Rent-seeking stymies genuine reform

For most of the past decade I’ve defended Australia’s mining companies and their boom against unreasonable criticism. So I could hardly be said to be anti-mining. But one of my failings is that don’t get any fun out of telling people what they’d like to hear. So when I was asked to speak at the federal government’s annual conference on resources and energy last month I decided to tell the miners a few home truths. This is a shortened version of what I said.

With the change of government I'm sure you're a lot happier about the prospects for the economy and its management, and a lot more confident of a sympathetic hearing from the new government. I wouldn't be so sure.

I suspect the mining industry's lobbying success is reaching its zenith as we speak. It won't surprise me if, looking back on the life of the Abbott government, you come to realise the big gains the industry made actually occurred under the Labor government. They occurred no thanks to Labor, and all thanks to the Coalition, but they occurred in reaction to the policies of Labor as part of Tony Abbott's successful four-year campaign to fight his way back into office.

Why did Abbott immediately oppose the mining tax and promise to repeal it? Because he genuinely believed it would wreck the mining industry and do damage to the wider economy? I doubt it.

He did it primarily because he saw opposing the tax as a popular cause and was hoping for a lot of monetary support from the big miners in the 2010 election.

Why did Abbott set his face against the carbon pricing scheme? Because it was the price of getting the backing within the party that allowed him to wrest the Liberal leadership from Malcolm Turnbull and because he could see what a popular cause it would be to oppose this "great big new tax on everything".

Now, I have no doubt that keeping his promises to get rid of the mining tax and the carbon tax will be among his priorities. But my point is this: having delivered so handsomely for the mining industry, I doubt if he'll feel in any way indebted to the miners.

Indeed, he may well feel he's the one that's owed. Certainly, he'll feel the miners have had enough favours to be going on with.

And it won't surprise me if that's the attitude other industries take: that the miners have had their turn and it's time to give other industries a go.

Does this analysis seem cynical? Sorry, it's just being brutally realistic. We all pursue our self-interest, but we all cloak our self-interest in arguments about how this would be in the best interest of the economy. All I'm doing is stripping away the bulldust.

Most people in business are hoping that with a more enlightened government in power with a big majority in the lower house and a workable Senate after July, we'll see some major economic reform, if not in Abbott's first term then certainly in his second. I think this is an idle hope.

In a prophetic speech he delivered in May - and which he's in the process of expanding into a short book - Professor Ross Garnaut argued that our political culture has changed since the reform era of 1983 to 2000, in ways that make it much more difficult to pursue policy reform in the broad public interest.

"If we are to succeed, the political culture has to change again," he said. Policy change in the public interest seemed to have become more difficult over time as interest groups had become increasingly active and sophisticated in bringing financial weight to account in influencing policy decisions.

"Interest groups have come to feel less inhibition about investment in politics in pursuit of private interests.
"For a long time, these past dozen years, it has been rare for private interests of any kind to be asked to accept private losses in the interests of improved national economic performance.

"When asked, the response has been ferocious partisan reaction rather than contributions to reasoned discussion of the public interest in change and in the status quo," Garnaut said.

I would remind you that, though John Howard's introduction of the GST is a notable exception, many of the reforms of the Hawke-Keating era were achieved with bipartisan support - something that's unthinkable today.

Much of that reform, particularly in taxation, involved packages of measures in which particular interest groups suffered some losses, offset by other gains. As Garnaut argues, and I'm about to demonstrate, this kind of co-operative give-and-take between interest groups willing to accept reforms in the wider public good isn't conceivable today.

My way of making Garnaut's point is that since the reform era of the 1980s and '90s, we've regressed to a culture of rent-seeking. You can see this at the level of the political parties and at the level of the industry lobbies.

When Howard had the courage to propose introducing a GST, Labor saw its chance to regain office by running a populist scare campaign against it, and came within a whisker of winning the 1998 election. At the time it professed to be righteously opposed to such a regressive tax, but when it finally regained power seven years later, the idea of doing something about that supposedly abhorrent regressivity never crossed its mind.

When, in turn, the Rudd government attempted the risky reforms of installing the "economic instrument" most economists recommend for responding to climate change, and rebalancing the tax system by reforming the taxation of mineral deposits and using the proceeds to reduce taxes elsewhere, Abbott lost little time in deciding to take advantage of Labor's vulnerability.

Do you really think the events of the past three years will have no bearing on the Labor opposition's attitude to any controversial reforms Abbott might propose in the next six years, or that Abbott's foreknowledge of this attitude will have no bearing on his willingness to propose such reforms?

The truth is the nation has fought itself to an impasse on controversial reform - of the labour market as well as taxation - and, among the industry lobbies, the miners have played a more destructive role than the rest.

Now, you can respond that the miners did no more than what you'd expect them to do: oppose taxes they perceived to be contrary to their industry's interests. But this is making my point: the reason the outlook for reform is now so bleak isn't solely because the two sides of politics have regressed to short-sighted, self-interested advantage seeking, it's also because the industry lobby groups have done the same thing.

There's nothing new about industry lobbying but in the past dozen years it's become far more blatantly self-interested and far more willing to devote large sums to advertising campaigns to oppose whatever government reforms an industry sees as contrary to its interests. What hasn't yet occurred to many business people - but you can be sure is well understood by the politicians and their advisers - is that when industries lobby governments for favours, or in opposition to new imposts, the various industries are in competition.

It's easy to imagine the government's coffers are a bottomless pit but, in fact, there's only so much rent to go around. As an economist would say, all concessions have an opportunity cost. It's easy to believe all industries could pay less tax if the pollies would only make households pay more tax, but I wouldn't hold my breath waiting for it to happen. I doubt either side of politics would see that as consistent with their own self-interest.

The truth is, when one industry gets in for a big cut, there's less left in the pot for the others. That industries don't understand this simple point about opportunity cost - don't realise they're in competition with each other - is easily demonstrated by the demise of Labor's mining tax package.

Think about the original package: the big three miners were going to pay more tax on their resource rents, but most of the proceeds were going to be distributed to other industries.

In particular, all companies (including miners, big and small) were getting their company tax rate cut by 2 percentage points, small miners were getting a resource exploration rebate, small business was getting instant write-off of most assets, the banks were getting more concessional taxation of depositors' interest income, and the financial services industry was getting its dream of having compulsory super contributions jacked up from 9 per cent to 12 per cent, a one-third increase in contributions.

So three big miners had a lot to lose, but the rest of industry had a lot to gain. So what was the rest of industry's attitude to the resource super profits tax? Didn't like the sound of it.

And what did they do when the miners sought to scuttle the new tax? Precisely nothing.

What happened then? The exploration rebate was to first thing to disappear and, in several stages under Labor, the cut in the company tax rate got whipped off the table.

Now, with Abbott's plan to abolish the cut-down mining tax, the small business concessions are being withdrawn and the phase-up of compulsory super has been deferred for two years.

With all the pressure on the Abbott government's budget, and the super industry extracting a promise from Abbott not to make any further savings on the concessional taxation of super, I'm prepared to bet the two-year deferment will become permanent.

Thus did the rest of business allow the miners to screw them over. And thus did the miners destroy faith in one of the techniques tax reformers believed made major tax reform possible: put together a large package with a mixture of wins and losses and the various industry lobbies keep each other on board in the wider interest.

But it doesn't stop there. When the miners and the rest of business dream of further tax reform under the Abbott government what do they have in mind? Mainly, a big cut in the company tax rate. Do you really see the Abbott government daring to fund such a cut by increasing the GST?

Had the minerals resource rent tax survived and got past its accelerated depreciation phase, the fact that the most highly profitable part of the corporate sector (along with the banks) was paying a lot more tax on its profits would have greatly strengthened the argument for a general cut in the company tax rate. This is particularly so because mining is so heavily foreign-owned. So the absence of the resource rent tax makes a cut in the company tax rate a lot less likely.

One way a cut in the rate could still be afforded is if it was covered by a broadening of the base by the removal of sectional concessions. But the bitter experience of the demise of the mining tax package makes it less likely any government would risk proposing such a compromise.

We can continue going down the road of ever-more blatantly self-interested behaviour by political parties on the one hand and industry lobby groups on the other, but while we do so it's idle to dream of major reform.

What we can do - as the miners have shown - is veto any reform we don't fancy.

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Environmental accounting: completing the picture

Dinner Talk to ABS Conference on Environmental Accounting, Melbourne, Thursday, May 14, 2012

Ross Gittins, Economics Editor, The Sydney Morning Herald

I’m pleased to be invited to speak to this dinner of a conference convened by the nation’s official bean-counters. I don’t use that term disparagingly. Some people may think they’re far too talented or too important to waste time counting the beans, but I’m not one of them. If outputs and outcomes are important, then measuring them must be too. I’ve had two careers so far, and both have involved bean-counting. The first was as a chartered accountant, and the accountant in me meant that when I switched to economic journalism, I devoted considerable time to making sure I understood how the key indicators of the economy’s health ticked - the labour force survey, the CPI, the balance of payments, the national accounts and so on. I agree with the quote from the Stiglitz-Sen commission, which could almost be the public statisticians’ mission statement: ‘What we measure affects what we do; and if our measurements are flawed, decisions may be distorted’.

I’m also pleased to be speaking at a conference devoted to a subject so close to my heart: how we can establish a system of environmental accounts capable of being integrated with the economic accounts, to eventually produce a bottom-line figure for ‘green GDP’. It may be a sign of old age, but as the years have gone by I’ve become increasingly concerned about the interrelationship between the market economy - as we define it and measure it - and the natural environment - the ecosystem - in which it sits and on which it depends for its continued survival.

It’s clear we need to know a lot more about, and take a lot more notice of how the natural environment is changing over time, mainly as a result of human activity. That is, we need to be doing a lot more measuring of the environment, in its own right. We must keep track of what’s happening to be sure we’re not caught out by developments we didn’t quite notice before they became acute.

And, turning to the economy, the way we manage it - and the way we measure it, because measurements inform managers - needs to change over time to keep up with change in the economy and its environment, and also with developments in the scientific understanding of the way economic activity impinges on the social and natural environment in which the economy operates. Economists and statisticians have been slow to recognise the need for change in the way we define and measure ‘the economy’, but now, thankfully, real progress is being made - as witness the SEEA (system of environmental and economic accounting) and, indeed, this conference.

When you think about it, however, it’s not surprising that, at the time in the 19th century when our way of conceptualising the economy was being laid down by Alfred Marshall and the other neoclassical economists, it was considered possible to think of ‘the economy’ in splendid isolation from what then, I guess, would have been thought of as Nature, but we today have been schooled by natural scientists to think of as the ecosystem.

A hundred and fifty to 200 years ago, global economic activity was puny compared to the vastness of the global ecosystem - the vast oceans, endless forests, the geographical barriers between continents and countries, the perishingly cold winters and, in faraway climes, the intolerable heat. With humankind so puny and nature so vast as to seem almost infinite, it made all the sense in the world to view ecosystem services and environmental assets - air and water and fish and sunlight - as so infinitely available they could be treated as ‘free goods’, goods that had no price and so didn’t need to be taken into account. There was pollution, of course - factories that made loud noises, belched smoke, emitted waste material into the river and maybe left the hillside scarred - but these things were limited and local. They were unpleasant, but they weren’t something to worry too much about.

Two things have changed since those days. The first is the unbelievable growth in economic activity across the globe. Advances in public health and personal healthcare, and advances in economic production techniques, have seen the world’s population increase by a factor of seven since the dawn of the 19th century from 1 billion to 7 billion today. And advances in production techniques on their own have seen the average material standard of living across the world increase by a factor of six over the same period. Put the two together and economic activity, as measured, has increased by a factor of at least 42. Suddenly, global economic activity isn’t looking so puny and the global ecosystem isn’t looking so vast.

The second thing that’s changed since the industrial revolution is the depth of scientific understanding of the way the natural world works and the effects human activities are having on the way it works. First among these discoveries is the first law of thermodynamics which, for our purposes, tells us that economic activity can’t increase or reduce the quantity of anything, just change its form. So what the economy does from a physicist’s perspective is take natural resources and turn them into various forms of waste. Any system of environmental accounts - and any attempt to integrate environmental and economic accounts - has to take account not only of the natural inputs to the economic system but also the output of waste from the system.
Scientists have also made us aware of the way farming practices have affected river systems and underground water systems, the effects of commercial fishing, the limitations to fish farming, the extent of the destruction of species and, of course, the way the burning of fossil fuels and clearing of forests is changing the climate.

If I didn’t know I wasn’t allowed even to think it, I’d be tempted to say the extraordinary growth in global economic activity relative to the eternally fixed size of the ecosystem must surely be taking us close to the limits to economic growth - at least as we presently define growth and pursue it. Surely that’s precisely what the climate science is telling us. We’ve reached the limit to our ability go on burning fossil fuels and destroying natural carbon sinks in forests and so forth. We’re perilously close to natural tipping points - points from which there can be no return to the way things used to be. When the definition of the problem is limited to climate change, many, probably most, economists are willing to accept that things can’t continue the way they have been. But I can’t believe the environmental problem is limited to climate change; that we don’t face similar major threats to the status quo from farming practices, water and land degradation, overfishing and species destruction. I don’t believe we can go on indefinitely increasing our throughput of natural resources and our interference with the operation of ecosystem services.

This is not to say the end of the world is nigh, or even the end of economic activity. But it may well presage the end of global population growth and that part of economic growth that’s based on growth in the use of natural resources. What we don’t have to give up is the other part of economic growth, which comes from productivity improvement and technological advance. It may well be, however, that the objective of productivity improvement needs to change from economising in the use of labour to economising in the use of natural resources. Markets will always economise in the use of the most expensive resource, which in developed economies is labour. We need to turn that around, partly by ensuring natural resources are properly priced to reflect their true social costs and partly by shifting the tax system away from its present heavy reliance on taxing ‘goods’ such as labour to taxing ‘bads’ such as the use of natural resources.

When scientists talk about the limits to growth, economists always accuse them of failing to understand the ability of the price mechanism to solve or work around the seemingly looming end to the availability of particular natural resources, including the price mechanism’s ability to call forth technological solutions to the problem. To this the scientists always retort that economists are hopelessly unrealistic ‘technological optimists’.

I think the truth’s in the middle. In the economists’ mind, the price mechanism solves problems in a way that’s simple and reasonably smooth. They tend to think in comparative statics - the economy snaps from one equilibrium to another - without giving much thought to the dynamics of the adjustment process and the possibility of path dependency, of being knocked off course before you reach the expected equilibrium. I’m not confident of the ability of global commodity prices to adequately foresee emerging shortages around the corner and thereby send a clear enough, and early enough, signal to innovators to get on with finding their technological solution to the problem. If huge price increases occur with little warning and there’s a delay of some years before technological solutions emerge, considerable economic damage can be done in the interim, with unexpected flow-on effects and less-than-efficient policy responses by governments. And all because of economists’ naive faith that the real world will adjust in textbook fashion.

I was interested to see that highly orthodox institution, The Economist magazine, seriously entertaining the possibility of Peak Oil in a recent article (Buttonwood column, Feeling Peaky, April 21, 2012). It noted that global output of crude oil (as opposed to alternatives such as biofuels and liquids made from gas) has been flat since 2005. You can argue the world is ‘awash with energy’ thanks to the exploitation of American shale gas, but The Economist counters that oil is still the main fuel powering the globe’s fleet of cars and trucks. You could convert them all to liquid gas, but you can’t do it without considerable expense and delay, with the prospect of pretty bad things happening in the interim. You could find more oil - in the Arctic or in tar sands - but you couldn’t do that without a considerable increase in the price of petrol. Remember, too, that some potential alternatives to conventional oil - including biofuels and tar sands - are highly ‘energy inefficient’ - you have to expend a lot of energy to produce them. And the fact remains that, just as the industrial revolution was built on coal, so the post-war economy has been built on cheap oil. If oil and its substitutes are now to be very much more expensive, this spells significant cost, economic disruption, social hardship and weaker growth.

But I’ve provoked you enough with the threatening thought that there may be limits to growth after all. Now I want to view the case for measuring change in the environment - and for combining it with the measurement of the economy - from a different perspective. As you know, the overriding goal of microeconomics is to help the community deal with ‘the problem of scarcity’ - the fact that the physical resources available to us are finite, whereas our wants are infinite. There’s any amount of goods and services we’d like to consume, but the wherewithal to produce those goods and services is strictly limited.

But Avner Offer, a professor of economic history at Oxford, and others have advanced an interesting proposition: that the developed market economies’ attack on the problem of scarcity over the time since the industrial revolution has been so remarkably successful that we’ve actually defeated scarcity and replaced it with a different problem, the problem of abundance. Now, technically, for an economist to say that a resource is scarce is merely to say that it can only be obtained by paying a price, that it’s not so abundantly available as to be free. Clearly, in that technical sense, the problem of scarcity is still with us.

But, in the broader sense, it’s hard to deny that the citizens of the developed world live lives of great abundance. As we’ve seen, our material standard of living has multiplied many times over since the start of the industrial revolution. No one in the developed world is fighting for subsistence; even the relatively poor among us are doing well compared with the poor of Asia or Africa; we satisfied our basic needs for food, clothing and shelter a mighty long time ago; our real incomes grow by a percent or two almost every year, and each year we move a little higher on the hog. Our greater affluence can be seen in our ability to limit the size of our families, in the growth in the size and opulence of our homes, the fancy foreign cars we drive, our clothes, the private schools we send our children to, the restaurants we eat in and the plasma TVs, DVDs, video recorders, personal computers, mobile phones, stereo systems, movie cameras, play stations and myriad other gadgets our homes teem with.

How has this unprecedented and widespread affluence come about? It’s the product of the success of the market system. But above all it’s the product of all the technological advance - the invention and innovation - the capitalist system is so good at encouraging. Malthus’s dismal prediction in the late 1700s that the growth in the population would outrun the growth in food production was soon disproved.
It’s therefore reasonable to say that, when we look around us, what we see is not scarcity but abundance. This is something to be celebrated. But, as with everything in life, no blessing is unalloyed. Every good thing has its drawbacks and difficulties. As we’ve seen, the first and most obvious problem with abundance is the damage the huge expansion in economic activity is doing to the natural environment.

The next but less obvious problem with abundance is that it exacerbates humankind’s difficulty achieving self-control. Notwithstanding the economists’ assumption of rationality, humans have a big problem with self-control. It’s ubiquitous to daily life: the temptations to eat too much, get too little exercise, smoke, drink too much, watch too much television, gamble too much, shop too much, save too little and put too much on your credit card, to work too much at the expense of your family and other relationships.

The more stuff we have - the fewer among us whose main problem remains satisfying our basic needs - the more problems of self-control emerge as our dominant concern. But there’s a deeper point: humans have never been good at self-control, but as long as we were poor and resources were scarce, our self-control problem was held in check. It’s when things become abundant, when we can afford to indulge so many more of our whims, when we have a huge range of things or activities to choose from, that self-control problems become more prevalent and we have trouble making ourselves choose those options that are best for us in the longer term, not just immediately gratifying.

The topical problem of obesity provides an excellent example of the way the move from scarcity to abundance has exacerbated self-control problems. Humans evolved in conditions where nutrition was scarce. Our brains are therefore hardwired to eat everything that comes our way while we’ve got the chance, and they’re surprisingly poor at signalling to us when we’ve had enough. For as long as food remained scarce - that is, relatively expensive - and work remained highly physical, there wasn’t a problem. But as we triumphed over scarcity the former balance was lost. Technological advances in the growing, transport, storage, preservation and cooking of food greatly reduced its cost to consumers. As humans have become more time-poor, we’ve seen an explosion in inexpensive fast food, all of it cunningly laced with those three ingredients our brains were evolved to crave: fat, sugar and salt. Then, on the output side, we’ve seen technological advance strip the physical labour first out of work and then out of leisure. We don’t play sport, we watch it being played and these days we don’t even go to the effort of travelling to the grounds.

There’s a third aspect to the problem of abundance: the increased resources devoted to the socially pointless pursuit of social status through consumption. When we have long passed the point where our basic needs for food, clothing and shelter are being satisfied, but our real incomes continue to grow by a couple of percent a year, we have to find something to do with the extra money. Partly, we spend it on ‘superior goods’ - goods you want more of as you get richer - such as health and education. That’s fine. But a fair bit of the extra income is spent on ‘positional goods’ - goods whose purchase is designed to demonstrate to the world our superior position in the pecking order. The point here is that, from the viewpoint of the community rather than the individual, the pursuit of status is a zero-sum game: the gains of those individuals who manage to advance themselves in the pecking order are offset by the loss of status suffered by those they pass. From the perspective of society, a lot of resources are simply being wasted.

So that’s the case for believing that, at this late stage in our development, the problem of scarcity has been superseded by the problem abundance. It has obvious implications for the environment and the need to integrate environmental and economic measurement. I like the example of commercial fishing. Two hundred years ago the constraint was the scarcity of human capital: not enough boats to haul in all the fish available. Today, after so much technological advance in the fishing industry, the scarcity problem is reversed: far too many boats chasing far fewer fish.

You don’t need to think for long about the SEEA exercise before you realise the paucity of measurement of the many dimensions of the environment and the changes in them over time. You realise how much of the bureau’s efforts are devoted to the myriad measurements needed to support the economic accounts. Our management of the environment should be much better informed just by the more comprehensive measurement of environmental indicators in physical values. When you covert those physical values to dollars and integrate them with the economic accounts you are (to quote one of the bureau’s documents) enabling analysis of the impact of economic policies on the environment and the impact of environmental policies on the economy.

For as long as we’ve been worrying about the economy’s effect on the environment the great bugbear has been the environment’s status as an ‘externality’ to the market economy and the price mechanism. The environment isn’t part of the system and it takes a lot of alertness and effort to incorporate it into the system, case by case. My dream is that, though environmental assets will continue to go unpriced until we find a way to price them, we may be able to short-circuit the process by incorporating environmental money values into the GDP bottom line.

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Outlook for politics and government in 2012

Talk to Australian Business Economists Annual Forecasting Conference
Sydney, November 24, 2011

Taken as a whole, the first full year of the Gillard government has been terrible. Julia Gillard has hardly taken a trick all year and her present standing in the polls is worse - much worse, consistently worse - than it was at last year’s election, when she failed to attract enough votes to form government in her own right. Her present primary vote in the low 30s would give her zero hope of winning an election. Only if she could get it up to at least 40 per cent would she be in the hunt. This time last year - three years out from the next election, assuming the government runs full term - I fearlessly predicted Labor would lose it, because ‘this generation of Labor is terminally incompetent’.
Having made that call, I’m sticking to it. I’m doing so even though I know full well how easily the political outlook can change over a period as long as a year, let alone two years. After all, who would have predicted in October 2009 that the election would be months early and fought not between Kevin Rudd and Malcolm Turnbull, but between Gillard and Tony Abbott, that Abbott would come within a whisker of winning and that Labor would be forced into an alliance with the Greens and rag-tag independents?

But I have to add that, at the end of her first year, Gillard and her government are looking in better shape than they did half way through it. The first point to acknowledge is that she’s held her minority government and its alliances together for a year - longer than many people expected - and it’s never seriously looked in trouble. The second is that it’s been a year of great achievement. The opposition has frequently criticised Labor for being unable to actually do anything but, as was always Gillard’s intention, this has been a year of ticking off items on the to-do list - in particular, the various items inherited from Rudd. Of the three big problems he left her, the carbon tax has been put to bed, the mining tax is well on the way and only the asylum-seeker issue remains chronically unresolved. Along with Gillard’s opportunity to be seen looking like a leader on the international stage with other leaders, these runs on the board do much to explain her recent slow improvement in the polls, in the two-party preferred and, particularly, as preferred prime minister.

While the polls continue moving in the right direction - however slowly and with however far to go - Rudd is unlikely to mount a challenge. There’s no reason to doubt his desire to return, and should the poll recovery falter, we’re likely to hear from him. Would the caucus ever turn back to him? There is so much continuing dislike of him they’d have to be terribly desperate, but it’s not impossible. Would it help? No. His grass-is-greener popularity in the polls would soon evaporate as voters were repulsed by this ultimate proof of Labor’s disloyalty, ruthlessness and lack of principle.

Next year should be a year of consolidation and less frenetic policy making, with the government needing to be sure the introduction of the carbon price arrangements goes smoothly. Should the world economy stay on track, the government will press on with its priority of returning the budget to surplus - as, in all the circumstances, it should. Should things go really bad in Europe, the primary response will be from the Reserve Bank, but the government will at least have to reverse its rhetoric and allow the budget’s automatic stabilisers to widen the budget deficit, and may need to consider a new round of fiscal stimulus. For Abbott and the opposition it will need to be a year where, finally, they make their contribution more constructive, outlining their own plans for improvement - even if, as ever, they leave the revelation of their detailed policies until much closer to the election. The longer Abbott continues with his relentless negativity, the more he risks trying the patience of voters.

Can we be sure the minority government arrangement will hold together for another year? No. But the grubby deal to install the former-Liberal Peter Slipper as speaker means it now would take two by-election losses to bring Labor undone. It also reduces Labor’s dependence on any particular independent. And by now it ought to be clear to all that the independents on whose votes Gillard relies have much to gain by continuing to prop her up and much to lose by deserting her. It should also be clear that achieving continued co-operation from the people whose votes she needs is one of the things Gillard is good at.

Why Labor is so bad at it

I have no problem putting the boot into politicians who are flying high, but I don’t enjoy kicking people when they’re down. If for no other reason than that I prefer to be ahead of the conventional wisdom. But I can’t take a look at the political scene and not address the obvious challenge for political analysts: why exactly is this version of Labor so bad at governing?

A host of explanations has been offered, many of which have only some degree of truth and some of which are more in the nature of excuses. One we can dispense with is that it’s all down to the personal failings of Rudd. He had many failings and he left Gillard with a terrible inheritance of a far too long agenda of half-finished policy projects, but we’ve seen enough to know things didn’t immediately look up after his departure.

A favourite excuse of Labor and its supporters is that it’s been turned on by the Murdoch press. It’s true The Australian has turned from being a newspaper to a product aimed at gratifying the prejudices of a particular segment of the audience, but it is - by commercial design - preaching to the already converted. Its influence is limited to those silly people in Canberra who continue to take it seriously, imagining it still to be a newspaper. As for the depredations of Sydney’s Daily Telegraph, it was ever thus. That organ has been a vehicle for foisting the bosses’ views on workers since it was owned by Frank Packer. It’s true the radio shock jocks often take their line from those two outlets, but were they not available the jocks would just have to work harder to find their sources of daily indignation. So, sorry, but I think the Murdoch excuse is greatly overdone. It falls into a class of argument politicians trot out to sustain the faith of the party faithful, not because they believe it or expect the uncommitted to believe it.

I think part of the problem attaches to Gillard herself. The brutal circumstances in which she came to power count against her in the mind of many voters. I don’t doubt there’s an element of misogyny in the electorate’s failure to warm to her and that many people find her voice grates. But her deeper problem is her inability to come over on television as a warm and likable person. Some pollies have that ability, others don’t. Other politicians manage to substitute an air of paternal authority - don’t worry, father is in charge - for likeability (eg Malcolm Fraser, Maggie Thatcher), but Gillard can’t manage that, either.

Lack of an air of authority - leaders who look like leaders and hence command respect and compliance; leaders who seem legitimate - has plagued the Rudd-Gillard government. I’ve come to the conclusion that - at the federal level, at least - the Liberals really are the natural party of government. That’s what the electorate thinks, what business thinks, what the media think, what the Libs themselves think and what, deep down, even Labor thinks. On the central polling question of which party is best to handle the economy, the Libs always win. The Hawke-Keating government managed to out-poll the Libs for a while, but Rudd and Gillard never have. This is not a question of track record, but of long-held and deeply held stereotypes. The party of the bosses will always be better at managing the economy than the party of the workers.

This is what allows Abbott to turn opposition to outright obstruction without attracting criticism. It’s what allows Abbott to take the support of business for granted, while Labor knows it must always be seeking business’s approval. It’s what has allowed business to conclude Labor is anti-business even while Labor modifies its policies - including Fair Work - to avoid offending business. It’s what, in the battle over the mining tax before Rudd’s overthrow, allowed the public to believe the foreign mining giants’ ads claiming the tax would destroy the economy over their own government’s ads assuring them the tax wouldn’t be a problem.

It’s what explains the Libs’ ability to wind up the electorate over Labor’s mountainous deficits and debt and why few economists intervened to dispel the nonsense. It explains why the opposition has had an excessive influence over the government’s fiscal policy and why Labor is obsessed by returning the budget to surplus in 2012-13. It also explains why only at this point have economists entered the debate to attack the government’s deficit mania.

Labor’s universally assumed inferiority - combined with journalism’s highly selective approach to quoting evidence - explains the success of The Australian in convincing almost everyone - punters, gallery journalists and even Labor politicians - that most of the money spent on Building the Education Revolution was wasted.

Associated with Labor’s lack of apparent authority is the phenomenon of the slippery slope. When you’re in power and on top you get a lot of co-operation, compliance and tacit support from interest groups and the public generally - all of which help you stay on top. These benefits of incumbency give you the strength to stand up to particular vested interests and tide you through the ups and downs of the polls. But when your weakness in the polls becomes sustained, you hit the slippery-slope part of the curve where it becomes a lot easier to fall further than to claw your way back up. Where things start to unravel as people who formerly accepted the reality of your continuing authority begin to wonder how long you’ll survive, whether they should give you a push on your way and whether they should start cosying up to your likely vanquisher.

Though she seems to have made a little progress back up the greasy pole in recent days, Gillard has spent most of her time as PM sliding down the slippery slope. It’s a situation that emboldens your critics and opponents while making your supporters more cautious. So things have been unravelling. The denizens of the House with the Flag on Top - pollies on both sides, staffers and journalists - revere success, fear the successful and despise failure. Lindsay Tanner says the press gallery is either at your feet or at your throat. It shifts when it sees you languishing in the polls, emboldened to be a lot more probing and critical and take a lot less on trust. The denizens take the polls so seriously that everyone starts expecting anything you do will fail, and their expectations tend to be self-fulfilling.

One interest group that’s particularly susceptible to this behaviour is business. Business will live with a housetrained Labor government with a steady grip on power. But it does so against its natural preferences. Big business people expect Labor to court them, while quietly accepting it when the Libs choose to ignore or pressure them. Business is very unhappy with Labor and I have no doubt its disenchantment and its increasing willingness to make its unhappiness known is magnified by its perception the Gillard government is not long for this world. It’s willingness to accept the carbon tax has been diminished by Abbott’s success in turning public opinion against the tax. Its complaints against Fair Work - which don’t seem to have great substance - are directed mainly at persuading the next government to shift the balance back in favour of employers. If this does collateral damage to Labor between now and the election, so much the better.

Both the Rudd and Gillard governments seem remarkably inexperienced. This shouldn’t be an excuse because it’s unusual for incoming federal cabinets to have many members with previous ministerial experience. Labor doesn’t seem to realise that maintaining good relations with business isn’t just a matter of senior ministers trying to fit in as many boardroom lunches as possible, or even keeping in touch with the business lobby groups. It means having big business chiefs feel they can ring the PM about a problem and their being on the receiving end of calls from the PM to inquire about their views on relevant matters. The main union leaders would have such a relationship with the PM, but I doubt the business chiefs do. They’d know this and would feel alienated from Labor, especially because Howard was such a great private phoner of power-holders.

Similarly, Labor’s failure to make sure the big miners knew what to expect well before the unveiling of the resource super profits tax is a sign of inexperience. The name of that tax - chosen by Labor’s spin doctors - did much to convince the rest of the business community Labor was anti-profit and anti-business, without doing much to arouse the punters’ resentment of foreign mining giants. Labor’s PR people have been far too young, lacking much journalistic experience, let alone political experience. It should have recruited some old hands. Rudd treated his staff so badly he burnt through a generation of good advisers.

But Labor’s chronic inability to sell its policies to the electorate can’t be explained simply in terms of the inexperience of its spin doctors. It isn’t primarily about spin doctors. I think the root of this generation of Labor politicians’ problem - the key reason they’re so bad at governing - is their background. Unlike earlier generations, almost all of them are apparatchiks; they come from Labor’s professional political class: people who start working for ministers or unions straight from university and climb the Labor career path, never making a success of a career in the outside world or even spending a lot of time as an on-the-ground union official dealing with ordinary workers and disparate employers.

The trouble with this system is that it seems to be breeding a generation of politicians who don’t have a good feel for human nature and, above all, don’t give up their profession and enter parliament with a burning desire to make the world a better place. Their burning desire is to make cabinet minister. Their entry to parliament is a promotion and a pay rise, not any sacrifice. These guys don’t have deeply held values and convictions they’re prepared to fight for and run risks for. Their lack of conviction robs them of the ability to explain policies that arise from their framework of belief. They can’t fashion a compelling narrative of what drives them and where the government wants to take us. They lack the missionary zeal of someone like Paul Keating; they have no desire to convert. They think ‘selling’ policies is a matter for spin doctors and advertising agencies, not of working tirelessly to help people understand the vision and see why it’s so important. When you’re not passionate about explaining your policies, when you’re just a political player, you do what Labor has done from the moment it took office: focus on attacking your opponents, thus conferring them and their criticisms a status they wouldn’t otherwise have. When you’re not a passionate explainer, you avoid answering questions and merely repeat prepared lines.

The problem with all this isn’t just that you fail win public support for your policies, it’s also that the public can sense your lack of commitment and conviction, your preference for self-preservation over leadership, your interests over theirs. You lose authority and respect in the eyes of voters. Courage comes from convictions; public confidence in governments comes from people’s perceptions of your courage and conviction. As John Howard demonstrated with the GST, voters are perfectly capable of giving you grudging respect for pursuing a policy they don’t like the sound of.

Minority government may be the making of Gillard

But having said all that, I now have to highlight a qualification. At the end of its fourth year, Labor has now amassed an impressive list of achievements. Leaving aside its remarkably effective response to the global financial crisis, we have: paid parental leave, equal pay for community workers, plain packaging for cigarettes, the foundations for a national disability insurance scheme, a price on carbon, the likely passage of the minerals resource rent tax, and the continuing pursuit of compulsory pre-commitment on poker machines. (Admittedly, the mining tax was butchered and Labor’s health and hospital changes fell far short of their billing.)

Some of the items on that list may not greatly appeal to you, but they would to the Labor heartland. And it’s noteworthy that some of the items wouldn’t have been there had it not been for the insistence of those whose votes Labor has depended on to stay in government. On the carbon price, in particularly, Gillard had no choice but to press on with its early introduction. See what’s happened? The circumstances of minority government and the ferocious opposition of Abbott have left Gillard with no option but to take principled positions and stick to them through thick and thin. If her improvement in the polls proves lasting, it will be because her failure to win a majority has forced her to exhibit all the impressive qualities she seemed not to possess. Her steadfastness and ultimate achievement may be winning her the grudging respect of the electorate.

Provided she can hold the numbers in the House for another two years, Gillard should benefit from the effluxion of time. It will give people more time to get used to her idiosyncrasies and more time to tire of Abbott’s. And there’d be something very wrong if more than a year of living under the carbon tax didn’t cause people to lose their fear of it.

It’s interesting to observe the way conservatives have transferred the mantle of bogyman from the ALP to the Greens. Labor’s greatest crime is not being typically wrongheaded Labor, but falling under the spell of the demonic Greens. Exhibit A would have to be the carbon scheme. But, apart from its higher levels of compensation to industry, it was little different from Rudd’s carbon pollution reduction scheme, which the Greens rejected out of hand. It’s not politic to say so but, in the end, it was the Greens who changed their tune, much more than Labor did.

The prospect of Abbott

Abbott has been far more effective as opposition leader than I and other smarties expected. He quickly learnt to keep disciplined and avoid putting his foot in his mouth, and quickly displayed his greatest, most enviable strength as a politician: an ability to ‘cut through’ - to have the things he says noticed and broadcast by the media.

His policy of blanket opposition to all the government’s policies has served him well. Many expected the electorate to tire of his relentless negativity, but it hasn’t happened yet. Even so, some strains are beginning to show. His autocratic style has put noses out of joint within the party and, should his standing in the polls ever slip, we will hear from his detractors. There is much discontent within the party and in business over his refusal to criticise Fair Work and propose any changes that could reawaken the spectre of Work Choices.

Despite the opposition’s remarkably strong standing in the polls, Abbott is not personally popular. He has a 55 per cent disapproval rating for his job as opposition leader. And the authoritative Australian Election Study, in which ANU political scientists surveyed voters soon after the last election, found that Abbott’s unpopularity was the main reason he failed to win enough seats. Though Gillard’s popularity rating was low, Abbott’s was a lot lower - lower even than Keating’s in the 1996 election.

Abbott has little interest in economics and no commitment to economic rationalism. His policy positions reek of populism, protection and direct controls. His solemn promises to roll back the carbon and mining taxes, but not reverse the goodies they will be paying for, leave him with a funding gap of many tens of billions he has, as yet, made no attempt to fill. How such a man could bring himself to outline the sweeping spending cuts needed to make good his promise to return the budget to surplus without delay is hard to imagine. He has, however, taken the precaution of refusing to use the services of the new Parliamentary Budget Office to cost his promises. There is no precedent for parties promising to abolish major new taxes already in operation, nor for governments actually doing it. I find it very hard to believe it would happen.

Should Abbott be elected, we face either a monumental breaking of promises or a government totally consumed by the effort needed to turn back the clock. Why the part of the electorate that cares most about good macro management and micro reform has had so little to say about Abbott’s incredible performance I don’t know. Perhaps they’ll have more to say as the reality of an Abbott-led government draws closer.

Observations on monetary policy

I normally begin this section by observing that the market and the business economists have had another bad year in their efforts the second-guess the Reserve Bank’s moves in the cash rate, but this year I have to declare the second-guessers to be ahead on points. The notion that the Reserve might cut rates entered the futures market’s head a lot earlier than it entered the Reserve’s head, so the market has to get credit for that. I’m not sure the market was particularly prescient on size and timing - suggesting it might have been right for the wrong reason. I suspect the market was dominated by foreign players who merely projected North Atlantic conditions onto the Antipodes, making insufficient allowance for local conditions. But, as all of us in the prediction business know full well, a win’s a win. I wouldn’t make those criticisms of the other great hero of this episode, Bill Evans. He stuck his neck out ahead of all of us, we marvelled at his folly, but he turned out to be right and he deserves all the accolades he got.

From where I sit it’s clear to me that to make a legendary call like Bill’s you have to get well ahead of the game, well ahead of the data - and you have to be right. When I saw Bill make his call I thought, that’s not in the Reserve’s plan, so he’ll only be right if he foresees developments the Reserve doesn’t foresee and those developments are big enough to change the plan. He did and they were.

The Reserve begins each year with a view of how the year’s going to pan out and a rough idea of the policy adjustments the outworking of that view will necessitate. It must have such a view because it has an on-the-record forecast, and that forecast is its view. The trick for you guys is to work out what its forecast tells you about the policy adjustments needed to bring the inflation forecast about, given the growth forecast.

This year the Reserve was expecting growth to accelerate as the effects of the resources boom spread through the economy, adding to inflation pressures at a time when we were already close to full employment. It was therefore expecting to have to tighten a few times as the year progressed. But here’s the point: it’s continuously testing its forecasts and its expectations against the data as they roll in. And it makes its judgments about whether policy needs to be adjusted one board meeting at a time. As events unfolded, the economy didn’t accelerate in the way it had been expecting, and so the Reserve never reached a point where it saw the need to act on its ‘bias to tighten’. At first there was the temporary setback of the Queensland floods - which proved less temporary than first thought - and then there was the backwash from the growing sovereign debt problems in Europe, mainly on business and consumer confidence. By November it was clear the economy wasn’t taking off the way the Reserve had expected - mainly because of the confidence backwash from Europe - so the Reserve wasn’t going to have the trouble keeping inflation within the target range it had expected to have, thus allowing it to make what it expects to be a once-off reduction in the cash rate to get it back to neutral. It’s worth noting that part of the scope for this move came not from the effects of Europe but from the past and future revisions to the underlying inflation figures arising from the Bureau’s reweighting of the index.

I don’t think the Reserve has very firm ideas about where the stance of policy goes from here. The economy is pretty much in equilibrium, policy is set at neutral, so the rate will stay where it is until developments occur that knock the economy off its equilibrium path - and off the Reserve’s forecast - in one direction or the other and require a policy response. Clearly, the balance of risks is very much to the downside.

But Bill has made another call and, as I understand it, is predicting another three cuts -presumably 25-basis-point cuts - next year. Here again you see him getting well ahead of the game; well ahead of the Reserve’s thinking, as expressed in its forecast. He can see something coming down the pike the econocrats can’t, and he may again prove himself to be more prescient than them. What would fit Bill’s call of three further cuts over the course of 2012 would be for the economy to slow down rather than speed up as forecast - for it to run out of gas, presumably because of growing caution and uncertainty on the part of business and consumers in response to continued turmoil in Europe. This would be manifest in a continuing rise in unemployment and an inflation outlook that was even more benign, thus allowing the rate to be lowered another click. Of course, were Europe to turn into the full catastrophe, we all know from the events of late 2008 how the Reserve would react. In that case I wouldn’t be surprised to see three cuts next year, but they’d probably come thick and fast, and each be nearer 100 points than 25.

I remarked in my column last Saturday that when the news is full of stories about some economic issue and the authorities pop with a policy change, all the instincts of the media and the punters are to assume that A caused B. In this case, we hear all this bad stuff from Europe, which makes us think the European economy is stuffed, therefore we must be stuffed and that must be what caused the Reserve to slash its forecast and cut the rate. I think all humans have a tendency to string together chains of cause and effect in this way and for our thinking to be unduly influenced by those events that have ‘salience’ (prominence in our consciousness) because they are so dramatic, so highly publicised or so recent.

My point is that this defective reasoning may be very human, but economists need to do better. Because the markets and business economists spend so much time studying developments overseas - usually the US, but these days, Europe - and they do that because national financial markets are so highly integrated - these developments have great salience in their minds, which can tempt business economists to over-weight them when forming views about likely developments in our economy - our real economy.

We need to remember that overseas events may be very exciting and very important, but they’re only relevant to us, our forecasts and our policy stance to the extent that, by some clearly identified channel, they have an effect on our real economy. They may be big in Europe, but are they still big by the time they reach us? Our real economy isn’t nearly as well integrated with the world as our financial markets are. Our domestic demand (GNE) accounts for almost all of our aggregate demand, sometimes more than all. As I keep reminding my readers, roughly 80 per cent of what Australians produce they sell to other Australians and roughly 80 per cent of what they purchase they buy from other Australians. Of course, the sharemarket is a more important channel than it used to be, and so - thanks to an ever-more globally integrated media - are confidence effects. I say all this simply because I keep hearing business economists making predictions about what the Reserve will do, and explaining why it’s done what it’s done, much more in terms of overseas development than I see in all the Reserve’s detailed exposition of why it did what it did. You’ve got to get your direction of causation right. The Reserve is managing our economy, it’s responsible for our inflation rate. Its highest consideration will be what’s happening in our economy and its interest in what’s happening in other people’s economies is limited to assessing the extent to which those events impinge on our economy. That’s obvious, but people who know a lot about what’s happening in other economies seem to keep forgetting it. Sometimes I think the traditional order in which the econocrats set out their analysis - start with the world, then move on to the domestic - may confuse people as to which is the more important.

Last year I advanced my theory that the timing of rate changes is influenced by ‘bureaucratic neatness’. At the time I said:

"Over the past five years the Reserve has changed rates 20 times. Since there are 11 meetings a year, if decisions to change rates occurred at random, each month would have a 9 per cent chance of being chosen for a rate change. The four meetings a year that are preceded by the release of the CPI and followed immediately by the release of the statement on monetary policy, would account for just over 36 per cent of random chances. But, in fact, the SoMP months - February, May, August and November - accounted for 65 per cent of rate changes, with November alone accounting for 25 per cent. The point is that the Reserve has set up a pattern in which the SoMPs come soon after the meeting that comes soon after the CPI release, and two of the SoMPs come not long before the Reserve’s twice-yearly appearance before the parliamentary committee. Remember, too, that the release of the CPI is a key influence on the revision of the Reserve’s inflation forecasts, which are published in the SoMP and which heavily influence decisions about rate changes. The SoMP serves as the main vehicle the Reserve uses to explain and defend its rate decisions. Is it surprising that, having carefully set up the timing of its key publication and parliamentary appearances, the Reserve is more inclined to fit its decisions into that timetable? But why in the past five years has the November pre-SoMP meeting had more than twice the hits that the other three pre-SoMP meetings have had? Perhaps because of an unconscious desire to get the books straight before the end of the year and the knowledge that what you’ve done has to tide the economy over until February."

That was a year ago. What’s happened since then? We’ve had just one rate move and it happened on . . . Melbourne Cup Day, making it the sixth cup day move in a row. Still think it’s mere coincidence? Last year when I advanced my crazy, utterly economics-free theory, my mate Rory Robertson was the first to express his scepticism. So I asked some relevant econocrats what they thought of it. They thought it had some validity. Provided the Reserve hasn’t got behind the curve, and thus needs to catch up ASAP, it will be more inclined to move in those months that fit its carefully constructed reporting cycle.

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THE DUMBING DOWN OF THE PUBLIC POLICY DEBATE

Gruen Lecture series, Australian National University
September 8, 2011

I’m delighted to be taking part in this lecture series to honour my old friend Fred Gruen. I still regret his passing, even though his two sons just about fill the vacuum he left.

Oldies have always lamented that things aren’t as good as they used to be, but I don’t think there’s any reason to doubt the widespread perception that the debate - or ‘discourse’ as the fashionable academics say - about politics and public policy has become a lot less intellectually satisfying. If Fred were to come back and take up today’s newspapers, I don’t doubt he’d notice the difference. It’s got worse since the arrival of the Rudd-Gillard government, and worse again since Tony Abbott became opposition leader. But I suspect it would be a mistake to attribute too much of the deterioration to the actions of particular individuals. And, in any case, I’m sure the rot set in a lot earlier than 2007 or 2009. We’re dealing with a deteriorating trend that has been running for many years.

I could regale you with the worst examples of the way the debate has dumbed down - the preoccupation with Julia Gillard’s appearance, Kristina Kenneally’s decision to let her hair grow out, Tony Abbott’s decision hardly to mention the budget in his budget reply speech - but I’m more interested in trying to explain why the dumbing down has come about. Suffice to say that evidence of the phenomenon can be found in the increased emphasis on ‘race-calling’ in political reporting (who’s winning, who’s losing; who’s up, who’s down), on personalities, trivialities, scandals and accusations, slogans and name-calling rather than reasoned debate.

Lindsay Tanner offered his explanation in his book Sideshow: Dumbing Down Democracy. He argues it’s pretty much all the fault of the media, which is under siege from commercial pressures and technological change. Since the politicians must use the media to communicate with the electorate, they’ve had little choice but to dumb down their message to meet the media’s demands. The Canberra press gallery’s response to this thesis was predictably defensive, passing a lot of the blame back to the pollies. So, which side is to blame? Well, here a bit if economic training comes in handy: to be convincing, any explanation of some development has to provide reasons from both the demand side and the supply side. In other words, I think we can share the blame roughly evenly between the media on the demand side and the pollies on the supply side.

Let’s start with the media. And let me start by observing that much of the media has always been pretty dumb. The tabloids have always been tabloid and the commercial electronic media - radio and television - have never been terribly earnest in their coverage of politics. I think it’s true, however, that the tabloids have become dumber over the years: more hyped up, more inclined to emotional outbursts than factual reporting. Even so, when people complain about the debate dumbing down, I suspect most of their complaints relate to what they read in the quality press - or on the quality press’s websites.

In my 37 years in journalism I’ve been particularly conscious of the way old professional standards - being a paper of record, strict separation of news and opinion, the avoidance of subjects considered sordid - have given way to more overt commercial considerations. Part of this I attribute to microeconomic reform, especially deregulation of the capital market, which has intensified competition in general and, in particular, the sharemarket’s scrutiny of the adequacy of the newspaper companies’ profit performance.

For many years newspapers have faced steadily intensifying competition from other media. For as long as I’ve been in this business newspapers have worried about their circulation figures, which have been falling heavily relative to population growth and, more recently, have been falling in absolute terms. This I take to be explained by the increased competition they face from the ever-growing list of other ways for people to spend their leisure time. Television long ago became the main way people get their news, and the rise of talk radio and radio talkback was pinching our customers long before the arrival of the internet, with its multitude of alterative news sources, including the newspapers’ own websites.

Evening television news bulletins and breakfast radio programs were stealing the thunder of morning newspapers long before the internet began delivering ‘breaking news’ to people in their offices throughout the day. Because the electronic media and the new media are so much better at breaking news, the media have been feeding the public’s natural impatience to know the very latest. But breaking news gives primacy to immediacy over meaning. It’s undigested news - often unable to give an adequate account of what happened, let alone how it happened and why. Breaking news is dumbed-down news.

A related phenomenon is the long-emerging 24-hour news cycle, which has been reinforced by the arrival of 24-hour news radio and television channels. This increased output of news greatly increases the demand for news items and for new news items as the day progresses. It has the effect of shortening attention spans and it may well be that increased quantity comes at the expense of quality reporting and commentary. Speaking of attention spans, television and radio news stories are getting briefer, with the grabs of ‘actuality’ from politicians getting ever shorter. Politicians are able to repeat slick slogans without having to elaborate or defend them.

The arrival of the internet poses a considerable threat to the survival of newspapers - particularly the quality press - as they lose the formerly highly lucrative classified advertising and some display advertising, but also lose readers -particularly younger readers who prefer to read our offerings on the net, on tablets or on smartphones.

With all these pressures, is it surprising newspapers are trying to attract more readers by making their news more entertaining and, in the process, dumbing it down? Journalists have long understood that people prefer stories - narrative - to analysis, and stories about people rather than concepts. News has always been a combination of the important and the interesting, so the news media have responded to increased competitive pressures by increasing the interest component at the expense of the importance component. They have personalised politics by focusing on individuals, particularly leaders, making it more presidential. They have increasingly covered politics as though it was a spectator sport rather than policy debate. They have made the news more exciting by focusing on conflict and controversy rather than reasoned debate. They have made the news more entertaining by focusing more on gaffes and gimmicks. They have always understood that their audience finds bad news more exciting than good news, but they have stepped up the search for bad news, allowing it to crowd out the reporting of straight news about the facts of policy proposals. They spend most of each parliamentary term demanding the opposition produce its policies, but then devote little attention to those policies when finally they are produced.

Newspaper websites are often much dumber than the papers themselves, with a lot of perfunctory news stories, sexy photos, gimmicky stories and stories about celebrities. This is partly because the internet audience is much younger and also because the online editors get real-time feedback on what people are clicking on, and what they click on is sexy photos and stories about celebrities. The better informed editors are about the customers’ ‘revealed preference’, the harder it is to feed them material they feel would be better for them.

I believe the advent of talkback radio has had a big influence on politics and political reporting. It is very much news as entertainment, particularly the engendering of indignation about the claimed failures of officialdom. Shock jocks have broken down earlier conventions about subjects considered off-limits, particularly those with xenophobic or racist overtones. This has affected the behaviour of other mediums - particularly the tabloids - and the politicians. The electronic media and the tabloids do much to cater to - and amplify - the public’s worries about crime. Once, the quality press avoided dwelling on the gruesome details of particular crimes, but in its efforts to attract and retain readers it now devotes a lot more space to crime reporting. Television thrives on colour and movement. If it bleeds, it leads. Television is well suited to covering natural disasters, and the print media have met this competition despite their disadvantage, leaving less room for politics and policy. The extended coverage of natural disasters is a form of voyeuristic entertainment. For completeness I should record that, over the years, the broadsheet papers have come to include a lot of overt entertainment, in the form of ‘lifestyle’ sections on television, food, fashion and weekend gig guides.

So the media have certainly played a major part in the dumbing down of the policy debate. But the politicians have also played a big part. Just as the media’s commercial imperative has become more dominant, so I believe the politicians have, in their own way, become more commercial. They’ve always sought to balance the conflicting goals of using power to make the world a better place and staying in office because it’s nice to be in charge. I think politicians on both sides now put a lot more emphasis on attaining and retaining office than on ensuring they use their time in office to achieve improvements. On the Labor side, but increasingly also on the Liberal side, politics is becoming a professional career structure, where you start out from university as a union or ministerial factotum, eventually working your way to the top of elected office. You become steeped in the backroom, cynical side of the game of politics - learning the tricks of attaining and retaining office - without gaining much experience of the outside world or, it seems, acquiring many deeply felt convictions about how the world needs to be changed.

Politics has also become more commercial - more professional, more scientific - with its increasing resort to the techniques of marketing and market research. In the old days politicians could only guess from personal contacts and experience how the policies they were pursuing would be received by the electorate of polling day. It was easier to convince yourself that something you really wanted to do would go down well. These days, opinion polls and focus groups leave both sides in little doubt about exactly what voters are thinking and feeling about particular policies. Note, however, that these things give the public’s opinions a constancy and stability they don’t possess. In earlier times, qualitative research was use to help politicians shape arguments to sell the policies they wished to introduce; these days, the lifetime professional-career approach to politics makes it a lot more tempting to use qualitative research to decide what your policies should be.

It also makes it tempting to confirm to the media’s whims if that’s what’s needed to connect with the electorate. Politicians now spend a lot more time inspecting disaster sites, getting in on the story, demonstrating their authority and their concern - and otherwise wasting time. Politicians and their bureaucrats devote a lot of time to coming up with minor ‘announceables’ to feed to the ever-demanding 24-hour news machine and fixing the problems of particular individuals whose case attracts the media’s attention.

Even so, it’s misguided to see politicians as innocent victims of the demanding media machine. To a great extent the media are open to being used as a tool by governments and interest groups. All governments and oppositions see ‘media management’ (read, manipulation) as a major part of the successful performance of their jobs. I don’t believe it was merely to oblige the media that politicians moved to a presidential style of politics; it suited the politicians’ marketing objectives just as it suited the media’s needs for personalisation. Similarly, it’s the politicians who choose to humanise themselves by being accompanied by their spouse and children on the campaign trail or being interviewed at home by a women’s magazine. Politicians and interest groups happily exploit the media’s disinclination to critically examine claims that are bad news before shouting them from the rooftops, such as that some proposed government measure will destroy 10,000 jobs. In moments of weakness some politicians have explained that keeping the media regularly fed with minor announceables keeps them too occupied to have time to go digging for their own, possibly less favourable stories.

Politicians have long understood that, in politics, the perception can be just as important as the reality. Their new-found access to knowledge of exactly how the public perceives policy questions can tempt them to concentrate on manipulating perceptions while neglecting to attend to the reality of government performance - which, if allowed to deteriorate too greatly, won’t fail to register on the public’s perceptions about a government’s competence.

I suspect the growing careerism in politics has caused the fight for office to become more intensely competitive, prompting politicians to seek short-term advantage at the expense of their profession’s long-term credibility with the electorate: to be more willing to make and break election promises, find deceptive ways of expressing things and take the fight into areas formerly held by tacit agreement to be off-limits, such as immigration and asylum seekers. The politicians themselves must accept most of the blame for this aspect of the dumbing down of the policy debate.

But let me finish by saying that, in some ways, the media discussion of politics and policies is richer than ever before. As part of its effort to compete with the greater immediacy of the electronics - and perhaps also in response to a much better educated and more economically literate audience - the quality press devotes a lot more space to commentary and analysis than it used to, and only a portion of this is the mere assertion of intemperate opinions. Much of it is analysis of policy issues by specialist journalists or academics. Then we have the media’s opinion websites, plus the universities’ The Conversation website, and any number of blogsites - both local and international - where academics and other erudite souls debate policy issues at a level of sophistication much higher than in any newspaper. The politicians themselves may not be conducting a very edifying policy debate, but if that’s what you want you can find it without too much effort.

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How influential are (economic) journalists?

Australian Conference of Economists, Canberra
Wednesday, July 13, 2011

I take my title, How influential are journalists?, to be a reference to economic journalists, particularly economic commentators. My answer has changed little since a paper I wrote on the topic was published in the Australian Economic Review in 1995: not nearly as influential as you might imagine. But in preparation for defending that view, let me make a few clarifying points.
First, economic journalists distinguish themselves sharply from business (formerly known as financial) journalists. We write about macro and micro issues, they write about the adventures of listed companies.

Second, economic journalists - those who specialise in writing about macro and micro issues, and usually bring some university-level economic training to bear - are relatively rare. There are a few at the ABC (eg Stephen Long), but most work for the quality press.

Third, the economic content in the press can be divided into reporting of news and commentary on that news. News covers such things as ABS statistics, RBA announcements and speeches, speeches by the treasurer and treasury heavies, government reports, the budget and mid-year reviews, and developments in financial markets. Most of that economic reporting is done from the Canberra press gallery. This means that, in practice (and unlike in the US and elsewhere) economic journalism tends to be a specialty within political journalism, making it more focused on political economy issues. Except for the quality press, much economic reporting is done by political reporters - which means, for instance, that if the opposition seems to be making political headway in criticising deficits and debt, the political journalists will take it a lot more seriously and uncritically than economic journalists would. Issues are judged on their political potency, not their economic merits.

Fourth, the role of the news media is much misunderstood by many people. They assume the media’s role is to give their audience a balanced picture of what’s happening in the world beyond people’s personal experience. In fact, because the media is directly or indirectly selling its news, we limit our reporting of what’s happening in the world to those things we believe our audience will find particularly interesting. This imparts considerable biases to what we report: we pay a lot more attention to bad news than good, to problems rather than solutions, and to conflict and controversy (so that, for instance, dissenters from the dominant view on climate change among scientists get a lot more space than their numbers warrant). The media are more interested in people than concepts, and more interested in concrete case studies than abstract principles. In political and economic reporting there is much resort to ‘race-calling’: which side’s doing well in the polls and which isn’t, which leaders are secure and which under threat; which economic indicators are up this month and which are down (or, for the share market and the exchange rate, which are a bit up or a bit down today). The media tend to pander to what they assume to be their audience’s prejudices: so rises in interest rates and the dollar are always good, falls are always bad. Deficits are always bad, surpluses are always good.

So, how influential are economic commentators? Well, not sufficiently influential to discourage their editors from the eternal race-call. They try to discuss indicators in a longer and broader context, but fight an uphill battle. Similarly, they stand against the political journalists’ misconceptions (eg references to the budget deficit as ‘Australia’s deficit’; the notion that the carbon tax package’s funding shortfall of ‘$4 billion over four years’ is a huge discrepancy, or belief that a budget surplus of $1 billion is significantly different from a deficit of $1 billion), but in this they don’t seem to have any impact on the political journalists’ judgements. They don’t have much success in resisting pressure for unending idle speculation about the timing and direction of the next move in the official interest rate.

Economic commentators, in sharp distinction to political commentators, don’t hesitate to take a position in the policy debate and to campaign for particular policies. It’s intended to be a constant and logically consistent position - not one that keeps adjusting so that whatever a government does can be criticised - based on their school of economic thought and personal values, not on partisan loyalties. The bane of an economic commentator’s life is people always trying to consign him or her to a party-political box. In the past most of them have tended to be pretty orthodox in their views - pretty rationalist - but some of us have been trying to offer a wider range of views. The commentators’ paper’s emphasis on race-calling means macroeconomic issues tend to crowd out microeconomic issues, which are often more important. The journalistic profession’s obsession with timeliness - with never being ‘off the pace’ - limits their ability to continue pursuing issues once the political caravan has moved on.

Economic commentators are not great original thinkers. They don’t keep up with the literature. As with most economists, most of the arguments they mount and policy solutions they espouse are pretty derivative. I’ve never deluded myself I’ve been giving the pollies policy advice that was significantly different to and superior to the official advice they were getting. Economic commentators spend a lot of time talking to senior econocrats, and much of what they write echoes the views of the particular econocrats they talk to. They don’t talk to academic economists as much as they probably should, mainly because so few academics keep up with the policy debate. My emphasis has been more on explaining economic policies to my readers than on telling pollies or central bankers how to run the country. And these days I’m trying to offer my readers a critique of economists and economics.

One factor that hugely limits the influence of economic commentators is that all of us read more for reinforcement of our existing views than for enlightenment. We generally avoid reading the opinions of people we know we’ll disagree with, though psychological studies find that, where we do persevere with an article that doesn’t fit with our views, it serves only to confirm the rightness of those views.

I guess that where the economic commentators all sing the same song, a song that’s being sung also by the econocrats and many academics, and we go on doing that for long enough, it is possible to make certain views the conventional wisdom among elite opinion. Of course, my opinion on the extent of our influence is hardly objective, but from my perspective it’s pretty limited.

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