Sorry, small business has no special sauce for jobs

Scott Morrison is surely on a winner with his decision to step up pursuit of jobs and growth by bringing forward the time when small and medium businesses have their company tax rate cut to 25 per cent.

Certainly, it’s likely to be a popular decision, not just with the owners of the more than 3 million businesses who’ll be paying a bit less tax, but also with a lot of ordinary voters.

After all, as everyone knows, small business is the backbone of the economy and its engine room. It’s where most of the economy’s jobs are.

How does everyone know it? Because that’s what politicians – and the small business lobby – keep telling us.

This is why Morrison is so confident of getting the bring-forward passed by the Senate.

Cutting the smaller-business company tax rate to 25 per cent by 2021-22 rather than 2026-27 will have an additional cost to revenue of $3.2 billion over four years.

Only about $1.3 billion of this would be offset by the government’s abandonment of its plan to cut the tax rate for bigger businesses. The rest would be covered by repaying government debt more slowly than previously projected.

There’s likely to be enough cross-benchers keen to push the fast-tracking through – big business may not be judged worthy of a tax cut, but smaller business is - even if Labor isn’t playing ball.

But it seems Labor will be. Why? Because it, too, professes to believe small business is what the economy revolves around.

According to its official policy: “Small businesses make a huge contribution to national prosperity and supporting Australian jobs. Small businesses play a central role in the economy.”

There’s just one problem with all this stuff. It ain’t true.

When you study the facts and figures, there’s no reason to believe small business has any economic virtue not possessed by businesses of any other size. If anything, the reverse.

I’ve spent my whole career as an economic journalist refuting the delusional claims of this or that part of the private sector to be more worthy than the rest of it.

If it’s not small business claiming to be the economy’s engine room, it’s farmers claiming to be the bedrock on which the rest of the economy is built, or manufacturing claiming that making things is more virtuous than doing things (providing services).

There are all those ads telling us it’s mining the country most depends on. (They’re trying to draw attention away from the truth that mining is hugely profitable, about 80 per cent foreign owned, avoids as much tax as possible and employs surprisingly few workers.)

Then there are the exporters claiming that producing things for sale to foreigners is more important than producing things for sale to locals.

Plus, of course, the common delusion that the private sector is “productive” whereas the public sector is unproductive and even parasitic. Do you really think curing the sick or teaching the young – or even directing the traffic – is unproductive? That people in the private sector pay taxes, but workers in the public sector don’t?

It’s all economically illiterate hype. And it’s used to try to justify demands that the government give my bit of the economy a special deal not available to other bits. Economists’ name for it is “rent-seeking”. (Though, as recent events remind us, no one does rent-seeking better than the Catholic schools.)

But back to measuring against the facts the claims that small business has a special sauce when it comes to jobs. It’s complicated by the fact that the usual way of measuring the size of businesses is according to the number of their employees, whereas eligibility for the lower company tax rate is determine by the size of a business’s turnover (sales, not profits).

Morrison says there are more than 3 million businesses with turnover of less than $50 million a year, employing “nearly 7 million Australians”.

If so, that’s more than half of our total “employed persons” of 12.6 million. But about a third of those 7 million would be in medium-size businesses, not small.

According to the latest figures from the Australian Bureau of Statistics, for 2016-17, small business (defined as firms with fewer than 20 employees) has 4.8 million workers, medium-size business (20 to 199 employees) has 2.6 million workers and large business (200 plus) has 3.5 million.

That means small business employs just 44 per cent of the private sector workforce and about 40 per cent of the total workforce.

But just because a sector employs a lot of workers, that doesn’t necessarily mean it's creating jobs faster than other sectors.

Over the two years to June 2017, small business may have had 44 per cent of the existing private sector jobs, but it accounted for only 18 per cent of the growth in jobs.

Overall, private sector employment grew by 2.3 per cent, but small business employment grew by just 0.9 per cent. Combine small and medium and they grew by 2.3 per cent, about the same rate large-business employment growth.

And this during a period when smaller businesses were paying a lower rate of tax, supposedly to encourage them to create more jobs.

Actually, the lack of apparent response shouldn’t be a surprise. The typical tax saving is small. Morrison himself says that an independent supermarket or a pub that makes a $500,000 annual profit would save $12,500 in 2021-22 “to invest back into the business or staff, or help to manage cash flow”.

That doesn’t buy many jobs, nor many pay rises. And since businesses are free to use their tax saving however they see fit, there’s no reason to think they’ll favour more jobs or higher wages. No more than big businesses would.

If Morrison’s on a winner, it’s a political winner, not an economic one.

But if there’s nothing special about small business, why do politicians on both sides keep spreading the sector’s propaganda that it is special?

Because the many more owners of small businesses have far more votes than the relatively few bosses of big businesses do. It's politics, not economics.

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Want a more capable nation? Start younger

The older I get, the more unimpressed I become with both sides – all sides – of politics. And the more disdainful I become of people who let loyalty to a particular party determine their support or opposition to particular policies. Don’t think for yourself, just follow your herd of choice.

On the other hand, since I do care about policy, I shouldn’t be slow to give a tick to whatever side is first to come up with a good one. So, two cheers for Bill Shorten for promising to extend universal access to preschool to three-year-olds.

The Coalition government and its predecessors, together with the state governments, have done a good job of ensuring almost all four-year-olds are now attending preschool for the equivalent of two days a week during the school year (though, for reasons I can’t fathom, the feds have insisted on guaranteeing funding for only a year at a time).

Trouble is, getting four-year-olds to preschool takes us only halfway to catching up with most other advanced economies, even New Zealand. So, with any luck, Scott Morrison won’t be too proud to match Labor’s promise to extend it to three-year-olds.

Why is an economics writer getting so excited about preschools? Because I can’t think of any other single initiative more likely to benefit us socially and economically.

And to do so at a relatively modest cost to taxpayers – particularly when you remember that the kids you help most will end up working more and paying more tax, while costing the government less in welfare benefits and accommodation courtesy of Her Maj.

For anyone who’s been living under a rock for the past 25 years, perhaps the most important and useful scientific discovery of our times is that the human brain develops rapidly in the first five years of life, and both the nurturing and the intellectual stimulation a child receives in that time has huge influence over their wellbeing during their lives.

An independent report prepared last year for state and territory governments by Susan Pascoe, of the Australian Council for International Development, and Professor Deborah Brennan, of the University of NSW, found “extensive and consistent” research evidence of the benefits of quality early childhood education.

The years before school are “the period when children learn to communicate, get along with others and control and adapt their behaviour, emotions and thinking".

“These skills and behaviours establish the foundations for future skills and success. They are provided in most, but not all, homes”, the report says.

Quality early childhood education gives all children the best chance of establishing these capabilities. Without these foundations in place, children often struggle at school, and then often go on to become adults who struggle in life, it says.

This is why the measured benefits of early education are greatest for vulnerable or disadvantaged children, including Indigenous children. “Support for these children is vital – children who start school behind their peers stay behind. Quality early childhood education can help stop this from happening, and break the cycle of disadvantage,” the report says.

It finds that quality early childhood education makes a significant contribution to achieving educational excellence in schools. There’s growing evidence that participation in early education improves school readiness and lifts NAPLAN results and scores in international tests.

“Children who participate in high-quality early childhood education are more likely to complete year 12 and less likely to repeat grades or require additional support."

It also has broader impacts: it’s linked with higher levels of employment, income and financial security, improved health outcomes and reduced crime. It helps build the skills children will need for the jobs of the future.

These days, childcare and early childhood education overlap, which explains why childcare is now called ECEC – early childhood education and care. Ordinary childcare for the under-threes now involves a higher proportion of TAFE-trained early childhood educators.

The two years of preschool we’re considering would occur in a range of settings: long daycare centres, community preschools and kindies, and schools. For parents with children already in care, 15 hours a week would be funded by the government, cutting costs to families.

But all this talk of “education” doesn’t mean hothousing young minds. As Professor Alison Elliott, of Central Queensland University, explains, learning is “play-based” – meaning children learn through play, both self-directed (“free play”) and guided by a trained adult following the official “early years learning framework”.

Preschool gives children access to a four-year degree-qualified early childhood teacher. Elliott notes that one problem in expanding preschool to three-year-olds is the present extreme shortage of early childhood teachers and educators.

But for those who’ve wondered “where will the jobs come from?” – especially after the robots arrive – what’s a problem for some is an opportunity for others. Such skilled jobs are likely to be full-time and permanent; they won’t be in the “gig economy”.

And those jobs will be created by bigger government – greater provision or subsidisation of public services, paid for by our higher taxes. In this and other areas, government will be a key source of additional employment.

Pascoe and Brennan point out that the linking of childcare and early childhood education allows governments to deliver us a “double dividend”: if they do it right, they can subsidise childcare to encourage parents’ participation in the paid workforce, while also promoting children’s wellbeing, learning and development. Sounds good to me.

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The long run is now, and bills are arriving

It’s easy to take Keynes’ dictum that “in the long run we’re all dead” out of context. When you do, you can come badly unstuck - as the banks and insurance companies are discovering.

In case you’ve ever wondered, economists see the short term as being for a year or two, the medium term as about the next 10 years, and the long term as everything further away than that.

See the point? If the long run is only 10, 15, 20 years from now, you won’t be dead. Nor will most of the people around you at work. The economy will still be alive and kicking in 20 years’ time and, in all probability, so will your company.

In which case, spending too many years making short-sighted decisions could leave you looking pretty bad if you haven’t had the foresight to skip town.

For many years people have bemoaned “short-termism” – the tendency to favour quick results over longer-term consequences. To go for the flashy at the expense of patient investment in future performance. To do things where the benefits are upfront, and the costs much later, even when the initial appearance of success actually worsens the likely outcomes down the track.

Short-termism seems particularly to have infected big business. Listed companies are under considerable pressure to ensure every half-year profit is bigger than the last.

This pressure comes from the sharemarket, from “analysts”, but more particularly from institutional investors – the super funds, banks and insurance companies that manage the savings of ordinary people, invested mainly in company shares.

Although the “instos” don’t actually own many of the shares they control, they represent the shares’ ultimate owners (you and me) by continuously pressuring companies to get higher and higher profits – which will lead to ever-higher share prices.

It’s long been alleged that the short-termism the sharemarket forces on big business – to which companies have responded by trying to align executive pay with profits and the share price – has led firms to underinvest in projects with high risks or long payback periods.

If so, this fits with former senior econocrat Dr Mike Keating’s thesis that the advanced economies’ weak growth in activity, productivity and real wages is explained mainly by a protracted period of weak investment.

But the banking royal commission is a stark reminder to a lot of companies, the sharemarket and shareholders that after years of short-sighted, corner-cutting, even illegal behaviour, the long run has arrived, we’re all still alive and there are bills to be paid.

Those bills will take many forms. It’s likely some of the borderline customer-harming behaviour will become illegal, and so won’t be available to keep profits heading onward and upward every half-year.

Banks and insurance companies found to have mistreated their customers in ways that are outright illegal, will face big bills for restitution.

But probably the biggest bill comes under the heading of “reputational damage”. As Australian Competition and Consumer Commission boss Rod Sims reminded us in a speech, most companies spend much time and money promoting and protecting their “brand”.

A highly-regarded brand is money in the bank to the firm that owns it – as you see just by comparing the prices of branded and unbranded goods on a supermarket shelf. Brands engender trust – that the product is of consistently good quality and will do what it promises to do – and often social status.

But, as Sims says mildly, “bad behaviour by a company can undermine its brand reputation”.

“A key value of the royal commission has been to expose the poor behaviour of financial institutions to public scrutiny. The evidence about the conduct of AMP was particularly damning. The resulting damage to AMP’s brand reputation has been substantial.”

Sure has. And that damage to AMP’s reputation and likely future profitability has seen its share price fall by 35 per cent since its first day in the witness box in April.

Sims says one way to discourage misbehaviour by companies is to “identify and shine a light on bad behaviour”.

“The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours,” he says.

Get it? The regulators are wising up, and in future will do more to name and shame offenders – to diminish brand reputation – so as to discourage short-sighted, take-no-thought-for-the-morrow behaviour. To move firms from the short run to the long run.

So far, the big four banks’ share prices have fallen only a per cent or two since the release of the commission’s interim report. But my guess is they have a lot further to fall once we see the full price they’ll be paying for past short-run profit-maximising behaviour, and how much less scope there’ll be for such behaviour “going forward”.

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Why so many businesses are behaving badly

While we digest the royal commission’s evidence of shocking misconduct by the banks and insurance companies, there’s another unpalatable truth to swallow: they have no monopoly on bad behaviour.

It seems almost everywhere you look you see examples of companies behaving badly. In a major speech he gave a few months ago, the chairman of the Australian Competition and Consumer Commission, Rod Sims, offered a remarkable list of business household names the commission was taking proceedings against, as I noted at the time.


Commissioner Kenneth Hayne has given us a lawyer’s explanation of why the banks misbehave, but Sims’ speech offers an economist’s explanation.

It’s an important, though sensitive, question for economists since their simple “neo-classical” model of markets predicts firms won’t mistreat their customers because, if they did, they’d lose them to a competitor.

Sims offers seven reasons for this evident “market failure” – a term economists use to acknowledge when real world markets fail to deliver the benefits the textbook model promises.

First, he says, meeting customer needs may not be the main way companies succeed.

On the supply side, markets and economies are driven by the desire of firms to earn and grow profits. (On the demand side, markets are driven by the self-interest of consumers seeking the best deal they can get.)

Nothing wrong with that. Indeed, it often means that those businesses best at meeting the needs of consumers over the longer term do best and survive longest.

“However”, Sims concedes, “being the best at meeting the needs of consumers is not the only, or even the dominant, way firms succeed. Staying ahead of rivals through continual improvement is a difficult task for most companies; eventually, someone [else] works out how to do things better and cheaper.”

“Commercial strategy therefore is largely about building defences against the forces of competition. To make it more difficult for other firms to develop a better product. Or, if they do, to limit their access to customers.” Much of this is perfectly legal.

Michael Porter, the doyen of corporate strategists, from Harvard Business School, demonstrated that firms can best attain commercial success by reducing the number of competitors, by erecting high barriers to new firms entering the market, by keeping suppliers dispersed and weak, by using brands or the bundling of products to create strong consumer loyalty, and by reducing the likelihood of other firms being able to offer your customers products those customers see as substitutable for your product (that is, by “product differentiation”).

Sims’ second reason customers may not get treated well is that executives are under considerable sharemarket pressure to increase short-term profits, so as to increase share prices. Executives’ bonuses are often geared to achieving this.

Many companies set a sales or profit target higher than the growth in nominal gross domestic product, meaning not all of them can achieve it. This can induce some executives to push the boundaries and ignore the risk of reputational damage over the longer term.

Third, in some markets poor firm behaviour goes unpunished by customers. This can be so because customers don’t see what’s been done to them – that they’re being misled, or that firms have formed an (illegal) cartel to keep prices high.

Or it can happen because customers don’t have viable alternative products to turn to. Or switching to another provider may be too difficult or costly. Firms may deliberately make it hard to compare their product with their competitors’.

Fourth, competition can become a race to the bottom rather than the top if firms gain a competitive edge through poor behaviour that goes undetected and unpunished. Stay pure and you lose business. A firm can know it’s bad practice, but not be game to be the first to stop doing it.

Fifth, companies may give their staff financial incentives without adequate safeguards to prevent mistreatment of customers.

Companies can establish poor business models, such as arrangements that leave franchisees little room to achieve a return on their investment while paying their workers award wages.

Sixth, customers can consider themselves badly treated when firms (including banks and power companies) engage in “price dispersion” – charging new customers a lower price than existing customers – which is a common practice and perfectly legal.

Economists have often judged this to be a good thing - “welfare enhancing”. But Sims notes that such behaviour imposes extra search costs (spending leisure time checking to see that companies you deal with aren’t taking advantage of you) which are a loss to society.

(He could have added than the economists’ simple model assumes away all search costs – an example of “model blindness”, by which economists mislead themselves.)

Finally, customers can suffer if executives’ loyalty to their company leads them to sail closer to the edge of what’s legal than they would in their private lives. If some lawyer tells you it’s not illegal, does that make it honest?

Not surprisingly, the economist’s explanation of why businesses behave badly is very different to the judge’s. But when it comes to what we can do about it, Sims and Hayne aren’t far apart.

Commissioner Hayne’s answer is not to pass new laws outlawing conduct that’s already illegal, but to increase penalties so as to make them a realistic deterrent to big businesses whose size means their misconduct in just one area can earn them huge sums, and then police the law with far more vigour and diligence that so far shown by the financial regulators, including Treasury.

Sims has several suggestions. Increase the "private cost" of bad behaviour by identifying and shining a light on bad behaviour, increasing penalties and continually looking for new ways to increase regulators’ ability to identify and pursue bad behaviour.

Markets will never be as competitive as the textbook model assumes, but Sims says governments should ensure they’re as competitive as possible.

And they should bolster competition on the consumer side by taking measures to lower customers’ search costs – the time and effort needed to find the best deal.

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How a better business culture is within reach

Last week must have been a terrifying wake-up call for Australia’s ruling class – not just our politicians, but also the chief executives and directors of our big corporations, both publicly and privately owned.

If they’re half as smart as they’re supposed to be – after all, we’re told they got their jobs on merit – their performance of their duties will be much improved “going forward”.

The problems at the ABC – managing director sacked and chairman resigned in the same week – and the problem behaviour of our banks are very different, but they have one thing in common.

Members of the ABC board were made aware, if they hadn’t already known, of the chairman’s alleged interference in the day-to-day running of the corporation in a way that endangered its independence from the elected government, but chose to do nothing. Until that knowledge became public and the public’s horrified reaction obliged them to act.

The directors of our big banks presided for many years over a system of remuneration incentives – from the chief executive down – that rewarded staff for putting profit before people.

If the directors didn’t know this was leading to bank customers being mistreated, regulators misled and laws broken, it can only be because they didn’t want to know.

Well now, thanks to the royal commission’s shocking revelations, all of us know the extent of the banks’ misconduct. And the directors have nowhere to hide.

See the link between the two cases? When you’re on a board, it’s easy to see how things look from the viewpoint of the insiders – the people in the room, and on the floors below. What’s harder to see, and give adequate weight to, is the viewpoint of outsiders.

But that’s the board members’ duty, statutory and moral: to represent the interests of outsiders, including the shareholders, but also other “stakeholders”. To view things more objectively than management does. To avoid falling into groupthink. To rock the boat if it needs rocking.

A good question is: how would it look if what’s now private became public? Because that’s what happened last week. And now a lot of executives and directors are viewing the consequences of their acquiescence with fresh eyes and are not proud of what they see.

The ABC’s governance problems, we must hope, will be fixed relatively quickly. The misconduct of the banks is a much tougher problem.

The interim report of the banking royal commission carried a wake-up call also for the financial regulators – particularly the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, but also the Reserve Bank and Treasury.

Allow yourself to be captured by the people you’re supposed to be regulating, and one day your failure to do your duty according to law will be exposed for all to see. How good will you feel?

Get too cosy and obliging, and the banks take advantage of you behind your back. Conclude from things they say - and the way they keep cutting your funding – that your political masters want you to go easy on their generous-donor mates in banking and, when the balloon goes up, the pollies will step aside and point at you.

Since you did neglect your duty to protect the public’s interests, you won’t have a leg to stand on.

Some people were disappointed the interim report contained no recommendations – no tougher legislation, no referrals to the legal authorities – but I was heartened by Commissioner Kenneth Hayne’s grasp of the root cause of the problem and the smart way to tackle it.

Too often, he found, the misconduct was motivated by “greed - the pursuit of short-term profit at the expense of basic standards of honesty . . . From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales”.

Just so. But what induces seemingly decent people to put (personal) profit before people? That’s a question for psychologists, not lawyers. We’re social animals with an unconscious, almost irresistible urge to fit in with the group. A tribal urge.

Most of us get our sense of what’s ethical behaviour from the people around us in our group. If what I’m doing is no worse than what they’re doing, that’s ethical. Few of us have an inner moral compass (set by our membership of other tribes – religious or familial) strong enough to override the pressure we feel under from what our bosses and workmates are saying and doing.

Sociologists call this “norms of acceptable behaviour” within the group. When regulators first said that banks had an unhealthy corporate “culture”, business leaders dismissed this as soft-headed nonsense. Now, no one’s arguing.

But, we’re told, how can you legislate to change culture? Passing laws won’t eliminate dishonesty.

Fortunately, that’s only half true. Rationality tells us people’s behaviour flows from their beliefs, but psychologists tell us it’s the other way round: if you can change people’s behaviour, they’ll change their beliefs to fit (so as to reduce their “cognitive dissonance”).

Hayne says “much more often than not, the conduct now condemned was contrary to law”, which leads him to doubt that passing new laws is the answer.

So what is? His hints make it pretty clear, and I think he’s right. Make sure everyone in banking knows what’s illegal, then police the law vigorously with meaningful penalties. Fear of getting caught will override greed, and a change in behaviour will be reinforced by an improvement in the banking culture.

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Digital disruption is changing us for better and worse

The rise of the internet and other aspects of the digital revolution has changed our working and private lives – mainly for the better. But all technological advance has its downside.

We tend to soon take the benefits for granted and are only starting to understand the costs.

To start with the latest, how many of us watched every moment of either or both grand finals, compared with how many of us actually attended the grounds?

If many of us did neither, it’s because digitisation has greatly multiplied the range of rival entertainments available to us – including while we’re supposed to be working.

Of course, the televising of sport – which has commercialised almost every (male) comp – began long before the internet. But it’s now digitally enhanced.

Trouble is, we seem to be watching more sport, but playing less. Is this a net plus?

Staying with leisure, who hasn’t passed many pleasant hours watching YouTube? Or spent hours on Facebook – still the only commercially significant social medium – thinking how much more exciting their friends’ adventures are compared to their own, or how better-looking or happier their grandkids are.

Mobile phones and social media have given us much more frequent contact with family and friends – although I agree with social commentator Hugh Mackay that digital contact is greatly inferior, in terms of emotional satisfaction and effective communication, to face-to-face contact.

We spend so much of our lives staring at screens, which seem to get smaller when we’re on the go, and ever bigger when we’re at home.

Indeed, I sometimes think there can be few white-collar jobs left – from chief executive to office kid - that don’t consist mainly of sitting at a desk in an office, staring at a screen. As a consequence, many jobs have become more office-bound.

Reporters, for instance, use up far less shoe leather. They “attend” a media conference without leaving the office. The hearings of the banking royal commission occurred mainly in Melbourne, but my colleague Clancy Yeates listened to almost every word by staying stuck to his desk in Sydney.

The internet has revolutionised banking, bill paying and how we pay for things in shops or repay a friend – and there’s a lot more to come. You need to be very old to think it noteworthy that these days we rarely darken the doors of our bank branch.

In the day, city workers devoted much of their lunch hours to walking a few streets to pay an electricity bill at the power company’s office. These days, you pay bills via the internet – or set up an arrangement to have them paid automatically.

(Lunch hours are disappearing, too. Eat something at your desk. But while you’re eating, it’s OK to switch from doing spreadsheets to catching up with the news on your favourite newspaper’s website.)

Some people find it harder to manage their money because it’s now less tangible and more conceptual. Pay envelopes stuffed with notes were long ago replaced by direct credits to your bank account. You pay for things with a plastic card (meaning many young people have trouble learning to manage their credit card). We now wave a card – or a phone – to pay the tiniest of amounts in stores.

When the Reserve Bank’s “new payments platform” – allowing you to move money from one account to another if you know, say, the other person’s mobile phone number – is fully adopted, it will be one of the last nails in the coffin of cheques, and bank notes will be a step closer to being used only by people up to no good.

Digital disruption – which has much further to run – almost always brings pain to conventional producers and their workers, but benefits to consumers. Digitised products are always more convenient and usually cheaper. They bring wider choice and easier comparison.

Online shopping is in the process of eliminating the “Australia tax”, whereby Australians pay higher prices for many items than consumers in America and elsewhere, but are sometimes blocked from accessing the cheaper foreign sites.

The digital revolution is changing the structure of our economy (as well as all the other advanced economies) in ways we don’t yet know about, don’t fully understand and don’t even know how to measure properly.

While the punters bang on about the cost of living, the Reserve Bank says one reason consumer price inflation stays so low is that heightened competition in retailing – most of it related directly or indirectly to digitisation – is forcing down prices, or holding them down.

Now we’re told that weak growth in wages is explained partly by the slowness with which advances in technology are spreading from the leading firm in an industry to the rest of them.

If so, that’s another downside from the digital revolution.

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How economists lost their fear of minimum wage rises

Do rises in the minimum wage come at the expense of jobs? If you listen to the employer groups, they certainly do. But this is a question on which economists have changed their tune.

So much so that the latest issue of the Reserve Bank’s Bulletin includes an article by one of its researchers, James Bishop, concluding there’s no evidence that modest, incremental increases in minimum award wages have an adverse effect on hours worked or the rate of job destruction.

There’s no way the Reserve would have said such a thing 20 years ago.

For decades, most economists did believe increases in the minimum wage would cause employment to be lower than otherwise if they took the wage rate above where market forces would have set it – the “market-clearing” price at which the quantity supplied and the quantity demanded were equal.

Their certainty came from elementary economic theory. Their simple “neo-classical” model of markets, the bedrock on which most economists’ thinking is based, told them that if you raise the price of something without any change in its supply, you’ll cause less of it to be demanded.

That was as true for the price of labour as it was for the price of bananas or anything else.

This continued to be the conventional wisdom among economists until 1994, when two American economists, David Card and Alan Krueger, published the results of their “natural experiment” in which they compared what happened in 410 fast food restaurants in two adjoining states after New Jersey raised its minimum wage by 19 per cent but Pennsylvania didn’t.

To much amazement, they found that the rise in the price of labour actually led to a small rise in employment, not a fall.

In other words, they checked the theory against the real world and found it wanting.

This implied that the simplified model of demand and supply might be good for predicting the consequences of a rise in the price of bananas, but it isn’t much good at predicting developments in a market where every unit of labour is different and comes with a human attached.

A model that could predict the outcome Card and Krueger found is one that assumes employers have a degree of market power over wages, allowing them to fix wage rates below where a free market would put them, until the government intervened.

Card and Krueger’s challenge to the conventional wisdom set off decades of empirical studies throughout the developed world trying to replicate or refute their findings. Not surprisingly – since academic economics is riven by ideological conflict – they found both.

Bishop says that, on balance, the weight of evidence is that “modest and incremental increases in minimum wages do not have significant adverse effects on hours worked and job loss”.

But Australia’s system of minimum wages is very different to other countries’ systems, and there hasn’t been much empirical testing here.

Countries such as Britain, Germany and New Zealand set a single national minimum wage; in the United States it varies by state.

In Oz we, too, have a national minimum wage, but we also have more than 100 industrial awards covering particular industries or occupations, each of which sets a number of minimum wage rates for particular job classifications covered by that award.

Awards cover those aspects of employees' pay and conditions that they’re permitted to cover by the national Fair Work Act. Awards are awarded by the Fair Work Commission after submissions from unions and employer groups and they have the force of law.

Pay someone less than the minimum amount specified in the relevant award and you’re breaking the law.

It’s true, of course, that many workers’ pay – a good third of all employees – is determined by their enterprise agreement rather than their award. The wage rates specified in agreements are usually a fair bit higher than those in the award.

Roughly 40 per cent of employees are covered by “individual arrangements” between the individual and their employer, which may be formal (written) or informal. These wage rates need to be at least as high as provided in the individual’s award.

Not a huge number of workers depend on the national minimum wage (of $18.93 an hour, $719 a week and $37,406 a year), but many workers are paid according the much higher minimums set out in their award.

And here’s the trick: when, after a public hearing, the Fair Work Commission decides by how much it will increase the national minimum wage on July 1 each year, it increases the thousands of minimums set out in awards by the same percentage. (The highest award minimum is $171 an hour.)

So our minimum wage directly affects the wages paid to about a quarter of all employees. That’s a much higher proportion than in the other rich economies.

What’s more, the minimum wage increase probably affects many more workers indirectly, particularly those on individual arrangements.

Our national minimum wage has long been among the highest in the rich countries, both in its absolute level and relative to the median wage.

Consider this: while the wage price index has been rising by only about 2 per cent a year in recent years, the annual increase in the minimum wage was 3.5 per cent this year, 3.3 per cent last year and 2.4 per cent in 2016.

All these are the reasons it was important for Bishop to study our minimum wages to check that the broad conclusions reached in other countries also apply to us.

He did, and they do. He finds that our minimum wage increases “appear to have no discernible adverse effect on hours worked or job loss”.

But minimum wages being the contentious topic they are, he’s quick to add some qualifications.

“The results do not necessarily generalise to large, unanticipated changes in award wages. There will always be some point at which a minimum wage adjustment will begin to reduce employment significantly,” he says.

And here’s a worry: “It is possible that the adverse consequences of higher wage floors may be borne by job seekers, rather than current job holders.”

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Political corruption: with so much smoke, there must be fire

How easy is it for the rich and powerful to buy favourable treatment from our politicians? Honest answer: we just don’t know. What we do know is that we’ve become increasing distrustful of our pollies and doubtful of their honesty.

Polling conducted this year by Griffith University and Transparency International Australia found that 85 per cent of respondents believe at least some federal Members of Parliament are corrupt. This is up 9 points just since 2016. It includes 18 per cent who believe most or all federal politicians are corrupt.

Fully 62 per cent of respondents believe officials or politicians use their positions to benefit themselves or their family, while 56 per cent believe officials or politicians favour businesses and individuals in return for political donations or support.

I can’t prove it, but I doubt it’s nearly that bad. Cases of money in paper bags changing hands would be few and far between. Such personal corruption as exists would usually be more subtle: hospitality in corporate boxes at sporting events and sponsored international travel.

Plus the risk that senior politicians and bureaucrats go easy on interest groups in the hope that, when they retire or leave the parliament, those groups will show their gratitude by giving them a cushy job.

But it’s institutional, not personal, corruption that’s the bigger problem. Businesses, unions and others give money to political parties in the hope of gaining access to decision makers and influence over their decisions.

Both sides of politics play this corrupting game because they’re locked in a kind of arms race to raise the most money for advertising at the next election campaign.

It’s so blatant that both sides hold fundraising dinners where they make no bones about people paying big bucks to sit at the same table as a cabinet minister.

It’s said half of all money spent on advertising is wasted, and I suspect it’s the same with political donations. They didn’t buy you what you were hoping for. It’s this half the pollies use to tell themselves they’re not doing anything dishonourable.

It’s the other half that’s the worry – the half that does buy access and influence. (This is what concerns me as an economic journalist. The prevalence of “rent-seeking”, as economists call it, has a pernicious effect on economic policy and thus the economic welfare of Australians.)

On Monday, the Grattan Institute released a painstaking and comprehensive examination by Danielle Wood and Kate Griffiths of what evidence is available on attempts to buy access and influence.

The report reminds us that federal politicians are much more reluctant than their state counterparts to be more active and open about their relations with donors and lobbyists.

They’ve long refused to follow the states in establishing an anti-corruption commission, wanting us to believe the states may suffer corruption, but the feds are pure as the driven snow. Clearly, we don’t.

The feds have resisted making ministers’ diaries public, so we can see who they’re meeting with, even though the NSW and Queensland governments now do so.

The federal register of lobbyists is a bad joke. It lists people working for lobbying firms, but not lobbyists working directly for businesses, unions or community groups, nor the lobbyists working for peak industry or union associations.

The report finds there are about 500 lobbyists on the register, whereas a further 1755 sponsored security passes have been issued. These allow the holders to move freely around Parliament House. May we know who these people are and who they represent? No.

The report finds that more than a quarter of federal ministers have gone on to work for a lobbying firm, industry body or special interest group since 1990. (Former Labor minsters rarely return to the labour movement because business pays much higher salaries.)

Federal ministers are supposed to wait until 18 months after they cease being ministers before lobbying on any issue they were involved in. For ministerial advisers and senior public servants the waiting time is 12 months.

But many fail to observe the rule – including Ian Macfarlane, Andrew Robb, Bruce Billson, Martin Ferguson – and there’s no penalty.

Rules about making political donations public are much improved in some states, but worst at the federal level. Parties spent $368 million over the two financial years spanning the 2016 federal election, with roughly a third of that coming from government grants rather than donations.

There’s a high threshold for donations to be reportable, and no requirement for parties to add up multiple below-threshold donations from the same source. And delays of a year or two before donations are made public.

The report finds that about 40 per cent of the money parties received had no identifiable source. Of the declared donations, just 5 per cent of donors contributed more than half.

By far the biggest share of declared federal donations comes from highly regulated industries – mining, property construction, gambling, finance, media and telcos – then unions.

This appalling record on federal disclosure, accountability and transparency tells us the public’s perception that our politicians are dishonest is of the politicians' own making.

They do tout for donations. They could agree to end the election advertising war by imposing limits on donations and no longer have to prostitute themselves.

When both sides finally decide there’s not much glory in being in a despised and distrusted occupation, nor much joy in basing policy decisions on rewarding the most generous vested interests, they know where to start in restoring their reputation.

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Frydenberg must lift Treasury’s game on spending control

I read that our new Treasurer, Josh Frydenberg, has already understood the chief requirement of his office: the ability to say no to ministerial colleagues wanting to spend more on 101 worthy projects.

Sorry, Josh, but if you’re hoping to be a successful treasurer in the years beyond the coming election, you – and your Treasury minions - will need to do much better than that.

It takes strength, but zero brain power, to say no to everything in the belief that, though a fair bit will get through, enough won’t to keep the budget on track for the ever-growing surpluses projected from 2019-20 onwards.

As we’re reminded by the Parliamentary Budget Office’s report on those projections out to 2028-29, the Abbott-Turnbull government has done a good job in restraining the growth in its spending so far.

Whereas in the 14 years to 2006-07 the Keating and Howard governments racked up real spending growth averaging 3.2 per cent a year, in this government’s term real spending growth so far has averaged just 1.5 per cent a year.

Trouble is, it’s hard to see any government maintaining such an extraordinary degree of restraint – repression? – for many years to come. That’s particularly likely to be so once the budget’s back in surplus and the net public debt is falling.

(A tell-tale sign of the been-there-done-that syndrome is Scott Morrison “doing a Swanny”: portraying the forecast return to tiny surplus by June 2020 as already in the bag.)

After such a period of discipline, the pressure to let out the budgetary stays will be huge. Yet the forward estimates for the four years to 2021-22 imply real spending growth averaging just 1.8 per cent.

This is composed mainly of increases in spending on the national disability insurance scheme of more than 0.6 percentage points of gross domestic product, more than 0.1 points for defence and almost 0.1 points for aged care, offset by falls of about 0.2 points each for road and rail infrastructure, pharmaceutical benefits, and the family tax benefit, and falls of about 0.1 points each for the disability support pension, veterans and public debt interest payments, plus a fall of 0.3 points for administrative costs.

The projected increases are easier to believe than the projected falls. Those for spending on infrastructure and pharmaceutical benefits are creative accounting. The tougher criteria for the disability pension won’t withstand the rise in the age pension age to 67, nor any economic downturn.

And, of course, the huge saving in public administrative spending assumes that after more than a decade of annual cuts to staffing costs, the “efficiency dividend” can roll for another four years without any noticeable loss of efficiency.

The Coalition’s rule that ministers proposing new spending programs must also propose equivalent savings from within their portfolio seems to do most to explain the low real growth in spending overall.

But this, too, is a discipline that will be ever-harder to sustain for a further decade. The way Morrison is dishing out dollars to fix political pressure points, it’s likely to take a beating just between now and the election.

What worries me is the way Treasury and Finance’s approach to spending control is so old-school, so blunt-instrument, so hand-to-mouth, so no-brainer.

Just Say No. Just tell every department to find savings, and cut their admin costs by yet another 2.5 per cent, then look the other way while they make short-term savings at the expense of our future.

Treasury and Finance see spending control as an act of being tough and unreasoning and opportunist, not one involving any science or learning or expertise.

It’s as though, stuck on a sheep run in the middle of NSW, obsessing about macro-economic management, they’ve been oblivious to the advances in spending control techniques made by applied micro-economists at universities around Australia.

There’s the campaign of Dr Richard Tooth (from a consulting firm) for price signals to encourage better driving, there’s Professor Bruce Chapman’s invention of the income-contingent loan which, as Professor Linda Botterill keeps saying, could be applied to drought loans and much else.

There’s all the work health economists put into the developing case-mix funding of hospitals, and the unending stream of smart suggestions coming from the nation’s leading health economist, Dr Stephen Duckett, of the Grattan Institute.

Then there’s former professor Andrew Leigh’s championing of using randomised control trials to discover what spending works and what doesn’t, there’s more rigorous and transparent use of benefit-cost analysis to evaluate infrastructure projects, there’s greater use of “behavioural insights” teams, there’s more emphasis on preventive medicine and there’s exploiting the long-term budgetary savings offered by greater investment in early childhood development.

Now, many of these advances have been taken up, at least in some modest way. But, to my knowledge, because they’ve been pushed by other people, not because Treasury and Finance have shown much interest. They’re asleep at the wheel.

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Never mind carbon, let’s put a price on bad driving

What would an economist know about road safety? More than you’d think. Certainly, more than the road safety establishment thinks.

Or maybe they just don’t want to disturb the insurance companies’ nice little earner from compulsory third-party car insurance.

The economist in question is Dr Richard Tooth, a consultant with Sapere Research Group, who’s been working for some years on his pet project of using economics to reduce the road toll (with, at one point, some funding from Austroads, the peak body representing road transport agencies).

Over the decades we’ve had much success in using seat belts, random breath testing and safer cars to bring down the road toll.

But we seem to have run out of ideas. The national death toll has started going back up. Last year 1226 people lost their lives on Australia’s roads.

The newly released report of the inquiry into national road safety for the coming decade (which says little about insurance) reminds us that at least another 36,000 people are admitted to hospital each year.

“Often these are life-changing injuries, such as paralysis, brain injuries, amputations or loss of sight,” it says.

Tooth thinks there’s an obvious improvement we could make that wouldn’t cost much more initially, and would actually save money once it started affecting people’s driving habits. It’s to base a driver’s annual motor vehicle insurance premium on how risky their driving is.

Viewed the way economists see things, there are two key problems. As behavioural economists (and social psychologists) have long known, humans tend to be overconfident.

Almost all of us think we’re good drivers, it’s just those other drivers that are causing the problem.

The second problem is that, when we drive badly and cause accidents, we don’t bear the full cost of the damage we do. Economists call the part we don’t pay for ourselves a “negative externality”.

And if someone else is paying, why should we worry? Economists call this “moral hazard”.

Insurance is obviously a good idea, a way of sharing risk. Those people whose house didn’t burn down make a small contribution to the cost of building a new house for the person whose did.

The downside of all insurance, however, is moral hazard. Why should I worry much about ensuring my house doesn’t burn down, it’s insured?

Insurers have ways – usually fairly primitive – of trying to reduce moral hazard. Say, you get a discount on your premium if you have smoke alarms fitted. And on other insurance policies there’s a “deductable”, where you bear the first part of the claim yourself. And, of course, the no-claim bonus.

With car insurance, however, a lot of the cost of accidents is borne by neither the insurance company nor the policy holder. A fair bit is borne by the general taxpayer – the need to maintain many traffic police, ambulances and hospital emergency departments.

But the biggest “cost” is one that’s hard to measure in dollars but is very real: the grief, pain and suffering caused by avoidable deaths and disablement.

Whatever price we put on a human life, it’s safe to assume it would be a whole lot higher than $200,000 – which is what Tooth says is the average cost paid via insurance.

He’s concerned that our system of dividing highly regulated compulsory third-party insurance (which covers injury to people) off from general vehicle insurance (which covers damage to property, plus other things such as theft) makes it hard to give drivers a greater monetary incentive to avoid driving riskily.

With a few exceptions, the state-government run CTP schemes charge people a flat premium that bears no relationship to how carefully they drive. Which, when you think about it (as an economist would), means the schemes effectively tax the low-risk drivers so as to subsidise the high-risk drivers.

That, of course, is the wrong way round if we’re trying to discourage rather than encourage risky driving. And that’s Tooth’s point.

He says we should do what most other advanced countries do and allow insurance companies to offer policies that cover third-party bodily injury in a package with property damage and other risks. The CTP component could remain compulsory and the other components remain voluntary.

This would allow the companies to charge premiums based on the individual’s assessed risk of having an accident, as is happening increasingly in Britain. It would better align insurance companies’ motivation to reduce claims with the community’s desire to reduce road death and injury.

It would mean higher premiums for drivers who were young - or very old. But technological advances have made it possible to assess risk more accurately than just via the driver’s age.

People using “advanced driver assistance systems”, such as autonomous emergency braking, would pay less. Young people driving cars with such assistance systems would get bigger discounts than older drivers.

And then there’s “telematics”, such as onboard devices that record the way a car has been driven – hard braking, swerving and so forth. Such UBI – usage-based insurance – is very big in Britain.

According to Tooth, research shows this can reduce crash risk by at least 20 per cent overall, and by up to 40 per cent among young drivers.

He believes risk-based insurance premiums can influence whether people drive (young people may delay becoming drivers, with ride-sharing apps helping this choice), what they drive (safer cars or cars with added assistance systems) and how and when they drive.

But Tooth would like us to go one better than the Brits (and anyone else). The government could “internalise the externality” of the intangible costs of death and disablement on society by imposing a commensurate charge on insurance companies, which they would pass on to customers having accidents in which they’re at fault.

The government could use the proceeds to build safer roads or for some other worthy cause. The real purpose of such a tax would be to encourage people to avoid it by driving more carefully.

Is this ringing any bells? Putting a price on bad driving follows the same logic as putting a price on carbon.

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Aged care abuses the latest of many economic mistakes

How will the era of “neoliberalism” end – with a bang or a whimper? With a royal commission – or three. But don’t worry. Royal commissions always make a lot of noise.

With the memory of the government’s embarrassing delay in yielding to public pressure for a royal commission into banking still fresh, Scott Morrison got in before the Four Corners expose to announce a royal commission into aged care.

Who’s to say this will be the last? A royal commission into electricity and gas prices is mooted. Maybe sometime in the future we'll see a royal commission into problems with the National Disability Insurance Scheme.

To Morrison, the aged care commission has the advantage of kicking a political hot potato into the long grass of the next parliamentary term. “How can you claim we’re doing nothing? We’ve called an inquiry.”

Actually, the neglect and mistreatment of old people in nursing homes has been the subject of so many inquiries and reports – going back to the kerosene baths in 1997 – that only an inquiry of the status of a royal commission could have satisfied the many complainants.

But I wonder if the increasing resort to royal commissions has a deeper economic and political significance.

A key part of the era of what we used to call “micro-economic reform” has been to take services formerly provided by governments – and sometimes charities – and pay profit-making businesses to provide them.

Among the first of these “outsourcing” schemes was the Howard government’s decision to abolish the Commonwealth Employment Service and contract a network of charitable and for-profit firms to help the jobless find work.

Then came the expansion of childcare to for-profit providers, the move by successive federal and state governments to make technical and further education “contestable” by private providers, and the decision to open the provision of aged care to for-profit providers.

Plus the decision to turn five state electricity monopolies into a single, competitive national electricity market.

The reformers were sure these changes would lead to big improvements. As everyone knows, the public sector is lazy and wasteful, whereas competition and the profit motive make the private sector very efficient.

The reform would allow governments to reduce their spending on the services they subsidised, even while the public got better service. Competition from private providers would oblige church and charitable providers to lift their game.

And introducing market forces meant the providers of government-subsidised services didn’t need to be closely regulated. As any economics textbook tells you, it would be irrational for providers to mistreat their customers because they’d soon lose them to their many rivals.

It hasn’t worked out the way the reformers hoped. We won’t know whether non-government provision of job-search services is working well until unemployment surges in the next recession. But we do know that childcare was thrown into crisis when one private provider, ABC Learning, which had been allowed to acquire about half the nation’s childcare centres, went belly up.

We know that making vocational education and training “contestable” was a costly disaster, as many private providers conned youngsters into signing up for unsuitable courses (and debt).

We know that turning electricity from government monopolies to a national market has seen the retail cost of power double in a decade.

And now it’s aged care where mounting complaints about neglect and abuse can no longer be fobbed off.

Providers have been required to make public so little evidence of staffing ratios and other indicators of performance that we don’t yet know whether neglect and abuse is greater among for-profit or non-profit providers.

The notorious Oakden nursing home in South Australia, after all, was state-government run. But our experience of private operators gaming government subsidies and cutting quality to increase profits in other areas of outsourcing makes me think I know where the greatest problems lie.

And the way the announcement of the commission prompted steep falls in the share prices of four aged-care companies listed on the stock exchange suggests investors share my suspicions.

According to research by the Tax Justice Network, if you measure it by number of beds, non-profit providers make up about half the “market”, with the six biggest for-profit providers accounting for more than 20 per cent.

The biggest is Bupa (owned by a British mutual), followed by Opal (part owned by AMP), Regis, Estia and Japara (all ASX listed), and Allity.

We do know that the number of serious-risk notices given to providers jumped by 170 per cent in the past financial year, and significant non-compliance increased by 292 per cent. This says there’s been a sudden increase not in misbehaviour, but in vigilance by the authorities.

Why are unannounced visits and compliance audits only now in vogue? Good question.

Aged care is just the latest instance of the failure of contestability and “marketisation” to deliver government services satisfactorily – a great embarrassment to econocrats and governments of both colours.

The chickens are coming home to roost and the uproar is threatening the Coalition’s survival. Calling a royal commission with all its shock revelations may be the answer to the politicians’ problem.

It changes the question from “how could you have been so naive as to believe competition would save customers from being abused?” to “what are you doing to punish these bastards and stop it happening?”.

It also tells generous donors to party coffers the government's had no choice but to let them go.

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Long way to go to get banks back in their box

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Morrison optimistic we’ll get much bracket creep

The mystery revealed. Consider this: how does the Morrison government cut income and company taxes and avoid big cuts in government spending, but still project ever-rising budget surpluses and ever-falling net public debt over the next decade?

With publication of the Parliamentary Budget Office’s report on the May budget’s medium-term projections, we now know. Short answer: by assuming loads more bracket creep between now and then.

You may remember that, at the time of budget, I was highly critical of the rosy forecasts and assumptions used in the budget’s “forward estimates” from 2018-19 to 2021-22, and then in its “medium-term projections” out for a further seven years to 2028-29.

They showed the budget’s underlying cash balance returning to a tiny surplus in 2019-20, then the surplus growing steadily to about 1.3 per cent of gross domestic product by the end of the decade.

As a consequence, the government’s net debt would peak in June this year at 18.6 per cent of GDP, then fall sharply to just 3 per cent in 2028-29 as the annual surpluses were used to repay debt.

There you go. Big cuts in company tax and a plan for three cuts in income tax, but we’ll soon be back in the black and eliminating the debt. I thought then it sounded too good to be true.

The budget office, which is independent of the government, is required by its Act to accept the government’s forecasts and macro-economy assumptions for its projections. But the budget papers gave no details of how, according to the government’s projections, the budget surplus would grow from 0.8 per cent of GDP in 2021-22 to 1.3 per cent in 2028-29.

This is what the office’s report tells us. It does so using its own modelling of each of the main taxes and 23 big spending programs, while sticking to the government’s macro-economy assumptions.

The report’s projections show total receipts ending the seven years where they began, at 25.5 per cent of GDP, while total spending grows more slowly than GDP so that it falls from 24.7 per cent to 24.1 per cent.

This implies that all the projected improvement in the budget surplus is expected to come from many years of amazingly disciplined spending restraint. But such a conclusion misses an obvious question: how can total receipts stay growing as fast as the economy is projected to grow when the government is planning to cut the rate of company tax by a sixth (from 30 to 25 per cent) and have three cuts in income tax?

Ah, that’s the report’s big reveal. Its projections show company tax collections declining as a proportion of GDP and “other receipts” also declining, but with this being exactly offset by the growth in income tax collections.

And that would be made possible by the fiscal magic of bracket creep. Remember bracket creep? It was the justification for the tax cuts and, according to then-treasurer Scott Morrison, the tax cuts would “eliminate bracket creep for the middle class”.

Or not. Turns out, according to the report’s projections, there’ll be so much continuing bracket creep as to more than wipe out the benefit from the promised tax cuts.

Taken over the full 10 years – and remembering that the first of the tax cuts began in July this year - income tax collections are projected to rise from 11.2 per cent to 12.5 per cent as a proportion of GDP, a huge jump of 1.3 percentage points.

Over the same decade, the average tax rate across all taxpayers is projected to rise from 22.9¢ in every dollar to 25.2¢. But here’s another important revelation by the report: some people do much better from the tax cuts than others, while bracket creep doesn’t affect everyone equally, either.

The report ranks everyone paying income tax according to their income, then divides them into five groups of about 2.9 million each - “quintiles” – from lowest to highest. It then looks at the way the average tax rate in each quintile is affected by the tax cut and by bracket creep. It looks at the change from 2017-18 to 2026-27.

On average, the three-stage tax plan will cut the average tax rate paid by people in the bottom quintile by just 0.3¢ in the dollar. Those in the second and third quintiles will save 0.9¢, while those in the fourth quintile save 1.1¢ and those in the top quintile save 2.1¢ in every dollar.

(This, BTW, is the proof that the three-stage tax plan does change the progressive income tax scale in a regressive direction, making it significantly less progressive.)

Now, the effect of bracket creep (before allowing for the tax cuts). It raises the bottom quintile’s average tax rate by 1.1¢ in the dollar, then the second and third’s by 5.4¢, but the fourth’s by 3.7¢ and the top quintile’s by just 2.9¢ in the dollar.

Leaving aside the bottom quintile (where most people rely on benefits and earn little income), the big net losers - bracket creep less tax cut – are those in the second and third quintiles. That is, those earning between 30 percentage points below the median income and 10 points above it.

Another name for such people is “low to middle income-earners” – the very people Morrison claimed his cuts were aimed at helping most.

But before you get too steamed up, remember that the budget office is merely exposing the previously hidden implications of the government’s medium-term projection and the rosy assumptions it depends on.

The key assumptions are “above-trend economic growth for much of the period” – which contains a hidden assumption that our record of 27 years without a severe recession will roll on for another 10 – and, in particular, “a return to trend wage growth”.

That is, it will take only a few years before wages are back to growing by 3.5 per cent a year – a percentage point faster than prices – and will stay growing that fast for the duration.

It’s this strong wage growth that does most to produce the bracket creep. So, if you’re not as optimistic about wages grow, you don’t need to be as concerned about bracket creep. By the same token, however, we wouldn’t be making as much progress reducing public debt.

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There are delusions for young and old

There are things oldies tell young people that the youngsters should believe, and things they shouldn’t. One thing I wouldn’t believe is the confident predictions about the huge number of different jobs and careers they’re likely to have.

One thing I would believe is that eligibility for the age pension is likely to have risen to 70 by the time they get there, whatever Prime Minister Scott Morrison says about it being off the table.

I’ve lost count of the number of times I’ve heard adults – usually teachers - assuring school kids they’ll end up having 17 changes in employer across five different careers.

It sounds as if it’s the conclusion of some careful scientific study by experts. But as far as I can tell, if there is such a study it’s been lost in the annals of time.

Which is a pity because other experts need to go back to such a study and tell us just how careful and scientific the study was. Doesn’t sound it to me.

Rather, the line’s become an urban myth – widely repeated and accepted as true because it’s so often repeated.

Those who peer into the “future of work” are always telling us the rising generation needs to be endowed with “21st century skills” such creativity, team work and critical thinking. True.

And our youth could start by applying some critical thinking to the prediction of exactly how many jobs and careers they’ll be having in a working life that hasn’t even started. More critical thinking than the silly adults who keep repeating a finding of whose origin and authority they know nothing.

A key critical-thinking question is: how on earth would you know? How could anyone, no matter how expert, look 45 or 55 years into the future and count the number of jobs and careers young people will end up having, even on average?

We can’t forecast with any confidence what the next five years will hold, let alone the next 55. Any genuine expert would hedge any guess they made with a dozen caveats and qualifications. Anyone who can be as certain as 17 and five is more entertainer than expert.

Do you remember when Julia Gillard dispatched Kevin Rudd in 2010? She had a to-do list of problems inherited from Rudd – including his mining tax and emissions trading scheme - that needed to be dispatched forthwith in readiness for an election.

Malcolm Turnbull’s successor seems to have a similar to-do list. Actually, the plan to raise the age pension age to 70 is inherited from Tony Abbott. It’s one of the few cost-saving measures remaining from the many included, but since abandoned, in Abbott’s first budget in 2014 – a budget so politically disastrous it has blighted the Coalition government throughout its life.

The higher pension age proposal was implacably opposed by Labor and Senate crossbenchers alike. It was already a dead letter and it’s no surprise Morrison has dumped it.

You can believe that, should Morrison be elected, he’ll stick to his promise. But the eligibility age wasn’t to reach 70 until July 2035, and a lot could change between now and then. Say, 17 prime ministers and five changes of ruling party.

We’ve been raising the pension age since the early 1990s and we still are. This has raised little controversy. So it’s not hard to believe that, by the time today’s school students are approaching 70, the age pension age will have drifted up from 67 to 70.

In 1993, the Keating government decided to increase the pension age for women from 60 to 65, phased in over 20 years.

In 2009, the Rudd government decided to phase up the pension age for men and women from 65 to 67, starting six years later. At present we’re up to 65 and six months, and it will rise by six months every two years until it reaches 67 in 2023.

Abbott’s plan was to wait a further two years then, from July 2025, raise the age by six months every two years until it reached 70 by 2035.

A point to ponder is that it was Labor governments that are getting us up to 67, even though Labor has so righteously opposed adding a further three years. Maybe it’s OK if they do it.

There’s no age at which people must retire. The rationale for raising the age at which we become eligible for retirement assistance from the taxpayer is we’re living ever longer, healthier lives.

That’s a good thing. But it comes at a cost to the community – particularly to younger taxpayers – if we insist that those extra years of healthy life must be spent in longer years of retirement rather than work, thus raising the proportion of non-workers to workers.

As I’ve noted recently, one way we’ve used to slow the ageing of our population is high levels of younger immigrants – but this too carries costs many people don’t want to pay.

The notion that retirement beats working is the great delusion of middle age. If the ever-diminishing minority of workers doing hard physical labour fear their bodies won’t last the extra few years, that’s partly why we have the disability support pension. We should stop stigmatising it.

If it’s too hard for older workers to find jobs, that’s an attitudinal problem among employers we should be – and are – reducing.

If workers find their jobs so unpleasant they can’t wait to retire, that’s a communitywide problem of misguided employers we should be correcting directly, to the benefit of all wage slaves.

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The social sciences: so essential we neglect them

As I’m sure you’re only too well aware, today is the first day of the inaugural Social Sciences Week. Just as I’m sure you knew that someone somewhere in America declared a day last week to be Read a Book Day.

Why do people name days, weeks, months and even whole years after worthy causes? Perhaps because there are so many worthy causes, and they’re hoping to gain theirs a little more attention amid the tumult.

We just want to be sure our fellow citizens are aware of who we are and what wonderful things we do, the organisers tell you. And once they’ve got their higher profile, there just might be a message or two they’d like to get through to the government and keeper of the purse strings.

What lifts Social Sciences Week above the ruckus is that last year by some mischance one of its sponsors made me a member of their club – shades of Groucho Marx – thus converting me to the cause. You have been warned, dear reader.

But just what are the social sciences, I hear you cry. Glad you asked. The week is being sponsored by the associations representing sociologists, criminologists, anthropologists and political scientists, plus the Academy of Social Sciences in Australia (whose members include demographers, geographers, accountants, economists, statisticians, historians, lawyers, philosophers, educationalists, psychologists and specialists in linguistics, management and marketing) and the Council for HASS – humanities, arts and social sciences.

In short, social scientists study human behaviour in all its dimensions. Nothing of much importance, then.

Not being ones to boast, the social scientists would like you to know their former students pretty much run the world. They’ve produced the majority of ASX-listed chief executives. Probably just as true of the public service and politicians.

Add the arts and humanities, and most of the tertiary-educated workers in Australia have HASS degrees. Almost three-quarters of university students are in HASS courses. Most of the overseas students paying full freight for their degrees – and now constituting one of our top export earners – do HASS courses, particularly business courses.

But though the social sciences and humanities dominate the work of universities, they don’t dominate their leadership. That honour more often goes to academics from a STEM – science, technology, engineering and maths – background.

And ratios of students to academic staff are much higher for HASS than for STEM courses. Truth is, law and more particularly, business, are the milch cows of universities, used to cross-subsidise subjects considered more worthy.

And you thought STEM was the neglected, put-upon Cinderella of academia? You’ve been spun. Just as every pollie wants you to believe they’re the underdog in the election, so the academics compete to be seen as hard done by. In that comp, STEM is winning. Its trouble is a shortage of customers to justify all the money it gets.

When it comes to research funding, there’s a hierarchy of perceived worthiness. The research aristocrats are the medicos. Since they devote their lives to saving ours (sometimes without thought of reward), we bow down before them.

They get their own special source of federal research funding – the National Health and Medical Research Council – plus money from bequests, philanthropists and patients with say, diabetes, being asked to kick the tin for diabetes research.

The rest of academia fights for a share of the funding distributed by the feds’ Australian Research Council. Here STEM is the upper class, the social sciences come a long way back as the middle class, leaving humanities as the poor relations.

A study from 2012 found that HASS produced 34 per cent of university research, and accounted for 44 per cent of the fields of research judged worthy of research funding, but got just 16 per cent of the lolly.

In this year’s hugely competitive funding round, 423 STEM projects got up, but only 113 social science projects did. This isn’t so surprising since none of the research priorities nominated by the council falls into the social sciences.

It makes no sense. As Senator Arthur Sinodinos said while minister for industry, innovation and science, “the advancement of the Australian economy relies on robust research from physical science and social science alike.

“The social sciences ... provide valuable insight into how to turn a scientific discovery into an informed policy for the nation, and how to implement that policy to ensure effectiveness.”

Just so. The Medicare funding system we value so highly was designed not by any medico, but by two professors of health economics. The huge expansion of university places we’ve seen was made affordable to taxpayers by an economics professor’s discovery of the income-contingent loan, known as HECS.

If applied to research grants, such loans would allow increased funding for social science research without cutting the funding to STEM. That’s what social science can tell you that STEM can’t.

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A beautiful set of numbers gets you only so far

This week’s national accounts don’t leave any doubt that the economy grew strongly in the first half of this year. But whether it can sustain that growth rate is doubtful.

According to figures issued by the Australian Bureau of Statistics, real gross domestic product grew by 0.9 per cent in the June quarter and an upwardly revised 1.1 per cent in the March quarter, yielding growth of 3.4 per cent over the year to June.

For once, the bureau’s “trend” (smoothed) estimates tell the same story.

Annual growth of 3.4 per cent is well above the economy’s medium-term “potential” growth rate of about 2.75 per cent, suggesting we’ve started making inroads into our unused production capacity.

It also means we’ve now completed 27 years of continuous growth since our last severe recession of the early 1990s. (We had recessions too small to remember in 2000 and again at the time of the global financial crisis in 2008, but let’s not spoil the party.)

The figures vindicate the Reserve Bank’s steadfast forecast of growth returning to “a bit above 3 per cent” in 2018 and 2019.

This growth of 3.4 per cent from one June quarter to the next amounts to growth averaged over the whole of the 2017-18 financial year of 2.9 per cent – meaning that (contrary to what I was expecting) the government has comfortably exceeded its budget forecast of 2.75 per cent.

Where’s the growth coming from? Over the year, the biggest contributions came from consumer spending and government consumption spending (mainly the wages of people working in health and education), business investment spending and public investment in infrastructure.

Since the volume of imports grew a lot faster than the volume of exports, the external sector subtracted from growth.

It was, however, a financial year of two halves, with growth at an annualised rate of less than 3 per cent in the last half of 2017, but more than 4 per cent in the first half of this year.

Trouble is, no one sees the economy continuing to grow at an annualised rate as high as 4 per cent – not private forecasters or the Reserve Bank, nor even the government.

Why not? Because the biggest contributor to growth – whether over the year to June or in the latest quarter – has been strong consumer spending.

Consumer spending accounts for more than half of GDP. And its growth does much to stimulate growth in business investment spending, particularly non-mining business investment. (It’s when demand for your product threatens to exceed your production capacity that you expand your business.)

Growth in consumer spending is driven by growth in households’ disposable income. Household disposable income, in turn, is driven mainly by growth in wages. That’s real growth in wages – wages growing a per cent or so faster than prices are rising.

But this is just what’s not been happening over the past three or four years. And although Reserve Bank governor Dr Philip Lowe remains confident we’ll get back to heathly real wage growth eventually, he keeps warning the recovery will be a long time coming.

This gives us good reason to doubt that the rapid growth of the first half of this year will be sustained. But, before we get to that, how’s it been achieved so far?

The first part of the explanation is the extraordinarily strong growth in employment. As you may have heard (many times), employment grew by a calendar-year record of 400,000 in 2017, about double the annual average.

This week the new Treasurer, Josh Frydenberg, noted that 2017-18 saw jobs growth of more than 330,000 – the largest jobs growth in a financial year since 2004-05.

Notice the diminishing superlatives? If you use trend figures to break that into half years, you find 70 per cent of it occurred in the first half and only 30 per cent in the second. Hmmm.

While wage rises are the main source of increase in household disposable income, the secondary source is increased employment – more people earning income in more households.

To illustrate, total wages paid to households (“compensation of employees”, in the jargon) rose by 0.7 per cent in nominal terms in the June quarter, whereas average wages per worker rose by 0.1 per cent. Get it? Increased employment accounted for almost all the growth in total wages.

But that employment growth is not the main thing that kept consumer spending growing strongly despite weak growth in household income. The bigger factor was households cutting their rate of saving.

The ratio of household saving to household disposable income continued its fall, dropping from 2.8 per cent to 1.4 per cent (using trend figures). This is down from a peak of 9 per cent after the financial crisis.

Note, this means households added to their savings at a lesser rate, not that they reduced the amount of their savings.

This is what economists call “consumption smoothing”. If the growth in your income is weak, you reduce your rate of saving to avoid having to tighten your belt and consume less.

Nothing wrong with that. But there’s not much scope left for further cuts in the saving rate.

Dr Shane Oliver, of AMP Capital, offers this summary of the outlook for the economy: “While housing construction will slow and consumer spending is constrained, a lesser drag from mining investment [because it’s almost hit bottom] along with solid export growth provide an offset, and are expected to see growth of between 2.5 and 3 per cent going forward.”

I’m more optimistic than that. I hope the Reserve’s “a bit above 3 per cent” will be on the money.

But be clear on this: no matter how wonderful the latest figures look - and there are two more quarterly announcements to come before an election in May - strong growth in the economy isn’t sustainable until workers are back to getting their share of the benefits of national productivity improvement in the form of real wage growth of a per cent or two a year.

Until then, voters aren’t likely to be greatly impressed by "a beautiful set of numbers”.

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Punishing wrongdoers won’t fix our problem with banking

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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