Government outsourcing has many pitfalls

Labor's Mediscare will have a benefit if it causes our politicians to think twice before they resort to "outsourcing" or "contracting out" the provision of government services, a practice that's led to a string of disasters.

The pretext for Labor's claim that the Coalition was planning to "privatise" Medicare was the Turnbull government's intention to save a little money by shifting the processing of Medicare's many bank transfers from its giant cheque-writing agency, the Department of Human Services, to a private provider.

We wouldn't even have noticed this back-office switch, but Malcolm Turnbull felt obliged to swear the proposal would be abandoned.

This probably means he'll also have to give up any thought of outsourcing all the many other, pension, allowance and benefit payments the department makes.

One reason for doing so was that the department's computer system is old and clunky and needing to be replaced – a prospect that always seems to frighten governments, especially those trying to keep their budget deficit low by postponing needed asset replacement.

Since polls show the public is strongly opposed to all privatisation, it's not hard to imagine most voters wouldn't like the sound of outsourcing.

But if this realisation comes as a surprise to the Coalition, it may also be a caution to Labor, which over the years has also engaged in much outsourcing.

Much of it has gone on, at state and federal level. When a woman rang me the other day to do a government security check on someone I'd worked with, I was surprised to hear she worked, not for ASIO, but for a Canberra company called Key Vetting Services.

In principle, it's very simple. You call for tenders and if a private outfit can do the job more cheaply than your public servants can, you give it the job.

In practice, it's never simple. For a start, you can't be sure that what we're assured is saving the taxpayer money really is, once you measure it properly.

For instance, one of the ways federal and state governments seek to retain their AAA credit ratings is by using "public/private partnership" agreements to have the borrowing for motorways and other big projects done by some private enterprise. This way, the debt appears on its balance sheet rather than the government's.

Small problem: hiding the government's debt in this way ends up being far more costly to taxpayers. The oh-so-holy credit rating agencies turn a blind eye.

Federal and state departments spend a fortune each year on private sector consultancies. It's possible this saves money.

But it's also possible it was done to get around some directive to reduce staff numbers and is actually more expensive. Or maybe they got rid of people they later realised they couldn't do without, and had to pay top dollar to get 'em back.

Another dubious scheme is the sale and lease-back of government offices. The budget deficit takes a big dip in the year you sell the office off, but is worsened in subsequent years by the big rents you now pay.

These schemes are notorious for the outrageously good deals used to entice private sector players to take up the properties and rent them back.

A related version of outsourcing follows the notion that the provision of government services should be made "contestable". Services normally provided by government agencies or by non-profit community groups are opened up to for-profit providers.

Successive governments have done this with Job Services Australia, childcare centres and vocational education and training. The pink batts scheme was left entirely to for-profit providers.

With childcare, the government let one aggressive provider, ABC Learning, take over more than half the nation's centres before collapsing, at great inconvenience to parents and expense to taxpayers.

The disaster from the outsourcing of VET – again, federal and state – is still being cleaned up. The loss of future trained workers may hurt the economy for years.

Many people assume the private sector will always do things more efficiently – or less inefficiently – than those tea-drinking public servants.

Maybe. The private sector has a big advantage over the public sector: it has just one objective, to make a buck.

But what those who think this way often forget is that private sector tenderers have to undercut the public service's price and make room for their profit, which they hope to make as big as possible.

Often they do this by cutting corners on the quality of the service they deliver. Leave a loophole in your contract and they'll jump right through.

The public sector's big disadvantage is also its big advantage: it always has a range of objectives, imposed on it by politicians who know that voters will hold them responsible should the service prove really bad.

And here's a point you won't find in any textbook, but all the stuff-ups of recent years should have woken us up to: when you give businesses access to the government's coffers, a surprisingly high proportion of them lose all sense and start acting like robbers in Aladdin's cave.

Witness: all the unsafe behaviour by outfits trying to make a killing in the pink-batt boom; all the operators using inducements to sign up students for unsuitable courses, the costs of which were borrowed from the government; all the operators using the lure of permanent residence to rip off foreign students with phoney courses.

I also suspect that, for the Coalition, there's an additional, political motive: outsourcing some government service shifts economic activity to private enterprise, the part of the economy whose interests the Coalition champions, and to the people who are your friends and donors.

If so, why does outsourcing also need to save the taxpayer money?

The Turnbull government's intention to implement the Harper competition report's proposal for greater contestability in the delivery of "human services" is now likely to be approached with caution. No bad thing.

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A SLIGHTLY DEFENSIVE CRITIQUE OF AUSTRALIAN ECONOMIC JOURNALISM

History of Economic Thought Society of Australia, annual conference, Melbourne, July 14, 2016

It’s a huge pleasure to speak at conference where passing remarks about your predecessors and competitors is not seen as a self-indulgent irrelevance. I’m going to leave it to Gerard to talk about two key pioneers of economic journalism in this country - Jack Horsfall and Max Newton - and say a little about the early, current and future practitioners of economic journalism, before moving on to say something more substantial about its strengths and weaknesses.

Just as macroeconomic management is essentially a post-war phenomenon and the quarterly national accounts have been published only since 1959, so the practice of economic journalism - reporting and commentary on macroeconomic and microeconomic events and issues, usually without reference to the fortunes of particular listed companies (a subject matter known to journalists as business journalism) - does not have a particularly long history.

During the 17 years he spent as financial editor of the Sydney Morning Herald, Tom Fitzgerald combined editorials and commentary on economic management with his path-breaking exposes of corporate mismanagement. When he left to join the Australian in 1970 he was replaced by both a financial editor and an economics editor. The economics editor was Alan Wood, who had been a Canberra economics correspondent for the AFR. After a period out of daily journalism Alan returned eventually as economics editor of the Australian. Ken Davidson worked for Treasury before becoming the Australian’s Canberra-based economics correspondent in 1965 and the Age’s economics editor in 1974. P. P. McGuinness joined the AFR as an economics writer in 1971, left to work for the Whitlam government, then returned as economics editor in 1974. When I joined the SMH as a cadet in 1974, having previously worked as a chartered accountant, I was encouraged to focus on economics rather than business, sent to Canberra late that year as economics correspondent and returned to Sydney in 1976 to replace the departing Wood as economics editor.

So it was in the early 1970s, and particularly after the first OPEC oil shock of December 1973 and the stagflation-induced crisis of confidence in conventional economic management, that economic journalism came to be seen not as an adjunct to business (financial) journalism, but as a specialty within political journalism. Indeed, it suddenly dawned on the nation’s editors that most of politics was economics, so that they needed more economic reporters and economic commentators, most of the latter referred to as economics editors.

It follows that a rollcall of the main economics editors and commentators over the years since then is not long. At the AFR: Paddy McGuinness, Michael Stutchbury, Steve Burrell and Alan Mitchell. At the Australian: Ken Davidson, Alan Wood, Michael Stutchbury and David Uren (I don’t include the additional contributions of Judith Sloan and Henry Ergas). At The Age: Ken Davidson, Tim Colebatch and Peter Martin. And at the SMH: Tom Fitzgerald, Alan Wood and me. Jessica Irvine was for a time the first and possibly the only national economics editor for the Murdoch capital city tabloids. That’s only about a dozen.

With most of those people now in retirement and people starting to wonder how much longer I’ll last - a fair while yet, I hope - you may be tempted by the thought that the end of an era is looming. But I think the future of economic journalism is in good hands: Peter Martin at The Age, Jessica Irvine at the SMH, plus, further afield: Garry Shilson-Josling at AAP, Stephen Long at the ABC and Shane Wright in Canberra for the West Australian. Among the rising generation, I have great hopes for Gareth Hutchens at Guardian Australia and Clancy Yeates at the SMH/AFR.

I’ve made the point that economic journalism isn’t to be confused with business journalism, about the activities of listed companies. Another important distinction to be noted is between the reporting of economic news and economic commentary. Reporting concerns mainly movements in economic indicators, policy pronouncements by governments and the Reserve Bank, speeches by treasurers and econocrats, and occasionally the contributions of think-tanks and university research centres. And, of course, the commentary on macroeconomic developments provided by the many business economists employed in the financial markets.

Because most announcements are made in Canberra, most economic reporting is done from the federal parliamentary press gallery. This is true of most reporting of Reserve Bank announcements, even though the bank is headquartered in Sydney. The main national and metropolitan newspapers have specialist economics correspondents in the gallery, most of them with university qualifications in economics. In smaller gallery bureaus the reporting is done by political correspondents. By comparison with American practice, Australia economic reporters aren’t afraid to offer their own interpretation of the meaning of movements in economic indicators.

Economic reporting suffers from the same shortcomings as other reporting. The role of the news media is much misunderstood by many people. They assume the media’s role is to give their audience a balanced picture of what’s happening in the world beyond people’s personal experience. In fact, because the media is directly or indirectly selling its news, we limit our reporting of what’s happening in the world to those things we believe our audience will find particularly interesting. This imparts considerable biases to what we report: we pay a lot more attention to bad news than good, to problems rather than solutions, and to conflict and controversy (so that, for instance, dissenters from the dominant view on climate change among scientists get a lot more space than their numbers warrant).

The media are more interested in people than concepts, and more interested in concrete case studies (what economists call anecdotes) than abstract principles. In political and economic reporting there is much resort to ‘race-calling’: which side’s doing well in the polls and which isn’t, which leaders are secure and which under threat; which economic indicators are up this month and which are down (or, for the sharemarket and the exchange rate, which are a bit up or a bit down today). The media tend to pander to what they assume to be their audience’s prejudices: so falls in interest rates and rises the dollar are always good, while rises in rates and falls in the dollar are always bad. Deficits are always bad, surpluses are always good.

Reporters’ eternal search for a good story, particularly one involving conflict, controversy or worrying news, makes them easy marks for governments and interest groups seeking to use the media to influence public opinion. Claims that some policy will caused the loss of X thousand jobs in the widget industry are widely reported, with little scrutiny. Governments and treasuries, no less than business lobby groups, advocating or opposing tax changes commonly employ an ever-growing industry of “economic consultants” to whip up modelling purporting to back up their case. Issues tend to be reported and judged on their political potency, not their economic merits.

Turning from economic reporting to economic commentary, economic commentators, in sharp distinction to political commentators, don’t hesitate to take a position in the policy debate and to campaign for particular policies. It’s intended to be a constant and logically consistent position - not one that keeps adjusting so that whatever a government does can be criticised - based on their school of economic thought and personal values, not on partisan loyalties and certainly not on personal interests. The bane of an economic commentator’s life is people always trying to consign him or her to a party-political box. The commentators’ paper’s emphasis on race-calling means macroeconomic issues tend to crowd out microeconomic issues, which are often more important. The journalistic profession’s obsession with timeliness - with never being ‘off the pace’ - limits commentators’ ability to continue pursuing issues once the media caravan has moved on.

Economic commentators are not great original thinkers. They don’t keep up with the literature. As with most economists, most of the arguments they mount and policy solutions they espouse are pretty derivative. I’ve never deluded myself I’ve been giving the pollies policy advice that was significantly different from and superior to the official advice they were getting. Economic commentators spend a lot of time talking to senior econocrats, and much of what they write echoes the views of the particular econocrats they talk to. They don’t talk to academic economists as much as they probably should, mainly because so few academics keep up with the policy debate.

A big part of any conscientious economics editor’s job is standing up to vested interests on the make - drug companies, chemists, private health funds and the doctors’ union in their effort to extract rents from Medicare; protectionist manufacturers, mining companies claiming a carbon tax would lead to massive job losses, the superannuation industry and all the rest.

Over the years I’ve often found it my duty use my column up the back of the paper to beat down the front-page beat-ups by overexcited youngsters. These days I’ve often found my duty lies in exposing the dubious modelling unprincipled economic consultants have been happy to produce for their paying customers. Sometimes these people know full well the way they’re twisting models and assumptions to fit their client’s vested interest, but other times I suspect they’re so caught up in the imaginary games all modellers play that they’ve actually forgotten the exercise is imaginary.

I’ve come to believe the big issue facing economic editors is whether they see their job as missionary - convincing their readers of the rightness of economic fundamentalism and its policy prescriptions. I think that’s the way most economics editors see their job and, in the first part of my career I did too, though my specialty has always been explanatory journalism - helping my readers understand why economists believe what they do and governments adopt the policies they do. I’d like to believe I write more overtly about economic theory than my competitors do.

While I’ve continued that explanatory role, the more I’ve read and learnt about economics - including my interest in behavioural economics - the more convinced I’ve become that I shouldn’t imagine myself to be a member of the economists’ union, but should take a more independent stance, providing my readers with an assessment of the strengths and weaknesses of the arguments economists present to the community. I should be more like the Herald’s theatre critic than an economic evangelist.

That should be enough to get you going.

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