Budget becomes Canberra's con job on the nation

Tuesday night's budget may have become the central plaything in the dog fight between Labor and Liberal, but its economic importance is a shadow of what it used to be.

It suits no one in Canberra to admit it - not the pollies of either side, the econocrats, the business lobbyists nor the journalists - but these days the budget is not of great significance in the macro management of the economy.

True, it's still of great newsworthiness because the decisions the government makes about changes to spending programs and taxes do affect the pockets of people across Australia.

And these decisions are of micro-economic significance because they affect the efficiency with which the nation's economic resources are allocated. They also affect the fairness with which income is distributed between low, middle and upper-income households.

But with so many people having made up their minds on whom they'll vote for, and so many of the nasties already leaked to the media (or selectively leaked to the morning papers before being announced the same day), I doubt the budget will have much political significance.

And that's even if, following the usual budget media-manipulation script, the government has held back a few nice measures for the media to give exaggerated attention to on the night.

Even so, Canberra's dirty little secret is that the decisions we'll be making so much fuss about on Tuesday night will have surprisingly little effect on how the macro economy performs over the coming financial year.

That's for two reasons. First, politicians' decisions have much less effect on the budget than the daily decisions made by the 98.4 per cent of Australians living outside the ACT.

If, as seems likely, most of the budget deficit we're told about on Tuesday is accounted for by the "structural deficit" - that is, the net cumulative effect of unwise decisions by governments of both colours over many years - this will prove how much tosh the pollies have been spouting about the bad state of the economy.

Even the government has long been crying crocodile tears about how tough people are finding it to keep up with the rising cost of living. Julia Gillard and Wayne Swan keep doing this because their focus groups tell them the cost of living is all the punters can find to complain about.

They make sympathetic noises even though they know the economic indicators say real incomes are rising, not falling.

The second reason the budget's macro-economic significance is exaggerated by the denizens of Canberra is that, as the fine print in the budget papers admits every year, the primary responsibility for the day-to-day management of macro economy rests with monetary policy (the manipulation of interest rates), which is determined by the Reserve Bank in Sydney without reference to the pollies in Canberra.

It's true changes in the budget balance affect the strength of aggregate demand in the economy, but what the Keynesian Rip van Winkles haven't woken up to is that so do a lot of other things - the exchange rate, for openers.

The point is, the budget is just one of various factors the Reserve takes into account when deciding whether to use its interest-rate lever to stimulate or restrict demand. In other words, monetary policy is the "swing instrument".

Sometimes the Reserve chooses to push in the same direction as the budget, sometimes it chooses to counteract the budget by pushing in the opposite direction (as it did in the Howard government's later years when it was using its budget to worsen rather than improve the business cycle).

Much will be made on Tuesday night of the forecasts for the economy contained in the budget papers. We'll be told how fast Treasury expects the economy, inflation and all the rest to grow next financial year, as though this is news of great significance.

It isn't. Why not? Partly because it's the forecasts of the macro managers that matter and, as we've seen, neither Treasury nor its masters manage the economy. It's the Reserve Bank's forecasts that matter.

Actually, Treasury makes sure its forecasts (which it uses primarily to help it estimate budget spending and revenue) are little different from the Reserve's. Why? Because the Reserve's independence of the politicians makes it the more credible forecaster.

And get this: the forecasts we'll be told about with great fanfare on Tuesday will be old news. Why? Because they'll be the same as the forecasts the Reserve announced last Friday. The economy's growth should average 3 per cent in 2012-13 and about 2.5 per cent in 2013-14. The forecasts for inflation will be 2.25 per cent and about 2.5 per cent respectively.

Why does everyone in Canberra have an interest in misleading us about the budget's macro-economic significance? Because, as the ACT's principal export to the rest of Australia, the budget is how they make their living.

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What it's like to be genuinely poor

Don't be too alarmed by all the talk of budget black holes and everything being on the table in Julia Gillard's search for savings. It's more likely we're being softened up for a lot more budget deficits than for a horror budget in two weeks' time.

Even so, it's clear there will be more cuts in spending and tax concessions. And though they're hardly likely to be draconian, you can be sure they'll draw howls of protest from those affected, egged on by shock jocks and opposition pollies on the make.

What's more, it's a safe bet they'll be aimed mainly at the better-off. So before we're engulfed by another round of upper middle class self-pity, I thought I'd get in early and tell you a little about the lives of people who really do have difficulty making ends meet.

According to a survey conducted by the Bureau of Statistics in 2010, almost one in five Australian adults experienced "financial stress" that year, where this means not being able to pay their bills, rent or mortgage on time or make minimum repayments on their credit cards, or they had to sell or pawn something because they needed cash.

A newly published report by Dr Nicola Brackertz, of Swinburne University, for the Salvation Army (my co-religionists), tells us a lot about the who, how and why of people suffering genuine financial stress. She surveyed 225 of the clients of the Salvos' free financial counselling service, Moneycare, operating for 20 years.

The first thing to note is that a third of respondents were living alone and another 28 per cent were sole parents. Only 14 per cent were couples with dependent children.

Two-thirds were women. Almost 80 per cent had a government pension or benefit as their main source of income. Only 15 per cent had wages as their main income.

Almost 40 per cent of respondents were renting privately and 22 per cent were renting public or community housing. Only 21 per cent were paying a mortgage and just 5 per cent owned their homes outright.

Put all this together and it tells me we're dealing with people right at the bottom of the heap. Most of the respondents would be unemployed, on the disability support pension or sole parents (many of whom have been relegated to the dole by a caring government).

Since the great majority of age pensioners own their homes, we're dealing in the main with only those age pensioners living alone and renting. It all goes to show how close people on the dole live to the poverty line, the more so if they have to rent privately.

With rents as they are, it's no surprise people in privately rented accommodation on a very low income are highly likely to experience financial stress. The surprise is the disproportionate number of respondents living in public housing.

The rent these people pay is generally set at 25 per cent of their income, no matter how low that income is. This sounds pretty generous; the standard measure of housing stress is rent or mortgage payments exceeding 30 per cent of income.

The trouble is the cost of true necessities such as food, clothing and power tends to be a reasonably fixed amount, whatever your income. So if your income is very low, you may not be left with enough for spending 25 per cent of the total on rent to be easily manageable. By the same token, if your income is quite high, a lifestyle choice to devote a lot more than 30 per cent of it to housing doesn't leave you feeling the pinch.

If you're as comfortably off as I am, it's a surprise to discover how small were the total debts that got the respondents into trouble with their creditors. Although a third had debts of more than $20,000, the typical (median) debt level was $5000 to $10,000.

Almost half had three or more sources of debt, with the most common being utility bills, credit cards, phone bills and personal loans. Well over half the respondents had been experiencing financial difficulties for two years or more.

Why did the respondents get into financial trouble? In their own words, "the leading causes were insufficient income caused by retrenchment, unemployment or underemployment and an insufficient level of government allowances and pensions", the report says.

"Health reasons, including disability and mental illness, often prevented respondents from earning sufficient income." It's easy for you and me to tell ourselves these people are just bad money-managers. But American research I've been reading says they're no better or worse managers than the rest of us. Their real problem is that life at the bottom is so much more unforgiving.

When your income's so low you need all of it just to get by, there's no scope to build a buffer of savings to cover you when quarterly utility bills arrive or some unexpected expense arrives. And when you can't afford car insurance or home contents insurance, big unexpected expenses are more likely to arrive.

When some service is cut off because you haven't paid the bill, you can't get it back on until you've paid the arrears and a reconnection fee. When you borrow to tide yourself over, you pay much higher interest rates than the rest of us - including to "payday lenders" and pawnbrokers.

If none of this applies to you, count your blessings (as we used to sing in Sunday school).

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'Wealth creators' push materialism over social side

There is a contradiction at the heart of the way we organise our lives, the way governments regulate society and even the way the Bureau of Statistics decides what it needs to measure and what it doesn't. Ask people what's the most important thing in their lives and very few will answer making money and getting rich. Almost everyone will tell you it's their human relationships that matter most.

And yet much of the time that's not the way we behave. Too many of us spend too much time working and making money, and too little time enjoying the company of family and friends.

We live in an era of heightened materialism, where getting and spending crowds out the social and the spiritual. That's the way most of us order our lives and it's the way governments order our society. They worry about the economy above all else.

Indeed, the parties' chief area of competition is over their ability to manage the economy. The opposition's latest criticism is that under Labor we're losing our "enterprise culture". What's an enterprise culture? One where all the focus is on "creating wealth" - making money, to you and me - and none is on how that wealth should be distributed between households or what it should be spent on.

It's one where the demands of the "wealth creators" (read business people) should receive priority over the selfish concerns of the wealth recipients and dissipaters (read you and me). But above all, it's one where the chief responsibility of governments is to hasten the growth of gross domestic product.

On the face of it, Julia Gillard seems to fit the opposition's criticism. This week she's hoping to make progress in putting her long-cherished national disability insurance scheme into law. Last week she was in the western suburbs of Sydney celebrating international women's day and offering "a pledge to all women and girls" that "Australia is promoting a world where women and girls can thrive and where their safety is guaranteed".

And Gillard used the occasion of her visit to the west to demonstrate her practical concern about growing traffic congestion and to announce a "national plan to tackle gangs, organised crime and the illegal firearms market".

At one level, all this is true, none of it's made up. At another level, however, it's carefully crafted image building, intended to highlight the difference between Gillard and her opponent and emphasise those differences considered most likely to appeal to traditional Labor voters who show every intention of changing sides.

The deeper truth is that, like most politicians, Gillard is working both sides of the street. Ask her and she'll assure you her government is just as good at managing the economy - and "creating wealth" - as her opponents, if not better.

Unsurprisingly, this other, harsher side of Labor was revealed at the weekend by the Treasurer. Wayne Swan opened his weekly economic note thus: "Putting a budget together is always about priorities. For the Gillard government, our No. 1 priority will always be putting in place the right strategies to support jobs and growth to keep our economy one of the best performing in the developed world."

Ah, yes. Labor professes to be just as devoted to the great god GDP as its evil, uncaring opponents. As part of this, it's been struggling - unsuccessfully so far - to get its budget back to surplus. And as part of this struggle it has required all government agencies to economise in their use of resources.

The Bureau of Statistics has been required to find savings of between $1.1 million and $1.4 million a year - hardly a huge sum in a government budget of $387 billion. But the bureau has found a way to solve its problem for the coming financial year pretty much in one go. It's decided to cancel the "work, life and family survey" long scheduled for this year.

This is mainly a survey of how people use their time, requiring a random sample of households to keep diaries of the way their time was spent for a short period. GDP measures only the value of work that's been paid for in the marketplace. It ignores all the unpaid work performed in the home, including caring for kids, and the work of volunteers.

Time-use surveys fill that gap. How much time are women spending in paid and unpaid work? How is women's participation in the paid workforce changing over time as they become better educated? How much paid work is being done by people of retirement age? To what extent is paid work encroaching on our weekends? How is the burden of housework being shared between husbands and wives in two-income families?

It had been hoped that this year's survey would shed more light on changes in the time devoted to caring for invalids and the frail aged as governments try to save money by keeping people out of institutional care. And while we're at it, what has growing traffic congestion done to the time we spend commuting?

One of the most popular maxims of the wealth creators is: you can't manage what you don't measure. Directly or indirectly, most of the Bureau of Statistics' efforts are directed at measuring GDP. It's so important it's measured four times a year. Our time use hasn't been measured since 2006. The cancellation of this year's survey means it won't be measured again until 2019.

How do we keep on our present, hyper-materialist path? One of the ways is by failing to measure its consequences.

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Budget redistributes income over life cycle

Listening to all the argy-bargy over the budget update makes you think - what strange things budgets are. The government spends all this money - hundreds of billions a year - but where does it come from? From us, of course. The politicians use the budget to take money from us with one hand, then give it back with the other.


They have one set of public servants to take our money from us and another to give it back. What's the point of all this "churning"? Wouldn't it be a lot simpler and cheaper to have lower taxes and lower spending?

If we each got back pretty much what we put in, it would indeed be a pointless, wasteful exercise. In reality, high-income earners put in a lot more than they get back, whereas low-income earners receive a lot more than they pay in taxes.

But even that doesn't adequately describe the rearranging brought about by the budget.

Every six years the Bureau of Statistics conducts a study in which, using several of its surveys, it takes all the taxation we pay - federal and state - and attempts to attribute it to different classes of household. It does the same for all federal and state government spending.

Of course, not all the taxes we pay can be attributed to households - company tax, for instance. Similarly, not all government spending can be attributed - spending on defence or roads, for instance.

In its latest study, for 2009-10, the ABS managed to attribute $194 billion, or 62 per cent, of total government revenue and $234 billion, or 51 per cent, of government spending.

Remember Shakespeare's seven stages of man? The study divides Australia's 9.8 million households into 10 main life-cycle stages. It turns out whether your household's a net payer or a net recipient depends heavily on where you are in the life cycle. We'll limit ourselves to six stages.

Most people start their working lives as single and under 35. On average, people in this category pay $226 a week in income tax and $115 a week in indirect taxes, such as the goods and services tax and the various excises.

They get back very little in cash benefits ($28 a week) and not a lot more in benefits in kind, $80 a week, mainly health care plus a bit of public spending on tertiary education.

So, on average, younger singles pay $233 a week more in taxes than they get back in benefits.

The next typical life stage is being young (under 35) and married, before the kids start coming. Households in this category - in which both partners are likely to be working - pay an average of $384 a week in income tax and $196 in other taxes.

They get back virtually nothing in cash benefits ($12), but $136 worth of benefits in kind, mainly healthcare and tertiary education.

So, on average, young childless couples pay no less than $432 a week more in taxes than they get back in benefits.

Once the kids start arriving, however, the tables turn. Somewhat older couples with dependent children, the eldest of which is aged between five and 14, pay more income tax ($454) and a bit more indirect tax at $227 (a sign of a more frugal life style).

Cash benefits jump to $133 a week (mainly family tax benefit) and benefits in kind leap to $608 a week (mainly school education, but also a lot more healthcare and a bit of childcare subsidy).

So, on average, couples with a kid or two get back $60 a week more than they put in. They think they're paying a lot of tax but, in truth, they're getting a net subsidy from other taxpayers.

Once the kids grow up, however, the tables turn again. Couples with non-dependent children average $604 a week in taxes. Against this, they get cash benefits of $176 and benefits in kind (overwhelmingly healthcare) of $328.

So older working couples revert to paying more in taxes than they get back, to the tune of $100 a week.

We've reached the last two stages of life: couples 65 and over, then single people 65 and over. On average, largely retired couples pay next to nothing in income tax and a bit in indirect taxes, totalling $168 a week. Against that, they get cash benefits of $378 (mainly the age pension) and benefits in kind (mainly healthcare) of $481.

So, on average, retired couples get back $691 a week more than they pay. For surviving single retirees it's a net gain of $475 a week.

See what all this proves? As well as redistributing income from rich to poor, the budget acts as a giant, multi-faceted mutual support scheme. At some points in your life you're a net contributor, at others a net recipient.

The system requires those without dependents to subsidise those with, particularly when the little blighters need educating. It requires the well to subsidise the sick. It requires those who work to subsidise those too old to work.

I think it's a good system, a sign we live in a reasonably caring, civilised society, where those in need get supported by the rest of us.

It's a reason we should pay our taxes with a lot less grumbling. The pity is, the system's so complex and convoluted it's not until you see a special study such as this that you realise how it works - it's inbuilt fairness and solidarity.

Something to think about next time you're tempted to justify a demand on government because you've "paid taxes all my life". You've also been benefiting all your life.

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We need a more balanced approach to progress

A lot of the problems the nation struggles with and argues over boil down to the considerable potential for conflict between what economists summarise as "equity" and "efficiency".

We act as though one is right and the other wrong but, in truth, sensible people want a mix of both. So, though we don't always realise it, the hard part is finding the best trade-off between the two.

"Efficiency" means taking the scarce resources of land, labour and capital available to the community and employing them in such a way that they produce the combination of goods and services that maximises the satisfaction of the community's material wants.

So it's about improving the productivity of our work effort - getting a bigger bang for our buck and minimising waste. But it's also about being flexible in our response to the change that comes along.

Technology is always improving, allowing us to achieve the things we want more efficiently or even allowing us to satisfy wants we didn't know we had. So we accept it as a force for good, but it can greatly disrupt the lives of people whose jobs have been geared to the old technology.

No one tends to argue against technological change, but we're often less willing to accept change coming from that other major source, change in how the rest of the world relates to us. Why should we change just because they've changed?

Let's say the economic development of China and India reaches the point where they need huge quantities of coal and iron ore to make steel. They're willing to pay much higher prices and their need for a lot of steel is likely to run for several decades.

Are we willing to take their money? Sure. Are we willing to build a lot more mines to accommodate their needs? Sure. Are we willing to pay the various prices that come with this good fortune: the high dollar that makes life a lot tougher for manufacturers and others, the need to shift workers and other resources to other parts of the country, the two-speed economy this will bring? Not so sure.

All this sounding familiar? The efficiency story is one we hear all the time from economists, business people and politicians.

Taken narrowly, "equity" refers to the fairness with which the proceeds from all this efficiency are distributed between individuals and households. Is income being shared more unequally between the top, middle and bottom, or less?

But I want to use the term more broadly to encompass all our non-efficiency objectives. Not just monetary fairness, but our need to preserve the natural environment, need for strong relationships with family and friends, need for recreation and our desire to live in a community that's free, democratic and subject to the rule of law, with harmony between the many groups that make it up.

You can see the scope for conflict between all these objectives. We don't want to be so efficient we're unfair, nor so fair we're inefficient.

Conflict arises partly because people tend to specialise in one objective or another. They bang on about the economy or the environment or social concerns as though their speciality was all that mattered. Business people and economists are particularly prone to having one-track minds, but they're by no means the only super-specialists.

An even bigger problem arises because so many people tend to conceal pursuit of their own interests behind the banner of a larger, worthier cause. Cutting my taxes would be great for the economy. If you care about People not Profit, you'll protect my job from change (what this implies for other people's jobs is not my concern; they can look after themselves).

I have doubts about the sincerity of business groups demanding reforms to correct our supposed weak productivity performance. Why? Because the "reforms" they choose to advocate would benefit themselves in the first instance and the rest of us only indirectly.

But, similarly, unions fight to preserve a status quo that's been overtaken by events and to protect their (surviving) members' interests at the expense of other workers.

Perhaps many of these urgers aren't knowingly dishonest in the way they frame their case, just so conscious of their own interests that they're unable to see how self-serving their arguments are.

Maybe I'm just getting old, but it seems to me the public debate about government policies is getting more self-seeking, strident and polarised.

It also seems the people who worry most about money have more of the stuff and are able to use it to buy a bigger say in the debate. We're always hearing how much money we'll lose if we fail to improve our productivity performance, but we rarely hear about what we have to give up to preserve and enhance our material affluence.

The people reminding us there's more to life than money and the things it buys don't get much of a hearing. Are we being asked to work longer hours (including at the end of a mobile phone)? Will we be required to work on weekends and public holidays? Will that mean we see less of our spouse, kids, extended family and friends? If so, how exactly will we be better off?

Will the hastening pace of modern life make us more stressed and damage our health? Will more people succumb to depression? Will greater efficiency make our jobs less secure and less permanent? Will we continue destroying the environment and losing species? If so, how exactly will we be better off?

We need a more balanced approach to progress. One that weighs the pros and cons of "reforms" more carefully and doesn't go overboard in one direction or another.

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Productivity loses in unholy Gonski money fight

We've just stuffed up a great opportunity to improve worker productivity. You didn't notice? I bet you didn't. It slipped past without the business people and economists who claim to be so concerned about productivity noticing a thing.

It happened last week. The independent schools lobby came out in full cry against the Gonski report's proposal to put federal funding of schools on a needs basis. As is now de rigueur for interest groups on the make, the lobby claimed to have ''modelling'' showing 3200 schools would lose funding under the proposal despite the government's guarantee that ''no school would lose a dollar''.

Though lists of allegedly losing schools were leaked to the Murdoch press, the modelling methodology has not been adequately documented, nor properly examined by the media (fat chance) or anyone else.

But when this attack was combined with the opposition's decision to use Gonski for another scare campaign, Julia Gillard went to water, promising ''every independent school in Australia will see their funding increase under our plan''. In real terms, no less.
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David Gonski and his committee proposed increased funding of $5 billion a year for schools - government or non-government - according to their numbers of low-income, indigenous, disabled, non-English speaking or remote-area students.

According to the calculations of Trevor Cobbold, of the public-school Save Our Schools lobby group, Gillard's promise of extra funding for independent schools regardless of educational need could cost a further $1.5 billion a year.

See what happened? Successful lobbying by the independent schools ensured that, however much extra ends up being spent on federal grants to schools, more will go to privileged students who don't need it and less to underprivileged students who do.

Should Tony Abbott win the federal election, it's likely little or nothing extra will be spent on increasing resources for the education of the underprivileged. And that will be a lost opportunity to improve the future productivity of Australia's workforce.

And yet we've heard not a peep from all those business people, economists and economic rationalists who profess to be so worried about our supposedly weak productivity performance. Why not? Two rival explanations come to mind.

One is that they're not genuine in their concern and are using the productivity argument merely as a cover for their demands the government shift the balance of industrial relations bargaining power back in favour of employers and cut the rate of company tax.

The more charitable alternative is that their thinking moves only in straight lines and familiar ruts, causing them to frame the Gonski debate as one involving ''equity'' (fairness) rather than ''efficiency''. Many economics types regard equity issues as beyond their expertise or interest.

Press them and some will say they believe in ''equality of opportunity'' but not ''equality of outcome''. If so, there aren't many proposals fitting that criterion better than ensuring disadvantaged kids get a decent education.

But you don't have to think hard to realise Gonski represents a rare - and thus highly attractive - case where equity and efficiency aren't in conflict.

When we think about human capital and its contribution to productivity improvement, we tend to think of doing more at the top of the skills ladder. But it applies just as much at the bottom.

Leaving aside the ultimate saving to the taxpayer, the better we educate the disadvantaged, the greater the productivity of their labour and its value to employers. And even if few became brain surgeons, their higher rate of participation in the workforce would increase their contribution to the nation's wealth.

It's important to realise the opportunity for ''moving forward'' we stuffed up last week. Gonski represented an attempt at compromise in the unending public-private school battle, a truce in the class conflict.

It involved an end to the division of federal school grants on the basis of schools' category, with funding growth based on the differing resource needs of disadvantaged students regardless of which system they were in. No school's funding would be reduced no matter how privileged, but in a relatively painless process over time the basis of funding would shift from past entitlement to present student need.

This required the teachers' unions and anti-state-aiders to accept that independent schools would continue to receive significant assistance regardless of need. It required privileged independent schools to accept that, over time, their share of total funding would decline in favour of the disadvantaged.

So who wasn't prepared to compromise? The ideologically crazed unions? No, the money hungry elite schools - as usual, hiding their naked greed behind the camouflage of the cash-strapped Catholic systemic schools and some far-from-loaded, relatively new independent schools.

There's nothing new about the pursuit of blatant self-interest in the eternal political money fight. But the political ''debate'' seems to be getting more selfish and aggressive as each year passes. We used to be able to compromise and co-operate for the greater good - to quietly accept that some people's need was greater than our own - but not any more, it seems.

Some of the headmasters and headmistresses of our elite schools are hugely impressive as individuals. Do they really go along with this self-seeking? Here's a good school motto: the first shall stay first and the last shall stay last.

To see so many professed followers of Jesus using all the secular world's dishonest lobbying tricks to preserve their privilege against the depredations of the undeserving poor is truly disillusioning.

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How to improve health without paying more to doctors

It's a well established fact and most of us have at least heard of it. It's also a surprising fact. But it's a fact that doesn't get nearly as much attention as it deserves - not from our politicians, the media or the public.

It's known to social scientists and medicos as the "social gradient" or the "social determinants of health". And it means there's a strong correlation between socio-economic status and health. The higher your status, the better your health.

To put it the other way, the lower a person's social and economic position, the worse their health. And the health gaps between the most disadvantaged and least disadvantaged socio-economic groups are often very large.

One organisation that's taken a great interest in the phenomenon is Catholic Health Australia. It has commissioned the national centre for social and economic modelling (NATSEM) at the University of Canberra to produce two reports on the subject, one of them released this week. It has also produced a policy paper of its own. I'll be drawing on all three documents.

You may think the explanation is pretty obvious: the more money you've got, the better health care you can afford. You can also afford a more nutritious diet. And the better educated you are, the more aware you're likely to be of the risks to health from smoking, excessive drinking and insufficient exercise.

These things are part of it, no doubt, but it's not that simple. Medicare is, after all, free or cheap to all. And who doesn't know that smoking damages your health?

There's growing evidence that status and power affect health. The lower you are in the hierarchy, the worse your health is likely to be. A fair bit of it seems to be psychological.

A study of men in England found life expectancy of 78.5 years for a professional worker, 76 years for a skilled non-manual worker and 71 years for an unskilled manual worker.

According to a paper by the American College of Physicians, job classification is a better predictor of cardiovascular death than cholesterol level, blood pressure and smoking combined. And non-completion of high school is a greater risk factor than biological factors for the development of many diseases.

The earlier report from NATSEM found that if people in the most disadvantaged areas of Australia had the same death rate as those in the most advantaged areas, up to two-thirds of premature deaths would be prevented.

Among Australians aged 25 to 44, only 10 per cent of those who are least disadvantaged report having poor health, whereas for those who are most disadvantaged it's up to 30 per cent. Among Australians aged 45 to 64, the most disadvantaged are up to 40 per cent less likely to have good health than the least disadvantaged.

Early high school leavers and those who are least socially connected are 10 per cent to 20 per cent less likely to report being in good health than those with a tertiary education or a high level of social connectedness.

Those Australians who are most socio-economically disadvantaged are twice as likely as those who are least disadvantaged to have a long-term health condition. More than 60 per cent of men in jobless households report having a long-term health condition or disability, and more than 40 per cent of women.

The socio-economic factors best at predicting whether people smoke are education, housing tenure (whether you rent, are paying off your home or own it outright) and income. Less than 15 per cent of individuals with a tertiary education smoke.

Among women aged 25 to 44, less than 20 per cent of those in the most advantaged socio-economic classes are obese, compared with up to 30 per cent of those in the most disadvantaged classes. The likelihood of being a high risk drinker for younger adults who left school early is up to two times higher than for those with a tertiary qualification.

See what this is saying? There are two ways to improve the nation's health. One way is to spend a lot more taxpayers' money on health care. That's the solution we're always hearing about, especially from doctors.

The other way is to reduce socio-economic disadvantage; to narrow the gap between the top and the bottom, not just in income but also in educational attainment (completing secondary education), housing tenure (more affordable rental accommodation) and the way people are treated at work.

This is the solution we rarely hear about. It too would cost money, of course. But it would make more people happy as well as healthy. And it would also save taxpayers money. Just how much is what NATSEM attempts to estimate in this week's report.

If the health gaps between the most and least disadvantaged groups were closed (an impossible ideal, but one we could work towards), up to 500,000 Australians could avoid suffering a chronic illness. Up to 170,000 people could enter the labour force, generating up to $8 billion a year in extra earnings.

That would produce savings in welfare payments of up to $4 billion a year. Up to 60,000 fewer people would need to be admitted to hospital annually, producing savings of $2.3 billion. Up to 5.5 million fewer Medicare services would be needed each year, saving up to $275 million. And up to 5.3 million fewer prescriptions would be needed each year, saving the pharmaceutical benefits scheme up to $185 million a year.

But the real point is that when we choose to allow the gap between rich and poor to widen each year - including by allowing the dole to stay below the poverty line - we're casting a blind eye to the ill health it causes.

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Economic fixes must offer a fair go for all

When you listen to street interviews with people in the troubled countries of the euro zone, a common complaint emerges: whereas some people waxed fat in the boom that preceded the crisis, it's ordinary workers who suffer most in the bust, and they and even poorer people who bear the brunt of government austerity campaigns intended to fix the problem.

In other words, achieving a well-functioning economy is one thing; achieving an economy that also treats people fairly is another. Economists and business people tend to focus mainly on economic efficiency; the public tends to focus on the fairness of it all.

Fail to fix the economy and almost everyone suffers. But offend people's perceptions of fairness and you're left with a dissatisfied, confused electorate that could react unpredictably.

The trick for governments is to try to achieve a reasonable combination of both economic efficiency and fairness. Fortunately, but a bit surprisingly, the need for this dual approach has penetrated the consciousness of the Organisation for Economic Co-operation and Development - the rich nations' club which is expanding its membership to include the soon-to-be-rich countries.

New research from the organisation deals with ways governments can get their budgets back under control without simply penalising the vulnerable and ways they can improve the economy's functioning and increase fairness at the same time.

Much of the concern about fairness in the hard-hit countries of the North Atlantic has focused on bankers. In the boom these people made themselves obscenely rich by their reckless, greedy behaviour, eventually bringing the economy down and causing many people to lose their businesses and millions to lose their jobs.

But their banks were bailed out at taxpayers' expense - adding to the huge levels of government debt the financial markets now find so unacceptable - and few bankers seem to have been punished. Some have even gone back to paying themselves huge bonuses.

It's a mistake, however, to focus discontent on the treatment of a relative handful of bankers. The fairness problem goes much wider. In most developed countries, the long boom of the preceding two decades saw an ever-widening gap between rich and poor.

In the United States, almost all the growth in real income over the period has been captured by the richest 10 per cent of households (much of it going to the top 1 per cent), so that most Americans' real income hasn't increased in decades.

It hasn't been nearly as bad in Australia. Low and middle household incomes have almost always risen in real terms, even though high incomes have grown a lot faster.

Looking globally, a lot of the widening in incomes has come from the effects of globalisation and, more particularly, technological change, which has increased the wages of the highly skilled relative to the less skilled. But a lot of the widening is explained by government policy changes, such as more generous tax cuts for the well-off.

The euro zone countries need not only to get on top of their budgets and government debt, but also to get their economies growing more vigorously. So the organisation has proposed structural reforms - we'd say microeconomic reforms - which can foster economic growth and fairness at the same time.

One area offering a "double dividend" is education. Policies that increase graduation rates from secondary and tertiary education hasten economic growth by adding to the workforce's accumulation of human capital while also increasing the lifetime income of young people who would otherwise do much less well.

Promoting equal access to education helps reduce inequality, as do policies that foster the integration of immigrants and fight all forms of discrimination. Making female participation in the workforce easier should also bring a double dividend.

Surprisingly - and of relevance to our debate about Julia Gillard's Fair Work Act - the organisation acknowledges the role of minimum wage rates, laws that strengthen trade unions, and unfair dismissal provisions in ensuring a more equal distribution of wage income.

It warns, however, that if minimum wages are set too high they may reduce employment, which counters their effect in reducing inequality. And reforms to job protection that reduce the gap between permanent and temporary workers can reduce wage dispersion and possibly also lead to higher employment.

Systems of taxation and payments of government benefits play a key role in lowering the inequality of household incomes. Across the membership of the organisation, three-quarters of the average reduction in inequality achieved by the tax and payments system come from payments. Means-tested benefits are more redistributive than universal benefits.

Reductions in the rates of income tax to encourage work, saving and investment need not diminish the inequality-reducing effect of income tax, provided their cost is covered by the elimination of tax concessions that benefit mainly high income earners - such as those for investment in housing or the reduction in the tax on capital gains. Getting rid of these would also reduce tax avoidance opportunities for top income earners.

So it's not inevitable that the best-off benefit most during booms and the worst-off suffer most in the clean-up operations after the boom busts. It's a matter of the policies governments choose to implement in either phase of the cycle.

You, however, may think it's inevitable that governments choose policies that benefit the rich and powerful in both phases.

But we're talking about the government of democracies, where the votes of the rich are vastly outnumbered by the votes of the non-rich. So if governments pursue policies that persistently disadvantage the rest of us, it must be because we aren't paying enough attention - aren't doing enough homework - and are too easily gulled by the vested interests' slick TV advertising campaigns.

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The economy's animal spirits

John Maynard Keynes first recognised it when seeking to explain why the Great Depression happened even though the economic theory of the time said it couldn't. But it's taken the global financial crisis to help us rediscover that truth: the main reason economies fluctuate as they do is the changing psychology of the people who compose the economy.

Keynes called this our "animal spirits", which is the title of a book by George Akerlof, a Nobel laureate in economics, and Robert Shiller, a leading proponent of behavioural finance.

Why isn't Keynes widely recognised for what he was: the first behavioural economist? Because his followers - notably Sir John Hicks, another Englishman - quickly suppressed that part of Keynes's explanation for the Depression in their efforts to make Keynesian thinking more acceptable to economists steeped in the neo-classical assumption that economic actors (you and me) always act rationally (with carefully calculated self-interest) and never emotionally or instinctively.

Hicks and others preferred to explain the Depression by means of the newly invented Keynesian "multiplier" so they could do what they thought mattered most, win support for Keynes's key policy prescription: the use of government spending to stimulate demand when it was deficient.

These days, the term animal spirits is usually used to refer to business and consumer "confidence", as measured by, for example, the Westpac-Melbourne Institute index of consumer sentiment and the NAB survey of business confidence.

But Akerlof and Shiller point out that "animal" means "of the mind" or "animating". So they take the term to refer to all our non-economic, non-rational emotions and motivations. Their point is that though these motivations have been defined as non-economic (and thus have been excluded from the conventional, neo-classical model of the economy), that doesn't stop them having a considerable influence over our economic behaviour.

The truth is that, even with a multiplier built in, the neo-classical model can't explain why market economies have always moved in cycles of boom and bust. It simply assumes the economy is always at full employment. But the changing moods and attitudes of the humans who make up the economy can explain the business cycle.

Akerlof and Shiller acknowledge confidence as the cornerstone of animal spirits, but argue they have four other components: fairness, corruption and bad faith, money illusion and stories. These other elements are needed to adequately explain the economy's ups and downs, and catastrophic events such as the global financial crisis.

Conventional economics assumes that when businesses or individuals make significant investment decisions they consider all the options available to them and all the possible monetary outcomes, they attach probabilities to each outcome, multiply the two together and then add them up to get the "expected benefit". If it's high enough, they go ahead with the project.

But often the probabilities are no more than educated guesses. So whether the project goes ahead often depends on how confident people feel about the prospects for the economy and their project, whether they're in an optimistic or pessimistic mood.

Concerns about fairness are excluded from the conventional model, but not from the motivations of economic actors. Questionnaires show most people regard it as unfair for a business to raise the price of umbrellas on a wet day (a behaviour economists regard as rational), but fair for it to raise prices when its costs have increased.

Sociologists tell us there are behavioural "norms" that describe how people think they and others should behave in particular circumstances. We get angry when people fail to conform to norms and this anger may have adverse consequences for businesses.

One area where perceptions of fairness are very much to the fore is in the setting of wages. Workers get angry when there's any suggestion of their wages being cut (even though they may well accept a fall in their real wages if economic conditions seem to warrant it).

Employers' inability to cut nominal wages when there's a fall in the demand for their product means downturns in the economy lead to more unemployment than they would if wages and prices were more flexible (as the model assumes).

Most recessions involve corporate corruption scandals and instances of "bad faith" (people behaving in ways that are unethical but not illegal).

The business cycle is connected to fluctuations in personal commitment to principles of good behaviour and to fluctuations in predatory activity, which in turn is related to changes in opportunities for such activity.

"Money illusion" means people base their economic decisions on "nominal" monetary amounts, failing to allow for the effect of inflation. But one of the most important assumptions of modern economics (where "modern" means it has reverted to the neo-classical assumptions that prevailed before the Keynesian revolution) is that people always see through the "veil" of inflation and compare prices in real terms.

The obvious truth is that sometimes people allow for inflation and sometimes they don't. Or, they do to an extent, but not completely. If so, this causes them to behave in ways contrary to those predicted by the conventional model.

The human mind is built to think in terms of narratives, of sequences of events with an internal logic and dynamic that appear as a unified whole. And much human motivation comes from living through a story of our lives that we tell ourselves.

The same is true for confidence in a nation, a company or an institution. Great leaders are first and foremost creators of stories.

High confidence tends to be associated with inspirational stories, stories about new business initiatives, tales of how others are getting rich.

"New era" stories (such as that the internet has brought us to a new era of profit and prosperity) have tended to accompany the major booms in sharemarkets around the world.

So ends Akerlof and Shiller's list of all the main "non-economic" things that are in our minds and that influence our economic behaviour, but aren't in the conventional model.

"If we thought that people were totally rational, and that they acted almost entirely out of economic motives, we too would believe that government should play little role in the regulation of financial markets, and perhaps even in determining the level of aggregate demand," they say.

"But, on the contrary, all of those animal spirits tend to drive the economy sometimes one way and sometimes another. Without intervention by the government the economy will suffer massive swings in employment.

"And financial markets will, from time to time, fall into chaos."

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