Monday, February 28, 2011

Carbon courage, and for Gillard, no going back

Maybe Julia Gillard will make a good prime minister after all. Her decisions of late - culminating in her commitment to impose a price on carbon from July next year - suggest she has learnt from Labor's mistakes and understands what she must do to stay in office.

Kevin Rudd's biggest mistake was to abandon his carbon-pollution reduction scheme after the going got tough, rather than seeking to get it passed after a double dissolution election. Urged on by Gillard and Wayne Swan, he thought abandoning the threat of "a great big new tax on everything" would help preserve his popularity.

Instead, it convinced voters he was lacking in courage and conviction. That was when his sharp slide in the polls began. His funk over climate change contributed to the mishandling of the resource super profits tax, while emboldening BHP Billiton and the other big miners to attempt to knock off the tax by knocking off the government. It's clear that, when Gillard replaced Rudd and rushed to an early election, she had no idea why Labor was in trouble. Rather than taking a different tack on the emissions trading scheme, she made matters worse by promising not to impose a price on carbon during her next term.

The result was that Labor voters abandoned the party in droves, while few if any swinging voters were attracted to such a chameleon party. She'd tried to "govern from the centre" and been caught between two stools. At last, however, Gillard seems to have realised leaders have to stand for something if they're to retain the loyalty of their heartland and impress the rest of the electorate.

She's starting to show signs of courage in imposing the eminently avoidable flood levy, in attacking rather than aping Tony Abbott's latest attempt to capitalise on popular resentment of boat people, and in restating Labor's support for multiculturalism.

For weeks she's been making speeches about her belief in economic reform and now she's given that some substance by announcing a firm objective of introducing a price on carbon well before the next election, not after it. No going back now.

Not long after Rudd followed John Howard's example in committing to using an emissions trading scheme as the means of imposing a cost on emissions of carbon dioxide and other greenhouse gases, many economists decided they favoured using a carbon tax.

In theory, the two are mirror images of themselves. Trading schemes limit the quantity of emissions directly, in the process pushing up their cost. Carbon taxes raise the cost of emissions directly, in the process discouraging people from emitting them. In practice, the two approaches have differing practical and political pros and cons. And now Gillard's agreement with the Greens commits her to a hybrid of the two. An emissions trading scheme will be established, but for the first three to five years the price of permits will be fixed and no trading allowed. After that trading will be permitted and this will cause the price of permits to vary with the balance of supply and demand.

This idea was originally proposed by Professor Ross Garnaut and later taken up by the Greens. Of course, most of the details of how the scheme would work remain to be negotiated with the Greens and sufficient independents in the House of Representatives.

But in his review of Gillard's statement, Dr Richard Denniss, the director of the Australia Institute, says the initial price is unlikely to be lower than the $26 a tonne initially used by Treasury in its modelling of the carbon pollution reduction scheme. The annual increase in the price is likely to be the inflation rate plus a few percentage points. Denniss says that if the eventual move to a trading scheme led to a rapid fall in the carbon price this would harm many businesses. So he suggests setting a price floor to prevent that from happening (as it did happen in the European Union's trading scheme).

Perhaps the greatest area of political vulnerability is the scheme's addition to households' electricity bills, given these have already risen by 40 per cent or so in recent times for other reasons. Here Denniss has an unorthodox and second-best suggestion.

Since it's all higher prices rather than just higher carbon prices that are expected to change our habits in the use of power, why not shield consumers from any further price increases?

The power generators could be made to pay for their emissions, but the higher costs could be offset by direct payments to the retail distributors. This would leave the price incentive for generators to invest in less emissions-intensive production methods, while removing the need to raise household electricity costs but then compensate people for the rise in their cost of living.

As Denniss reminds us, behavioural economics explains why the punters hate being taxed with one hand and compensated with the other. Partly it's distrust - the pollies may welsh on the deal - but mainly it's because most people are "loss averse": they dislike losing money more than they enjoy receiving money.

The very use of the word "compensation" is a reminder to people there must be pain involved.

Because it's so hard to adequately compensate every last person with unusual circumstances, governments commonly end up overcompensating a lot of people. So if you sent the compensation direct to the electricity retailers you could avoid wasting the proceeds from the tax on overcompensation, leaving more available for subsidising research and development of alternative energy sources.

Saturday, February 26, 2011

Surge in savings masks current account rise

One little-noticed consequence of the resources boom has been a big rise in the current account deficit on our balance of payments with the rest of the world. But when we get the latest figures on Tuesday we're unlikely to see any evidence of that. Why not? Because of the surge in household saving.

The current account deficit occurs because our imports and payments of interest and dividends to the rest of the world almost always exceed our exports and receipts of interest and dividends from the rest of the world.

Over the past 30 years the current account deficit has averaged about 4 per cent of gross domestic product. Since the start of the resources boom in 2003-04, however, the current account deficit has been nearer 5 or 6 per cent of GDP.

You might expect that, with the resources boom meaning the world is paying us much higher prices for our exports of coal and iron ore, the current account deficit would be smaller rather than larger. But it hasn't worked out that way.

Why not? Because the higher export prices represent an increase in the nation's real income, and when that extra income is spent by individuals and firms, much of the additional spending goes on imports.

But it's always easier to see the factors driving the current account deficit if we explain it in terms of saving and investment rather than exports and imports.

How is it possible for us to go on year after year having our recurrent payments to the rest of the world exceeding our recurrent receipts? It's possible only if we can cover the difference by having someone in the rest of the world lend us that difference (or by accepting foreign ''equity'' investment in Australian businesses).

These capital transactions are recorded in the capital account on the balance of payments. So it turns out that if we're running a deficit on the current account this has to be exactly matched by a surplus on the capital account.

And the capital account surplus represents the amount by which the nation's investment in new housing, business plant and structures, and public infrastructure during a period exceeds the nation's saving during that period.

Households save by spending less than all their income on consumption. Companies save by retaining some of their after-tax profits rather than paying them all out as dividends. And governments save when they raise more in taxes than is needed to cover their recurrent spending.

The amount we save pays for the amount we invest. So when a nation's physical investment spending during a period exceeds the amount it has saved during that period - as it always does in Australia - it has to cover the gap by calling on the savings of foreigners.

Looked at this way, the resources boom increases the current account deficit because it leads the mining companies - many of which are foreign-owned - to greatly increase their investment in the construction of new mines, natural gas facilities and so forth.

In the first stage of the resources boom - before the global financial crisis interrupted - there was an increase in national saving, but a greater increase in national investment, thus causing the current account deficit to be 1 or 2 percentage points of GDP higher.

Then there was the period of the crisis - particularly in 2009 - when national saving increased but national investment fell, thus causing the current account deficit to narrow to about 3 per cent.

But now we've got the economy recovering from the mild recession induced by the crisis. We have seen a bit of growth in investment in new housing, stronger growth in companies' investment in ''non-dwelling construction'' (mainly continuing construction of new mines), though no growth in companies' investment in new machinery and equipment, and very strong growth in governments' investment in infrastructure, particularly the state governments.

So national investment spending is up on the crisis period. But national saving is up by more. As we saw in this column last week, the household saving ratio has shot up to 10 per cent of household disposable income (equivalent to about 6 per cent of GDP).

Corporate saving is quite high, as companies use retained earnings to repay debt and improve their gearing. Yet governments have gone from saving to dissaving as their revenues have been hit by the delayed effect of the downturn while their recurrent spending has been swollen by stimulus measures.

Putting these three components together, national saving is well up on what it was before the crisis struck. Whereas gross national saving had coasted along each year at about 20 per cent of GDP (here, ''gross'' means before making a deduction for the annual depreciation in the value of the stock of the nation's physical capital), now it is up to about 25 per cent.

So, though national investment is up a bit on what it was during the crisis, national saving is up a lot - mainly thanks to the remarkable increase in household saving. This suggests the current account deficit, which got down to 3 per cent of GDP during the crisis, has taken a step lower to 2 per cent. It averaged 2 per cent in the June and September quarters of last year and, when we see the balance-of-payments figures on Tuesday and the national accounts on Wednesday, they're likely to show the current account deficit stayed at about 2 per cent in the December quarter.

Two conclusions. First, the fact that the increase in the current account deficit during the noughties occurred because of higher investment rather than reduced saving (which actually increased a bit), suggests that the foreign debt we are racking up is financially sustainable. In the main, we're borrowing from foreigners to expand our capacity to sell more coal, iron ore and natural gas to foreigners.

Second, the expectation that the resumption of the resources boom will lead to many more years of outsized current account deficits arises because we know there's a huge amount of investment in mining construction to come, with much of the funding for that investment coming from foreigners.

But this expectation assumes no change in the nation's saving habits. So to the extent that our households continue saving a lot more of their incomes than they used to, we can have the mining construction boom with lower-than-expected current account deficits and less increase in our foreign debt.


Wednesday, February 23, 2011

Hard to hear angels above the racist heartbeat

Scientists used to think chimpanzees - our close relatives - were a gentle, peace-loving species, until they observed their behaviour in the wild and found they could be quite murderous in the treatment of other chimps.

And what was it that caused them to become so vicious? The arrival of chimps from a different troop in the part of the forest they considered to be their territory.

I remembered this one day after failing to persuade a friend who took a dim view of boat people that her objections were unfounded. Whenever I knocked down one argument she'd just switch to another.

Our evolutionary history has left us with an instinctive fear of outsiders - people who are different, people who invade our territory to steal our food and our women or, in the contemporary context, to jump the queue and steal our jobs, overcrowd our schools (and win most of the prizes), overwhelm our culture, crowd out the rellos we're trying to get into the country, push up house prices and add to congestion on the roads.

You can call it racism or religious intolerance - the nation that invented the White Australia Policy can hardly object to that charge, except to say we're no worse than most nationalities and better than some.

But it's best thought of as xenophobia - a fear of foreigners, people who are different, who aren't one of us.

And it's so deeply ingrained in us - so visceral - it's not susceptible to rational argument. It would be nice if a greater effort by the media to expose the many myths surrounding attitudes towards asylum seekers could dispel the fear and resentment, but it would make little difference.

Our politicians have long understood that widespread dislike of newcomers, especially those of darker skin or strange religious practices, lay just beneath the surface and could be easily aroused. The politician or party that tapped this vein would draw much support.

For decades there was an unspoken agreement between the major parties to keep such tactics off limits. Their role was to avoid bringing out the worst in the Australian psyche.

But maybe 20 years ago that bipartisan approach began breaking down. Perhaps it was the rise of Asian immigration, perhaps the era of so many people arriving uninvited by boat.

It may be true we have a bigger problem with visitors arriving by plane and overstaying visas, but the more visible arrival of scruffy people on an overcrowded, leaky boat - the footage of which can be replayed many times, leaving an exaggerated impression of the numbers involved - seems far more threatening.

Perhaps it was the huge rise in the levels of sanctioned immigration in recent years, for which governments have failed to provide sufficient housing and public infrastructure.

Another factor was the advent of talkback radio, which gave greater currency to the disaffection of individuals, and then the rise of shock jocks who, in pursuit of ratings and commercial gain, where prepared to incite their listeners' resentments.

Pauline Hanson brought the issue crashing onto the stage of federal politics, forcing the major parties to respond. But politicians had begun walking away from their commitment to avoid politicising the issue much earlier.

Perhaps they couldn't avoid responding to public concerns; perhaps in the heightened contest between the parties they could no longer resist the temptation to gain an advantage over their opponents.

Some people blame it all on John Howard, but the harsh treatment of boat people began under his Labor predecessors. And whoever started it, once the embargo had been breached both sides got down and dirty.

Julia Gillard took the debate to a lower level before the election when she invited people to give their prejudices free rein. "People should feel free to say what they feel," she said. "For people to say they're anxious about border security doesn't make them intolerant. It certainly doesn't make them a racist."

To acknowledge we have an evolutionary predisposition to fear and resent outsiders is not to condone such attitudes. The process of civilisation involves gaining mastery over our base emotions which, if they once contributed to our biological "fitness", are now antisocial and counter-productive.

But if such attitudes are instinctive and impervious to rational argument, what's to be done now the pollies have let their standards fall?

I was at a loss to answer that until last week and the arrival in Sydney of that poor distressed orphan boy for the funeral of his father. Suddenly a crack appeared in the wall of prejudice against boat people. Tony Abbott and his immigration spokesman, Scott Morrison, got caught going beyond the pale in their pursuit of electoral advantage. It emerged that Morrison had earlier proposed exploiting the popular resentment of Muslims, but had been rebuffed by colleagues insisting the Liberals' long-standing commitment to a non-discriminatory immigration policy remain inviolate.

The minister, Chris Bowen, was widely criticised for his bureaucratic and insensitive treatment of the boy and his relatives. And it seems the episode has prompted Gillard to find the courage to lead.

"People easily fear change. People easily fear difference," she said. "It is the job of national leadership to reassure in the face of that fear, to explain to people that there is ultimately nothing to be afraid of."

What changed? Here's a clue: in their efforts to gratify and exploit public resentment of "illegals", governments of both colours have given the highest priority to preventing individual boat people from telling their stories to the media. They must continue to be seen as monstrous invaders, never as flesh and blood.

Our attitudes towards asylum seekers may be impervious to rational argument, but they're not to rival emotions - particularly the positive emotion of empathy.

Like all nationalities, Australians are neither good nor bad, they're both. Our leaders can play up to our darker side, or appeal to the better angels of our nature.


Monday, February 21, 2011

The economy is a lion disguised as a lamb

The big divide in economists' views on the outlook for the economy - and hence, for interest rates - is whether they regard the present weakness in consumer spending as worrying or welcome. And that turns on how forward-looking they are.

I suspect it's also affected by what psychologists call "salience" - the tendency for our judgments to be most affected by those events that are highly visible and memorable, those that make the biggest impression on us. Looking at the economy now, what stands out is the weakness of consumer spending, including quite anaemic growth in retail sales. Tourism - whether inbound or domestic - is another area of weakness, badly affected by the high dollar.

So weak is consumer spending that it's putting downward pressure on a lot of retail prices. As Dr Philip Lowe, of the Reserve Bank, pointed out last week, over the past year the Bureau of Statistics' price index for clothing has fallen by 6 per cent (assisted by a fall in import duty on footwear, clothing and textiles at the beginning of last year).

The various indexes have fallen by 4 per cent for major household appliances, 1.5 per cent for furniture and furnishings and by 18 per cent for audio, visual and computing equipment. Indeed, apart from processed food, the prices of very few manufactured goods rose during the past year.

Lowe suspects the weak consumer spending has led to a faster than usual pass-through to retail prices of the substantial appreciation of the dollar, which has lowered the cost of imported goods and services (and also put downward pressure on the prices of locally made goods and services that compete against imports in the domestic market). His suspicions are confirmed by the research of Kieran Davies, of Royal Bank of Scotland, who found the weakness of retail prices was more likely to be the result of pass-through of the higher exchange rate than the compression of retailers' margins.

Davies notes that, unless the dollar appreciates further (not something I'd wish for), the exchange rate's dampening effect on inflation will soon start to wane.

All this spells tough times for the retailers, and their lamentations have had much publicity. So it's easy to see the economy as going through quite a weak patch. This impression will be compounded when we see the way the Queensland floods and cyclone Yasi have taken a bite out of the growth in gross domestic product in the December and, more particularly, March quarters.

Little wonder the financial markets aren't expecting any further increases in the official interest rate until quite late this year, and the governor of the Reserve Bank, Glenn Stevens, thinks rates are "about right for the medium-term outlook". But I think there's a lot more strength behind the economy than all the surface noise would suggest. If I'm right, the rate rises will resume earlier than the markets presently expect.

For a start, the blow from the extreme weather events largely represents the displacement of activity from the March quarter to the June and later quarters. The Reserve is expecting the level of GDP to be no lower by the end of this year than was expected before the floods happened.

For another thing, the weakness in consumer spending is occurring because of a reversion to our earlier saving habits and a (presumably temporary) bout of caution. In other words, consumers aren't short of a bob, they're choosing not to spend.

It's not the sort of thing the media shout about, but household disposable income grew by 6.4 per cent over the year to September in nominal terms. It's being boosted by two major sources of present and future growth: our most favourable terms of trade in 140 years and strong growth in employment. The Reserve's index of commodity prices has risen by almost half over the past year. This doesn't add to GDP directly, but it does add to the nation's real income which, when spent, becomes more visible.

Another less salient factor is the strength of the labour market. Over the year to January, total employment grew by 3 per cent. Within that, full-time employment grew by 3.4 per cent. The unemployment rate is down to 5 per cent, while the rate of participation in the labour force is at a near record high of 65.9 per cent.

This is not the hallmark of a weak economy - quite the reverse. It also gives the lie to the silly talk of a two-speed economy. You may object that the labour market's yet to register the effect of the weak retail sector but, in fact, the various forward indicators suggest employment will continue growing strongly.

And to top off all that there's the least salient factor of all: the looming wall of mining construction spending. Consider this quote from the latest statement on monetary policy: "For some time, the [Reserve] has been expecting very strong growth in resources sector investment.

"The information received over recent months has provided greater confidence in this forecast, with announced plans to date at least as strong as had been expected."

All this is what you see when you lift your eyes from hard-pressed retailers and look at what's in the pipeline. When you do you see that, from a wider perspective, the fact we're not yet adding a consumption boom to a business investment boom is more welcome than worrying.

The economy's potential rate of economic growth is only about 3.25 per cent a year and, with unemployment already down to 5 per cent, we have little spare production capacity.

Even so, the Reserve is forecasting growth of about 4.25 per cent over this year, with growth of 3.75 to 4 per cent in the following years.

Sounds like a recipe for higher interest rates to me.


Saturday, February 19, 2011

Urge to splurge fades as savers born again

The punters, pollies and shock jocks who tell us we're groaning under the weight of the rapidly rising cost of living need to answer a question: if so, how come households are managing to save 10 per cent of their disposable income?

It has drawn remarkably little comment, but the household saving ratio - saving as a proportion of household disposable (that is, after-tax) income - is the highest it has been in more than 20 years.

You wonder why the retailers are doing it so tough? That's why. With wage rates increasing and more people in jobs, household income has been growing quite strongly. But in recent years we've been much less inclined to rush out and spend every cent that comes our way.

That's what saving is: the bit that's left over when you don't spend all your income on consumption. In fact, economists define saving as ''deferred consumption''.

Most of us think of saving as putting money in bank accounts. We've been doing more of that lately, but it's not the main way we save. Historically, the main way Australians have saved is by borrowing a shed-load of money to buy a house, then paying it off over the next 25 years. Your savings are embodied in the proportion of the house that's owned by you rather than the bank - your ''equity'' in the house.

The household saving ratio was at 15 per cent in the early 1980s, but then it fell for more than two decades to reach a low point of minus 2 per cent in the early noughties. We were ''dissaving'' - consuming more than we earnt.

How's that possible? By running down past savings or by borrowing.

Since the mid-noughties, however, the saving ratio has shot up to 10 per cent. You could be forgiven for not knowing this because much of the increase has suddenly appeared as a result of the Bureau of Statistics' revisions to the national accounts.

The bureau doesn't measure saving independently, just takes it as the residual when it compares two huge numbers: for household income and for household consumption. So any errors in measuring those two big numbers will be reflected in the figure for saving, making it volatile and subject to revision as better information comes to hand.

Since 2004 household disposable income has grown strongly, averaging 7.3 per cent a year in nominal terms (that is, before allowing for inflation). Over the same period, household consumption has grown by 5.4 per cent a year.

Dr Philip Lowe, an assistant governor of the Reserve Bank, expressed the figures differently in a speech he gave this week. In quite a few of the years during the decade and a half to 2005, household consumption increased by more than a dollar for every extra dollar of household disposable income received.

Since then, however, only about 65¢ in every extra dollar of income has been spent. (Small prize if you realised this measure is that old Keynesian workhorse, the ''marginal propensity to consume''.)

The evidence that something has changed in our attitude to saving can be seen in other indicators. One example comes from the annual survey of Household, Income and Labour Dynamics in Australia.

In the surveys between 2000 and 2005, there was a clear trend of fewer and fewer households with mortgages reporting they were ahead of schedule in their repayments (a way of saving). But this downtrend slowed in about 2005 and then in 2009 - the most recent year for which results are available - there was a marked increase in the share of people saying they were ahead of schedule.

Similarly, over the past couple of years there has been an increase in the proportion of households who say they pay their credit card balance in full each month. It has gone from about 60 per cent to almost 65 per cent.

Then if you look at the Westpac-Melbourne Institute monthly survey of consumers you find there has been a marked increase in the number of households saying the wisest thing to do with their savings is to pay down debt or build up bank deposits.

Correspondingly, there has been a decline in the perceived attractiveness of more risky investments.

A final bit of evidence comes from the estimates of how much equity households are adding to the housing stock. Until the late 1990s, it was normal for the value of newly constructed homes each year to be significantly greater than the increase in the amount we all owed on our housing.

Why? Because, while the people buying the newly-built homes would usually borrow most of the cost of the home, other, established home owners would be trying to pay back their mortgages as quickly as they could (mainly by keeping their monthly mortgage payments higher than the bank's minimum requirement).

In other words, the proportion of the nation's total amount of housing that wasn't owed to banks would increase each year. Economists call this ''equity injection''.

But during the early part of the noughties this changed and the household sector was withdrawing equity. Now here's the point: in recent years things have changed again and we've returned to the usual pattern of increasing equity.

So what's going on? Why did we stop saving and why have we started again? Over the decade to 2005, there was a large run-up in household debt and a related rise in the (gross) value of household assets such as homes and shares, while our rate of saving declined.

This seems to have been a period of adjustment to the fall in nominal interest rates (caused by our return to low inflation) and financial innovation (banks keener to lend for housing, with new products such as home-equity loans and reverse mortgages).

Lower nominal mortgage rates allowed us to borrow more, which many of us did at much the same time, thus bidding up house prices in the process. Some of us even increased our mortgage to pay for an overseas trip.

But it seems this period of adjustment to new possibilities was largely completed by the mid-noughties and we've gone back to our usual preference for paying off the mortgage as soon as we can.

And then this episode of ''structural adjustment'' seems to have been reinforced by the global financial crisis, which has led some households to rethink their spending and borrowing decisions. Some people are a lot more cautious and a lot less sure that house and share prices can only ever go up.


Wednesday, February 16, 2011

Inflation whingers bite the very hand that feeds them

Have you been struggling to cope with the rapidly rising cost of living? Well, tell it to the pollies because I don't believe it. Actually, the pollies probably don't believe it either but they'll pretend to rather than risk offending you by telling you to stop feeling sorry for yourself. They care about your approval, not your edification.

Ever since 1957, when the British prime minister Harold Macmillan caused uproar by telling the Poms they'd "never had it so good", politicians have been wary of incurring the voters' ire by reminding them of their growing prosperity.

Many people prefer to see themselves as put-upon and pollies are happy to go along with the self-deception as long as it keeps them out of trouble. The really weak ones would agree with a proposition that you'd never had it so bad if they thought it would humour you. (And the shock jocks are no better.)

My theory is that if people are reduced to whingeing about the cost of living, it's a sign they don't have any more pressing problems to complain about. The cost of living is always rising, so there's always something to complain about if you're that way inclined.

Many people have long believed living costs are rising considerably faster than the official measure of inflation, the consumer price index, and now the Bureau of Statistics has appeared to confirm their suspicions by publishing special cost-of-living indices for particular types of households.

The CPI is an imperfect guide to living costs, partly because it's an average for all capital-city households, whereas different types of households have differing spending patterns. Mainly it's because, for "conceptual reasons", the CPI takes no account of the ups - and downs - of mortgage interest payments.

This week the bureau issued figures showing that, whereas the CPI said prices rose by 2.7 per cent over the year to December, the cost of living for employee households rose by 4.5 per cent, as it did for non-aged welfare recipients.

For age pensioners costs rose by 3.1 per cent, whereas for the self-proclaimed self-funded retirees they rose by about the same as the CPI: 2.6 per cent.

So, does this prove life is as expensive as you think, as one headline had it? No, it doesn't. Why not? Because you think your cost of living rose by a mighty lot more than 4.5 per cent last year.

What it proves is that, while the CPI may at times understate the rise in your cost of living, it doesn't understate it by nearly as much as you'd like to believe. And remember this: at times when mortgage interest rates (and fruit and vegetable prices) are falling rather than rising, the CPI is likely to overstate the rise in your living costs.

This means that, since interest rates and fruit and vegie prices regularly go up and down, over time much of the difference between CPI inflation and the cost of living comes out in the wash.

Consider this: over 11 years to December, the CPI rose by 43.8 per cent, whereas the living-cost indices rose by 43.6 per cent for self-funded retirees, 48 per cent for employees, 48.4 per cent for age pensioners and 50.3 per cent for non-aged welfare recipients.

A difference of 4 percentage points or so over a period as long as 11 years isn't a lot to write home about. The perpetually self-pitying self-funded retirees have nothing to complain about but the people with most to complain about, those on sole-parent pensions or the dole, are the people we feel least sympathy for (which is precisely why successive governments have screwed them).

Why is it so many of us imagine our living costs to have risen by far more than any official measure of price increases records? Because of the frailties of human nature. We make casual observations of changes in the prices we pay, whereas the Bureau of Statistics - which sends people out to check prices in supermarkets and many other retail outlets around the nation - calculates it all very thoroughly.

You and I take no account that the car or computer we buy today does more tricks than the last one we bought but the bureau makes allowance for this "quality improvement" so as to distinguish between rises in the cost of living and rises in our standard of living.

More pertinently, you and I vividly remember the big prices rises we've suffered - electricity and water rates in recent times, petrol prices at other times - while being vaguer about the small price falls we've enjoyed and taking no notice of the many prices that don't change (but which, of course, are working to hold down the rise in our cost of living).

The high dollar and weak retail sales have brought more falls in prices than most of us realise.

The bureau's records show the prices of clothing and footwear fell by 4.8 per cent last year. The combined prices of household contents and services fell a fraction, while the prices of new cars fell by 1.5 per cent, the prices of phone calls and internet service providers fell by 0.6 per cent, the prices of electronic entertainment devices and computers fell by 7.8 per cent.

The prices of overseas holidays fell by 1.2 per cent, and those for domestic holidays fell by 3 per cent.

And while the overall cost of living was rising, so were our incomes. To quote Macmillan in full: "Let us be frank about it. Most of our people have never had it so good."


Monday, February 14, 2011

Fiscal heaven is pollies worrying about deficits

The most surprising thing in the great debate over how Julia Gillard should finance the cost of "rebuilding Queensland" is the alacrity with which some economists have urged her to just add it to the budget deficit rather than - gulp - temporarily increase taxation.

Admittedly, the best argument for putting it all on the tick is that the sum involved - $5.6 billion over three or four years - is too small to worry about.

And some economists have pointed out that, since most of the cash will be paid out this financial year and next, the cost is highly unlikely to endanger Gillard's election promise to return the budget to surplus in 2012-13, as she has claimed it would. (Though putting it on the tick would add to the stock of public debt, of course.)

But for the sake of argument, let's pretend the amounts involved - including the horrendous impost of the one-year flood levy - are big enough to worry about so we can debate the principles involved. What's amazed me is seeing economists telling the government it's far more worried about the urgency of getting the budget back into surplus than it needs to be; that it's propagating pre-Keynesian nonsense. This year, next year, the year after - what's it matter?

Funny thing is, I don't remember any of these guys offering that advice when the opposition was shouting populist nostrums about the evil of deficits and debt and, in the process, painting into a corner a deeply insecure government.

Seems like it took the threat of having to pay a bit more tax to get these guys to speak out about fiscal silliness. So short are our memories that no one seems to have noticed the remarkable role-reversal we're witnessing: the pollies - on both sides - more worried about budget deficits than the economists are.

We've been playing the must-get-the-deficit-down game on and off since Malcolm Fraser's day. And in case you're too young to remember, the way the game's played is that,

. in the aftermath of a recession, Treasury and a few economist

. supporters bang on endlessly about the need to reduce the deficit, while the pollies pretend to care and the electorate yawns.

Now, believe it or not, the pollies are leading the charge to get the budget back to surplus, with

Treasury trailing in their wake. And the punters have been convinced it really matters.

The point is, economists should think twice before they pour cold water on this fashion, even if the reasons the non-economists think it's so important are dubious and their sense of urgency is greater than needed.

Much of the credit for this remarkable role-reversal goes to my old mate Peter Costello. He started the fashion of using deficits and debt to beat the heads of his Labor opponents, and some good has come of it.

Costello and his charter of budget honesty also get the credit both for asserting the need for adherence to a medium-term fiscal strategy and for the sounder-than-it-looks formulation of that strategy: "to maintain budget balance, on average, over the course of the economic cycle".

Contrary to the impression he and his mates might leave you with, that formulation makes full allowance for the operation of the budget's automatic stabilisers in pushing it into deficit during recessions (and restoring it to surplus during recoveries) and for adding discretionary Keynesian stimulus on the top, provided that stimulus is wound back as the economy recovers.

Whether because of her innate sense of fiscal responsibility or her fear of Costello's successors, Gillard is determined to stick to this strategy and has imposed various strictures on the government - such as limiting the real growth in government spending to 2 per cent a year - to ensure it's achieved.

Sensible economists should think twice before telling her she's trying harder than she needs to. They should also avoid being too picky about exactly when the return to surplus is to be achieved.

Whenever governments seek to "operationalise" a nice economic concept, whenever they turn a "medium-term strategy" into a target to be hit (or missed), they're drawing a line in the sand that smarties can condemn for being quite arbitrary. What's so magical about 2012-13? Why not a year earlier or later?

But such criticism is too smart by half. It fails to understand the simple human difficulty in achieving objectives that are too flexible. The difficulty prime ministers, treasurers and finance ministers have in preventing their colleagues from doing what comes naturally: spending taxpayers' money too freely.

If more economists were familiar with behavioural economics, they'd see Gillard's promise to return the budget to surplus in 2012-13 not as an irrational "political" act but as a "pre-commitment device" - a calculated act of self-control - akin to what the Productivity Commission wants to be available to problem gamblers.

And there's one other point to note: who says there's no urgency to get the budget back to surplus? I bet that's not what the econocrats are telling Gillard.

It seems the expectations of many business economists have been too influenced by the weakness of consumer spending. The September quarter national accounts purported to show the economy slowing to a crawl, and these guys believe it.

Well, let me tell you, the econocrats don't. They see record terms of trade, low unemployment and a wall of mining construction spending about to descend on the economy.

With such an outlook, the faster Gillard returns the budget to surplus the better.

Saturday, February 12, 2011

A carbon price can't save the planet by itself

I have a love-hate relationship with economic rationalism. I have great respect for the power of market forces - individuals and firms do change their behaviour in response to changing prices - but I'm well aware of their limits.

To me the test of economic understanding is whether it's pragmatic and "evidence-based" or ideological and faith-based. Is the neo-classical model simply a tool of analysis, suited to some jobs better than others, or is it an infallible guide to the universe?

A good test for economists is their attitude to climate change. A few - particularly those associated with the Lavoisier Group and libertarian think tanks such as the Centre for Independent Studies and the Institute of Public Affairs - would prefer to deny the weight of scientific opinion rather than admit that global warming represents an instance of "market failure" needing to be corrected by government intervention.

I'm convinced the great majority of economists, however, accept the existence of global warming and the need for intervention. They argue the best way to tackle the problem is to use a carbon tax or emissions trading scheme to incorporate the cost of the damage done by greenhouse gas emissions into the prices faced by the producers and consumers of emissions-intensive goods and services, harnessing market forces in the service of the environment.

Agreed. But the next stage of the evidence-versus-faith test is whether an economist thinks "putting a price on carbon" is all we need to do the trick, or whether "complementary policies" are needed to bolster the pricing policy. Such complementary policies may involve government subsidies or tax concessions, or laws imposing certain requirements or prohibiting certain behaviour.

This issue arises because Julia Gillard is proposing to cover much of the cost of rebuilding Queensland's public infrastructure by ending or capping various government spending programs intended to reduce emissions. She's defended this by saying they'll no longer be needed once we get a price on carbon.

Actually, most of the programs she wants to chop would be no loss because they're far from cost-effective in reducing emissions. But should they be replaced by programs that are cost-effective or will the carbon price be sufficient, as Gillard implies?

The present secretary of the Department of Climate Change and soon-to-be secretary to the Treasury, Dr Martin Parkinson, is in no doubt that complementary measures are necessary.

He said in a speech last year that "the lack of a carbon price signal is fundamental, and no long-term policy solution is possible without the creation of [price] incentives to protect the integrity of our climate system and reduce the risks of dangerous climate change.

"But it needs to be complemented by other measures. These include support for the development of new low-emission energy technologies, integration of climate considerations into transport planning, provision of general energy efficiency information, and addressing split incentives in rental markets."

In a discussion paper issued this week by the Australia Institute, Dr Richard Denniss and Andrew Macintosh remind us that governments have a long history of using complementary policies to augment price-based measures in changing behaviours.

In their efforts to discourage smoking, for instance, governments used taxes to raise the price of cigarettes but also used subsidised access to quit treatment plus restrictions on advertising, sales to minors, who may sell cigarettes and where they may be smoked.

To encourage the use of unleaded fuel, governments cut the tax on unleaded but also required all cars sold after 1998 to run on unleaded petrol.

So when are complementary measures necessary and how should they be designed? Denniss and Macintosh set out six principles. First, measures should be cost-effective. The budgetary cost of measures to reduce emissions should be compared with the quantity of emissions likely to be prevented, thus expressing the cost as dollars per tonne of carbon dioxide. This can be compared with the price on carbon created by the tax or the trading scheme.

Second, measures must be in response to a clear case of market failure. It's because in practice markets sometimes fail to deliver the benefits the economists' model promises that putting a price on carbon isn't enough.

One example of market failure is "split incentives": if a tenant incurs the cost of installing insulation in a rental property, it's likely to be future tenants who capture most of the benefits. And if a landlord installs insulation it's the tenant who will benefit from better temperatures and lower electricity bills.

Another example is "public goods": sometimes people can't be excluded from benefiting from services they haven't helped to pay for, making it unprofitable for the market to provide these services in sufficient quantity. Research and development spending has this characteristic, meaning it should be subsidised by government in the public interest.

Third, complementary policies should work in conjunction with, not in opposition to, other policies aimed at reducing emissions.

For instance, the Rudd government's emissions trading scheme was designed in such a way that any reduction in emissions caused by its subsidies for households installing solar panels would simply reduce the effort required by other polluters, not add to the overall reduction.

Fourth, the complementary policies of the federal government should fit with the policies of state governments. Rudd's emissions trading scheme gave the feds all the responsibility for reducing emissions, while leaving with the states the responsibility for "adaptation" - coping with the effects of climate change - even though in some areas the states were better placed to reduce emissions.

Fifth, complementary policies should be equitable. While it's accepted that low-income earners should be compensated for the effects of a carbon price, much less attention is paid to the fairness of complementary policies.

For instance, only the well-off could afford to install photovoltaic solar panels but the cost of the generous feed-in tariffs they enjoy is borne by all electricity users, rich or poor.

Finally, complementary measures need to involve accountability. As we saw with the home insulation scheme, it's easy for such measures to be badly administered or for a lot of money to be spent without much effect, particularly where subsidies are involved.

So the objectives of complementary measures need to be spelt out clearly and the schemes need to be monitored regularly against those objectives.

It's no bad thing for Gillard to abandon those complementary measures that have proved wasteful. But the limitations of market forces mean doing no more than imposing a price on carbon emissions is unlikely to reduce emissions to the extent we need.


Wednesday, February 9, 2011

Carbon price is no fix-all

Our wide brown land has always been subject to ''extreme weather events'' - droughts, floods, cyclones, bushfires and heatwaves. That's why no one can say the extreme events we've been suffering lately are a direct consequence of climate change.

But scientists have long predicted that one effect of global warming would be for extreme events to become more extreme, which is just what seems to be happening. So it would be a brave or foolhardy person who denied recent events had anything to do with climate change. And, certainly, the insurance industry, which keeps careful records of these events, is in no doubt that climate change is making things worse.

All this being so, you'd expect it to strengthen our determination to get on with doing our bit to reduce emissions of greenhouse gases. Yet cuts in spending on climate change programs are one of the main ways Prime Minister Julia Gillard proposes to cover the cost of rebuilding public infrastructure in Queensland. The cuts will save almost $1.7 billion over four years, compared with the $1.8 billion the temporary tax levy will raise.

So what on earth is Gillard on about?

She says the key to it is her determination to deliver a carbon price. ''There is complete consensus that the most efficient way to reduce carbon is to price carbon. Some of these policies are less efficient than a carbon price and will no longer be necessary - others will be better delayed until a carbon price's full effects are felt,'' she says.

She's right that there's strong agreement among economists and others that the most efficient - that is, the least costly in terms of economic activity discouraged - way to reduce our emissions of carbon dioxide is to build the cost of the damage done by the emissions into the prices of the emissions-intensive goods and services we produce.

This is the way to enlist market forces - our tendency to change our behaviour in response to changes in the prices we pay - in the service of the environment. It encourages us to find ways to reduce our emissions while giving us freedom to choose the ways that work best for us.

It also removes the price disadvantage suffered by the various forms of renewable energy because the prices of fossil fuels don't include the cost of the damage they're doing to the environment.

But, as the Australia Institute's Richard Denniss and Andrew Macintosh point out in a paper to be released today, imposing a price on carbon emissions won't solve the problems most of the affected climate programs were intended to tackle.

For instance, the cash-for-clunkers scheme and the Green Car Innovation Fund are designed to reduce emissions from cars. But the government's former emissions trading scheme specifically excluded petrol, and there's been no suggestion the new arrangements will include it.

The government plans to cut research into carbon capture and storage. But though raising the price of coal in Australia will provide some incentive for coal companies to continue pursuing clean-coal technology, they're unlikely to put in nearly as much money as the government was promising because the technology is not at all promising.

The government plans to cap or cancel various programs aimed at encouraging households to install solar panels. Again, it's doubtful whether raising the price of coal-based electricity will be sufficient to overcome the various impediments to better energy use in the home. So Gillard's claim that a price on carbon will remove the need for other measures to discourage emissions doesn't stand up.

But that's not to say she shouldn't be cutting back or getting rid of those particular measures. Most of them would be no loss. The cash-for-clunkers scheme is a hugely expensive way of encouraging a modest reduction in omissions. The green car fund is just a disguise for giving further help to car makers.

And the hope that the carbon dioxide emitted during the generation of electricity from coal could be captured and stored underground in a commercially viable way is probably a pipedream.

As for the schemes to encourage households to go solar, they've been far too generous, requiring the taxpayer to pay much too much for the reduction of emissions - up to $280 a tonne in the case of one scheme.

No, the disappearance of most of these programs will be no loss. But in claiming they will be made redundant by a carbon price, Gillard is trying to cover the government's embarrassment because most of them were introduced by Labor itself. And, as Denniss and Macintosh argue, she is inflating expectations about how much a carbon price could achieve. It may be the most important thing we need to do, but it's not the only thing.

Because market forces are powerful but far from perfect, the carbon price needs to be complemented by other measures. Getting rid of bad complementary measures is fine, but they need to be replaced by measures that are more cost effective.

And if Gillard is looking for cost savings to help pay for flood damage, she should start by getting rid of programs that actually subsidise the use of fossil fuels: the concessional taxation of company cars, the exemption from fuel excise for aircraft and natural gas and certain other tax concessions. Getting rid of those would not only help reduce emissions, it would save the budget more than $4 billion a year.


Monday, February 7, 2011

All views about the levy are political

Some economists stress that Julia Gillard's decision to finance part of the Queensland infrastructure rebuild by means of a temporary tax levy is a "political" choice, not one dictated by the needs of economic management.

It's true. But the economists don't go on to acknowledge that their almost universal opposition to the levy is based not on value-free (or "positive") economic reasoning, but on a political philosophy buried so deep within their model - and so deep in the way economists are trained to think - that many of them don't know they're being just as political as the pollies.

I have to admit that, as I argued in this space last Monday, the sums involved in this exercise are too small to be worth arguing about. Even so, it's worth debating the principles involved in preparation for the time when the sums are material.

The fact is that the economists' basic, neoclassical model doesn't acknowledge the legitimacy of government intervention in the economy. So it's not surprising they're so predisposed to opposing government spending and taxation. The presumption against the legitimacy of government activity comes mainly from the model's unit of analysis: the individual. Economies are made up of individuals. End of story. What individual consumers and producers want is paramount.

The notion that individuals could choose to confer power on elected governments isn't contemplated. Nor is the notion that non-market institutions such as governments could create benefits for society that wouldn't otherwise exist. This is the basis for Margaret Thatcher's famous assertion: "There is no such thing as society: there are individual men and women, and there are families."

The next anti-government element of the model is its assumption individuals are "rational" - they always know their own mind and act in their own best interests. Since each of us is, in effect, infallible, no government can ever know what's in our interests better than we know ourselves.

So how could I ever be better off allowing government to confiscate some of my income via taxation and give it back to me (or worse, to poor people) in government spending programs? The third anti-government element of the basic model is its implicit assumption that markets always work perfectly in maximising our welfare. So who needs governments to put an oar in? This could only ever stuff things up.

All this means neoclassical economics is founded on the political philosophy of libertarianism: maximum freedom for the individual. Now, in principle, all economists accept there can be instances of "market failure". Even the libertarians accept markets can't be relied on to protect the private property rights of the individual. So they support government intervention to provide law, order and defence.

In principle, most economists accept the existence of "public goods", which only governments will supply in sufficient quantity (because the nature of the good or service renders it unprofitable to private producers). But the economic rationalist revival involves a new reluctance to accept instances of market failure.

It's also heavily influenced by a relatively new and highly political line of economic thought - "public choice", which holds that "government failure" is ubiquitous: when governments intervene they almost invariably make matters worse.

All this submerged intellectual baggage explains economists' knee-jerk opposition to using a temporary tax increase to help finance the rebuilding of public infrastructure and their almost universal preference for covering the cost by cutting "wasteful government spending".

Many economists are convinced wasteful government spending abounds. And, once again, they fail to acknowledge how highly subjective, even political, these judgments are.

Like beauty and fairness, wastefulness lies in the eye of the beholder; it's a value judgment, not something that proceeds from value-free economic analysis (which doesn't exist). Many economists refuse to take a position on fairness questions because they're so subjective, while being happy to denounce this or that spending as wasteful.

There wouldn't be many cases where government spending involved significant "deadweight losses" - pure waste, the elimination of which would leave no one worse off. Rather, most government spending involves losses to the taxpayers, who pay for it, and gains to the recipients of the spending.

Non-recipients may well regard a program as wasteful, but you can be sure the recipients don't. Economists in their wisdom may judge a program wasteful, but the recipients will vigorously disagree.

So decisions about how much to cut and what to cut will always be influenced by political considerations. As an example, the Prime Minister announced plans to cut the funding for the building of low-cost rental housing (which would have added to the supply of housing at a time of unmet demand) rather than scrap the first home buyer's grant (which adds to the demand for housing - and thus raises prices - without adding to supply). Why did she cut what I consider to be the wrong one? Because renters are a lot less politically powerful than home owners. So whether spending cuts will actually lead to a reduction of waste is anyone's guess.

Economists oppose hypothecated (earmarked) tax levies on the basis of arguments that would make sense if voters and taxpayers were rational. You need a feel for behavioural economics to see the virtue of taxes linked to certain spending programs.

They're an attempt to deal with the public's chronically asymmetric attitude to governments and budgets: the way we're always thinking of things the government should be doing to fix the world's problems, but are so reluctant to pay the taxes needed to pay for all the things we want done.

I support special levies - including most of the Howard government's levies - because they teach a freeloading electorate the most basic economic lesson: if you want it, you have to pay for it.


Saturday, February 5, 2011

Productivity, or a future paved with gold?

Economists are convinced our highest priority is to keep increasing our material standard of living as rapidly as possible. I'm not sure they're right. But if they are, we have a problem.

There are three ways for a country to get richer, to raise its real income (gross domestic product) per person. The first is to keep increasing the labour and physical capital being used to produce goods and services at a faster rate than the population is growing.

The second way is to be lucky enough to have the rest of the world pay us higher prices for the stuff we sell it.

The third way is to increase our productivity - to find ways of producing more goods and services each year from the same quantities of labour and capital. We achieve this mainly through technological advance.

Trouble is, we've got problems with two out of three of these - and the third can't last.

We used to have no trouble increasing the total number of hours we worked faster than the population was increasing, but the ageing of the population means we won't be able to keep this up.

Not to worry. The world is paying us more for the stuff we sell it, particularly our coal and iron ore. Hugely more. That's why we have been getting a lot richer for most of the past decade. Unemployment has been falling and wages and other incomes have been rising faster than prices.

But this is the bit that can't last. The prices we're getting for our exports of coal and iron ore can't keep rising from their present stratospheric heights. And sooner or later they will fall back to more reasonable levels.

Now, none of this would matter all that much if we were going OK on productivity improvement. Productivity improvement through continuous technological advance is actually the bedrock of material living standards, which in the developed countries have been rising continuously since the industrial revolution.

This is the magic of the capitalist system. Every year we get a little bit more efficient and a little bit richer. Only when you're as old as I am can you look back and realise that these days we're a lot smarter about the way we do things than we used to be.

But here's the problem: over the past decade there has been a dramatic deterioration in Australia's productivity performance, with the broadest measure of productivity actually getting worse over the past five years.

Why haven't you heard about this major reversal? Because its effect on our pockets has been concealed by all the extra income flowing in from China and our other trading partners. But that's what can't last.

This remarkably under-remarked story is revealed in a report issued this week by Saul Eslake and Marcus Walsh of the Grattan Institute, Australia's Productivity Challenge.

Eslake reminds us that, whereas in the 1990s real GDP grew at an average rate of 3.4 per cent a year, with improvement in the productivity of labour accounting for 60 per cent of that growth (2.1 percentage points a year), in the noughties GDP growth averaged 3.1 per cent a year, with labour productivity improvement accounting for only about 45 per cent (1.4 percentage points a year).

But it's actually worse than that because the average for the noughties conceals a steady decline over the course of the decade. Whereas the annual rate of improvement in labour productivity kept increasing over the '90s to reach a peak of 2.8 per cent a year during the five years ended 2001-02, since then it has slowed continuously, reaching a low of just 0.8 per cent during the five years ended 2008-09.

One way to increase the productivity of labour is to give workers more machines (physical capital) to work with. And we did a lot of that during the noughties.

So if we switch from looking at the productivity of labour to looking at the productivity of labour and capital combined (known as ''multi-factor productivity''), we find it has actually been going backwards since the mid-noughties.

Why haven't we heard a lot more about this remarkably poor performance (which, as you can see, began long before the Rudd government came to office)? Mainly because it has been concealed by the riches of the resources boom, but also because the econocrats have argued it's the product of special, temporary factors in a couple of sectors.

The mining sector, for example, has been spending on a huge expansion of its production capacity, but a lot of the extra production hasn't yet come on line. So, arithmetically, its productivity performance has been appalling.

Then if you look at utilities - electricity, gas and water - you find that, after neglecting to invest in increased production capacity to keep up with population growth, in the noughties governments have had to invest heavily (including in five new desalination plants), installing capacity that won't all be used until the population has grown further.

Finally, the output of the agricultural sector has been hard hit by drought over the past decade, wrecking its productivity figures.

The econocrats have argued that these three problem areas are sufficient to explain the deterioration in our productivity performance overall.

But Eslake disputes this, producing new figures to show there has been a substantial deterioration in overall labour productivity growth even when mining and utilities are excluded.

He argues ''it may be dangerously complacent to assume that the decline in productivity growth over the past decade will be automatically reversed at some point during the coming decade''.

So how does Eslake explain the decline? By the absence of further significant micro-economic reform during the noughties (compared with the big payoff from earlier reform during the second half of the '90s), but also by an increase in ''productivity-stifling legislation and regulation'', much of it in pursuit of ''national security'' (in the aftermath of the terrorism attacks on September 11, 2001) and improved standards of corporate governance (following a series of corporate scandals in the US and Australia).

But Eslake also blames the ''paradoxical downside of economic success''.

We have managed to keep the economy growing strongly for a record period since the recession of the early '90s, but this may have sapped our enthusiasm for further reform as well as permitting firms to be less vigilant in their pursuit of higher productivity. Finally, the return to near full employment permitted by the long expansion phase has led to productivity-reducing shortages of skilled labour and bottlenecks in transport and other infrastructure.


Wednesday, February 2, 2011

Floods expose national loss of respect

It's a pity Julia Gillard announced her flood levy after Australia Day rather than before it. Instead of spending the day telling ourselves what wonderful people Aussies are, we could have reflected on our darker side - why we're developing a Jekyll and Hyde personality.

As many acts of minor and major heroism during the Queensland floods have reminded us, Aussies are good people to be around in times of crisis.

We rise to the occasion; we pull together. If we're on the spot and see someone in difficulties we'll do all we can to help them, then look around for anyone else who needs helping.

Even if we're not personally involved, even if all we know of the disaster comes to us on the TV news, our hearts go out. We yearn to contribute towards the needs of those poor sods. Sling $20 or $50 into a bucket for the Premier's Relief Fund? Think nothing of it.

But ask the better-off half of us to pay a temporary tax levy to help fund the rebuilding, which will cost only the wealthiest among us more than $5 a week, and all hell breaks loose. Suddenly, we can think of half a dozen reasons why we shouldn't have to pay.

I've already donated - why are you coming back for more? If you compel people to pay, fewer will donate. I pay too much tax already, why are you hitting me again? Why can't you just cut some of all that wasteful government spending? Why are you so obsessed with balancing the budget - why can't you just add the cost to the deficit? Don't you realise how much the cost of living's rising?

They sound like reasonable arguments but, in truth, we just don't want to pay no matter how worthy the cause. Why such a change of tune? Because the government got involved. When we thought it was personal - I give my time or money to help other people in need - that's fine.

But introduce the government and it all becomes impersonal and amorphous. The link between me and my money and the people it will help is broken. The government's budget is a vast, bottomless pit. Why ask me to throw more money into it? Surely there's someone earning far more than me who should contribute? And, in any case, what about all the money you're already wasting?

Many objectors don't seem to have paused long enough to learn that their donations go to helping individual families who've suffered loss, whereas the levy will go towards rebuilding public "infrastructure" - otherwise known as roads, bridges and ports.

So alienated have we become from the work of government we regard it as a giant soft cop - a magic pudding, where the idea is to take out as much as possible ("I've paid taxes all my life ...") and put in as little as possible. How is this circle squared? Who knows, who cares?

But there's more to this affair than just our pathological objection to paying more tax. It's a dramatic demonstration of the way Australians are losing the ability to fall in behind a leader.

All of us know the nation's problems won't be overcome without decisive leadership. We regularly bewail our politicians' lack of courage and conviction, their reluctance to risk their personal survival in the country's best interests.

Yet we give our leaders so little loyalty. The announcement of a government decision is taken as the occasion for the outbreak of dissent. All those with a reason for objecting cry out and their criticism is amplified by the media, whereas those who agree fall silent. No one feels obliged to actively support the leader, even if just because she is our leader and someone has to accept ultimate responsibility for deciding what we'll do and how we'll do it.

Of course, no one wants to live in a country where the leader's will is never challenged. We each have the democratic right to oppose all government decisions by all legal means. But we also have the democratic right to support, defend or even just acquiesce in the judgment of the people we elected to lead us.

Why are we becoming so much more prone to arguing the toss than falling into line? And how do we imagine making leadership so much more difficult for the leader of the day will leave us better governed? Why are we training our governments to timidity?

Part of the explanation is partisanship - our willingness to put loyalty to party ahead of loyalty to our community and its need for effective leadership. I didn't vote for these people, so I'll regard everything they try to do as illegitimate.

Trouble is, there is little partisanship running the other way. Consider the deathbed bastardry of Labor's own Kristina Keneally in objecting that NSW taxpayers deserve special concessions under the levy.

No, there's more to this than partisanship: there is a general loss of loyalty and respect for whoever is our leader. The government is always and everywhere fair game. Consider the lack of public censure of the Opposition Leader, Tony Abbott, for his utterly obstructive behaviour.

Having narrowly lost the last election, he's behaving like a spoilt child, refusing to support any policy proposed by the government, whether good, bad or indifferent.

His self-righteous opposition to the flood levy and all tax increases is extraordinarily hypocritical, considering he proposed his own special levy in the election campaign and supported at least six temporary levies imposed by the Howard government, not to mention that ultimate "great big new tax on everything" known as the GST.

What he's saying to the nation is: I'll do all in my power to make Parliament unworkable until you make me leader.

Oh yeah, we reply, fair enough.

We have a democratic right to make our country ungovernable - and it seems we're well on the way to doing so.