How we killed off Australia's inflation problem

Before we let 2018 go, do you realise it’s the 25th anniversary of the introduction of the Reserve Bank’s target to achieve an inflation rate of between 2 and 3 per cent? It’s a milestone worth celebrating.

Why? Because it’s worked so well. For the past quarter century, we’ve had inflation that has fallen within the target range “on average, over time” and hence been low and stable.

This week the Reserve Bank issued a volume of papers from its conference to discuss inflation targeting, and whether it needed to change. (Conclusion: it didn’t.)

In that 25 years we haven’t had a serious worry about inflation – which certainly can’t be said of the 20 years before the target was unveiled in 1993.

In those earlier years we were continually worried about high inflation. It reached a peak of 17 per cent in the mid-1970s, averaged about 10 per cent for that decade and 8 per cent during the 1980s.

All the other advanced economies had high inflation rates at the time, but ours was higher and took longer to fix.

Our problem was usually linked with excessive growth in wages, and the “wage explosions” of the mid-1970s and early 1980s prompted the authorities to jam on the brakes, leading inevitably to severe recessions.

Even though inflation remained high, a third and more severe recession in the early 1990s was more the consequence of the authorities’ overdone attempt to end a boom in commercial property prices.

It’s not by chance that this year we reached 27 years of continuous growth since that recession. Before it, we had recessions about every seven years, all of them caused by the authorities jamming on the brakes – and then, when we crashed into recession, stepping on the accelerator, a “stop/go policy”.

The first reason we haven’t needed to worry much about inflation since then is that, as part of the adoption of the inflation target, responsibility for setting interest rates was moved from the politicians to the econocrats running an independent central bank.

They’ve been a much steadier hand on the interest-rate lever, moving rates up or down according to the needs of the business cycle, not the political cycle.

Another reason we’ve stopped worrying about inflation is that this year is also the 35th anniversary of the floating of our dollar in 1983. A floating exchange rate – which, remarkably, has almost always floated in the direction needed to keep the economy on an even keel – has made it a lot easier for the Reserve to keep inflation low and stable.

A third reason is the extensive program of “micro-economic reform” begun by the Hawke-Keating government in the 1980s – including the deregulation of many industries and the decentralisation of wage-fixing – which has made our economy much less inflation-prone than it used to be.

Yet another factor was the realisation at the time the inflation target was adopted – informally by the Reserve in 1993, and then formally by the incoming Howard government in 1996 – that the key to lower inflation was to get “inflation expectations” down to a reasonable level.

Why? Because there’s a strong tendency for the expected inflation rate in the minds of shopkeepers and union officials to become a self-fulfilling prophecy. If they expect prices to keep rising rapidly, they get in first with their own big price or wage rises.

We’ve spent the past 25 years demonstrating that if you can get everybody expecting inflation to stay low, you have a lot less trouble ensuring it actually does.

The hard part was how to get from the high expectations of the late-1980s to the low expectations we’ve had for most of the past 25 years.

Bernie Fraser, Treasury secretary turned Reserve Bank governor, the man who introduced the target, knew what to do: define what was an acceptably low inflation rate – between 2 and 3 per cent, on average - and keep the economy comatose until you actually achieved the target, then keep it low until everyone had been convinced that “about 2.5 per cent” was what today we’d call “the new normal”.

How did Fraser achieve this? He did the opposite of what his predecessors did whenever they realised they’d hit the economy harder than they’d intended to. Despite knowing we were in for a bad recession, he let the interest-rate brakes off only slowly, and didn’t hit the accelerator.

In other words, he made the recession of the early ‘90s longer and harder than it could have been. I think he decided that, since we were in for a terrible belting anyway, he’d make sure we at least emerged from the carnage with something of value: a cure for our inflation problem that wasn’t just temporary, but lasting.

And that’s what he delivered. With low inflation expectations embedded, he was able to stimulate the economy to grow faster and get unemployment down. It went from 11 per cent after the recession to 5 per cent today.

At the time the inflation target was adopted, some people worried it meant the Reserve didn’t care about unemployment. As events have demonstrated, that was wrong. To Fraser, low inflation was just a means to the ultimate end of low unemployment.

I rate him the best top econocrat we’ve had in 50 years. He was wise and caring, with the best feel for how the economy worked. Peter Costello gets the credit for formally adopting Fraser’s inflation target, pursued by an independent Reserve Bank.

But another person also deserves credit – Dr John Hewson. It was Hewson who, as Coalition shadow treasurer, made the most noise about the need for an independent central bank with an inflation target.

Fraser decided he’d better get on with specifying his own target before “some dickhead minister” tried to impose a crazy one on him.

Read more >>

How to keep the news coming

If you thought the Australian Competition and Consumer Commission’s latest report on “digital platforms” was about the debatable ways Google and Facebook treat their users, you’re a victim of the news media’s reluctance to bother their audience with the worrying state of their own finances.

The report was really about the effect of digital disruption on what it calls “news and journalistic content”. So great has the disruption been that the day may come when most newspapers cease to exist.

That wouldn’t be quite so terrible if their companies continued to publish news on the internet. But unless they can find a way to make their digital products adequately profitable, it’s possible even this could cease.

At present we get news from two sources almost wholly funded directly by the federal government, the ABC and SBS. But most of the rest of our news comes from commercial businesses: free-to-air radio and television, plus two or three big former newspaper chains, now producers of what the report calls “print/online news”.

We’re so used to this we don’t see how anomalous it is. At one level, the commercial news media are just selling news to make a profit for their shareholders (who, these days, turn out to be mainly everyone with superannuation).

At another level, however, the news they sell us isn’t an ordinary product like soap or cornflakes. We consume news because we find it interesting – even entertaining – but we also need it to keep us informed about what’s going on in the world: what’s happening overseas, what’s happening in the economy, what’s happening about schools, universities, hospitals, law and order, roads, transport and 100 other areas of government responsibility, and what’s happening in the community.

Knowing about all this is of private benefit to you and me, but the fact that we know it is also of social or public benefit to the community as a whole. Each of us would suffer if we were surrounded by people who knew nothing about what was going on.

And imagine how well governments would perform, and elections would work, if we didn’t have the media telling us what the politicians were up to and holding them to account.

I like to say the commercial media also have a “higher purpose”. Journalism academics speak of “public interest journalism”. Fortunately, such anomalies are well understood by economists, including those at the ACCC. They see that news and journalism have the characteristics of a “public good”.

Another strange thing about commercial journalism is that, historically, its customers paid for it mainly indirectly, via the advertising costs built into the prices of the things they buy. That’s obviously true of free-to-air radio and TV, but it’s been almost as true of newspapers, with subscriptions and the cover price covering only a fraction of production costs.

This, however, is what’s disrupted the production of news. First classified advertising moved online, then display advertising and many former newspaper readers. Now about half of all Australian advertising spending has moved online, with Google and Facebook capturing more than half of it and the news media getting just some.

The legacy media used to sell their news in packages, called newspapers or bulletins. But the internet has “atomised” news, with most people searching for news story by story. About half the people coming to news sites do so via Google and Facebook.

The report says news has the two characteristics of a public good: it’s “non-excludable” (you can’t stop people who don’t pay from getting it) and “non-rivalrous” (me knowing about the budget doesn’t stop you knowing about it, in the way me eating an apple stops you eating it).

Public goods are an instance of “market failure”, in that they’re susceptible to “freeriders” (people who leave it to others to pay) and – significantly, in the commission’s mind – because private providers can’t capture enough profit, there’s a high risk they won’t produce as much of the product as would be in the public’s interest.

Sometimes this means governments take over the production of public goods (as they do with public schools and hospitals) or they subsidise the cost of privately produced public goods (as they do with visits to doctors).

The report explores the possible ways the federal government could subsidise news and journalism to ensure its supply is optimal. One way would be a tax incentive scheme, as is done to support local content for film and television.

Or the government could make grants for journalism projects it wished to encourage. But newspaper companies have long rejected any offer of government assistance that could threaten their independence by being withdrawn should they publish news that offended a government.

A better idea would be for private subscriptions to news services to be made tax deductible, just as are donations to charities and even to politically aligned think tanks.

Canada has already taken up the idea. Since deductibility would go to all news outlets that had signed up to industry codes of journalistic standards, and would go directly to customers rather than businesses, it would be hard for politicians to punish individual news organisations.

It’s an idea that could help secure the future of news and journalism.

Read more >>

The truth behind the mid-year budget update

Wow. Under Scott Morrison’s inspired leadership, the budget is almost back to surplus and the economy is ticking over nicely. And having brought home the bacon, Santa ScoMo can deliver our reward, scattering little presents from now until the election.

It’s a lovely thought, but the truth is less heroic. An old saying would assess the position outlined in the midyear budget update as: good things come to those who wait. Or, franker: better late than never.

To be boasting about how much better the budget balance is looking is a bit rich, coming from a government that, five long years ago, talked its way into government by claiming we faced a "budget emergency" of debt and deficit that only the Liberals could fix because they had good economic management in their DNA.

After the disastrous political reception to its first budget in 2014, the government made no further serious attempt to reduce the budget deficit, instead quietly resolving to wait until the passage of time caused the economy to strengthen and tax collections to recover.

That’s where it finds itself now. Tax collections have strengthened in the past year or so because heavy infrastructure spending by the state governments and the rollout of the national disability insurance scheme have boosted employment and the number of people paying income tax.

As well, company tax collections are stronger because export prices have recovered a bit, businesses have finally used up their deductions from accumulated losses incurred during the downturn, and because the crackdown on multinational tax avoidance initiated by the previous government is paying off.

Even so, the government’s net public debt has doubled from the $175 billion it inherited in September 2013 to $355 billion this October.

Initially, the government resolved not to cut taxes until the budget was back to significant surplus. Malcolm Turnbull ditched that in his first budget and the government has proposed tax cuts in every budget since.

Had it held the line it could have been back to actual (rather than foreshadowed) surplus today. And it could have shown us a net debt that had already fallen a little, rather than telling us its projections see the debt peaking in June next year.

The first politician to show us a projected return to surplus in the next few years was Julia Gillard in 2010. Since then, the Coalition has had to revise down its own projections countless times. We’ve learnt the hard way not to believe any budget number that’s not an "actual".

The Coalition’s budgetary performance has been ordinary in all respects bar one: over the five years to June 2017, it limited the average real growth in its spending to 1.5 per cent a year.

Very few governments can better that restraint – certainly not the previous Labor government which, despite all the dodgy figures Wayne Swan showed us at the time, ended up with real spending growth averaging 5 per cent a year.

As for Morrison’s claims about how well the economy’s doing, Josh Frydenberg has had to revise down the budget’s forecasts for growth in wages and the economy.

With luck the economy will keep growing reasonably strongly in the coming year or two, but only if it negotiates the housing downturn without mishap and only if wages return to reasonable growth.

Read more >>

ACCC wins watchdog of the year, as others lick their wounds

It’s been an infamous year for Australia’s economic regulators. Most ended it with their lack of vigilance exposed, their reputations battered and their ears stinging from judicial rebuke.

The biggest loser is the Australian Securities and Investments Commission, followed by the Australian Prudential Regulation Authority. But the mismanagement of the national electricity market became more apparent. And neither the Reserve Bank nor Treasury emerged unscathed.

Just one regulator had a good year, the Australian Competition and Consumer Commission. It worked hard, discharging its duties with vigour and initiative, taking on powerful business interests, seeking and being granted hugely increased maximum penalties, and fighting to make up for the negligence of its fellow regulators.

As the others have been found wanting, its role has been expanded. And as next year we see the government’s response to this year’s seemingly endless revelations of regulatory failure, it’s role may well be further widened. That’s what tends to happen when rival regulators’ failures become apparent.

It’s been a watershed year. From now on, life will never be the same for regulators found wanting under the microscope of public scrutiny.

Much of that scrutiny came from the banking royal commission, of course. Its interim report in September criticised ASIC for "rarely" going to court "to seek public denunciation of and punishment for misconduct," and being too accommodative when negotiating penalties with the companies it polices.

APRA faced criticism for a "lack of action" in response to widespread misbehaviour in superannuation, including cases where thousands of members were kept in higher fee accounts, rather than being moved into no-frills MySuper products.

But the royal commission wasn’t the only critic of economic regulators this year. I’ve said plenty elsewhere about the failure of the national electricity market’s three (and now four) official operators and regulators to prevent the massive blowout in retail power prices.

One of the many things the Turnbull government did in its vain attempt to fend off pressure for a royal commission was to get the Productivity Commission to report on competition in the financial sector.

The commission confirmed competition in banking was weak and made one eye-opening revelation: part of the problem was that, in their concern to ensure the stability of the banking system, APRA and the Reserve Bank weren’t too worried about ensuring this did as little as possible to inhibit price competition between the big banks.

The commission noted that when APRA had imposed limits on new interest-only lending, it and the Reserve had looked the other way while all four big banks used this as an excuse to jack up interest rates on new and existing interest-only loans.

It recommended that a “consumer champion” be appointed to join APRA, ASIC, Treasury and the Reserve on the co-ordinating Council of Financial Regulators. No prize for guessing the ACCC was the champion the commission had in mind. Nor for reading between the lines that the commission suspected the Reserve and Treasury had been “captured” by the bankers they were supposed to be regulating.

The ACCC has done what little it could over the years to oppose the misregulation and oligopolisation of the national electricity market, and its reports this year revealed what went wrong.

Last week it acted on three fronts. Its preliminary report on digital platforms took on Google and Facebook, greatly expanding our understanding of the questionable ways they operate and working on ways they could be regulated.

ACCC boss Rod Sims has long worried publicly about the state governments privatising their electricity businesses and ports in ways that maximised their sale price by inhibiting price competition. The banker-led Baird-Berejiklian government in NSW is the worst offender.

Last week Sims announced the ACCC was taking the Botany port operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

And last week the ACCC released its final report on factors influencing residential mortgage prices, commissioned at a time when the banks were threatening to pass the new “major bank levy” straight on to their customers.

The report covered similar territory to the earlier Productivity Commission report, noting again the way the banks had used APRA’s move on interest-only loans as an opportunity for “synchronised pricing”.

But the ACCC’s analysis of pricing dynamics in an oligopolistic market like banking revealed far more realism (and advanced economics) than the Productivity Commission’s trademark introductory textbook neo-classicism. The more I see, the more I like.

Read more >>

Trump's mad trade war has a hidden logic

Simple economics tells us Donald Trump’s stated reasons for starting a trade war with China make no sense. But more advanced economics tells us it’s no surprise he’s 'P’d off' over China’s economic rise.

Trump complains that the United States buys more from China than China buys from the US, meaning his country runs a trade deficit with China. He sees this as an obvious injustice and a sign China is cheating.

But economics teaches that bilateral trade imbalances are natural and normal, the inevitable consequence of countries’ differing “comparative advantage”. (Australia’s strength is rural and mineral commodities, for instance, whereas China’s is manufacturing.)

What matters is a country’s trade with all its trading partners. But, even here, economics teaches it’s not necessarily bad for a country to run an overall trade (or, strictly, current account) deficit.

Why not? Because a country runs a current account deficit when its investment in new homes, business equipment and public infrastructure exceeds its ability to fund this investment with its own saving by households, companies and governments, thus requiring it to call on the saving of foreigners.

Conversely, a country runs a current account surplus when it saves more each year than it needs to fund that year’s investment spending, thus allowing it to lend some of its saving to foreigners.

Because some countries (such as China, Germany) save more than their profitable investment opportunities can take up, they run current account surpluses most years.

On the other side of the coin are countries (the US, Australia) that have more profitable investment opportunities than their savings can cover, so they run current account deficits most years.

Put the two groups together and – at least in theory – the world’s annual saving flows to the most profitable investment opportunities to be found on the planet, thus leaving everyone in the world better off.

But a deputy secretary of the Department of Prime Minister and Cabinet, Dr David Gruen, noted in a recent speech that, at a more advanced level of analysis, some of the recent tension over trade is a consequence of the strong and sustained growth of Asian economies, including China.

“As economies in our region have grown and moved up the value-added chain, they have increasingly competed with more entrenched, influential and valuable industries in advanced countries [such as the US],” Gruen says.

When rapidly developing countries embrace some new technology, the consequent increase in their productivity constitutes an increase in their real income (because they’re producing more output per unit of input).

This should also help raise the income of the developed countries with which they trade, since the rich guys are usually getting access to imports that are cheaper than they can produce themselves.

“While some advanced-country industries [and their workers] have undoubtedly been harmed by a rising Asia-Pacific, a rising Asia-Pacific has also meant more demand for other goods and services from advanced countries [as the developing countries spend some of their higher income on imports from the rich world],” Gruen says.

So better technology and increased trade between the rich and poor countries don’t reduce the real incomes of the advanced countries, but they are likely to change the distribution of income.

More income is likely to flow to the owners of capital and to highly skilled workers, while some lower skilled workers’ real incomes stagnate or fall.

“Such disruption is likely to continue as technology makes it easier to trade services across borders, and economies in the Asia-Pacific become increasingly sophisticated. Some of these newly threatened advanced-economy jobs rely on intellectual property or skills premiums, providing an economic rent worth protecting.

“It is no surprise that the generally open-trade stance of those in places like Silicon Valley sits alongside [Trump’s] demand for strong enforcement of intellectual property rights,” Gruen says.

And, although the rich world is better off with free trade, as technology continues to bring down natural barriers to trade in sectors previously considered “non-tradeable” – particularly services – politically influential opposition to free and open trade is likely to continue, he says.

But there’s a second implication of the economic rise of Asia I bet you haven’t thought of. “It makes less sense for the largest economy in the world to bear the costs of maintaining an open trading system as its economy becomes a relatively smaller share of global output.

“Free trade is a 'public good' – we all benefit from it, but each country has an incentive to shift the cost of maintaining it to others.

“The United States shouldered that burden when it was the world’s largest economy. When you are half the global economy you tend to benefit wherever in the world trade is occurring.

“The logic of [it] continuing to do so is now less compelling. The rules-based [trading] system, including the World Trade Organisation, emerged at a time when the US was the dominant global superpower."

Small or medium-sized economies with limited bargaining power in global markets (such as us) are better off with free trade – even when other countries are being protectionist. Why? Because protecting a few of your industries against imports hurts the rest of your industries more than it hurts the countries whose imports you don’t take.

But that’s not always true for large economies with significant market power, such as the US. They can sometimes use tariffs to drive down the prices other countries charge them for imports.

How? Their market is so lucrative the country supplying the imports absorbs some of the cost of the tariff to keep its retail prices competitive. The lower price of imports across the docks improves the big country’s terms of trade, increasing its real income.

Get it? The US has less to lose from an outbreak of protectionism than do smaller countries like us. That’s why the rest of us have to put more effort into preserving and abiding by the WTO’s “rules-based system” and Trump isn’t quite the madman he seems.

Read more >>

Privatisation has been a disaster in many cases

If you’ve always doubted the sense of privatising government-owned businesses, vindication is now flowing thick and fast. In many – but not all - cases it’s turned out to be bad idea. One that’s costing consumers a pretty penny. Unscrambling the egg, however, is proving a frustrating and painful process.

Many people feared that if private businesses were allowed to buy government businesses, the first thing they’d do would be to jack up their prices. Politicians and supposed experts told them not to worry. Sorry, experts wrong, doubting punters right.

In some cases, the businesses privatised were natural monopolies – electricity transmission and distribution networks, and geographic monopolies, such as federally owned airports and state-owned ports.

It the case of the electricity networks, the experts told us not to worry. The prices the private owners are allowed to charge would be tightly regulated. Wrong. In no time the monopolists found ways to rort the system.

One of Scott Morrison’s biggest problems at the coming federal election is voter anger over the huge increase in electricity prices and his government’s limited progress in getting them back down.

Morrison was so rattled he made the most un-Liberal-like threat to use a “big stick” to force the three big companies that have come to dominate the national electricity market to be broken up if they didn’t cut their prices before the election.

He’s since had to replace his big stick with a small one – suggesting he won’t get far in lowering power prices.

The blowout in power prices is the direct result of a decision to take five state-owned electricity generation, transmission and retailing monopolies and turn them into a national electricity market of competing privatised businesses.

But although the feds are now carrying the can for this giant national stuff-up, it was all the doing of the state governments who did the privatising.

How did they get is so badly wrong? They sabotaged it. While you and I were being told not to worry – that vigorous competition would prevent the businesses from raising their prices unduly – the state governments were busy selling their businesses to the highest bidders.

The highest bidders turned out to be companies putting together a vertically integrated business of power stations at the bottom and power retailers at the top. In some cases, governments tightened reliability standards in a way they knew would make it easier for potential purchasers to game the price regulation rules.

If you wonder why parking is so expensive at airports – and catching a taxi home comes with an extra fee – it’s because the Keating government privatised these geographic monopolies without price controls.

With the state governments’ privatisation of their ports, some private lessees have been allowed to fatten their profits in ways too diffuse for us to see how we’re being got at.

For scheming behaviour by premiers and treasurers, there’s no case more appalling than the way the NSW government privatised its ports of Botany, Port Kembla and Newcastle.

Botany is the state’s one big container port, with Port Kembla specialising in bulk commodities and Newcastle the biggest coal port in the world.

In 2013, Botany and Kembla were leased to a single operator and the sale price was enhanced by a “confidential” agreement that the state government would compensate the operator for each additional container handled by the Newcastle port beyond a minimal level.

The Newcastle port was leased to a separate operator with a confidential agreement requiring it to compensate the government – to the tune of about $100 a box, it’s said - for any money it has to pay the other operator if Newcastle increases its handling of containers.

Trouble is, five years on, this deal the public wasn’t supposed to know about is a classic “seemed like a good idea at the time”. Newcastle’s future as a coal port is all decline (the more so if the Adani mine in Queensland goes ahead), but it’s well placed to diversify by building a big new, state-of-the art container terminal.

It has the land, it could build a single ship-rail-road interchange and its port is deep enough to take the next generation of much bigger container ships that will otherwise be accommodated by only one other Australian port, Brisbane.

But the confidential deal makes a container port in Newcastle uneconomic.

Meanwhile, routing all the state’s inward and outward container movements through Botany is a crazy idea. It’s a long way from the Moorebank intermodal terminal, meaning a huge amount of heavy trucks lumbering through Sydney.

New modelling by AlphaBeta economic consultants for the Port of Newcastle claims a new container terminal would allow businesses in the northern part of the state to divert about 16 per cent of the state’s two-way container traffic through Newcastle, cutting their freight distance by 40 per cent, putting competitive pressure on Botany’s container handling prices, taking many trucks off Sydney roads, boosting the NSW economy and cutting the freight costs hidden in the prices consumers pay.

On Monday the Australian Competition and Consumer Commission announced it was taking the Botany operator to court, alleging its agreement with the NSW government is anti-competitive and illegal.

Just another skirmish in what will be a long-running battle to undo the not-so-unintended consequences of privatisation.

Read more >>

Budget Office finds the bigger picture is looking OK

There’s a weakness in the way we think about the government and its effects on the economy that economists and politicians usually don’t see. We draw macro conclusions from micro data because we forget the need for what accountants call “consolidation”.

The problem arises because we keep forgetting that the responsibility for governing Australia is divided between the federal government and eight state and territory governments – not to mention any amount of local councils.

Yet most of us focus only on the federal government’s budget when we want to know what’s happening at the “macro” (national or economy-wide) level, and on our own state government’s budget when we when want to know what’s happening at the “micro” (individual component) level.

Because we think – correctly – that responsibility for managing the macro economy rests with the federal government, and also that the feds’ budget is one of their main instruments for influencing the economy, we study the federal budget in great detail and forget that the eight state budgets also have big economic effects.

It’s when you remember this that you realise the federal budget is micro (part of the total picture) not macro (the whole picture).

We’re bamboozled by the existence of different legal entities, each producing their own accounting statements, even though the economy – a common market between eight states and territories – recognises no legal barriers between its components.

Sometimes this causes us to mislead ourselves, other times it gives the politicians from each level of government much scope for misleading us.

For instance, a federal treasurer bent on showing that our public debt isn’t high by international standards, shows us a graph which compares our federal public debt with other countries’ total public debt.

Similarly, a premier whose state is growing faster than others will claim all the credit. If it’s growing more slowly than the national average, they’ll find some reason to blame it on the feds.

Although it’s true that each state has a different combination of industries, and some states are a bit better governed than others, because Australia is a common market the greatest influence on the economic performance of any state is usually the performance of all the other states.

And, at any point in time, the government whose policies are having the greatest influence on a particular “state economy” is usually the federal government.

It’s partly because we focus on bits of the national economy rather than the whole that politicians – federal and state – put so much effort into shifting costs to the other level of government. (The bigger reason, of course, is that it saves them money.)

Or appears to. A less-remarked flaw in Tony Abbott’s reviled first budget in 2014 was that much of its cost savings involved shifting unchanged costs to other budgets: massive cuts in grants to the states for public schools and hospitals. Abbott’s successors have been backpedalling on those supposed savings ever since.

By contrast, most big listed companies consist of a group of many (mainly wholly-owned) separate legal entities. This is why company law has long required them to publish their financial statements on a “consolidated” basis.


When you combine the accounts of, say, 20 companies into one, you have to eliminate the overlap between them, ensuring nothing’s counted more than once. Money transferred between subsidiaries “washes out”.

The closest we come to a consolidated financial statement for our nine governments – showing us the full picture - is the federal Parliamentary Budget Office’s recent innovation of an annual “national fiscal outlook” using the nine governments’ latest budgets. The report for 2018-19 was published last week.

It’s not a full consolidation because it doesn’t show us total government spending by function. So it doesn’t correct the misperception that spending is dominated by social security payments.

Combine federal and state spending and you see the big ones are health and education.

Because the states use accrual accounting, whereas the feds keep the focus on cash accounting, a federal budget balance can’t be compared with a state budget balance.

Putting them on the same accrual basis (but taking government projections at face value), the consolidated budget balance (the "net operating balance") reached zero last financial year and over this and the next four years is projected to reach a surplus of $46 billion.

Consolidated annual net capital investment is projected to peak at $32 billion this financial year and fall to $28 billion by 2021-22 (though this misses the feds' creative accounting on new airports and inland railways).

Consolidated net public debt is projected to grow by $51 billion to $414 billion in June 2022.

Even so, by then our consolidated net public debt should be about 20 per cent of gross domestic product, compared with Britain’s 75 per cent and America’s 80 per cent.

Read more >>

Why more expressways don't fix traffic jams

When Marion Terrill, of the Grattan Institute, set out to find out how much commuting times had worsened in Sydney and Melbourne, she discovered something you’ll find very hard to believe. But it would come as no surprise to transport economists around the world.

Everyone is sure traffic congestion has got much worse in recent years. This is only to be expected since Sydney’s population grew at the annual rate of 1.9 per cent, and Melbourne’s rate grew even faster, at 2.3 per cent, between the censuses of 2011 and 2016.

Both cities have grown much faster than the Australian population overall. People are crowding into our big cities, much to the disapproval of many people already living there.

Why are they piling into already-crowded cities? For reasons economic geographers call “economies of agglomeration”. One way for countries to get richer is for their businesses to pursue economies of scale; another way is for businesses and their workers to pursue the gains from agglomeration – a fancy word for piling things together.

There are three kinds of agglomeration economies. They come from matching (in a big city, people are more likely to find a job, while businesses are more likely to find the particular workers they need; there can be greater specialisation), sharing (less idle capacity in, say, car parks, or waiting around for customers), and learning (more workers for you to see and imitate; knowledge and know-how shared face-to-face).

Sharing, matching and learning can occur in two ways. When a lot of firms in the same industry gather in the same city, or just because a lot of people and firms are located together, making the city large enough to justify, for instance, heart and lung transplant centres.

Of course, along with the great benefits of crowding together go the costs of crowding together - such as feeling terribly crowded.

There are more people per square kilometre living in the centres of our big cities than there were five years ago. Sydney’s population density has increased by 23 per cent – and Melbourne’s by a mere 46 per cent.

And surely more crowding means more traffic congestion. But this is where Terrill and the co-author of her report, Hugh Batrouney, found their first strange fact. Between the last three censuses, from 2006 to 2016, there’s been virtually no change in the distance between where people live and where they work, measured as the crow flies.

Next surprise came from the HILDA survey – household income and labour dynamics in Australia – which, among other things, asks people how long they spend commuting.

In the four surveys between 2004 and 2016, for both Sydney and Melbourne there was no change in the fact that a quarter of workers had one-way commutes lasting no longer than 15 minutes. One half of workers had commutes no longer than 30 minutes.

When you take it up to the experience of three-quarters of workers, there was some increase over the years in Sydney, but only a small increase in Melbourne. Other figures, from Transport for Victoria, tell a similar story.

So, we all think the increasing traffic volume is leading to greater delay and, hence, longer commute times, but the best available actual measures of commute times say they’re little changed.

Find that hard to believe? Well, as I say, few transport economists would. Why not? Because it fits well with what they call “Marchetti’s constant”. Marchetti was an Italian physicist credited with discovering the empirical truth that the average time spent by a person on commuting is about an hour a day – 30 minutes each way.

The amazing truth of this “constant” has been shown by many studies of many cities around the world.

And it fits with another empirical regularity known as the “Lewis-Mogridge position”, formulated by those gents in 1990: “traffic expands to meet the available road space”.

The government notices that traffic is particularly congested on a certain road, so it builds a big new expressway. When it opens, the time taken to get from A to B falls dramatically. But when people realise this, more of them stop travelling to work by public transport and start going by car.

So many people do this that the speed gain disappears within months, even weeks. The time taken to get from A to B goes back to about what it was before the expressway was built.


The only change is that a higher proportion of workers are able to go by car. The traffic jam is often just shifted to another place on the road network.

Getting back to road congestion in Sydney and Melbourne, how can the gap between what we think has happened and what actually happened be explained?

One possible part of the explanation is that although the traffic really is heavier, making trips less pleasant, this doesn’t prolong the time of the trip as much as we think it has.

But the main explanation – both in Oz and in other countries – is that commuters adapt to the greater congestion.

They take evasive action by moving to a job that’s closer to home, or moving to a home that’s closer to the job. Or they stop going by car and start using public transport.

One thing that really has changed with our bigger cities is more crowded trains and buses.

It’s as though each of us has our own internal, unconscious regulator that draws the line at 30 minutes and, when that limit is exceeded, prompts us to take steps to get travel times back down to where they should be.

Terrill and Batrouney are clear on this: in neither city was enough new infrastructure built between 2011 and 2016 to explain why the huge population growth didn’t lengthen commute times.

The government didn’t fix it, you and I did. Which says we ought to be wary of thinking the obvious – and only - solution to greater crowding is greater spending on transport infrastructure.

Read more >>

The great drawback from 27 years of economic sunshine

Talk about ingratitude. It’s enough to make a grown economist cry. The nation’s dismal scientists labour mightily to produce almost three decades of continuous economic growth, and few people care.

In April this year a venerable crowd called CEDA – the Committee for Economic Development of Australia, the gentlepersonly end of big business – conducted an online survey of almost 3000 people from all states, asking for their thoughts on the economy.

Asked whether they’d gained from 26 years of uninterrupted economic growth – actually, it’s now ticked up to 27 years – only 5 per cent said they’d gained a lot, with 40 per cent admitting they’d gained “a little”.

That left 40 per cent saying they’d gained nothing and 11 per cent who didn’t know. This is deeply shocking for most economists, who hold as their highest article of faith the belief that the public is crying out for unceasing and rapid growth in the size of the economy – by which they mean an ever-rising material living standard.

But if you and I gained little from all the economic growth, who do we think gained a lot? Well, 74 per cent thought large corporations had, but only 8 per cent thought small and medium-sized businesses had.

Just over half of us thought foreign shareholders gained a lot, whereas only 31 per cent thought Australian shareholders did.

Almost three-quarters of us thought senior executives had gained a lot, a third thought white-collar workers did well, and only 12 per cent thought blue-collar workers did.

These answers don’t add up. They reveal that the public’s understanding of how the economy fits together is confused.

While it’s probably true that big businesses are, on average, more profitable than smaller businesses, it’s a mistake to think big business has been coining it over the past three decades, with most of small business struggling. Were that true we’d have heard a lot more howls of complaint.

It’s true that our mining companies did exceptionally well from the resources boom, and that those companies are about 80 per cent foreign owned, but mining accounts for only 6 per cent of the economy. Looking overall, foreign owners would account for more like a third of businesses. And it’s wrong to think foreign shareholders get a better deal than local shareholders.

People often forget that, when you trace it through, the shares in Australia’s big listed companies are owned mainly by Australians with superannuation and other savings for retirement. So, if big companies have done well over recent decades, that means yours and my super balances are a lot higher than they were. This not a gain?

It’s true that the incomes of senior executives have grown a lot faster than the rest of us over recent decades. But with a workforce of 12.6 million, that’s just a relative handful. Say there are 400 big companies. If each of those has 10 people on million-plus salaries, that’s just 4000 of them.

Make it 40,000 and you’re still not talking about many people. Enough to be envious of but, arithmetically, not enough to make a big difference. Were we to take their millions off them, there wouldn’t be enough to give the remaining 12.6 million of us much more than a small pay rise.

In other polling, many people – even many West Australians – say they have nothing to show for the much-trumpeted resources boom. Do you remember the four or five years before 2015 when the dollar was worth a bit less or a bit more than $US1? It was up there because of the resources boom. And, whether or not they realise it or remember it, the many people who took the opportunity to go on an overseas holiday or three were getting their cut from the boom.

What’s the bet all those people with seniors cards, paying only nominal amounts to use public transport, think they’ve gained little over the decades? The aged have done a lot better, mainly because of changes made by the Howard government. And that’s before you count the rising value of their homes and investment properties.

It’s the young who are much more justified in lacking gratitude.

Speaking of which, most people don’t get the point when reminded of our 27 years of uninterrupted economic growth. It doesn’t mean we’ve had twice the growth other countries have had, and so should all be rolling in it. We’ve had more, but not a huge amount more.

No, what it really means is that the others have had three or so severe recessions in that time – including the Great Recession – and we haven’t.

The one great drawback of going for so long without a recession is that so many people have no experience of how much harm and hurt they cause – how depressing they are – while others have forgotten it.

Still, voters have precious little gratitude to give politicians and bureaucrats, and absolutely none for what amounts to the absence of something that would have been terrible. And anything good that happens to us, we soon take for granted.

Read more >>

Boards and managers responsible for reducing banks' value

Too few of us realise it, but we should thank God (and my new best friend, Peter Costello) for our independent central bank. Prime ministers and treasurers seem to say little that’s not point scoring, and Treasury is now highly politicised, but we can always rely on Reserve Bank governors to be frank about what’s happening in the economy and what should be happening.

Last week the latest of our straight-shooting governors, Dr Philip Lowe, offered his conclusions on the shocking revelations of the banking royal commission. His wise words are worth recounting at length, to be sure you don’t miss them.

As Lowe reminds us, finance is all about trust. The first line of the voluntary “banking and finance oath” (which more bankers should now be taking) says “trust is the foundation of my profession”.

Australian banks have a strong record of being worthy of the trust that is placed in them to repay deposits, but in other areas trust has been strained.

The royal commission has highlighted three issues where work is needed to restore the public’s trust. First, Lowe says, “the inadequate way in which banks have dealt with conflict of interest issues”.

Second, “the way that poorly designed incentive systems can distort behaviour – promoting a sales culture at the expense of a service culture, and promoting the short term at the expense of the long term”.

Third, “the fact that the consequences for not doing the right thing have, in some cases, been too light”.

Central to fixing these breaches of trust is creating a strong culture of service within our financial institutions, Lowe says. This starts with correcting the system of internal reward established by the board and management.

“The vast bulk of the people who work for Australia’s financial institutions do want to do the right thing, and they do want to serve their customers as best they can. But, like everybody else, they respond to the incentives they face.

“If they are rewarded on sales or short-term objectives, it should not come as a great surprise that that’s what they prioritise.”

In the minds of economists, incentives can be negative (sticks) as well as positive (carrots). “One of the things that influences incentives is the consequences and penalties that apply when something goes wrong.

“Strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking it.”

But it’s worth distinguishing between the penalties that apply for poor conduct and those that apply for granting loans that can’t be repaid, Lowe says. “On conduct issues, we should set our expectations and standards high, and if they are not met the penalties should be firm.”

With bank lending, however, it’s trickier. “Even when banks lend responsibly, a percentage of borrowers will end up in financial strife and be unable to meet their obligations.

“We need banks to be prepared to make loans in the full expectation that some borrowers will not be able to pay them back."

Get this: “Banks need to take risk and manage that risk well. If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer.”

So it does seem true that Lowe fears the banks will overreact to the punishment and tighter regulation imposed on them following the royal commission’s findings, and that this could lead to them crimping economic growth.

(Just how concerned Lowe is about this is something the media can only speculate about. Top econocrats will always be sotto voce, for fear a loud shout of warning may be self-fulfilling. The media trumpet dire predictions because they don’t imagine anyone will take them seriously.)

Back on the public’s trust, having clear lines of accountability can help. But “we should not lose sight of the fact that it is the banks’ boards and management that are ultimately responsible for the choices that banks make. Creating the right culture is a core responsibility of boards and management.”

One thing that would help, Lowe says, “is for financial institutions to a have a long-term focus and reflect that in their internal incentives. Managing to short-term targets might boost the share price for a while, but this short-termism can weaken the long-term franchise value of the bank.

“I would argue that the franchise value is more likely to be maximised if our financial institutions have a long-term perspective, treat their customers well, reward loyalty rather than take advantage of it, and invest in systems and technology that deliver world-class financial services . . .

“Doing this would not only be good for bank shareholders, but also for the broader community.” Well said.

Read more >>

How about a Robin Hood carbon tax to combat climate change?

What does a public-spirited citizen do when a government makes a solemn commitment to do something important, but simply can’t come up with a policy measure to keep that commitment? Why, they come up with their own suggestion to fill the vacuum.

If you haven’t guessed, the government in question is Scott Morrison’s. The solemn commitment is our Paris agreement to cut our greenhouse gas emissions by 26 or 28 per cent from 2005 levels by 2030.

As part of his overthrow, the government backbench refused to accept former prime minister Malcolm Turnbull’s NEG – national energy guarantee – policy. But Morrison hasn’t been able to come up with a policy measure to take its place.

The public-spirited citizen – or citizens – are Richard Holden, an economics professor at the University of NSW, and Rosalind Dixon, a professor of law at the same uni (who just happen to be married).

This week the pair launched a proposal for an “Australian climate dividend plan” as part of the uni’s “grand challenge on inequality”.

The plan is for a carbon tax, levied at the rate of $50 per tonne of carbon dioxide emissions, not just from electricity generation, but also from transport fuels, direct combustion, fugitive emissions and industrial production processes.

The pair estimate the tax would raise net revenue of about $21 billion a year – and would, of course, raise the retail prices of electricity, gas, petrol, diesel, cement and various other products subject to the tax.

Not likely to be politically popular? Here’s the trick: the $21 billion would be returned to every Australian citizen of voting age, in the form of a tax-free “dividend” payment of about $1300 per person per year.

Because the amount of tax a person paid would vary with the amount of their consumption of taxable items (which, in turn, would vary roughly in line with the size of their incomes), but everyone’s dividend would be a flat $1300 a year, this would produce net winners and net losers.

Holden and Dixon estimate the average household would be a net $585 a year better off. The poorest 25 per cent of households would be better off by more than double that. The net losers would be people whose high spending on taxed items put them on incomes way above average.

Get it? The tax would be highly “progressive”, taking from the rich and giving to the poor. There need be no concern that low-income families would be adversely affected by the new tax. (This, BTW, is how the plan fits the “grand challenge on inequality”.)

And don’t forget this. Pollution taxes such as a tax on carbon are intended to encourage people to avoid paying them. How? By using or doing less of the undesirable thing that’s being taxed.

There are many ways a family could reduce the carbon tax it pays. Avoid wasting electricity and gas. When replacing household appliances, make the next one more energy efficient. Make your next car more fuel efficient.

And here’s an idea: why not generate your own power by putting solar panels on the roof? The higher cost of electricity from the grid would mean the investment paid for itself all the quicker.

In other words, an individual family could increase its net saving by paying less tax but still getting its $1300 annual dividend.

Of course, if too many people did that, the total amount of tax collected would be a lot lower and so the amount of the dividend would need to be reduced.

And, indeed, since the object of the exercise is to significantly reduce our carbon emissions, the tax’s ideal is that next to no one ends up paying it. The more successful the tax, the less it collects. If so, the dividend would start high, but gradually fall to zero.

Since the higher prices of the taxed products they produced would discourage their customers from buying as much, the carbon tax would also create an incentive for the affected businesses to find ways of reducing the emissions caused by those products.

Innovations that made this possible would be very valuable. One obvious way for electricity retailers to reduce the tax on their product (and hence, its price) would be to buy more renewable energy (whose generation involves few emissions) and less coal-fired energy (whose generation involves heavy emissions).

Underlying the economists’ preoccupation with “putting a price on carbon (dioxide)” is their concern that the greenhouse gases emitted by use of fossil fuels impose a cost on society - global warming – that isn’t reflected in the prices charged by producers of emission-intensive products and paid by their customers.

This means that, left to their own devices, the price mechanism and market forces will do nothing to discourage private sellers and buyers of these products from imposing the “social” cost of global warming on all of us.

In other words, emissions and other forms of pollution are outside the economy’s system of private prices. That’s why economists call them “externalities”. Because they’re a cost to society, they’re a “negative” externality. (An example of a “positive externality” is the small benefit to the rest of us when little Janey takes herself off to uni to get an education, which she does purely for her own (private) benefit.)

In econospeak, the point of “putting a price on carbon” is to “internalise the externality”. To get it into the prices charged and paid by private sellers and buyers. Why? To give them a monetary incentive to find ways to reduce the social cost their polluting activity is imposing on us.

In the absence of a carbon price, polluting coal-fired electricity has an undesirable price advantage over non-polluting renewables electricity. This is the economic justification for government subsidy schemes for renewables electricity and household solar power systems.

But Holden and Dixon remind us that, if we introduced their Robin Hood carbon tax, those subsidies would no longer be needed, saving governments (and often, other power users) about $2.5 billion a year.

Read more >>

ALIGNING INSTITUTIONAL INCENTIVES WITH GOOD SOCIAL OUTCOMES

Talk to University of Sydney Association of Professors Symposium, Friday, November 23, 2018

The other day I noticed a tweet that was in the form of an incomplete statement, to be finished by the hearer: At the end of this course, students will be able to . . . The tweet suggested Socrates’ ending would be “know that they know nothing”. The education administrator’s response would be “I’m sorry, but that is not a measurable learning outcome”.

I want to give you an economic journalist’s perspective on the symposium’s question of What should Universities be? Economic journalists take a great interest in budgets, particularly the federal budget. Politicians are eternally conscious of the public’s unending demand for more government spending on 101 worthy projects, but – at least in the politicians’ belief - the public’s steadfast reluctance to pay the higher taxes needed to fund that higher spending.

By the late 1980s, the Hawke-Keating government realised that free university education – which had failed to achieve its goal of significantly increasing the proportion of students from low-income homes – could no longer be afforded, particularly because it involved taxpayers who had not benefited from higher education contributing to the education of students from better-off families gaining, at no tuition cost, an education that brought them significant private benefit in the form of higher lifetime incomes. In what I regard as one of the most important applications of applied micro economics in our times, Professor Bruce Chapman, of the ANU, invented what is properly know as the income-contingent loan, but we remember as HECS, an ingenious way of requiring students to contribute part of the cost of their education, without discouraging students from poor families from going to uni. The introduction of HECS and the advent of full-fee paying international students were the first steps in reducing the burden of universities on the federal budget. The Howard government greatly increased HECS and universities greatly increased their reliance on revenue from international students, with the government taking every opportunity to reduce its share of the cost of a growing local student population. Unis were freed to set their own fees for post-graduate degrees and diplomas, and have turned this into a “nice little earner”. If you remember, at one stage the Howard government even allowed unis to charge a full fee to local undergraduate students whose marks fell not too far short of the cut-offs applying to Commonwealth-supported places, until the incoming Rudd government put a stop to the practice.

The one development which didn’t fit the feds’ trend of expanding the universities’ revenue-raising capacity as a way of reducing their own contribution was Julia Gillard’s decision to relinquish the feds’ control over the number of funded undergraduate places for local students and allow them to be “demand driven”. This was part of a plan to greatly increase the proportion of school-leavers going on to higher education. To universities that had been under so much pressure to generate their own funding, this was like the opening of a great safety valve. The following years saw a huge increase in the number of undergrad places. My guess is that it was the second-tier and regional unis that did most to increase their numbers. When the demand for places had exceeded the government-limited supply of places, universities had used high ATAR cut-offs to select the brightest available students. Admittedly, when a policy decision is made that a higher proportion of each cohort should receive a university education, a reduction in entry standards is inevitable. But the abandon with which some universities dreamt up reasons for admitting students with limited qualifications has been, to coin a phrase, unedifying. It didn’t disguise the unseemly rush for money from the government’s open coffers.

What followed with the election of the Abbott government was, with hindsight, eminently predictable. The increased cost to the feds of demand-driven places was unsustainable, and the only answer was to reduce the proportion of feds’ contribution to undergrad places, while allowing the universities to cover this loss by deregulating fees. To me, it was impossible to not to see where this move was intended to take us: as unis progressively increased their fees, the feds would progressively reduce their contribution to teaching costs until the cost of university teaching was completely off the federal budget, leaving only the cost of the HECS loan scheme and the cost of research funding. As the Group of Eight used their pricing power to really ramp up their fees, changing students a premium for their greater social status and more centrally located and better-appointed campuses, and using that premium to subsidise their research effort, it might be possible for the feds even to cap their contribution to research costs. The more the sandstone unis ramped up their fees, the more scope they would create for second-string unis to raise their fees, even if to a much lesser extent. The claim that market forces would prevent unis from abusing their pricing power was naive economics. The existence of HECS meant the price students were paying was government-subsided and of uncertain size over the distant future. Universities of lesser reputation or regional location would be unlikely to compete by charging a lower price than other second-string universities because the difficulty of knowing the quality of their degrees before actually undertaking them meant students would use price as an indicator of quality. Thankfully, fee deregulation was blocked by the Senate. The Coalition government has since tried to make savings in other ways, finally succeeding in abandoning the demand-driven system and capping the number of Commonwealth-supported places. I’m not sorry to see an end to the demand-driven approach. It created the perverse incentive of encouraging unis to get more funding by further lowering their entry standards.

What this story amounts to is that, for the past 30 years, successive federal governments have worked to get university funding off the federal budget. Although it’s possible to point to snippets of economic fundamentalist thinking – eg competition between universities would prevent them from abusing their right to set their own fees – there’s been no government report that has recommended such a policy and I don’t believe it’s the result of some grand “neoliberal” conspiracy. Rather it’s been an undeclared, unplanned, backdoor privatisation of the universities. I believe it’s happening in an ad hoc way as Treasury and Finance have looked at each year’s budget and tried to find ways of reducing the deficit by saving money here and saving a bit more there.

Because it’s not genuine privatisation – because universities remain government-owned agencies, subject to quite a high degree of regulation by the federal Department of Education and Training; because university education is in no meaningful way a market in which profit-making universities compete against one or two formerly government-owned unis – this backdoor privatisation has left universities rudderless, with no boss to report to, no simple objective of maximising profits, no one telling them what their objectives should be. University leaders have found themselves overwhelmingly preoccupied with a task their academic careers have not prepared them for and for which there’s no precedent to follow: raising sufficient revenue to fund their ever-growing establishments. Little way of knowing how to find the best trade-off between the funding imperative and the maintenance of traditional standards of teaching and research, let alone such airy-fairy notions as the pursuit of knowledge just for its own sake.

Little wonder then that so much of universities’ present performance is open to criticism.  My greatest fear is that a university degree is not as valuable, not as rigorous, not as life-changing and life-preparing as it used to be. That gaining a university degree has become more like being processed through a sausage factory, with ever declining staff-student ratios, with lecturers who have far less personal interaction with their students, lecturers who are rewarded for gaining research funding by being give money to pay some part-timer to take their place in lectures (another perverse incentive), with videoed lectures placed on websites so that students don’t have to physically turn up, with assignments and exams that are easier to pass, with essay assignments that aren’t marked with comments as conscientiously as they should be, with informal quotas on how few students may be failed and informal rules on how vigorously widespread plagiarism should be detected and punished.

I worry that the period of demand-driven open slather, combined with overly ambitious parents and universities’ eternal quest for more funding, has led to too many not-particularly-academically-inclined young people going to uni when they would have been better served going to TAFE.

I worry that, heightened by the Howard government’s perverse attack on compulsory student unionism, universities have become places you visit between your employment obligations, not places you hang around most days, debating incessantly with your friends.

I worry that too many international students are paying big bucks for degrees than haven’t taught them as much as they should have. Like many others, I worry that universities have become too dependent on revenue from international students, particularly from China. In the longer term, this revenue source will diminish as Asian countries get more universities of their own. In the short term, unis could be hard hit by a sudden deterioration in relations between Australia and China.

I worry that universities have become bad employers, mistreating young people seeking an academic career by keep them on successive short-term contracts when they should be given permanency. I worry about professors who take advantage of their young helpers’ job insecurity.

I worry that in their newfound search for a lodestar, universities have settled on key performance indicators, debatable measures of academic effort and excellence and, above all, international university rankings, most of which value research excellence more highly than teaching excellence. The trouble with relying on such “metrics” is that they too often create perverse incentives, and are too easily gamed, not just by staff but by university leaderships themselves. I accept the value of the universities’ contribution through research. But research effort whose primary objective is to gain promotion, or to get the university a higher league-table ranking, may not be research that’s worth taxpayers paying for.

So, what can be done to better align institutional incentives with good social outcomes? One good outcome is students who’ve been taught to think critically, whose outlooks and values have been broadened beyond those they got from their families, and who have been left with inquiring minds and a love of learning. Another good outcome is research motivated by a genuine spirit of inquiry, rather than as a means to the end of promotion or higher ranking on league tables. Yet another good outcome is vice-chancellors unafraid to proclaim to the world that a primary objective of their university is knowledge for its own sake. Vice-chancellors willing to argue that humans have always been an inquisitive animal, and that the richer we become the more we can afford to indulge – yes, indulge - our curiosity. That learning is an end in itself, not just a means to better jobs and higher incomes.

How can we better align incentives with good social outcomes? For a small start, politicians should stop encouraging the unhealthy obsession with league tables by boasting about well we’re doing. I believe it is reasonable to require students to bear part of the cost of their tuition (at present, about half), particularly because of use of HECS-style concessional arrangements for repayment. But I don’t believe it’s reasonable to require students, rather than taxpayers, to contribute to the cost of university research. The Productivity Commission has already pointed out that students whose course puts them in the top tier for HECS payments – such as law and business students – are being required to make such contributions. The Productivity Commission has also pointed out that the universities’ preoccupation with international league tables is also motivated, at least in part, by a desire to attract more international students and be able to charge them higher fees. This is not healthy.

The logical implication of all I’ve said is that federal governments should abandon and reverse their covert ambition to get universities off their budget. Government’s should bear more of the cost of universities, and be braver in asking voters to pay higher taxes as a consequence. Politicians would be assisted in this if there was greater confidence by voters that youngsters going to university were being well taught. Inevitably, any significant increase in public funding is likely to come with strings attached. At least in principle, I’m not sure it would be a bad thing for universities to have their owner and paymaster give them a clearer indication of what the community requires universities to be. In practice, however, greater central regulation may not be as sensibly done as we would like.

Read more >>

Why Morrison has changed his tune on immigration

Wow. And you thought the punters had no political power. Scott Morrison’s change of tune on population growth – following on the heels of NSW Premier Gladys Berejiklian – will please a lot of ordinary voters and enrage big business.

Be clear on this: almost to a man or woman, the nation’s business people, economists, Coalition politicians and Labor politicians have long believed in high rates of immigration, going back to the days of “populate or perish”.

They still do. They’ll have one dismissive, contemptuous word for the Liberal Party’s seeming backflip – “populism”.

By contrast, the public has long had reservations about immigration, going back to Chinese joining the gold rush and, as the movie Ladies in Black reminds us, to post-war resentment of “reffos” (not to mention dagoes and wogs).

It’s quite possible Gladys had a word in the ear of Scott, but I have no doubt both are reacting to results from their party’s private polling and focus groups. (If so, Labor politicians would be getting a similar message.)

That would explain their changed thinking on the topic. Their sudden sensitivity to popular opinion may be explained also by the proximity of elections in Victoria, NSW and federally.

Morrison is nothing if not direct. He’s left no doubt that this is a Sydney and Melbourne special. In the reduction in the size of the annual national permanent migration program he says he expects to emerge from the review, NSW and Victoria may wish to have fewer migrants, while other states may wish to have more.

Whether such picking-and-choosing is practically possible will be a matter for the experts to debate. Sydney and Melbourne are natural entry points of migrants. They have more jobs going, and immigrants are more likely to have relatives, friends and communities already established there. The two big cities’ businesses are likely to want to sponsor more skilled workers.

Before we leave elections, a cautionary tale from the 2010 federal election. Early that year, Kevin Rudd brought forward the next Intergenerational Report, showing the population was projected to reach 36 million by 2050. Rudd proudly proclaimed himself a Big Australia man – which, among other benefits, would give Australia (and him) more clout at international forums.

Then came the backlash. By the time of the election in July, both Julia Gillard and Tony Abbott were loudly proclaiming their opposition to Big Australia.

But here’s the point: after Gillard’s election in 2010 and Abbott’s in 2013, nothing was heard again about the evils of Big Australia. Immigration continued on its merry way.

If the public has always had reservations about immigration, what’s brought matters to a head?

Again, Morrison is direct. Though population growth has played a key role in our economic success, he says, “I also know that Australians in our biggest cities are concerned about population. They are saying: enough, enough, enough.

“The roads are clogged, the buses and trains are full. The schools are taking no more enrolments. I hear what you are saying. I hear you loud and clear.”

So, in a word, resentment over congestion has brought simmering disapproval to a rolling boil.
But I suspect there’s a further factor.

Because the establishment’s enthusiasm for high immigration has always been at odds with the public’s instincts, there was for many years a tacit agreement between both sides of politics not to wake up the question of immigration.

Want to know why this nation of immigrants has never had a formally established population policy? That’s why. (I know because once, during the Fraser government’s time, I wrote in my naivety that we needed a great big debate about immigration and population. The immigration minister immediately slapped me down, almost accusing me of racism.)

That bipartisanship has broken down as politicians realised there were cheap votes to be had by echoing the public’s objection to “too many Asians”. When asylum seekers started arriving by boat, it was on for young and old between the parties.

John Howard allowed very high levels of immigration during his almost 12 years in office – the population was growing by 2 per cent a year at the end of his reign – but the public’s disapproval never boiled over.

Why not? Perhaps because traffic congestion wasn’t as bad as it is today. But my theory is that, while coping with the genuine problem of boat people, Howard also used them to draw the public’s attention away from high levels of conventional immigration. Sometimes you even hear political candidates claiming its boat people who are clogging the roads.

But now there are no boat people arriving – not, we belatedly discover, because none are setting out, but because of our navy’s success in turning them back – this diversionary tactic is no longer available. The voters’ ire turns back to ordinary immigrants.

But what of the much-touted economic benefits of immigration? Business people want a bigger population because having more people to sell to is the easiest way to increase their profits. But that doesn’t necessarily leave you and me better off.

The traditional fear that immigrants take our jobs is wrong – they add about as much to the demand for labour as to its supply.

Immigration does slow down the ageing of our population, but most of the other efforts to show how much benefit it brings the rest of us rest on economic modelling exercises using convenient assumptions. I hae ma doots.

Read more >>

Benefits from big data at risk from untrustworthy politicians

The digital revolution holds the potential to use mere “data” to improve the budget and the economy, and hence our businesses and our lives. But you have to wonder whether our politicians are up to the challenge.

In a speech last week, the Australian Statistician, boss of the Australian Bureau of Statistics, David Kalisch, said the new statistical frontier is “data integration” – you take two or more separate sets of statistics and put them together in ways that reveal new information. Things you didn’t know about how bits of the world work.

This is just exploring the huge, still largely untapped potential of computers to manipulate a lot of figures and produce useful information about what’s going on in this field or that. But it also involves new statistical techniques for combining data in ways that make sense and don’t mislead.

(This, BTW, raises a bugbear of mine. Digitisation, which allows us to measure any number of aspects of a company’s performance cheaply and easily, has given rise to the enthusiasm for “metrics”. But bosses who allow their metrics to be chosen and presented by people who know a lot about IT but nothing about the science of statistics, or who draw conclusions from those metrics without any knowledge of stats, are asking to be led up the garden path. They never know when the metric is answering a different question to what they imagine.)

Kalisch says data integration is already delivering new insights, such as improved estimates of Indigenous life expectancy, understanding outcomes for successive cohorts of migrants, and the importance of small to medium enterprises for job creation (not as outstanding as the propaganda would lead you to expect).

There’s much more of that kind of thing we could do. But Kalisch points also to the considerable untapped potential to use data integration to assess the performance of government policies and programs, and thus to target budget funding to programs assessed as more likely to be effective.

Kalisch says “Australia does not have a strong tradition of rigorously evaluating outcomes of government programs and policies”. That’s putting it politely. The Americans do (because Congress insists on it) and so do many other countries – even those backward and poverty-stricken Kiwis do.

Why don’t we? Because too many ministers and department heads fear the embarrassment if rigorous assessment showed a program was a waste of money, as many would. And also because Treasury and Finance don’t bother pushing it – perhaps because program evaluation costs money upfront, and only saves money down the track.

But that’s only one reason we risk failing to exploit all the benefits of big data analysis. The biggest is the very real probability bully-boy politicians and over-zealous agency heads try to ram through data aggregation schemes over the worries of people concerned about breaches of their privacy.

Consider the hash they’re making of My Health Record where, among other things, the instigators are relying more on slick ads than honest explanation. Consider the long running attempt by the masterful Alan Tudge, the department and the Centrelink PR man to deny there was any problem with robodebt, until the full extent of the fiasco – and the hurt it caused many innocent victims – could no longer be concealed.

Then consider the way Tudge used the shield of Parliament to reveal very private information about a woman who'd had the temerity to criticise him. And he escaped uncensured.

Such episodes, and many years of spin doctor-led politicians playing the true-but-misleading game, have hugely reduced the public’s trust in politicians and their happy assurances that nothing could possibly go wrong.

We stand on the cusp of reaping huge benefits from data analysis, or stuffing it up so badly the electorate punishes any government that touches it.

Part of this is the risk that government penny-pinching doesn’t give the data gatherers enough funding to install adequate privacy safeguards, or enough resources to respond honestly and adequately to the public’s questioning.

But that’s just part of a bigger money question: data integration isn’t particularly dear relative to the benefits of greater understanding, better public policy and more effective government spending it offers, but that doesn’t mean the pollies have the sense to cough up.

Operational funding of our bureau of statistics has been cut by 30 per cent in real terms over the past decade, by governments of both colours.

An independent benchmarking exercise in 2016 found that our bureau’s funding was about half the funding provided to Statistics Canada for roughly equivalent work. Even New Zealand’s official statistician got more than ours did. Smart thinking.

Read more >>