bad thing. It helps keep us safe. It's an example of the scientists' "precautionary principle" – the dire prediction may not come to pass, but better to be on the safe side and take out some insurance, so to speak.

By contrast, failing to take notice of good news is less likely to carry a cost.

Except that, like many good things, it can be overdone. If we're too jumpy, reacting to every little thing that comes along, we're unlikely to be terribly happy. And unremitting stress can take its toll on our health.

Which brings us to the media. Journalists didn't need evolutionary psychologists to tell them the customers find bad news more interesting. Bad news has always received a higher weighting in the assessment of "newsworthiness".

But I have a theory that the news media have responded to greater competition – not just between them but, more importantly, with the ever-increasing number of other ways of spending leisure time – by turning up the volume on bad news.

This can create a feedback loop. People wanting their messages to be broadcast by a media that's become ever-more obsessed by bad news respond by making those messages more terrible.

I'm not sure the media have done themselves a favour by making the news they're trying to sell more depressing, BTW.

But Borland and Coelli offer a further possible explanation of why we're inclined to believe that the technological change which has been reshaping the jobs market for two centuries without great conflagration is about to turn disastrous: the cognitive bias that causes people to feel "we live in special times" – also known as "this time is different".

"An absence of knowledge of history, the greater intensity of feeling about events which we experience first-hand, and perhaps a desire to attribute significance to the times in which we live, all contribute to this bias," they say.

If so, a lot of people will continue believing stuff they should doubt.

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Closing out the world won't fix our problems

Talk about a slow burn. It's 10 years since the beginnings of the global financial crisis, the greatest economic collapse any of us will ever see. Things ought to be back to normal by now, but they aren't.

The world is still picking through the wreckage, deciding what should be kept and what dispensed with. What needs to be done differently to restore normality and ensure there's never another disaster like that one.

A lot of people were surprised the retribution didn't happen at the time: bankers sent to jail, famous economists and their theories discredited, presiding politicians pushed out to pasture, their reputations in tatters.

For a long time, it looked as though the same people who brought us the disaster were kept on to clean up the mess. "Sorry about that. Poor execution. Nothing wrong with the basic policies, of course. Won't let it happen again."

Now, however, there's a revolt by disillusioned and angry punters evident in many developed countries: the Americans voting in an outsider oddball like Trump, the Brits voting to quit the European Union then knackering the government trying to arrange it, the French electing a president from neither of the two main parties, the Germans re-electing Mummy Merkel, but only after reducing the combined vote of her party and the main alternative to their lowest share since the war.

It's a similar story in Oz, where last year's election saw one voter in four avoiding the two main parties and the resurrection of One Nation to scourge the establishment.

Fancy footwork by the Rudd government at the time allowed us to escape the GFC with only a few scratches. Turns out it's not that simple. The economy's been below par ever since and, for the past four years, our growth in wages has been as weak as in the other advanced economies.

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Trouble is, when the pressure for change comes from the grassroots rather than frank admission of failure on the part of the policy elite, the great risk is that we'll flip to populism – policies that are popular because they sound like they'd make things better, when they wouldn't really because they misunderstand the deeper causes of the problem.

Much of the discontent has centred around globalisation – the breaking down of barriers separating countries.

Globalisation is a popular target because it can be blamed for the fall in jobs in manufacturing as well as the admission to our country of people who look different and have strange habits. Are they taking our jobs or just taking over our country?

But though it's true that some of the jobs lost in manufacturing have shifted to other countries (providing employment and income to people much poorer than any of us), our compulsive fear of foreigners blinds us to the much greater role played by automation.

As Dr Andrew Leigh, federal Labor's shadow assistant treasurer and a former economics professor, writes in a new book for the Lowy Institute, Choosing Openness, advances in technology have been shifting jobs from the farm to the cities, and now from manufacturing to the services sector, continuously since Australia became a federation.

This means attempting to "make Australia great again" by restoring protection – reducing our openness to the world – can't work. We'd have trouble establishing many new factories, and those we did would employ a lot more machines than workers.

What restoring protection would do, however, is raise the prices of all the goods we protected – starting with cars, clothing and footwear – worsening the cost of living of all working people.

It's too easy to forget the benefits of globalisation along with the costs.

Apart from being a bit too late, trying to return to White Australia would rob us of greater human links with rapidly developing Asia, where we all know our best hope of future prosperity lies.

Overall, we've gained more than we've lost from the successive waves of new technology, as well as from the way we opened our economy to the world in the 1980s. Trying to re-erect the shutters would be a costly mistake.

Overall, employment has just kept growing – which is not to deny that many less-skilled men formerly employed in manufacturing have not been able to find satisfactory employment.

The sensible conclusion is that there have been losers as well as winners, but little has been done to help the losers – with the winners required to do more to kick the tin.

"The chief challenge," Leigh says, "is to deal with the inequality that can accompany technological change and economic openness.

"This is not just a matter of fairness; it is also essential if we are to deal with the political backlash against openness.

"A spate of studies in economics and psychology have shown that humans exhibit loss aversion [we prefer to avoid losses more than we prefer making gains] and are more conscious of headwinds than tailwinds.

"Open markets require egalitarian institutions," Leigh concludes.

He's right. This is the key principle of reform we lost sight of after the departure of Hawke and Keating.

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Everyone has a different excuse for the electricity stuff-up

The electricity market is such a mare's nest of stuff-ups and problems it's impossible to see the deeply divided Turnbull government making much progress in fixing it.

The goals of halting runaway power prices and reducing the risk of summer blackouts wouldn't be quite so daunting, for instance, were it not for the third goal of "sustainability" – the euphemism you use when you can't say "climate change".

It's tempting to focus on the first two and forget the third, but even that wouldn't work because the inescapable reality of climate change means that, until the Turnbull government ends the "policy uncertainty" about its treatment of fossil fuels relative to renewables, it's unlikely to get sufficient investment in new production capacity to keep prices controlled.

Even if Turnbull were to patch together some weakened version of an (already toned down) clean energy target, that wouldn't do the trick if it failed to win the endorsement of the alternative government.

Even so, the industry's line that ending the policy uncertainty is pretty much all you need to fix the problem is self-serving bulldust.

Ditto the Coalition's line that government subsidies (via the renewable energy target) to renewable energy, with its fatal flaw of "intermittency", are the heart of the problem.

The environmental damage done by burning fossil fuels is a significant "social cost" to the community. If you're not prepared to use some form of carbon pricing to internalise this "externality" then subsidising the cost of emissions-free energy is the next-best policy.

The good news is that the cost of renewable energy and storage is falling so fast it won't be long before it can compete against socially unpriced fossil fuels without explicit subsidy.

Economic rationalists are always preaching that governments shouldn't attempt to "pick winners" by subsidising the establishment of new industries.

The reality, however, is that they've wasted far more taxpayers' money over the years by "backing losers" – propping up declining industries in defiance of technology-driven economic change.

The Coalition's attempt to prop up steaming coal – a sunset industry if ever there was – and demonise renewables may be the worst example of loser-backing since Barnaby Joyce's ancestors' fight to save the horse and buggy from the depredations of those dangerous and smelly horseless carriages.

And this from the prime minister who used to sermonise on the need for much greater innovation and agility. Which, of course, should be "technology neutral".

Yet another strand in the spaghetti diagram links the malfunctioning of the electricity market with the way we've stuffed up the eastern seaboard gas market.

Did you know that domestic gas users – particularly manufacturers, but also the gas-fired power stations we were relying on to tide us over the intermittency problem – are now paying far more for gas than are foreigners buying our exported LNG?

Beat that for a stuff-up. But, says the gas industry's own self-serving bulldust, the problem is easily solved by letting it frack all over NSW and Victoria.

Apparently, no responsibility should attach to the three big companies that built no less than six liquefaction "trains" near Gladstone to cash in on the supposed humungous gas bonanza.

How could they be expected to know that the citizens of NSW and Victoria would object to being fracked over, or even that the price of oil wouldn't stay at $100 a barrel?

Far from these firms accepting the consequences of their high-return/high-risk investment decisions, we're told that for the Turnbull government to protect manufacturers and households from the consequences of this public/private balls-up is a heinous example of "sovereign risk".

Yet another dimension of the problem is the abject failure of the whole micro-reform project of establishing a national electricity market.

We've gone from four separate state-owned power monopolies to a national market dominated by just three vertically integrated oligopolists, and all we've got to show for it is a massive real increase in prices.

This stuff-up is partly explained by the federal government's belated recognition that it must accept ultimate responsibility for any national market.

But explained much more by the state governments' preference for putting the health of their budgets ahead of the need for genuinely competitive markets, through their practice of maximising the sale price of their privatisations by including pricing power in the package.

It's not good enough, however, for economists to tell themselves their reforms would have worked fine were it not for those appalling politicians.

The reformers' mistakes were imagining they'd get vigorous competition between many firms instead of the usual non-price competition between two or three oligopolists, and imagining the regulators of a government-created market wouldn't be "captured" by the oligopolists.

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How micro reform of electricity has failed

The soaring price of electricity is testament to the disastrous failure of a major item on the 1990s agenda of micro-economic reform – establishing a national electricity market.

In practice, nothing worked out the way the reformers' economic textbooks told them it would.

The failure occurred because the people charged with implementing the reforms – governments and their bureaucrats – did so in ways that defeated the object of the exercise.

They either had ulterior motives, or people charged with regulating the national market in the interests of consumers were "captured" by the big businesses they were regulating.

These are the conclusions I draw from the exposition of the market's many problems given by Rod Sims, chairman of the Australian Competition and Consumer Commission, in a speech this week.

Before reform began, the electricity industry consisted of separate state government-owned monopolies, each generating, distributing and selling electricity, with little trading of power between them.

The reformers' idea was to get a competitive market going, with individual power stations across the eastern states competing to sell electricity into a national grid, and competing electricity retailers at the other end buying the power and selling it to households and businesses.

There was no reason the power stations had to be government owned, so they could be privatised, as could the retailers. New retail firms could be allowed to compete with the big privatised retailers.

The transmission and distribution networks remained natural monopolies, of course, but there was no reason they too couldn't be privatised – provided there was regulation of the prices they could charge.

Victoria's Kennett government was the first to sell off everything in 1994, joined much later and more hesitantly by South Australia, NSW and Queensland.

The consumer price index shows retail electricity prices have doubled in real terms over the past decade, whereas the competition commission's calculations show the average retail consumer's bill has increased by "only" about 50 per cent in real terms.

Three main factors explain the difference. First, the price index is based on the retailers' "standing offer" price, whereas some households have taken advantage of cheaper offers.

Second, many households have responded to price increases by finding ways to reduce the amount of electricity they use, thus reducing the increase in their quarterly bills.

Third, many households with solar panels buy a lot less power from the grid and many get unrealistically high credits for the power they put into the grid.

Sims' people estimate that, of the total increase in household power bills, 41 per cent is explained by increased charges for the distribution network, 19 per cent by increased "wholesale" prices for power generation, 24 per cent by increased retail costs and profit margin, and 16 per cent by the increased cost of the renewable energy target and household solar power incentive schemes.

The excessive increases in charges by the natural monopoly distribution networks of poles and wires occurred because, about a decade ago, the state governments – which owned most of the network businesses and greatly profited from them – succeeded in weakening the rules for regulating their prices.

Some states also lifted their standards for avoiding blackouts to unrealistic levels, thus allowing their networks to increase the cost base on which they get a set rate of return.

When a regulator tried to stop the networks charging for "inefficient costs", the NSW and ACT governments took her to court and got her stopped. Although the NSW government was in the process of privatising its networks, it wanted to preserve their profitability so as to maximise their sale price.

For most of the past decade, the highly sophisticated wholesale market designed by the reformers worked well, keeping prices low while generating capacity exceeded demand.

But now that's changed as ageing coal-fired generators are closed and aren't sufficiently replaced by new generators because of the "regulatory uncertainty" created by the present federal government and its climate-change deniers.

Apart from the contribution the misregulation of the gas market is making to higher wholesale electricity prices, prices are also rising because two or three big companies – Origin, AGL and Energy Australia – have been allowed to dominate both the wholesale and retail ends of the market.

Reformers' models always envisage a market composed of a large number of firms competing vigorously on price, but it hasn't worked out that way. It's taken less than a decade for the national electricity market to become oligopolised, giving the few big firms greater pricing power and ability to induce regulators to "see it my way".

State governments have been happy to sell businesses to the aggrandising oligopolists because they offered higher prices than other buyers. The competition commission's efforts to block these takeovers were unsuccessful.

Meanwhile, the oligopolists were figuring out ways to game the wholesale bidding system.

Retail electricity prices were regulated for many years, but the reformers persuaded state governments to deregulate them since competition between the many electricity retailers could be relied on to keep prices in check.

It hasn't worked out that way. Oligopolistic firms are adept at non-price competition, and so it's proved.

The commission's estimate that 24 percentage points of the overall increase in real power costs have come from the retail level breaks up into 7 points for higher profit margins and a remarkable 17 points for higher costs – mainly, I presume, the costs of marketing, advertising and sales people to flog an essential service. Remarkable.

Being entirely a creation of government policy, the national electricity market is heavily regulated by at least three agencies.

But the regulators have been surprisingly slow to recognise that the market is falling far short of what the reformers promised, and also slow to implement their corrective actions.

They've been far more conscious of the need to avoid annoying the oligopolists than the need to stop consumers having to pay more than they should.

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TAFE mustn't be another bad deal for the young

When they look at the economy that older generations are leaving for them, young Australians have a lot to be angry about. Some of their fears and resentments are misplaced, but most aren't.

Oldies who should know better have, for their own reasons, given them an exaggerated impression of the likely extent and timing of digital disruption in the jobs market.

There's much resentment of the higher education tuition fees the young have to repay, but I've never thought it unreasonable to ask them to contribute about half the cost of their qualifications, which will greatly increase their lifetime incomes – especially when repayments are geared to the size of that income and the loan carries a real interest rate of zero.

But I must add some qualifications. It is a bit rich for federal governments to have been tightening up on subsidies to students at the same time as they've been increasing subsidies to the retired, particularly those who believe themselves entitled to a handout because they're "self-funded" (that is, too well off to get the age pension).

You can understand why young people resent being lumbered with education debt when governments have gone for years tolerating distortions in the tax system – negative gearing and the capital gains tax discount – that favour older people buying investment properties over first-home buyers, and push the price of homes and the size of home loans even higher.

And it's understandable that graduates should be uncertain about the economic value of their degrees at a time when so many uni leavers are taking so long to find a full-time job – which is partly because the past few years of weakness in employers' demand for workers is being borne mainly at the entry level, and partly because universities have lowered the average value of their degrees by lowering entry standards and by educating far more people for particular occupations than are ever likely to be needed.

A big part of this last problem comes from the way successive "reforms" by both sides of politics at both levels of government have stuffed up the choice between going to uni and going to TAFE or a for-profit provider of VET – vocational education and training.

The plain truth is, while it's right that, in our ever-more complicated, knowledge economy, almost all students need further education after completing their schooling, it's wrong to believe everyone should go to university.

The less academically inclined – of whom there will always be many – would be better served going on to vocational education and training, as would the economy (that is, the rest of us).

Yet recent times have seen multiple pressures for every kid to go to uni. The first and most potent is that being a graduate carries more social status – an irresistible lure to many parents and students.

The long-standing policy of encouraging students to stay to the end of year 12 adds to the presumption that young people will and should go on to uni. The last years of high school are overwhelmingly academically inclined.

It was always accepted, in principle, that not all students were suited to university and that, for many, their last years of schooling should be a "pathway" to a trade or other technical qualification.

Great idea; doesn't seem to have amounted to much in practice.

And then we have the introduction in 2012 of demand-driven federal funding of undergraduate places at university, which has prompted a huge increase in student numbers as unis – some more than others – dropped their entry standards so as to maximise their federal grants.

Would it be surprising if this led some students to go to uni when they should have gone to TAFE?

I'm told that, at NSW TAFE's big campus at Ultimo in Sydney, more than 30 per cent of the students are there because, though they already have a uni degree, they can't find a job.

I'm told there's a shortage of architectural drafters because people who should have done the tech course have gone to uni to be architects. Then they're disillusioned when they're put to work doing drafting.

But would it be surprising if school leavers are steering clear of vocational education when they've read so many stories about the tribulations of TAFE and some private providers ripping off the young and trusting, so as to rort the federal government's VET version of the student loan scheme?

The truth is that the efforts of federal and state governments of both colours to make VET "contestable" by making for-profit education providers part of the system have been a disastrous failure.

Now the federal bureaucrats have belatedly sorted that mess, we're left with private providers who will only ever cherry-pick the most popular and profitable courses, usually those with low capital costs.

So we're back to relying on good old government-owned TAFE – always the education system's poor relation, towards which the feds' commitment runs alternatively hot and cold.

But the misguided reformers were right to believe TAFE needs to change from its old complacent, inflexible ways, where the convenience and income of staff were given priority over the changing needs of employers and of young people wanting to gain skills relevant to the needs of present and future employers.

TAFE will need to change a lot if it's not to be yet another respect in which the young are getting a bad deal.

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