It's the rich wot get to complain and the poor wot get infected

If you’re anything like me, you’re getting mighty tired of lockdowns. I miss being able get out of the house whenever I choose, I miss going to restaurants and – my favourite vice – going to movies. That bad, huh? You’re right, I don’t have much to complain about. I don’t envy those having to school their kids while working at home – although I do miss seeing my grandkids in the flesh.

If you think I need reminding of how easy I’m doing it compared with a lot of others, you’re probably right. But I suspect that’s true of many of us, even those of us doing it just a tiny bit tougher than me.

Apart from those with kids to mind, the first hardship dividing line is between those of us easily able to work from home and those not. This probably means those still on their usual pay and those reliant on some kind of government support.

Even those unable to work from home but “fortunate” to work in an essential industry probably pay the price of running a much higher risk of getting the virus. And that without anyone doing enough to help them get jabbed.

Another divide would be between those in secure employment, with proper annual and sick leave entitlements, and the third of workers in “precarious” employment, most of whom are casuals rather than in the “gig economy”.

Having so many workers without entitlement to sick leave has been a burden for those involved and for the rest of us, namely an increased risk of being infected by someone who, needing the money, keeps working when they shouldn’t.

But though the dividing lines are different in a pandemic, the greatest divide of all is unchanged. As the old song says, it’s the same the whole world over, it’s the rich wot gets the pleasure, it’s the poor wot gets the blame.

Any amount of research confirms what the medicos call “the social gradient” – the well-off tend to be in much better health than those near the bottom. They’re less likely to be overweight (I must be an exception) and less likely to smoke.

The Mitchell Institute at Victoria University has just issued the second edition of its “health tracker by socio-economic status”. It finds that the 10 million Australians living in the 40 per cent of communities with lower and lowest socio-economic status have much higher rates of preventable cardio-vascular diseases, cancer, diabetes or chronic respiratory diseases than others in the population.

Why then should we be surprised to learn that, though Sydney’s outbreak of the Delta variant seems to have started in the better-off eastern suburbs, it soon migrated to the outer south west, where it finds a lot more business?

Last week the welfare peak body, the Australian Council of Social Service, issued a joint research report on Work, Income and Health Inequality, with academics at the University of NSW.

ACOSS boss Dr Cassandra Goldie says “the pandemic has exposed the stark inequalities that impact our health across the country. People on the lowest incomes, and with insecure work and housing, have been at greatest risk throughout the COVID crisis. Now, they are the same people who are at risk of missing out in the vaccine rollout”.

Then there’s the question of trust. Social trust works through social norms of behaviour, such as willingness to co-operate with strangers and willingness to follow government rules. As in other rich countries, our trust in governments has declined over the years. Last year it seemed to lift, as many of us believed we could trust our leaders – particularly the premiers – to save us from the pandemic.

Whether that confidence survives this year’s missteps we’ll have to see. But the economic historian Dr Tony Ward, of Melbourne University, reminds us of a significant finding in this year’s World Happiness Report: in general, the higher a country’s level of social trust, the lower its COVID-19 death rate.

Stay with me. An experiment by the American behavioural economist Alain Cohn and colleagues in Switzerland involved “losing” 17,000 wallets in 355 cities across 40 countries and seeing how many of them were returned to their supposed owners.

The rate of wallet return was about 80 per cent in the Scandinavian countries and New Zealand, just under 70 per cent in Australia, less than 60 per cent in the US and less than 30 per cent in Mexico.

Ward did his own study and found that two-thirds of the difference between countries could be explained by their degree of inequality of income. The greater the inequality, the less trust. When he added survey data on people’s perceptions of corruption, his apparent ability to explain the differences in trust rose from 68 per cent to 82 per cent.

Premier Gladys Berejiklian and her minions tell us the virus is raging in certain “LGAs of concern” because people aren’t doing as they’ve been asked. Maybe their lack of co-operation reflects a lack of trust in the benevolence of those higher up the income ladder. Inequality doesn’t come problem-free.

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Afterpay tells us we're suckers for the illusion of 'free'

There’s more to be learnt - sorry, there are more “learnings” – from the phenomenal success of Aussie “fintech” start-up Afterpay before it drifts off into corporate history. Learnings about human nature, public policy and what switched-on economists call “market design”.

Economists need to do more thinking about the way markets are – and should be – designed. The sub-discipline of market design recognises that, increasingly in the real world – especially the digital world – markets don’t work in the simple, transparent, what-you-pay-is-what-you-get way assumed by economics textbooks.

This means there’s more scope for “market failure” – market forces not delivering the benefits that economic theory promises they will.

Afterpay’s first “learning” is that, far from being “rational” – carefully calculating – consumers (and taxpayers) are hugely attracted by the illusion that something is free. Afterpay’s success seems explained by Millennials being greatly attracted by its promise to let them BNPL - buy now, pay later - without charging any interest.

It seems young people are turning away from credit cards and their very high interest rates in favour of BNPL. When you think about it, however, you see there isn’t much difference between a credit card and an Afterpay BNPL interest-free loan.

A standard credit card is also an interest-free BNPL loan provided you pay it off at the end of the month, in full and on the dot. Fail to manage that, however, and you soon see how high credit card interest rates are.

(Warning to all lawyers and judges: apparently, your legal learning robs you of the ability to understand the argument that follows. To a lawyer, any payment to a lender can’t be a payment of interest unless it’s wearing a label that says “interest” and is expressed as a percentage of the amount lent. You’d all make good Millennials.)

With an Afterpay BNPL loan, it’s only interest-free if you make four equal fortnightly repayments on time. If you’re late with a repayment, you’re charged a $10 late fee. And if you’re more than a week late you’re charged another $7.

The usurious nature of these charges is disguised by their small absolute size (but the amount borrowed is also pretty small) and by our practice of expressing interest rates on an annual basis (this loan is only for eight weeks, not 52).

But that’s not all. As Milton Friedman didn’t win his Nobel prize for discovering, there’s no such thing as a free lunch. Even if the borrower using either a credit card or BNPL manages to repay their loan without incurring any penalty, the lender still has to receive the equivalent of an interest payment to make the transaction worth funding.

In the case of both credit cards and Afterpay loans, this is achieved by a “merchant fee” paid by the retailer that made the sale. The fee is a percentage of the amount lent although, in the case of Afterpay, it’s a huge 4 to 6 per cent plus a flat 30c. (My guess is the 30c is there to fool lawyers into thinking the fee couldn’t possibly be payment of interest).

Whatever the reason, Afterpay has managed to convince the lawyers that, since BNPL obviously has nothing to do with borrowing and lending, it cannot be subject to the Credit Act, meaning Afterpay is not subject to the “responsible lending obligation” and so escapes the expensive obligation to do credit checks and verify the borrower’s ability to repay the debt. (We’re assured, however, that Afterpay and its many imitators are subjecting themselves to a voluntary code of conduct.)

This raises another “learning” right there. Almost invariably, the many market disrupters produced by the digital revolution – including Uber and Airbnb – amount to the combination of a genuine, productivity-enhancing innovation (something every economist wants to encourage) and a trumped-up claim that, because we’re so new and different, none of the regulation that shackles the existing industry applies to us.

“Their workers are employees, ours aren’t. The firms we’re disrupting have to provide employee super contributions, annual and sick leave, and workers compensation insurance, as well as comply with health and safety requirements, but we don’t.”

This, of course, is why we’re developing a two-class workforce, where those unfortunate enough to be able to find work only in the “gig economy” have badly paid, precarious employment with bad conditions and few rights.

The thought that this regression to feudal conditions for some should be allowed to persist in an economy as rich as ours is utterly repugnant. And to respond to it by introducing a universal basic income is an admission of defeat.

But before we leave Afterpay, there’s another learning. Using merchant fees to hide the interest cost of BNPL schemes, whether credit cards or Afterpay-style, involves an arrangement that’s both inefficient and unfair. It encourages retailers to recover the effective interest cost by raising their prices to all their customers, thus obliging those who pay cash or with a debit card to subsidise those who choose to BNPL.

Afterpay prohibits retailers from recouping the cost by asking those who choose BNPL to pay a surcharge. Just as Visa and Mastercard used to prohibit retailers from imposing a surcharge on those who choose to pay by credit card.

For obvious reasons, the promoters of supposedly interest-free loans want the true cost of this free lunch to remain hidden. The Reserve Bank – which has oversight of payment system regulation – laboured for years to get the prohibition on credit-card surcharges outlawed, and finally succeeded.

These days, credit-card surcharges have become common. My guess is that these surcharges, not just the advent of Afterpay and its imitators, help explain the big shift from credit to debit cards. This is just what the Reserve wanted to see.

But it’s utterly inconsistent for the authorities to stop the banks from banning surcharges while allowing Afterpay to ban them. Maybe they’re applying some kind of infant-industry argument. Let them get established, then rope them into the regulatory fold.

Final learning: look around and you find our human susceptibility to the illusion of “free” in lots of places. Starting close to home, free-to-air television and – until Google and Facebook stole our business model – almost-free newspapers and websites were so much a part of the furniture that it was easy to forget that the cost of all the advertising they carried was buried in the cost of most of the things we buy.

The internet still carries a host of free sites with interesting and useful information, even if the legacy newspaper companies have finally moved to making most of their money via subscriptions.

Then there are Google and Facebook, for whom the market-design people have invented a new bit of jargon. They are “multi-sided platforms” whose ostensibly free services are paid for by selling to advertisers the myriad information the platforms have gathered about the preferences, actions and locality of their users.

But our love of the supposedly free – our preference for having the true cost of things hidden from our sight – applies just as much to us as taxpayers. It took the Liberals a long time to realise how much voters loved Medicare, and didn’t want it fiddled with. Why the great love? Bulk billing. The way it makes visits to GPs and hospitals appear free.

Despite all their speeches on the evils of higher taxes, the Libs (like Labor) have never needed to be told of the one tax increase we don’t mind because we don’t see it: bracket creep. When it comes to kidding ourselves, we’re past masters.

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How Morrison can claim emissions are falling when they aren’t really

Other world leaders have treated this week’s report by the UN Intergovernmental Panel on Climate Change as a “wake-up call,” whereas our leader, Scott Morrison, has mumbled something about how we’re on track to “meet and beat” our emissions reduction target, and gone back to sleep.

The report finds that whereas the world’s increase in average temperatures since the start of the industrial era is 1.1 degrees, our average land temperature has risen by 1.4 degrees over the past century – which does much to confirm the impression most of us have that droughts, floods, bushfires, heatwaves and cyclones are now bigger and more frequent than they used to be.

Climate change isn’t coming, it’s arrived.

At the UN climate change meeting in Paris in 2015, countries agreed to each reduce their emissions of greenhouse gases sufficiently to limit the rise in average temperatures to 2 degrees, and preferably no more than 1.5.

The report’s wake-up call was its revised prediction that warming of 1.5 degrees could be reached by the early 2030s, much sooner than formerly expected. So we’ve got even less time than we thought.

At the Paris meeting, each country announced its “nationally determined contribution” to the reduction in global emissions. It was agreed that each country would review and increase its contribution every five years.

The first round of increases will be announced at the next “conference of the parties” in Glasgow in November. In preparation for the conference, almost all of the world’s 20 biggest emitters – including the G7 countries, China and us – have committed to reach net zero emissions by 2050.

But 2050 is a long way off – perhaps too far off. What matters more is the increases countries make in their contribution targets in Glasgow. At their summit meeting in Cornwall in June, the G7 members agreed to increase their reduction targets to between 40 and 63 per cent over the same period.

It’s possible Morrison will decide to accept the net zero emissions target by 2050, and possible he’ll go to Glasgow promising an improvement on our original Paris contribution of a 26 to 28 per cent reduction on 2005 emission levels by 2030.

This week, however, he was promising nothing. Why not? Because we’re already set to “meet and beat” our original target. Indeed, the most recent figures show our emissions are already down 20 per cent on 2005, he said.

And, as he’s told us many times, we’re world-beaters when it comes to moving to renewable, wind and solar energy.

Now, you’ve probably heard there’s something sus about these wonderful don’t-you-worry-about-that figures Morrison and his ministers keep tossing around. The people who know and care about climate change say our emissions are getting worse, not better.

The doubters are right. But we’re indebted to the Australia Institute think tank for producing a careful report spelling out how the government’s figures are able to be so misleading. The Australian National University’s noted emissions analyst, Hugh Saddler, tests Morrison’s claims that, when it comes to reducing fossil fuels use and transitioning to renewable energy sources, we’re at the front of the pack.

Saddler compares our performance with 22 other decent-sized members of the Organisation for Economic Co-operation and Development, plus Russia, on a number of key indicators of energy transition.

Examining our performance relative to the others between 2005 and 2019, Saddler found that we started at the back of the pack in 2005, and either maintained that position or had slipped even further by 2019 on all the indicators.

Australia remains among the highest emitters on a per-person basis, and on the basis of emissions per dollar of gross domestic product. On those indicators where our performance has improved over the period, the others have improved just as much as we have, if not more.

The “emissions intensity” of our energy system – that is, emissions per unit of energy consumed – is the highest, except for Poland. Why? Because both countries were, and still are, heavily reliant on coal for generating electricity.

Despite all Morrison’s boasting about how much we’re spending on wind and solar power, the others are also spending more. Our share of electricity generated from renewables has slipped back relative to the others.

But here’s the killer punch: we were one of only three countries out of the 24 whose emissions from energy use actually increased between 2005 and 2019. By 18 million tonnes of carbon dioxide equivalent a year, according to Saddler.

How can this possibly be reconciled with Morrison’s claim that our emissions have fallen by 20 per cent? It’s simple when you know. Saddler is talking about emissions from energy use, whereas Morrison is also including emissions from what the UN calls LULUCF – land use, land use change and forestry. In short, land clearing and logging.

This source of emissions has been included in the official calculations since Australia insisted on it at the Kyoto conference in 1997. And be clear on this: so it should be. I have no patience with greenies who think taking account of what’s happening to “carbon sinks” is somehow immoral. Tell that to the people who worry about the deforestation of the Amazon.

No, the point is not that land clearing should be ignored, but that we wanted it counted solely because we knew it would make our figures look a lot better than they really were. Why in 2015 did we want to set 2005 as the starting point for our promised cut in emissions? Because we already knew the cessation of land clearing in Queensland would make our performance look good even if we didn’t do anything much to reduce our use of coal and gas.

Trouble is, this long-passed, once-only improvement in land use does nothing to transform our energy use away from fossil fuels and towards total reliance on renewables. It thus does nothing to get us to net zero emissions.

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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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