Monday, April 30, 2018

Bank inquiry will change the course of politics and policy

The misbehaviour by banks and other big financial players revealed by the royal commission is so extensive and so shocking it’s likely to do lasting damage to the public credibility and political influence of the whole of big business and its lobby groups.

That’s particularly likely should the Coalition lose the looming federal election. If it does, that will have been for many reasons. But it’s a safe bet that pollies on both sides will attribute much of the blame to the weeks of appalling revelations by the commission.

With Labor busy reminding voters of how much effort during its time in office the Coalition spent trying to water down the consumer protections in Julia Gillard’s Future of Financial Advice legislation and then staving off a royal commission – while forgetting to mention the tough bank tax in last year’s budget – the Coalition will surely be regretting the closeness of their relationship.

Some Liberals may see themselves as having been used by the banks, notwithstanding the latter’s generous donations to party coffers. So, even if the Coalition retains office, it’s likely to be a lot more reluctant to be seen as a protector of big business.

A new Labor government is likely to be a lot less inhibited in adding to the regulation of business, and tightening the policing of that regulation, than it was in earlier times.

Should Malcolm Turnbull succeed in getting the big-company tax cut through the Senate, an incoming Labor is likely to reverse it (just as Tony Abbott didn’t hesitate to abolish Labor’s carbon tax and mining tax).

Many punters are convinced both sides of politics have been bought by big business, leaving the little guy with no hope of getting a fair shake from governments.

But that view’s likely to recede as both sides see the downside as well as the upside of keeping in with generous donors. This may be the best hope we’ll see of both sides agreeing to curb the election-funding arms race.

I’m expecting more customers for my argument that, in a democracy, the pollies care most about votes, not money. If they can use donations to buy advertising that attracts votes, fine. But when their association with donors starts to cost them votes, they re-do their calculus.

The abuse of union power during the 1960s and ‘70s – when daily life was regularly disrupted by strikes, and having to walk to work was all too common – left a distaste in voters’ mouths that lingered for decades after strike activity fell to negligible levels.

This gave the Libs a powerful stick to beat over Labor’s head. Linking Labor with the unions was always a vote winner. Every incoming Coalition government – Fraser, Howard, Abbott – has established royal commissions into union misbehaviour in the hope of smearing Labor.

But the anti-union card has lost much of its power as the era of union disruption recedes into history. The concerted efforts to discredit Julia Gillard didn’t amount to much electorally, nor this government’s attempt to bring down Bill Shorten.

From here on, however, the boot will be on the other foot. It’s big business that’s on the nose – being seen to have abused its power – and it is being linked with big business that’s now likely to cost votes.

All this change in the political and policy ground rules just from one royal commission, which may or may not lead to prosecutions of bank wrongdoers?

No, not just that. This inquiry’s revelations come on top of the banks’ longstanding unpopularity with the public and the long stream of highly publicised banking misbehaviour running back a decade to the aftermath of the global financial crisis.

And the bad story for banks, fund managers and investment advisers piles on top of continuing sagas over the mistreatment of franchisees and a seeming epidemic of illegal underpayment of wages to young people and those on temporary visas.

That’s not to mention the way fly-by-operators rorted the Vocational Education and Training experiment, ripping off taxpayers and naive young people alike, nor the mysterious way the profits of the three companies dominating the national electricity market at every level have blossomed at the same time retail electricity prices have doubled.

Times have become a lot more hostile for business, and only a Pollyanna would expect them to start getting better rather continue getting worse. Should weak wage growth continue, that will be another factor contributing to voter disaffection.

Why has even the Turnbull government slapped a big new tax on the banks, tried to dictate to the private owner of Liddell power station and now, we’re told, plans to greatly increase the petroleum and gas resource rent tax?

Take a wild guess.
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Saturday, April 28, 2018

Both sides of politics play along with costly con trick

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

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

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

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

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

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

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

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

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

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

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

A great way to make yourself poorer rather than richer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now get this: should we join with the other members of the Regional Comprehensive Economic Partnership – China, Japan, South Korea, India, New Zealand and the ASEAN countries – in refusing to increase tariffs while everyone else was, the effects of a not-so-global trade war on us would be tiny.
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Wednesday, April 25, 2018

What motivates decent bankers to rip off their customers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Measurement’s fine, so long as it’s used as an aid to human judgment, not a substitute for it.
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Monday, April 2, 2018

What would Jesus do about tax and government spending?

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

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

This is my take on what I read.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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