Both sides of politics play along with costly con trick

Since there’s probably more madness to come, it’s too soon to tell how much Donald Trump’s uncomprehending machinations on trade will do to make America’s economy less great, let alone the rest of us. But it’s safe to predict damage to our economy – much of it self-inflicted.

Yes, self-inflicted. It won’t just be what Trump and others do to us, but also the damage we do to ourselves by hitting back in ways that hurt us more than they hurt the other guys.

By reacting emotionally rather than intelligently. By playing to the peanut gallery.

It’s true that our economy loses when other countries try to reduce their spending on our exports by imposing a tariff (import duty) on their citizens’ purchases of those exports.

But for us to retaliate by whacking a tariff on our imports from them – as is the instinctive reaction of almost everyone – just makes matters worse by requiring our citizens (and businesses) to pay more for those imports.

This gut reaction is prompted by people’s unthinking assumption that exports are good, but imports are bad. When you think it through, however, you realise imports are just as good as exports – why would we be so keen to buy them if they weren’t?

And exports are good mainly because we can use the money we make from them to buy imports.

International trade is an exercise in mutual and reciprocal benefits. They gain from buying our exports; we gain from buying their exports.

The gains are greater the more each side concentrates on exporting the things they’re good at and importing the things they aren’t much good at. That is, from specialising in their strengths, then exchanging with others with different specialisations.

Trying to maximise your exports while minimising your imports is like not wanting to take your turn in a playground game. The others will object and exclude you from the game if you won’t play fair.

But there’s more to it than just fairness to others. By trying to reduce your imports you’re seeking to divert your own resources – land, labour and capital - from producing stuff you’re good at to producing stuff you aren’t good at.

A great way to make yourself poorer rather than richer.

But to get back to where we started, how can I be so sure our politicians would be stupid enough to respond to the folly of others by doing something that would merely increase the cost to us?

Because of the knee-jerk reaction of both the Coalition and Labor when Trump first announced his intention to impose a tariff of 25 per cent on America’s imports of steel.

As Peter Harris, boss of the Productivity Commission, reminded us in a speech this week, “politicians on both sides, along with steel company executives, competed to sound alarms and promote the concept of even bigger price imposts on steel users in this country, all in the name of supposedly saving jobs”.

Apart from asking our best mate Don to exempt our steel from the new tariff (which is what eventually happened), the government trumpeted its willingness to ramp up our “anti-dumping assistance”.

It didn’t mention that this would have been the third ramp-up in decade. A ramp-up of a ramped-up ramp-up.

Not to be outdone, the opposition not only pledged support for tougher anti-dumping measures, it also said it was willing to shift responsibility for reviewing applications for “safeguards” tariff increases from the hard-headed Productivity Commission to some other, soft-headed outfit.

Both the anti-dumping and the safeguards provisions are backdoor ways of using excuses to sneak back-up tariffs you’d earlier reduced.

They’re ways of giving special treatment to our tiny and inefficient steel industry. And, as always, at the expense not just of all Australian consumers of steel products, but all the other Australian industries that use steel as an input to whatever it is they’re producing, possibly for export.

The popular delusion is that higher protection against imports hurts only the countries whose exports we’re trying to keep out. The truth we’re never told about is that the cost of protecting our industry is actually picked up by all our other industries.

Protection doesn’t save jobs, it just attempts to save jobs in the favoured industry by reducing jobs in all other industries. It’s a form of income redistribution from the efficient to the inefficient which, in the process, makes our economy less efficient overall.

Great idea. So why do politicians do it? In Trump’s case, because he’s a fool, and takes no advice from people who are smarter. In the case of our politicians, because they’re knaves: they know (if only because our econocrats keep telling them) that protection is a costly con trick, but prefer to humour popular incomprehension.

In its Trade and Assistance Review for 2016-17, published this week, the Productivity Commission models several “scenarios” that could emerge from Trump’s trouble-making, depending on how we and others respond to his provocation.

It finds that, should no country respond to Trump significantly increasing tariffs on imports from Mexico and China, Australia would be little affected.

On the other hand, should an all-out trade war leave all countries (including us) with tariffs 15 percentage points higher than at present, real gross world product would fall by 2.9 per cent. The fall in our GDP would be less than half that.

Should we hold out from the general increase in tariffs, our gross domestic product would actually be a bit higher than otherwise, though our real national income would be a little worse.

Now get this: should we join with the other members of the Regional Comprehensive Economic Partnership – China, Japan, South Korea, India, New Zealand and the ASEAN countries – in refusing to increase tariffs while everyone else was, the effects of a not-so-global trade war on us would be tiny.

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What motivates decent bankers to rip off their customers

Amid all the reluctant truth-telling at the banking royal commission, one big lie has yet to be apprehended: shame-faced witnesses keep admitting they put their shareholders’ interests ahead of their customers’. Don’t believe it.

From the chief executives and company directors to those middling managers who seem to be the main ones being sent into the firing line, it’s not the shareholders’ pockets they’ve been so keen to line, it’s their own.

They’ve been jumping whatever hurdles they’ve had to clear to get the bonuses they were promised. Why would you rip off old people’s life savings for any lesser reason?

It’s a safe bet that everyone from the very top to well down has been “incentivised” with performance targets and bonuses. I reckon only the lowly would be lumbered with key performance indicators unattached to extra moolah.

It’s hard to imagine how so many seemingly ordinary, decent Australians were led to do so many unethical, dishonest, even illegal things for so many years without them convincing themselves it was normal bankerly behaviour – “everyone’s doing it; I don’t want to miss out” – and that by achieving the targets their bosses had set them, they were being diligent and loyal employees, worthy of reward.

But though the financial services industry must surely be the most egregious instance of the misuse of performance indicators and performance pay, let’s not forget “metrics” is one of the great curses of modern times.

It’s about computers, of course. They’ve made it much easier and cheaper to measure, record and look up the various dimensions of a big organisation’s performance, as well as generating far more measurable data about many aspects of that performance.

Which gave someone the bright idea that all this measurement could be used as an easy and simple way to manage big organisations and motivate people to improve their performance.

Setting people targets for particular aspects of their performance does that. And attaching the achievement of those targets to monetary rewards hyper-charges them.

Hence all the slogans about “what gets measured gets done” and “anything that can be measured can be improved”.

Thus have metrics been used to attempt to improve the performance of almost all the major institutions in our lives: not just big businesses, but primary, secondary and higher education, medicine and hospitals, policing, the public service – the Tax Office and Centrelink, for instance.

Trouble is, whenever we discover new and exciting ways of minimising mental effort, we run a great risk that, while we’re giving our brains a breather, the show will run off the rails in some unexpected way.

It took a while for someone to come up with the slogan antidote: “Not everything that can be counted counts, and not everything that counts can be counted”. Not everything that’s important is measurable, and much that is measurable is unimportant.

Trust, which the bankers had a lot of, is hugely valuable but hard to measure. They failed to notice the way their sharp practice – their attempt to “monetise” that trust – was eroding it.

And now they are reaping a whirlwind no KPI warned them was coming. If you work in financial services, don’t try measuring “esteem” or “reputation” any time soon.

I’ve long harboured doubts about the metric mania, but it’s all laid out in a new book, The Tyranny of Metrics, by Jerry Muller, a history professor at the Catholic University of America, in Washington DC.

Muller says we’ve been gripped by “metric fixation” which is “the seemingly irresistible pressure to measure performance, to publicise it, and to reward it, often in the face of evidence that this just doesn’t work very well”.

The glaring weakness of metrics and KPIs is how easily they can be fudged. Since most jobs are multifaceted, and you can’t slap a KPI on every facet, the simplest and least dishonest way to fudge is concentrate on those aspects of the job covered by a KPI, at the expense of those that aren’t.

Everyone from the chief executive to the lowliest clerk understands this. So why does the practice persist? Because bosses are just as busy fudging their targets as their underlings are. So long as your fudging helps your boss with their fudge, what’s the problem?

Schools fudge their performance on standardised tests by “teaching to the test” or even inviting poor performers to stay home on test day. Police services improve their serious crime clear-up rates by classing more crimes as less serious, or failing to record every crime reported to them.

Hospitals improve their performance by declining to admit people with complicated problems; surgeons improve their performance rates by refusing to treat tricky cases. Sometimes this means patients with big problems suffer delays in treatment, and maybe die. But this doesn’t show in the indicator.

Muller notes the obsession with measurement can get everyone focused on unimportant things that seem easy to measure and away from important things that can’t be measured. It can divert resources away from frontline producers towards managers, administrators and data handlers.

Worse, using money to motivate people tends to crowd out intrinsic motivation: taking a pride in doing your job well and giving customers or taxpayers value for money. It can distort an organisation’s goals and stifle creativity.

Measurement’s fine, so long as it’s used as an aid to human judgment, not a substitute for it.

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What would Jesus do about tax and government spending?

It’s Easter, so let me ask you an odd question: have you noticed how arguments about governments’ intervention in the economy – should they, or shouldn’t they – often rely on an appeal to Christ’s parable of the Good Samaritan?

No, me neither. Until I read a little book called, The Political Samaritan: How Power Hijacked a Parable, by Nick Spencer, of the British religion-and-society think tank, Theos.

This is my take on what I read.

Polling in 2015 by the British Bible Society found that 70 per cent of respondents claimed to have read or heard the parable, but in case you missed that day at Sunday school, I’ll summarise.

One day a lawyer trying to trap Jesus quoted the Old Testament law to “love your neighbour as yourself”, but asked, who is my neighbour?

Jesus replied with a story. A man was travelling down a road when he was attacked by robbers and left half-dead. A priest came down the road and saw the man, but passed by on the other side. So did a religious functionary.

But next came a Samaritan who took pity on the man, bound his wounds and took him to an inn, where he looked after him. Next day the Samaritan paid the innkeeper to look after the man until he was well.

Then Jesus asked the lawyer which of the three was a neighbour to the man who’d been robbed. “The one who had mercy on him,” the lawyer replied. Jesus told him, “Go and do likewise”.

Politicians have been using this parable to support their arguments at least since British evangelicals were campaigning for the abolition of slavery in the early 1800s. Martin Luther King spoke about the parable at length in his last sermon before he was assassinated in 1968.

George W Bush spoke about it, as did Hillary Clinton. But it’s been a particular favourite of the British Labour Party.

Early in his establishment of New Labour, Tony Blair said: “I am worth no more than anyone else, I am my brother’s keeper [an allusion to Cain and Abel in the Book of Genesis], I will not walk by on the other side. We are not simply people set in isolation from one another . . . but members of the same family, same community, same human race. This is my socialism.”

Blair’s successor as British prime minister, Gordon Brown, son of a Presbyterian minister, said “we are prepared to spend money to help the unemployed; we are not going to walk by on the other side, we are going to help them.’’

In the aftermath of the global financial crisis, Brown said: “In a crisis what the British people want to know is that their government will not pass by on the other side, but will be on their side.”

So, to politicians on the left, the Good Samaritan is the all-purpose justification for state intervention to help anyone anywhere with a problem. It’s about collective responsibility and collective action.

To a politician like Margaret Thatcher, however, it’s about precisely the opposite. The Good Samaritan was an individual; he saw someone with a problem and he acted to help them. He didn’t tell the government to do something about it.

People shouldn’t hand over to the state all their personal responsibility. Point one.

Point two: the Samaritan needed money to be able to help the half-dead man, and he had it. But the more we’re taxed, the less we have to discharge our personal responsibility to others.

So what was Jesus really saying? First, according to Spencer, he was reacting against the lawyer’s legalism.

Jesus was concerned with following the spirit of the law, not exploiting its letter. And he was saying the law of neighbourly love is the key commandment which, in cases of conflict, overrides other commandments.

The Samaritan was from an ethnic group the other people in the story despised. So neighbours aren’t just the people in our street, our friends, our fellow Australians, they’re everyone, including those we don’t know or don’t like. The parable is relevant to our treatment of other races and asylum seekers.

The world has changed a lot in the 2000 years since the parable was spoken, so I think we should be wary of assuming it speaks definitively about every modern practice. It doesn’t explicitly authorise compulsory state redistribution of income from rich to poor, nor is it condemned. It doesn’t even give the tick to organised charities.

Conservatives are right to emphasise that our personal responsibility for others is fundamental. But I think supporters of collective action may claim that it’s consistent with the spirit of the parable.

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Competition isn't always as good as we're told

The banking royal commission has many sub-plots. Did you notice the one where a couple of the banks blamed their decisions to keep doing things they knew were dodgy on the pressure of competition?

A chap from Westpac didn’t argue when one of the inquiry’s barristers criticised it for paying “flex commissions” to car dealers arranging loans for people buying cars. The higher the interest rate the dealers could get their customers to accept, the higher the (undisclosed) commission Westpac paid them.

The Australian Securities and Investments Commission has decided to prohibit this practice from November. So why was Westpac persisting with it until then? Because, if it simply stopped doing it off its own bat, it would lose most of its business to competitors.

Another chap, from the Commonwealth Bank, gave a similar explanation for it continuing to base its commissions to mortgage brokers on the size of the loans they organised. If it stopped doing the wrong thing, he said, its brokers would switch to dealing with other banks.

But since it’s a relaxing long weekend, let’s not persist with such a blood-pressure raising subject as the behaviour of our lovely banks. No, let’s just have a calming philosophical discussion about the complications of competition in markets.

Economists like to give us the impression competition is a fabulous thing in any market, all upside and no downside. Competition is something you can never have enough of, they imply.

Don’t believe it. It’s certainly true that a market with no competition – a monopoly – isn’t a great place. Prices are high, service is bad, and when you complain to the company, no one gives a rat’s.

But it doesn’t follow that all competition is wonderful, nor that more is always better. Far from it.

The simple “neo-classical” model of markets assumes a large number of small sellers. The competition between them is so fierce that none of them dares charge a price that’s a cent more than the minimum needed to cover their costs (including the cost of the capital invested in the business, aka profit).

All sellers charge the same price, and if you try selling for a bit more, you sell nothing and go bankrupt.

In the real world, it ain’t so simple. There are various reasons for this, but a big one is the presence of economies of scale – the more you produce, the lower the average cost of what you’re producing.

This allows you to lower your price – which is good for buyers – but, as a consequence, sell a lot more, which is also good for you.

It’s scale economies that explain why so many of our real-world markets are the opposite of what textbooks assume: a small number of large sellers – known as oligopoly. The big four banks are a good example.

When you look at the behaviour of oligopolies you see competition isn’t as wonderful as it’s cracked up to be. Oligopolists compete fiercely against each other, but they compete mainly for market share, and try to avoid competing on price.

According to the economists’ basic model, however, low prices are the key benefit competition brings us. In reality, oligopolists prefer to keep prices and profit margins high by competing via marketing and advertising, including by “differentiating” their products.

Occasionally a firm tries to steal a march on its competitors by innovation – coming up with a product that’s clearly better than the others. Mainly, however, product differentiation involves superficial differences.

Economists preach the virtues of competition because they assume it gives consumers a wider range of products to choose from, which must be a good thing.

But with only a few sellers, competition tends to do the reverse, limiting the choice available. Each firm will have a product range remarkably similar to the others.

This is because the few big firms focus on each other, not the customers. Their goal is not so much to find the magic product the punters will love, as to make sure their competitors don’t get ahead of them. So product ranges tend to be the same.

But how do we explain those two bankers claiming competition prevented them from ceasing dodgy practices? Why wouldn’t a bank want to get itself a reputation for being square with its customers?

Because of another weakness in the economists’ basic model: its assumption that both buyers and sellers know all they need to know about market conditions - an implicit assumption that gaining the knowledge you need to make good choices is easy and costless.

In reality, it costs time and money to be well-informed, which gives sellers (who tend always to be in the market) an inbuilt advantage over buyers, who tend to buy a new car, or change houses, only occasionally.

The first economists to starting thinking such thoughts just a few decades ago ended up winning Nobel prizes for realising that information is “asymmetric”, with sellers usually knowing a lot more than buyers.

In the two cases from the royal commission, the banks and their car dealers and mortgage brokers know about the conflicts of interest caused by their commission arrangements, but customers don’t.

Should one bank decide to stop playing that game, many of its dealers or brokers would have taken their business elsewhere long before the nation’s customers realised it was more trustworthy than its competitors.

Up-to-date economists see this as a class of “market failure” called a “collective action problem”: all the firms in a market realise they’re doing something wrong, or even profit-reducing, but no one’s game to be the first to stop.

The obvious solution is for the government to intervene and ban the practice, letting everyone off the hook at the same time - just as ASIC has decided to do in the case of flex commissions for car dealers. Sometimes competition needs help from a visible hand.

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Cheating cricketers symptomatic of our declining standards

I can’t see why people are so shocked to discover our cricketers have been cheating. Surely that’s only to be expected in a nation that’s drifted so far from our earlier commitment to decency, mateship and the fair go.

Such behaviour is unAustralian? We do, or condone, many things that used to be thought of as unAustralian.

There was a time when it would have been unthinkable for Australians to stand by while an elected government physically and psychologically mistreated people whose only crime was to arrive by boat without an invite.

Many of them are fleeing persecution in their own country, but that makes no difference. We even mistreat their children, causing them to have mental illnesses and then refusing them medical treatment.

Last week a government led by Mr Harbourside Mansion dished out another round of punishment to fellow Australians whose crime was to be unemployed or to have split with their partner while having dependent children, making it hard for them to do paid work.

The money to be saved will go just the tiniest way towards paying for tax cuts for big business. Did the rest of us care? Not really.

But let’s not kid ourselves. If governments thought mistreating asylum seekers and being unreasonable to welfare recipients would lose them votes, they wouldn’t do it.

They do it because they believe most voters want them to punish boat people and supposed dole bludgers. Which also explains why both sides of politics are guilty of it.

Lovely people, Australians. (And don’t imagine the rest of the world isn’t realising how unlovely we are.)

But stoop to tampering with a cricket ball? We’d never do something so utterly despicable. A player could have been injured.

Don’t forget that cricketers have money at stake when they decide whether to ease the path to victory with the help of a little sticky tape.

Nor should we imagine they’re the only Aussies yielding to the temptation to bend the rules in pursuit of a bigger bonus. What do you think the royal commission into banking misconduct is about?

I fear we hear about only a fraction of the national franchises that screw their franchisees, who then screw the kids working for them; the many employers paying less than award wages, including those ripping off people on temporary work visas who’re afraid to complain.

They do so because they’ve lost any sense of fairness towards their workers – and because they’re (rightly) confident their chances of being caught are low.

Governments – Coalition and Labor - have been cutting the number of inspectors and auditors in the name of greater public service efficiency.

We’ve become less Godfearing, more individualistic, more materialistic and more self-centred. We’ve become less community-minded, less committed to “solidarity” – where the strong go easy so as to help the weak do better – and less sympathetic to the battling of the battlers (except when we kid ourselves that we are battlers).

We’ve changed the meaning of “professional” to being highly competent in your occupation, whereas it used to mean putting your clients’ interests ahead of your own.

Politics has degenerated into an unending battle between interest groups, in which each seeks advantage at the expense of the rest. Much of the fighting is conducted by a thriving industry of lobbyists.

Even the churches fight like Kilkenny cats for a bigger share of the government handouts to private schools – just so they can afford to teach their children Christian values, of course.

But don’t imagine the greed is limited to businesses and institutions. Almost all of us have a mercenary attitude towards the government, paying as little tax as possible while demanding free public hospitals, subsidised pharmaceuticals, bulk-billed GP visits and much else.

How does all that add up? Not my problem. My problem is paying an investment adviser to tell me the somersaults I have to turn to get the pension and avoid paying tax on my investments.

What I’ve found most surprising in recent days is not money-hungry cricketers but the views of a leading businessman, Harold Mitchell, expressed in this very organ: “I’m an Australian and I pay tax for the good of the country.”

Mitchell tells of being visited by representatives of the Singapore government, who invited him to move his head office there. Their advertised company tax rate was 15 per cent, but he’d get a special offer of 7 per cent.

He declined. “I believe in the Australian system that creates the sort of society that enabled me to build a successful business. Avoiding tax, even if it seems legal, is a very shortsighted ambition,” he wrote.

What’s wrong with the man? What a corporate dinosaur. He claims to have found at least one other rich person who thinks similarly – the Scottish children’s author, JK Rowling.

“I pay a lot of tax, and I feel one of the reasons I stay and pay and why I’m not based in Monaco ... is I think my country helped me,” she's said.

Mitchell even quoted the American jurist Oliver Wendell Holmes’ dictum that “taxes are what we pay for a civilised society”.

Perhaps the problem is it also works the other way: more money-grubbing, rule-bending and tax avoiding are part of a society that’s becoming less civilised.

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We have a bad case of misdirected compassion

Why do so many of us – and the media, which so often merely reflect back the opinions of their audience – feel sorrier for those who profess to be poor than for those who really are?

Last week, on the day after the single dole was increased by 50¢ to a luxurious $273 a week ($14,190 a year), Malcolm Turnbull’s henchmen succeeded in persuading Pauline Hanson’s One Nation to let him give the down-and-out part of our one nation another kicking. (Sorry, my Salvo upbringing is showing again.)

You’ve heard the news that homelessness is much more prevalent than we thought. According to the Australian Council of Social Service, the Senate’s passing of the Orwellian Welfare "Reform" Bill will, in its first year, add to homelessness by cutting off payments to more than 80,000 people.

The bill contains 17 measures that will adversely affect the lives of thousands of the unemployed, single parents and women and children escaping violence.

You’ve never seen such a list of pettifogging nastiness, yielding tiny savings to the budget.

The unemployed will no longer be back-paid to the day they lodged their claim, meaning the longer Centrelink takes to process that claim, the longer the jobless go without (or have to go cap-in-hand to outfits like the Salvos) and the more pennies the government saves.

Let’s hope it doesn’t make lengthening processing times a KPI.

Until now, the legislation has protected people who can’t complete and lodge their claim because they’re in hospital, are homeless, are escaping domestic violence, or are victims of natural disaster or fire. Sorry, such pathetic excuses will no longer be accepted.

Fortunately, Hanson was shamed into reneging on a commitment to remove a small, one-off “bereavement allowance”.

So, were the media up in arms over this gratuitous attack on people who are already below the poverty line – this “cash grab”?

No, they hardly seemed to notice. Perhaps they were distracted by the bitter tears they were shedding over the plight of all those poor self-funded retirees whose unused dividend imputation refunds the evil Labor Party is threatening to steal.

I’m sure there must be a few retireds with genuine cause for complaint, but I didn’t see any among those whose cries of pain were taken up by a righteously outraged media.

Perhaps the problem is that most political reporters are too young to know how retirement income works. Let’s look at Australia’s most self-pitying and grasping group, the self-proclaimed “self-funded retirees”.

What they mean by this term is that they don’t get the age pension. What they fail to mention to naive reporters is that they don’t get it because they’re too well-off to meet the means test – notwithstanding the best efforts of their investment advisers to rearrange their affairs so they do.

What’s the main reason they’re too well-off to get the age pension? Too much superannuation savings. That’s why I see red every time I hear them claiming to be “self-funded”.

They’ve convinced themselves they’re fiscal heroes who are saving the government a fortune by not getting the pension. Rather, they’ve scrimped and sacrificed for decades to amass the super savings they have.

But they’re deluding themselves on both counts. They conveniently forget that their contributions to super were taxed at 15 per cent rather than their much higher marginal tax rate, as were the annual earnings on those tax-concession-enhanced contributions.

And, since 2007, thanks to Peter Costello (who spent his time as treasurer planting time-bombs in the budget), they’ve paid no tax on their super withdrawals.

As a result, a proportion of their super balance is attributable not to their frugality, but to decades of annual tax concessions, plus compound interest on those concessions.

The higher the payout, the higher the proportion of it attributable to tax breaks rather than actual saving. For most of those with super balances high enough to exclude them from the pension, those accumulated tax breaks would greatly exceed the budgetary cost of that pension, sometimes several times over (as in my case).

That’s being “self-funded”?

Another thing the media’s bleeding hearts (middle-class division) don’t know is that since withdrawals from super are tax-exempt, the money that allegedly self-funded retirees have to live on far exceeds the modest “taxable income” they tell you about.

When they cry poor, these comfortably-off people with their hand out don’t tell you their goal is to get sufficient assistance from the taxpayer to allow them to avoid dipping into the capital value of the shares and property they want to hand on intact to their offspring – who are, no doubt, just as deserving as they are.

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Economic case for cutting company tax rate is weak

Most people don't realise it, but we're on the verge of letting foreign multinationals pay less tax on the profits they earn in Australia because we locals don't mind paying higher tax to make up the difference.

Our almost unique system of "imputing" to Australian shareholders the company tax already paid on their dividends means they have little to gain from Malcolm Turnbull's pressure on the Senate to phase the rate of company tax down from 30 per cent to 25 per cent, over about 10 years, at a cumulative cost to the budget of $65 billion.

So what can we hope to obtain in return for our generosity to foreign businesses? Economic theory (which may or may not prove realistic) assumes it would induce them to increase their investment in Australia which, in turn, would increase the demand for Australian workers relative to their supply, thus bidding up their price (otherwise known as wages).

Note that, contrary to all Turnbull's said about his "plan for jobs and growth", the theory does not promise a significant increase in employment – mainly because the theory assumes the economy is already at full employment before the company tax rate is cut.

As my colleague Peter Martin has written, Treasury's updating of its modelling of the theory finds that, after 10 to 20 years, consumer welfare (arising mainly from higher wages) would be $150 per person higher than it otherwise would be.

Doesn't seem a lot.

Apart from the initial benefits of the company tax cut going pretty much only to foreigners, another reason Treasury's modelling has always shown the ultimate benefits to us as being surprisingly small is Treasury's further assumption that the budgetary cost of the cut would have to be covered by some means.

Treasury's consultant modelled several possibilities: by cutting government spending (don't hold your breath), imposing a lump-sum tax (a textbook fav), increasing the goods and services tax, or by letting bracket creep quietly increase income tax (the most likely).

Trouble is, the model's assumption that increased taxes would harm the economy's performance diminishes the good the lower company tax is assumed to do. As Milton Friedman liked to say, there are no free lunches (you'll end up having to pay, one way or another).

So the impression the government and big business are trying to give us (and naive crossbench senators), that only an economic wrecker would oppose a lower company tax rate, is just spin.

As always, every possible economic policy change has costs as well as benefits, which should be debated. I think the case for cutting company tax is weak.

With the government taking such a propagandist line, the most dispassionate advice we've received has come from evidence Reserve Bank governor Dr Philip Lowe, and an assistant governor, Dr Luci Ellis, gave to a parliamentary committee last year.

Lowe pointed out something no other official has mentioned: the main countries are engaged in a bidding war, in which each moves to a lower company tax rate than the others, hoping to pick up a bigger share of the world's foreign investment - before some other country cuts to an even lower rate.

You can imagine how much the world's chief executives love this game and are urging their own government to put in the lowest, supposedly winning, bid.

But the longer everyone keeps playing, the closer we'll come to the point where no country has any company tax to speak of – and no country has any competitive advantage over the others. All we'll be left with is a distorted tax system.

Lowe's point was that we should think twice before we join this mutually destructive game. Why would a tax war be good, whereas a trade war would be terrible?

The proponents' latest argument is that, now the US is cutting its company tax rate to 21 per cent, we'll get little foreign investment if we don't cut our rate from 30 per cent.

What no one seems to have noticed is that the case for a company tax cut has now turned from positive to negative. It's not that we'll gain anything by cutting, but just that we'll avoid losing if we don't.

But you don't have to accept that argument if you don't want to. Behavioural economics reminds us that the proponents have "framed" our choices in a way that favours their case.

They want us to accept without thinking that foreign companies make their decisions about whether or not to invest in Oz solely by comparing the rate of our company tax with other countries' rates.

That is, foreigners take no account of how our special tax breaks compare with other countries' tax breaks, nor any non-tax factors that make investing in Oz attractive (say, we've got better iron ore than everyone else) nor even that they don't have to worry about our taxes because their lawyers know how to avoid paying them.

As Lowe and Ellis explained to the parliamentary committee, the notion that multinationals focus solely on the rate of our tax is highly implausible.

I think all those other factors mean we're unlikely to attract insufficient foreign investment, even though the US has cut to 21 per cent.

But Treasury's been a great worrier about us attracting enough foreign investment for as long as I've been in the game, without there ever being much sign of a problem.

So, what's eating Treasury? My theory is that it hasn't adjusted its thinking since we moved from a fixed to a floating exchange rate in 1983.

What the proponents of a lower company tax rate don't tell you is that, with a floating dollar (and all else remaining equal), the more successful we are in attracting foreign investment – as we were in the resources boom - the higher our exchange rate will be. Is that what we want?

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How Labor is taking on the greedy elderly

Talk about missing the point. The media spent all last week working themselves into a lather over Labor's newly announced policy to abolish cash refunds for unused dividend imputation credits. (If you have no idea what that means, it probably wouldn't affect you.)

This promise would be terribly unfair to dirt-poor self-funded retirees, we were told. And it was utter stupidity for Bill Shorten to drop such a monumentally unpopular proposal in the last week of the Batman byelection, which he was now safe to lose.

Except, of course, that Labor won comfortably, with little sign the policy had much effect.

The media smarties' greater failure was their inability to see the bigger picture: the next federal election is shaping as a battle between the generations, with Labor championing the put-upon young and the Coalition defending the privileged old.

According to Canberra conventional wisdom, this too is crazy-brave territory for Labor. The ageing of the population means Grey Power is our fastest growing political force.

Those of retirement age (which includes me) have little more pressing to do than to worry incessantly about their finances, and have developed an unshakable sense of entitlement ("I've paid taxes all my life ..."). Any concession they've been granted, no matter how unjustified or unaffordable, can't be taken back, we're assured.

Well, I'm not so sure.

As a political force, Grey Power has one huge weakness: of all the age groups, the over-65s are those least likely to change their vote. The great majority vote for the Coalition, so Labor doesn't have a lot to lose.

It's among the non-aged (sorry) that most swinging voters are found, and it's by picking up enough swingers that a party wins.

Haven't you noticed how, since 2013, the Coalition has been reacting to Labor's pro-younger policies by flying to the defence of the better-off old? The conservatives are allowing themselves to be "wedged" – separated from the majority of voters.

The Canberra smarties also used to believe negative gearing was politically untouchable. But Labor went to the 2016 election promising to curtail it – while the Libs predicted it would send house prices crashing – and came within a whisker of winning. Labor's persisting with the policy.

Labor went to that election with another pro-younger policy: cutting the tax breaks going to exceptionally well-off superannuants (including me). This time, Malcolm Turnbull, needing help to pay for his company tax cuts, produced his own, Treasury-crafted version of Labor's idea.

The issue didn't feature greatly in the election campaign, but after the Coalition had won, the exceptionally well-off superannuants in the Liberal heartland turned on Turnbull. This advantaged Labor by adding to the disunity in the Coalition's ranks. Turnbull modified his super changes, but not greatly.

And now Labor is planning to remove another super tax concession that goes overwhelmingly, but not exclusively, to superannuants with large share portfolios. The Coalition hasn't resisted the temptation to side with its well-off elderly heartland, nor have the media resisted the temptation to promote its (and the super industry's) misrepresentation of the policy as an attack on struggling retirees (who just happen to own a lot of shares).

How is this another of Labor's pro-younger policies? That will be easier seen if, as seems likely, Labor uses the saving to pay for a promise of income tax cuts for people earning less than $87,000 a year – few of which would go to the retired rather than to the workers who pay for the retired's largely income tax-free status.

If you think an election campaign based on conflict between the generations is not a good thing, I agree. Unless what you mean by that is that the better-off aged should be allowed to retain their relatively recently conferred tax advantages, and the taxpaying non-old should continue to lump it.

It's a pity John Howard and Peter Costello (the chap who kept issuing reports warning that population ageing would play merry hell with the budget) didn't worry more about future generational conflict when they spent most of their 11 years in office slipping new benefits for the aged, particularly self-funded retirees, into the budget.

They started with the private health insurance tax rebate (the biggest users of private health insurance services are 60 to 79-year olds) and moved on to giving the alleged self-funded retirees the "seniors and pensioners tax offset", also making it easier for them to get health cards and pay the pensioners' rate for pharmaceuticals.

In 1999, they gave negative gearing a huge boost by introducing a 50 per cent discount on capital gains tax. And they decided that anyone who paid so little income tax they couldn't take full advantage of their dividend imputation credits should be sent a refund for the balance.

On the younger side of the ledger, while they didn't invent HECS debts for university students, they greatly increased them.

Then, in 2007, Costello introduced sweeping super changes, making super payouts completely tax-free for people over 60. He also made a lot of supposedly self-funded people eligible for a part pension.

Since this largesse was quite unaffordable, Labor and Coalition governments have been chipping it back ever since.

Even so, we retain an income tax system where how much you pay sometimes depends on the size of your income, but other times on how old you are. And that's not going to lead to intergenerational conflict?

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Immigration the cheap and nasty way to grow the economy

The ABC's temerity in hosting a debate about the merits of high population growth has drawn predictable repostes from the economic establishment. Shades of the legendary note in the margin of a politician's speech: "shout here - argument weak".

There are at least four counts against the advocates of high immigration. First, their refusal to engage with the academic environmentalists arguing that we've exceeded the "carrying capacity" of our old and fragile land. Scientists? What would they know?

Second, they keep asserting high immigration's great economic benefits, blithely ignoring the lack of evidence. Whenever the Productivity Commission has examined the issue carefully it's found only small net effects, one way or the other. Its latest modelling found only a "negligible" overall impact.

Third, the advocates not only decline to admit the high social and economic costs that go with high rates of immigration, they decline to accept their share of the tab, doing all they can to shift it to the young, the poor and those on the geographic outer, including many of the migrants.

You rarely hear pro-immigration economists acknowledging the clearest message economic theory gives us on the topic: more population requires more spending on additional public and private infrastructure if material living conditions aren't to deteriorate.

The more we invest in such "capital widening" to stop the ratio of capital to labour declining, the less scope for investment in "capital deepening" to keep the ratio increasing, and so improving the productivity of our labour.

When we fail to invest sufficiently in capital widening – which we have – the decline in living conditions is manifest in overcrowding, traffic congestion and long commuting times.

Why have we failed to invest sufficiently? Partly because a high proportion of the promoters of high immigration are also promoters of Smaller Government, never acknowledging the two are incompatible.

A bigger population requires a bigger government, with more debt, not less. When you persist with high population growth, but put the clamps on government, you end up with overcrowding, congestion and the rest.

Another truth the high immigration advocates refuse to acknowledge is that a much bigger population must lead to much bigger cities and higher-density living in those cities.

The Reserve Bank's estimates of the huge addition to Melbourne and Sydney house prices caused by state governments' acquiescence to resistance to higher density in inner and middle-ring suburbs, are partly a consequence of successful attempts to shift the spatial cost of high immigration onto the less well-placed.

The fourth criticism of high immigration is that it's the cheapest and nastiest way to pursue economic growth. You get a bigger economy, but not the promised benefits. The studies repeatedly fail to show high immigration leads to a significant increase in real income per person.

Of course, the business lobby has no reason to care whether high immigration yields economy-wide benefits. All they're after is a bigger domestic market, allowing them to sell more widgets, make a higher profit and justify a bigger salary package.

Few economists can see this is a cop-out. An escape hatch. As a way of achieving corporate growth, it's even easier than taking over your competitors. And it sure beats the hard graft of trying to increase profits by being more efficient and contributing to national productivity improvement.

As we've seen, high immigration probably comes at the expense of productivity-enhancing (capital-deepening) business investment and public infrastructure. To the extent that inadequate capital-widening leads to overcrowding and congestion, it worsens productivity.

In principle, one productivity-enhancing effect of high immigration is that you get greater human capital on the cheap by pinching it from other (mainly poor) countries.

After foreign students have come here and paid full freight for Australian qualifications, you let them stay and work. You select permanent immigrants on the basis of their skills, or you let skilled workers on temporary visas stay on.

But as Dr Bob Birrell, of the Australian Population Research Institute, has shown, there's a big gap between the claims made for our skilled migration program and the reality. We let in people whose skills aren't in high demand, and plenty of them end up driving taxis because the local professions' gatekeepers refuse to recognise their qualifications.

So it's not clear the benefits of our skill-pinching program exceed the cost of discouraging businesses from incurring bother and cost training enough of our own young people, when you can always get the government to let you bring in someone ready-trained.

High immigration may suit our rent-seeking business people, but it's a hell of a way to pursue the professed benefits of economic growth.

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Why protection from imports isn't smart

With The Donald now busy playing poker with Little Rocket Man, the threat of a trade war has receded. Good. Gives us time to get our thinking straight before the threat returns.

Everyone knows a trade war would be a terrible thing, but most people's reason for thinking so is wrong. This misunderstanding means such a war could happen, even though everyone knows it would be bad.

It seems common sense for a country to want to protect its industry by imposing a tax – known as a tariff or import duty – on imports competing with locally-produced goods. After all, we win and foreigners lose.

The problem arises only if the foreigners retaliate and slap a tariff on our exporters. That's bad for us because it may lead to job losses among those of our workers who earn their living making goods for export.

Is that the way you figure it? Sorry, it may be common sense, but it's wrong. You need to have learnt a bit of economics to see why, because the case against protection is "counterintuitive" – it doesn't seem right, but it is.

The reason people can't see what's wrong with protection is that every baby is born with a disease called mercantilism.

Mercantilism is the belief that exports are good, but imports are bad. Why? Because we – Australia – make money selling exports to foreigners, whereas it costs us money to buy imports, the foreigners' exports.

So mercantilists see Australia as like a company, and our balance of trade as like a company's profit and loss statement. The more you can export and the less you can import – the higher your trade surplus - the richer you become.

What's wrong with that way of thinking? Plenty. For a start, it's the mentality of a miser – someone who loves money for its own sake, not for what it will buy.

Money is just a means to an end, not an end in itself. The economic game is about producing goods and services so we can consume them. Production is the means; consumption is the end. Focus on one at the expense of the other and you've actually done badly in the game.

Similarly, jobs are just a means to an end. Why do people want jobs? So they can earn money and then spend it.

Exports are production, imports are consumption (although much of our imports are of machines we use in the production process). Production without consumption makes sense only to a miser.

Get this: 80 per cent of the way Australia makes its living is by all the workers and businesses and governments producing goods and services and selling them to other Australian workers, businesses and governments, so they can be consumed.

In principle, we could raise the 80 per cent to 100 per cent by only selling to and buying from ourselves. So why do we sell about 20 per cent of the things we produce to foreigners?

Not because it makes us richer, nor because it creates more jobs. It's solely so we can afford to buy some of the goods and services produced by businesses and workers in other countries, when we judge them to be better or cheaper than the stuff made locally.

Exports are good solely because we can use the proceeds to pay for imports – and imports are also good because they raise our material standard of living by giving all of us (workers, would-be workers and dependents) access to goods and services that are better or cheaper than those made in Australia.

If we weren't willing to use the proceeds from our exports to pay for imports from other countries, those countries would refuse to buy our exports.

Refusing to buy our exports would leave those countries worse off (because they'd lose their ability to buy the things we can produce better or cheaper than they can), as well as leaving us worse off because we lost our ability to use our export income to buy their exports.

This, BTW, is why trade wars are mutually self-harming. A group exercise in cutting off your nose to spite your face.

Why wouldn't it be better to be 100 per cent self-sufficient? Because this would limit the benefits to us from "specialisation and exchange". Our domestic economy is organised on the basis that we're all better off if each of us specialises in producing what we're good at, then uses money to exchange what we've produced with what other specialists have produced.

Opening our economy to trade with other countries merely extends this principle, on which we've always run our domestic economy, beyond our borders.

This is why the mercantilists' assumption that trade is a zero-sum game – if you win, I lose – is wrong. Both sides win because both benefit from the "mutual gains from trade".

It follows that the mercantilist notion that foreigners are the only people who lose when we decide to protect some of our industries is wrong. The biggest losers are every other industry and every Australian who loses their access to cheaper or better imported goods and has to pay more for the local version.

That is, tariffs are a tax, not on foreigners, but on Australian producers and consumers. A way of favouring some Australian industries at the expense of all the others. A redistribution of income to favoured industries from those that aren't favoured, and from Australian consumers generally. A form of rent-seeking.

And thus, an attempt to protect some jobs at the expense of all other jobs. Great idea.

Trade wars are destructive not primarily because it's crazy for other countries to retaliate – which it is – but because the country that provokes the retaliation by protecting some favoured industries is damaging itself.

Better to let it stew in its own juice than punish it by harming yourself.

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RENT SEEKING, THE GAME OF MATES, AND THE STUFF-UPS OF ECONOMIC REFORM

Talk to Newcastle Institute, Wednesday March 14, 2018

When Malcolm Turnbull knocked off Tony Abbott as Prime Minister in 2015, Turnbull decided to get rid of some older ministers to make room for young blood, and – surprisingly – got rid of his mate Ian Macfarlane, who’d been minister for minerals and industry for many years. Macfarlane, who was 60, decided to get out of politics. In a speech farewelling him, Abbott observed that Macfarlane had served the mining industry well over the years, and now he was leaving politics Abbott hoped the industry would remember this service. It’s hard to remember any more blatant hint.  Macfarlane left the parliament in July 2016 and two months later it was announced he’d been appointed as chief executive of the Queensland Resources Council.

After the Liberal’s Andrew Robb, who’d spent his time as minister for trade – Abbott govt – negotiating many free trade agreements with Korea, Japan and China, resigned from parliament in 2016 he soon took up a $880,000-a-year job as a “high level economic consultant” with the Chinese company that bought the lease on the Port of Darwin.

After the Liberal’s Bruce Billson, who’d been minister for small business, left parliament it became known that he’d taken up a job as executive director of the Franchise Council of Australia – and that his salary began before he’d actually left the parliament.

Note that none of these men have been found to have done anything against the rules. But before you get too indignant about the appalling behaviour of those terrible Liberals, don’t forget Martin Ferguson, the former ACTU president turned Labor minister who, as minister for resources and energy, was deputised by Julia Gillard to negotiate the miners’ rejig of Kevin Rudd’s resource super profits tax. Sometime after he left parliament in 2013, he turned up as chairman of the Advisory Board of the Australian Petroleum Production and Exploration Association. He’s spoken out strongly in support of coal seam gas exploitation.

Then there’s Gary Gray, who ended his career as a Labor party official to work in WA for Woodside, entered parliament, became minister for minister for minerals and energy, then lost his preselection for being “too close to the Industry”.

Or Stephen Conroy, former Labor minister for communications, who’s now executive director of an outfit lobbying for online betting companies.

Last year, Cameron Murray and Prof Paul Frijters, published a book you can find via the internet called Game of Mates. It argues that a small class of well-connected operators hanging around the levers of government power are lining their own pockets at the expense of the rest of us.

This is a game of mates doing what mates do, look after each other. I do you a favour and maybe one day you'll do me one. This game is played particularly in land zoning, but also in many other areas. It can be played wherever government departments are supposedly regulating the activities of powerful industries in the interests of the public.

How many times have we seen politicians and top bureaucrats retire, but then pop up a few months later on the board or as a consultant to one of the companies they used to regulate? How many times have we seen lobbyists brought in to head departments that regulate particular industries? How many times have we seen people leave the offices of Labor prime ministers to go and work for Rupert Murdoch or, in earlier times, Kerry Packer.

Players in the game exploit flaws in our laws and regulations that create an economic honeypot to be snatched. The mates need to work as a group to capitalise on these flaws by establishing their networks of favour exchanges. They need to shield their true actions from public scrutiny with plausible myths suggesting their dodgy dealings are good for Australia.

The authors stress that people playing this game aren't necessarily acting illegally, and in that sense may not be corrupt. "The rules surrounding conflicts of interest, cooling-off periods for politicians [before they begin] working in industry, and exercising political discretion, are weak," they say.

We’re witnesses the rise of the lobbying industry and its incestuous relationship with bureaucrats, ministerial staffers and politicians.

The individual politicians, staffers and senior bureaucrats playing these games are themselves engaged in “rent seeking” on their own behalf, but they’re orchestrating rent-seeking by very big companies and industries. In this context, rent seeking means firms or industries seeking favours from government that increase their profits and make their lives easier by reducing the competition they face.

This brings me to the third element of my topic, the program of economic reform, which began in the mid-1980s with the Hawke-Keating government’s big reforms – floating the dollar, deregulating the financial system and other industries, removing import protection, introducing the fringe benefits tax and capital gains tax, and moving from centralised wage fixing to enterprise bargaining.

I believe most of these major reforms were inevitable, and have left our economy better off. But I also believe that, under later governments – Labor and Coalition; federal and state – the reform agenda has degenerated into much more dubious reforms, including some – but not all – privatisations, much outsourcing of the provision of government services, the creation of markets by allowing for-profit providers to compete against public or not-for-profit providers, and the whole notion of making the provision of taxpayer-funded services more efficient by making them “contestable”.

By now the list of economic reforms that have turned out to be stuff-ups is a long one. The collapse of the for-profit ABC Learning in childcare, the utter disaster of trying to turn TAFE into VET – vocational education and training, John Howard and Julia Gillard’s failed idea of improving public schools by hoping they’d compete with private schools, the way 30 years of putting the squeeze on our universities has made them obsessed by money-raising at the expense of their teaching, the way the unis are trying to attract students who should be going to TAFE. The huge scope for improving the performance of our public hospitals and our system of “primary care” by GPs and others.

And all that’s before you come to the mismanagement of the move to turn five state-owned electricity monopolies into a single, privately owned, competitive National Electricity Market, which has seen the real retail cost of electricity double over the past decade. The market has three levels – wholesale generation of electricity, transmission and distribution of electricity, and the retailing of electricity – and costs have blown out at all three levels. We’ve gone from five largely unconnected state monopolies to a single national market dominated by three big, vertically integrated, highly profitable companies, AGL, Origin Energy and Energy Australia. Then there’s the stuff up in the gas market, which has seen Australian industrial users of gas, and gas-fired power stations, paying prices far higher than we’re getting for the gas we now export in huge quantities.

What most of these stuff-ups have in common is successful rent-seeking by businesses doing business with the government (say, for the provision of childcare or vocational education services), or being regulated by politicians and bureaucrats that they’ve managed to turn into mates.

And then we wonder why so many voters are disillusioned with both sides of politics and turning to Clive Palmer one minute, Pauline Hanson the next, and some other crazy to come.

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What's making homes hard to afford and what we could do

There aren't many material aspirations Australians hold dearer than owning their own home - but dear is the word. There are few greater areas of policy failure.

The rate of home ownership, of which we were once so proud, has been falling slowly for decades. And as the last high home-owning generations start popping off, it will fall much faster.

We've been debating this issue for years, while it's just got worse. Yet we have a better handle on the causes of the problem, and what needs to be done, than ever.

Let me see if I can pull a lot of the elements together and give you the big picture.

Don't let anyone tell you the younger generation would be happy to stay renting forever. Nuh.

And while the hurdle of owning a home and a mortgage seems almost insurmountable to the young, jumping it is just the start of our property ambition. Most people want to keep moving up to a bigger and better home. Every promotion we get makes us wonder whether we can afford a better place.

This preoccupation with the quality of our housing is the first part of the reason house prices have risen so high: ever growing demand.

Don't forget that our newly built houses are much grander than they were even 10 years ago. And most older houses have been renovated and extended to make them better.

When two-income families became common people thought "great, now we can afford a bigger mortgage on a better place".

When we got on top of inflation in the early 1990s and interest rates fell so far, people could have paid off their mortgage faster, or bought a boat, but more people said "great, now we can afford a bigger mortgage on a better place".

Trouble is, you can't satisfy increased demand for better houses – particularly better-located houses - by building more places on the outskirts of the city. And when a lot of people decide to move to a better place at the same time, the main thing they do is bid up the prices of existing houses.

One change in recent decades is the growth of the services sector and the knowledge economy (more workers knowing how to do things; fewer workers making things), which means many of the jobs have gravitated to the CBD and nearby suburbs.

So the meaning of "position" has changed from good views to "proximity" to the centre. In theory, the amount of land within 10 kilometres of the GPO is fixed. In practice, factories and warehouses can be moved further out, while detached houses can be replaced by townhouses and low-rise or high-rise units.

Even so, in every city, property prices have risen more the closer homes are to the centre.

Another source of increased demand for housing is our high population growth, caused by our policy of high immigration.

Then there's foreigners' investment in our housing, though this isn't as big a cause of higher prices as many imagine because – in principle but not always practice - foreigners are only supposed to buy newly built or "off-the-plan" homes. That is, create their own supply.

Another source of greater demand is Paul Keating's introduction of capital gains tax in 1985 and John Howard's introduction of a 50 per cent discount on the tax in 1999. This has made owner-occupied homes (which are exempt from the tax) and, thanks to negative gearing, rented-out homes, more attractive as a form of investment, relative to shares.

So house prices are higher partly because we've acquired a second motive for home-ownership: not just the security and freedom of owning the home you live in, but also the prospect of homes becoming much more valuable over time.

Of course, increased demand leads to higher prices only if supply fails to keep up. And that's where our governments – state and federal – have failed us.

It's better now, but for ages state governments failed to do enough to permit the building of more homes on the edge of cities. We got more immigrant families, but not more homes to put them in.

Worse, state governments have allowed people in inner and middle-ring suburbs and their councils to resist the pressure for more medium-density housing – more units – from people wanting to live closer to where the jobs and facilities are.

Just last week the Reserve Bank published estimates that this resistance to higher density had added more than $300,000 to the average Melbourne house price and almost $500,000 to the Sydney price, over the past two decades.

So, who pushed housing prices so high? We did. Who failed to do what was needed to counter the increase? Our governments.

The feds failed to limit the growth in demand (by limiting immigration and fixing the tax system), while the states did too little to increase supply (by discouraging the building of new homes on the outskirts and by permitting a first-in-best-dressed mentality by people in inner and middle-ring suburbs).

Why are they allowing the proportion of home owners to decline? Because most things they could do to genuinely help first home buyers would come at the expense of existing home owners, who have more votes than the youngsters.

If young people and their parents don't like that, the answer's more pressure at the ballot box. Wheels that squeak more.

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How we could gang up against a Trump trade war

A possible trade war looms and, as always, an adverse overseas development has caught poor little Oz utterly unprepared. Well, actually, not this time.

Just as Treasury had been war-gaming the next big world recession well before the global financial crisis of late 2008, so the Productivity Commission began thinking about our best response to a trade war soon after the election of Donald Trump.

In July last year it published a research paper, Rising protectionism: challenges, threats and opportunities for Australia, to which Dr Shiro Armstrong, co-director of the Australia-Japan Research Centre, at the Australian National University, made a major contribution. (During a visit to ANU last week I also benefited from discussion with Professor Jenny Corbett.)

Trump's tariffs (import duties) on steel and aluminium were never a great threat to our economy. It'll be only when he decides to take a crack at the Chinese that there'll be a lot to worry about.

But the chest-thumping by our pollies (on both sides) over steel is a demonstration of the way populism can crowd out clear-headed self-interest where protectionism is involved.

Trade wars happen by accident. They start out in a small way, the perceived victims feel their manhood demands they stand up to a bully by retaliating, the bully hits back and pretty soon everyone in the bar is throwing chairs and punches.

As the research paper puts it, "significant worldwide increases in protection would cause a global recession."

Economic modelling by Armstrong estimates that, for every extra dollar by which our revenue from import duties rose, economic activity in Australia would fall by 64¢.

In total, the level of real gross domestic product would be 1 per cent lower each year. This would equate to a loss of about 100,000 jobs. (As with all modelling, take these figures as, at best, roughly indicative.)

A full-blown global trade war would take many months, even years to build up, so how should we respond to the provocative actions of others? What could we do to minimise the damage we'd suffer?

The research paper proposes what economists call a "first-best" response (here I'd call it the What-would-Jesus-do? cheek-turning response): not only should we resist the temptation to retaliate in any way, we should also cut what few remaining protective barriers we have.

If you think that would be plum crazy, you don't know as much about protection as you should. But you've demonstrated why any politician would find such advice almost impossible.

That's why I'm attracted by the paper's second-best suggestion: "working with a coalition of countries to keep their markets open is a strategy that would make it easier for Australia to resist protectionist pressures".

Good thinking. Our leaders want to be seen to be acting to defend our economy, and this response – "let's form our own gang and fight back" - is active rather than passive, and harder to portray as appeasing the bullies.

Oh yeah, what gang? What coalition of countries? That's obvious. We're already a member of a gang that, depending on how you measure it, is bigger than Trump's, or the Europeans'. And our gang's by far the fastest growing.

We do almost three-quarters of our two-way trade (exports plus imports) with Asia – in descending order, China, ASEAN, Japan, South Korea, New Zealand, India, Hong Kong and Taiwan. Europe accounts for only about 15 per cent and Trumpland​ for little more than 10 per cent.

Although it's true Asia needs to trade with North America and Europe, it's also true there's huge trade within our region. Just imagine the damage we'd suffer if we Asians started jacking up tariffs against each other. Or all of us against the rest of the world.

Australia and New Zealand are already members of various Asian trading clubs. And what greater incentive for Asians to pack down more closely than a threat from Trumpland, or from a Europe trying to repel boarders?

Nor is it presumptuous for Oz to take a (quiet) leadership role. Despite all their trade, there's a lot of mistrust between China, Korea, Japan and other countries. China and Japan, for instance, find it easier to work with us than with each other.

After all, we played significant roles in the formation of the Asia-Pacific Economic Co-operation group and in improving the governance arrangements for China's new Asian Infrastructure Investment Bank. We worked behind the scenes with Japan to keep the Trans-Pacific Partnership alive despite Trump's dummy-spit.

And guess what? Malcolm Turnbull will host a summit of the 10 leaders of the Association of Southeast Asian Nations in Sydney next weekend.

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The economy is readying for faster growth

The last three months of 2017 were yet another quarter of weak growth in the economy. Fortunately, however, they weren't as weak as we've been led to believe.

According to the national accounts, issued this week by the Australian Bureau of Statistics, real gross domestic product grew by 0.7 per cent in the previous quarter, but slowed to 0.4 per cent in the December quarter.

This caused the annual rate of growth to slump from 2.9 per cent to 2.4 per cent.

Trouble is, the sudden slowdown is largely the product of quarter-to-quarter volatility, caused by one-off factors and unexplained "noise" in the figures – noise that stops you hearing the signal those figures are trying to send.

This is why the bureau also publishes "trend" or smoothed figures, which reduce the noise and make it easier to hear the underlying signal.

The trend figures show the economy growing at a fairly steady rate of 0.6 per cent a quarter, and by 2.6 per cent over the year to December.

This is likely to be closer to the truth, though it's still weaker than we've been hoping for, especially since employment grew by a remarkably strong 3.3 per cent during 2017 – almost 400,000 more souls.

How can the economy's production of goods and services grow by only 2.6 per cent when the number of people employed to produce those goods and services has grown by 3.3 per cent?

Over a period of more than a few years, it can't. But over shorter periods it's surprisingly common for the standard relationships between economic variables not to show up in the figures. Why? In a word: noise. (And noise not even statistical smoothing can penetrate.)

Note, however, that for as long as employment is growing faster than production, the productivity of labour will be falling, just as a matter of arithmetic. If you think employment growth is a good thing, this temporary fall in productivity is nothing to worry about.

To emphasise how weak quarterly growth averaging 0.6 per cent is, consider this. Growth in GDP per person is averaging only about 0.2 per cent a quarter.

This gives annual growth in GDP per person of 1 per cent. (Huh? Four quarters of about 0.2 per cent adds up to 1 per cent? Yes. You can't just add 'em up, you have to allow for compounding - otherwise known as "interest on the interest", as in compound interest.)

To have GDP growth of 2.6 per cent, but growth per person of only 1 per cent, is a reminder of how fast our population is growing, and how much of our growth (almost invariably faster than the growth rates of those rich countries whose populations aren't growing much) comes merely from population growth – a point every economist knows, but few bother pointing out to the uninitiated.

And don't hold your breath waiting for any treasurer to point it out. To those guys, a big number is a big number – and what's more, it's solely the result of our government's wonderful policies.

But back to the reasons this week's news of further weak growth isn't as bad as it sounds.

The first is that annual growth of 2.6 per cent isn't a lot lower that our estimated "potential" (medium-term average) rate of growth of 2¾ per cent.

It's true, however, that we've been growing at below our non-inflationary potential rate for so many years we've acquired such a lot of spare production capacity (including unemployed and under-employed workers) – such a big "output gap", in econospeak - that we could and should be growing a fair bit faster than that medium-term speed limit of 2¾ per cent, until the spare capacity's used up.

Another indication things aren't a bad as they've been painted is Reserve Bank governor Dr Philip Lowe's statement that this week's figures give him no reason to revise down the Reserve's forecast that growth will strengthen to 3 per cent this year and next.

Why so confident? Because when you look into the detail of this week's results, you see more signs of strength than weakness. (From here on I'll switch to quoting the unsmoothed figures favoured by those who prefer the exciting confusion of noise to the boring wisdom of signal.)

First point is that "domestic demand" (gross national expenditure) grew over the year at the healthy rate of 3 per cent, meaning it was a fall in "net external demand" (exports minus imports) that caused growth in aggregate (domestic plus external) demand to be only 2.4 per cent.

The fall in the volume of "net exports" (exports minus imports) was caused mainly by a fall in exports, but there's little reason to believe this was due to anything other than temporary factors.

Turning to the biggest components of domestic demand, we've been worried that consumer spending wasn't growing strongly because of the lack of growth in real wages. But this week's figures show consumer spending growing by 1 per cent during the quarter and a healthy 2.9 per cent over the year.

Quarterly growth of 1 per cent won't be sustained, but an upward revision to the previous quarter's growth adds to confidence that household consumption is stronger than we'd believed.

All the increased employment is boosting household income, even if real wage growth isn't.

Business investment in new equipment and structures fell by 1 per cent in the quarter, but this was explained by another fall in mining investment (which falls are close to ending) concealing stronger than expected growth in non-mining investment (as estimated by Treasury) of 2.1 per cent in the quarter and 12.4 per cent over the year.

As Paul Bloxham, of the HSBC bank, summarises, "the key drivers of domestic demand – household consumption and non-mining business investment – were strong, and should drive a lift in overall growth in 2018".

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Sensible communities set boundaries for business

A highlight of our trip to New York after Christmas was a visit to the Tenement Museum down on the lower east side, where the movie Gangs of New York was set. It was the area where successive waves of Irish, German and Russian immigrants first settled, crowded into tenements.

We were taken around the corner to see inside a tenement building restored to its original condition.

As we climbed the back stairs, we were shown a row of dunnies and a water tap in the backyard. This, we were told, was one of the first tenements required to have outside toilets and running water under a new city ordinance.

Can you imagine any developer today thinking they could get away with building multi-storey units without adequate (indoor) toilets and plumbing? Unthinkable.

But I can imagine the fuss the developers of that time would have made when the city government – no doubt acting under pressure from citizens worried about the spread of disease – was passing the new ordinance.

These excessively luxurious requirements would be hugely expensive and could send some tenement owners bankrupt – owners who had families and elderly parents to support. The additional cost would have to be passed on to tenants, of course, making rents prohibitive. Some families would be forced onto the street.

I bet few of those dire predictions came to pass. Why? Because business people still play this game and once the bitterly opposed legislation goes through and the new status quo is accepted, the exaggerated forebodings are soon forgotten.

Another highlight was a tour of Carnegie Hall. Once, when it fell on hard times, someone acquired it with a view to tearing it down and building high-rise apartments. A public outcry stopped it.

Then, our guide reminded us, there was the time Jacqueline Kennedy Onassis led the fight to stop Grand Central Station being replaced by an office block.

It reminded me of how that ratbag commo Jack Mundey – being quietly urged on by respectable National Trust-types – was frustrating go-ahead developers all over Sydney.

Just think how better off we’d be today had those those pillars of industry not been prevented from doing away with the crumbling old Queen Victoria Building – with its verdigris domes and rickety lifts – and building a shiny new office block.

Gosh, by now we’d be ready to tear it down and build a taller one. And just think how many jobs that would create.

Do you see where this travelogue is heading? I’m an unfailing believer in the capitalist system. We’d all be much poorer than we are were it not for those ambitious, hard-working, enterprising, optimistic souls who set out to make themselves rich by engaging in some business.

But that doesn’t stop them being thoroughly self-interested and often short-sighted. Whatever new project it is they’ve decided will make them more money, they want to get started yesterday and get terribly angry with those who won’t step out of their way and let them get on with it.

My point is, it was ever thus. Market economies work best – and all the people within them do best – when governments act on behalf of the community in setting boundaries within which entrepreneurs are free to be entrepreneurial.

It’s the community’s economy, and it’s the community that decides the rules that ensure businesses make their profits – good luck to them – in ways that do more good than harm to the rest of us.

The huge hurt and cost of the global financial crisis – from which the world is still recovering, 10 years later – is but the latest reminder of something we should have known: how easily an economy can run off the track when we fall for the line that self-interested, short-sighted business people should be free to do as they please.

I remind you of all this because we’re just emerging from a period of more than 30 years in which the Western world flirted with the notion that economies work best when businesses are given as free a hand as possible.

The present royal commission into the misbehaviour of the banks is just one response to the consequences of that ill-considered notion.

You have to be at least in your 50s to remember the world as it was before then, when governments felt free to limit businesses’ freedom of action in respects they judged necessary and to impose obligations on them.

Where do you think the minimum wage, four weeks annual leave, long service leave, sick leave and many other employee benefits came from? Governments decided to impose them on business so as to ensure workers got their share of the benefits of capitalism.

Many of our young people are deeply pessimistic about the working world they’re inheriting – the “gig economy” where most employment is “precarious” – because they’ve grown up in a world where businesses seemed to be free to do whatever suited them.

They think the gig economy would be a terrible world to live in. They’re right, it would. Which is why I’m sure it won’t be allowed to happen. Governments will stop it happening.

Why will they? Because workers have infinitely more votes than business people do. In the end, the economy is moulded to serve the interests of the many, not the few. Governments keep getting thrown out until they get that message.

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Retailers affecting the economy in ways we don’t see

As uncomprehending punters complain of the soaring cost of living, and the better-versed ponder the puzzle of exceptionally weak increases in prices and wages, don't forget to allow for the strange things happening in retailing.

It's a point the Reserve Bank's been making for months without it entering our collective consciousness the way it should have.

The debate over the cause of weak price and wage growth has been characterised as a choice between a "cyclical" (temporary) problem as we recover only slowly from the resources boom, and a "structural" (long-lasting) problem caused by the effects of globalisation and industrial relations "reform" that's robbed employees of their power to bargain collectively.

To the annoyance of protagonists on both sides, I've taken a bit-of-both position. But the Reserve has raised a different structural contributor to the problem: the consequences of greatly increased competition in a hugely significant sector of the economy, retailing.

The media have focused on the digital disruption aspect, with the arrival in Oz of the ultimate category killer, Amazon Marketplace.

But that happened only late last year and, although retailers may already have been tightening up on wage increases and other costs in anticipation of greater threat from online competitors, much of those consequences are yet to be felt.

Of greater significance to date is the arrival of new foreign bricks-and-mortar competitors such as Aldi and Costco.

As Dr Luci Ellis, an assistant governor of the Reserve, said last month, "Australia has seen a marked increase in the number of major retail players. Foreign retailers have entered the local market in recent years and continue to do so.

"This has also induced the existing players to reduce their costs to stay competitive, for example by improving inventory management. This has probably been a bit easier for larger or less-diversified retailers than for smaller firms.

"Whether through lower costs, narrower margins or a combination of both, this competitive dynamic has weighed on prices for consumer durables.

"And for staples such as food, competition and related changes in pricing strategies (such as 'everyday low price' strategies) have contributed" to keeping prices low.

If you doubt that adds up to much, try this. According to the consumer price index, prices of food and non-alcoholic beverages (including restaurant and take-away meals) were almost unchanged over 15 months to December, and rose only 3.6 per cent over the previous six and a half years.

Prices of clothing and footwear fell by 3.5 per cent over the 15 months to December, and fell by 4.6 per cent over the previous six and a half years.

Prices of furniture and household equipment fell by 1.5 per cent over the 15 months to December, and rose by just 4.5 per cent over the previous six and a half years.

As Reserve Bank governor Dr Philip Lowe has remarked, this is good news for consumers, although not for some retailers – nor their employees, for that matter.

Sometimes I think everyone would be a lot happier if prices and wages were growing by 4 per cent a year rather than 2 per cent. This would be a delusion, of course, but the beginning of behavioural economic wisdom is to realise that illusions abound in the economy.

Low inflation is not a bad thing to the extent that it's caused by increased competition forcing down businesses' profit margins – and goodness knows the two big supermarket chains have plenty of profitability to cut into.

Indeed, the benefit to consumers – who, remember, include all employees – makes competition-caused low inflation a good thing. (What's not a good thing is low inflation caused by weak demand.)

And particularly where increased competition involves innovation and digital disruption, it usually brings consumers greater choice and convenience, not just lower prices.

The downside of increased competition and digital disruption, however, is the adverse consequences for employees. Some may lose their jobs; many may find pay rises a lot harder to extract from bosses worried about whether their business has a viable future.

Retailing is our second biggest employer, with about 1.2 million full-time and part-time workers. And whereas the overall wage price index rose by 2.1 per cent over the year to December, in retailing it rose by only 1.6 per cent. This was lower than all other industries bar mining, on 1.4 per cent.

It's likely to be some years yet before the disruption of retailing has run its course, and this may mean structural change in the sector acts as a continuing drag on wage growth overall.

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