Wednesday, November 29, 2017

The real reason you're feeling the pinch

Maybe it's just me, but these days the more politics I hear on TV or radio, the less time it takes for my blood to boil. Just ask my gym buddies. "No point shouting at the radio, Ross, they can't hear you."

Last week, for instance, I heard the erstwhile Queensland leader of One Nation carrying on about what a big election issue the rising cost of living was. There was the cost of electricity ... but he ran out of examples.

High on my list of things I hate about modern pollies is the way they tell us what they think we want to hear, not what we need to know. Then they wonder why voters think they're phoneys.

As someone who's spent his career trying to help people understand what's going on in the economy, it's galling to hear politicians reinforcing the public's most uncomprehending perceptions.

The crazy thing is, the widespread view that our big problem is the rapidly rising cost of living is roughly the opposite of the truth.

It's true the price of electricity has been rising rapidly, lately and for many years, for reasons of political failure. But electricity accounts for just a few per cent of the total cost of the many goods and services we buy.

And the prices of those other things have been rising surprising slowly, with many prices actually falling. You hadn't noticed? Goes to show how wonky your economic antennae have become.

Annual increases in consumer prices have been so low for the past three years that the governor of the Reserve Bank, Dr Philip Lowe, is worried about how he can get inflation up into his target zone of 2 to 3 per cent.

Why would anyone worry that the cost of living isn't rising fast enough? Because, though it's hardly a problem in itself, it's a symptom of a problem buried deeper.

Which is? Weak growth in wages over the past four years. Rising wages are the main cause of rising prices. Price rises have been small because wage rises have been small.

It's the weak growth in wages that's giving people trouble balancing their household budgets – a problem they mistakenly attribute to a fast-rising cost of living.

What they've grown used to over many years is wages rising by a per cent or so each year faster than prices, and they've unconsciously built that expectation into their spending habits. When it doesn't happen, they feel the pinch.

For the past four years, wages have barely kept pace with the weak – about 2 per cent a year – rise in consumer prices.

This absence of "real" wage growth is a problem for age pensioners as well as workers because pensions are indexed to average weekly earnings – meaning they too usually rise each year by a per cent or so faster than prices.

Why would any economist worry that wages weren't growing fast enough? Because, as well as being a cost to business, wages are the greatest source of income for Australia's 9.2 million households.

And when the growth in household income is weak, so is the growth in the greatest contributor to the economy's overall growth: consumer spending.

It might seem good for business profits in the short-term, but weak wage growth eventually is a recipe for weak consumption and weak growth in employment. What sounded like a great idea at first, ends up biting business in the bum.

Weak wage and price growth is a problem in most rich countries at present, meaning it's probably explained by worldwide factors such as globalisation and technological change.

In a speech last week, Lowe opined that a big part of the problem was "perceptions of increased competition" by both workers and businesses.

"Many workers feel there is more competition out there, sometimes from workers and sometimes because of advances in technology" and this, together with changes in the nature of work and bargaining arrangements, "mean that many workers feel like they have less bargaining power than they once did".

"It is likely that there is also something happening on the firms' side as well . . . Businesses are not bidding up wages in the way they might once have. This is partly because business, too, feels the pressure of increased competition."

Lowe says a good example of this process is increased competition in retailing, where competition from new entrants (Aldi, for instance) is putting pressure on margins and forcing existing retailers to find ways to lower their cost structures.

Technology is helping them do this, including by automating processes and streamlining logistics (transport costs). The result is lower prices.

"For some years now, the rate of increase in food prices has been unusually low. A large part of the story here is increased competition. The same story is playing out in other parts of retailing. Over recent times, the prices of many consumer goods – including clothing, furniture and household appliances – have been falling," Lowe says.

"Increased competition and changes in technology are driving down the prices of many of the things we buy. This is making for a tough environment for many in the retail industry, but for consumers, lower prices are good news."

True. Which is why I find it so frustrating when idiot politicians keep telling people the cost of living is soaring.

Monday, November 27, 2017

Tax cuts: lies, damn lies and bracket creep

If Malcolm Turnbull's promised tax cuts ever eventuate, we can be sure they'll be justified in the name of redressing terrible "bracket creep". But there are few aspects of taxation that involve more deception.

Treasury has been overselling the bracket creep story since the arrival of the Abbott government, while the Turnbull government has been exaggerating how much of it there's likely to be, so as to prop up its claim it's still on track to return the budget to surplus in 2020-21.

Every politician with their head screwed on loves bracket creep. When pressed, however, all profess to think it a bad thing. The punters think they disapprove of it, but their "revealed preference", as economists say (what they do rather than what they say), tells us they prefer it to the alternative.

It's only commentators like me who are free to say openly that, in this imperfect world, bracket creep's a jolly good thing and there ought always to be a fair bit of it.

Bracket creep occurs when a taxpayer's income increases by any amount for any reason. That's because we have a progressive income tax scale – one where successive slices of income are taxed at higher rates in the dollar – that's fixed in nominal terms.

Sometimes the creep happens because the increase in income lifts the last part of someone's income into a higher tax bracket, but it occurs even if this isn't the case. That's because the higher proportion of their income that's taxed at their highest ("marginal") tax rate increases the average rate of tax they're paying on the whole of their income.

If politicians really disapproved of bracket creep they could eliminate it by indexing the tax scale's bracket limits on July 1 each year in line with the rate of inflation in the previous financial year.

If you wanted to allow only for the effect of inflation, you'd index the brackets to the consumer price index. If you were a true believer in Smaller Government, who thought it a crime for a person's rising real income to raise their average rate of tax, you'd index it to average weekly earnings.

That no government has indexed the tax scale in this way since Malcolm Fraser's abortive experiment with it in the late 1970s is all the proof you need that, whatever they say, politicians of both colours quite like bracket creep. Same goes for Treasury.

The pollies' preference is to let it rip, but then make big guys of themselves by giving some of it back about once every three years, just before or just after an election. Only during the first half of the resources boom, when their coffers were (temporarily) overflowing, did John Howard and Peter Costello depart from this approach.

I believe in bracket creep because it's always played a vital role in helping to balance the budget. It's part of the implicit contract between governors and the governed, who want ever-growing government spending, but don't like explicit tax increases, particularly new taxes.

Their unspoken message to governments is: you find a way to pay for the spending we want, just don't wave it in front of our faces. Bracket creep is the tried and true way of squaring this circle, with limited objection from taxpayers.

What few people seem to realise at present, however, is that we've had precious little bracket creep for the past four years because inflation has been unusually low, and wages have barely kept up with it.

Limited bracket creep is the greatest single reason the Coalition government has had so little success in returning the budget to surplus. The government's persistent over-estimation of the bracket creep that will come its way is the main reason it has kept failing to reduce the deficit as forecast.

Yet throughout this government's term, official estimates of the huge extent of future bracket creep have been published, seemingly making the case for big tax cuts. The latest, issued last month by the Parliamentary Budget Office, were reported as though they were established (and scandalous) fact.

In truth, they were mere projections, based on this year's budget projections that wage growth will accelerate to 3.75 per cent a year over the next three years – projections that have been pilloried as wildly optimistic.

I'll let you into a secret unknown to the innumerate end of the media: if your big economic problem is exceptionally weak wage growth, one problem you don't need to worry about is excessive bracket creep. Nor is there any urgent case for tax cuts.

Saturday, November 25, 2017

Economic garden gets back to normal - very slowly

With the year rapidly drawing to a close, the chief manager of the economy has given us a good summary of where it looks like going next year. The word is: we're getting back to normal, but it's taking a lot longer than expected.

The chief manager of the economy is, of course, Reserve Bank governor Dr Philip Lowe, and he gave a speech this week.

For years Lowe and others have been tell us the economy is making a difficult "transition" from the resources boom to growth driven by all the other industries. But now, he says, it's time to move to a new narrative.

"The wind-down of mining investment is now all but complete, with work soon to be finished on some of the large liquefied natural gas projects," he says.

Mining investment spending rose to a peak of about 9 per cent of gross domestic product in 2013, but is now back to a more normal 2 per cent or so.

This precipitous fall has been a big drag on the economy's overall growth, meaning its cessation will leave the economy growing faster than it has been.

As Lowe puts it, "this transition to lower levels of mining investment was masking an underlying improvement in the Australian economy". The decline in mining investment also generated substantial "negative spillovers" to other industries, particularly in Queensland and Western Australia.

This is a good point: weakness in the mining states has made the figures for the national economy look below par, even though NSW and Victoria have been growing quite strongly.

The good news, however, is that these negative spillovers are now fading. In Queensland, the jobs market began to improve in 2015, and in WA conditions in the jobs market have improved noticeably since late last year.

This is one reason Lowe expects the economy's growth to strengthen next year. Another is the higher volume of resource exports as a result of all the mining investment.

"We expect GDP growth to pick up to average a bit above 3 per cent over 2018 and 2019." This may not sound much, but "if these forecasts are realised, it would represent a better outcome than has been achieved for some years now.

"This more positive outlook is being supported by an improving world economy, low interest rates, strong population growth and increased public spending on infrastructure," he says.

And the outlook for business investment spending has brightened. "For a number of years, we were repeatedly disappointed that non-mining business investment was not picking up . . .

"Now, though, a gentle upswing in business investment does seem to be taking place and the forward indicators [indicators of what's to come] suggest that this will continue.

"It's too early to say that animal spirits have returned with gusto. But more firms are reporting that economic conditions have improved and more are now prepared to take a risk and invest in new assets."

The improvement in the business environment is also reflected in strong employment growth. Business is feeling better than it has for some time and is lifting its capital spending as well as creating more jobs.

Over the past year, the number of people with jobs has increased by about 3 per cent, the fastest rate of increase since the global financial crisis.

The pick-up is evident across the country and has been strongest in the household services (which include healthcare, aged care and education and training) and construction industries.

It's also leading to a pick-up in participation in the labour force, especially by women.

So, everything in the economic garden is back to being lovely?

No, not quite. Consumer spending – by far the biggest component of GDP – "remains fairly soft". It's been weaker than its annual forecast since 2011 and hasn't exceeded 3 per cent for quite a few years.

Why? Because of weak growth in real household income and our very high level of household debt. The weak growth in household income is explained mainly by the weak growth in wages for the past four years, which have barely kept pace with (unusually low) inflation.

Lowe says "an important issue shaping the future is how these cross-cutting themes are resolved: businesses feel better than they have for some time but consumers feel weighed down by weak income growth and high debt levels".

Let me be franker than the governor. The economy won't get back to anything like normal until we get back to the modest rate of real (above inflation) growth in wages we've long been used to.

Just what's causing the weakness in prices as well as wages – which is a problem occurring in most other developed economies – and whether the problem is temporary or lasting, is a question that's hotly debated, with Lowe adding a few pointers of his own.

He thinks it's partly temporary, meaning wage growth will soon pick up from its present (nominal) 2 per cent a year, and partly longer-lasting, meaning it may be a long time before it returns to its usual 3½ to 4 per cent.

"We expect inflation to pick up, but to do so only gradually. By the end of our two-year forecast period, inflation is expected to reach about 2 per cent in underlying terms . . . Underpinning this expected lift in inflation is a gradual increase in wage growth in response to the tighter labour market."

Here's his summing up:

"Our central scenario is that the increased willingness of business to invest and employ people will lead to a gradual increase in growth of consumer spending. As employment increases, so too will household income. Some increase in wage growth will also support household income.

"Given these factors, the central forecast is for consumption growth to pick up to around the 3 per cent mark" – which would still be below what was normal before the GFC.

Wednesday, November 22, 2017

Tax cuts would have cons and pros

Yippee! It's almost Christmas and Malcolm Turnbull has dropped a big hint that tax cuts are coming. Good old rich Uncle Mal has been to see his bank manager, got the overdraft extended, and is determined we'll all have a great Chrissie, no matter what.

Actually, it's all a bit vague at this stage. We don't yet know whether the cuts will even be announced before Christmas, let alone when they'll be delivered. Nor do we have any idea whether they'll be large, small or indifferent.

Wouldn't surprise me if they were on the small side, nor if we got them only as a reward for voting Turnbull back into office at the next election, to be held late next year or in the middle of 2019.

All we actually know is what Turnbull dropped into a speech to the Business Council after affirming his intention to press on with the hugely expensive company tax cuts for big business.

"In the personal income tax space, I am actively working with the Treasurer and my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus," he said.

It wouldn't surprise me if even Turnbull doesn't yet have a clear idea about the size and timing of the cuts. That will depend partly on Treasury's grudging willingness to make it seem they can be afforded "while also meeting our commitment to return the budget to surplus", but just as much on the calculations of his spin doctors.

Will they decide to announce the cuts soon, using them as an attempt to break the circuit of negative media discussion of some problem the government's having, or keep them under wraps until much closer to the time when voters are asked to show their gratitude at the polls?

That Turnbull has dropped the big hint this early in the piece is a sign they're more likely to be chewed up in a desperate but futile attempt to give the government some "clear air", than carefully preserved as part of a grand re-election strategy.

But though uncertainty abounds, there are three iron laws of tax cuts.

The first is that a government's motive in making them is always mainly political. It either fears that if it doesn't cut it will lose votes – because voters are starting to resent how much tax they're paying on any pay rises or overtime – or it hopes if it does cut this will win votes in thanks for its magnanimity.

The second law is that, despite their political motivation, tax cuts always come colourfully wrapped in wonderful economic justifications. By taking this political gift, we're assured, we'll be creating jobs, reducing unemployment and making the economy grow.

It's almost our economic duty to accept the offer of the bloke selling tax cuts for votes.

The third law, however, is that voters' gratitude for being given a little of their own money back is faint to non-existent. A tax cut announced is soon forgotten; a tax cut delivered before an election has next to no influence on the outcome.

But can the budget afford tax cuts? Not if you accept the government's preferred way of measuring the deficit. It says we're still a long way from returning the budget to balance.

The government's prediction we'll be back to budget surplus by 2021 rests heavily on its forecast that wages will soon start growing strongly, much faster than inflation. Maybe.

If Treasury finds a way to maintain that trajectory while paying for tax cuts, it will be by stepping up its over-optimistic forecasts of wage growth. With circular logic, the "bracket creep" such forecasts imply would then be used to justify the tax cuts themselves.

For years we've been told a government that needs to borrow each month to keep itself afloat can't possibly afford to give aid to poor people overseas. But borrowing to cover tax cuts to big business isn't a problem nor, apparently, is borrowing to give voters a tax cut.

The sad truth is that this Abbott-Turnbull government has got neither the conviction nor the honesty to stick to a consistent line on debt and deficits.

In opposition they told us the debt was a frightening crisis, but easily fixed by them. In government they had one go at fixing it at the expense of everyone but their own supporters, but lost public support from that moment, and since then have abandoned any serious attempt at budget repair, merely waiting like Mr Micawber for something (bracket creep) to turn up.

Now it's decided it can't wait even for that, but must give some of it back on the assumption it will turn up – eventually.

But whatever their political motivation, tax cuts do have effects on the economy, so what would they be?

At a time like this, tax cuts would have a similar effect to a decent pay rise, making it a little easier for households to keep spending, giving consumer spending a modest boost and, indeed, creating a few more jobs.

And if you defy federal Treasury and measure the budget balance more sensibly, stripping out investment in infrastructure, you find the recurrent deficit has already been largely eliminated. A small tax cut wouldn't set it too far off course.

Monday, November 20, 2017

Labor plans further blow to Treasury power

It's a process that's gone on for so long few people have noticed it: the waning influence of the once-mighty federal Treasury.

There was a time, 40 years ago, when Treasury sought to monopolise the economic advice going to the federal government. But those days are long gone.

The peak of Treasury's influence came with the sweeping micro-economic reforms and opening up of the economy in the 1980s and 1990s. It first convinced its minister, John Howard, of the need for widespread reform, but he made little progress under Malcolm Fraser.

Under a much more sympathetic Bob Hawke, Howard's successor as treasurer, Paul Keating, delivered on Treasury's reform agenda beyond its wildest dreams.

Since 2000, after Howard as prime minister won Treasury's 25-year battle to introduce a broad-based consumption tax, it's been largely downhill all the way on micro reform, with its loss of momentum, direction and purity of motive.

This is what's so significant about the Productivity Commission recently seizing the initiative to Shift the Dial and revive and redirect the reform agenda. Its "new policy model" could never have come from a tired and hidebound Treasury.

When Fraser sought to punish Treasury in 1976 by dividing it in two, Treasury and Finance, the initial judgment was that he'd succeeded only in doubling its vote in favour of budget rectitude at the cabinet table.

Forty years on, I now doubt that. Its bifurcation has diminished Treasury's effectiveness in the endlessly recurring task of "fiscal consolidation" (getting the budget deficit down) by robbing it of both the expertise and the motivation to find innovative, politically sustainable ways to limit the growth in government spending.

This trickier side of the budget has largely been left in the hands of the Finance accountants, whose vision rarely extends beyond this year's budget task, and who know more about creative accounting than the wider economic consequences of their crude spending cuts.

On the revenue side, Treasury shares the Business Council's unending obsession with tax reform. Why? To a surprising extent, for the simple, institutional reason that tax policy still lies within its own ministerial responsibility.

Treasury's become more inward looking and less concerned to oversee ("co-ordinate") the activities of other departments.

With one glaring exception. Treasury's greatest loss of influence came with the recognition of Reserve Bank independence in the mid-1990s.

From that time, the day-to-day management of the macro economy moved to the Reserve, with Treasury merely retaining a seat on the bank board and the ear of the treasurer.

Yet there's been great reluctance on Treasury's part to acknowledge this loss of power. It pretends nothing's changed, devoting far too many of its shrinking human resources to second-guessing the Reserve.

The Reserve devotes many resources to "liaison" (gathering businesses' views on the state of the economy), so Treasury must do it too.

The Reserve has an extensive forecasting round each quarter, so Treasury must do its own – but half-yearly, because its only actual forecasting need is for a set of macro-economic "parameters" to plug into its budget estimates of spending and revenue.

The Reserve regularly investigates the latest macro puzzle – say, why non-mining business investment is so slow to recover – so Treasury must do its own. Its new Treasury Research Institute focuses on macro management issues.

What gets neglected is Treasury's oversight of the big micro reform issues. Think health, education, infrastructure. Without an institutional understanding of the detail of these areas, Treasury simply isn't up to speed on either micro reform or budget sustainability.

So its recent establishment of a "structural reform" division seems a step in the right direction – until you learn that the group's first big project was to inquire into non-mining business investment's slowness to recover.

Another part of Treasury's decline is its politicisation, particularly Tony Abbott's decision to sack the Treasury secretary, Dr Martin Parkinson, and replace him with someone whose views he felt more comfortable with, John Fraser.

Recent Coalition governments have preferred Treasury and other departments to be less the fearless policy advisers and more the handmaidens to the minister and their office.

This politicisation makes it ever-harder to believe Treasury's persistently over-optimistic economic and budget forecasts are the product of forecaster fallibility rather than political interference.

Trouble is, the more your influence and authority decline, the more people want to take a crack at you.

Should Labor win the next election, it says it will shift responsibility for budget forecasting and the five-yearly intergenerational report (whose credibility Joe Hockey destroyed by turning it into a political tract) from Treasury to the more independent Parliamentary Budget Office.

Saturday, November 18, 2017

Unis should never be allowed to set their own fees

The Productivity Commission has changed its ideological tune, shifting away from the slavish adherence to an idealised version of the "neoclassical" model of the economy for which it and its predecessors became notorious.
It's moved to a more nuanced approach, recognising the many respects in which real-world markets differ from those described in elementary textbooks.
This shift has been underway since the present chairman of the commission, Peter Harris, succeeded Gary Banks in 2012.
You could see it in the commission's 2015 report on the Workplace Relations Framework, which acknowledged, readily and in detail, the factors that made the simple neoclassical, demand-and-supply model unsuitable for analysing the labour market.
But it's even more apparent in the commission's blueprint for a very different approach to economic reform, Shifting the Dial. Consider this.
Remember the plan in the Abbott government's first budget, of 2014, to deregulate the fees universities are allowed to charge students doing undergraduate degrees?
It was a logical next step following the Gillard government's decision some years earlier to deregulate the number of undergraduate places each university was permitted to offer.
The unis had responded by hugely increasing the number of government-funded places, at greatly increased cost to the federal budget, after successive governments had spent decades trying to quietly privatise the unis and get them off the budget.
The economic rationale was that "market forces" – competition between the unis – would prevent them for using their new fee-setting power to overcharge students.
It was a reform that all right-thinking people should support, and those terrible popularity-seekers in the Senate should never have blocked.
Get this: as part of its plan to improve the teaching of uni students, and in the course of explaining how some students are being charged higher fees than they should be, the commission also shows why deregulating fees would have been a crazy idea.
At the same time as it allowed unis to set their own fees, the government's intention had been to cut its funding of places by 20 per cent. It wasn't hard to see that, as unis continued to raise their fees each year, the government would keep cutting its own funding contribution until it was no more.
The commission argues (on page 109) that government "regulation" of the maximum fees unis may charge for particular undergrad courses "is necessary because price competition [between universities] is difficult to establish in the domestic university market.
"This is primarily because the vast majority of domestic students have access to income-contingent HELP loans and consequently have a low price sensitivity, which was a necessary by-product of enabling university access on merit, rather than family income."
Get it? The elementary model's promise that "market forces" – competition between sellers, plus the self-interest of buyers – will stop firms overcharging rests on an assumption that customers have to pay the price upfront.
In the case of uni fees, however, the upfront price is paid by the government, and students incur a debt to the government, which they don't have to start repaying until their income reaches a certain level at some uncertain time in the future.
How long they'll be given to repay the debt is also uncertain, though it's certain their repayments will be geared to their ability to pay, and the only interest they'll pay is the rate of inflation. Cushiest loan you'll ever get.
With the cost of university tuition to a student so far into the future and so uncertain, it's unrealistic to assume students will shop around to find the lowest-charging uni. (Actually, they all charge the maximum allowed.)
Remember, too, that the fee is less than the full cost of the tuition, meaning the unis are "selling" a product whose retail price has been heavily subsidised by the government.
The commission notes that price competition is further limited by the geographic immobility of students. Because more than 80 per cent of commencing students live at home, and moving out would add greatly to their costs, you might get competition between the unis in a particular capital city, but that's all.
But even that's unlikely. The elementary model assumes "perfect knowledge" – both buyers and sellers know all they need to know about the prices and qualities of the products on offer.
In reality, knowledge is far from complete, and is often "asymmetric" – sellers know far more than buyers, usually because the sellers are professionals, whereas the buyers are amateurs.
The commission explains why all unis – big-name or bad-name, city or country – charge the maximum fees allowed.
"In the absence of good information, lower prices may undermine the prestige of a university and its capacity to attract good students," the commission says.
This is an admission of a weakness in the elementary model that affects far more than uni fees. The assumption of perfect knowledge leads to the further assumption that the prices market forces allow a firm to charge fully reflect the quality of its products relative to the quality of rival products.
As behavioural economists have pointed out, however, quality is something that's often very hard for buyers to know in advance. Only after they've bought it and tried it will they know. Think bottles of wine.
So whereas economists assume buyers' foreknowledge of differences in quality is what determines differences in the prices of similar products, buyers who don't know the differences in quality assume they can use prices as a quality indicator. Higher price equals higher quality.
So why don't lesser unis seek to attract more students by charging lower fees than the big boys? Because it would be taken as an admission of their inferior quality, and could lose as many customers as it attracted, maybe more.
The assumption that market forces would prevent unis from abusing their freedom to set fees as they chose was extraordinarily naive, as the commission is now happy to explain.

Wednesday, November 15, 2017

What we can do to cure affluenza

If our grandparents could see us now, what would they think? They'd be amazed by our affluence, but shocked by our wastefulness.

You'd never know it to hear us grousing about the cost of living, but most of us are living more prosperous, comfortable, even opulent lives than Australians have ever lived.

We live in a consumer society, surrounded by our possessions. We're always buying more stuff, more gadgets, an extra car, more TVs for other rooms, more laptops, iPads and smartphones.

We update to the latest model, even though the old one's working fine, and make sure our car is never more than a few years old.

We buy new clothes all the time – a lot on impulse – filling our wardrobes with stuff we wear rarely, if ever.

We buy more food than we can eat, chucking it out when it's no longer fresh so we can buy another lot.

Why do we keep buying and buying? Short answer: because we can afford to. Long answer: because, for a host of reasons, we've become addicted to consumption, whether or not it provides lasting satisfaction. We suffer from "affluenza".

Many of us engage in "conspicuous consumption" so as to impress other people with our wealth – with how well we're doing in the materialist race. Can't have the neighbours thinking we can't afford the latest model.

Other people use their hairstyles or the clothes they wear to express their individuality or, paradoxically, to signal their membership of a particular tribe.

I heard about a partner in a law firm remarking with disapproval that whenever any young person was made a partner they immediately went out and bought a black Volvo. But, someone asked, don't you have a black Volvo yourself? Oh, no, he said, mine's blue.

In his new book Curing Affluenza, Richard Denniss, chief economist of The Australia Institute, observes that, these days, much consumption is done for symbolic, signalling reasons, not because we actually need the stuff.

And then there's retail therapy – stuff we buy purely for the fleeting thrill we get from buying some new thing.

If something's telling you all this needless consumption can't be a good thing, you're not wrong. What's less obvious is why: because of the damage it does to the natural environment.

Not only the extra emissions of greenhouse gasses, but also excessive use of natural resources – both non-renewable and renewable, when usage exceeds the rate at which they can be renewed (think fish in the sea).

The richest 15 per cent of the globe's 7.6 billion population can continue living the high life only for as long as we have the wealth to commandeer more and more of the other 85 per cent's share of the world's natural resources.

But as the world's poor, led by India and China, succeed in raising their material living standards towards ours, this will get ever harder. It is not physically possible for all the world's population to live the wasteful lives we do. Nothing like all the world's population.

How can we stop using more than our fair share of the globe's natural resources? Denniss says we can start by distinguishing between consumerism, which is bad, and materialism, which isn't. Huh?

He defines consumerism as the love of buying things, whereas materialism is just the love of things. Meaning the latter is a cure for the former. The more we love and care for the stuff we've already got, repairing it when it breaks, the less we're tempted to buy things we don't need.

It's true the capitalist system invests heavily in marketing and advertising to con us into believing we need to buy more and more stuff.

But we're free to resist the system's blandishments. Indeed, I often think the people most successful in the system are those who most resist.

Unusually for an economist, Denniss argues that much of what we do – and buy – we do for cultural reasons. Because it's the normal, accepted thing to do.

But, just as our grandparents weren't as spendthrift as we are, culture can change. And you need less than a majority of people changing their behaviour to reach the critical mass that prompts most other people to join them and, by doing so, cause an improvement in the culture.

If we all stopped buying stuff we don't need, however, wouldn't that cause economic growth to falter and unemployment to shoot up?

Yes it would – if that's all we did. The trick is that every dollar we spend helps to create jobs. So we need to keep spending, but we don't need to keep spending wastefully.

There are a host of things we could spend on – better health, better education, better public infrastructure, better lives for the disabled and the elderly, less congestion, less pollution – that would yield us more satisfaction while doing less damage to the environment.

I have a feeling, however, that the cure to affluenza will require more than just changed behaviour by enough individuals. We replace rather than repair many things because the cost of repairers' labour greatly exceeds the cost of the material parts we throw away.

We need to rejig the tax system so we reduce the tax on "goods" – labour income – and increase the tax on "bads" – use of natural resources.

Monday, November 13, 2017

Econocrats are giving up on smaller government

You may not have noticed, but the Productivity Commission's search for "a new policy model" for reform, in reaction to the breakdown of the politicians' "neoliberal consensus", offers better prospects for finally getting the budget under control.

That's because, although the commission doesn't say so, its reformed approach to reform represents a retreat from a central tenet of neoliberal doctrine for the past 30 years: the goal of Smaller Government.

The retreat makes sense for three reasons. First, because attempts to reduce government's role in the economy – think privatisation, deregulation and cuts in government spending – are central to the populist revolt against neoliberalism.

Second, because the smaller-government push has had little success and, particularly in recent times, some spectacular failures – think the attempt to reform TAFE by making vocational education and training "contestable" by for-profit providers, which the commission now admits was a "disastrous intervention".

Third, because, paradoxically, abandoning the goal of smaller government offers a better prospect of budget repair and a return to "fiscal sustainability" (low public debt) via greater control of government spending over the medium term and a lifting of the fatwa against explicit tax increases.

That's partly because, as we've learnt since the ill-fated 2014 budget, the electoral opposition to significant cuts in spending on social security (read the age pension), healthcare and education actually exceeds the resistance to hypothecated tax increases (those linked to worthy spending programs).

But it's also because, as we've known for decades, but chosen to ignore, there's little empirical evidence of a correlation between the size of a country's public sector and its rate of economic growth or macro-economic stability.

Nor has there ever been much empirical evidence that the willingness of high income-earners to work hard - as opposed to "secondary earners" (mainly married women choosing between part-time and full-time work) – is greatly diminished by high rates of income tax.

If there's little evidence favouring smaller government, why's it been central to the neoliberal project? Because a presumption against government intervention is built into the assumptions of the economists' neoclassical model, and because limiting the size of government minimises the taxes and maximises the freedom of the rich and powerful.

The Productivity Commission's new reform agenda unconsciously reveals how much the old agenda of the past 30 years was influenced – and constrained – by the goal of smaller government.

If you're trying to improve productivity, there are two broad approaches. One is to reduce the role of government by privatising government-owned businesses (including natural monopolies), outsourcing the provision of government services, reducing government regulation and reforming taxation in ways believed to improve incentives to work, save and invest.

The alternative approach is to focus on ensuring the nation's education and training system delivers the best skill formation possible – including those skills most useful in the digital economy – and on ensuring spending on public infrastructure is both sufficient and sufficiently well directed to maximise the private sector's productivity, particularly in the big cities.

Get it? The commission's new reform agenda approaches productivity improvement more directly, accepting that the old agenda is well into diminishing returns. In the process it's shifted the goal from smaller government to better government.

The great side benefit of the commission's new policy model is that, as well as seeking to give micro-economic reform a new direction, it improves governments' chances of regaining control over their spending.

As successive federal and state intergenerational reports have shown, by far the greatest source of future growth in combined federal and state spending will be healthcare. The second biggest area of combined spending is on education and training.

The standard, Treasury and Finance-promoted approach to restraining these two spending areas adopted in the Abbott government's first budget was simply to shift a big chunk of spending off the federal budget and on to the budgets of households (the co-payment for GP visits) and the states (slashed federal grants for public hospitals and schools).

The vehemence of the public's opposition to these cuts not only rendered them impossible, it warned off governments of either stripe from trying such an approach again. Malcolm Turnbull's surprise embrace of needs-based school funding covered his retreat from cuts in grants for schools.

The alternative approach to controlling the rate of growth in spending on health and education over the medium term is to get deep into the nitty-gritty of what the respective systems do and how well they're doing it.

It's not hard to believe that improving the quality of service they deliver to patients and students could also reduce waste and inefficiency, thus slowing the rate at which their costs are growing.

Saturday, November 11, 2017

We need better teaching at every level

It's taken an eternity, but the econocrats have finally twigged that the big problem with the nation's education and training system isn't its high-cost to budgets, but its failure to provide enough of our youth with the skills they need to get and keep a decent job.

When the Productivity Commission set out to find a "new policy model" that could "shift the dial" on productivity improvement, the penny dropped. It decided that "if we had to pick just one thing to improve ... it must be skills formation".

That's because the adoption, use and spread of new technology – the long-run drivers of productivity – require people with the right skills.

As befits its obsession with productivity, the commission doesn't bother to acknowledge that knowledge is valuable for its own sake. Humans value knowing things about their world.

But the more prosaic role of education and training is to equip people with the skills that help them earn a living.

As economists go, however, the commission's more broad-minded than most: "There is additional value in improving skills formation – from foundational to advanced – because it gives people better job security, income and job satisfaction.

"These effects are not well measured in the official statistics, but have major implications for prosperity and quality of life more broadly."

Trouble is, the commission finds our present education and training performance – from schools to vocational education and training, to universities – is falling well short of what it should be.

"A good school system ensures that people have the key foundational skills – numeracy, literacy, analytical skills – and the capacity to learn so that they can easily acquire knowledge throughout their lives," the commission says.

What shocks me most about our schools' performance is their high failure rate. Evidence the commission doesn't quote is the Mitchell Institute's estimate that 26 per cent of students fail to finish school or a vocational equivalent.

It seems so many kids have been getting behind and dropping out for so long that schools and their teachers have come to accept this as part of the natural order, not as a sign something's going badly wrong with teaching.

The commission notes that, while the regular testing under the Organisation for Economic Co-operation and Development's PISA program shows Australian school students' academic achievement is still above the OECD average, our average scientific, reading and mathematical ability is falling in absolute terms.

We've gone for decades underpaying teachers relative to other graduates, so we shouldn't be surprised our brightest people don't go into teaching.

We have a growing proportion of lower performers and a falling share of high performers. Other evidence shows our rates of participation in year 12 physics and advanced maths fell by about a third between 1992 and 2012.

One of the worst inhibitors to  gains in learning is "learner [dis]engagement" – being inattentive, noisy or anti-social. About 40 per cent of our students are involved in such unproductive behaviour.

The commission fears our youth may now be less capable than earlier cohorts. For example, an Australian 15-year-old in 2015 had a mathematical aptitude equivalent to a 14-year-old in 2000.

"Australia's growing group of low performing students will be increasingly exposed to unemployment or low participation in the future world of work," the commission says.

Its review of the evidence on school performance concludes we need to focus on improving the quality of the teaching workforce and on methods of teaching that have been proved to be more effective.

We've gone for decades underpaying teachers relative to other graduates, so we shouldn't be surprised our brightest people don't go into teaching.

Many teachers are teaching "out of field" – subjects for which they have no qualifications.

We've done too little testing of the effectiveness of different ways of teaching, and too little dissemination of the results of what testing we've done. It's obvious our classroom teaching isn't as effective as it needs to be, but we've done little about it.

The commission has less to say about the failings of VET – vocational education and training – except that it's a "mess" and still recovering from a "disastrous intervention".

This was the utterly misguided attempt to drag TAFE into the 21st century, not by doing the hard yards with the teachers union, but by applying the magic answer of "contestability" – allowing private businesses to sell taxpayer-subsidised training for profit. Many rorted the system and cheated students until the government belatedly woke up.

Turning to universities, their performance is also falling short. In 2014, more than 26 per cent of students had not completed their degree within nine years of starting – a significant loss of time, effort and money for the students, as well as taxpayers.

And this is before we see any effect from the leap in uni admissions following Julia Gillard's (misguided) decision to provide government funding for any students the unis choose to enroll.

The proportion of recent graduates finding full-time employment is falling, with the under-employment rate among recent graduates rising from 9 per cent in 2008 to more than 20 per cent.

But the fact that graduate full-time starting salaries have fallen from 90 per cent of average weekly earnings in 1989 to about 75 per cent in 2015 suggests this has more to do with the weak state of the labour market than with a decline in the quality of degrees.

Which ain't to say quality hasn't fallen. More than a quarter of recent graduates in full-time jobs believe their roles are unrelated to their studies, with their degree adding nothing to their employability.

Australian unis continue to perform poorly on student satisfaction measures relative to unis in Britain and America.

There's a lot more to the commission's critique of the unis' performance, but I'll leave that for another day.

Sufficient to say the commission has convincingly demonstrated the case for putting the quality of the nation's teaching at the top of our list of things needing urgent improvement.

Wednesday, November 8, 2017

Sorry, but Medicare needs to change

The apparent success of Labor's scare campaign on the Coalition's alleged plans to "privatise Medicare" at last year's election tells us many things – how much we care about the good performance of our healthcare system, how much we like the way healthcare is paid for under Medicare, and how suspicious we are of politicians' plans to change things.

But Medicare is showing its age. It was designed by health economists in the 1960s, implemented by Gough Whitlam in the 1970s, dismantled by Malcolm Fraser, then reinstalled by Hawke and Keating in the 1980s.

Our health has changed a lot since then. Whereas the system is designed to cope with acute illnesses – you catch a bug or have an accident, so you go to your GP, who fixes the problem or refers you to a specialist or, in the extreme, rushes you to hospital – these days we're more likely to suffer from chronic conditions, such as diabetes, mental illness, lung cancer or cardiovascular disease.

That's because higher living standards, improvements in public health and advances in medical technology have reduced the incidence of accidents and infectious diseases, leaving us living lives that are longer, but more anxious and overweight, while suffering from conditions that will stay with us until we drop off.

If you don't have a chronic illness yet, you probably will.

Trouble is, the ageing Medicare system isn't well-suited to this change. GPs are paid according to the number of patients they see for a few minutes – "fee for service".

They're not rewarded for helping patients change their behaviour in ways that prevent the onset of chronic diseases, nor for helping patients manage their conditions in ways that stop them getting worse over time, or needing to go to hospital.

As healthcare has become more expensive, it's clearer that visits to GPs and other frontline health professionals are relatively cheap, whereas visits to specialists are much dearer. Operations and stays in hospital are hugely expensive.

Get it? We could improve people's health and happiness and reduce expense if we made sure the "primary care" provided by GPs and others was as effective as possible in preventing and managing chronic conditions, reducing the need to call on specialists and hospitals.

All this is the thinking behind the Productivity Commission's advocacy of a "new policy model" that shifts tax changes, deregulation and privatisation onto the backburner, and shifts healthcare (and education and cities) to the forefront of economic reform.

The health system suffers from its division of responsibility between federal and state governments, with the states responsible for public hospitals and the feds for most of the rest.

Lack of co-ordination between the parts of the system generates much wasted time and money, not to mention inconvenience and frustration for patients.

So the commission wants a renewed effort to achieve an integrated system.

"The international and Australian experiences with integrated care indicate that, if properly implemented, it leads to gains in health outcomes for patients, improvements in the patient experience of care, reductions in costs, and improved job satisfaction for clinicians," the commission says.

The place for this integration to occur is at the local, regional level. There are about 30 regions in Australia. The commission wants regional health authorities to have freedom to modify national arrangements to suit local conditions.

Public hospitals have already been organised into "local hospital networks" but, after protracted disagreement between Labor and the Coalition, the feds are only now setting up private "primary health networks" contracted to co-ordinate patient care in their locality, including by working collaboratively with the local hospital network.

It's almost inevitable that big outfits like hospitals – but even doctors' surgeries – tend to be run for the convenience of the outfit, rather than the patient.

But the commission wants changes that encourage the system to focus on patients rather than suppliers.

"Patient-centred care gives prominence to the preferences, needs and values of consumers. In a better system, patients' time would be recognised. Patients would be given the information and power to be co-contributors to treatments and disease management," the commission says.

"Medical records would be owned by patients and they would be able to add comments. The commission sees such rights to data as a broad requirement across many public and private services. Where choice was feasible, it would be facilitated."

The digital age has largely eliminated the excuse for different parts of the system – including different doctors – not keeping each other fully informed, and doing so via the patient's own, digitised and portable medical record.

This idea isn't new, but doctors have been dragging their feet and governments need to renew their determination to make it happen.

Using fee-for-service as the main way of paying doctors encourages activity (more visits) whereas it would be better to reward outcomes – successful efforts at preventing chronic conditions or stopping people from needing to go to hospital.

Fee-for-service would continue under a regionally based integrated care model, but its role would diminish as primary health networks and local hospital networks found other ways to remunerate GPs for clinical outcomes.

Little of all this is new, and governments are unlikely to do it all next week. Rather, it's the commission setting priorities for economic reform in general, and healthcare in particular, and urging governments to get on with bringing it to pass.

Monday, November 6, 2017

Economic rationalists regroup under populist attack

Reading the Productivity Commission's grand plan to "shift the dial" on micro-economic reform gives me a feeling of deja vu all over again.

When I started in this business in the mid-1970s, macro-economics had become a pitched battle between Keynesians and monetarists. It took years for a resolution of that conflict to emerge.

The monetarists didn't win the war, but they did win a lot of battles, and management of the macro economy was changed forever.

Today's great conflict in economics comes in the aftermath of the global financial crisis, as politicians in all the advanced economies abandon the "neoliberal consensus" under pressure from the populist revolt against privatisation, deregulation, austerity and all the rest.

You could say the global rethink of economics began immediately after the crisis, but it's just in the Productivity Commission's latest report proposing a "new policy model" for future change that we see our local "thought leaders" among economic rationalists shifting to an agenda that responds to the criticism of the old approach and proposes a new set of reforms aimed at improving productivity while giving voters far less cause to object.

Why so few commentators have perceived the significance of this "dial shift" is hard to fathom.

Read the report and it sticks out like organ stops. For some years since the crisis, the bosses of the International Monetary Fund, the Organisation for Economic Co-operation and Development, and even the Bank of England have said we need economic growth to be more "inclusive".

Now the Productivity Commission agrees and has reshaped its reform agenda accordingly.

The old agenda accepted the conventional wisdom that economic efficiency and equity (fairness) were in conflict. Since the crisis, however, economists at the fund and the OECD have been producing evidence that increasing inequality inhibits economic growth.

Now our commission agrees, arguing that its proposed shift in the reform dial will avoid "too great a dispersion in incomes, given evidence that this can, in its own right, adversely affect productivity growth".

In shifting reform priorities from changing tax incentives, moving the balance of wage-setting power in favour of employers, deregulating and privatising, to reforming healthcare, education and cities, the commission is attempting to humanise reform.

In setting its main priorities as improving the quality of services delivered to patients, students and commuters, the commission has made ordinary punters the main beneficiaries. What's that if it's not more "inclusive"?

Low and middle-income earners would be the chief winners because the better-off are better able to buy their way out of bad medical treatment, bad teaching and long commutes.

And get this: more efficient and effective healthcare, teaching and cities bring intrinsic benefits to the lives of ordinary people, whether or not they ever "shift the dial" of the measures of productivity that the commission takes so literally (which they quite possibly won't).

The commission's "new policy model" is far better fitted to an economy ever-more oriented to the services sector, and to an economy where the value of knowledge becomes more apparent as each year passes.

What seems to have bamboozled the commentators is the notion that nothing on the commission's new reform agenda is particularly new.

True, but silly. In economics, there's not much that's new under the sun. Sure economists have been rabbiting on for years about the need to reform healthcare and education and – much more recently – "urban economics".

What's new is not the topics but the priority and emphasis they've been given. What's new is sorting through a list of old potential reform topics to find those that tick the efficiency box and the fairness box.

Another uncomprehending reaction has been that many of the specific reforms the commission advocates – road-use charging, for instance – would be politically difficult, and most unlikely to be taken up by the Turnbull government.

True, but beside the point. What's significant is the radical change in thinking about the nature and direction of economic reform, not how long it will take for those reforms to be made.

I've been around long enough to see plenty of politically impossible reforms come to pass.

A more perceptive critique of the "new policy model" is that it takes us straight into territory where the states have as much say as the feds, if not more. No easy country.

And while it's true ordinary voters have much to gain from the new agenda, it's equally true that vested interests in the health, education and city industries have much to lose.

One further lesson from economic rationalism's poor record in recent times is that if you're not game to take on powerful rent-seekers, you won't get far.

Saturday, November 4, 2017

We're Closing the Gap, but far too slowly

The latest report on government spending on Indigenous people makes shocking reading. So let me explain it to you before some One Nation-type gives you her version.

The report estimates that federal and state spending on Aboriginal and Torres Strait Island Australians was more than $33 billion in 2015-16, a real increase of almost 24 per cent since 2008-09.

That amounts to spending $44,900 a year per Indigenous Australian, twice the equivalent spending per person on the rest of the Aussie population.

See? Proof positive of what many radio shock jocks and One Nation supporters have always said: Aborigines get a host of government benefits the rest of us aren't entitled too.

After the nation's vow to Close the Gap between Indigenous and non-Indigenous Australians on health, education and employment, it's hardly surprising Indigenous spending has grown.

Trouble is, there's little likelihood this apparently massive spending will see the Closing the Gap targets reached.

Bad, eh? Waste on a grand scale.

Fortunately, however, all is not as it seems. As associate professor Nicholas Biddle, a fellow of the Centre for Aboriginal Economic Policy Research, at the Australian National University, has explained in an article on my second-favourite website, The Conversation, a closer look at the figures shows there's no reason to swallow the rubbish peddled by the downward-envy brigade. ("Oh, Aborigines get it so much easier than we do.")

First point is that the $44,900 in annual spending per Indigenous person covers more than 150 spending categories, including social security payments, but also government spending on health, all levels of education, law and order, housing, community welfare, transport and even a share of the cost of the public service and defence.

So most comes in the form of services provided, rather than cash in hand. A bit over half of the spending comes from state and territory governments, leaving a bit less than half from the feds.

The report divides the $44,900 into "mainstream services" – services available to all Australians regardless of ethnic origin – and "Indigenous-specific services".

The latter account for just 18 per cent of the total – about $8000 a year per person. This proportion is down on earlier years.

But this still leaves the annual cost per person of mainstream services for Indigenous Australians exceeding the equivalent cost for other Australians by about $14,500. How's this explained?

Mainly by the greater intensity of Indigenous people's use of mainstream services. For instance, their rate of unemployment is higher. And, rightly or wrongly, a disproportionate share of law and order spending is devoted to Indigenous people.

As well, the Indigenous population is, on average, younger – meaning disproportionate spending on education.

The rest of the difference between the levels of spending on mainstream services is explained by the higher cost of providing those services in remote locations. Biddle says that 22 per cent of Indigenous Australians live in remote and very remote areas.

And remember this. While real spending on Indigenous Australians seems to be rising rapidly in absolute terms, so too is the Indigenous population. It's up by almost 16 per cent over the seven years to June 2016, compared with a little more than 11 per cent for the non-Indigenous population.

Biddle calculates that while real Indigenous spending per person has risen by 6.9 per cent over the seven years, real gross domestic product per person has risen by 7.5 per cent.

Sadly, it's true that the Closing the Gap targets set by the Council of Australian Governments in 2009 look unlikely to be achieved.

That's because progress to date has been so modest. The targets were worthy, but unrealistic. At this stage it's probable that setting revised, more achievable targets would do more to motivate governments to keep trying.

But this isn't to say we're making no progress. Biddle and a colleague at the Centre for Aboriginal Economic Policy Research, Francis Markham, have been examining last year's census for evidence on how we're going with the gap.

On employment they find no noticeable improvement since the previous census in 2011. On education, however, the news is more encouraging.

"Indigenous people are getting into the education system earlier and staying for longer," they say. "This is likely to lead to improved socio-economic outcomes in future."

The proportion of three to five-year-olds attending preschool is up from 43.5 per cent to 48.5 per cent. The proportion of 15 to 18-year-olds at high school is up substantially from 51.2 per cent to 59.7 per cent.

The proportion of Indigenous people who've completed year 12 has risen from 28 per cent to 34.6 per cent. And the proportion of 15 to 24-year-olds in tertiary education is up from 14.1 per cent to 16.2 per cent.

But let's get real in another sense. Checking the figures to see what's been happening to government spending on Indigenous people is fine, but it tells us nothing about whether that spending is efficient, effective or even adequate.

What's more, looking at how we've been going on the various indicators of progress during the same period tells us little about whether that money is being spent well or badly.

Why? Many reasons. Because spending in one year may take many years to have an effect. Because spending in one area can affect multiple outcomes. Because outcomes in one area can be influenced by spending in many areas.

We know we're spending more but not achieving the improvement we'd hoped for. What we don't know is whether we're wasting our money or need to be spending a lot more.

Why not? Because we know too little about the effectiveness of particular spending programs. We haven't done nearly enough research to see what works and what doesn't.

We won't get as far as we should in Closing the Gap until we do our homework. That includes making more data held by government departments available to researchers.

Wednesday, November 1, 2017

Report heralds big change in economic reform priorities

Government reports come and go with great rapidity. Some are acted on, most are quickly pigeonholed. Last week Scott Morrison tabled a report from the Productivity Commission called Shifting the Dial, but it was soon lost amid all the excitement about raids on a union and politicians being thrown out of their jobs.

Despite this inauspicious beginning, let me make a fearless prediction: when the history of the economy in the early decades of the 21st century is written, this report will get prominence.

Why? Not because this government or the next will rush out to implement its recommendations, but because it will be seen as a turning point in the thinking of the nation's economic advisers.

The populist revolt against the doctrines of "neoliberalism" – or economic rationalism, as we've called it in Australia – has been apparent for most of this year. It's been apparent since the middle of the year that the long-running bipartisan consensus in support of neoliberalism in the advanced economies has collapsed.

But where to now? The economy and its apparatus are far from perfect and there's always something that needs working on. The econocrats need something to be working on to justify their existence, so what are they to do now that so many citizens are jack of deregulation and privatisation?

Well, now we know. Ostensibly, the commission's report is just the first of many five-yearly reports on ways to improve the economy's "productivity" – its ability to increase its outputs of goods and services faster than the increase in its inputs of land, labour and capital – the magic that's made us so much richer than our great-grandparents.

The Productivity Commission, would you believe, is preoccupied with productivity. Same old, same old.

Don't be deceived. The commission – formerly a leader of the economic rationalist charge – has taken the initiative in proposing an agenda for economic improvement that's quite different to what we've had so far.

Its new agenda attempts to restore public support for economic "reform" (a word it tries to avoid) by responding to popular criticism of the push that, while well-intentioned and necessary when it originated in the Hawke-Keating years, has since seemed to degenerate into "bizonomics" – what's good for big business is good for the rest of us.

Gone is the unending obsession with tax reform (cutting the rates of tax on companies and high-earning individuals) and industrial relations (cutting penalty rates and shifting bargaining power in favour of employers).

In their place, the commission focuses on three big issues: healthcare, education and cities.

On health, it argues there needs to be more emphasis on preventing and managing the growing incidence of chronic illnesses, such as diabetes. This may involve less reliance on paying doctors according to fee-for-service.

The health system – state-run public hospitals in one box, most doctors in another and pharmaceuticals in a third – needs to be better integrated so as to make it more centred on the needs of patients rather than the suppliers of health care.

This greater co-ordination should happen at the local level.

On education, too many students are being let down at every level.

The commission finds that school results are deteriorating, vocational education and training is "a mess" and universities are more concerned with publishing research papers than improving teaching standards.

As for cities, they produce a growing portion of our gross domestic product – about 80 per cent, with Sydney and Melbourne accounting for half of that.

By the time we reach 2050, almost 11 million extra people will be squeezed into our capital cities, according to Morrison.

The social costs of congestion in our capital cities will grow from almost $19 billion a year in 2015 to more than $31 billion a year by 2030, we're told.

See how different all this is to the economic reform talk we're used to?

It's shifted the focus from business to the "non-market economy" run mainly by government bodies. It's less concerned with mining, farming and manufacturing, and more with the services sector.

Its approach to reform is bottom-up – concentrate on the needs of patients and students, on getting to work – not trickle down.

Putting it another way, it's people-friendly, not business-friendly.

The three issues are two-sided: they directly affect the wellbeing of individuals, but also the nation's productivity, as a healthier, better-skilled workforce gets to work more easily.

This means the "reform agenda" ought to be a lot more relevant and appealing to ordinary voters. It also means it can be pursued by either side of politics.

One of the great objections to the old agenda was fear that it benefited the better-off at the expense of the rest of us.

Rest easy – the commission has got the message.

"A key issue will be to ensure that future economic, social and environmental policies sustain inclusive [note that word]growth – by no means guaranteed given current policy settings, and prospective technological and labour market pressures ...

"One of the advantages of better healthcare, education systems and cities is that they provide strong prospects for improving lifetime outcomes for people from all backgrounds.

"Indeed, improvements in these areas have the potential to decrease health inequalities, and reduce job insecurity and wage risks for those whose skills are at most risk from technological change," the commission concludes.