Wednesday, October 16, 2019

Politicians too poor at their jobs to fix poverty

You could be forgiven for not knowing this is anti-poverty week. The poor, as we know, are always with us – which is great because it means we can focus on our own problems and worry about the poor’s problems later.

We can fight to protect our tax breaks, then get around to wondering about how easy we’d find it to be living on $280 a week from the Pollyanna-named Newstart allowance.

But it’s not just our natural tendency to let our own problems loom larger than other people’s. It’s also that, as property prices make our cities ever more stratified, we so rarely meet people from the poorer parts of town.

We find it hard to imagine how hard they find it to make ends meet, and to lift themselves out of the hole they’ve fallen into. Why can’t they work as hard as I do? (Short answer: because they can’t find anyone willing to give them a job.)

Why can’t they budget as carefully as I would if I were in their position? (Short answer: you have no idea of how carefully they have to watch their pennies.)

The question we should be asking, but rarely do, is: why hasn’t their luck been as good as mine?

Why didn’t they choose their parents more wisely? Why didn’t they go to a better school? Why can’t they afford health and car insurance? Why don’t they have a few thou in the bank in case of emergency? Why don’t they have well-placed relatives and friends to help them find a job or talk their way out of a problem with the authorities?

One of the many things the Salvos (my co-religionists) do to help the disadvantaged is run a financial counselling service called Moneycare. I’ve been reading some of their recent reports, most of them prepared by the Salvos’ research analyst, Lerisca Lensun.

It probably won’t surprise you that the number of people seeking help has increased by more than 40 per cent over the past five years. Most are there because of an unexpected change in their financial circumstances – they’ve lost their job or lost income, they or a family member have acquired a serious illness, or they’re victims of domestic violence.

The main issues they present with are managing their debt, or managing their budget. More than a third of people in the sample had financial difficulties arising from health problems.

More than 60 per cent of those needing financial counselling are women. The median income was $535 a week, less than 40 per cent of an average Australian’s income and well below the poverty line.

A quarter are on Newstart and another fifth on the disability support pension.

Almost half rent privately and, of these, 45 per cent suffer housing stress (paying more than 30 per cent of their disposable income in rent), plus a further 26 per cent in severe housing stress.

The proportion of those over 55 who are in private rental has risen over a decade from 27 per cent to 42 per cent. Of these, almost 80 per cent experience housing stress.

Of those with debt, half have credit card debt, 30 per cent have personal loans and a quarter have electricity debt. Many have more than one type, of course.

Compared with average Australian households, clients spent at least 50 per cent less on essential items such as food and health. Try this story from a 41-year-old mother of three: “Go without the main meal and just provide for the children. Before payment arrangements were organised, I would put off paying electricity and gas bills to pay for other things due.”

Or this sick 26-year-old woman, living alone: “When I don’t have money I don’t eat and only get the medication I could not live without. Bills and debts get fines. The medical conditions get worse so I end up needing more medication and get admitted to hospital to fix that.”

The counsellors at Moneycare – who spend much time interceding with creditors on behalf of clients – say they see no sign on the ground of improved behaviour by lenders since the report of the royal commission on banking misconduct.

They worry a lot about the way unscrupulous payday lenders take advantage of people with pressing debts and no money, greatly deepening the hole they’re in. Legislation to crack down on such lenders was introduced to Parliament in March last year, but has yet to be passed.

It never ceases to surprise me that a prime minister so ready to proclaim his Christian faith is so hard of heart when it comes to people on benefits (age pensioners excepted). Presumably, he’s not prepared to “give them a go” because he’s not convinced that they “have a go”.

As the Australian Council of Social Service has said, increasing Newstart would be “the single most effective step to reduce poverty” – not to mention giving a much-needed boost to the nation’s retailers.

But Scott Morrison, so generous in his promises of big tax cuts to high-income earners like me, has steadfastly refused to oblige. Rather, he’s working on an unending list of torments for people on welfare.

It’s as if he’s seeking applause from all those who think anyone on welfare must be a lazy loafer.

If that’s how you imitate Christ, things have changed a lot since I grew up in the Salvos.
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Monday, October 14, 2019

Barring another financial crisis, it will be a long wait for QE

It’s amazing so many people are so sure they can see where the Reserve Bank is headed. Once interest rates are down to zero it will be on to QE - “quantitative easing” – and negative interest rates, they assure us. Don’t you believe it.

What’s surprising is how heavily the self-proclaimed experts are relying on their vivid imaginations. Or maybe lack of imagination, falling back on the lazy market dealer’s assumption that we should do – and will do – whatever the Americans have done.

What few in the financial markets and financial media are doing is their due diligence: carefully examining what the Reserve – particularly its governor, Dr Philip Lowe – has actually said about its attitude towards “unconventional monetary policy tools”.

Lowe had a lot to say when he appeared before the House economics committee in August. And in the Reserve’s written response to the committee’s questions. As well, Lowe had more to say when delivering a report on the topic by a Bank for International Settlements committee (BIS), which he chaired.

People assume the Reserve is hot to trot. It ain’t. It began the written response by saying “while at this point it is unlikely that the Reserve Bank will need to employ unconventional monetary measures, the [board] considered it prudent to understand the issues involved and has studied the experience of other countries”.

Prudence is the word. Since these are times when the unprecedented has become commonplace, Lowe is resolved to “never say never”. But don’t mistake this for enthusiasm. Read what he says -more in his remarks on his own behalf than as chair of the BIS committee – and you see how reluctant he is to start down the unconventional road.

He keeps repeating that the effectiveness of the various unconventional measures “depends upon the specific economic and financial conditions facing each economy at the time, as well as the structure of its financial system”.

That’s his way of saying, just because the Yanks did it, doesn’t mean we will.

His reference to the particular structure of a country’s financial system is especially relevant to the unconventional tool so many people assume is next: “purchasing government securities, so as to lower long-term risk-free interest rates”.

It’s a lot easier to believe this would stimulate private sector borrowing and spending in financial systems where home loans and business borrowing are geared to “the long end” – such as America’s – than in systems like ours, where lending for housing and small business is based on the short term and variable end of the interest-rate yield curve.

And Lowe’s reference to financial conditions at the time is also relevant: long-term interest rates are already at unprecedented lows. What would be gained by making them even lower?

If there’s one thing we ought to have figured out by now it’s that, whatever ails our economy at present, it ain’t that interest rates are too high.

People in the financial markets can fail to see this because, in all the trading of currencies and securities they do (many, many times more than would be necessary just to provide firms in the real economy with “deep” markets), so many of them make their living betting on the central bank’s next move.

When you’ve fallen into the habit of seeing the Reserve’s main role as holding regular race meetings, you see the conventional race days continuing until the official interest rate hits zero, obliging it to move to unconventional race days.

Trouble is, the Reserve thinks monetary policy is about the effect it has on the real economy of households and businesses, not about keeping money-market dealers in the luxury to which they’ve become accustomed.

For instance, it’s not at all clear that it will keep cutting until it hits zero. In its written response, the Reserve says that reducing the long-term bond rate “would involve reducing the cash rate to a very low level [my emphasis] and possibly purchasing government securities”.

Why get off at Redfern? Because there’s little point in cutting the official rate beyond the point where the banks are able to pass it on to their customers in the real economy.

Similarly, why would the Reserve engineer negative interest rates if the banks couldn’t get away with passing them on to their customers?

Lowe says the most clearly successful use of unconventional tools – buying private-sector securities - was at the height of the financial crisis when “the financial sector stalled and stopped doing its job, hamstrung by losses and drained of liquidity”.

However, security-buying policies aimed primarily at providing monetary stimulus were less obviously successful. So, should another financial crisis cause particular markets to freeze then, yes, sure, the Reserve would be in there taking whatever unconventional measures were needed to get them going again.
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Saturday, October 12, 2019

Why surpluses aren't necessarily good, or deficits bad

According to the Essential opinion poll, only 6 per cent of people regard the size of the national surplus as the most important indicator of the state of the economy. I think that’s good news, but I’m not certain because I’m not sure what “the national surplus” is – or what the respondents to the poll took it to mean.

They probably thought it referred to the balance on the federal government’s budget. But the federal budget is not yet back to surplus and, in any case, it can’t be the national surplus because it takes no account of the budgets of the state governments that, with the feds, make up the nation.

Assuming respondents took it to be the federal budget balance, its low score is good news about the public’s economic literacy, but bad news for Scott Morrison and Josh Frydenberg, who are hoping to make a huge political killing when, in September next year, they expect to announce the budget finally is back in surplus.

The pollies are assuming that voters know nothing more about the economy than that anything called a surplus must be a good thing, whereas anything called a deficit must be very bad.

Actually, no economist thinks all surpluses are good and all deficits bad. Sometimes surpluses are good and sometimes they’re bad. Vice-versa with deficits. It depends on the economy’s circumstances at the time.

But the confusion doesn’t end there. There are lots of measures in the economy that can be in deficit or surplus, not just governments’ budgets. When I wrote a column some weeks back foreshadowing that the current account on the nation’s balance of payments would probably swing into surplus for the first time in 44 years, some people assumed I must be referring to the federal budget.

Wrong. The federal budget records the money flowing in and out of the federal government’s coffers – it’s bank account. The “balance of payments” summarises all the money flowing into and out of Australia from overseas – covering exports, imports and payments of interest and dividends in and out (making up the “current account”), and all the corresponding outflows and inflows of the financial payments required (making up the “capital and financial account”).

The trick is that, thanks to double-entry bookkeeping, the balances on the two accounts making up the balance of payments must be equal and opposite. So the longstanding deficit on the current account was always exactly offset by a surplus on the capital account.

And that means the (probably temporary) current account surplus was matched by the capital account swinging from surplus to deficit. Oh no.

Although Australia has been a net importer of (financial) capital almost continuously since the arrival of the First Fleet, for the June quarter we became a net exporter, lending or investing more money in the rest of the world than the rest of the world lent or invested in us.

If you tell the story of this change in plus and minus signs from the current account perspective, it’s mainly that the resources boom has greatly increased our exports, while the slowing in the economy’s growth means our imports of goods and services are also weak.

But there’s also a story to be told about why the capital account has gone from surplus to deficit. As Reserve Bank deputy governor Dr Guy Debelle explained in a speech at the time, the composition of the inflows and outflows of financial capital have changed a lot since 2000.

Since Australia has always been a recipient of foreign investments in our businesses, by June this year, the value of the total stock of that equity investment amounted to a liability to the rest of the world of $1.4 trillion.

But the value of our equity investments in the rest of the world amounted to assets worth $1.5 trillion. So, when it comes to equity investment, the latest figures show we had net assets of $142 billion.

The fact is, the value of our shares in them overtook the value of their shares in us in 2013. That’s a remarkable turnaround from the previous two centuries of being a destination for foreign investment.

Why did it come about? Mainly because of our introduction of compulsory superannuation. Our super funds have invested mainly in local companies, but they’ve also invested a lot in the shares of foreign companies.

For the most part, however, our seemingly endless string of current account deficits has been financed by borrowing from the rest of the world. By June, our debt to foreigners totalled $2.4 trillion. Their debt to us totalled $1.3 trillion, leaving us with net foreign debt of a mere $1.1 trillion.

There was a time when Coalition politicians carried on about that debt – owed more by our banks and businesses, than our governments - rather than the (much smaller) debt of the federal government, only about 55 per cent of which is owed to foreigners.

Why does our huge net foreign debt rarely rate a mention these days? Because it’s always made economic sense for a young country with huge development potential to be an importer of financial capital – it’s part of what’s made us so prosperous.

Because all the debt we owe is denominated in Australian dollars or has been “hedged” back into Aussie dollars – meaning a sudden big fall in our dollar would be a problem for our creditors, not us.

But also because, though our net foreign debt keeps growing in dollar terms, our economy is also growing – and hence, our ability to pay the interest on the debt. That’s a sign that, overall, the money we’ve borrowed has been put to good use.

Adding our net foreign assets to our net foreign debt gives our net foreign liabilities. Measured against the size of the economy (nominal gross domestic product), our net foreign liabilities reached a peak of about 60 per cent in 2009, but have since fallen to about 50 per cent.
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Wednesday, October 9, 2019

Why are the Viking economies so successful? They pull together

I’d like to tell you I’ve been away working hard on a study tour of the Nordic economies – or perhaps tracing the remnant economic impact of the Hanseatic League (look it up) – but the truth is we were too busy enjoying the sights around Scandinavia and the Baltic for me to spend much time reading the books and papers I’d taken along.

But since I always like telling people what I did on my holidays (oh, those fjords and waterfalls we saw while sailing up the coast of Norway to the Arctic Circle!), I’ve been looking up facts and figures in a forthcoming book comparing the main developed countries on many criteria, by my mate Professor Rod Tiffen and others at Sydney University (and me).

But first, the travelogue. Prosperous countries have a lot in common but Scandinavia is different. I have seen the future and, while some might regard it as political correctness gone mad, it looked pretty good to me.

One aspect in which the Nordics (strictly speaking, Finland isn’t Scandinavian because it’s a republic rather than a monarchy and because the Finnish language bears no relation to Danish, Swedish or Norwegian) are way more advanced is the role of women.

All of them have had female prime ministers or presidents, they have loads of female politicians and we were always seeing women out at business functions with their male colleagues.

Governments spend much more on childcare and they’re big on men actually taking paid paternity leave. They have “family zones” in trains and we were struck by how many men we saw by themselves pushing prams.

They’re much more relaxed on sexual matters. These days, any new building in Sweden will have unisex toilets, with rows of cubicles and not a urinal to be seen. Neat way of sidestepping debates about which toilet transgender people should use.

The Nordics are well ahead of us on environmental matters. They’re bicycle crazy (a big health hazard for tourists who don’t know they’re standing in a bike lane) and drive small cars.

They’re obsessed with organic food and even hotel guests are expected to recycle their paper and plastic. One hotel we stayed at in Copenhagen was so concerned to save the planet its policy was to make up the rooms only every fourth day.

The Norwegians have made and, unlike the rest of us, saved their pile by selling oil to the world but you get the feeling it troubles their conscience. So, like the other Nordics, they have ambitious targets to move to renewables and, to that end, are making more use of carbon pricing than most other countries.

The truth is, I’ve long wanted to see Scandinavia for myself. It’s a part of the world that most politicians and economists prefer not to think about. Why not? Because its performance laughs at all they believe about how to run a successful economy.

Everyone in the English-speaking economies knows big government is the enemy of efficiency. The less governments do, the better things go. The lower we can get our taxes, the more we’ll grow.

Just ask Scott Morrison. As he loves to say, no one ever taxed their way to prosperity. What’s he doing to encourage jobs and growth? Cutting taxes, of course. That’s Economics 101 – so obvious it doesn’t need explaining.

Trouble is, the Nordics have some of the highest rates of government spending in the world and pay among the highest levels of taxation, but have hugely successful economies.

The Danes pay 46 per cent of gross domestic product in total taxes, the Finns pay 44 per cent, the Swedes 43 per cent and the Norwegians 38 per cent (compared with our 28 per cent).

Measured by GDP per person, Norway's standard of living is well ahead of America's. Then come the Danes and the Swedes – at around the average for 18 developed democracies (as are we) – with the Finns just beating out the Brits and the French further down the list.

The Nordics are also good at managing their government budgets.

We all know unions are bad for jobs and growth and we’ve succeeded in getting our rate of union membership down to 17 per cent. Funny that, the Nordics still have the highest rates (up around two-thirds). So, do they have lots of strikes? No.

The four Nordics are right at the top when it comes to the smallest gap between rich and poor, with Canada, Australia, Britain and the United States right at the bottom.

Other indicators show that (provided you ignore the long snowy winters) the Nordics enjoy a high quality of life and not just a high material standard of living.

Note this: I’m not claiming that the Scandinavians are more economically successful because of their big government and high taxes. No, I’m saying that, contrary to the unshakable beliefs of many economists and all conservative politicians, there’s little connection between economic success and the size of government.

So how do the Scandis do it? I read this on the wall of an art museum in Aarhus, Denmark: “In a society we are mutually interdependent. Strengthening the spirit of community, we improve society for all of us as a group but we also provide each individual with better opportunities for realising his or her own potential.”
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Monday, October 7, 2019

Why we don't get more joy out of our super

When one of our top econocrats gives a speech about behavioural economics, you know we’re making progress. Take the ever-present problem of income in retirement. “BE” explains both why it’s a major area of government intervention in our lives and how that intervention can be made more effective.

One of the greatest limitations of conventional economics – based on the “neo-classical” model, which focuses on how prices are determined by the interaction of supply and demand – is its assumption that people are unfailingly “rational” – calculatingly self-interested – in their response to the prices they face.

Behavioural economics accepts that we’re not the financial automatons the model assumes us to be, and uses insights from the more empirical sciences of psychology and sociology to gain a much more realistic picture of the many non-monetary factors that also affect our behaviour in economic matters.

Behavioural economists draw on the long list of “heuristics” – mental shortcuts or biases in the way we think – developed by cognitive psychologists. In a recent speech, Dr David Gruen, top economics guy in the Department of Prime Minister and Cabinet, outlined the cognitive biases that limit many people’s ability to make adequate provisions for the income they’ll need in retirement.

For more than a century the government has provided the age pension, of course. But in the 1990s people began to worry that it wouldn’t be sufficient to meet the aspirations of the rising generation. So the Keating government introduced compulsory employee superannuation.

In those days before the spread of BE, most economists accepted the imposition of compulsory saving as a correction to the “market failure” of “myopia” – most of us are too short-sighted to save enough towards our retirement.

The BE way of putting it is that we suffer from “present bias” – we overvalue the present relative to the future. Gruen takes the idea further, noting that “while choosing a retirement plan is likely to influence literally decades of our lives, many of us spend little time – sometimes less than an hour – choosing our plan”.

Then there’s “confirmation bias” – we tend to remember events that confirm our existing views, but forget developments that cast doubt on those views. Gruen uses this to explain why many of us spend what little time we have set aside to choose a retirement plan looking for one with an investment strategy that supports our existing investing approach.

And “cognitive overload”. This occurs when people find it too hard to process a mass of information in order to make decisions. In the context of planning for retirement, it leads many of us to stick with choices we have arrived at by default.

“Together, these cognitive biases create a big gap between our intentions and our actions: although people intend to save for their retirement, they often don’t translate that into action. For most people, how much to save, and in what form, are difficult cognitive problems – because of both our limited calculation powers and the apparent enormity of the task,” Gruen says.

When the compulsory super system was first set up, the government adopted the conventional economics view that savers were rational economic agents who knew their own business best. So all it had to do was require the super funds to reveal relevant information about their investment options, and diligent savers would do the rest, ensuring they picked the option that best suited their circumstances.

Yeah sure. At the time of a review of super in 2009, 80 per cent of super fund members were invested in the default fund chosen by their employer. Of that 80 per cent, anecdotal evidence suggested that only about 20 per cent explicitly chose the default option, with the rest making no active choice whatsoever.

“When complicated decisions are required, people often stick with the status quo and take no decision at all. In that case, the default option becomes very important,” Gruen says. (This is actually one of the key “insights” of BE.)

So the review panel recommended creating a default option – called MySuper - with features that would promote the wellbeing of those who didn’t actively choose another option. MySuper funds must be simple and cost-effective, with a diversified portfolio of investment.

Of course, there are remaining challenges in the compulsory super system, which the latest review of retirement incomes, instigated by Treasurer Josh Frydenberg, will consider. Let’s hope it takes full advantage of the behavioural insights available to it.

As Gruen says, BE allows all government policymaking to be improved by starting with a richer understanding of human behaviour and building this into the design of measures.
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Saturday, October 5, 2019

Governments are learning to nudge us down better paths

The world is a complicated place – partly because humans are complicated animals. One of the many things this means is that when governments try to influence our behaviour, their chances of stuffing up are surprisingly high.

Consider this. Say I’m an investment adviser telling you (or your parents or grandparents) where to invest your retirement savings. I warn you that, should you take my advice, I’ll be paid a commission by the managers of the investments I put you into.

How do you react?

Well, you should react by becoming a lot more cautious about following my advice. It’s clear I have a conflict of interest. Is my advice aimed at doing the best I can for you, or at maximising the commissions I earn?

When governments require investment advisers to disclose any conflict of interest to their clients, that’s how the pollies expect you’ll react. They also expect that this requirement will prompt advisers to eliminate or reduce any conflict so their advice is more likely to be trusted.

But research by Dr Sunita Sah, a psychologist at Cornell University in upstate New York, has found it often doesn’t work like that. Although such disclosures do indeed cause clients to have less trust, they can often lead people to feel social pressure to act on the advice anyway.

Clients may be concerned that refusing to follow the advice would be a signal of their distrust in the adviser, with whom they’ve often formed a personal bond. They may even interpret the disclosure as a request that the advice be taken, as a favour to the adviser who, after all, needs to earn a living like the rest of us.

Sah found that clients given advice they knew to be conflicted were twice as likely to follow that advice as were clients where no disclosure was made.

The lesson is not that we should stop requiring advisers to disclose their conflicts, but that government policymakers need to think carefully about the specific design of their policies.

It turns out you can reduce the undesirable effects of disclosure if they come from a third party – that is, someone other than the adviser. It also helps if clients’ decisions are made in private, or if there’s a cooling-off period before the decision is finalised.

Have you guessed where this is leading? It’s a plug for a relatively new tool that’s been added to the bureaucrats’ policy toolkit – “behavioural insights”.

In a speech he gave in Canada last week, Dr David Gruen, a deputy secretary in our Department of Prime Minister and Cabinet, explained that behavioural insights is an approach to policymaking that draws from psychology, cognitive sciences and economics to better understand human behaviour, help people make good choices more easily, and help improve the effectiveness of public policy interventions.

As the case of conflict-of-interest disclosures illustrates, people’s responses to government policy measures can be surprising. Politicians and bureaucrats need to be more conscious of the insights of behavioural insights when designing policies to fix problems.

And the behavioural insights tool can also be used for real-world testing of how policy measures are working – or not working – in practice.

The first government to establish a behavioural insights team was Britain in 2010, at the initiative of prime minister David Cameron, Gruen says. It’s since become a partly privatised joint venture.

By now, according to the Organisation for Economic Co-operation and Development, there are more than 200 public sector organisations around the world that have applied behavioural insights to their work.

In Australia, the federal government’s behavioural economics team – BETA – was set up to apply behavioural insights to public policy and to build behavioural-insights capability across the public service. It’s at the centre of a network of 10 behavioural insight teams across the federal government and alongside several state government teams.

These teams are also known as “nudge” units because they’re often trying to give individuals a nudge in the direction of making more sensible decisions, while leaving them free to do something else should they choose. You’re not forced, just nudged.

Gruen offered several examples of what the feds have been doing. BERT, the behavioural economics research team in the Department of Health, looked at the ballooning cost of reimbursements to doctors for providing after-hours care.

After-hours care considered urgent was remunerated at about twice the rate of that judged a non-urgent visit. Who judged whether the care was urgent? The doctor.

The department identified the 1200 doctors with the highest urgent after-hours claims, and ran a randomised control trial, sending each of them one of three alternative letters, with the letter a doctor received chosen at random.

One letter compared the doctor’s billing practices with their peers, showing they were claiming the urgent category far more often than others were. This drew on the behavioural insight that individuals are often motivated to change their behaviour when they are out of step with their peers.

The second letter emphasised the consequences of non-compliance, including the penalties and legal action. This letter drew on the behavioural insight that people tend to avoid losses more than they seek the equivalent gains.

The third letter was the control – the standard bureaucratic compliance letter, running to three pages.

All three letters were successful in reducing claims, but the peer-comparison one was far more effective than either the standard compliance letter or the loss-framing letter. The peer-comparison letter reduced claims by 24 per cent.

And it was just a nudge, not a threat of punishment for dishonestly claiming cases to be urgent when they weren’t.

In the six months after the letters were sent, the 1200 high-claiming doctors reduced their claims by more than $11 million (across all three letters), and 18 doctors voluntarily owned up to more than $1 million in previous incorrect claims.

So, as Gruen concludes, a simple and cheap nudge can yield big dividends.
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