If Afterpay's interest-free loans sound too good to be true . . .

If you’ll forgive a bean-counter’s lament, it’s a pity our success at the Olympics overshadowed our much rarer, more valuable, commercial success, when two young Aussie entrepreneurs sold their business, Afterpay, to the American financial technology giant, Square, owned by Twitter co-founder Jack Dorsey, for $39 billion – making it our biggest-ever company takeover. Oh the honour, the glory, the recognition for poor little Australia!

Yes, I am laying it on a bit thick. It’s certainly a big deal but, as my mum used to say, I hae ma doots about how pleased we should be to see Afterpay and its ilk inflicted on our own young people, let alone young people around the world.

But welcome to the mysterious world of “fintech” – the application of the internet and digital technology to the formerly boring world of paying for things, borrowing money and moving it around.

We’re witnessing the migration to online retailing, we’ve seen Uber shake up – or shake down – the taxi industry, seen Airbnb do over the hotel industry, seen the digital disruption of the media moguls, and now it’s the banks’ turn in the firing line.

All these innovations have taken off because, whatever they’ve done to the careers and livelihoods of people working in the affected industries, they’ve brought benefits – often just greater convenience – that consumers find attractive.

The global tech behemoths – particularly Apple, with its Apple Pay – are moving in on the banks’ territory, while a host of start-up businesses are thinking of new ways to provide a financial service the banks don’t. The big banks are unlikely to take this lying down, but so far they haven’t done much.

This is where Afterpay comes in. In 2014, Nick Molnar and Anthony Eisen came up with a new way to BNPL – buy now, pay later; get with it – without having to pay interest. You buy something from a retailer – usually for a modest sum, say $1000 or less – then pay off the purchase price in four equal fortnightly instalments.

That’s it. No more to pay. Unlike the old practice of buying things on lay-by, with BNPL you get your hands on the purchase at the beginning, not the end.

The scheme has proved really popular with people under the age of 30 – who seem to have an aversion to using credit cards and the high interest rates that go with them. So you don’t just have one BNPL loan, you probably have several.

The idea’s been so popular that Afterpay’s had a number of competitors spring up, each with slightly different repayment rules. At first it was assumed Afterpay would be hit by last year’s lockdown but, but with everyone stuck at home and buying things online, its business has exploded.

You might imagine it’s making huge profits – especially considering what the Americans are prepared to pay for it – but that’s often not the way success works in the digital startup space, where the emphasis is on funding rapid expansion. Afterpay has yet to declare a profit – or a dividend. But don’t look at the profit, feel the rocketing share price.

By now, however, I trust your bulldust detector is flashing. They lend you money, but they don’t charge interest? There must be a catch. Two, in fact. The first is that Afterpay charges the retailer a “merchant fee” of 4 to 6 per cent of the value of the transaction, plus 30c.

So, it’s the retailer that pays the interest – in the first instance, anyway. And when you remember we think in terms of annual interest rates, 4 to 6 per cent on a loan for just eight weeks is a pretty steep rate.

How does the retailer cover the cost of the “merchant fee”? By raising the prices it charges – to the extent that competition allows. This could well mean customers who don’t use Afterpay help cover the costs of those who do.

But the second way Afterpay recoups the equivalent of interest is by charging a flat $10 fee for a late fortnightly payment. If the payment is still outstanding after a week, a further $7 is charged. On a $150 fortnightly repayment, $10 would be a quite hefty penalty interest rate.

But whereas all this looks and smells like interest payments to a bean-counter like me, it doesn’t to a lawyer. So the BNPL game isn’t subject to the Credit Act that regulates other lenders, including its responsible lending obligation, which requires the lender to perform credit checks and verify a customer’s income and ability to repay.

Someone who borrowed no more than they could afford to repay would come to no harm. But not all of us are so self-controlled and worldly-wise. Especially when we’re young.

I suspect the authorities are pleased to see the fintechs putting our hugely profitable banks under competitive pressure, and will leave it a while before they bring the innovators into the regulated fold. Until then, some poor people may learn financial literacy the hard way.

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Blame the lockdown on business urgers trying to wish the virus away

I’ve yet to see any of the perpetrators – Liberal tribal mythmakers, industry lobby groups and business’ media cheer squad – admit to their part in the humbling of that “gold standard” virus fighter, NSW premier Gladys Berejiklian (a woman I quite like).

All those business people feeling the pain of NSW’s protracted lockdown – which seems not to be getting anywhere, with no end in sight – have no one to blame but the short-sighted, self-centred urgers on their own side.

The great “learning” from our earlier struggles to control the coronavirus – particularly Victorian premier Daniel Andrews’ struggles this time last year – was the wisdom of the medicos’ advice that the exponential nature of pandemics meant the best strategy was to go early, go hard.

The economic modelling Treasury did to accompany the Doherty Institute’s epidemiological modelling confirmed this wisdom. “Continuing to minimise the number of COVID-19 cases, by taking early and strong action in response to outbreaks of the Delta variant, is consistently more [economically] cost-effective than allowing higher levels of community transmission, which ultimately requires longer and more costly lockdowns,” Treasury concluded.

Another relevant “learning” – drawn by Treasury from economic studies overseas – is that, should governments not impose lockdowns, many anxious people will significantly curtail their economic activity of their own accord. The assumption that it’s the government’s lockdown, not the virus’s threat to people’s health, that does all the economic damage is fallacious.

Yet going early and strong is just what Berejiklian failed to do. Why? Because of all the pressure she was under from her own side to be a true Liberal and control the problem without resorting to lockdowns or border closures.

That pressure started at the top with Scott Morrison and his ministers, but was eagerly pursued by the business lobbies and business’ media cheer squad. In his efforts to score points off Andrews, no one worked harder than Treasurer Josh Frydenberg to propagate the mythology that only Labor premiers were so dictatorial and disregarding of business wellbeing as to lockdown and close state borders at the first sneeze, whereas Liberal premiers knew how to get results with superior testing and contact tracing.

To be fair, it’s clear Labor’s Mark McGowan in Western Australia and Annastacia Palaszczuk in Queensland, both with state elections coming up, were well aware of the votes to be reaped by gratifying their locals’ xenophobic tendencies towards possibly plague-ridden people from “over East” or “down South”.

But the fact remains that with Sydney and Melbourne being the country’s two main international gateways, it’s been eminently sensible for the other premiers to protect their states from infection by closing their borders. Yet they’ve been subject to continuing abuse from the national press.

And in view of the medical experts’ consistent advice, the pressure to which all the premiers have been subjected over lockdowns and borders amounts to trying to wish the virus away. “Don’t worry about contagion, just keep business open and making money.”

This is hardly enlightened self-interest. It’s short-termism at its worst. It’s wilfully disregarding the greater good. “Ignore the interests of other ‘stakeholders’ – even the consumers I hope will still be able to buy my product in the months ahead – I’m just gunna keep pushing my own self-interest.”

The nation’s business people don’t need me to tell them our politicians – including those purporting to represent the business side - can be trusted to favour their own survival at the next election over the prospects for businesses long beyond the election.

But I do wonder whether business people understand the potential for conflict between their interests and those of others anxious to take up the cudgels on their behalf – for the small fee.

The industry lobby groups work in the national capital representing the interests of member businesses around the country. No doubt much of what they do isn’t highly visible and doesn’t lead to spectacular results.

Much of their communication with members would be via the media, where they need to be seen as tireless champions of their members’ interests, shouting louder than rival interest groups. Just to be noticed by the media they’d need to be hardline.

An ability to see the other side’s viewpoint – or the government’s difficulty in balancing conflicting objectives - wouldn’t be career-enhancing. Like the pollies themselves, they’d worry more about appearances and impressions than about making all things work together for the ultimate good of their members.

The self-appointed media business cheer squad is operating on a business model that sees telling people what they want to hear as more rewarding than telling them what they need to know. Commercially, they may be right. But, as you may have gathered, it’s not the way I do business.

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Our dealings with the world have reversed, for good or ill

One of the most remarkable developments in our economy in recent times is also the most unremarked: after endless decades of running a deficit on the current account of our balance of payments, for the past two years we’ve been running a surplus. Which looks likely to continue.

Because a “deficit” sounds like it’s a bad thing, and the media know their audience finds bad news much more interesting than good news, I guess it’s not so surprising this seemingly good news hasn’t attracted much attention.

But one thing economics teaches is that, contrary to popular impression, not all deficits are bad and not all surpluses are good. It depends on the circumstances. But regardless of whether they regard a current account surplus as a good sign or a bad one, I suspect most economists think there are more important issues to worry about.

This week the Australian Bureau of Statistics revealed a record trade surplus of $10.5 billion in just the month of June.

We recorded a current account surplus of $17.6 billion during the March quarter this year. That compares with a peak deficit of $23.5 billion in September quarter, 2015.

Since the bureau started publishing the figures in 1959, we’ve run 221 quarterly deficits, but just 26 surpluses. Eight of those have come over the past two years.

But let’s start at the beginning. A country’s “balance of payments” is a summary record of all the transactions during a period of time between, in our case, an Australian on one side and a foreigner on the other. Those on either side could be businesses, governments or individuals. Mainly they’re businesses.

Conceptually, the balance of payments is recorded using double-entry bookkeeping, where one side of the transaction is recorded as a debit and the other as a credit. So, when you add up all the debits and add up all the credits, the two amounts should be equal. Thus the balance of payments is in balance at all times.

This matters because the balance of payments is divided into two main accounts, the “current account” and the “capital and financial account”. The value of transactions involving exports or imports of goods and services goes in the current account, as do payments – in or out - of income such as interest and dividends.

But the other side of each of those transactions involving exports, imports or income payments, the amount someone has to pay – the financial side of the transaction – goes in the capital account, as do purely financial transactions, such as when one of our banks borrows from or lends to some overseas bank, or when one of our superannuation funds buys or sells shares in a foreign company.

Bear with me. The income we earn from foreigners who buy our exports or pay us dividends or interest is recorded as a credit, whereas the money we pay to foreigners for our imports or as dividends on the Australian shares they own or interest on the money they’ve lent us is recorded as a debit.

When we sell them shares in an Aussie business, borrow from them or sell them some real estate, that’s a credit in the capital account. When they sell us shares or land or lend us money, that’s recorded as a debit.

An account where the debits exceed the credits is in deficit. When the credits exceed the debits it’s in surplus.

There had to be a reason for explaining all this, and we’ve reached it. Historically, we almost always imported more than we exported, running a deficit on trade in goods and services. Likewise, we always had to pay more in dividends and interest to foreign owners and lenders than they had to pay us on our foreign shareholdings and loans to them, thus causing us to run a “net income deficit”.

Put the trade deficit and the net income deficit together and you get the balance on the current account, which was always in deficit. Oh no!

But here’s the trick. Since the double-entry system means the debits always equal the credits, if we always ran a deficit on the current account of the balance of payments, that means we always ran an equal and opposite surplus on the capital account. Yippee!

So if you think it’s good news that our current account is now in surplus, what do you think of the news that our capital account is now in deficit? Time to stop assuming all deficits are bad and all surpluses good.

In all the decades that our current account was in deficit, economists never thought that a bad thing. They knew Australia was – and should be – a “capital-importing country”. We always had a lot more investment opportunities than we could finance with our own saving, so we invited foreigners to bring their savings to Oz to participate in our economic development.

This continuous inflow of foreign capital gave us a continuous surplus on the capital account and thus allowed us to import more than we exported. Naturally, we had to pay big dividends and interest to those foreign investors.

So, why has all that reversed? Well, the reversal began in about 2015, long before the pandemic. Its first main cause is the rapid industrialisation of China, which has greatly increased our exports of minerals and energy and, until the pandemic, education and tourism.

But a second, less-favourable development has been our part in the rich economies’ slowdown in economic growth since the global financial crisis in 2008. This has involved increased saving and reduced investment spending – both of which have helped move our current account towards surplus and our capital account towards deficit.

Economists at the ANZ Bank predict the current account will fall back towards balance over the next few years. But we won’t return to our accustomed capital-importing status until we and the rest of the rich world escape the present low-growth trap.

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Our leaders would do better if their followers were thinking harder

Much has been said about the failures of Scott Morrison, Daniel Andrews and Gladys Berejiklian in our never-ending struggle to keep on top of the coronavirus. But just this once, let’s shift the spotlight from our fallible leaders to the performance of those they lead. I think we ourselves could be doing a better job of it.

There is, after all, much truth in the saying that we get the politicians we deserve. When we think we’re entitled to have good government served up to us on a plate, we’ve lost sight of the truth that well-functioning democracies require diligent citizens, not just honest and smart politicians.

Perhaps our biggest complaint has been that our leaders and experts keep changing their tune. Why can’t we be told simply and clearly what’s required of us? Why can’t the pollies decide what they want and stick to it?

It’s as though they’re making it up as they go along, chopping and changing when they realise they’ve taken another wrong turn. Hopeless.

Let me tell you the shocking truth: they are making it up. But if you were thinking harder you’d realise that’s all they can do. As Morrison rightly says, a new virus doesn’t come with an instruction manual.

Our political leaders are relying heavily on epidemiologists and other medical experts because pollies have so little knowledge and experience of pandemics. The medicos know a lot about viruses, epidemics, vaccination and immunology, but at the start they knew little about the characteristics of this particular virus.

They were forced to make assumptions about those characteristics but, as they’ve realised those assumptions were wrong, they’ve changed them.

At the start they thought the virus was spread in big droplets landing on surfaces within one or two metres, whereas now they think it’s more like smoke. Without strong ventilation, it builds up in the air. This explains much of the early uncertainty about whether masks were a good idea.

The medicos have relied on the findings of the limited studies available, but when bigger and better studies have come along with different findings, they’ve updated their views.

As I don’t think Keynes actually said, “When the facts change, I change my mind. What do you do, sir?” Or, as he did say, “It is better to be roughly right than precisely wrong.”

Those people carrying on about how confusing it all is and how incompetent our leaders are reveal their own intellectual laziness: their reluctance to think through complex, nuanced, ever-changing problems when they’d prefer to be back watching carefully choreographed “reality” television. And their ignorance of how science works, slowly groping towards an ever-changing best guess at the truth.

The media’s new-found interest in public health means formerly obscure academics have become TV stars and any boffin who disagrees with what the government’s doing about X gets an op-ed article to air their dissent.

You could say this is adding to the confusion, but it’s science proceeding the way science does. It’s academics doing what academics do – eternally arguing among themselves.

It’s tempting to tell them “not in front of the children”, but when you remember how lacking our leaders are in competence, openness and accountability, the last thing our democracy needs is for experts to keep their critique of government policies to themselves.

You might have thought that a bunch of media-innocent scientists and a news media devoted to highlighting the exceptional over the typical, seeking out controversy and not always untempted by the sensational, would make an explosive combination.

But for the most part, the media have been on their best behaviour, favouring their audience’s need for accurate, trustworthy information. That brings us to the Australian Technical Advisory Group on Immunisation, and its ever-changing recommendation on who should be receiving the AstraZeneca vaccine now it’s been found to carry a very rare risk of blood clotting.

The advice has changed partly because circumstances have changed, but mainly because the original advice led to considerable vaccine hesitancy at a time when the vaccine rollout is way behind, we have Greater Sydney in lockdown and loads of AstraZeneca is going begging while little of the alternative Pfizer vaccine is available.

The advisory group has been criticised, but I think it was a narrowly constituted group, which gave narrow advice when what the government needed – and should have sought from elsewhere – was advice taking account of a broader range of factors.

The public’s huge reaction against the vaccine is unwarranted and unfortunate at such a time. AstraZeneca is less risky than taking aspirin. But when the media gave such attention to the clotting risk, the overreaction wasn’t surprising.

Responsible reporters can say “very rare” as many times as they like but, as our science reporter Liam Mannix has explained, humans are notoriously bad at giving minuscule probabilities the weight they deserve.

The saver may be that, as highly social animals, when people see so many of their friends lining up to “bare their arms”, their hesitancy may evaporate. It’s a strange, messy world we live in.

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Privatisation has done too much to perpetuate monopolies

It always disturbs me to see how few of our econocrats and economic rationalists – “neo-liberals” to their lefty critics – are willing to acknowledge the many cases where, what looked like perfectly sensible micro-economic reform on the drawing board, turned into a disastrous rort in the hands of the politicians.

But that’s not true of one of the great survivors from the reform era. Rod Sims, now chair of the Australian Competition and Consumer Commission, who’s an experienced econocrat and formerly a key advisor on the 1993 Hilmer report on national competition policy, which urged increased competition at state as well as federal level.

At the commission’s annual regulatory conference last week, Sims criticised the many privatisations of government-owned businesses that have simply bundled up a public monopoly and sold it to the highest bidder, without doing anything to get some competition into the industry, or even to adequately regulate the prices charged by a now-privately owned monopoly.

“Privatising assets without allowing for competition or regulation creates private monopolies that raise prices, reduce efficiency and harm the economy,” Sims said.

Why would governments do such a terrible thing? Because they put short-term budgetary pressures ahead of the best interests of their voters, as consumers and business-users of essential services. It’s actually part of a trick that buys the appearance of good management at the price of paying more than necessary for essential services from now on.

The pollies say: “Look at how much I got for that business, look at how I’ve got the budget back to surplus and reduced government debt, look at how I’ve kept our triple-A credit rating”. (Just don’t look at how much more you’re paying for electricity, for using the airport and for imported goods.)

Adding to these short-term budgetary temptations is the way politics and public policy have become more tribal, more public bad/private good. More “binary” as Prime Minister Scott Morrison would say. By definition, the public sector is inefficient and the private sector is efficient, people think.

It follows that merely by changing the ownership of a business from government to private you’ve made it more efficient. But that’s not economics, it’s just prejudice. Economists believe that whether a business should be privatised should be judged case-by-case, and by the way it’s proposed to be done.

Sims says “privatisation can generate important benefits to the economy, such as improved incentives for cost control, investment and innovation to meet the needs of consumers”.

“There have been many examples of privatisations that have been done well and that have benefited Australia. The privatisation of Qantas was done appropriately, for example, and the privatisation of Telstra was accompanied with measures to promote rather than constrain competition.”

Governments can be bad owners of businesses because – thanks to budgetary pressures – they’re usually hungry for big dividends, but reluctant to provide the extra capital needed to keep up with innovation and changing consumer needs.

But I’ve never understood people who lament the privatisation of the Commonwealth Bank. Its treatment of customers was never very different to that of its three big privately-owned competitors. On aviation, we’ve long had trouble keeping enough competition in our domestic market, but Qantas had plenty of international competitors.

“The problem is that, in more recent years, many of Australia’s key economic assets have been privatised without regulation, and often with rules designed to prevent them ever facing competition. This makes us all poorer,” Sims says.

“You regularly hear people calling for micro-economic reform these days. The best way to do that is to expose more of our economy to competition, and by dealing with excessive market power. Australia has on a number of occasions been doing the opposite.

“Many monopolies are subject to regulation, such as gas pipelines, electricity networks, railways and the NBN. In contrast, many ports and airports, which are essential gateways for our economy, are largely unregulated, mostly due to decisions made when they were privatised.”

In its search for a top-dollar selling price, the Keating government stuffed up the privatisation of capital-city airports, particularly Sydney’s. But nothing Victorian governments have done compares in infamy with the behaviour of the Baird and Berejiklian governments in NSW.

They took the state’s three vertically integrated electricity companies – each owning power stations and electricity retailers – and sold them to the people offering to buy them at the highest price. They became the three oligopolists dominating the national electricity market, Origin Energy, AGL and EnergyAustralia.

Then, when they privatised NSW ports, they promised the new owner of the Botany and Port Kembla ports it would be compensated should the Port of Newcastle start handling containers, not just coal.

Then they made the new owners of the Newcastle port agree to pay this compensation should they set up a container facility. They were so proud of this deal they tried to keep it a deep dark secret.

When its existence became known, the ACCC tied to get it struck down by the court as anti-competitive. But it failed to persuade the judge that trying to maximise the sale price by including monopoly rights in the deal was anti-competitive.

Which shows that it’s not just the ulterior motives of politicians that can turn good reform into a travesty. It’s also that many privatisation deals end up before the courts, where economic questions are decided by judges “learned in the law” but, in too many cases, not as well-versed in economics.

I understand that, in a recent case where one of the state’s public-sector unions sought to object to the NSW government’s wage freeze before the NSW Industrial Relations Commission, an economist brought as an expert witness by the union mentioned that wage increases were supposed to reflect productivity improvement.

He was chastised by the bench for introducing such a novel and controversial notion so late in the proceedings. Really?

My point is that would-be reformers need to be a lot warier of doing more harm than good.

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Don’t be surprised if the economy surprises on the downside

The economy has been on a roller-coaster since the virus arrived early last year, dipping one minute, soaring the next. Now, with the Delta variant putting Sydney and Melbourne back in lockdown, we’re in the middle of another dip. But as you hang on, remember this: what goes down must come up.

When governments order many businesses to close their doors, and us to leave our homes as little as possible, it’s hardly surprising that economic activity takes a dive. What did surprise us was the way the economy bounced back up the moment the lockdown was eased.

We rushed out of our houses and started spending like mad. Not that we weren’t spending whatever we could while locked down. Another surprise was the way the presence of the internet changed what would otherwise have happened.

Apart from allowing most people with desk jobs to work from home, and talk face to face to people in other cities without getting on a plane, it allowed us to keep spending: ordering groceries and takeaways online, consulting doctors over the phone – I thought receptionists were there to stop you getting through to the great personage – buying exercise equipment and stuff to get on with fixing up the back bedroom.

As I keep having to remind myself, only God knows what the future holds – and He’s not letting on. But it’s part of the human condition to be insatiably desperate to know what happens next. We keep searching the world for the one person who might be able to tell us.

Since even the experts can’t be sure what will happen, they base their predictions on the hope that what happens this time will be much the same as what usually happens. Experts are people who remember last time better than we do.

But that way of predicting the future hasn’t worked this time. The epidemiologists – and all the related -ologists we hardly knew existed – know a lot about viruses but, at the start, little about the particular characteristics of this one. Their predictions have kept changing as they’ve had more to go on.

Last year’s recession was the fifth of my career (counting the global financial crisis, which I do). I thought that knowledge put me so far ahead of the game I was an expert expert. Wrong.

Ordinary recessions happen because the people managing the economy stuff up. The economy takes well over a year to unravel, then three or four years to wind back up. But this recession was completely different, having been knowingly brought about by governments, for health reasons. When at last they let us go back to business, however, that’s just what we did.

The initial, nationwide lockdown caused the economy’s production of goods and services (gross domestic product) to dive by an unprecedented 7 per cent in just the three months to the end of June last year. But then the economy bounced back by 3.5 per cent in the September quarter and a further 3.2 per cent in the December quarter after Victoria’s delayed release from lockdown.

In the period before the Delta strain sent Sydney back into humbling lockdown, GDP was ahead of what it was at the end of 2019. Total employment was also ahead, while the rate of unemployment was actually a little lower.

Since the present September quarter has two months left to run, and Sydney’s lockdown rolls on even though Melbourne’s has ended, it’s too early to be confident by how much GDP will fall but, depending on how long Sydney’s drags on, it’s likely to be a fall of less than 1 per cent or somewhat more than 1 per cent. However bad, a lot less than last time.

As for the December quarter – and barring some new outbreak, say a new letter in the Greek alphabet – it’s likely to show expansion rather than contraction. Victoria will be growing, NSW will be in bounce-back mode as soon as the lockdown ends, and the rest of Australia will be doing its normal thing.

So all those silly people desperate for a chance to repeat the R-word aren’t likely to get the excuse they imagine they need.

Another major respect in which coronacessions differ from normal recessions is that politicians can’t consciously decide to stop the economy without at the same time providing generous assistance to all the workers and businesses this will harm. Normally, the assistance comes much later and is less generous.

Despite cries for the return of JobKeeper, the arrangements Scott Morrison has hammered out with Gladys Berejiklian and Dan Andrews are, by and large, a good substitute for the measures used the first time around.

The other thing to remember is that the economy is in much better shape now than at the end of 2019. Households have more money in the bank, the housing market is booming, profits are up and businesses are complaining about staff shortages.

Not such a bad time to cope with a setback. It won’t be the end of the world.

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The real reason we’ve hit policy gridlock: fear of public opinion

You don’t have to agree we owe big business a living to know that our public policies are far from perfect and that every government’s job is to beaver away at improving them. Nor to know recent governments have tired of doing that. We each have our theories on why this has happened, but now someone sensible has analysed the reasons policy reform has ground to a halt.

John Daley, the man who spent the past decade building our leading non-aligned think tank, the Grattan Institute, having handed its leadership over to Danielle Wood, has just released his last report, Gridlock: Removing barriers to policy reform. It’s his magnum opus, worthy of study by everyone who thinks they know a bit about how modern Australia ticks.

Daley defines “reform” as “changes to policy that would improve the lives of Australians” (as opposed to improving the careers of our top business people).

He starts by demonstrating that the pace of reform really has slowed, and isn’t just old-timers remembering the glory days of Hawke, Keating and Howard and complaining about “the young people of today”. He dismisses the excuse that “you can’t float the dollar twice”, noting “there are plenty of other good policy ideas that governments have failed to adopt”.

Daley examines the fate of the many policy recommendations in the regular reports of the Organisation for Economic Co-operation and Development, but focuses on the success or failure of the 73 proposals made in Grattan’s reports over the decade to 2019, covering budgets, tax and welfare, retirement incomes, housing, transport and cities, health, energy (aka climate change) and education.

He finds that, of the 73 reforms, about a third were substantially implemented and two-thirds weren’t adopted. He identifies seven main potential blockages to good ideas going ahead: popular opinion, partisan shibboleths, vested interests, a weak evidence base, budgetary costs, upper house obstruction and federal-state disagreement.

By “partisan shibboleths” he means policy views that are contrary to the weight of policy evidence, but are almost universally held within a political party or party faction, while much less widely accepted in other circles.

“One of the functions of shibboleths is that they mark membership of a group – a ‘tribe’. A belief is likely to be more effective as a marker of membership when it is not rational – otherwise the belief would be shared by many people who are not part of the tribe,” he says.

It will surprise many that, by Daley’s reckoning, the biggest blocker by far is popular opinion, not opposition from vested interests or party shibboleths.

Of the 23 Grattan reforms that were substantially implemented, none was unpopular, and none was opposed by powerful vested interests without that opposition being countered by substantial independent evidence from government reports and the like.

Only one of the successful proposals ran counter to a party shibboleth, and only one involved a big budget outlay.

By contrast, the most common blockage among the 50 proposals that weren’t adopted was that they were unpopular with the electorate. That accounted for 15 of them.

After that came 10 blocked by party shibboleths (although three of these were also unpopular). Six of the remainder were actively opposed by powerful vested interests not countered by strong independent evidence. Three more were blocked because the evidence for them was poor or contradictory, and five were blocked because they involved large budgetary costs exceeding $2 billion a year.

As for the other potential causes of blockage, in only two cases could their rejection be attributed mainly to a failure to pass the Senate. Federal-state disagreement was a significant issue in only six of the proposed reforms that weren’t adopted, and all of them were probably blocked for other reasons.

It’s hardly surprising that popular opinion is a powerful force in a democracy. But this is worth remembering when we’re tempted to think that the power of vested interests and politicians’ corruptibility are the reasons governments don’t make the changes we think they should. Maybe they don’t because not enough people agree with us.

Daley finds that whereas, over the past decade – but not necessarily during the preceding “golden age of reform” – public opposition invariably doomed a reform proposal, popular support is no guarantee a policy will be adopted. However, it certainly improves the chances.

Where the immediate effect of a reform is to reduce taxes or prices for consumers, it’s likely to be popular. And public opinion has a tendency to focus on immediate effects rather than on promised longer-term benefits.

But liberal democracies have always been a delicate balance between popularly elected rulers and a whole series of institutions – ranging from the courts and central banks to expert administrators of everything from water allocation to child protection – designed to temper popular views.

People tend to trust these experts much more than politicians. And it’s long been accepted that the primary duty of elected representatives is to govern according to their judgment of what's in the interests of their electors, rather than simply following the opinion of their electors, Daley says.

Our not too distant past holds plenty of examples of governments pressing on with controversial policies, confident in the belief that public opinion can change once people experience the reality of a policy change they didn’t like the sound of.

When they do so, they end up winning a lot of respect – something they so obviously lack at present. “So it is surprising that unpopularity has become an automatic strike-out for policy reforms,” Daley says.

He concludes that, “in general, Australian governments today seem less willing to take on public opinion.” How have Australia’s institutions changed to make public opinion so much more decisive?

And what can we do to improve things? Good questions – for another day.

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Reduced competition between businesses is harming productivity

In the search for explanations of the slowdown in productivity improvement, the world’s economists are closing in on one of the significant causes: reduced competition between the businesses in an industry, giving them increased “market power” – ability to raise the prices they charge.

Research by various Treasury economists has found evidence of this happening in Australia. And this month US President Joe Biden acted to increase competition in various markets where it had been lacking.

A new study by Jonathan Hambur has added to earlier research by Treasury people finding that Australia’s private sector has shown less “dynamism” – ability to become more economically efficient over time – during the past decade or so.

Hambur has used a database of tax returns covering almost all Australian businesses to find that their “mark-ups” have increased by about 5 per cent since the mid-noughties.

To economists, a firm’s mark-up is the ratio of the prices it charges compared to its “marginal” cost of production – that is, the cost of the last unit it produced.

Hambur says that, while part of this increase seems to have been caused by technological change, it also shows an increase in firms’ market power and a decline in competition.

If so, this would explain about a fifth of the slowdown in the rate of productivity improvement we’ve seen over the past decade, since we already know the same period has seen slower reallocation of resources from low-productivity to high-productivity firms.

We measure productivity by comparing the quantity of the output of goods or services with the quantity of inputs of raw materials, labour and physical capital used to produce the output. Increasing output per unit of input is the main way we’ve been able to keep improving our material standard of living over the past two centuries.

And one of the ways an economy increases its productivity is by more of the production being done by the firms that are best at turning inputs into outputs at the expense of the less-efficient firms. Resources (inputs) are thereby “reallocated” to their most efficient use. What causes this reallocation to occur? Price competition between the firms in an industry.

Many people assume big companies can set whatever price they like. But this can’t be true. Even in the case of a single firm selling an important product, if the monopolist uses its considerable market power to set a price that’s simply too high for many people to afford, it will get to a point where it loses more from the sales it no longer makes than it gains from the extra profit it makes from those people still willing and able to pay the extra.

This is why economists say a firm wanting to maximise its profits is able to charge no more than “what the market will bear”. How much the market will bear depends mainly on the strength of the competition it faces from other firms selling the same product.

The textbook, neo-classical model of a “perfectly competitive” market – which is hugely oversimplified and has never existed in the real world – tells us the many firms in a market are able to charge a price no higher than their marginal cost of production (remembering that the “cost” includes a rate of profit just sufficient to discourage the owners of the firm from taking their financial capital to another market).

In this case, each firm that survives in the market will be able to charge only the identical market price set by the marginal cost. A firm that tries to charge more than the market price will sell nothing, whereas a firm that charges less will sell out immediately, but then go out backwards because it hasn’t covered its costs.

In the real world, there are a host of possible reasons why firms are able to charge a price higher than their marginal cost, and so make excess profit: because customers don’t know where to find the products that are cheaper but just as good, because customers are bamboozled by advertising and phoney “product differentiation”, because economies of scale and improved technology allow firms to get bigger and reduce their average cost of production.

Firms pursue scale economies and other innovations in the hope of making excess profits, but theory tells us that competition from other firms will end up forcing them to pass their cost savings on to their customers in the form of lower prices. The consumers always beat the capitalists.

When competition isn’t strong enough to make this happen, however, firms can and do earn mark-ups well above their marginal costs. Now Hambur has confirmed this happens in Australia. Worse, our mark-ups have increased over the past decade, telling us competition has weakened further and given our businesses greater market power.

With US economists finding similar evidence of reduced competition contributing to America’s own productivity slowdown, it’s not surprising to see President Biden acting to increase competition. Earlier this month he signed an executive order urging federal government agencies to crack down on anti-competitive practices ranging from agriculture to pharmaceuticals.

He denounced the present era of business monopolies. “Rather than competing for consumers [businesses] are consuming their competitors; rather than competing for workers they are finding ways to gain the upper hand on labour,” he said.

“Let me be very clear, capitalism without competition isn’t capitalism, it’s exploitation.”

Biden directed the Department of Justice and Federal Trade Commission to carefully review mergers and even challenge deals already put through.

He directed the trade commission to deal with competition concerns about the behaviour of Facebook, Apple, Alphabet’s Google, and Amazon, and to limit “killer acquisitions” where large internet platforms buy out potential competitors.

The justice department will launch a review of merger guidelines to determine whether they are “overly permissive”.

So, what could our government do about our own decline in competition? Well, we could start by tightening our own merger laws so the Australian Competition and Consumer Commission can be more successful in its efforts to protect us from anti-competitive takeovers.

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Getting to net-zero emissions an easier ride than some want to think

I have a mate who – in normal times, anyway – gives me a lift to the gym in his new all-electric Mercedes. He loves its lack of engine noise and amazingly fast acceleration when the lights change (not that I’m implying he’s a rev-head hoon the police should be watching). I’m no car lover, but it’s certainly a smooth, quiet ride.

Most of us accept that, as part of the world’s move to net-zero emissions by 2050, we’ll all be moving to electric cars. Other countries are already further down this road than us.

We’ve made big strides in shifting electricity generation to renewables, and our emissions are falling. But electricity production accounts for only a third of our total emissions. Transport, in all its forms, accounts for about 20 per cent of total emissions, so its move away from fossil fuels is another part of the transition we should get on with.

In all the years we’ve been arguing about climate change, people have tried to convince us how costly it will be. How disruptive to industry and our way of life. All the higher prices, the tax we’ll pay, the jobs we’ll lose.

So far, however, there’s been little extra cost or disruption. The rise of wind and solar power has happened without much pain. And a report this week from Tony Wood and colleagues at the Grattan Institute think tank suggests the move to electric vehicles can be achieved without angst.

More than 60 per cent of the transport sector’s 20 per cent of total greenhouse gas emissions comes from the tailpipes of cars and light commercial vehicles, including our two biggest selling cars, Toyota HiLux and Ford Ranger utes. That leaves trucks accounting for 20 per cent of the sector’s emissions and domestic aviation for about 10 per cent.

Australia has about 18 million light vehicles, up from fewer than 15 million in 2010. And we’re driving bigger, heavier cars than we were a decade ago. (All those appalling SUVs. One day they’ll run over my little Toyota Yaris.)

At present, electric vehicles make up just 0.7 per cent of new sales in Australia. This doesn’t count hybrid electric/petrol cars which, because of their continued use of fossil fuel, can’t be a lasting part of the shift, Wood says.

Our tiny all-electric share of new sales compares with 2 per cent in the US, 3 per cent in New Zealand, 11 per cent in Britain and 75 per cent in Norway.

Because it takes more than 20 years to replace our light vehicle fleet, for our transport sector to make a sufficient contribution to the target of net-zero total emissions by 2050 we’ll need to get to the point where all new light vehicles are electric by about 2035, he estimates.

Government projections suggest that, if the market is left to itself, the move to electric vehicles will cause light vehicle emissions in 2030 to be 7 per cent lower than they were in 2019. This isn’t good enough.

So what can be done to speed the shift? Wood says governments should reduce the main barriers to buying an electric car. First, the high cost of switching and limited choice and, second, the lack of charging points.

We pay an average of about $40,000 for a new car. But we have fewer than 30 electric models to choose from – much lower than overseas – and of these, just three models retail for less than $50,000.

As with all innovative products, the price of electric cars is coming down as the novelty wears off and sales increase. They’ll fall further as batteries become cheaper to make. But the point where the price of an electric car falls below an equivalent conventional car is still some years away.

So Wood proposes removing several taxes on the purchase of new electric cars. Scrapping state stamp duty would cut the price by up to 6.5 per cent, he estimates. Remembering that, these days, all vehicles are imported, removing federal import duty would cut the cost by up to a further 5 per cent.

Exempting electric cars from the federal luxury car tax – a tax of 33 per cent of the price exceeding the first $80,000 – until 2030 would also help.

Australia is alone among the rich countries in not having mandatory fuel efficiency and emissions standards. And there’s a suspicion some foreign makers send us only the high-emissions conventional models they have trouble flogging in other markets.

So to these carrots, Wood adds a stick: to phase out petrol and diesel cars, the feds should impose an emissions limit on light vehicles and reduce it to zero by 2035.

Many people hesitate to buy an electric vehicle because they worry about finding places to recharge. Wood says governments should require all new buildings with off-street parking to make provision for vehicle charging.

Getting everyone into electric vehicles wouldn’t solve our emissions problem, but it would help. And it’s another indication that the fears of huge costs and disruption are greatly exaggerated.

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Reality is catching up with our freeloading, populist climate deniers

Don’t be taken in by the Morrison government’s outraged cries of “protectionism” against the EU plan to impose a carbon tariff on our exports to Europe. It’s we who are in the wrong, failing to do what we should have to reduce emissions, in favour of politicking and populism.

What we’re seeing is just the reality of the world’s need to act to limit climate change catching up with a government and federal party which, since Tony Abbott used denialism to seize the party’s leadership from Malcolm Turnbull in 2009, decided to make global warming a party-political football: a way to beat your opponents, not a need to tackle the nation’s biggest problem.

It’s a condemnation of our business people that, when their own side of politics offered them a way to postpone the inevitable costs of adjusting to a low-carbon world, they happily embraced it.

It’s a condemnation of Australian voters that they were willing to allow their preferred party to tell them whether they cared or didn’t care about their children’s future. It should have been the other way round. “It’s all too hard; you do my thinking for me.”

But the game has moved on since those bad days, and now it’s not just the rest of the world that’s realised there’s no future in denying the reality of climate change and the need to act. As each day passes, we see more evidence that our own financial regulators, banks, investors and businesses are accepting the inevitable and modifying their behaviour.

All our state governments – most notably the Berejiklian Coalition government of NSW – have embraced the target that all other rich nations have embraced, net-zero emissions by 2050. Everyone can see that our refusal to take climate change seriously is wrong-headed and unsustainable.

So, apart from being a national embarrassment – we’re the person stopped for not wearing a mask, so to speak – it’s no bad thing that even other countries have stepped in to oblige our national government to shoulder its responsibilities.

As part of their plan to reduce their emissions by 55 per cent by 2030, the Europeans are toughening up the emissions trading scheme they introduced in 2005, which imposes a price on the carbon emissions of European industries.

To prevent this putting their industries at a disadvantage against imports from countries that don’t impose a similar carbon price on their own industries, the Europeans plan to use a “carbon border adjustment mechanism”, a tax on imported cement, fertilisers, aluminium and iron and steel to bring their carbon costs up to those faced by local producers.

This not only levels the playing field for local industry, it eliminates the incentive for producers to move their production to countries without carbon pricing.

These problems are ones we ourselves worried about when designing Kevin Rudd’s original carbon pollution reduction scheme (which the Coalition and the Greens voted down in 2010) and Julia Gillard’s carbon pricing scheme of 2012 (which was repealed by Abbott in 2014).

So what the Europeans want to do can’t honestly be called protectionism. It bears no similarity with the new import duties China’s imposing on some of our exports.

What’s true is that it’s a messy but necessary way of solving the “wicked” problem of climate change which, being global, can only be fixed by all of the world’s big emitting countries doing their bit. This is why we can expect many other big countries – starting with America, and maybe extending to Japan − to impose similar carbon border taxes on those countries that try to freeload on those doing the right thing, while helping to sabotage the good guys’ efforts in the process.

So there’s no reason for any of us who believe climate change is real and must be countered to have any sympathy for the Abbott-Turnbull-Morrison government. All its sins of expedience and populist politicking are finding it out. It took a bet that the rest of the world wouldn’t get serious, and we lost.

The point is, had we stuck with either the first or the second version of our own emissions trading scheme – which were actually designed to fit with the Europeans’ scheme – we wouldn’t have this problem.

By now our exporters would be paying our carbon tax to our government (or, if they weren’t yet, we could easily fix it) rather than paying the same tax to foreign governments. Why’s that a good idea?

From the beginning, this government has used climate change as nothing more than an opportunity to attack the other side of politics by pushing populist delusions that taxes are always and everywhere a bad thing. Bad for the economy. Yeah, sure.

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