Wednesday, February 21, 2018

Governments only pretending to fix Murray-Darling

Genelle Haldane, my desk calendar tells me, has said that "only until all of mankind lives in harmony with nature can we truly decree ourselves to be an intelligent species". I've no idea who Haldane is or was, but she's right.

And you don't need to be terribly intelligent to realise it. Even most economists get it. It's blindingly obvious that the economy – that is, human production and consumption of goods and services - exists within the natural environment.

The economy is sustained by the natural resources the environment supplies to it and by the natural processes that are part of the human production process. We rely on the ecosystem also to deal with the mountains of waste and emissions we generate.

It's equally clear that economic activity can damage the environment and its ability to function. We're exploiting the environment in ways that are literally unsustainable, and must stop doing so before the damage becomes irreparable.

But if it's all so obvious, why are we having trouble doing what we know we should? Why, for instance, has more fighting broken out over our use and abuse of the Murray-Darling river system, a problem we've been told our governments – state and federal – are busy fixing?

One reason is that some people – not many of us – earn their living in ways that damage the environment, and don't want their businesses and lives disrupted by being obliged to stop.

Often, they don't bear the cost of the damage they're doing. It's borne by farmers downstream, or by the wider community, or the next generation.

Those bearing the direct and immediate cost of stopping invariably fight harder to keep going than those affected only indirectly and to a small extent.

In the case of the Murray-Darling, it's only the costs being born by downstream irrigators – and downstream water drinkers in Adelaide – that keep the fight alive.

Since it's hard to be sure when damage to the environment has reached the point of no return, there's a great temptation to say doing a bit more won't hurt. I'll be right, and the future can look after itself. Business people think that; politicians even more so.

Democracy has degenerated into a battle between vested interests. Get in there to fight for your own interests, and don't worry about whether it all adds up or what happens to those who lose out.

The political parties have succumbed to this approach. They're too busy keeping themselves in power by oiling enough of the squeakiest wheels to worry about showing leadership, about the wider community interest or about any future beyond the next election.

I don't trust any of them, nor the Murray-Darling Basin Authority they appointed, which seems to see its job as assuring us everything's fine, when clearly it isn't.

Just how bad things are – how little progress has been made, how little has been done and how much spent on subsidies to irrigators – is made clear in a declaration issued this month by a dozen academics - scientists and economists - led by professors Quentin Grafton and John Williams, of the Australian National University, who've devoted their careers to studying water systems and water policy.

The decades of degradation of the Murray-Darling Basin, exacerbated by the Millennium drought, finally led John Howard to announce a $10 billion national plan for water security (since increased to $13 billion) in the months leading up to the 2007 election. Its intention was to return levels of water extraction for irrigation to environmentally sustainable levels.

It took until late 2012 for federal and state governments to agree on a basin plan to reduce water diversion by 2,750 gigalitres a year by July 2019, even though this was known to be inadequate to meet South Australia's water needs.

So far $6 billion has been spent on "water recovery", with $4 billion going not on buying back water rights but on subsidies to irrigators to upgrade to more efficient systems which lose less water.

Trouble is, those loses were finding their way back into the system, but now they don't. This has left the irrigators better off, but it's not clear there's much benefit in greater flows down the river. And no one has checked.

Federal figures show that buying water from willing sellers is 60 per cent cheaper than building questionable engineering works.

But little money has been spent helping communities adjust to the effects of adverse changes.

There's little evidence of much environmental improvement as a result of all the money spent, and river flows have been declining since 2011.

Until the ABC's 4 Corners program in July last year, many Australians were unaware of alleged water theft, nor of grossly deficient compliance along the Darling River.

State governments don't seem to be trying hard to fulfil their commitments under the 2012 agreement. Nor did the feds seem to take much interest when Barnaby Joyce was the minister.

The blow-up over the Senate's refusal to go along with a new round of reductions in the amount by which water extraction from the river is to be reduced – supposedly to be offset by increased spending on dubious engineering projects – is just the latest in the various governments' pretence of fixing the environmental problem, while quietly looking after their irrigator mates.
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Monday, February 19, 2018

Unions play their cards wrong in hopes for higher pay

You don't need to read much between the lines to suspect that Reserve Bank governor Dr Philip Lowe and his offsiders think the workers and their unions should be pushing harder for a decent pay rise.

Why else would he volunteer the opinion, in his testimony to a parliamentary committee on Friday, that average wage growth of 3.5 per cent a year would be no threat to the Reserve's inflation target?

This while employers are crying poor and Scott Morrison makes the extraordinary claim that big business needs a cut in company tax so it can afford to pay higher wages.

Why should Lowe care about how well the workers are doing? Because, as one of his assistant governors, Dr Luci Ellis, pointed out last week, our economic worries are shared by most of the other rich economies, except in one vital respect: they have reasonably strong growth in consumer spending, but we don't.

What's making our households especially parsimonious? No prize for remembering our world-beating level of household debt. Trouble is, consumer spending accounts for well over half the demand that drives economic growth.

Our economy won't be sparking on all four cylinders until consumption spending recovers, and that's not likely until our households return to annual wage growth that's a percent or more higher than inflation. That's why Lowe's encouraging workers to think bigger in their wage demands.

Even so, his proposed pay norm of 3.5 per cent, errs on the cautious side. That figure comes from 2.5 percentage points for the mid-point of the inflation target, plus 1 percentage point for the medium-term trend rate of improvement in the productivity of labour.

But 4 per cent a year would be nearer the mark because the trend rate of productivity improvement is nearer 1.5 per cent a year.

Even so, Lowe is acknowledging a point employers and conservative politicians have obfuscated for decades: national productivity improvement justifies pay rises above inflation, not just nominal increases to compensate for inflation (as is happening at present).

Lowe's concern that the present annual wage growth of about 2 per cent not be accepted as "the new norm" is an important point from behavioural economics: rather than calculate the appropriate size of pay rises based on the specific circumstances of the particular enterprise, as textbooks assume, there's a strong tendency for bargainers to settle for whatever rise most other people are getting.

That is, there's more psychology – more "animal spirits", as Lowe likes to say; more herd behaviour – and less objective assessment, in wage fixing than it suits many employers and mainstream economists to admit.

Which implies that, if the unions would prefer a wage norm closer to 4 per cent than 2 per cent, they should be doing a better job of managing their troops' fears and expectations.

In the Reserve's search for explanations of the four-year period of weak wage growth, it puts much emphasis on increased competitive pressure, present or prospective.

But in her speech last week, Ellis qualified her reference to the more challenging "competitive landscape" by adding ". . . or at least how it is perceived". Just so. It's about perceptions of reality.

It's easier for firms worried about a future of more intense competition to take the precaution of awarding minimal wage rises if they can play on their employees' own fears about losing their jobs to Asian sweatshops or robots or the internet.

There's little sign in the figures for business profitability that most firms couldn't afford much bigger pay rises than they're granting. But it's no skin off the employers' nose if their fears of future adversity prove exaggerated. Only their workers had to pay for the excessive fearfulness.

Workers - particularly those in industries with enterprise bargaining – are meekly accepting smaller pay rises than their employers' circumstances could sustain because the union movement has done too little to counter the alarmists telling their members they've lost the power to ask for more.

They've played along with the nonsense about 40 per cent of jobs being lost to robots, and that there's nothing to stop greedy businesses from making us all members of some imaginary "gig economy".

Worse, they've exaggerated the spread of "precarious employment" and encouraged the still-speculative belief that weak wage growth is explained almost exclusively by anti-union industrial relations "reform", which has stripped workers' bargaining power to the point where the right to strike has been lost.

Presumably, their game is to advantage their Labor mates by heightening disaffection with the Turnbull government, but this is coming at the expense of the economy's recovery, not to mention workers' pay packets.
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Saturday, February 17, 2018

How our economic prospects turn on wage growth

You know the world's behaving strangely when you hear a heavy from the central bank saying it's expecting more "progress" on the "turnaround in inflation", then realise they're hoping inflation will go higher.

That's just what Dr Luci Ellis, the Reserve Bank's third heaviest heavy, told a bunch of economists at a conference this week.

Why would anyone hope for prices to be rising faster than they are? Not so much because higher prices are a good thing in themselves, as because rising inflation is usually a sign of an economy that's growing strongly and keeping unemployment low.

By contrast, very low inflation – say, below 2 per cent – is usually a sign of an economy that's not growing strongly, with unemployment either rising or higher than it should be.

Ellis' remarks are a reminder that the economy's biggest problem at present is weak growth in wages. She knows that if prices started rising faster, the most likely explanation would be higher growth in wages, which employers were passing on to their customers by raising their prices.

What could oblige employers to increase the wages they pay? Their need to retain or attract more workers – particularly skilled workers – at a time when the demand for labour was rising, caused typically by increased demand for the goods and services businesses were employing people to produce.

The point to note here is that the Reserve's mental model of inflation is of what economists used to call "demand-pull" inflation. It's simple: the prices of goods and services rise when the demand for them is outpacing their supply.

Note, too, that this involves an inverse relationship between inflation and unemployment: when one goes up, the other goes down, and vice versa. Economists call this the "Phillips curve", named after its discoverer, Bill Phillips, a Kiwi economist.

Ellis confirmed that, although the economy (real gross domestic product) grew at a trend rate of just 2.4 per cent over the year to September, the Reserve's forecast that growth will pick up to about 3¼ per cent over this year and next remains unchanged.

This will involve a pick-up in wage growth and inflation, she said.

The Reserve is more confident of these forecasts than it was when it first made them in early November. Even so, Ellis admitted to some particular "uncertainties": how much production capacity in the economy is going spare at present, and how much, and how quickly, wage growth and inflation will pick up as spare capacity declines.

How much unused production capacity remains in the economy matters because, until it's used up, the economy can grow much faster than it can once the economy's at full capacity – full employment of labour and capital – without this causing inflation pressure to build.

Once the economy is at full employment, how fast rising demand can cause the economy to grow without also causing higher inflation is determined by the economy's "potential" growth rate – that is, by the rate at which rising participation in the labour force, increasing investment in capital equipment and improving productivity are adding to the economy's ability to produce more goods and services.

That is, how fast potential supply is growing. So the economy's potential growth rate sets the medium-term speed limit on how fast demand can grow before causing a build-up in inflation.

The Reserve's most recent estimate is that our potential growth rate has slowed to 2.75 per cent a year (mainly because of the retirement of the bulge of baby boomers).

But how do we measure how much spare production capacity we have at any time? We measure the spare capacity of our mines, factories and offices mainly by looking at answers to questions in the regular surveys of business confidence.

That's physical capital. In the labour market, idle production capacity is measured by the rate of unemployment.

But it's wrong to think full employment is reached when the unemployment rate falls to zero. That's partly because, at any point in time, there will always be some workers moving between jobs (called "frictional" unemployment).

Also because of a much higher rate of "structural" unemployment. The structure of the economy is always changing, with some industries expanding and some contracting. This increases the number of workers who don't have the particular skills employers are seeking, or who do have them but live far away from where the job vacancies are.

In the old days, there were a lot of low-skilled jobs that could be filled by people who had left school early and hadn't learnt much. These days, there a far fewer of those jobs, so people with inadequate skills are often out of a job.

Economists measure full employment by estimating the rate to which unemployment can fall before shortages of skilled labour cause employers to bid up wages and thus cause price inflation to accelerate.

They call this the NAIRU – the non-accelerating-inflation rate of unemployment – and the Reserve's latest estimate is that it's "around 5 per cent". It says "around" because every economist's estimate is different, so it's wrong to be too dogmatic.

This week's trend figures from the Australian Bureau of Statistics for the labour force in January show the unemployment rate has been steady at 5.5 per cent since July. That's well above the NAIRU.

Over the same six months, however, employment has grown by almost 180,000, or 1.5 per cent, causing the rate at which people are participating in the labour force to rise by 0.4 points to 65.6 per cent – its highest for seven years and a record high for participation by women.

If the laws of supply and demand still hold – a safe bet – this unusually strong growth in the demand for labour should lead to higher wages and then higher prices sooner or later. But Ellis warns it's likely to be "quite gradual".
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Wednesday, February 14, 2018

Private health insurance is a con job

You won't believe it, but my birthday was on Tuesday and I got a present from the federal government. I also got a card from my state member, sending his "very best wishes" for reaching such an "important milestone" in my life.

I almost wrote back asking him to alert the Queen to be standing by in 30 years' time. Instead, my ever-sceptical mind told me the pollies have awarded themselves privileged access to the private information we're obliged to give the electoral commission.

So, what was my fabulous federal birthday present? Apparently, I'm now so ancient and infirm I get a bigger private health insurance tax rebate.

I never tire of pointing out that, contrary to what people say, our cost of living, overall, has not been rising strongly, unless you regard 2 per cent a year as "soaring".

It is true, however, that a few, easily noticed prices have risen a lot – including the government-regulated price of private health insurance.

My "important milestone" reminds me that people have been complaining about – and I've been writing about – the high cost of private health insurance for as long as I've been an economic journalist.

And the opposition leader of the day – Bill Shorten, as it happens – hasn't resisted the temptation to exploit people's disaffection by putting it firmly on the agenda for this maybe-there'll-be-an-election year.

The popular view is that everyone needs private insurance – if only they could afford it. Which about half of us can't.

Opinion polling by Essential has found that, although a clear majority of people believe "health insurance isn't worth the money you pay for it", 83 per cent of people believe that "the government should do more to keep private health insurance affordable".

The former opinion is right; the latter is delusional. Governments have been trying to keep health insurance affordable on and off for decades, while its cost just keeps climbing.

Why? Because it's a self-defeating process. The more you do to make insurance affordable, the easier you make it for the people running the health funds, the owners of private hospitals and the surgeons and other procedural specialists who work in hospitals, to raise their prices and fatten their profits.

Which the pollies fully understand.

In the old days, health funds were owned by their members, except for the government-owned Medibank Private. These days, three of the biggest funds – Medibank Private, Bupa and NIB – are for-profit providers, thus increasing the pressure on the government to allow big price rises and reducing the chance of getting value for money.

As Ian McAuley, of Canberra University, has written, from a policy perspective health insurance is a high-cost and inequitable way to fund healthcare.

Only 85 cents of every dollar passing through private insurance makes its way to paying for healthcare. And only if you can afford it do you share in the government subsidies taxpayers provide.

From the customers' perspective, it's a con job. Most people under 60 get back only a fraction of what they pay. Often when you do claim you don't get what you expected, because you don't get choice of doctor or a private room, you're caught by ever-changing exclusions from your policy, or because no one warned you about a huge gap payment.

Many buy insurance to avoid waiting times for elective surgery. But if private insurance didn't exist, surgeons would have to earn more of their income from public hospitals and waiting times would be shorter. It creates the problem it purports to solve.

Health insurance is such bad value that, when John Howard sought to prop up the private system, he had to make it subject to a tax rebate. When that didn't work he imposed a Medicare levy surcharge on better-off people who don't have insurance, and imposed escalating prices for people who aren't in a fund by the time they're 31 (which is a con trick on the innumerate).

When the Hawke government reintroduced Medicare, it intended that the universal, taxpayer-funded provision of high quality hospital and medical care would make private insurance unnecessary. Those who preferred the snob status of private care could pay for it from their own pocket.

This is why Labor long opposed public support for private insurance. Shorten, however, has taken a populist line, carrying on about the big increases in premiums and promising to cap them at 2 per cent a year for two years.

Another con. The profit-driven funds would respond either by excluding more procedures from coverage, or by demanding catch-up increases once the cap was lifted (as happened last time).

Private insurance is so counter-productive and so unfair that the best thing would be to end the subsidies and use the saving to improve the performance of the public system. (Howard's claim that his tax rebate would reduce the pressure on public hospitals was always just a fig-leaf to hide his attempt to prop up the two-class system.)

A less politically controversial alternative was first proposed in an Abbott government federalism discussion paper: use the saving to introduce a commonwealth hospital benefit, where the same amount would be paid to the hospital someone chose to go to, whether public or private.

Private hospital beds would stay in the system – at a price fixed by the government – but the parasitic private funds would be out on their own.
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Monday, February 12, 2018

Economists do little to promote bank competition

The royal commission into banking, whose public hearings start on Monday, won't get a lot of help from the Productivity Commission's report on competition within the sector. It's very limp-wristed.

The report's inability to deny the obvious - that competition in banking is weak, that the big four banks have considerable pricing power, abuse the trust of their customers and are excessively profitable – won it an enthusiastic reception from the media.

Trouble is, its distorted explanation of why competitive pressure is so weak and its unconvincing suggestions for fixing the problem. It offered one good (but oversold) proposal, one fatuous proposal (to abolish the four pillars policy because other laws make it "redundant") and a lot of fiddling round the edges.

It placed most of the blame for weak competition on the Australian Prudential Regulation Authority, egged on by the Reserve Bank, for its ham-fisted implementation of international rules requiring banks to hold more capital, and for its use of "macro-prudential" measures to slow the housing boom by capping the banks' ability to issue interest-only loans on investment properties.

The banks had passed the costs of both measures straight on to their customers. It amounted to an overemphasis on financial stability (ensuring we avoid a financial crisis like the Americans and Europeans suffered) at the expense of reduced competitive pressure on the banks.

This argument is exaggerated. Even so, it's quite likely that, in their zeal to minimise the risk of a crisis, APRA and the Reserve don't worry as much as they should about keeping banking as competitive as possible.

The report's proposal that an outfit such as the Australian Competition and Consumer Commission be made the bureaucratic champion of banking competition, to act as a countervailing force on the committee that makes decisions about prudential supervision, is a good one.

The report's second most important explanation for weak competition is inadequacies in the information banks are required to provide to their customers. Really? That simple, eh?

See what's weird about this? It's blaming the banks' bad behaviour on the regulators, not the banks. If only the bureaucrats hadn't overregulated the banks, competition would be much stronger.

Why would the bureaucrats in the Productivity Commission be blaming other bureaucrats for the banks' misdeeds? Because this is the prejudiced, pseudo-economic ideology that has blighted the thinking of Canberra's "economic rationalist" econocrats for decades.

Whatever the problem in whatever market, it can never be blamed on business, because businesses merely respond rationally (that is, greedily) to whatever incentives they face. If those incentives produce bad outcomes, this can only be because market incentives have been distorted by faulty government intervention.

Market behaviour is always above criticism; government intervention in markets is always sus.

When the report asserted that the big banks had used the cap on interest-only loans as an excuse for raising interest rates, and would pass the new bank tax straight on to customers, there was no hint of criticism of them for doing so. They were merely doing what you'd expect.

In shifting the blame for these failures onto politicians and bureaucrats, the report fails to admit that the distortion that makes interest-only loans a worry in the first place is Australia's unusual tolerance of negative gearing and our excessive capital gains tax discount.

In criticising the bank tax, the report brushes aside the case for taxpayers' recouping from the banks the benefit the banks gain from their implicit government guarantee, and the case for taxing the big banks' super-normal profits (economic rent), doing so in a way that stops the impost being shunted from shareholders to customers.

Here we see a hint that the rationalists' private-good/public-bad prejudgement​ is only a step away from Treasury being "captured" by the bankers it's supposed to be regulating in the public's interest, in just the way it (rightly) accuses other departments of being captured.

The report's criticism of existing interventions would be music to the bankers' ears. Its fiddling-round-the-edges proposals for increasing competitive pressure have one thing in common: minimum annoyance to the bankers.

The Productivity Commission's rationalists can't admit that the fundamental reason for weak competition in banking comes from the market itself: as with many industries, the presence of huge economies of scale naturally (and sensibly) leads to markets dominated by a few big firms.

Market power and a studied ability to avoid price competition come with the territory of oligopoly. Have the rationalists spent much time thinking about sophisticated interventions to encourage price competition in oligopolies? Nope.

Have they learnt anything from 30 years of behavioural economics? Nope. When you've learnt the 101 textbook off by heart, what more do you need?
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Saturday, February 10, 2018

Indigenous middle class arises despite slow closing of the gap

It's easy for prime ministers to make big promises at some emotion-charge moment of national attention, but a lot harder to keep those promises when the media spotlight (and that prime minister) are long gone.

I could be alluding to the promise Kevin Rudd made that the federal government would never forget the needs of the victims of Victoria's Black Saturday bushfires in 2009, but I'm referring to the promise he made a year earlier, at the time of his apology to the stolen generations, to Close the Gap between Indigenous and non-Indigenous Australians.

The gap needing to be closed – and the commitments Rudd made – referred particularly to health, education and employment.

But all of those gaps contribute to another one: the gap between Indigenous and non-Indigenous incomes. What's been happening there?

I'm glad you asked because Dr Nicholas Biddle and Francis Markham, of the Centre for Aboriginal Economic Policy Research at the Australian National University, have just written a paper on the subject.

And, on the face of it anyway, the news is reasonably good.

First, however, some background. You won't be surprised that there is a gap between the two group's incomes. But it's worth remembering that gap has existed since the early days of European settlement of the Wide Brown Land.

To be euphemistic, it's a product of our colonial history. To be franker, Indigenous people were systematically and violently deprived of access to economic resources, especially land, a process that continued until well into the second half of the 20th century.

And though Aboriginal and Torres Strait Islander people engaged with the settler-colonial economy in many ways, underpayment or theft of wages was systematic in many parts of the country until the 1950s and '60s.

This colonial legacy endures into the present, Markham and Biddle say.

They quote another academic saying that "Aboriginal people, families, households and communities do not just happen to be poor. Just like socioeconomic advantage, socioeconomic deprivation accrues and accumulates across and into the life and related health chances of individuals, families and communities" (my emphasis).

The authors use the censuses of 2006, 2011 and 2016 to study what's been happening to the level and distribution of incomes within the Indigenous population, and between it and the non-Indigenous population.

The good news is that the median (the one dead in the middle) disposable equivalised​ household income for the Indigenous population rose from 62 per cent of non-Indigenous income in 2011 to 66 per cent in 2016. ("Equivalised" just means adjusted to take account of differences in the size and composition of households.)

That's the highest the percentage has been since reliable data started in 1981. And, in fact, it's been trending up since then.

There's progress, too, on the Indigenous "cash poverty rate", which measures the proportion of Indigenous incomes falling below 50 per cent of the median disposable equivalised household income of the nation's entire population.

So, as is usual in rich countries, it's a measure of relative poverty (how some incomes compare with others) rather than absolute poverty (whether people's incomes are high enough to stop them being destitute).

It's called "cash poverty" in recognition of the truth that there's more to poverty than how much money you have. As well, it acknowledges that no account is taken of "non-cash income", such as the value of food gained by hunting and gathering in remote areas.

Remember, however, that there are also costs involved in hunting. And the prices of basic necessities are much higher in remote areas.

Measured this way, the Indigenous poverty rate has declined slowly over past decades. More recently, it's gone from 33.9 per cent in 2006 to 32.7 per cent in 2011 and 31.4 per cent in 2016.

Sorry, that's where the good news runs out.

For a start, the rate of improvement is far too slow. Markham and Biddle calculate that if the gap kept narrowing at the rate it did over the five years to 2016, the medians for Indigenous and non-Indigenous incomes would be equal by 2060. That fast, eh?

Now get this: while the gap between the two groups has been narrowing, the gap within the Indigenous group has been widening.

If you take the weekly disposable personal incomes of all Indigenous people aged 15 or older, adjust them for inflation, rank them from lowest to highest, then divide them all into 10 groups of 10 per cent each, you discover some disturbing things.

Between 2011 and 2016, the average income of those in the top decile rose by $75 a week, compared with $32 a week for those in the middle decile. Individuals in the bottom decile had no income (possibly because they were students or home minding kids), while those in the second and third lowest deciles saw their incomes fall.

But what explains this growing gap between the top and the bottom within the Indigenous population?

Turns out it's explained by where an Indigenous person lives. Household disposable incomes are highest – and have grown fastest - in the major cities, with a median of $647 a week, but then it's downhill all the way through inner regional areas, outer regional, and remote, until you get to "very remote", where the median income is $389 a week.

Over the five years to 2016, the real median income in remote areas hardly changed, and in very remote areas it actually fell by $12 a week.

Got your head around all that? Now try this: despite the weakness in median incomes in remote (but not very remote) areas, the incomes of the top 20 per cent are higher and have been growing relatively strongly.

Get it? However poorly we're doing on Closing the Gap, we are getting an Indigenous middle class.
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Wednesday, February 7, 2018

If we had more sense, we'd push early childhood education

Did I tell you that my grandson, fast approaching his second birthday and not many months away from losing his status as our one and only grandchild, is a budding genius?

His educational development is supervised by his father, who, being a doctor, started with identifying parts of the body. My grandson's always being quizzed, and loves showing off how much he knows.

Already he can count – provided you don't test him too closely above two or three – and, courtesy of Play School, can sing the alphabet song, whether or not he's invited to. He misses no more than a few of the letters, and is always careful to sing zed rather than zee.

Do I worry about how he'll manage to scratch out a living in the looming, frightening world of robots and artificial intelligence? No I don't. Not with the parents he's got.

For centuries the great advantage has been seen as inherited wealth. But, as The Economist magazine pointed out a few years ago, in the knowledge economy it's probably just as advantageous, maybe more, to inherit your intelligence from two highly educated, well-paid, education-conscious and bookish parents.

Of course, not every Aussie kid is as fortunate as any grandchild of mine. Which is why I worry a lot about the continuing high high-school dropout rate. Join the workforce without even a good grasp of the basics and the rest of your working life is likely to be "problematic", as mealy mouthed academics say.

It's also why I get so annoyed with politicians – and Treasury and Finance econocrats – who regard early education as just another of the outstretched hands that must be given something, but never enough to fully exploit its potential to improve our wellbeing, social as well as economic.

The good news is that Simon Birmingham, federal Minister for Education and Training, announced over the weekend the government's decision to spend $440 million extending for a year the "national partnership agreement" on universal access by four-year-olds to early childhood education, while federal and state ministers continue "negotiating" (haggling over) a new long-term agreement.

The bad news is that, when it comes to making sure all children attend preschool, we started much later than most of the other rich countries, and aren't catching up nearly as fast as we would be if we had more sense.

Our politicians on both sides think their interests are best served by using the limited funds available to placate as many interest groups as possible, rather than spending money where it's likely to yield the most lasting benefit.

Our econocrats ought to be encouraging their masters to spend more wisely, but if they are it's news to me. They seem to think it their job to disapprove of all extra spending equally. Not working well so far, guys.

There are no magic bullets in government spending, but putting money into early education – whether by lifting the quality of childcare, or beefing up preschool – comes a lot closer than most of the other things governments spend on.

We've known it for decades, but the evidence keeps growing. According to the Ontario early learning study, "the early years from conception to age six have the most important influence of any time in the life cycle on brain development and subsequent learning, behaviour and health".

Early experiences and stimulating, positive interactions with adults and other children are far more important for brain development than previously realised, it says.

According to a paper on early childhood education, issued last year by Dr Stacey Fox and others, of the Mitchell Institute at Victoria University, "investing in early learning is a widely accepted approach, backed by extensive evidence, for governments and families to foster children's development, lay the foundations for future learning and wellbeing, and reduce downstream expenditure on health, welfare and justice".

While all children benefit from high-quality early learning, research also shows that children experiencing higher levels of disadvantage benefit the most, and can even catch up to their more advantaged peers, the paper says.

In an earlier Mitchell report, Fox says that nearly a quarter of Australian children arrive at school with significant vulnerabilities – in their knowledge and communication, their social skills and emotional wellbeing, or in their physical health.

Here's a surprise: a child's risk of being developmentally vulnerable is closely, but inversely, correlated with their socio-economic status.

After five or six years, we've got close to achieving universal access by four-year-olds to a potential 15 hours a week of preschool. The only state dragging the chain is NSW (yeah, but look how much bigger its budget surplus is).

But kids from disadvantaged homes are less likely to be getting the full 15 hours. And there's strong evidence that two years of preschool – that is, starting at three – yields more than twice the benefit.

British research shows 16 year olds who attended at least two years of preschool were three times more likely to take a higher academic pathway after leaving school.

It's easier to get kids up to speed in preschool than at any later level of education. Clearly, the smart way to improve the performance of the whole system is to start at the bottom. Make sure we get preschool right, and the benefits will flow on to schools, TAFE and uni.

Nah, too much trouble. Let's just give ourselves a tax cut. My grandkids will do fine.

Read more >>

Monday, February 5, 2018

Next election will offer voters more genuine, wider choice

Even if we don't end up having a federal election this year, rest assured, it will feel like a year-long campaign. But whenever it occurs, it's likely to determine the fate of neo-liberalism, aka "bizonomics".

Though the two sides like to paint every election as a clear choice between good (us) and evil (them), many voters have concluded all politicians are the same – liars and cheats.

But that's truer of the way they behave than of the policies they espouse on some key issues.

The plain fact that neither side has enough committed supporters to guarantee it election means victory goes to the party that attracts more of the uncommitted voters in the middle.

This has long been a factor encouraging both sides away from extremes of left or right and towards the more moderate, "sensible centre". They've retained only enough pro-business or pro-worker positions to keep their voting, donating and polling-booth-staffing "base" motivated, as well as to provide some product differentiation.

The standard approach of recent decades has been for each side to seek to neutralise those issues where the other side is perceived by voters to have the advantage, by saying "me too", while trying to highlight those issues where it has the perceived advantage over its opponents.

Polling released last week by Essential, shows the Liberals' great perceived strengths are national security and terrorism, and management of the economy, whereas Labor's strengths are (in ascending order) education, health, housing affordability, the environment, industrial relations and climate change.

Note that almost all the contentious issues are economic, broadly defined. Voters see little to distinguish the two sides on population growth and asylum seekers. The government's already pushing hard on national security and terrorism, but Labor will run from any argument over these issues, where it starts well behind in voters' estimations.

Of late, however, the parties have departed from the standard script. Realising he lacked the charisma to get away with mimicking Tony Abbott's virtuoso performance of total negativity against the death-wish Rudd-Gillard-Rudd Labor, Bill Shorten thought he had little to lose by abandoning the small-target strategy of most oppositions, and went to the 2016 election with some relatively daring proposals on tax increases, particularly on restricting negative gearing and the capital gains tax discount.

Despite the conventional wisdom that touching negative gearing would be political suicide, Shorten's bravery was rewarded. Now look at the speeches Shorten and Malcolm Turnbull gave last week, and you see both sides planning to widen, rather than narrow, the policy distance between them.

Abbott was someone with conservative social values and hard-right economic views that fitted well with a party base that's be drifting to the right for many years. But he knew better than to highlight such views when seeking enough middle-ground votes to win the 2013 election.

Which leaves Turnbull with a big problem. His oft-stated position as a small-l liberal means much of his parliamentary party neither likes nor trusts him. To keep them behind him, he's had to loudly espouse policy positions – on big business tax cuts, weekend penalty rates and saving coal mines, for instance – that are far to the right of majority, middle-ground opinion.

The further Turnbull's party base has forced him away from the centre, the more Shorten has been emboldened to move his own policies further leftward from the centre than his predecessors would ever have dared.

It's clear Turnbull will go to the election offering no real plan to achieve Australia's Paris climate change commitments and making no more than sympathetic noises about the supposedly soaring cost of living, while claiming that big business tax cuts would trickle down and allow big pay rises.

In the meantime, the ever-continuing budget deficit won't stop the government also promising a tax cut for ordinary workers.

In echoes of Labor's winning policies at the 2007 election, Shorten will promise concrete action on climate change and on winding back the parts of Work Choices' attack on collective bargaining that Kevin Rudd and Julia Gillard weren't game to.

A rhetorical challenge for Shorten will be to shift the punters from their misconceived concern with the soaring cost of living, to the real problem: weak wage growth.

Despite that weak growth, I doubt many voters will be greatly tempted by the promise of modest tax cuts. A test of Shorten's leadership credentials will whether he has the courage to avoid matching Turnbull's promise.

But with Turnbull sticking to his plan for big-business tax cuts, and his resistance to reform of negative gearing and wage-fixing, this election may well determine the fate of the era of bizonomics.
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Saturday, February 3, 2018

CPI a more accurate measure of living costs than we imagine

Ask any pollie, pollster or punter in the pub and they'll all tell you there are no political issues hotter than the soaring cost of living. But this week the Australian Bureau of Statistics issued its consumer price index for the December quarter.

Oh no. It showed prices rising by 0.6 per cent in the quarter and a mere 1.9 per cent over the year to December.

That's a soaring cost of living? What are these guys smoking? Has the government got to the statisticians? Or do the bureaucrats sit in some office in Canberra making up the numbers?

None of the above. In truth, the bureau puts an enormous amount of expertise, care and effort into making the CPI as accurate as possible. Which is not to say the indicator is without its limitations – nothing in the real world is.

The care is shown in an explanatory paper the bureau issued this week to accompany its latest six-yearly updating of the index.

The CPI is purpose-built to measure changes in the price of a fixed quantity of goods and services bought by people living in metropolitan households.

"Metropolitan" means the eight capital cities, and the households include wage-earners, the self-employed, self-funded retirees, age pensioners and social welfare beneficiaries. That covers almost two-thirds of all Australian households, leaving out only those in regional areas.

The index measures the change in the price of a metaphorical basket containing fixed quantities of goods and services bought in each of the capital cities. It looks at thousands of prices of individual items, divided into 87 expenditure classes, 33 sub-groups and 11 major groups.

These are: food and beverages (accounting for 16 per cent of the total basket), alcohol and tobacco (7 per cent), clothing and footwear (4 per cent), housing (23 per cent), furnishings, household equipment and services (9 per cent), health (5 per cent), transport (10 per cent), communication (3 per cent), recreation and culture (13 per cent), education (4 per cent), and insurance and financial services (6 per cent).

How does the bureau know which particular goods and services to include in the basket and, more especially, what "weight" (relative importance) to give each class of expenditure?

Every six years it conducts a survey of more than 10,000 households, asking them to keep diaries of the spending they do. As spending patterns change over time, it updates the contents and the weights given to the items in the basket.

This week it applied new weights derived from the household expenditure survey it conducted in 2015-16.  From now on, however, the weights will be updated yearly.

The bureau checks the prices consumers are being charged by regularly visiting shops and offices, by phoning businesses, and, increasingly, by checking online supermarket sites and records of scanner transactions in stores.

It checks the prices of items at least once a quarter, but more frequently if prices – petrol, for example – keep changing. It aims to show the average price charged during the quarter.

It measures the retail prices we actually pay, so prices include the goods and services tax, and excise taxes, embedded in them, but also any government price subsidies for items such as private health insurance or childcare.

It takes account of widespread "specials", provided the items are of normal quality. It seeks to measure "pure" price changes, meaning it tries to exclude price changes attributable to a change in the quality or quantity of the latest version.

If some producer tries to disguise a price increase by leaving the price of a can of baked beans unchanged, but reducing the amount of beans, the bureau uses the actual price increase per gram.

When the latest laptop or mobile phone is more powerful than the previous model, or does more tricks, the bureau tries to take account of this quality improvement by calculating the underlying or "pure" price change – often a price fall.

But if the bureau takes so much care to measure price changes accurately, why do its figures invariably seem much lower than our impression of the price rises we've experienced?

Short answer: because we don't take nearly as much care as it does. We don't keep meticulous records, but form impressions. And, as behavioural economists tell us, our memories of prices changes are subject to predictable biases.

Price changes we don't like stick in our minds, while those we don't mind are soon forgotten. We remember clearly a few big price increases – the shock we got when we saw our quarterly electricity bill – but don't remember price falls (of which there are far more in these days of digital disruption). And it never occurs to us to take account of all the many items whose prices hardly change.

As a statistician would say, we don't attach the right weights to the price changes (including zero changes) that come our way.

So, for instance, we carry on (justifiably) about ever-rising power prices, but forget that electricity accounts for just 2.2 per cent of the average household's total consumer spending.

Of course, no particular household's experience is likely to be perfectly represented by such a broad average. The index lumps together people in different cities, smokers and non-smokers, drinkers and non-drinkers, renters, mortgagees and outright home owners.

The bureau tries to reduce this problem by also publishing special living cost indexes for certain types of households. Over the year to September, in which the CPI rose by 1.8 per cent, living costs rose by 1.5 per cent for employee households, 1.6 per cent for self-funded retirees, 1.7 per cent for age pensioners, and by 2.1 per cent for unemployed households.

Sorry, but the notion that the prices I pay rose way more than other people's did is just another of our happy self-delusions.
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