FOREWORD TO MONOGRAPH BY CONNORS AND MCMORROW, PUBLISHED BY THE AUSTRALIAN EDUCATION REVIEW

May 2015

Many of those of us old enough to remember, pride ourselves that the sectarian bitterness of our youth is long gone. The debates over ‘state aid’ to Catholic and other non-government schools are now just a distant memory. Similarly, many of us like to believe that the class-based struggle of old is no longer part of modern political life.

But the continuing influence of both sources of conflict isn’t hard to find in federal and state arrangements for funding Australia’s schools. Although governments switched to their own systems of secular education in colonial times, Catholic systemic schools still receive considerable government funding on a separate basis to the public school systems, which are separate again from the greatly increased public funding going to ‘independent’ non-government schools.

If you’re tempted to think this no more than an artefact of ancient history, just try fiddling with it. Whereas religious schools have long been much more tightly absorbed into government school systems in most other developed countries, our Catholic systemic schools have retained a high degree of (heavily subsidised) independence. Few politicians have shown any desire to change these longstanding arrangements. Sectarian sympathies are too easily aroused.

And whereas in other advanced economies other non-government schools have retained their independence by swearing off public funding, in Australia they’ve been able to enjoy the best of both worlds. While you may think there is little media sympathy for what journalists almost invariably describe as ‘elite’ private schools, the authors of this review remind us that just twice in the past 40 years has one side of politics - Labor - dared to propose cuts in grants to prosperous private schools, before abandoning the policy and quietly vowing never to provoke such uproar again.

It’s commonly believed that politics has entered the post-ideological age, but schools funding is an exception. Whereas Labor governments have tended to emphasise equity and needs-based funding, Coalition governments have emphasised choice and competition. The result has been a degree of see-sawing over the decades as government has changed hands.

The authors trace the effects of these conflicting influences on schools funding by the federal government over the almost 40 years between the early days of the Whitlam government in 1973 and the later years of the Rudd-Gillard government in 2011. Using prices at December 2011, they find that federal grants for recurrent school funding grew in real terms from $900 million to $11.4 billion a year, a more than 12-fold increase.

Even remembering that the number of students grew by 24 per cent to 3.5 million over the period, this represents a significant real increase in schools funding. So, no evidence of unwillingness to increase spending by either side of politics. And international comparisons confirm that Australia’s total spending on schools is a little above the average for the OECD countries.

The authors’ figures reveal two outstanding trends over the period, however. First, whereas federal recurrent grants to government schools rose by a factor of about nine over the period, grants to non-government schools increased almost 16-fold. So whereas total federal grants were shared equally between government and non-government schools in 1973, by 2011 the non-government schools’ share had risen to 63 per cent. This represents the federal government supplanting the states as the main provider of funding to non-government schools.

Second, whereas total student numbers increased by 24 per cent over the period, the number of government-school students grew by just 3 per cent. This left the number of students in Catholic systemic schools growing by half and independent-school students growing by a factor of four. So government schools’ share of all students fell from 80 per cent to 65 per cent, with the Catholic schools’ share increasing by 5 percentage points to 19 per cent and independent schools’ share rising by 10 points to 16 per cent.

This raises an obvious question: has the balance of federal funding shifted in favour of non-government schools as parents have voted with their feet in leaving the government system, or has the shift in funding in favour of non-government schools encouraged parents to move?

No doubt there’s truth in both possibilities. With a growing proportion of two-income families, rising real incomes and smaller family sizes, it would be surprising if more parents weren’t attempting - wisely or otherwise - to advantage their children by sending them to fee-charging private schools. If it costs more, it must be better, right?

But equally, it would be surprising if the lower-than-otherwise fees or better-than-otherwise facilities at non-government schools permitted by greatly increased government funding hadn’t encouraged many families to send their children to non-government schools. And as often better-off, better-performing and better-behaved students have left or failed to join the public system, it has become that much harder for government schools to maintain their standards and attractiveness to parents able to afford other options.

What’s clear is the increased social stratification of Australian schools, with official estimates of socio-educational advantage in 2010 showing 36 per cent of government-school students in the bottom quarter of the distribution, compared with 21 per cent of students at Catholic schools and 13 per cent at independent schools. At the opposite end of the distribution, 47 per cent of students at independent schools were in the top quarter, compared with 29 per cent of Catholic systemic students and 22 per cent of government-school students.

So, we’ve spent a lot more money on schools, with much of the increase going to subsidise the growth of non-government schools, to the point where only about 5 per cent of all schools spend more on teachers’ salaries than they received in federal and state grants. What, then, have we achieved in terms of measured educational outcomes?

The authors quote research published in 2013 which found a small decline in reading and mathematics achievement among Australian students in the middle years of secondary school since 2000, stability in science and maths achievement among Year 8 students since 1994, a small improvement in maths achievement among students in Year 4 since 1994 and a small improvement in reading among students in Year 3 since 2008. So, as a general conclusion, little improvement.

Perhaps findings such as these account for those arguing that all the extra funds taxpayers have put into schools over recent decades have done little to improve educational outcomes. But it may not be that simple. It’s not just how much we spend, it’s also how we spend it. And, as we’ve seen, we’ve been directing more of our funds to non-government schools with higher proportions of socio-educationally advantaged students.

Results from the OECD’s PISA study in 2012 show that the lower a country’s overall level of schools’ educational resources, the greater the gap in resources between advantaged and disadvantaged schools. But we’ve managed to make ourselves an exception to that rule: despite our above-average level of school resources overall, we have the fifth largest resource gap between advantaged and disadvantaged schools. Why? Mainly, it seems, because successive federal governments have divided their recurrent grants to government and non-government schools in a way that favoured choice and competition over equity and needs-based funding.

It’s often argued in support of subsidised choice that, even so, parents who pay extra to send their children to a non-government school are doing other taxpayers a favour. Such arguments ignore the diseconomies of scale often involved when students move from public to private. According to rough figuring by the authors, federal and state recurrent spending on schools would have been somewhat less had the migration from government to non-government schools between 1973 and 2012 not occurred. As for the common contention that subsidised choice of schools would, by increasing the competition between government and non-government schools, serve to improve educational outcomes, little evidence has so far emerged to support it.

With its proposal for a ‘sector-blind’ reorientation of federal and state schools funding in favour of disadvantaged students regardless of their sector, The Gonski review panel offered the political parties and interest groups on all sides of the debate a rare opportunity to move to a fairer and more rational funding system in a spirit of compromise and co-operation rather than capitulation.

Regrettably, with the change of government in Canberra that opportunity has been forgone, partly because of the persistence of old partialities and partly because the compromise based on the Gillard government’s requirement that ‘no school would lose a dollar’ was judged too expensive by the Abbott government. Rather, after the first four years of Gonski funding the government proposes to subject its existing recurrent grants to government and non-government schools to a much less generous indexing regime.

This would save money while doing nothing to distribute federal funding in a way fairer to disadvantaged students. It would ignore the scope for savings by reducing grants to the most privileged schools. And it would pass up an opportunity to improve the labour force participation and productivity of young people near the bottom of distribution. As an Abbott minister might say, such an unsatisfactory outcome is surely ‘unsustainable’.

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Super: ignore it and miss seeing you're being bled

You know you're getting old when you attend the funeral of the man who hired you four decades earlier. Among all the rough-and-ready types in journalism, Alan Dobbyn, long-lasting news editor of the Herald - in the days when that meant he was really the editor - was a true gentleman.

When, as a chartered accountant, I applied for a job as a cadet journalist, Dobbyn told me he wasn't sure I'd last, but was prepared to give it a go. He didn't know how keen I was to escape the round eternal of the cash book and the journal. At the wake, I learnt from his family his concern was his inability to offer me a wage of more than $100 a week.

Not to worry. He got me a hefty pay rise four months later. And, in any case, being an accountant with an interest in such matters, I joined the Fairfax super scheme in my first week and this has served me more than well.

Just as it never crossed my mind I'd one day attend my boss's funeral, so most people under 50 can't bring themselves to think about superannuation. It is too complicated and too boring. It deals with contingencies so far into the unknowable future that they're inconceivable.

Why do bankers and other purveyors of "financial services" earn stratospheric incomes that chief executives have been quick to copy and medical specialists to envy? To a fair extent because so few people can bring themselves to keep a watchful eye on their super.

How do you get ripped off in a capitalist economy? By not paying enough attention to what the capitalists are doing to you via boring things like superannuation. By ignoring the watchwords of capitalism: caveat emptor - let the buyer beware.

Paul Keating is particularly proud of Labor's introduction of compulsory employee super in the 1990s. John Howard has always had his doubts, partly because of the compulsion, but mainly because it's meant so many unwashed union officials getting a hand in administering the billions that, by rights, should be the exclusive preserve of Liberal-voting business people.

I have no problem with the compulsion. It is an easily justified government intervention to help counter the very market failure we've been discussing: life-cycle myopia. But even if you regard our present arrangements as a great reform, it remains true they're also a great scandal. A remodelled house that's yet to have its tarpaulin replaced by a new roof to stop the rain getting in.

Lately, we've heard much about the way a mainly compulsory saving scheme is accompanied by tax inducements that cost the government about as much as the age pension, but are of little benefit to low-income earners, with most of the lolly going to high-income earners like me.

It's a scandal for the government to be proposing cuts to the age pension because its cost has become "unsustainable", while ignoring the super tax concessions going to the more than well-off.

But another scandal gets far less attention: the way the banks and life insurance companies and innumerable hangers-on are able to quietly overcharge all those mug punters who can't muster any interest in their super.

Think of it: the government compels employers to take 9.5 per cent of their workers' wages and hand this over to the "financial services" industry, then looks the other way while these fat cats rip off the mugs the government has delivered into their hands.

As Jim Minifie explains in his report, Super Savings, for the Grattan Institute, the previous government did do something to improve things, mainly by tightening requirements on the "default" super funds that workers are put into when, as usually happens, they don't exercise their right to nominate a fund.

But this just scrapes the surface of the potential reductions in the administrative and investment management fees imposed on people's accounts. The industry is inefficient because its customers' inattention means competition is inadequate.

To be fair to punters, it's just too hard to understand how super works and how different funds compare, and too time-consuming to complete the forms needed to move money around. Putting that into econospeak​, information and transaction costs are prohibitive, causing the market to fail.

Minifie finds there are too many super accounts - on average, about two per person - and too many super funds, which stops the exploitation of economies of scale. He says the government should encourage fund mergers and make it easier for people to consolidate their accounts.

But most of all, the government should inject more competition by calling tenders for the right to be a default fund, with those funds charging the lowest fees winning.

These reforms could cut the $21 billion in fees paid each year by people with super accounts by up to $6 billion a year. That's a decrease of almost 30 per cent.

Punters assume that, apart from the size of your wage, how much super you retire with depends on how well your investments do. Often, however, how much you're charged in fees can make a bigger difference.

Few realise they're paying about $1000 a year in fees. Minifie estimates that just introducing a tender for default funds would cause the average retirement payout of people in such funds to be 5 per cent higher.  That's about $40,000. Worth worrying about, I'd have thought.

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Jesus the great debt-eliminator

At this time of our greatest Christian holy-days, what does the Bible have to say about economics? A lot more than you may think.

That's according to the Czech economist Tomas Sedlacek, whose book, Economics of Good and Evil, I'll be heavily relying on in this column.

When God expelled Adam and Eve from the Garden of Eden after they had disobeyed him, part of their punishment was that "by the sweat of your brow you will eat your food" – they'd have to work for their living.

But Jesus said, "Man does not live on bread alone". So we have to be concerned about making our living, but we also have to be concerned about more than that.

"We were endowed with both body and soul, and we are both spiritual and material beings . . . Without the material, we die; without the spiritual, we stop being people," Sedlacek says.

Christianity doesn't condemn the material, but it does condemn materialism. It's not money that's the problem, it's the love of money. Keep too much of it for yourself and you've probably crossed the line.

It's true Jesus chased from the temple "men selling cattle, sheep and doves, and others sitting at tables exchanging money", but he didn't chase them any further. His problem was not with their commerce but with their mixture of the sacred with the profane.

Jesus's teaching is often based on paradox, we're told. Jesus considers more valuable two mites that a poor widow drops on to the collection plate than the golden gifts of the rich.

Implicitly, this legitimises the role of money. But, to economists, it also shows Jesus understood the concept of marginal disutility. The widow's mite involved much greater sacrifice than the rich person's gold.

Sedlacek notes the New Testament's extensive use of economic metaphors. Of Jesus's 30 parables, 19 are set in an economic or social context: the parable of the lost coin; of talents (money), where Jesus rebukes a servant who didn't "put my money on deposit with the bankers"; of the unjust steward; of the workers in the vineyard; of the two debtors; of the rich fool, and so forth.

But get this: the most central concept in the Easter story of Christ's death and resurrection – redemption – originally had a purely economic meaning. You need to know that, in New Testament Greek, sin and debt were the same word.

People who were unable to pay their debts became debt slaves. Once you fell into slavery, the only escape was for someone to ransom you, to pay your bail. Jesus's role was to redeem us, purchase us at a price, buying us out of our debt of sins. The price was the shedding of his blood on the cross, just as the sacrificial lamb's blood was shed at Passover.

"In him we have redemption through his blood, the forgiveness of sins, in accordance with the riches of God's grace," St Paul said.

Western civilisation has been shaped by Christianity and Christian values, which means Christianity has also shaped economics. Sedlacek says the prayer "forgive us our sins", meaning "cancel our debts", could be heard from the West's leading banks in the global financial crisis.

Our modern economy cannot function without institutions that deliver the unfair forgiveness of debt. Bankrupts, for instance, are discharged even though they've paid back only a fraction of what they owe. When a company goes bust owing millions, the liability of its shareholders is limited to the face-value of their shares, paid long before by the original purchaser of the shares.

As for the GFC, Sedlacek says, "It would be hard to imagine the financial Armageddon that would follow if the government actually did not pay the ransom and redeem banks and some large companies".

"This, of course, goes against all principles of sound reason and of basic fairness. We also breached many rules of competition on which capitalism is built. Why did the most indebted banks and companies, which did not compete very well, receive the largest forgiveness?"

Why? It had to be done, in order to redeem not only these particular troubled and highly indebted companies, but also others that would fail if these few were not saved.

You've heard of "positive discrimination", but Sedlacek says Christian thought emphasises the concept of "positive unfairness": the more you've sinned, the bigger dollop of forgiveness you get.

"It doesn't matter how hard you try – everyone gets the same reward" (something the prodigal son's brother had trouble accepting).

"Christianity thus largely abolishes the accounting of good and evil. God forgives, which is positively unfair," he concludes.

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Behavioural economics makes more sense to regulators

Pssst ... have you heard about this great new investment product called hybrid securities? They're terrific. Rather than having to choose between high-reward, high-risk shares and low-risk, low-reward bonds and other debt securities, hybrids give you the best of both worlds: high reward, low risk.

At least, that's what I think. And it's probably what the outfit that sold me the hybrids wanted me to think. But it's certainly not what the Australian Securities and Investments Commission wants people to think.

It regards hybrid securities as highly complex, tricky investments. They often promise high yields and are issued by well-known companies with trusted brands, but "investors need to very carefully consider the features and risks before investing".

So keen is the commission to make sure it's getting the message through to potential investors that it did something unusual: it resorted to the behavioural economists – those who, rather than assuming everyone always acts rationally, use psychology to discover how real people make decisions – to help it understand what it is that attracts people to hybrids.

It commissioned the Queensland behavioural economics group at the Queensland University of Technology Business School to conduct some experiments. The group assembled a lot of business-school uni students and gave each of them 100 units to be notional invested in a portfolio of bonds, hybrids and shares, getting them to take it seriously by promising to let them keep any profit they made.

First, however, it asked each student a bunch of questions designed to establish whether their decision-making was influenced any of a range of "cognitive biases" rather than solely rational consideration of the options.

Investors are known to be commonly affected by such "heuristics" (mental shortcuts) as the availability bias, representativeness bias, framing bias, recency bias, overconfidence, illusion of control, competence bias, ambiguity aversion and mental accounting.

So now, gentle reader, it's time for me to ask you some strange questions on this long weekend.

Give me high and low estimates for the average weight of an adult male sperm whale (the largest of the toothed whales) in tonnes. Choose numbers far enough apart to be 90 per cent certain that the true answer lies somewhere between.

Don't like that one? Try this: give me high and low estimates of the distance to the moon in kilometres. Choose numbers far enough apart to be certain that the true answer lies somewhere between.

Now something more personal. When you buy a Lotto ticket do you feel more encouraged regarding your chances if you choose the number yourself rather than using a computer-generated number?

Answer: (a) I'm more likely to win if I control the numbers picked, or (b) it makes no difference to me how the numbers are chosen.

Huh? What's all this about? Extensive testing has allowed psychologists to use people's answers to the first two questions to determine whether they suffer from overconfidence. (If you must know, such whales weigh about 40 tonnes and the moon is 384,400 kilometres away.)

Plenty of investors are overconfident in the sense that they have unwarranted faith in their own intuitive reasoning, judgments and cognitive abilities. Their ability to sell up just before the boom turns to bust, for instance.

Can you guess what the Lotto question was intended to discover? It makes no difference to your (tiny) odds of winning Lotto whether you or a computer picks your numbers.

If you imagine it does, you're suffering from what psychologists call the "illusion of control" – the belief you can control, or at least influence future outcomes when, in fact, you can't.

The illusion of control has been found to contribute to the overconfidence bias. And it's a lot more common than you may think. It is, for instance, the reason people keep asking economists for their forecasts about the economy even though they know economists are hopeless forecasters. We like to delude ourselves we can control the future.

Anyway, the Queensland behavioural economists – Anup Basu, Uwe Dulleck, Yola Engler and Markus Schaffner – found from their experiment that students who were more overconfident and suffered from the illusion of control were more inclined than others to invest in hybrid securities.

With better information about what it is that attracts some investors to buy hybrids, the commission should be able craft more effective warnings to people who need to think a lot more carefully before they leap in.

Of course, it also helps to know how to word your warnings. A growing number of government regulatory bodies around the word have found that different ways of writing a letter can have a surprising effect on the way people respond to it – whether they ignore it or act on it.

The commission asked the Queensland behavioural economics group to suggest ways of improving its letters to the directors of companies in liquidation, reminding them of their legal duty to co-operate with the liquidator in handing over the company's books and providing any other information.

Again the group conducted a laboratory experiment. Such experiments, using uni students, have their disadvantages, but they also have the advantage of giving researchers greater ability to control the many factors that could influence the decisions you're studying.

The experimenters recommended that the commission proceed to a randomised controlled trial where some directors were sent the present letter, while others were sent one of four different letters: one where the order of the points was reverse to make them easier to remember, one including a "social norm" noting that about 75 per cent of directors comply, one that allows directors to make active decisions that involve them in the process, and one that appeals to the good intentions most directors have.

At least some of those changes are likely to significantly improve directors' compliance. Practical regulators are getting much more useful advice from the behavioural brand of economists.

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Tax reform needs explanation not spin

Sometimes I think there's no hope for the present crop of politicians - on both sides. When voters react badly to their proposals, they tell themselves there was nothing wrong with the policy, it just wasn't pushed properly.

What they should do is call in a policy expert capable of explaining the proposal and the need for it in words the public can readily understand. What they actually do is call in the spin doctors to help them "sell" the policy.

Lacking the ability themselves, the pollies don't see the difference between explaining something and doing a sales job. Spin doctors use slogans and catchy lines to make policy proposals seem simpler and more attractive than they really are. That is, they're deliberately misleading.

Joe Hockey seems to have a bad case of this. Both his recent intergenerational report and the tax reform discussion paper he issued on Monday were strange amalgams of densely written Treasury analysis preceded by fluffy executive summaries and glossy handouts, which seem to have been written by advertising copywriters who know little about the topic.

One of these characters decided it would be real cool to title the tax discussion paper Re:think.

Some other genius came up with the slogan, Better Tax: lower, simpler, fairer. Anyone who knows anything about tax reform knows that's a trifecta with the longest possible odds.

Not sure who thought of it, but Hockey keeps repeating the line that the tax system needs reform because it was "largely designed before the 1950s". Anyone beyond their 20s would need the memory of a gnat to believe that.

Every country that existed before the 1950s has a tax system that was designed before the 1950s, including us. No developed country I know of has thrown out their old system and replaced it with a quite different system, and neither have we.

But their systems would have changed hugely over the past 60 years - and ours has too. Apart from incessant tinkering, substantial changes were made by Paul Keating in 1985, in a package called RATS - reform of the Australian tax system.

Further big changes were made by John Howard in 1999, in a package called - wait for it - ANTS, a new tax system. Little thing called the GST - remember it?

In 1951, income tax cut in at an income of $300 a year, at a rate of 1 per cent. It then proceeded in 21 steps to a top rate of 65 per cent on income above $30,000 a year.

Today, income tax cuts in at $18,200 a year, at a rate of 21 per cent (including the 2 per cent Medicare levy) and proceeds in just four steps to a top rate of 49 per cent (including the Medicare levy and the temporary budget repair levy of 2 per cent) on income above $180,000 a year.

In the 1950s we paid sales tax on certain goods, but no services, at the rate of 2.5 per cent.  By the time sales tax was replaced by the goods and services tax in 2000, it was imposed on selected goods at six different rates ranging from 22 per cent to 45 per cent.

In the old days capital gains and fringe benefits went untaxed, but the tax breaks on superannuation were much less generous to higher income-earners than they are today. In the old days the states had franchise taxes on petrol, alcohol and tobacco, as well as various fiddling stamp duties, that no longer exist.

Hockey's hyped-up bit of the discussion paper makes much of the fact that, among member countries of the Organisation for Economic Co-operation and Development, only Denmark relies more heavily on income and company taxes than we do.

But if this leaves you thinking we pay more tax than almost every other country, you've been misled. As Treasury says in the fine print, when you take account of all the taxes we pay, "Australia has a relatively low tax burden compared to other wealthy countries."

And when you add compulsory social security contributions (Australia: none) and payroll taxes (Australia: low) to get a like-with-like comparison between countries, we raise 63 per cent of total taxation through "direct" taxes, compared with the OECD average of 61 per cent. Oh.

The discussion paper makes no recommendations, but add up all its arguments and the conclusion we're led to is clear: to reform our tax system to cope with the globalised 21st century, we need to make changes that cause high-income earners and foreign investors to pay less tax, but the rest of us to pay more. Purely coincidentally, of course.

As well, the paper engages in a two-card trick. Hockey's first budget was rejected by voters and the Senate because it sought to fix the budget deficit in ways that were manifestly unfair: big cuts in government spending programs affecting the bottom half of households, but no cuts to the huge tax concessions enjoyed by the top 20 per cent-odd of taxpayers.

The discussion paper readily concedes the unfairness of these elite tax concessions. But it makes virtually no mention of the government's oh-so-pressing problem with the budget deficit.

Get it? In the unlikely event anything much is done about these unfair concessions, the saving will be used to help pay for tax cuts for companies and high-income earners, not to help reduce the deficit.

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Let's be more hard-nosed towards foreign miners

Joe Hockey and Competition and Consumer Commission boss Rod Sims must surely deserve a medal for their selfless devotion to the interests of foreigners, after their shocked reaction to Twiggy Forrest's suggestion that the world's big producers stop the plunge in iron ore prices by limiting their output.

And here was me thinking economics was about rational self-interest.

Hockey sniffed that the idea smacked of forming a cartel. Which was good of him when you remember the way the plunging price of iron ore is robbing his budget of company tax revenue and causing his deficits to be bigger than those Labor left.

We can't afford to give much money to the foreign poor, but if foreign-owned mining companies want to keep forcing down ore prices by expanding production at a time when world demand is weak, that's fine by Joe.

Sims proclaims that cartels are illegal and is investigating whether Twiggy should be prosecuted. It surely can't have escaped his notice that very little of Australia's iron ore production is used locally, meaning no Australian consumers or businesses would suffer from such an arrangement.

But that, apparently, is not the point. Cartels are morally wrong, even if they advance Australia's national interest. If big foreign-owned producers such as Rio Tinto and BHP Billiton want to use their lower costs per unit to keep expanding production, forcing down the world price and attempting to wipe out higher-cost Australian-owned producers such as Forrest's Fortescue Metals, good luck to them.

Fine by us. That's the way the global resources game has always been played – wild swings from excess demand and inadequate supply causing booms, to weak demand and excess supply causing busts – and so that's the way it must continue to be played.

No effort can or should be made to moderate this crazy game. That there is a lot of fallout on bystanding industries, workers and consumers in the countries where big mining chooses to play this contact sport, is just an unfortunate fact of economic life which it is our government's sacred duty to make us grin and bear.

But while we're being so noble and self-sacrificing, it's worth remembering it wasn't always thus. Consider the many decades in which our governments sought to stabilise the world price of wool, which ended badly only after misguided economic rationalists handed control of the scheme to the woolgrowers themselves.

And don't forget the old Australian Wheat Board's "single desk". We weren't big enough to control world wheat prices, but we did make sure our growers weren't bidding against each other.

While the punters talk xenophobic nonsense about Chinese state-owned corporations taking over NSW's electricity poles and wires, Australia's economists have a deeply ingrained ethic that it's a form of racism ever to acknowledge that a company is foreign-owned.

Now we're in the final throes of the decade-long mining resources boom, it's a good time to reflect on how much we got out of it (not all that much, remembering it's all our minerals) and how well we handled it.

We played it by letting the foreign mining companies do pretty much whatever they wanted, which was to build as many new mines and gas facilities as possible in minimum time. This insane rush came at the expense of all our other industries, but no one questioned its wisdom.

It was left to the Reserve Bank to ensure the miners' greedy stampede didn't cause a wages breakout and inflation surge, which it did by repressing the rest of the economy. To "make room" for the money-crazed miners, it held interest rates higher than they otherwise would have been, which may have caused the exchange rate to be even higher than otherwise.

Was any effort made to assess whether attempting to build 180 resource projects in three years was in the national interest? Yes, but the economists left it to the lawyers. Each of those projects would have been accompanied by an environmental assessment assuring some court that the project would create thousands of jobs and do wonders for the economy.

Evaluating each project separately, the lawyers bought it. You needed to be a macro-economist to see that, added together, those claims made no sense. There wasn't that much skilled labour available and, with the economy near full employment, it just isn't possible to create many extra jobs. All you'd do is move jobs around, bidding up wages and creating shortages in the process.

But the macro-economists were away at the time, probably busy explaining to politicians why it was our economic duty to allow foreign mining companies to use our economy as a doormat.

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State governments don't greatly affect the economy

With the election over, Sunday is the first day of the rest of the life of the NSW economy under the new Baird government. So how much has changed?

A lot less than the rhetoric of the election campaign may have led you to expect.

State elections are times when governments claim the credit for all the good things happening in the economy and get blamed by oppositions for all the bad things.

In truth, they should get only some of the credit or blame. That's because there is really no such animal as the NSW economy.

There are no barriers between NSW and the other states and territories, meaning it's just the NSW corner of the national economy.

So the government agencies with the most influence over our corner are the Reserve Bank and the federal government.

It is true the NSW economy has grown relatively strongly since the O'Farrell-Baird government took over four years ago. We were performing poorly compared with other states, but now we are doing best in various categories.

But that's mainly because market economies are cyclical: what goes up must come down, and what is down will go back up soon enough.

What came down was Western Australia and Queensland as the mining construction boom came to an end. What went back up was NSW and Victoria as things got back to normal.

Because NSW is by far the largest of the states, it is rarely far from the national average, and often a bit above it.

But the Coalition's economic policies have been good and it can take some of the credit for our improved performance.

Historically, NSW has had trouble building enough new housing to accommodate the state's growing population, a problem that does much to explain Sydney's exceptionally high house prices – and one the state government can do much to improve.

The undue regulation and high charges on developers have limited the supply of new homes on the outskirts of the city, and planning restrictions have permitted too little of the medium and high-density in-fill home buyers are demanding so as to be closer to jobs.

But a lot more homes are now being built, for which Mike Baird should get credit. This higher level of building is likely to continue.

State governments have no control over immigration and national population growth, but are responsible for solving the growing social and economic problem of traffic congestion and long commute times.

Both sides of politics have neglected the development of public transport. And road projects such as WestConnex are likely to offer only temporary relief.

The state's performance on employment has improved relative to the other states, but worsened with the national performance in recent years.

It will continue slowly worsening until the national economy picks up speed. Schemes offering payroll tax incentives to encourage businesses to increase employment are gimmicks to impress voters at election times.

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A rational analysis of Hockey's 'asset recycling'

I'm never sure who annoy me more, the business types who are certain every business is better run if privately owned, or the lefties who oppose every sale of government-owned businesses on principle.

On the question of privatisation, mindless prejudice is no substitute for rational analysis of the pros and cons. On the tricky question of the "asset recycling" being promoted by Joe Hockey to all state governments with businesses left to sell, careful analysis is essential.

Premier Mike Baird's hugely controversial proposal to sell most of NSW's electricity transmission and distribution network businesses – the "poles and wires" – and use the proceeds to finance $20 billion worth of public transport, road and other infrastructure is a classic example of asset recycling.

It offers a good case study in thinking through the issues, even to people who won't be voting in Saturday's state election.

You must cover all the relevant major considerations for and against, ignoring considerations that aren't relevant (or are common to both alternatives). You have to remember to take account of opportunity costs as well as actual costs and to avoid any double counting.

It will avoid confusion if we consider the two sides of the proposition separately. First, is it a good idea to sell the poles-and-wires businesses to private owners? Second, assuming the planned infrastructure projects are worthwhile, is privatising businesses the only way available to finance them?

The obvious starting point for consumers is: would selling the businesses lead to electricity prices being higher than they would be under continued public ownership? Or would there be a decline in the quality of service, such as blackouts?

In this particular case, the answers are more certain than usual: no and no. That's because, the networks being natural monopolies, the prices they charge are controlled by the Australian Energy Regulator, which believes they're already too high. Service quality is also tightly regulated.

The regulator's determination to get efficiency up and prices down suggests there will be job losses – in other states as well as NSW – whether or not the businesses are privatised.

This being so, the main issues of contention concern state government finances. The critics of privatisation stress that it's no magic pudding: sell these profitable businesses and you lose the dividends they were paying the government, along with the equivalent of the company tax they were paying to the state (because state-owned businesses don't pay tax to the federal government).

That's obviously true. But remember that, according to economic theory, the sale price of any business should be the "present value" of the stream of income it's expected to earn in coming years.

If so, the seller is perfectly compensated in the sale price for the loss of future dividends. Why else would they sell?

But does the theory work in practice? Not perfectly. For one thing, who can be sure what income will be earned in the future? The seller ought to have a better idea than the buyer, but if there aren't many potential buyers and the seller is anxious to sell, they may settle for less than they should.

Alternatively, if there are a lot of potential buyers, the seller may get more than the business is worth. Almost all buyers of established businesses are confident they can run it more profitably than the present owner.

Point is, provided the sale price is adequate, there's no financial reason to regret the loss of dividends. A complication is that a fair price would not compensate the state government for its loss of tax equivalent payments.

That's because a new private owner would be liable to pay real company tax to the federal government. This is part of the rationale for Hockey's scheme to give federal grants – $2 billion, in this case – to states that take part in his asset-recycling incentive scheme.

A factor having a bigger (downward) influence on the amount of the fair sale price is that the flow of annual profits from the network business in coming years is likely to be much lower than the recent $1.7 billion a year that Labor's Luke Foley keeps quoting.

That's partly because the regulator has signalled its intention to crack down on the excessive profits being earned by the nation's electricity network businesses, but also because the demand for electricity from the grid is falling and will fall further as people move to solar and the introduction of smart meters helps homes and businesses limit their demand for power.

(This demonstrates the economic truth that natural monopolies are a product of the existing technology. The network businesses' monopoly is being eroded by climate-change-driven technological advance.)

Some critics argue that selling profit-making assets and replacing them with roads and loss-making public transport reduces the state government's "net worth" and weakens its balance sheet.

This is true arithmetically, but is a strange argument. Governments aren't profit-seeking businesses. Their job is to meet the social and economic needs of their community by, among other things, ensuring the provision of adequate infrastructure – directly profitable or otherwise.

Turning to the predicated link between the sale of network businesses and the spending on needed infrastructure, it rests on an assumption it would be unthinkable for the state government to lose its AAA credit rating, which would happen if it simply borrowed another $20 billion.

For decades, federal and state treasuries have used credit ratings to beat off unworthy proposals for vote-buying capital works. But I think we have little to lose by causing the discredited rating agencies to lower our rating by a notch or two.

But though their limit on our debt level may be too low, there does have to be some safe limit. And the doctrine that state governments may acquire assets but, once acquired, they may never ever be sold off, strikes me as weird.

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Poles and wires: who's misleading us about what

The politicians' decades of bad behaviour may have caused them to lose our trust, but not our mistrust - making us suckers for scare campaigns.

This election campaign has been dominated not by reasoned debate but by Labor and the power unions' almighty scare campaign over the sale of the state's electricity poles and wires.

It's the most successful scare-job since all the dishonest things Tony Abbott said about how the carbon tax would destroy the economy.

The truth is it doesn't matter much to electricity users whether the state's power transmission and distribution businesses stay government-owned or are sold off. That's because, being natural monopolies, the prices they charge are controlled by a national body, the Australian Energy Regulator.

The standard of service they deliver - blackouts, for instance - is also tightly regulated.

It is true that private owners would attempt to increase their profits by reducing overstaffing and other inefficiencies - which tells you what the power unions are so excited about - but the regulator has announced its intention to force all the nation's public and privately owned poles and wires businesses to raise their efficiency and to ensure the savings are passed on to consumers as lower prices.

It's clear that, whoever owns the poles and wires, those businesses will be doing it much tougher in coming years. That's because the demand for electricity from their grid will keep falling, with households and businesses moving to solar and the introduction of smart meters helping households cut their usage, especially at peak periods.

This is why the dividends the state government would lose by selling the businesses would be a lot lower than the present $1.7 billion a year Luke Foley keeps claiming. (A characteristic of scare campaigns is that you stick to your wrong claims even after you've been caught out.)

This is not to say we can believe everything Mike Baird has been saying, of course. He describes his plan as "the long-term lease of 49 per cent of the NSW electricity network". This is highly misleading, an attempt to fool us into believing he isn't really privatising the network.

There's little practical difference between a 99-year lease and an outright sale. And that figure of 49 per cent - making it seem the government would retain majority ownership of the network - is highly contrived.

Baird plans to sell 100 per cent of TransGrid, the state-wide high-voltage transmission business, and 50.4 per cent each of Ausgrid and Endeavour Energy - which distribute power locally to about 70 per cent of the state's population living between Ulladulla and Newcastle, and inland to Scone, Lithgow and Bowral.

How does that add up just 49 per cent? By taking account of the plan not  to sell any of Essential Energy, which distributes power to the state's backblocks. Convinced?

A separate question is: is selling the electricity network the only way we would be able to fund the $20 billion in new public transport, road and other infrastructure Baird promises?

Yes - if you think it matters that the state keeps its triple-A credit rating. No - if you don't. I don't.

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Should taxpayers develop properties for churches?

Election campaigns are busy times for interest groups. They turn up the pressure on governments and oppositions to give them written promises to grant them particular benefits, or not do things the groups don't fancy, during the next term.

It's surprising how often the pollies give in to such tactics. They do so for fear the interest groups will campaign against them if they don't sign on the line.

In the last federal election, for instance, the banks and other financial institutions got the Labor government to promise not to make any more adverse changes to the taxation of superannuation for five years, then persuaded the Coalition to match Labor's promise during its first term. A lot of promises have been broken since then, but not this one.

Historically, few groups have pursued this tactic more successfully than the Catholic systemic schools. If you were a pollie, which would you choose: risk being preached against on the Sunday before election day, or be photographed beside a beaming archbishop as you sign the deal?

Recognising the Catholics' superior bargaining power, the other religious and independent schools tend to ride on their coat-tails.

Late last month the Catholic Education Commission announced that in the NSW election campaign it would "play an advocacy role in the interests of students, parents and teachers in the Catholic education sector".

Its "key policy issue" is that, in the light of the expected growth in the number of schoolchildren, the state government "must increase its capital funding to Catholic schools to help Catholic schools enrol their share of this growth".

Last year, we're told, the state's 584 Catholic schools educated 21 per cent of the state's students, but received only 2 per cent of the NSW government's capital funding for schools.

"The NSW Government must first reverse its 2012 decision to cap capital funding to non-government schools at $11 million per year and put in place a sustainable, long-term funding framework that grows as enrolments increase", the commission's executive director, Brian Croke, said.

The Catholic schools' share of the $11 million was $7.6 million, equivalent to about $30 per student, while government schools received more than $399 million, or $524 per student.

The state government's forecast is that all NSW schools will need to accommodate an extra 267,000 students by 2031. For the proportion of students in Catholic schools to remain unchanged, Catholic schools would need to create places for a further 58,000 students, the equivalent of more than 2300 new classrooms.

Sorry, but this argument needs thinking about. For one thing, the campaigners don't mention that non-government schools also receive capital funding from the federal government, which is a lot more generous than state grants.

For another, it's hardly surprising the state government spends a lot more on building and equipping its own schools than it does on subsidising other people's schools.

Where do taxpayers' obligations to Catholic and other non-government schools end? Governments have an obligation to provide for a growing student population, but do they have an obligation to ensure Catholic or any other non-government group's share of the school population doesn't decline as the population grows?

For religious or other groups to say they have school facilities they wish to make available for the education of kids - kids of their own choosing in locations of their own choosing - is one thing. For those groups to argue governments have an obligation to subsidise their provision of additional facilities so their share of the overall school population doesn't drop is quite another.

Who's to say those non-government groups will want to build their additional facilities in those locations where the population growth occurs? If the groups want to build in areas other than those of fastest growth - which these days would include the inner city - are taxpayers obliged still to cough up subsidies while also building the new schools where they're actually needed?

And is it reasonable to demand that taxpayers provide big subsidies towards the building of new facilities that remain the property of the churches or other groups involved?

The Catholics argue that their building of new facilities has been, and will continue to be, largely funded by parents. So the church itself doesn't put up much, but gets to retain ownership of the schools while the parents move on. When it comes to real estate, I wouldn't have thought the mainstream churches were all that property poor.

Federal grants come with a proviso that, should the subsidised school facilities be sold or used for another purpose within the first 20 years, the government may ask for its grants to be repaid. How often this provision is enforced I don't know.

We've long been asked to believe the non-government schools are doing taxpayers a favour, providing education to kids that taxpayers would otherwise have to pay for. But this demand for capital grants is aimed at reducing the size of the favour.

And when it comes to recurrent funding, the favour isn't all that great. Federal and state grants covered almost three-quarters of the costs of running Catholic schools in 2012. Fees charged to parents covered another 22 per cent.

With the election just a few days away, I'm hoping whichever side wins will get through without promising more funds to non-government schools. But we may not know whether they have until after it's over.

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