HOW AGEING AND THE RESOURCES BOOM WILL AFFECT WORKERS

Talk to Centrelink Financial Information Service Officers, Brisbane
March 24, 2010

With the recent publication of the federal government’s third intergenerational report since 2002 we’ve had another surge of concern about the ageing of the population. I want to try to clarify for you what this is likely to involve. It’s been generally portrayed as a bad thing - a threat - but, though it will certainly bring changes, many of those changes will be for the better. Let’s start by being clear on what ageing involves.

What is population ageing?

All of us get older every year, so what does it mean to say the population is ageing? It means the average age of all the people in Australia is rising - though by a lot less than 12 months each year. The average age would be falling if a lot more babies were being born to counter the fact that we’re getting older as individuals but, in fact, women are having fewer children than they used to in earlier decades (even though the fertility rate recovered a little in the noughties). The other factor is that the death rate is falling as we live longer lives. So a lower birth rate and rising longevity are the main causes of population ageing, but it’s being made more acute by the fact that the great bulge in the population that is the baby boomers (people born between 1945 and 1960), which is working its way through like a pig in a python, has reached the point where they’re turning 65 and starting to retire.

The latest report tells us that the number of people aged 65 to 84 is projected to more than double over the next 40 years, while the number over 85 more than quadruples. At present there are five people of working age to support every person of 65 or over, but this is projected to fall by almost half (to 2.7).

The ‘problem’ of ageing is exaggerated

Since a big part of the cause of ageing is that we’re living longer, you’d think this would be seen as a good thing, something to be celebrated. But ageing is almost always portrayed as a bad thing - a cause of many problems - and the latest intergenerational report is no exception. It tells us ageing will cause the economy to grow more slowly - our material standard of living won’t rise as quickly as it has been. As well, we’re told, increased spending on the aged will put great pressure on the federal budget, creating a ‘fiscal gap’ between government spending and revenue equal to 2.75 per cent of GDP by 2050, which is equivalent to about $35 billion a year in today’s dollars.

It’s true that the economy’s likely to grow a little more slowly in coming decades, mainly because of slower growth in the number of people joining the workforce. However, when you examine the report and its projections you find that most of the expected growth in government spending comes not from costs associated with the higher number of old people, but from the rising cost of new health technology and the likelihood that all of us will be demanding more and better healthcare. So the budget will have a problem with inexorably rising spending on healthcare. But though the politicians don’t like to admit it, the obvious solution to that problem is that we’ll all have to pay more tax from our rising incomes over the next 40 years.

It’s true that most other developed countries - the US, Britain, Europe, even New Zealand - will face serious budgetary problems coping with the growing cost of aged pensions and aged care. But that’s because their unfunded pension schemes are much more generous than ours, being unmeans-tested and, in many cases, related to the individual’s pre-retirement income. We don’t have problems to anything like the same degree because our age pension is so frugal, being means-tested and flat-rate. The compulsory super scheme we’ve put in to supplement the age pension - so that most people will retire with a combination of age pension and private pension - is an accumulation scheme that makes no promises about how much you’ll end up with.

Many ageing problems will solve themselves

The next point I want to make is that many of the ageing problems people point to will, to some extent, sort themselves out. Where they don’t, the government will sort them. The point is that our economy is ‘dynamic’ - it changes over time in response to situations that arise. People don’t just sit there accepting their fate, they try to do something about it. And though it’s wrong to imagine that ‘market forces’ have magical powers to eliminate all problems, it’s equally wrong to imagine they have no power to improve matters and that the only solutions come from government action.

Take for instance the often-heard complaint that the babyboomers can’t afford to retire because they haven’t saved enough. There’s truth in this complaint - even though I have to say that this problem arises because the babyboomers are sure they couldn’t get by on the age pension - even though all previous generations have - and even though they haven’t bother to save much. But here’s the real point I’m making: if it’s true the babyboomers can’t afford to retire then they won’t retire. They’ll keep working, even if only part-time. And every year they postpone their retirement is one extra year of saving plus one less year of having to support themselves in retirement.

And, indeed, this trend has already begun. In the 1980s and early 90s we saw a trend towards earlier and earlier retirement. Some of this was voluntary - such as federal public servants whose pension scheme had a quirk that encouraged them to retire just before they turned 55 - but a lot was involuntary, particularly for less-skilled blue-collar workers being made redundant from manufacturing. As you know, people are able to get access to their superannuation savings from the age of 55 - and earlier if they’re made redundant.

But that was a long time ago, and though some public servants may still be retiring early because of quirks in their super schemes, for about the past decade the tide has been turning and the proportion of 55 to 64 year-olds participating in the labour force has been rising, not falling. That is, people are tending to retire later. Since 2001 the participation rate for men aged 55 to 59 has risen from less than 72 per cent to more than 78 per cent. Since 1993 the participation rate for men aged 60 to 64 has risen from 54 per cent to almost 60 per cent. I expect this trend has a lot further to run.

You can see the federal government seeking to reinforce this trend, first by phasing up the female age pension age from 60 to 65; second, by introducing tax-free treatment of retirement income provided the individual has turned 60; and now in last year’s budget by beginning to phase the age pension age up to 67. The limited outcry over these moves is a sign they fit with people’s changing social attitudes. We’re living a lot longer than we used to, and are healthier than we used to be, so it follows that we can work for more years before we retire. It doesn’t make much sense for all of our extra years of life to be spent in retirement. What about manual workers whose bodies may not hold up for another two years to 67? We already make provision for them - disability support pension.

The pension age is being raised in most developed countries and I don’t think we’ve seen the last of our government’s efforts to raise the de facto retirement age. The next step - which may be recommended in the Henry tax reform report - would be to raise the age at which tax-free retirement benefits are available to align it with the age pension age. Nor do I think that 67 is the highest the pension age will go.

It’s often said that, whether or not older people want to keep working, they can’t because of employer prejudice against older workers. Older workers are the first to be laid off and the last to be rehired, we’re told. I’m sure there was a lot of truth to this complaint and there may be some lingering vestige of such a prejudice, but I’m equally sure it’s disappearing and probably largely gone.
Why? Because, at a time of population ageing, where skilled labour is perpetually in short supply, it’s a luxury employers can no longer afford. And most of them have already figured that out.

So I believe employers’ attitude towards older workers is in the process of reversing itself. One consequence of ageing is that fewer and fewer young people will be leaving education each year and joining the workforce (though this will be countered to some extent if we achieve high levels of skilled immigration). This being the case, employers will be anxious to retain the services of their existing, older - but skilled and experienced - workers. They’ll generally be sorry to see them retire and willing to offer the flexible arrangements necessary to have them stay on, even if only part-time.

Older workers possess something economists call ‘firm-specific knowledge’. They know how things are done; they know why they’re done that way and not some other way. When in the recessions of the early 1980s and the early 1990s big companies followed the corporate fashion of the time and sought to impress the sharemarket by announcing mass redundancies, they learnt the hard way that getting rid of your older workers involved also excising the firm’s ‘corporate memory’, so that it lost the ability to do certain things. Some of these key people had to be brought back, sometimes at great expense and as an admission of error. It’s no longer fashionable for big companies to try to impress with huge layoffs, and I suspect that part of the reason for this is the belated recognition that getting rid of your corporate memory isn’t a smart thing to do.

As older workers become more inclined to stay on, and employers become more desirous of having them stay on, governments are increasingly likely to change the tax laws to accommodate and encourage this trend. That’s because reversing the trend to early retirement represents the easiest and most obvious way to reduce the economic and budgetary costs of ageing. The next best way is to do more to help mothers return to the workforce and help more to work full-time rather than part-time. It’s probably no coincidence that we’re now finally seeing some action on paid parental leave.

The changing balance of supply and demand for labour

The key to understanding how ageing will affect workers is to understand the basic economic forces we’re dealing with - the changing balance of the supply and demand for labour. You also need to understand where we’re coming from. The economy is now emerging from a period of about 30 years - starting in the mid-1970s - when the number of people wanting to work greatly exceeded employers’ demand for workers and the rate of unemployment was always high. According to the economic textbook, such a position can’t be sustained because the price of labour (wages) will always adjust to bring supply and demand into balance. But the labour market doesn’t work the way textbooks say it does and, as I say, we went through a protracted period in which the supply of labour exceeded demand.

The supply of people wanting work was plentiful for three main reasons. First, because of the high fertility rate in the 50s, 60s and 70s, a lot of young people were entering the labour force each year. Second, because the bulge of babyboomers were at their prime working age. And third, because changing social attitudes and rising levels of educational attainment were prompting a lot of married women to return to the workforce.

As a consequence of this period of excess supply of labour, the balance of power in industrial relations shifted decisively in favour of employers. We saw a marked decline in strikes and other industrial disputes and, indeed, the steady decline of the union movement. More to the point for our present purposes, employers realised there was rarely any shortage of people wanting to work for them and so they became a lot more picky. They could demand higher levels of education than were needed to perform the tasks involved; they could favour married women over young people (more reliable); they could decline to interview any job applicant who’d been unemployed for more than a month or so and, above all, at a time of rapidly changing technology they could favour hiring young people over older people, whether those oldies were job applicants or existing employees. I can remember a time in the days of the Fraser government when there were concerns about high youth unemployment, it was considered virtuous to bundle older workers into retirement to make way for the younger generation.

Why did employers behave like this? Because the excess supply of labour allowed them to. The trouble is, because this excess lasted for 30 years, many people have come to regard it as part of the natural order - the way the world has always worked and always will.

In truth, that era has ended and we’ve entered a new era where employers’ demand for labour now exceeds the supply of people wanting to work. And this means the balance of industrial power is shifting from the employers back to the workers, just where it was in the post-war period that ended in the mid-70s. Why has the balance of supply and demand shifted? In a word, because of ageing. With an older population, you get more people who consume but don’t produce. So the demand for labour remains strong, but the supply of labour declines. To be more specific, we have fewer young people joining the workforce each year as the low rates of fertility in the 80s and 90s have their effect and as the babyboomers start surging into retirement.

The point is, it’s this change in the balance of demand and supply that gives workers the upper hand and forces employers to change their behaviour in line with the changed economic reality.

Employers will stop favouring young people over older people because they have to. There just won’t be enough young people entering the labour market to allow them to discriminate against older workers.

More generally, shortages of skilled labour will become commonplace, and rather than giving their workers a hard time, employers will have to try harder to retain the services not just of older workers but of all workers and discourage them from being poached by rival firms. Salaries will be higher, perks will be greater and employers will be a lot more solicitous of their workers’ welfare. Firms will vie to be seen as the ‘employer of choice’ in their industry. Why will they? Economic necessity.

This is the amazing thing about the portrayal of ageing as a great problem for the economy. It will be a problem for employers, but just the opposite for workers.

Before I move on, let me warn you about something. At about the time of the first intergenerational report in 2002, people focused their minds on ageing, looked at their existing workforces and noticed the high proportion of babyboomers, all of whom were about to retire. They did a bit of manpower planning and projected that, within 10 or 20 years there’d be huge shortages of doctors, nurses, teachers and many other professions. You could add all these shortages together and conclude that, with all these unfilled vacancies, the economy will surely grind to a halt. But I warn you against such a conclusion. Why? Because, as I said at the beginning, the economy is dynamic. Or to put it another way, because nature abhors a vacuum. Those massive projected shortages won’t transpire because, to a greater or lesser extent, people will find a way to overcome them. They’ll try to attract skilled immigrants, they’ll look for labour-saving solutions, they’ll allow nurses to do the work of doctors, or whatever.

I haven’t left myself much time to talk about the effect of the resources boom. In the last part of the noughties, immediately before the global financial crisis, we were in the grip of a resources boom, getting sky high prices for coal and iron ore as China and India undertake the massive and protracted installation of all manner of infrastructure needed to turn them into developed economies. The result for us was a booming economy, the lowest unemployment rate in 30 years and widespread shortages of skilled workers. We’ve been through resources booms before and the GFC seem to bring that one to an end as all the others had ended. But China and India turned out not to be greatly affected by the global recession. They have resumed their rapid march towards economic development, their demand for our resources has continued unabated and, after falling somewhat, resource prices are on the way up. We’re in for another period of huge investment in increased mining capacity, including a huge investment in LNG facilities. So the resources boom is back on, it seems like it won’t be long before the economy is back to full employment and skill shortages, and Asia’s heightened demand for our minerals and energy could run on for a decade or two.

If so, this will have profound effects on our economy. It will keep our exchange rate and interest rates high, and lead to a much bigger mining sector, but smaller manufacturing, agriculture and tourism sectors. It will change the mix of occupations accordingly, and it will change the nation’s geographic balance, favouring rapid growth in Western Australia and Queensland and much slower growth in the other states. Population will shift to the mining states as it has been for some time. That will be great for Queensland, though it will continue suffering the same problems it’s been suffering from for a while: growing pains.

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WHAT POLICY INSTRUMENTS ARE APPROPRIATE FOR THE GFC?

Talk to Graduate School of Government, University of Sydney
March 18, 2010

Before I get on to talking about the policy response to the GFC I want to go back to first principles and remind you that while, as public servants, you take government policy activity for granted - it’s what you’re employed to do - the appropriate role of government (whether, and under what circumstances, governments should intervene in markets) is perhaps the most contentious topic in politics and economics. The political philosophy of libertarianism - which gives primacy to individual liberty and carries a presumption against the need for government intervention - is overrepresented in the political debate in Australia and particularly the US. While by no means all economists are libertarians, most have a big streak of it in them because the dominant model of conventional, ‘neo-classical’ economics is built on the assumptions that people always act rationally and that markets are self-righting.

The ground rules for intervention

While the public is always urging governments to intervene to correct problems, real or perceived, and politicians are almost always keen to leap in, economists have a two-stage test before they accept such a need: 1) a significant instance of ‘market failure’ has to be demonstrated and 2) the ability of government intervention to correct the market failure - or at least do more good than harm - has to be demonstrated.

Market failure arises where:

a) there is insufficient competition within the market to produce the outcomes the model promises, or

b) there are ‘externalities’ (that is, where the actions of the participants in a market transaction have consequences for third parties [eg the wider community] whether those consequences are negative [eg generation of pollution] or positive [eg my education -or my invention of some improved technology - benefits other people]), or

c) where the goods or services being exchanged display the qualities of ‘public goods’. The two key qualities are that they a non-rivalrous (my consumption of the good doesn’t reduce the quantity of it available to others eg knowledge, use of the internet) and non-excludable (no one can be effectively excluded from using the good eg free-to-air television). The standard egs of public goods are lighthouses and defence spending, but there are other, less perfect examples. The free market will produce less of a public good than is in the best interests of the community because it’s so hard for private firms to make sufficient profit from producing it. This is why governments often end up producing those goods and services which have partial or complete public goods characteristics.

Other classes of market failure arise because of transaction costs, agency problems, or information asymmetry.
But there is also such a thing as government failure - where government intervention in the market makes things worse rather than better, or when the modest benefits don’t justify the considerable costs (eg the home insulation scheme?). There is a political/economic theory known as ‘public choice’ which holds, among other things, that politicians and bureaucrats always act in their own interest rather than the public’s interest, and that, whatever their original motivations, all government regulation of industry ends up being captured by the industry and turned to the industry’s advantage in, say, reducing competition within the industry (to the incumbents’ advantage), increasing protection or in persuading the government to subsidise industry costs.

Where I do stand in this debate? I believe market failure is common and that governments should usually act to correct it. But I also believe in govt failure and some degree of truth in the public choice critique. Governments and their bureaucrats do sometimes act in their own interests rather than the public’s and some regulation is captured and perverted by those being regulated. So I believe in intervention, but I also believe that getting intervention right, minimising unintended consequences and doing more good than harm is a tricky business, requiring a lot of careful thought, trial and error, experimentation, learning from experience and project evaluation. This is why I’m pleased to see you studying Policy in Practice and interested in discussing the choice of appropriate policy instruments.

Now let’s turn to the GFC. But before we do, let me just say this: one reason I was moved to remind you of the libertarian, free market, laissez faire view of the world is that it’s been very much in evidence in the debate about the causes and cures of the GFC, particularly in the US. It seems blatantly obvious to most people (including, I think, most economists) that the GFC is a case of massive market failure, but there have been plenty of libertarian-leaning economists in the US (and some here) willing to argue the crisis was really the product of government failure - government intervention gone wrong - and argue that the proposed regulatory response to correct the problem was unnecessary or even counterproductive. This, of course, is a line of argument that powerful interests in the financial markets are happy to hear and willing to sponsor.

I could talk about the GFC from a global perspective, but I’m going to concentrate on the Australian perspective - which, of course, is very different from that of the North Atlantic economies in the eye of the storm. (You can draw me out on the more global view in question time.)

The policy response to the crisis can be divided into two strands: 1) the macroeconomic response - the policy actions necessary to restore stability to the real economy, to lessen the recession and hasten the recovery and 2) the regulatory response - the policy actions necessary to correct the regulatory failures that permitted the crisis to occur and reduce the likelihood of a similar crisis recurring. I’m going to devote most time to discussing the choice of instruments in the macroeconomic response, but I will briefly discuss the prudential regulation response. (Again, you can draw me out in questions.)

The two main instruments available for macro management - the short-term stabilisation of demand as the economy moves through the business cycle - are fiscal policy (the manipulation of govt spending and taxation to influence the strength of demand) and monetary policy (the manipulation of interest rates to influence demand). Under the Keynesian influence, fiscal policy was the dominant instrument used in the post-war period, but from the mid-1970s the dominance switched to monetary policy. I want to start by explaining why fiscal policy fell out of favour with policy-makers - why they changed their view on which policy instrument was more appropriate for use in the day-to-day management of aggregate demand - and then explain why, contrary to that established view that fiscal policy was passé, it has been given a major role in the macro response to the GFC, both here and around the world.

Why fiscal policy fell out of favour with policy-makers

There has never been any denial that the budget’s automatic stabilisers should and do play an important counter-cyclical role. Rather, the query has been over discretionary policy. At least since the time of the Fraser government, monetary policy has been the primary instrument used for the short-term management of demand, with fiscal policy playing a back-up role at best. There was a great concern that policy adjustments needed to be more timely, to ensure their effects on economic activity were counter-cyclical rather than pro-cyclical. Policy-makers identified three causes of delay, and concluded that monetary policy was better than fiscal policy on two out of the three.

First, the recognition lag - the time it takes policy makers to realise that a policy adjustment is needed. This is caused mainly by delays in the publication of economic indicators and, on the face of it, you would expect it to apply equally to both policy arms. However, monetary policy has sought to reduce the lag by adopting a forward-looking or pre-emptive approach where policy adjustments are based on forecasts of inflation, with actual indicators used mainly to update the forecasts. Particularly because of the next point, this is easier to do with monetary policy than fiscal policy.

Second, the implementation lag - the time it takes to actually change the policy setting after it has been decided that it should be changed. Here, monetary policy wins hands down; it’s significantly more flexible. The stance of monetary policy is reviewed at every monthly meeting of the Reserve Bank board and could be changed even more frequently if necessary. Changes are easily implemented the following morning after the decision has been made. Policy can be changed in small or large, frequent or infrequent steps, without any implication that earlier decisions were wrong. By contrast, fiscal policy is usually adjusted only in May each year and though mini-budgets are possible, for them to come too soon after a budget, or for there to be too many of them, could attract criticism over short-sightedness. More significantly, there are delays while cabinet decides the particular tax or spending changes to make, while the legislative authority is passed through parliament, and while the administrative arrangements needed to put decisions into effect are put in place.

Third, the transmission lag - the time it takes for the implemented measure to affect economic activity. Here, fiscal policy wins. Government spending affects economic activity as soon as the money leaves the government’s coffers, while tax cuts or cash bonuses (transfer payments) affect activity as soon as the recipient chooses to spend the money. By contrast, Reserve Bank research shows that a sustained change in interest rates of 1 percentage point causes a change of 0.33 percentage points in real GDP in the first year, with a further 0.33 points in the second year and a further 0.17 points in the third, giving a total effect after three years of 0.83 percentage points.

But despite this advantage on the transmission lag, fiscal policy lost out because of its poor performance on the recognition and implementation lags.

Why fiscal policy is back in favour

It was always easy to predict that fiscal policy would come back into fashion just as soon as the economy dipped into recession. The politician who could resist the temptation to use the budget to stimulate the economy during recession has yet to be born.

But there were two other, more economic arguments favouring greater reliance on fiscal policy which arose from the particular nature of the global financial crisis. First, the synchronized nature of the global recession - because all developed economies were hit at the same time by the same developments in global capital markets - gave fiscal policy a comparative advantage. When a single country goes into recession, easing monetary policy can help stimulate the economy also by lowering its exchange rate, thus making its export and import-competing industries more price competitive. But that can’t happen when all the country’s trading partners go into recession and ease monetary policy at the same time, because there’s no one to depreciate against.

When a single country goes into recession, easing fiscal policy has the disadvantage that some proportion of the stimulus leaks overseas in the form of higher imports. But in a synchronized recession, when all countries ease fiscal policy at the same time their leakages cancel each other out. Each country suffers a leakage from imports, but also enjoys an injection from exports.

Second, the fact that this global recession had its origin in a crisis on the financial side of the economy was another factor counting in favour of fiscal policy. When you’ve got an impaired banking system, lower interest rates may not be passed through to households and businesses and, even if they are, the banks may be unwilling to lend. Further, if you’ve got an impaired banking system, the official interest rate will probably soon be close to zero, leaving no further room for conventional monetary easing, although ‘quantitative easing’ remains open. Countries in this situation are caught in the legendary Keynesian ‘liquidity trap’ - a classic justification for favouring fiscal policy over monetary policy.

That last argument doesn’t apply to Australia, of course, but all of these arguments explain why the circumstances of this global recession prompted even the ultra-orthodox International Monetary Fund to urge its members to respond to the downturn with fiscal policy.

A further, local factor is that, this time, worries about the recognition and implementation lags were countered by the peculiar nature of this crisis. We were able to see the shock coming, and start acting to counter it, well before it actually reached us across the Pacific (apart from the instantaneous effect on business and consumer confidence as Australians watched the crisis unfolding on TV every night).

Before we move on, I should warn you that fiscal policy has not replaced monetary policy as the dominant instrument of macro management. And Dr David Gruen of our Treasury has noted that the special circumstances that made fiscal policy such a necessary and major element in the response to the GFC aren’t likely to be present in future recessions.

The regulatory response to the GFC

As you know, in the heat of the crisis, in October 2008, the Rudd government responded by producing two new policy instruments: the government guarantee of all small deposits in banks and other deposit-taking institutions. This was in response to a lot of people moving their money to banks they perceived to be bigger and safer, thus causing significant problems for some of our smaller banks. An unwanted side effect of the guarantee was to prompt other people to move their savings out of unguaranteed non-bank trusts (such as mortgage trusts) requiring those trusts to freeze withdrawals for a time. Second, the government guaranteed the bank’s large deposits and wholesale funding, in return for a variable fee. This was necessary to ensure they could continue to obtain the considerable overseas funds they needed to continue operating, in the face of a world where most other developed countries’ government had guaranteed their banks. Because this latter guarantee was quite expensive for the banks, they stopped using it as soon as they could, and now it will be removed at the end of this month. It tended to advantage the bigger banks over the smaller ones. As yet, nothing has been done to regularise the guarantee of small deposits, which the government should really be charging for, thereby reducing the competitive advantage accorded to the guaranteed sector.

Looking at the regulatory response more broadly, I won’t discuss the regulatory failures that permitted the crisis to occur - particularly as there weren’t any great failures in the regulation of our banks - but go straight to discussing the improvements in regulatory instruments being worked up at the international level by two bodies associated with the Bank for International Settlements in Switzerland (the central bankers’ club): the Basel Committee on Banking Supervision and the Financial Stability Board. As part of the G20’s renovation of these bodies, Australia has a seat on both.

They are working on proposals to tighten up the international standards on the adequacy of the capital banks are required to hold - that is the limits on the extent to which banks may increase their gearing - including by closing loopholes in the capital adequacy standard and by introducing a supplementary leverage ratio. They are also working up proposals to require banks to improve their liquidity - their ability to pay their debts as they fall due - by holding greater highly liquid assets (such as government bonds, which can really be sold on the market) sufficient to tide them over for, say 20 days, if their short-term funding was suddenly cut off (as it was during the crisis).

This is all fine and much needed internationally, but the Australian banks - and the Australian authorities, especially APRA and the Reserve Bank - are concerned that the rules may be more onerous here than is justified by the good performance of our banks. These rules will increase the cost of ‘intermediation’ - which is what banks do, act as an intermediary between savers and investors, lenders and borrowers. Raising the cost of intermediation would mean widening the gap between the average interest rate the banks pay to borrow funds and the average interest rate the banks charge their borrowers. This increased cost would be passed on to the banks’ customers, particularly their borrowers. These higher interest rates to borrowers would act to dampen economic growth. That is, there is a price to be paid for making banking safer and less exposed to crises. A particular worry of the Australian banks and our authorities is that, as the liquidity requirement now stands, it would require our banks to hold more government bonds than are actually on issue.

Once the new capital and liquidity standards have been agreed on internationally, it will be up to the national authorities in each country (APRA in our case) to adapt them to local conditions and apply them locally. In theory, this means we don’t have to comply with any requirement that doesn’t suit us. In practice, however, we will be under considerable pressure from other countries to comply with the higher standards. Our banks need to borrow from overseas and want to operate in other countries, and their reputations would suffer if a perception arose that they were being inadequately regulated at home.

At present, our authorities are working on the two committees to ensure the final requirements are sufficiently flexible to accommodate the Australian case. To the extent that they fail, APRA will have to walk a fine line to modify the new standards in a way that doesn’t damage Australia’s reputation.

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AUSTRALIA’S OUTLOOK FOR POLITICS AND GOVERNMENT IN 2010

Talk to Australian Business Economists Annual Forecasting Conference, Sydney, December 8, 2009

After the tumultuous events in Canberra last week, it now seems clear the next federal election will be a double dissolution held not much earlier than normal - late September - with climate change and Work Choices as its main issues. It also seems likely that Kevin Rudd will win in a landslide.

Mainly through over-reach, Mr Rudd has managed the most remarkable wedge of his opponents, driving a huge divide between the party faithful and the wider electorate. The polls show majority support for an emissions trading scheme, even among Liberal voters. The only respect in which that support wavered was on the question of whether it needed to be approved before Copenhagen. The polls show no evidence of growing disapproval of an ETS, suggesting that all the emails and phone calls flooding into Liberal members’ offices insisting the ETS be blocked were coming from the party faithful, whose main motive was distrust of anything proposed by Labor, and so were quite unrepresentative of the wider electorate.

The Liberals

So the party that lived by the wedge while in government is now dying by the wedge while in opposition. The distinction, however, is that whereas Labor always ended up spurning its heartland in favour of the wider electorate, the Liberals have chosen to go the other way. Mr Rudd has positioned Labor slightly to the right of centre, and now has succeeded in pushing his opponents further away from the middle ground.

Tony Abbott won the Liberal leadership by accident. Polling before the leadership contest revealed him to be the least popular among the three contenders. The majority intention within the parliamentary party was always to pass the job to Joe Hockey, but that didn’t happen, mainly because of his ambivalence towards taking the job before this election and because of his reluctance to repudiate his support for the ETS. Some in the party have charged Mr Hockey with being indecisive, but I think he’s been fortunate and is now well positioned to take over the job from Mr Abbott when the party tires of him, as seems inevitable. Mr Abbott is an immensely likeable person in the flesh, but few voters will get to meet him in the flesh. As his very first days in the job demonstrate, he’ll be incapable of concealing his extreme views on social issues and quite conservative views on issues such as individual contracts, unfair dismissal and nuclear power. This expression of his views in advance even of the selection of his shadow cabinet suggests he’s unlikely to be more consultative than his predecessor. Some politicians do change their spots when they attain high office, but I doubt if Mr Abbott will. The pollster Rod Cameron has branded him ‘unelectable’ and I’ll be surprised if the election results don’t bear him out.

Mr Abbott has made it clear he intends to be a lot more obstructionist than Malcolm Turnbull was, opposing almost everything the Government tries to get through the Senate. The Opposition is so divided that that just about the only thing it can agree on is hatred of the Labor usurpers. This sentiment is shared by its party faithful, so they too will be gratified. But more pragmatic opposition leaders don’t let through a lot of government legislation because of a sense of public duty, they do it because they know the electorate hates obstructionism and negativity in its politicians. Once again, the Libs will be preaching to the choir, not the unconverted.

It’s worth remembering that the hardliners in the parliamentary party tend to be senators and people with very safe seats, whereas the moderates who supported Mr Turnbull and wanted the ETS passed and out of the way tend to have marginal seats. So if the party suffers a significant loss of seats at the election, this will tend push it further to the right. Perhaps that could save Mr Abbott after all.

The ETS legislation

Don’t be in any doubt about the status of the ETS. The Government has made clear it remains committed to getting it passed as amended by the agreement with Mr Turnbull. Once you’ve conceded ground to the rent-seekers, there’s no going back. And that means Mr Rudd, who must have a scheme, has no choice but to call a double dissolution. There’s no way the Liberals will agree to any ETS , and since there’s no way the Government will gain a majority in the Senate at the next election, its only hope of getting the bill passed is at a joint sitting after a double dissolution. Whether or not the election is a double dissolution, it seems likely the balance of power in the Senate will shift to the Greens in their own right. So were the Government simply to try its luck at getting the bill through the next parliament, it would have to throw out all the concessions it has granted to business and move the scheme in entirely the opposite direction, an utterly unattractive prospect for Mr Rudd.

The Double Dissolution

However, Mr Rudd has no desire to pull on a double dissolution early next year for several reasons: it would clash with state elections in South Australia and Tasmania on March 20; it would put the two houses out of kilter and thus truncate the next term by about a year; it would give Mr Abbott too little time to blot his copybook, and finally because modern politicians seem genuinely reluctant to risk annoying the electorate by calling early elections.

The Government has announced its intention to bring the amended bill back into parliament in February, even though it’s highly unlikely to be passed. It has left the press gallery with the impression it will then wait three months and put the bill up to be rejected again. This new trigger, it says, would allow it to take the amended bill to the joint sitting rather than the original bill. But I understand the constitution allows it to amend the bill at a joint sitting, so its true motive is probably just to delay the double dissolution until later in the year, for the reasons I’ve given.

For constitutional reasons, the Government is unlikely to want to hold a double dissolution election before July 1, but it must be called before August 10. This suggests the most likely time for the election to be held is the second half of September - which wouldn’t be considered particularly ‘early’ by most people.

It’s not always the case that the rejected bills that provided the trigger for a double dissolution rate much attention in the election campaign, but I have no doubt the ETS will be a key issue in this campaign. The Opposition will run a scare campaign about Labor’s ‘big new tax’ and Labor will have to explain and defend its scheme. But Mr Abbott’s and Julie Bishop’s inability to stop themselves speaking in defence of individual contracts and unfair dismissal will leave it open for Labor to run its own scare campaign about the return of Work Choices. If I’m right, the 2010 election campaign will be fought on the same two policy issues that contributed most to the Liberals’ defeat in 2007 (apart from the it’s-time factor). Remarkable.

Rudd’s over-reach

On the face of it, Mr Rudd has brilliantly wrong-footed his opponents, almost guaranteeing they’ll perform poorly at the election - and maybe the one after that. But I think it got out of control and he over-reached himself, damaging his opponents more than he intended to and failing to achieve various of his objectives. For a start, he failed to get through legislation he could boast about at Copenhagen. He further debauched his ETS at a cost of $7 billion but has nothing to show for it; he’s lumbered with a double dissolution he pretty clearly didn’t want, he’s facing a more obstructionist Opposition between now and the election, and has to fight the election trying to counter an almighty scare campaign about ‘a big new tax,’ a prospect he doesn’t relished.

Although he can’t avoid a double dissolution if he wants his ETS, it has costs. Because they halve the quota of votes needed to be elected, double dissolutions favour minor parties and disadvantage the major parties in the Senate. Labor’s expected to make a net gain of only one Senate seat; Mr Rudd might have done better than that in an ordinary half-Senate election. The number-crunchers expect Senator Fielding to disappear but be replaced by some other independent, and Senator Xenophon to gain a running mate. The Greens would have gained the balance of power in their own right in a half-Senate election, but a double dissolution will give them even more seats.

Mr Rudd was playing politics with policy. Despite agreeing to special concessions earlier this year that made a complex policy even more so, he long ago stopped explaining and defending the ETS, preferring all the attention to be on the brawling Coalition. He did nothing to counter the alarm being spread by Barnaby Joyce and Alan Jones, nor to refute the self-serving exaggerations of various industry lobbies. He allowed the ETS to be further perverted to provide Mr Turnbull with the cover he needed to be able to support the bill, leaving unchallenged the fiction that it was ‘deeply flawed’ but had now been improved to ‘save tens of thousands of jobs’. But in his desire to have the world watch the Liberals tearing into each other he over-reached, undermining Mr Turnbull by failing to counter the propaganda spread by Mr Turnbull’s opponents in the Coalition, and thereby allow opposition within the Coalition to grow to the point where Mr Turnbull was overwhelmed.

The invisible recession

At this conference two years ago, the greatest problem of the newly elected Rudd Government was that it had won office at a time when a recession was overdue and, with the economy travelling near full employment and the Reserve Bank vigorously applying the brakes, it was facing a high likelihood of recession some time in its first term. At this conference one year ago, after the culmination of the global financial crisis with the collapse of Lehman Brothers, it looked certain we were facing a severe recession, but one that could easily be blamed on forces beyond the Government’s control. Kevin Rudd was off the hook: don’t blame me, it’s the GFC.

What a lot has changed in 12 months. Today, after the application of huge fiscal and monetary stimulus, we’re emerging from a recession so mild the public can’t see that we had one. So the old business cycle has been completed and a new one begun with only the most moderate collateral damage. Through a combination of good luck and good management - its own and its predecessor’s - the Rudd Government is home scot free: it’s presided over a recession as feared, but one that generated little pain and no blame. The one small risk is that, as memories fade, the whole thing may come to be regarded by some as a Government beat-up: a lot of carry on about nothing. Such forgetfulness would strength the Opposition’s claim that Rudd has gone on a pointless spending spree leaving nothing to show but huge deficits and debt that will burden our children and grandchildren. The fear of government debt does have some potential to worry the economically unsophisticated, but its potency is greatly diminished by the Opposition’s general lack of credibility. The fading memory of the cash splashes and the likelihood of further interest rate rises next year won’t help Labor’s re-election campaign, but they’re unlikely to represent a significant problem to a government that remains so popular.

The painless Prime Minister

A further year to observe Kevin Rudd has served only to deepen my disappointment in him and confirm the reservations I expressed last year. He’s a much more skilful - that is, cynical - politician than most of us realised, but he’s no great reformer and, thus, no great leader. He’s a weak leader, lacking ideology and conviction apart from his unquenchable desire to stay in power. Combine his lack of commitment to particular policy reforms with his preoccupation with political objectives and you understand his reluctance to do anything that imposes pain on anyone and thus could threaten his popularity.

In his unconscious mind he’s still in opposition, ready to throw overboard any mildly unpopular policy that could stand between him and (re-)election. Perhaps because of his success with the recession, and partly because of his frenetic pace of activity, it’s yet to occur to him that governments get judged by their achievements, rather than their busyness, and that to get truly memorable achievements up and running involves taking risks and putting noses out of joint. John Howard understood this with his determination to introduce his two cherished reforms, the GST and Work Choices. He almost lost an election over the GST and he only pulled back from the full-bore Work Choices when he realise how deeply unpopular it was with Howard’s Battlers. It’s too early in Mr Rudd’s career as Prime Minister for it to have occurred to him that, unless he gets some genuine reforms into place, he risks the same judgment made of Malcolm Fraser: he managed to stay in power for X years, but what is there to show for it? A leader who lacked the courage to lead, who was only ever prepared to use his credit points to secure his re-election, never to buy reform.

Mr Rudd is no economic rationalist because he simply hasn’t absorbed ‘the economist’s way of thinking’. From his chronic inability to set priorities or to delegate you see he has no inherent conception of opportunity cost. He has no inbuilt suspicion of interventionist solutions. Combine this with his lack of ideology - his dearth of prior beliefs about how the world works and should work - and you see the best label for him is that he’s a ‘pragmatic interventionist’. He is pro-business rather pro-market, seeing economists as just another interest group to be propitiated from time to time. He is keen to ensure business remains generally on side, so interest-group appeasement is a major part of his modus operandi.
From his utterances he has an ambivalent attitude towards economic rationalism, blaming ‘neo-liberals’ for the global financial crisis and accusing his Liberal opponents of being neo-liberals, while claiming the credit for Labor for all the Hawke-Keating government’s microeconomic reforms. He also claims to have instigated an extensive program of micro reform himself through COAG, involving ’27 regulatory reform agendas, covering areas such as financial regulation, consumer protection, trade licences, food regulation, occupational health and safety, and chemicals and plastics laws’. Most of this involves answering the call of big business for a ‘seamless economy’ through the reduction of differences between the states. It’s true that a huge program has been initiated, but it’s also true that negotiations have bogged down and little progress has been made in two years, partly because the prime ministerial caravan has moved on to other, greener fields. Mr Rudd loves the grand gesture - signing the Kyoto protocol, apologising to the Stolen Generations, announcing ‘the most comprehensive [Defence review] of the modern era’, promising to rebuild the Victorian bushfire towns ‘brick by brick, school by school’ and to be there with these communities in ‘the months and years that lie ahead’ - but so far always falls down on the follow-through.

Much has been made of Mr Rudd’s policy wonkery and commitment to process, but there’s precious little of value to show for it. The truth is that, because of his inability to set priorities and delegate, his interest in every policy consideration hasn’t improved the quality of decisions. Rather, his obsession with personally approving every detail has produced a behind-the-scenes shambles, where decisions pile up waiting for his attention, unreasonable demands are made on public servants, everything runs late and policy elements are thrown together at the last minute. While Mr Howard kept a tight rein on policy decisions, he didn’t usurp the role of his ministers the way Mr Rudd does. The cabinet has become a rubber stamp for decisions made by Mr Rudd’s kitchen cabinet, the Strategic Priorities and Budget Committee, composed of himself, Julia Gillard, Wayne Swan and Lindsay Tanner. There are even suggestions that the other three merely get to comment on the propositions Mr Rudd brings to this committee.

It’s become much clearer that it’s politics Mr Rudd is on about, not good policy. Presumably, much of his obsession with detail is directed to getting the politics right. Smart leaders try to starve their political opponents of oxygen by purporting to ignore them; Mr Rudd can’t resist criticising and baiting his opponents at every opportunity, often with a phony appeal for bipartisanship. What he doesn’t seem to have realised is that by debating the Opposition’s criticisms, he brings them more media attention than they’d otherwise get. Hence the seriousness with which the press gallery has taken the Opposition’s carry-on about deficits and debt, and the ill-informed claim that the planned fiscal stimulus needs to be curtailed.

Mr Rudd is even more obsessed with dominating the 24-hour news cycle than Mr Howard was. The motive is to keep the initiative away from the Government’s critics, give the appearance of ceaseless devotion to duty and keep the media so busy they don’t have time to hunt out their own stories - such as why promises haven’t been kept or why policies aren’t delivering. The main instrument is to produce a continuous stream of (usually pretty minor) ‘announceables’. The price of this media management is that it wastes the time of bureaucrats, distracts the attention of ministers and gives spin doctors primacy over policy wonks.

Mr Rudd is not a Labor animal. He has no powerbase within the party, no union links (or much sympathy with unions), no great factional support and no mates. His undoubtedly strong support within the party at present is based purely on his political success; he enjoys little affection or loyalty. But even on this he is stretching the forbearance of his party with his delight in giving jobs to the Liberal boys. At one level this is a clever political tactic, wrong-footing his opponents and increasing his apolitical appeal to wayward Liberal and swinging voters. It’s saying: I can’t be such a bad manager if all these big-name Liberals are happy to work for me.

At another level, however, it’s storing up trouble for the future. If your modern Labor politician is, like Mr Rudd himself, less driven by a desire to implement traditional Labor policies and more attracted to attaining and enjoying the spoils of office, then Mr Rudd is advancing how own enjoyment of power at the expense of his underlings’ advancement. It’s something they will remember when the day comes that Mr Rudd loses his winning touch. The other point is that his willingness to appoint people whom he has criticised so heavily in the past, and the alacrity with which they accept the offer to work for a Government they have branded as incompetent, exposes the phoniness of much political rhetoric.

Rudd Government’s second year

Mr Rudd’s first year involved the commissioning of a huge number of inquiries; his second year has involved the receiving of many of those reports without many decisions about implementing their recommendations. So far there’s been a lot of talk and a lot of spending, but not much reform.

A few weeks back Lindsay Tanner offered a list of reforms in which, he said, ‘substantial progress has been made’. His list included: developing a national trade licensing system, improving processes in the regulation of the construction industry, improving environmental assessment and the development of a national construction code.

Of course, you could argue that for much of the year the Government had its hands full responding to the global financial crisis. I think it did a very good job on this, not just in the alacrity and Treasury-provided skill with which it applied fiscal stimulus, but also in the cleverness with which it managed business and consumer confidence - a key element in making the recession so mild. Oppositions have to find things to oppose, but I suspect an element in the Opposition’s disapproval of the fiscal stimulus was resentment that Labor had used the good budgetary position it inherited from the Libs to spend a lot of money and buy a lot of popularity in the name of staving off recession.

There’s something in this. If you look carefully at the stimulus packages you see tell-tale signs of political as well as economic calculation. The first cash splash, for instance, was supposed to be aimed at those welfare recipients so credit-constrained that they were highly likely to spend all the cash without delay. How then do you explain the decision to exclude people on unemployment benefits from the bonuses, while including self-funded retirees?

Political considerations explain it easily. Dole recipients were also left out of the second cash splash. And what about the decision to build a new building at every primary school in the country, whether public or private? It can be readily defended as spreading the stimulus to the building industry far and wide, but consider the political attractions.

This year’s budget wasn’t bad, but wasn’t particularly good. Its main measure was an excessively generous increase in pensions. This seemed largely politically motivated because age pensioners are hardly the most needy welfare recipients, and steps were taken to limit the flow-on to the more needy but less politically powerful sole parents and people on the dole. This measure was hugely expensive, with the cost growing each year forever. True, this cost was largely offset by five measures - including the phasing up of the age-pension age, and the cutbacks in salary sacrifice for superannuation - which could be classed as reductions in middle-class welfare.

Well done. Only problem is, whereas these reforms could have been used to undo some of the spending and tax-cut extravagance of the Howard years and thus help get the budget back into surplus, they were in a sense ‘wasted’ on helping to pay for a new extravagance of the Rudd Government.

The year ahead and tax reform

Aside from the election, the two big economic issues for 2010 will be the budget and the Government’s response to the report of the Henry taxation review. Despite the imminence of the election, I expect the budget to be a restrained affair, with any new spending programs covered by savings elsewhere. Total government spending in 2010-11 is likely to fall in real terms - for the first time in 20 years - because of the planned withdrawal of stimulus. The Government will have a terrible struggle to achieve its commitment to limit its real spending growth to 2 per cent a year, but not in the election year.

Turning to the tax review, although it’s due to report to the Government before Christmas, the Government isn’t likely to make its report public until February or March next year. Even so, we have an idea of what to expect.

The report is intended to lay out a blueprint for the direction of reform over the next 25 years, to act as a guide to governments in their day-to-day decision-making. Would some particular decision move us towards or away from the ideal destination we are hoping to reach eventually? So although the report may include some popular proposals the Rudd Government could implement before the 2010 election, and some which it could promise to implement in its second term, it will also contain controversial proposals the Government is likely to disavow. This was the initial fate of the Asprey report of 1975, which included such obviously politically impossible recommendations as the introduction of a capital gains tax, a fringe benefits tax, a dividend imputation scheme and even a goods and services tax. Dr Henry is hoping to produce the next Asprey report.

As always, the report will focus on improving the pursuit of the three objectives of good tax design: efficiency, equity and simplicity. But it will be looking for reforms that, while increasing allocative efficiency, can also be advocated as increasing fairness. For instance, the 50 per cent discount on the tax on capital gains can be criticised as distorting taxpayer choices, but it can also be criticised as unfair because such a high proportion of all capital gains are enjoyed by a handful of high income-earners.

Often, simplicity is the objective that loses out in the effort to find better trade-offs between equity and efficiency. But not this time. Dr Henry has long been concerned about the growing complexity of the tax law and the greater risks this generates for those (generally poorer) taxpayers who lack access to good advice. He is determined to strike a blow for simplicity, which he believes will also increase fairness. A major gain for simplicity would be achieved if, rather than continuing to have to run to the expense of paying a tax agent to prepare their annual tax returns, most people were able to submit a pre-filled return just with a few clicks of a mouse.

The great workhorse of tax reform is the maxim: broaden the base to cut the rate. So we can expect to see plenty of examples of the report proposing that exemptions and special deductions from a particular tax be reduced so as to finance a general reduction in the rate of the tax. Both sides of such a reform could be expected to reduce the tax’s distortion of producers’ and consumers’ choices. One example could be rationalising the differing rates of tax on different forms of alcohol, without that leading to any increase in overall receipts from alcohol taxes.

Until now, a guiding principle of tax reform has been the ideal of ‘comprehensive income taxation’. This is the notion that a dollar of income is a dollar of income, so it should be taxed at the same rate regardless of how it is derived - from work, profits, dividends, interest, rent or capital gain. Sometimes the comprehensive ideal is seen in terms of nominal income but, it should really be based on real income - meaning that allowance should be made for the inflation-compensation component of interest income and capital gains. However, Dr Henry has noted that the comprehensive income ideal has fallen out of favour with tax economists around the world, implying that it will be abandoned in the report in favour of a dual tax system, where there is one rate scale for earned (work) income and a different one for investment income.

In any case, the comprehensive income tax ideal has, in practice, been honoured in the breach. Income from the different ways of saving is taxed at radically different rates because of a multitude of special arrangements. Dr Henry calculates that, at present, for a middle income-earner on a nominal marginal tax rate of 31.5 per cent, the real effective marginal rate of tax is minus 40 per cent for saving through superannuation, zero for saving through paying off owner-occupied housing and plus 54 per cent for saving through bank accounts. The tax rate on saving through ownership of rental property is plus 24 per cent if the property is owned outright, but minus 22 per cent if negatively geared. The tax rate on saving through listed Australian shares is plus 10 per cent if the shares are owned outright, but minus 35 per cent if negatively geared. I doubt if Dr Henry would be pointing to these hugely anomalous results if he wasn’t intending to propose that something be done about them.

The report is likely to recognise the need to ensure Australia attracts sufficient foreign investment to meet its continuing investment needs, but seems likely to recommend only a small reduction in our present company tax rate of 30 per cent. It may recommend an increase in the resources rent tax on mining companies.

On superannuation, where the present concessional taxing arrangement greatly favours those on higher marginal tax rates (that is, those who already have the greatest capacity to save), the report is likely to recommend arrangements that redirect more of the tax benefit to those on lower marginal rates. It may also propose phasing up the age at which people are able to access their super savings from the present 55 years (with the ability to receive benefits tax free at 60 years) to align with the recent decision to phase up the age for age-pension eligibility to 67.

With the cut-in point for the top personal income-tax rate of 46.5 per cent having been lifted to $180,000 a year - so that now only 2 per cent of taxpayers are subject to the top rate - the report is not likely to recommend the top rate be lowered.

The report will also recommend reform of state taxes. It may propose that steps be taken to harmonise the tax bases (including tax-free thresholds and exemptions) and possibly rates between the states. It is unlikely to propose the abolition or reduction of payroll tax - which is essentially similar in its effects to the goods and services tax - although it may propose national harmonisation, with a lower tax-free threshold in exchange for a lower tax rate. The report may recommend the removal of stamp duty on insurance policies, but it won’t recommend removal the of stamp duty on property conveyancing for as long as the family home remains exempt from capital gains tax.

Finally, Dr Henry is very concerned about environmental issues and the need to internalise to the price system the external costs of environmental degradation. To this end, it seems clear he will propose the introduction of graduated road user charges - congestion pricing - to replace fuel tax and registration fees.

Observations on monetary policy

It’s been another bad year for business economists and markets in their attempts to second-guess the Reserve Bank’s rate adjustments. It was a year in which people forgot a lot of the Reserve-watching rules we were supposed to have learnt a long time ago. Most people spent most of the year on the wrong tram in terms of their expectations, even though they were switching trams. People spent the first part of the year expecting a lot more easing than eventuated, then the second part expecting more tightening than eventuated. People have trouble picking the turning points - the point where easing stops and then the point where tightening starts, or vice versa - but then when they finally pick up the new trend they go overboard and get the pace wrong, expecting a lot more a lot sooner than eventuates.

A big part of the trouble the market has interpreting the Reserve’s utterances arises from its self-absorption. It interprets the Reserve’s remarks from its own perspective rather than the perspective of the speaker. Because the market is always forward-looking, it assumes that when the governor talks about not being ‘too timid to lessen the stimulus in a timely way’ he must be talking about the future, when, being a bureaucrat concerned with explaining and justifying the recent decision to get on with lessening the stimulus (a move some business economists criticised as premature), he was talking about the past. The market may be focused on the future, but bureaucrats find it much easier to talk about what they’ve done, rather than what they intend to do. In that particular episode, some people were saying that by next month the case to start tightening would be clear, but if it was already that close to being clear, why wait? The board didn’t.

Having said that, I have to add that the Reserve is far from adept at sending clear signals to the market. As a professional communicator I have a simple rule: if the punters take the wrong message from what you say, it’s always your own fault. You’d think the Reserve would have learnt by now that its backward-looking self-justifications were often taken to be hints about the future and would know to label those justifications more carefully.

But there’s also inconsistency in the Reserve’s behaviour. For some months it kept repeating that its reduction of monetary stimulus would be ‘gradual’, but its action last week in making an unprecedented three rate rises in a row leaves me at a loss to know what meaning it intended us to attach to the word ‘gradual’. Was it just a signal that it didn’t intend to tighten in steps of 50 or 100 basis points? I suspect the truth is that, for reasons undisclosed, it decided to throw ‘gradual’ overboard.

Turning to the outlook for 2010, the Reserve will be seeking to manage the economy in a new expansion phase. Earlier this year, when the governor was seeking to prepare people for the commencement of a new tightening phase, he spoke often of the need to start moving the stance of policy ‘towards’ neutral, but the media usually reported this as ‘to’ neutral. There’s an important distinction between ‘towards’ and ‘to’. But whether that distinction will turn out to have any content I wouldn’t be sure.

Since the Reserve will be responding to the data as they roll in - and this year has reminded all of us how appallingly bad we are at predicting what data will roll in - it’s certainly possible that, by this time next year, the stance of policy will be back to neutral or even on the tight side. But for this to happen, the economy would need to be growing very strongly - well above trend - and underlying inflation’s return to the middle of the target range would have to have faltered.

Last year I observed that when interest rates are a long way from neutral - in either direction - you probably shouldn’t stay there for long. I think this attitude has been an important part of the governor’s thinking this year, as reflected in his references to the need to end the emergency setting of rates now the emergency has passed. Against this, you might have thought that when he judges the emergency component to have been withdrawn he would pause for some months while deciding when he judges a continuation of the tightening to be warranted. But whether the Reserve ends up sticking to this logic is anyone’s guess.

As rates rise during the year the question of just where neutral is will become more important and it’s possible the Reserve will feel the need to offer more guidance on the question than it has. So far, the governor has declined to nominate a figure, except to say that the long-run average cash rate is between 5 and 6 per cent. I usually take this to mean the neutral rate is 5.5 per cent, near enough, but there’s an argument to say it should be lower than it was if the banks’ spreads above the cash rate are higher and credit standards are more demanding. Trouble is, there’s another argument to say it should be higher than it was if faster population growth and unusually high rates of investment spending have raised our potential growth rate. This leaves me thinking the two arguments probably pretty much cancel each other out, leaving neutral remaining near enough to 5.5 per cent. We can expect to hear more such speculation as next year progresses.

And as the year progresses many observers’ minds will be exercised on the question of how the approach of the election will affect the timing of rate rises. My guess is that this question will exercise the observers’ minds more than it does the governor’s. He’s already said he knows of no convention that monetary policy should not be adjusted during election campaigns. Mr Stevens is a very straight shooter. He doesn’t play political games and his idea of being apolitical is to focus on doing his job as normal and make sure no one can accuse the Reserve of failing to do what needed to be done.

Decisions about changing the setting of policy from one month to the next are judgment calls, as much a matter of art as science. This is why, as I’ve said before, monetary policy is set in the governor’s gut. Many people imagine he has a game plan in his head and if only you could know what that plan is you could predict rate movements with great accuracy. I think that was much truer of his predecessor than it is of Mr Stevens. All you can say is that he reacts to the data as it comes in and makes up his mind before or during the monthly meeting.

So if you’re going to be second-guessing the Reserve again next year I wish you good luck. You’ll have your work cut out and I doubt you’ll be getting many reliable signals from the Reserve.

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CAN THE NOBEL PRIZE REFORM ECONOMICS?

Talk to University of Sydney Department of Government and International Relations
October 29, 2009

Economists often suspect that Australia’s quite extensive quarantine restrictions - against apples from New Zealand, for instance - constitute a form of disguised protection. But when Alexander Downer was Minister for Foreign Affairs he was having none of that. ‘I want to assure you,’ he once said, ‘that our quarantine laws are based strictly on science - [pause] - political science.’

I wanted to say a few words about economics but, since this is a political science function, I thought I should compromise and speak about the politics of economics. It’s not hard to meld the two disciplines because, as many of you would have heard a fortnight ago, this year’s Nobel Prize in Economics was won for the first time by a woman, Elinor Ostrom, who isn’t even an economist, but a political scientist. (Her win caused Michael Jackson some chagrin, because she’d once offered him a job, which he’d turned down.) The person Ostrom shared the prize with, Oliver Williamson, is regarded as an economist, although the person who drew his work to my attention was a sociologist, and it certainly reads as if it was written by a sociologist.

Before we go any further - and in case there are any people from the hard sciences who’ve strayed into the room - I should confess that the economics Nobel isn’t a real Nobel. It wasn’t provided for in Alfred Nobel’s will - I’ve heard he didn’t have much regard for economists, though I’m sure that can’t be true - but was established just 40 years ago under the sponsorship of the Swedish central bank, and styles itself as the Swedish Riksbank Prize in Economic Sciences in memory of Alfred Nobel. That reference to ‘economic sciences’ is sus, for a start. I’m not convinced economics is a science, let alone more than one. But it certainly implies that the sponsors saw economics as a broad church.

This year’s awards - to a political scientist and an economic sociologist - come at a critical time for economics - in both senses of the word. In the wake of the global financial crisis, economics has come under considerable criticism for its failure to foresee that trouble was brewing. There’s been a lot of soul-searching within the profession, some of it quite acrimonious. In America they’ve been arguing on blogs; in Britain they’ve been sending petitions to the Queen.

A lot of the blame is going to the unrealistic assumptions on which conventional economics is based - as epitomised by the ‘efficient-markets hypothesis’ - and on the effort economists have made over the past 40 years to make their discipline more scientifically rigorous by making it more mathematical. The two criticisms are linked because the unrealistic assumptions are needed to make the equations work. In America, last year’s Nobel Laureate, Paul Krugman, concluded that ‘the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth’. In Britain, the eminent petitioners agreed with what they said were the complaints of three Nobel laureates that ‘in recent years economics has turned virtually into a branch of applied mathematics, and has been become detached from real world institutions and events’.

The annual awarding of the Nobel prize is a bit like the Melbourne Cup for economists. It generates considerable excitement among younger academic economists and, no doubt, quite a lot of covetousness among older economists - especially in America, which has taken out two-thirds of the awards so far. There’s a lot of betting on who’ll win. This year in the betting at Ladbrokes, the odds-on favourite was the same as last year: someone from the University of Chicago, Eugene Fama.

Really? Really? The man who dreamt up the efficient-markets hypothesis was the favourite to win the Nobel in the year after the GFC? There could hardly be a better illustration of the insularity of the economics profession - truly, they don’t live in our world. Fortunately, those anonymous souls who nominate and vote on the prize - including, I suspect, a disproportionate number of Swedes - are a little more politically attune.

And so, in the aftermath of the GFC, they gave the prize to a female political scientist and an economic sociologist. That’s the first noteworthy feature of the award: it wasn’t even given to real economists. Second shock: neither Laureate made a ‘formal’ contribution. Their contributions lacked the two qualities academic economists admire most: ‘elegance’ and ‘parsimony’. Meaning? They wrote their papers in words, not equations. Wow. Third shock: neither Laureate’s work fits the conventional right/left, libertarian versus interventionist dichotomy. Rather, they drew conclusions neither side would be particularly comfortable with.

Fourth shock: Elinor Ostrom’s work in particular is essentially empirical. Rather than theorising about the world on the basis of mathematically convenient assumptions, she’s spent her career doing field studies - ranging from irrigation systems in Nepal and grazing on the grasslands of Asia to lobster fisherpersons in Maine - to disprove a favourite theory of economists about the alleged ‘tragedy of the commons’. Although Ostrom’s contribution clearly concerned an economic issue, the fact she is a political scientist means few economists have heard of her - even though her 7000 citations on Google Scholar exceed the well-known Williamson’s by 40 per cent.

My daughter told me last night that, according to her psychology lecturer at this august institution, economists are psychologists dealing with bigger numbers. I would have said economists were psychologists who hadn’t read the textbook. Economics is amazingly inward looking. Economists know little about other social - or physical - sciences, bar mathematics. In particular, they know far less psychology, sociology and ecology than they should.

It seems clear to me the Nobel selectors were sending a pretty clear message to economists, about the need for them to widen their horizons, become more multidisciplinary and more empirical. Can the Nobel Prize reform economics? Well, economists believe in incentives, and it’s a pretty powerful incentive. If it doesn’t work, it won’t be surprising to see the prize going more often to those psychologists and political scientists who do the economists’ job for them.

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TALK TO UNIVERSITY OF SYDNEY PROFESSORS DINNER

Sydney University
October 6, 2009

You may know that about once a month I appear on the Journos’ Forum segment on Richard Glover’s drive time program on ABC Radio 702. I usually appear with Greg Sheridan, foreign editor of The Australian, and Jennifer Byrne of the First Tuesday Book Club on ABC TV. Greg is a terribly right wing character but, in person, a really nice bloke with a great sense of humour. My role is to act as straight man for Greg’s jokes. Whenever Jennifer can’t make it, Richard hunts around for another token female and once a few years ago he came up with Jana Wendt. I was beside myself with excitement: at last l was getting to meet the great, the beautiful Jana. But when the great day came and I walked into the room, she instantly greeted me with, ‘G’day Ross, how’s it going?’. How come we were so well acquainted when we’d never before clapped eyes on each other?

Well, since that wasn’t the first time it had happened to me when meeting a celebrity TV journalist, I think I know. Big-name TV journalists are infinitely more famous - and more highly paid - than someone like me. But there’s something a broadsheet newspaper columnist has that they haven’t got and really envy - professional gravitas. So they want to be able to think of themselves as close colleagues of all the top journos in the profession.

The moral of the story is that many people crave intellectual recognition. So when I was asked to speak to a room full of Sydney University professors, there was no way I was going to say no. Of course, once the gratification had worn off, it’s also a bit daunting. No matter what topic you choose to speak about, there’ll be people in the audience who know a lot more about it than you do. Were I to speak on any economic topic - the weaknesses of economics, for instance, or the economists’ failure to forewarn of the global financial crisis - there’d be sure to be someone furiously arguing the toss. But not to worry: I’ve thought of a topic I know a lot about and, particularly since my mate Rod Tiffen isn’t here, none of you know much about: journalism. I want to make some comparisons between journalists and academics and explain a few things about journalism that improve your understanding of it.

I used to feel sorry for professors. All of them think they’re a lot smarter than I am, but I earn far more than they do - unless they’re doing a mighty lot of consulting work. And the fact that you guys have got time to come here tonight suggests you’re not doing a lot of consulting. Whenever I write about the money-grubbing ways of the medical profession I get indignant letters from doctor’s wives arguing that their husband deserves his high income because of all the years of study he had to put in. I’m often tempted to ask whether they think an academic who spent eight years getting a PhD in Italian deserves to be paid as much as a doctor. The link between years of study and salary seems a tenuous one, with the explanation for the weak correlation embodied somewhere in the words ‘market forces’. But I stopped feeling sorry for professors: they may be as poor as church mice, but their employment gets them at least 10 times more overseas travel than I get. You can never find them when you want them because they’re always away delivering a paper to a conference in Seoul. And all their frequent flyer miles get them regular overseas holidays, to boot. I console myself with the knowledge that they have to travel steerage (unless they’re on a consulting job, of course).

Actually, I quite like professors. That’s to say, I don’t dis-like them as much as I dislike lecturers and senior lecturers and even aspros. I long ago formed the theory that only when academics gain a chair do they feel licensed to express an opinion. Until they’ve attained that point they’re not game to say anything they can’t reference to someone’s paper. Just why they feel it’s poor form to express an opinion but perfect form to quote someone else’s opinion is something I’ve never understood.

There’s a lot of rivalry and professional jealousy in journalism, something I’ve used to my advantage. The great thing is that, when you’re first to get on to a new topic, or to think of a slightly different way to write a column, no matter how successful it is your competitors simply won’t abase themselves by copying you - nor give you the satisfaction of being copied. This, of course, is quite contrary to what’s predicted by the economists’ neoclassical model. But the rivalry in journalism is nothing to the rivalry and jealousy in academia. They say that the less there is to fight over, the more furiously academics battle. Sometimes the fights are ideological, but the trouble with academics is that, though they love to argue, they tend to take things personally (which is a mark of the introvert). And that can end up meaning the fights aren’t about rival theories. It’s been a great disappointment to me that, in this university, Political Economy and straight economics never boxed it out intellectually, but sat in opposite corners of the faculty hating each other’s guts, until finally PE was cast into the outer darkness of the Arts faculty. This absence of engagement was to the great disadvantage of both sides’ students because, in my never-humble opinion, each side was incomplete without the other.

You may not know that there are two broad classes of journalist: writers (mainly reporters, but also opinion writers such as me) and sub-editors (better understood by their American name, copy editors). So reporters and writers write the copy and subs sub it - check it for spelling, grammar and libel, then write a headline for it and find it a hole to fill in the paper. So writers and subs have the same status, but different roles. Every young person entering journalism starts as a reporter, but some stay as reporters, where they get out and about, while others gravitate to the office-bound desk job that is subbing. What drives this sorting process? It’s long been clear to me that extroverts stay as reporters and writers, whereas introverts become subs (provided they can spell). Subs are supposed to consult reporters before they change their copy, but they often don’t because they’re so desperately afraid of possible confrontation.

I mention this because it’s long been clear to me that the people who become academics tend also to be introverts - they prefer reading books to talking to people. Reporters, by contrast, love talking to people. My mate Rod Tiffen says it’s just as hard to persuade an academic to talk to someone as it is to persuade a journo to read a book. I remember once, long before the internet, a reporter asked me how much the inflation rate was. I said I didn’t know, but gave him very detailed instructions of where to find the CPI press release a few steps away in the Herald library. When I asked him about it later he said: ‘Oh it was OK. I rang the Bureau of Stats and asked them what it was’. When young economic journalist recruits come to me - usually from this university; from Political Economy, in fact - I lose no time in telling them: in journalism we never do Research, we phone experts and ask them what they think. Eventually, of course, they learn that it’s often a waste of time to phone academic experts. Why? Because journalists are always dealing with some new development, but many academics don’t keep up with the latest news in their field and, being academics, they’re not willing to give an on-the-record reaction to the latest development the journo has just summarised for them. If you hate being pestered by phone calls from journalists, this is a great way to ensure you aren’t.

Academics are often highly critical of the things they read or see in the media. I don’t want to shock you, but journos are often just as critical of academics. Much of this criticism is unfair and, more to the point, uninformed. Each side judges the other by its own standards and finds the other wanting. What both sides fail to understand is that they’re playing different games, with different rules and different objectives. Both sides are involved in writing, but they write in very different genres. When I go into the budget lockup each year I get five hours to read and digest a stack of budget papers a foot high and write a punchy comment for the front page of the next morning’s paper. The very purpose of the lockup is to ensure I get no time to consult experts independent of the government before deadline. Not surprisingly, I sometimes misjudge the budget’s objectives and motivations and have to modify my views in subsequent days. Sometimes I even get some of the facts wrong. By contrast, for many years the leading economic academic journal in Australia used to publish a budget review in which leading macroeconomics professors delivered a carefully considered and measured (and possibly refereed) judgment. Just one problem: this review appeared at least six months after budget night. Journalism is said to be the first draft of history, but it’s a very rough draft. The public can’t wait six months to be told what the budget adds up to. Even so, there’s a useful place for the academics’ carefully researched and considered judgment on the budget. Each profession has a different role to play; there’s little to be gained by each judging the other by standards inappropriate to the role the other plays. The reason journos use the phone rather than a library is the extreme time pressures they’re under.

I’ve always been contemptuous of the Marxist theory of the press, that the media is an integral means by which the capitalists keep the workers in thrall. If this implies some sort of conspiracy by the media barons, it’s rubbish. Even so, I’ve come to believe that in many ways the media do help keep the wheels of the capitalist economy turning. It took me years in journalism to realise I was part of the fashion business - we deal with the latest, not just in clothes, but in movies, TV shows, restaurants, discos and much else, including ideas. But the paradox is that this Marxist approach seems to blind many academics to our capitalist motivation. They love to try to explain our behaviour in ideological terms and can’t see the bleeding obvious: the main reason we do what we do the way we do it is because we’re trying to make a quid. Our primary motive isn’t ideological, it’s commercial. What’s more, humans’ evolutionary drive to compete means that, despite its lack of commercial motivation, the ABC behaves much the same way as its profit-motivated rivals do.

Academia is - supposedly, hopefully - dedicated to the search for truth. But contrary to what many academics and media-users imagine, the news media isn’t. Although we’re supposed to be truthful in what we say, and many journalists are anxious to reveal an unexpected truth in some area, it’s a mistake to think the news media is on about the search for truth. Why not? Because much of the time the truth is dull. Media owners are dedicated to profit maximisation, and their minions seek to do this by selling a product called ‘news’. What is news? Whatever sells. What sells - what’s ‘newsworthy’ as journos say? Anything happening out there that our audience will find interesting or important, although the interesting will always trump the important. Paris Hilton is interesting but of no importance; the latest change in the superannuation rules is important but deadly dull - guess which one gets more media coverage?

Maybe 99 per cent of what happens in the world is of little interest: it’s the old, not the new; the good, not the bad; the usual, not the unusual. It’s dog bites man, not man bites dog. Much of the criticism of the media rests on the unspoken assumption that the media’s role is to give us an accurate picture of the world around us. We don’t have first hand experience of much of what’s happening around us and we need the media to inform us.

Sorry, but that’s just not what we do - because we don’t think there’s much of a market for it. Let me tell you two stories and then I’ll stop. Stories to demonstrate how we select news - how what we do bears no relation to the scientific method that guides so much of what academics do. Once when I was answering a question at a Treasury seminar in Canberra it occurred to me to say this: when social scientists take a random sample they may examine the sample and discard any outliers that could distort their survey, throwing them on the floor. A journalist is someone who comes along, finds them on the floor and says, ‘these would make a great story’.

Final story: I happened to be in the Herald’s daily news conference in February this year on the day Kevin Rudd’s $42 billion stimulus package was announced, with all its (then) $950 cash handouts. We discussed searching for a farmer who’d get $950 because he was in exceptional circumstances, $950 because he paid tax last year, $950 because his wife also works, $4750 because he has five school-age kids, and maybe another $950 because one of the kids is doing a training course. And, of course, he’d have a big mortgage, meaning he’d also save $250 a month because of the 1 per cent cut in interest rates announced the same day. Had we found such a person and taken a good photo of him he’d have been all over our front page. The point is that we were search for the most unrepresentative person we could find. Why? Because our readers would have been fascinated to read about him. It’s reasonable to expect the media to be accurate in the facts they report but, even if they are, it’s idle to expect them to give us a representative picture of the world. We’re not in that business.

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GIVE MY REGRETS TO WARATAH HIGH

Newcastle Boys’ High School Old Boys’ Association annual dinner
August 8, 2009

I’m honoured to be invited back to my home town to speak to the Old Boys of my old school. I’ve lived in Sydney for 40 years this year, but I’m always proud to say I’m a Novocastrian and particularly proud to say I went to Boys’ High. However, I’m not sure how well qualified I am to talk to you. Of course, in a sense no one’s qualified to talk. We’re here to do a little reminiscing about our school days, but Boys’ High existed for many years, and I’m conscious that some of you would have left the school long before I arrived and many of you would have arrived long after I left. So the scope for talking about people and events that don’t ring any bells for you is great.

I guess I should start by putting myself in the context of the school’s existence. The first high school I went to was Fort Street Boys’, then my parents - who were Salvation Army officers - were moved to Bathurst for a year before being moved back to the suburb in which I’d been born, New Lambton. That means I was at Boys’ High only for my last three years of high school, 1962, 63 and 64 - which was the second last year of the five-year leaving certificate before the introduction of the six-year HSC. The fact that two years after I left school no one left school in NSW proved particularly fortunate for me because, by then I’d finished my second part-time year of a commerce degree at Newcastle Uni. I wanted to switch to full-time, so I applied for a Commonwealth scholarship and, despite a checkered academic record, I got one - purely because they were going begging that year.

One respect in which I’m not well qualified to talk to you is that, although I was obviously smart enough to make it to a selective school, I wasn’t diligent enough to get anywhere once I’d arrived. I was always well down in the year and usually in the E class - in the days when all classes were ‘streamed’ (graded) and teachers made no effort to protect your fragile ‘self-esteem’ by disguising how poorly you were doing in the competition. At the Intermediate I just scraped through maths and failed English. I can’t remember doing much study for the Leaving, and the results I got were pretty undistinguished - two As and four Bs - but in those days that was enough to get you into uni. I can remember being quite over-awed as I walked around the old campus at Tighes Hill - I thought I was surrounded by people who were much brighter than I was - so I resolved to work a lot harder. It worked for the first year, but then I eased off. I actually failed macroeconomics at my first attempt (and failed commerce stats twice) but in those easy days failing a few subjects earned you only the minor inconvenience of having to ‘show cause’.

So I’m hardly the finest example of Boys’ High’s academic excellence. I guess I’m proof that there’s life after an undistinguished academic career. But another respect in which I’m not well qualified for this talk is that there’s a lot about my school days I can’t remember. For instance, I can’t remember ever playing any sport at Boys’ High. I guess I must have, but it’s just a blank in my mind. All I can remember was being keen to be a Library Boy because they were allowed to skulk in the Library on Wednesday afternoons. And I would much rather have been covering library books than playing sport. The only school prize I ever got was for being a Library Boy.

But it’s not just that I’ve forgotten so much, it’s also that my memories aren’t always accurate. When I attended our year’s 20-year reunion at the Rugby Club in 1984, I was looking forward to meeting our old headmaster, Harold Beard, and was completely nonplussed when the principal in our final year was introduced as Mr Richardson. Who was he? Where had he sprung from? It took me a long time to remember that Mr Beard had retired in our second last year and been replaced in our final year by the much less memorable Mr Richardson. But that’s not all. One thing I had intended to say tonight was my clear, indelibly imprinted memory of where I was when I heard the news of President Kennedy’s assassination: in the playground at Boys’ High. But when I mentioned this to a friend he said I’d better check it because his clear memory was that JFK died on a Saturday. I checked, and he was right. So all I can do is borrow from Clive James and say that what follows is my Unreliable Memoirs.

Rather than talk about the other boys in my year I thought it might touch more chords if I mentioned the teachers I remember, most of whom were there for many years. This should be the point where I wheel out my personal fund of stories about Charlie Goffet - who was there when my brother went to Boys’ High in 1947 and still there when most of you went through. Unfortunately, however, I never had Charlie - my last year of French was with the mild-mannered Mr Jackson. My first maths teacher was Jacky Shield - a nice guy but not a great maths communicator, who later turned up in Sydney as an organiser for the Teachers Federation. But the maths teacher I remember most was young Tony Abraham, who had a Triumph sports car he was very proud of and spoke with a strange British accent I later realised was Welsh. If he wanted you he’d say, Come Cheer!

I remember the head of the English department, Mr Judd (Pinhead), Mr Blunden (Chrome Dome), who was a leading light in the Youth Hostels Association, the librarian, Mr Rigby, and, of course, the man who rose to fame in various Channel 10 soap operas, Vic Rooney. I remember our history teacher, Mr Carter (Orsen Carter) who said something one day I never forgot: that for an exemplary example of written English we should follow his example and read the editorials in the Newcastle Morning Herald. I thought of that many years later when I was writing editorials (or ‘leaders’) in the Sydney Morning Herald. I guess my prose wouldn’t have been up to Mr Carter’s standards, but I hope I knew a bit more about the subject matter than most editorial writers did. Seeing the leader-writing process from the inside is like watching sausages being made - it’s better not to know what goes into them.

My last English teacher was Mr Kerr (Cat’s Eyes). I was in the E class, but one day I put up my hand and asked him if he thought it was worth me trying to get an A in English. He unhesitatingly told me not to bother - but as it turned out, I got one. Some tiny inkling of my future career was starting to peep through. Mr Kerr was also the careers adviser, but I don’t blame him for the careers advice I got which typically in those days was uninspired and uninspiring. I probably told them I wanted to be an accountant (which was true), they looked at my academic performance, saw I was quite good at a subject called accountancy but not much else, and grudging suggested that, if I tried really hard, I could probably manage a part-time tech course in accounting. Perhaps all the tough love we got from teachers in those days - all the negative comments on report cards - had a useful effect in making us determined to show we were better than our teachers assumed. I enrolled in accounting at uni rather than tech, and had no trouble doing well in it. It was only the economics that gave me trouble.

But Mr Kerr ended up doing me a favour. A local chartered accountant, Ray Patrick, came to the school saying he needed to employ a junior audit clerk. Mr Kerr recommended me, I took the job with alacrity and worked for Ray Patrick for two years before going to uni full-time and then moving to Sydney to work for one of the big chartered accounting firms.

That brings me to Lyle Abell, who taught me both accountancy (in which I got my other A) and economics (only managed a B). Took me a long time to see the point of economics, as you can tell. Many years later, after I was economics editor of the Herald, I was invited to come back to Newcastle to talk to a lecture day for HSC economics students from various schools held in the main lecture theatre at Newcastle Uni, one I had sat in many times as a uni student, the fragrantly named BO1. As I held forth to the school kids it suddenly struck me that, when I was studying economics at school, I wouldn’t have understood a word of what I was saying to those students. The modern HSC is a lot more intellectually demanding than the Leaving was in my day.

Then there was Harold Beard’s deputy, Tom O’Connor, known by his initials as TOC. He was the complete antithesis of the mild, intellectual Mr Beard. TOC was perpetually red-faced and shouting, a stern disciplinarian and wielder of the cane. Mr Beard was the good cop; TOC was the bad cop. Years later in discussions with teachers I discovered this was pretty much the standard formula for high schools: a principal who acts as the intellectual leader with a soul above the mundane, and a down-and-dirty deputy who does the enforcing.

But that didn’t stop us fifth-years having a little fun at TOC’s expense. I guess it wasn’t an original wheeze, but someone got the idea of taking an item of school clothing, marking on it the owner’s name, Mike Hunt, and handing it in as lost property. TOC would stand in front of the school assembly with the offending item of property and bellow at the top of his lungs, Where’s Mike Hunt!? while the fifth-years sniggered and the rest of the school looked puzzled. Then we played a more subtle game, inventing someone called Duncan Abercrombie - I guess we just liked the name - who, too, was always losing his uniform and having to be searched for. It took the authorities quite a while before they realised there was no such boy.

Everyone is supposed to have a memorable teacher who inspired them with ambition or a love of learning. All told I attended five primary schools and three high schools, but only one heroic, outstanding teacher sticks in my mind: Harold Beard. If you didn’t experience Mr Beard in the flesh during his 16 years as Headmaster then I’m sure you must remember his name from the F.H. Beard library.

He was probably the most eccentric man I’ve ever observed - not in his dress or demeanour, but in his beliefs and practices as a teacher. He had his own ideas - his own educational priorities - he was in charge of exactly the right school to implement those ideas, and so he did, not caring for a moment that others may have considered him odd (as I’m sure many did). In this he set a great example to us boys. He was a pioneer in the field of sex education, with his endlessly repeated showings of the battered and scratchy film, Human Reproduction, from which kids, by the time they were in fifth year, could recite long passages by heart.

He was a great believer in current affairs and public speaking. Two days a week would be divided into nine periods rather than eight, and the last period of the day would be devoted to this purpose. The senior or junior half of the school would go to the assembly hall to listen to a guest speaker, while the other half would go to their roll teacher who would take them in ‘speech training’. Sometimes we’d do debating, other times we’d each give two-minute speeches in front of our school mates on a topic we’d been given only a few minutes to think about. I think that was excellent training for boys likely to end up in positions of leadership. Nothing could be better calculated to help people overcome their fear of public speaking.

Mr Beard did all he could to encourage our interest in current affairs. We would memorise the names of Asian political leaders for his regular current affairs tests - Lee Kuan Yew, Tunku Abdul Rahman, Sukarno, U Thant and many more. He conned many of us into subscribing to Sydney University’s Current Affairs Bulletin, and every month or so the school corridors would be awash with bulk copies of the latest CAB, that none of us were keen to read. Then there was his enormous faith in the ability of the United Nations to deliver world peace. We had a loud-speaker system in every classroom and, at times of international tension, Mr Beard would listen to the radio and then excitedly break into our lessons to bring us the latest uplifting news from the world. It was only years later that I realised how few people shared Mr Beard’s faith that the UN would solve all our problems.

My favourite guest speaker at the assemblies was Professor Brinley Newton-John, the vice principal of Newcastle University, who’d been in the British secret service during the war. He used to tell us he was sworn to secrecy about his wartime exploits, but still managed to tell us enough to keep us interested. Only later did I realise we should have been more interested in seeing and hearing his daughter Olivia.

As a boy I thought the Second World War had happened in the olden days. Only much later did I realise how recent the war was when we were growing up in the 50s and early 60s. Most of our teachers were ‘returned men’ - and by today’s standards it’s remarkable to think how many of them were men. In my first two years at Boys’ High there was only one woman on the staff, the music teacher Mrs Hindmarsh. But by 1964 she’d been joined by three other women. Perhaps that was Mr Richardson’s doing. I note that whereas Mr Beard was always referred to as the Headmaster, Mr Richardson was the Principal. When you remember how comparatively rare university degrees were in those days - a lot of returned men had the qualification ASTC (associate of Sydney Technical College) - it’s surprising that almost all our teachers had BAs. Perhaps that was Mr Beard’s doing - or perhaps in those days, unlike today, the Education Department accepted that a selective school needed highly qualified teachers.

When the guest speaker didn’t turn up to school assemblies, Mr Beard, who was a pianist, would lead us in community singing from a special school songbook he’d had printed. These were riotous fun. Mr Beard’s problem was that, from the piano on the stage, he needed one set of glasses to see the music and another set to see us. So while he was frantically juggling his owlish glasses, the fifth years would be up the back demanding to sing our favourite, the Drinking Song from the Student Prince - Drink, drink, drink! Let every true lover salute his sweetheart - let’s drink!

Perhaps because of his great interest in human reproduction, Mr Beard still had a young family to support after he retired, so he became a representative of World Book Encyclopaedia, and used his extensive contacts with other school principals to sell a copy of the encyclopaedia to most of the schools in Newcastle.

One event that sticks in my mind was when, in 1963, the Minister for Education, Mr Wetherell, came to open the new library. I’ve never seen a place so on edge; the staff were beside themselves. The school had been cleaned and polished from top to bottom and a collection potted of aspidistras had been acquired from somewhere and distributed strategically along the corridors. It was all so pristine that any boy who dared set foot in the school was roared at and we were kept out in the playground for the whole day until the Minister arrived. But then it rained during the opening ceremony and everyone had to rush inside. I often thought of that day 11 years later when I was a cadet reporter in the press gallery at Parliament House in Macquarie Street. The then minister for education could have been an old Labor lag, a drunk and a buffoon, a figure of derision around the House, but were he to visit a particular school, everyone from the principal down would quake in their boots.

I was very sorry not to be able to make it to my year’s 40-year reunion in 2004; I didn’t hear about it until after I was committed to flying out to Europe the next morning. But I did attend the 20-year reunion and found it quite memorable. I know that only those confident of their success are inclined to show up to reunions, but even so I was struck by how many people in my year seemed to have ended up as barristers and medical specialists. I suppose I shouldn’t have been surprised - when you take the brightest kids in a city as big as Newcastle it’s not surprising a lot become professionals - but I guess I hadn’t realised what a high-powered group we were. Our year and every year at Boys’ High.

But the thing I found really disconcerting about that night at the Rugby Club was the way the whole show was taken over and run by our prefects, with the school captain presiding, wearing his school blazer, lovingly preserved by his mother and which he could still fit into. What disconcerted me was that this arrangement instantly re-established the social hierarchy that had existed in my last year at Boys’ High: prefects on top, followed by the first XIII, then the first XI, and so on down to the misfits, Choir Boys and Library Boys. I’d spent the previous 20 years fighting to get myself a bit of social status and here I was cast right back to the bottom of the pecking order.

In the years since leaving Boys’ High I’ve often considered the rights and wrongs of selective schools. They’re hugely popular with parents these days - and no politician would dare do anything other than add to their number - but the Teachers Federation has long been implacably opposed to them and, as you well know, there was a time when that opposition was in the ascendancy and some selective schools were deselected, so to speak. I still remember the disappointment I felt when I learnt that Boys’ High was now nonexistent, with Waratah High taking its place. As I pondered this over the years I realised that most of the big-name Sydney selective schools had been left intact - Sydney Boys, Sydney Girls, North Sydney Boys, North Sydney Girls, although the two Fort Streets had been merged. Indeed, just about the only other selective school to bite the dust that I heard of was John Howard’s old school, Canterbury Boys. How come we got the chop when so many others survived? My own theory is that many of our most influential old boys rose in the ranks of BHP and so were all down in Melbourne and thus unavailable to do what I suspect the influential old boys of the surviving schools did - have a quiet word with the Premier: ‘of course, Premier, the new rules won’t be applying to my old school will they?’ ‘Oh no, Sir John, not to your old school.’

I once met a university education lecturer who was very much opposed to selective schools arguing, among other things, that they were bad for the confidence of the kids selected. These kids had come from being first or second in the class at their primary school, only to discover that at high school they were well down in the year, and this would lead them to doubt their abilities and stop trying so hard. I don’t think I accept that. I didn’t see much evidence of it at Fort Street or Boys’ High, and it ought to be counteracted by the fact that you’re thrown into a whole group that’s travelling much faster than the individual kid would be travelling back at the comprehensive high school, as well as having a lot more expected of them by their teachers at the selective school.

If anything, I think going to a selective school frees bright young kids from the peer-group pressure at comprehensive schools not to act brighter than the others and not to do nerdish things like bringing a violin to school.

I think kids in selective schools are more tolerant of individual differences - you can be a bit odd and no one thinks much of it. Certainly, that was my experience at Boys’ High. I realised this years later when I went to work for a big Chartered Accountant firm in Sydney, which was staffed by a lot of private school boys. They just couldn’t help themselves remarking continually on the respects in which I differed from all of them: my oddball religion and even what they regarded as my odd political opinions.

I think what we had at Boys’ High was a good mix of classes. There must have been plenty of middle-class boys who were the bright sons of bright fathers who were the town’s business and professional people, but there was also a high proportion of boys who were the bright sons of fathers who were just ordinary workers. We had a mixture of classes but we weren’t terribly conscious of it. People were different in some way, but what of it? The denizens of the NSW Right look on the Labor Party not as party trying to advance the interests of all the battlers and disadvantaged, but as a ladder the bright sons of workers can climb to achieve their overwhelming goal in life: escaping the working class. I think Boys’ High filled that ladder role for many of the boys who attended it - including me.

How well did the experience of starting your career through life at a school like Boys’ High equip you for the fight to get ahead in the world? Did going to Boys’ High heighten your ambition? Well, I suppose it must have provided a good base and made many of us more ambitious. Although we didn’t have famous old boys paraded before us as was the case with Fort Street, I think you can find running through the rhetoric of Mr Beard and Mr Richardson the expectation that we were bright, intellectually privileged boys who would go far and had an obligation to contribute to the advancement of our nation.

I think that growing up in the working-class town of Newcastle left many of us feeling like we were outsiders with something to prove; many of us with a burning desire to prove we could make a better fist of material advancement than our fathers had. That’s certainly the way I felt - it was a big part of my motivation - though a lot of that came from my family circumstances. We didn’t have the natural self-assurance, the born-to-rule mentality of the kids attending private schools, but we did have a belief that we lived in a meritocracy, where those who were bright enough and worked hard enough could get ahead. It was the very opposite of The Old School Tie. Perhaps it was that positivity that Boys’ High added to our attitudes as boys growing up in a working-class, anti-boss town like Newcastle.

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