Monday, October 2, 2017

Lure of globalisation battles our instinctive tribalism


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Remind you of any redheads you know?

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

First, slow growth in living standards when the proceeds of economic growth haven't been shared.
"In societies where prosperity is broadly shared, a cosmopolitan outlook steadily replaces traditional values of religion, deference to authority, and an exclusive focus on the security of our family and tribe," he says.

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

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

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

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

Seems to me that, though much of the problem is manifest in fear of foreigners, the best way to strengthen cosmopolitan values is to ensure the benefits of globalisation and technological change are shared more fairly.
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Saturday, September 30, 2017

Our bulldust detectors are on the blink

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

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

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

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

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

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

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

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

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

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

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

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

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

What? Journalists? Bad news?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If so, a lot of people will continue believing stuff they should doubt.
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Wednesday, September 27, 2017

Closing out the world won't fix our problems

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Open markets require egalitarian institutions," Leigh concludes.

He's right. This is the key principle of reform we lost sight of after the departure of Hawke and Keating.
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Monday, September 25, 2017

Everyone has a different excuse for the electricity stuff-up

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The reformers' mistakes were imagining they'd get vigorous competition between many firms instead of the usual non-price competition between two or three oligopolists, and imagining the regulators of a government-created market wouldn't be "captured" by the oligopolists.
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Saturday, September 23, 2017

How micro reform of electricity has failed

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

They've been far more conscious of the need to avoid annoying the oligopolists than the need to stop consumers having to pay more than they should.
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Tuesday, September 19, 2017

TAFE mustn't be another bad deal for the young

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TAFE will need to change a lot if it's not to be yet another respect in which the young are getting a bad deal.
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Monday, September 18, 2017

We’ve turned our unis into money-grubbing exploiters

Of the many stuff-ups during the now-finished era of economic reform, one of the worst is the unending backdoor privatisation of Australia's universities, which began under the Hawke-Keating government and continues in the Senate as we speak.

This is not so much "neoliberalism" as a folly of the smaller-government brigade, since the ultimate goal for the past 30 years has been no more profound than to push university funding off the federal budget.

The first of the budget-relieving measures was the least objectionable: introducing the Higher Education Contribution Scheme, requiring students – who gain significant private benefits from their degrees – to bear just some of the cost of those degrees, under a deferred loan-repayment scheme carefully designed to ensure it did nothing to deter students from poor families.

Likewise, allowing unis to admit suitably qualified overseas students provided they paid full freight was unobjectionable in principle.

The Howard government's scheme allowing less qualified local students to be admitted provided they paid a premium was "problematic", as the academics say, and soon abandoned.

The problem is that continuing cuts in government grants to unis have kept a protracted squeeze on uni finances, prompting vice-chancellors to become obsessed with money-raising.

They pressure teaching staff to go easy on fee-paying overseas students who don't reach accepted standards of learning, form unhealthy relationships with business interests, and accept "soft power" grants from foreign governments and their nationals without asking awkward questions.

They pressure academics not so much to do more research as to win more research funding from the government. Interesting to compare the hours spent preparing grant applications with the hours actually doing research.

To motivate the researchers, those who bring in the big bucks are rewarded by being allowed to pay casuals to do their teaching for them. (This after the vice-chancellors have argued straight-faced what a crime it would be for students to be taught by someone who wasn't at the forefront of their sub-sub research speciality.)

The unis' second greatest crime is the appalling way they treat those of their brightest students foolish enough to aspire to an academic career. Those who aren't part-timers are kept on serial short-term contracts, leaving them open to exploitation by ambitious professors.

However much the unis save by making themselves case studies in precarious employment, it's surely not worth it. If they're not driving away the most able of their future star performers it's a tribute to the "treat 'em mean to keep 'em keen" school of management.

But the greatest crime of our funding-obsessed unis is the way they've descended to short-changing their students, so as to cross-subsidise their research. At first they did this mainly by herding students into overcrowded lecture theatres and tutorials.

Lately they're exploiting new technology to achieve the introverted academic's greatest dream: minimal "face time" with those annoying pimply students who keep asking questions.

PowerPoint is just about compulsory. Lectures are recorded and put on the website – or, failing that, those barely comprehensible "presentation" slides – together with other material sufficient to discourage many students – most of whom have part-time jobs – from bothering to attend lectures. Good thinking.

To be fair, an oddball minority of academics takes a pride in lecturing well. They get a lot of love back from their students, but little respect or gratitude from their peers. Vice-chancellors make a great show of awarding them tin medals, but it counts zilch towards their next promotion.

The one great exception to the 30-year quest to drive uni funding off the budget was Julia Gillard's ill-considered introduction of "demand-driven" funding of undergraduate places, part of a crazy plan to get almost all school-leavers going on to uni, when many would be better served going to TAFE.

The uni money-grubbers slashed their entrance standards, thinking of every excuse to let older people in, admitting as many students as possible so as to exploit the feds' fiscal loophole.

The result's been a marked lowering of the quality of uni degrees, and unis being quite unconscionable in their willingness to offer occupational degrees to far more people than could conceivably be employed in those occupations.

I suspect those vice-chancellors who've suggested that winding back the demand-determined system would be preferable to the proposed across-the-board cuts (and all those to follow) are right.

The consequent saving should be used to reduce the funding pressure on the unis, but only in return for measures to force them back to doing what the nation's taxpayers rightly believe is their first and immutable responsibility: providing the brighter of the rising generation with a decent education.
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Saturday, September 16, 2017

Jobs in the services sector have smartened up

So much for our ailing economy. Did you see that 264,000 additional jobs have been created in the first eight months of this year, with 88 per cent of them full-time?

That's a remarkable increase of 2.2 per cent in total employment, according to trend figures issued by the Australian Bureau of Statistics this week.

Where did all those jobs come from? We won't know for certain for a week or two, but I can tell you now: not from agriculture, the production of goods (mining, manufacturing, utilities and construction) or the distribution of goods (transport, postal and warehousing; wholesale and retail trade), but from household and business services.

How can I be sure all the net increase in jobs will have come from the services sector? Because that's been the case for about the past 40 years.

This isn't all that surprising. As the Reserve Bank's head of economic analysis, Dr Alexandra Heath, observed in a speech last week, one of the most pronounced changes in the structure of our economy [and all advanced economies] has been its move away from a goods-producing economy towards a more services-oriented economy.

This isn't because we're producing fewer goods – we aren't – but because the growth in our production of services has been much faster.

"Australians are producing more services, consuming more services and trading more services with other economies than ever before," Heath says.

One reason for the shift to a services-based economy is that Australian households have experienced remarkable growth in their real incomes, she says.

We've had uninterrupted growth for more than 25 years, and real income per household has more than doubled since the early 1960s.

"As incomes rise," she says, "households typically spend more of their income on household services – such as health, education and restaurant meals – than on goods."

But demand for business services – that is, businesses providing services to other businesses - has seen its share of gross value-added grow from less than 20 per cent in the early 1990s to more than 25 per cent today.

The category includes professional and technical services; information, media and telecoms; rental, hiring and real estate; and financial and insurance services.

Part of this growth is just the reclassification of existing activity from goods to services as businesses that produce and distribute goods have increasingly outsourced non-core activities to specialist providers in the services sector.

The trend to outsourcing has been encouraged by technological advance that's lowered the cost of communication and logistics (moving things around) and meant that the scope and complexity of what can be outsourced have increased over time.

(Though, in my humble opinion, firms that outsource their telephone answering to overseas call centres where people you can't understand repeat scripted lines regardless of the context, and have little power to fix your problem because the firm back in Oz doesn't really trust them, will one day reap the customer revenge they so richly deserve.)

It should involve cost savings to outsourcing firms because specialist providers are able to achieve greater economies of scale and pass some of the benefits on to their customers.

So outsourcing is an example of one of the key building blocks of our modern prosperity: ever-greater specialisation and exchange, leading to ever-greater productivity. (This ought to be true when profit-driven businesses do it; it's not always true when governments do it badly or with ulterior motives.)

But outsourcing doesn't explain all the growth in business services. Some of those services are totally new.

And Heath says there's evidence that the nature of the work being done in the business services sector is generally changing faster than in other sectors. "This all suggest that business services are at the centre of how technological change is transforming the Australian economy," she says.

Traditional business services, such as accounting and legal, have been joined by management consulting, internet providers and computer system design.

The growth in outsourcing of business services, and the increasing integration of business services with other sectors of the economy, fit with evidence that "supply chains" are getting longer. That is, there's an increasing number of stages through which goods and services pass.

Not surprisingly, the goods production sector is the most fragmented – has the longest supply chain – because it uses the most "intermediate" inputs to produce its final products.

Research suggests that the reorganisation of production associated with the lengthening of supply chains has led to a shift towards more high-skilled labour, Heath says.

There's growing evidence that advances in computer technology have helped drive a shift from routine to non-routine jobs, creating new jobs as well as making others obsolete.

The share of people employed in the business services sector has almost doubled over the past 50 years, to be about 20 per cent of the workforce. Most of this growth has been in "non-routine cognitive" jobs, as you'd expect when computerisation is an important driver.

(Similar forces are working in the household services sector – all those extra doctors, teachers and academics – although it has also seen a significant increase in demand for non-routine manual jobs.)

If you look more directly at the types of skills and abilities required in the business services sector you see that, since the mid-1990s, there's been a shift towards occupations requiring higher-level cognitive skills such as systems analysis, persuasion, originality, written expression, complex problem solving and critical thinking.

Heath concludes that the business services sector "has played a key role in the way the economy has responded to technological progress.

"In the process, business services have become more important, more specialised and more integrated with other sectors. There is some evidence that this has been associated with higher productivity growth."

Figures from the labour market "also support the idea that business services industries are at the heart of how technological change is transforming the structure of the economy".
Read more >>

Wednesday, September 13, 2017

How the threat from robots was exaggerated

You'd have to have been hiding under a rock not to know that 40 per cent of jobs in Australia – about 5 million of them – are likely to be automated in the next 10 to 15 years.

Ask a young person what they know about the future of work and that's it. Which may help explain why so many of them seem angry and depressed about the economic future they're inheriting.

This information is widely known because it's the key finding of a major report, Australia's future workforce?, published in 2015 by the Committee for Economic Development of Australia, a well-regarded business think tank, derived from modelling it commissioned.

It's the sort of proposition you see many references to on social media, particularly because it chimes with a similar widely known prediction made in 2013 that 47 per cent of American jobs could be automated in the next 20 years.

Neither figure is a fact, of course, just a prediction about the distant future based on "modelling".

Why is it that if a prediction is big enough and gloomy enough, everyone keeps repeating it and no one thinks to question it? Why do we accept such frightening claims without asking for further particulars?

Why doesn't anyone ask the obvious question: how – would – they – know?

Because the prediction is based on "modelling"? That if it came out of a computer, it must be true?

Because the modelling for Australia reached similar results to the modelling for America? Sorry, it's actually the same model applied to different figures for each country.

Fortunately, not everyone is as easily convinced that the sky is falling. Two economists from Melbourne University, Professor Jeff Borland and Dr Michael Coelli, have taken a very hard look at the modelling undertaken for the committee by Professor Hugh Durrant-Whyte, of Sydney University, and other engineers at National Information and Communication Technology Australia.

Durrant-Whyte's modelling simply applies to Australia modelling of US occupations by Carl Frey, an economic historian, and Dr Michael Osborne, an engineer, of the Oxford Martin School for a sustainable future at Oxford University.

Frey and Osborne provided some colleagues with descriptions of 70 US occupations and asked them to judge whether they were "automatable" or not. This sample was then analysed and used to classify all 702 US occupations according to their likelihood of being automated.

Any occupation with a predicted probability of automation of more than 70 per cent was classed as being at "high risk" of automation.

Borland and Coelli make some obvious criticisms of this methodology. First, the colleagues found that 37 of the sample of 70 occupations were at risk of automation. Should these subjective assessments prove wrong, the whole exercise is wrong.

For instance, the colleagues judged that surveyors, accountants, tax agents and marketing specialists were automatable occupations, whereas Australian employment in these has grown strongly in the past five years.

Frey and Osborne say the need for dexterous fingers is an impediment to automation, but their method predicts there is an automation probability of 98 per cent for watch repairers.

Second, Frey and Osborne's modelling makes the extreme assumption that if an occupation is automated then all jobs in that occupation are destroyed. The advent of driverless vehicles, for instance, is assumed to eliminate all taxi drivers and chauffeurs, truck drivers, couriers and more.

Third, their modelling assumes that if it's technically feasible to automate a job it will be, without any need for employers to decide it would be profitable to do so. Similarly, it assumes there will be no shortage of the skilled workers needed to set up and use the automated technology.

More broadly, their modelling involves no attempt to take account of the jobs created, directly and indirectly, by the process of automation.

No one gets a job selling, installing or servicing all the new robots. Competition between the newly robotised firms doesn't oblige them to lower their prices, meaning their customers don't have more to spend – and hence create jobs – in other parts of the economy.

All that happens, apparently, is that employment collapses and profits soar. But if it happens like that it will be the first time in 200 years of mechanisation and 40 years of computerisation.

In 2016, the Organisation for Economic Co-operation and Development commissioned Professor Melanie Arntz and colleagues at the Centre for European Economic Research to offer a second opinion on Frey and Osborne's modelling.

Arntz and co noted that occupations categorised as at high risk of automation often still contain a substantial share of tasks that are hard to automate.

So they made one big change: rather than assuming whole occupations are automated, they assumed that particular tasks would be automated, meaning employment in particular occupations would fall, but not be eliminated.

They found that, on average across 21 OECD countries, the proportion of jobs that are automatable is not 40 per cent, but 9 per cent.

Those countries didn't include Oz, so Borland and Coelli did the figuring – "modelling" if you find that word more impressive – and found that "around 9 per cent of Australian workers are at high risk of their jobs being automated".

Why are we so prone to believing those whose claims are the most outlandish?
Read more >>

Monday, September 11, 2017

Turnbull, Morrison holding their own on the economy

Whatever is holding Malcolm Turnbull and his government behind in the polls so consistently, it doesn't seem to be their handling of the economy.

Voters' responses to special questions in the September Fairfax-Ipsos poll are hardly a ringing endorsement of the Coalition's economic policies, but it is clearly ahead on points.

On which party has the best policies for managing the economy, the Coalition is preferred by 38 per cent of respondents, hardly overwhelming, but comfortably ahead of Labor's 28 per cent, with the Greens scoring a mere 3 per cent.

Decades of polling show voters almost invariably see economic management as one of the Coalition's comparative strengths. This poll shows that pre-judgment has not been shaken by the Turnbull government's struggles.

We need to remember, of course, that, since the Howard government's reforms more than 20 years ago, the day-to-day management of the economy is carried out by the Reserve Bank, not the elected government.

Since then, governments of all persuasions have benefited from the central bankers' steadying hand on the tiller.

As Treasurer, Scott Morrison has had his critics but, even so, his latest approval rating of 42 per cent exceeds his disapproval rating of 38 per cent.

And that's a vast improvement over Joe Hockey's position in April 2015, some months before he lost the job, when his disapproval exceeded his approval by 25 percentage points.

It's hardly surprising that Morrison's approval among intending Coalition voters far exceeds his approval among Labor voters.

What is surprising – and to his credit politically - is that his approval rating among Labor voters is almost double his disapproval rating among Coalition voters.

On the question of preferred treasurer, Morrison scored 38 per cent, comfortably ahead of Labor's shadow treasurer, Chris Bowen, on 29 per cent.

This, too, compares favourably with Hockey's margin of just 1 percentage point over Bowen in July 2014, just two months after Hockey's delivery of the government's hugely unpopular first budget.

This suggests Turnbull and Morrison's tactic in this year's budget of trying to bury all memory of that budget – and switch to using tax increases rather than spending cuts to repair the budget – is helping on the popularity front.

On the question of whether Turnbull or Tony Abbott has provided better economic leadership as prime minister, Turnbull's support of 56 per cent is more than double Abbott's 25 per cent.

Truly, Abbott and Hockey's popularity was unrecoverable after that disastrous first budget.

It's also noteworthy that, at 74 per cent, Labor voters' preference for Turnbull over Abbott far exceeds Coalition voters' preference of 66 per cent.

Some in Turnbull's party may see this as confirmation of his lack of conservative purity; the more savvy will see it as evidence of his potential to win votes from the other side if permitted to move closer to the "sensible centre".
Read more >>

Sorry, but using migration to boost growth ain’t smart

Ask an economist where the growth in the economy will be coming from and it's surprising how often they fail to give the most obvious answer: from growth in the population.

Why don't they? Partly because it's an admission of failure: more people, bigger economy. Wow, that must have been hard to engineer.

Economists aren't supposed to believe in growth for its own sake. Their sales pitch is that economic growth is good because it raises our material standard of living.

But this is true only if the economy grows faster than the population, producing an increase in income per person (and even this ignores the extent to which some people's incomes grow a lot faster than others).

This simple truth is obscured by economists' practice of measuring growth in the economy without allowing for population growth.

Take the national accounts we got for the June quarter last week. We were told the economy grew by 0.8 per cent during the quarter and by 1.8 per cent over the year to June.

Allow for population growth, however, and that drops to 0.4 per cent and a mere 0.2 per cent. So, improvement in living standards over the past financial year was negligible.

Over the past 10 years, more than two-thirds of the growth in real gross domestic product of 28 per cent was accounted for by population growth, with real growth per person of just 9 per cent.

It's a small fact to bear in mind when we compare our economic growth rate with other developed countries'.

We usually do well in that comparison, but rarely admit to ourselves that our population growth is a lot higher than almost all the others.

Our population grew by 1.6 per cent in 2016, and by the same average rate over the five years to June 2016. This was slower than the annual rate of 1.8 per cent over the previous five years, but well up on the 20-year average rate of 1.4 per cent.

So in the past decade we've been relying more heavily on population growth – read, increased immigration – to bolster economic growth and make the improvement in our material prosperity seem greater than it is.

By now, much less than half our population growth comes from natural increase (births minus deaths) and much more than half from "net overseas migration" (immigration minus emigration).

Meaning, of course, that the even-faster rate of population growth over the past decade has been a conscious act of policy.

Almost all our business people, politicians and economists support rapid population growth through high migration. With that much conventional wisdom behind it, who needs evidence?

It's certainly rational for business people to support high migration. Their concern is to maximise their own living standards, not those of the rest of us, and what easier way to increase your sales and profits and salary package than to sell in a market that keeps expanding?

But I oppose "bizonomics" – the doctrine that the economy should be run primarily for the benefit of business, rather than the people who live and work in it – and the older I get the more sceptical I get about the easy assumption that population growth is good for all of us.

For a start, I don't trust economists enough to accept their airy dismissal of environmentalists' worries that we may have exceeded our fragile ecosystem's "carrying capacity".

But even before you get to such minor matters as stuffing up our corner of the planet, there are narrowly economic reasons for doubting the happy assumption that a more populous economy is better for everyone.

The big one is that the more we add to the population, the more we have to divert our accumulation of scarce physical capital – housing, business equipment and public infrastructure of roads, public transport, schools, hospitals and 100 other things – from "capital deepening", so as to improve our productivity, to "capital widening", so as to stop our productivity per person actually worsening.

The feds decide how much immigration we get, but it's the hard-pressed states that have to keep increasing their infrastructure spending to keep up with the needs of their ever-expanding populations.

But the states allow discredited American credit-rating agencies to limit how much they can borrow. And then there's the glaring inconsistency between believing in rapid population growth and the smaller-government brigade's eternal struggle to stop tax increases and limit government borrowing.

Is it any wonder the long-suffering denizens of our chronically under-serviced outer suburbs end up diverting so much of their dissatisfaction onto immigrants who arrive uninvited by boat? Sometimes I wonder if that's by design, too.
Read more >>

Saturday, September 9, 2017

Little Aussie battler battles on to future glory

Have you noticed how people are getting more upbeat about the economy? It's no bad thing. And, on the face of it, the figures we got this week confirmed their growing confidence.

The Australian Bureau of Statistics' national accounts showed that real gross domestic product grew by a very healthy 0.8 per cent in the June quarter. That's equivalent to annualised growth of 3.6 per cent.

But GDP growth is far too volatile from quarter to quarter for such calculations to make much sense (even though it's what the Americans do). And, just to ensure we don't get too confident, we have a media skilled in finding the lead lining to every silver cloud.

They lost no time in pointing out that half that growth came from increased consumer spending during the quarter of 0.7 per cent. But this return to strong growth was unlikely to be sustained because weak growth in wages meant much of the spending was covered not by an increase in household income, but by a decline households' rate of saving.

The household saving rate had fallen from 5.3 per cent of household disposable income to 4.6 per cent. Indeed, this was the fifth successive quarterly fall from a rate of 7 per cent in March 2016.

It's undeniable that we won't get back to truly healthy economic growth until we see a return to wages growing in real terms. And it's hard to know how long this will take.

Without doubt, weak wage growth is the biggest cloud on our economic horizon.

But the story on the decline in our rate of saving isn't as dire as the figures imply. Saving is calculated as a residual (household income minus consumer spending), meaning any mismeasurement of either income or spending - or both - means the estimate of saving is wrong, and likely to be revised as more accurate figures come to hand.

This time three months ago, for instance, we were told that for consumer spending to grow by 0.5 per cent in the March quarter, it was necessary for the saving rate to fall from 5.1 per cent to 4.7 per cent.

Huh? Obviously, the March-quarter saving rate has since been revised up 0.6 percentage points. How? By the bureau finding more household income. (The saving rate was revised up by lesser amounts in each of the previous six quarters.)

And it won't be surprising to see it happen again. We know that, according to the wage price index, average hourly rates of pay rose by 1.9 per cent over the year to June, whereas this week's national accounts tell us average earnings per hour fell by 0.8 per cent.

It's quite possible for the national accounts measure to show less growth than the wage index if employment is growing in low-paid jobs but declining in high-paid jobs, but it's hard to believe such a "change in composition" would be sufficient to explain so wide a disparity.

Moral: don't drop your bundle just yet.

A second line of negativity we've heard this week says much of the rest of the June quarter's growth came only from increased spending by governments, with government consumption contributing 0.2 percentage points and capital spending contributing 0.6 points.

Two points. First, increased spending on public infrastructure is no bad thing and, indeed, is exactly the budgetary support for stimulatory monetary policy (low interest rates) the Reserve Bank has long been calling for.

Second, the transfer of the new, private sector-built Royal Adelaide Hospital to the South Australian government during the quarter had the effect of overstating public investment for the quarter and understating business investment.

Looking at the adjusted figures for business investment, we find the good news that non-mining investment spending grew by (an upwardly revised) 2.1 per cent in the March quarter and 2.3 per cent in the latest quarter, to be up 6.1 per cent over the year to June.

That says the long-awaited recovery of business investment in the non-mining economy (the other 92 per cent) is well under way. It's also good to know that the long, growth-reducing decline in mining investment isn't far from ending.

Growth in home-building activity was negligible during the June quarter, although Treasurer Scott Morrison says there's a "solid pipeline of dwelling construction" remaining.

The volume of exports of goods and services rose by 2.7 per cent during the quarter, offset by a rise of 1.2 per cent in the volume of imports, implying a net contribution to growth of 0.3 percentage points in the quarter.

However, this was more than countered by a negative contribution of 0.6 percentage points from a fall in inventories, mainly a rundown of the grain stockpile. (That is, grain produced in an earlier quarter was exported in the latest quarter.)

Rural export volumes rose by 18.7 per cent over the year to June. Exports of services were also strong, having averaged annual growth of more than 7 per cent over the past three years, driven by exports of education and tourism.

So, overall, economic growth in the June quarter was a mixed picture which, following a contraction of 0.4 per cent in September quarter last year and - also weather-related - weak growth of 0.3 per cent in March quarter this year, amounted to growth of just 1.8 per cent over the year to June.

This is artificially low, but the September quarter should see us bounce up to artificially high annual growth of about 3 per cent, as last September quarter's minus 0.4 per cent drops out of the calculation.

If you want more persuasive support for our more optimistic mood, however, don't forget employment grew by a super-strong 214,000 in just the first seven months of this year – with 93 per cent of those jobs full-time – and leading indicators showing more jobs strength to come, plus surveys of business conditions showing them at their best in almost a decade.

Read more >>

Wednesday, September 6, 2017

It's business that has the greatest sense of entitlement

How the worm – and the world – turns. When the Abbott government came to power just four years ago, it claimed its arrival signalled the "end of the age of entitlement". Don't laugh, it's happening – but in the opposite way to what treasurer Joe Hockey had in mind.

As Hockey saw it, the sense of entitlement we'd acquired, but which could no long be afforded, applied to the social needs of individuals and families.

We saw the results of this attitude in Tony Abbott and Hockey's first budget of 2014, which got an enormous thumbs-down from the public and the Senate, so that pretty much all that remains of the attack on unwarranted entitlement is the unending crusade by the government's Don Quixote, Christian Porter, and his loyal Sancho, Alan Tudge, to root out the last welfare cheat.

Not content with the grand stuff-up that was the "robodebt" use of unguided computers to collect amounts that may or may not have been overpaid, the pair are now hot on the trail of drug-taking welfare recipients.

Drug testing isn't cheap, so it's likely the exercise will cost the taxpayer more than it saves. And drug care experts – who weren't consulted - say addicts can't be successfully coerced into treatment.

Trouble is, successive governments have been cracking down on the crackdown on welfare cheats every year for decades, so there can't be all that many of 'em left.

Why do I get the feeling that cracking down on welfare cheating is, at best, what governments do when they want to be seen to be cutting their spending but aren't game to.

Or, at worst, when they want to exploit the popular delusion that we could all be paying less tax if it weren't for the massive sums being siphoned off by dole bludgers and the like.

Sorry, the people doing by far the most to keep welfare spending high and rising are known as age pensioners. And no one has a stronger sense of entitlement than an oldie fighting for the pension. "I've paid taxes all my life . . ."

But though one of Aussies' less attractive traits has been our proneness to "downwards envy" – the delusion that people worse-off than us are doing it easy – polling by the Essential organisation suggests it may be wearing off, replaced by disapproval of wealthier tax dodgers.

Essential finds only 12 per cent of respondents (including 14 per cent of Coalition voters) are "bothered a lot" by "the feeling that some poor people don't pay their fair share", whereas 53 per cent (40 per cent of Coalition voters) are bothered a lot by "the feeling that some wealthy people don't pay their fair share".

Ask whether they're bothered a lot by the feeling that "some corporations" don't pay their fair share, and disapproval shoots up to 60 per cent, including 51 per cent of Coalition voters.

It's a sign of the times. It has finally dawned on us that the people with the overweening sense of entitlement are our business people.

They used not to be so arrogant, but more than three decades of neoliberal ideology – under which governments should do as little as possible to burden the private sector or restrict its freedom – have left business people convinced they're demi-gods, the source of all goodness and justly entitled to our approbation and genuflection.

They're the source of all jobs, and thus entitled to have their every demand satisfied.

Why should chief executives earn up to 300 times what their workers earn? Isn't it obvious?

Why should the chief executive's package rise by 8 per cent while his workers' wage rise is held down to 2 per cent because times are tough? Because I've just realised that Joe Blow over at XYZ Corp is getting more than me, and I'm better than him.

Why should companies doing legal contortions to minimise the tax they pay, hesitate to demand a cut in the rate of company tax in the name of creating jobs?

The developed world is still recovering from the carnage of the global financial crisis, caused by letting American banks do hugely risky things in the pursuit of higher profits and bonuses, confident in the knowledge that, should things come unstuck, the government would bail them out.

We weren't so silly as to let our own banks behave like that, but the years since then have seen a litany of banks mistreating their customers, as their managers put bonuses ahead of service and the four big banks compete single-mindedly for the highest rate of profit.

Meanwhile, journalists are uncovering a remarkable degree of lawlessness by other businesses: young people paid less than their legal entitlement, exploitation of foreign workers on visas, employers failing to pay in their workers' super contributions.

It's as though business people see themselves as so economically virtuous as to be above the law. Just a bit of red tape those gutless pollies have yet to clear away.

What's changed with the end of the era of neoliberalism, however, is the willingness of politicians on both sides to toughen up on the banks and other businesses.

They'll be paying more rather than less tax in future, and governments are already far less hesitant to regulate them more closely.

I see a lot more coming. Why? Because voters have got jack of arrogant business people.
Read more >>

Monday, September 4, 2017

Econocrats’ job to minimise damage from lurch to populism

With the collapse of the "neoliberal consensus" between both sides of politics, which is reversing politicians' attitudes to intervention in markets, we're in danger of lurching from one extreme to the other.

My Financial Review colleague Alan Mitchell likes to say that one of the econocrats' primary contributions to good government is to "keep the crazy decisions to a minimum". Never was that truer.

The challenge for Treasury, the Productivity Commission and the rest is to be less doctrinal – less true to the one true economic rationalist faith - and more practical in giving advice that satisfies the pollies' ever-present need to "do something" without the something they do causing a lot of harm, maybe even some good.

To put that into econospeak: econocrats should stop proposing first-best solutions and propose more politically palatable second- or even third-best solutions than have been properly thought through.

Why should they compromise? Because if they go on strike, get the sulks or just let themselves be dealt out of the policy decision process, we'll all be lumbered with a lot of decisions that make things worse rather than better.

That's particularly so now ministers' offices are loaded with pushy young punks at the start of their lifetime careers in politics, who think they know a lot about what's good for the minister and the government but, unfortunately, haven't had the time or inclination to learn much about policy: what works and what doesn't.

Leave a policy vacuum and these chancers will happily fill it. They'll fill it with whatever will get a cheer from the all-indignation-and-no-responsibility radio shock jocks and tabloid loudmouths.

Those reptiles will cheer for what's showy and prejudice-satisfying, not for less spectacular policies the experts know are more likely actually to improve things.

The point is that with the populist reaction against what it's now fashionable for the often-uncomprehending left to call "neoliberalism", we're moving from 30 years of presumption against intervention in markets to a new era of presumption in favour of intervention.

That presumption against intervention came from the 1980s shift to a more fundamentalist approach to neo-classical economics, with its confidence that markets are essentially self-correcting, so intervening in them is more likely to derail this process than assist it.

This involved playing down the significance of "market failure" – factors that stop real-world markets from acting in the perfect way economics textbooks predict they will – or arguing that government interventions to correct market failure usually result in "government failure" – they make the problem worse rather than better.

The rationalists were wrong to play down market failure – it's ubiquitous – and wrong to denigrate government rule-setting for markets as "intervention", as though it's some kind of unnatural act. But they were on to far more than they realised in worrying about government failure.

What ended up discrediting their program of "micro-economic reform" was the way so many privatisations and attempts to make the provision of government services "contestable" were utterly stuffed up by governments that didn't know what they were doing, or were swinging one for their business mates.

Though it's true people have traded with each other since primitive times, it's historical ignorance to imagine that markets in the modern economy are anything other than the creation of governments, regulated and policed under laws of private property, contract, bankruptcy, limited liability, accounting standards and a host of other "interventions" and "regulations".

So there isn't and never has been such an animal as a "free market". What's in question is the degree of regulation and the specifics of what's regulated and how. Presuming against regulation (further or existing) was always an arbitrary and extreme position that would end in tears.

The era of deregulation has discredited itself, with inadequately regulated American and European banks causing the pain and destruction of the global financial crisis, declining standards of business behaviour much in evidence among our own banks, and mounting evidence of business lawlessness.

But for politicians to react to all this with a massive increase in ill-considered regulation would hardly be an improvement.

The real point is regulation is neither intrinsically good nor bad. What it is is very, very tricky. Very hard to get right; easy to get wrong. Bedevilled by "unintended consequences".

Why? Because of the terrible power of "market forces" – actually, profit-seeking firms and self-interested consumers.

There are two mistakes you can make when it comes to regulation: one is to believe market forces are infallible, the other is to believe they're of little consequence and incapable of utterly frustrating the regulators' good intentions.
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Saturday, September 2, 2017

Turns out productivity's been fine all along

What a joke. A scholarly article in Treasury's latest Economic Roundup has admitted that all the years of handwringing over our poor productivity performance was just jumping at shadows.

Turns out all the angst was caused by not much more than the figures being distorted by the mining industry's construction boom.

This after our top econocrats gave speech after speech urging "more micro reform" to improve productivity and keep living standards rising. (They'd have advocated more reform even if productivity was improving at record rates; its supposed weakness was just a convenient selling proposition.)

Meanwhile, the business lobby groups, led by the Business Council of Australia, claimed – without any evidence – the supposed weakness had been caused by the "reregulation" of wage fixing under Labor's evil Fair Work changes, and demanded the balance of bargaining power be shifted yet further in favour of employers. (A claim even the Productivity Commission wasn't convinced by.)

Even at the time, it seemed the contortions of the mining industry during the decade-long resources boom were a big part of the story, but that didn't stop people who should have known better going into panic mode.

"Despite concerns", the paper by Simon Campbell and Harry Withers, says with masterful understatement, "Australia's labour productivity growth over recent years is in line with its longer-term performance.

"In the five years to 2015-16, labour productivity in the whole economy has grown at an average annual rate of 1.8 per cent.

"This compares to an average annual rate of 1.4 per cent over the past 15 years, and 1.6 per cent over the past 30 years," it says.

Let's take a step back. Productivity compares the quantity of the economy's output of goods and services with the quantity of inputs of resources used to produce the output.

When output grows faster than inputs – as it does most years – we're left better off. This improvement in our productivity is the overwhelming reason for the increase in our material standard of living over the years and centuries.

Productivity can be measured different ways. The simplest (and least likely to be inaccurate) way is to measure the productivity of labour: growth in output per worker or, better, per hour worked.

Labour productivity improvement is caused by two factors. The first is by increases in the ratio of (physical) capital to labour used in the economy.

This known as "capital deepening" – translation: giving workers more tools and machines to work with, which makes them more productive.

The second driver of labour productivity is improvements in the efficiency with which labour inputs and capital inputs are used, arising from such things as improved management practices. This is known as MFP – multi-factor productivity.

In recent years the figures have shown multi-factor productivity growth to be zero or even negative, causing great concern among some economists, including the Productivity Commission.

But Campbell and Withers argue this focus on MFP is misplaced. They remind us that MFP is calculated as a residual (the product of a sum), meaning its likelihood of mismeasurement is high.

And they criticise the conventional view that physical capital should grow no faster than output – known as "balanced growth" - because capital deepening is an inferior source of productivity improvement to MFP.

People take this view because (making the unrealistic assumption that the economy is closed to transactions with foreigners) increased investment in physical capital must come at the expense spending on consumption.

The authors point out that achieving improved MFP isn't costless, while the price of capital goods (most of which are imported) has fallen persistently relative to the price of consumption goods.

"This has allowed Australia to sustain its high rate of capital deepening without forgoing ever higher levels of consumption," they say.

Actually, they say, our economy has never fitted the "balanced growth" story. Of the 30-year average of 1.6 per cent annual growth in labour productivity, MFP contributed only 0.7 percentage points, while capital deepening contributed 0.9 points.

Next the authors examine the causes of the ups and downs in labour productivity improvement overall by breaking the economy into six sectors: agriculture, mining, manufacturing, utilities, construction and services (everything else).

They find that labour productivity in agriculture is now 2 1/2 times its level in 1989, but it's too small a part of the economy – 2.5 per cent – for this to make much difference to the economy-wide story.

The utilities sector showed strong productivity growth until the turn of the century, before steadily declining through to 2011-12, mainly because of one-off developments such as the building, then mothballing of many desal plants.

The story of mining is well-known: its productivity fell because of the delay between companies hiring more workers to build new mines and gas facilities and that extra production coming on line. Since 2012-13, however, mining productivity has shot up. What a surprise.

Productivity in manufacturing and construction has grown at similar rates to the economy overall, as has productivity in the services sector (hardly a surprise since services now account for 70 per cent of gross domestic product).

Over the past five years, more than half of our total labour productivity improvement was attributable to the services sector, compared with about a quarter attributable to mining.

Apart from productivity improvement in the various sectors, overall productivity can be affected when changes in the industry structure of the economy cause workers to shift from lower-productivity sectors to higher-productivity sectors, or vice versa.

Because mining, being highly capital-intensive, has by far the highest level of labour productivity, the authors say it's really only when workers move in or out of mining that structural change has much effect on economy-wide productivity.

"These movements of labour into and out of mining have been the key driver behind the fluctuations in ... aggregate labour productivity growth," the report concludes.

Now they tell us.
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Wednesday, August 30, 2017

A terrible injustice most of us could face

It's one of the most glaring gaps between theory and practice in our community, a huge disconnect between our democracy and our economy. A terrible injustice most of us could face. Everyone knows about it, but it's rarely discussed. What is it?

The prohibitively high cost of justice. We're all supposed to be equal before the law, but you ain't anything like equal if they can afford a lawyer and you can't.

The president of the Law Council of Australia, Fiona McLeod, is running a campaign to highlight the plight of people who, in theory, should be receiving aid to help them with their legal problems but, in practice, often aren't.

People who include Indigenous Australians, those with disabilities, older people, children, the homeless and those experiencing economic disadvantage, prisoners and detainees, asylum seekers and other recent arrivals to Australia, people who have been trafficked and exploited, LGBTI people, those experiencing family violence and those in regional and remote areas.

The sad truth is that, in these times of tight budgets, when federal and state governments of both colours lack the courage to tackle the powerful interest groups benefiting from the biggest swathes of government spending, legal aid is treated as a soft touch.

You can chop it back without outcry.

But the problem is bigger than that. Lawyers speak of the "missing middle" – people who aren't rich enough to afford lawyers, but aren't poor enough to be eligible for legal aid.

That's some middle. In the Productivity Commission's 2014 report on access to justice, it estimated that only the bottom 8 per cent of households were likely to meet income and asset tests for legal aid, leaving "the majority of low and middle income-earners" likely to struggle or miss out.

To give you an idea, a less complex family law case costs the parties between $20,000 and $40,000, with complex cases costing more than $200,000.

And your chances of requiring legal help are higher than you may realise. A survey conducted in 2008 found that close to half of respondents experienced one or more civil (not criminal) legal problems, including family law matters, during a year.

The report says that "the ability of individuals to enforce their rights can have profound impacts on a person's wellbeing and quality of life.

"For example, it can mean that someone who has sustained injuries due to the negligence of others can seek recompense for impairment and/or their reduced income-generating capacity."

So what can we do to reduce this gap between what we're entitled to and what actually happens?

Short of nationalising the legal profession, there is no single, simple solution to the high level of lawyers' incomes and thus legal costs.

Apart from urging governments to spend more on legal aid, the Productivity Commission's answer is to chip away at the problem in as many places as possible.

More should be done to disseminate legal information (including self-help kits). States should establish a central, well-publicised point of contact for legal assistance and referral. The service would provide free telephone and web-based legal information, as well as actual advice on minor matters.

People need to be more aware of the ways to resolve disputes without using lawyers and courts. There are more than 70 government and industry ombudsmen and complaint bodies, covering telecom providers, banks and government agencies, which sort many matters with little cost or delay.

There are almost 60 federal and state tribunals, dealing mainly with challenges to bureaucratic decisions. The idea was that people would represent themselves and lawyers be avoided, but a legalistic approach is creeping in.

Then there's "alternative dispute resolution" where people such as retired judges can fix problems before matters get as far as court. More could be done to encourage this.

The courts have been doing more to manage their case load and push cases through, but they could do a lot more to reduce unnecessary cost and delay. They could make more use of technology to improve their performance.

The commission says there is "substantial scope to improve the efficiency and effectiveness of Australia's civil justice system" by curbing abuse of the adversarial system through a lack of co-operation and disclosure between the parties and the use of procedural tactics, and by discouraging disproportionate legal and other costs.

Rules about the awarding of costs could be toughened to discourage tactical delays and over-servicing.

As for the lawyers themselves, some of their longstanding rules of behaviour, supposedly intended to ensure clients get the best service, may be more about allowing them to charge more.

The commission says lawyer and client should be able to agree that the lawyer will do some, but not all, of the legal work involved.

It should be possible for more legal tasks to be performed by non-legal professionals.

It's permitted for lawyers to work on the basis that no fee is charged if a legal action is unsuccessful, but an extra percentage is added to the normal bill if it is successful.

But it's not permitted for lawyers to charge an agreed percentage of the damages their client receives. The commission believes that, with adequate protections, it should be.

If the courts and lawyers can't do more to limit the cost of legal proceedings, one day governments will get tough with them.
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Monday, August 28, 2017

Government losing its resistance to rent-seeking businesses

I'm starting to suspect the federal government – of whatever colour – has lost its ability to control its own spending.

Even if this is, as yet, only partly true, governments are likely to have unending trouble returning the recurrent budget to balance and keeping it there, let alone getting it into surplus so as to pay down debt.

Those of us who worry about such things have given too little thought to the causes of the Abbott-Turnbull government's abject failure to achieve its oft-stated goal of repairing the budget solely by cutting government spending.

It's common to blame this on political failure and obstacles. There's truth in most of those excuses, but they miss the point. Spending restraint will never be easy politically, governments rarely have the number in the Senate and their opponents will always be opportunistic.

That's why governments need to be a lot clearer about what they're seeking to achieve on the spending side, and a lot more strategic in how they try to bring it about.

On ultimate objectives, the goal of literally smaller government – smaller than it is today – is a pipedream. Government spending is almost certain to rise over time – don't you read Treasury's intergenerational reports? – meaning taxes will have to rise over time.

But there are obvious limits to voters' appetite for higher taxes, which is why governments need to be able to control the rate at which their spending is growing, and do it not by cost-shifting to other governments or service recipients – as was the approach in the failed 2014 budget – but by ensuring ever-improving value for money through greater efficiency and effectiveness.

Unless governments lose their obsession with welfare spending (most of which goes to the aged) and come to terms with the other two really big items of government spending, health and education – especially when you consolidate federal and state budgets – they won't get far with controlling the rate of growth in their spending.

What too few people realise is how much of government spending goes not directly into the pockets of voting punters, but indirectly via businesses big and small: medical specialists, chemists, drug companies, private health funds, private schools, universities fixated by their ranking on global league tables, businesses chasing every subsidy they can get, not to mention international arms suppliers.

The budget, in other words, is positively crawling with vested interests lobbying to protect and increase their cut of taxpayers' money.

A government that can't control all this potential business rent-seeking – isn't perpetually demanding better value for taxpayers; perpetually testing for effectiveness – is unlikely to have much success in limiting the growth in its spending.

Which brings me to my fear that government has already lost that ability.

A wrong turn taken early in the term of the Howard government – when the Finance department moved most responsibility for spending control to individual departments and got rid of most of its own experts on particular spending areas – plus many years of "efficiency dividends" (these days a euphemism for annual redundancy rounds) have hollowed out the public service.

The spending departments have lost much of their ability to advise on policy, while the "co-ordinating departments" – Treasury, Finance and Prime Minister's – have lost much of their understanding of the specifics of major spending programs.

This matters not just because the departments have become increasingly dependent on outside consultants to tell them how to do their job – and to be the for-profit repositories of what was formerly government expertise – which could easily be more expensive than paying your own people.

The big four chartered accounting firms were paid $1 billion in consulting fees over the past three years, thus introducing a whole new stratum of potential rent-seeking.

More importantly, the longstanding practice of having specialised departments – one each for the farmers, miners, manufacturers, greenies etc – makes them hugely susceptible to being "captured" by the industry they're supposed to be regulating in the public interest.

The departments soon realise their job is to keep the miners or whoever happy and not making trouble for the government.

The Health department, for instance, would see its primary task as dividing the taxpayers' lolly between the doctors, the chemists, the drug companies and the health funds in a way that keeps political friction to a minimum.

How much incentive do you reckon this gives the spending departments to limit their spending, root out rent-seeking and lift effectiveness?

That's why, by denuding the co-ordinating departments of people who know where the bodies are buried in department X, government has lost a key competency: the ability to control the growth in its own spending.
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Saturday, August 26, 2017

In truth there's no apprenticeship 'crisis'

If we're to believe what we're told, Australia's apprenticeship system is in crisis, with plunging numbers following cuts in government support.

In last year's federal election campaign, Bill Shorten claimed the number of people "in training for an apprenticeship" – note that tricky wording – was "now at its lowest level since 2001".

Spending cuts by the Abbott-Turnbull government had "seen apprentice numbers fall by more than 120,000 since the 2013 election".

In May this year, Karen Andrews, Assistant Minister for Vocational Education and Skills in the Turnbull government, said the objective of a new government fund was to "restore the number [of apprenticeships] to 2012 levels, when Labor's withdrawal of employer incentives contributed to a massive decline".

Earlier this year, a joint statement by the three biggest business lobby groups claimed that apprenticeships had declined by 45 per cent since June 2012 and urged the Turnbull government to "take urgent action to avert an imminent crisis in our apprenticeship system".

Not to be outdone, the ACTU claimed in last year's election campaign that the Coalition had "ripped funding out of apprenticeship programs", resulting in a "catastrophic drop in the number of apprentices learning their trade".

When you remember the almighty hash that federal and state governments of both colours have made of their efforts to smarten up TAFE colleges by making vocational education and training "contestable" by for-profit training providers, it's not hard to believe that, between them, the former Labor and present Coalition federal governments have stuffed up apprenticeships.

Fortunately, however, you don't have to believe it. It isn't true. For their own reasons, the people I've quoted – Labor and Liberal, employers and unions – are seeking to mislead us about the state of the apprenticeship system.

This is clear from a report published this week by the highly regarded higher education expert Professor Peter Noonan, and Sarah Pilcher, of the Mitchell Institute at Victoria University.

Let me ask: What do you understand the word "apprenticeship" to mean? Do you take it to mean the system that's existed for decades where young people work in trades such as carpentry, plumbing, electrical, commercial cooking and hairdressing, and undertake about four years of training before becoming qualified tradespeople?

Now try this: Have you heard of the "traineeships" that the Hawke government invented in 1985 to reduce youth unemployment by providing job and training opportunities for young people in service sector occupations not covered by traditional apprenticeships?

They typically last for only a year or less, and are common in retail and hospitality, admin, childcare and aged care.

Get this: when all those people I quoted spoke of the "apprenticeship system", what they were actually referring to was those short-term traineeships.

There's been a huge fall in the number of traineeships since 2012, because the Gillard government decided to crack down on massive rorting by employers and training providers of changes in the traineeship system made by the Howard government.

There has been a modest fall in the number of traditional apprenticeships since 2012, but this is despite the absence of any change in the full funding of traditional apprenticeships.

No one would understand the distinction between apprenticeships and traineeships better that Shorten, the minister responsible, the employer groups and the ACTU.

None of them would fail to realise that the public worries a lot more about trade apprenticeships than about short-term service sector traineeships.

So when they chose to depict a crackdown on employer rorting of traineeships as a crisis in the apprenticeship system, they knew full well they were misleading us.

But how did they think they could get away with such deceit? That no Peter Noonan would blow the whistle on them?

Here's the bit you'll have trouble believing. It sounds like it's straight out of Utopia.

They thought they'd get away with it because, some years ago, some genius in the federal government decided to add the traineeship figures to the apprenticeship figures and call them all apprenticeships.

You know, add oranges to apples and call them all apples. Good one.

So far has that bureaucratic obfuscation gone, that actual figures for apprenticeships and traineeships have disappeared.

You can, however, divide the so-called apprenticeships between trade apprenticeships (the real ones) and non-trade "apprenticeships" (actually traineeships).

The number of traineeships has long been a lot greater than the number of apprenticeships, which tend to vary with the strength of the economy. Even so, commencements have increased in some categories: carpenters, plumbers and electricians.

But the number of traineeship commencements ballooned after 1998, when the Howard government took a scheme aimed at encouraging employers to hire more young people, and made subsidies available for training of existing employees, of any age.

The report says registered training organisations, apprenticeship centres and brokers "aggressively marketed" these existing-worker traineeships.

"A business model emerged whereby employers would share the incentives with registered training organisations, who then delivered training, too often of questionable duration and quality," the report finds.

By 2012, the peak year before the Gillard government's restrictions took effect, 44 per cent of all traineeship commencements were for existing workers. About 18 per cent of all "trainees" were aged 45 or older.

The Howard government also decided in 1998 to make employer incentives available for part-time traineeships and apprenticeships.

"This decision . . . also created a market in Commonwealth employer subsidies, through which firms could shift their part-time and casual youth workforces (including full-time school and university students) into part-time traineeships," the report says.

"This had a dual benefit for employers – they were able to pay trainees the national training wage (below the relevant award) while also claiming employer subsidies, with training provided fully on the job.

"Major retail firms and franchises, in particular in the fast food industries, took full advantage of these incentives."

Now why do I find that easy to believe?
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