Aged care abuses the latest of many economic mistakes

How will the era of “neoliberalism” end – with a bang or a whimper? With a royal commission – or three. But don’t worry. Royal commissions always make a lot of noise.

With the memory of the government’s embarrassing delay in yielding to public pressure for a royal commission into banking still fresh, Scott Morrison got in before the Four Corners expose to announce a royal commission into aged care.

Who’s to say this will be the last? A royal commission into electricity and gas prices is mooted. Maybe sometime in the future we'll see a royal commission into problems with the National Disability Insurance Scheme.

To Morrison, the aged care commission has the advantage of kicking a political hot potato into the long grass of the next parliamentary term. “How can you claim we’re doing nothing? We’ve called an inquiry.”

Actually, the neglect and mistreatment of old people in nursing homes has been the subject of so many inquiries and reports – going back to the kerosene baths in 1997 – that only an inquiry of the status of a royal commission could have satisfied the many complainants.

But I wonder if the increasing resort to royal commissions has a deeper economic and political significance.

A key part of the era of what we used to call “micro-economic reform” has been to take services formerly provided by governments – and sometimes charities – and pay profit-making businesses to provide them.

Among the first of these “outsourcing” schemes was the Howard government’s decision to abolish the Commonwealth Employment Service and contract a network of charitable and for-profit firms to help the jobless find work.

Then came the expansion of childcare to for-profit providers, the move by successive federal and state governments to make technical and further education “contestable” by private providers, and the decision to open the provision of aged care to for-profit providers.

Plus the decision to turn five state electricity monopolies into a single, competitive national electricity market.

The reformers were sure these changes would lead to big improvements. As everyone knows, the public sector is lazy and wasteful, whereas competition and the profit motive make the private sector very efficient.

The reform would allow governments to reduce their spending on the services they subsidised, even while the public got better service. Competition from private providers would oblige church and charitable providers to lift their game.

And introducing market forces meant the providers of government-subsidised services didn’t need to be closely regulated. As any economics textbook tells you, it would be irrational for providers to mistreat their customers because they’d soon lose them to their many rivals.

It hasn’t worked out the way the reformers hoped. We won’t know whether non-government provision of job-search services is working well until unemployment surges in the next recession. But we do know that childcare was thrown into crisis when one private provider, ABC Learning, which had been allowed to acquire about half the nation’s childcare centres, went belly up.

We know that making vocational education and training “contestable” was a costly disaster, as many private providers conned youngsters into signing up for unsuitable courses (and debt).

We know that turning electricity from government monopolies to a national market has seen the retail cost of power double in a decade.

And now it’s aged care where mounting complaints about neglect and abuse can no longer be fobbed off.

Providers have been required to make public so little evidence of staffing ratios and other indicators of performance that we don’t yet know whether neglect and abuse is greater among for-profit or non-profit providers.

The notorious Oakden nursing home in South Australia, after all, was state-government run. But our experience of private operators gaming government subsidies and cutting quality to increase profits in other areas of outsourcing makes me think I know where the greatest problems lie.

And the way the announcement of the commission prompted steep falls in the share prices of four aged-care companies listed on the stock exchange suggests investors share my suspicions.

According to research by the Tax Justice Network, if you measure it by number of beds, non-profit providers make up about half the “market”, with the six biggest for-profit providers accounting for more than 20 per cent.

The biggest is Bupa (owned by a British mutual), followed by Opal (part owned by AMP), Regis, Estia and Japara (all ASX listed), and Allity.

We do know that the number of serious-risk notices given to providers jumped by 170 per cent in the past financial year, and significant non-compliance increased by 292 per cent. This says there’s been a sudden increase not in misbehaviour, but in vigilance by the authorities.

Why are unannounced visits and compliance audits only now in vogue? Good question.

Aged care is just the latest instance of the failure of contestability and “marketisation” to deliver government services satisfactorily – a great embarrassment to econocrats and governments of both colours.

The chickens are coming home to roost and the uproar is threatening the Coalition’s survival. Calling a royal commission with all its shock revelations may be the answer to the politicians’ problem.

It changes the question from “how could you have been so naive as to believe competition would save customers from being abused?” to “what are you doing to punish these bastards and stop it happening?”.

It also tells generous donors to party coffers the government's had no choice but to let them go.

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Long way to go to get banks back in their box

Have we learnt from the mistakes of the global financial crisis, now 10 years ago? Yes, but not nearly as much as we should have.

Of course, the answer is different for the Americans and the other major advanced economies to what it is for us, who managed to avoid bank failures and the Great Recession.

Globally, much has been done under the Basel rules to strengthen requirements for banks to hold more capital and liquidity, reducing the likelihood of them getting themselves into difficulties.

It would be naive, however, to imagine this has eliminated the possibility of any future financial crisis. Recurring financial crises are a feature of capitalist economies through the centuries.

All we can do is work on reducing their frequency and severity. On that score, the rich countries could have done a better job of rationalising the division of responsibility between the various buck-passing authorities supposed to be regulating their financial system.

The root cause of the GFC was ideological: the belief that the more lightly regulated the banks and other financial players were, the better they’d serve the wider economy’s interests, allied with the belief that their greater freedom wouldn’t tempt them to take excessive risks because that would be contrary to their interests.

Wrong. This badly misread the perverse incentives bank executives faced – heads I win big bonuses; tails my shareholders do their dough – and the way the heat of competition can induce business people to do things they know they shouldn’t, not to mention the “moral hazard” of knowing that, should the worst come to the worst, the government will have no choice but to bail us out.

As actually happened. In the North Atlantic economies, politicians and central bankers did the right thing in rescuing failing banks. Had they not, the whole financial system would have collapsed and the loss of wealth and employment would have been many times greater than it was.

But don’t try telling that to a public that watched governments racking up billions in debt to save banks and bankers, who then proceeded to turn out on the street people who could no longer afford the mortgages they should never have been granted.

The US authorities’ mistake was failing to draw a clear distinction between saving banks to protect their customers and stop the system collapsing, and punishing the failed banks’ managers and shareholders for screwing up.

Why didn’t they? In short, because the banks are too powerful politically.

Which brings us to Australia’s response to the GFC and how we escaped the Great Recession. Our big banks didn’t fall over because our econocrats never believed the banks wouldn’t be silly enough to take risks that could endanger their survival. Our banks didn’t buy toxic assets because our prudential supervisors wouldn’t let ‘em.

That didn’t stop the GFC dealing a blow to business and consumer confidence, such that real gross domestic product contracted by 0.5 per cent in December quarter 2008. That we avoided recession is thanks to the quick action of the Reserve Bank in slashing interest rates and the Rudd government in applying huge fiscal stimulus, which stopped the economy unravelling.

At another level, however, the econocrats did believe the banks should be lightly regulated in their relations with customers, and could be trusted not to mistreat them. Outfits such as the Australian Securities and Investments Commission had their funding cut and were given the nod not to be overactive.

The absence of a crash meant our governments didn’t learn that, in the non-textbook world, market forces can cause, as well as limit, the mistreatment of customers. Our own banks’ great political influence reinforced this naivety, prompting governments to wave aside the mounting evidence of bank misconduct and the public’s mounting disquiet and distrust.

So, in a sense, the banking royal commission is the product of our earlier failure to learn what we should have from the GFC.

But there’s a much broader lesson we’ve yet to learn from the crisis, one that applies to all the advanced economies. It’s that the banking and “financial services” sector is far bigger than we need, is bloated by rent-seeking, involves many times more trading between banks (a form of gambling) than trading between banks and real-economy customers, and is thus a waste of economic resources.

When financial services’ share of our economy (and most other advanced countries’) was expanding rapidly in the decades preceding the crisis, economists told us we were benefiting from financial innovation and advances in the management of financial risk.

The GFC revealed that rationale as about 95 per cent bulldust. To misquote Keynes, the economy would be better off if most of the people making big bucks in finance got useful jobs such as being dentists.

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Morrison optimistic we’ll get much bracket creep

The mystery revealed. Consider this: how does the Morrison government cut income and company taxes and avoid big cuts in government spending, but still project ever-rising budget surpluses and ever-falling net public debt over the next decade?

With publication of the Parliamentary Budget Office’s report on the May budget’s medium-term projections, we now know. Short answer: by assuming loads more bracket creep between now and then.

You may remember that, at the time of budget, I was highly critical of the rosy forecasts and assumptions used in the budget’s “forward estimates” from 2018-19 to 2021-22, and then in its “medium-term projections” out for a further seven years to 2028-29.

They showed the budget’s underlying cash balance returning to a tiny surplus in 2019-20, then the surplus growing steadily to about 1.3 per cent of gross domestic product by the end of the decade.

As a consequence, the government’s net debt would peak in June this year at 18.6 per cent of GDP, then fall sharply to just 3 per cent in 2028-29 as the annual surpluses were used to repay debt.

There you go. Big cuts in company tax and a plan for three cuts in income tax, but we’ll soon be back in the black and eliminating the debt. I thought then it sounded too good to be true.

The budget office, which is independent of the government, is required by its Act to accept the government’s forecasts and macro-economy assumptions for its projections. But the budget papers gave no details of how, according to the government’s projections, the budget surplus would grow from 0.8 per cent of GDP in 2021-22 to 1.3 per cent in 2028-29.

This is what the office’s report tells us. It does so using its own modelling of each of the main taxes and 23 big spending programs, while sticking to the government’s macro-economy assumptions.

The report’s projections show total receipts ending the seven years where they began, at 25.5 per cent of GDP, while total spending grows more slowly than GDP so that it falls from 24.7 per cent to 24.1 per cent.

This implies that all the projected improvement in the budget surplus is expected to come from many years of amazingly disciplined spending restraint. But such a conclusion misses an obvious question: how can total receipts stay growing as fast as the economy is projected to grow when the government is planning to cut the rate of company tax by a sixth (from 30 to 25 per cent) and have three cuts in income tax?

Ah, that’s the report’s big reveal. Its projections show company tax collections declining as a proportion of GDP and “other receipts” also declining, but with this being exactly offset by the growth in income tax collections.

And that would be made possible by the fiscal magic of bracket creep. Remember bracket creep? It was the justification for the tax cuts and, according to then-treasurer Scott Morrison, the tax cuts would “eliminate bracket creep for the middle class”.

Or not. Turns out, according to the report’s projections, there’ll be so much continuing bracket creep as to more than wipe out the benefit from the promised tax cuts.

Taken over the full 10 years – and remembering that the first of the tax cuts began in July this year - income tax collections are projected to rise from 11.2 per cent to 12.5 per cent as a proportion of GDP, a huge jump of 1.3 percentage points.

Over the same decade, the average tax rate across all taxpayers is projected to rise from 22.9¢ in every dollar to 25.2¢. But here’s another important revelation by the report: some people do much better from the tax cuts than others, while bracket creep doesn’t affect everyone equally, either.

The report ranks everyone paying income tax according to their income, then divides them into five groups of about 2.9 million each - “quintiles” – from lowest to highest. It then looks at the way the average tax rate in each quintile is affected by the tax cut and by bracket creep. It looks at the change from 2017-18 to 2026-27.

On average, the three-stage tax plan will cut the average tax rate paid by people in the bottom quintile by just 0.3¢ in the dollar. Those in the second and third quintiles will save 0.9¢, while those in the fourth quintile save 1.1¢ and those in the top quintile save 2.1¢ in every dollar.

(This, BTW, is the proof that the three-stage tax plan does change the progressive income tax scale in a regressive direction, making it significantly less progressive.)

Now, the effect of bracket creep (before allowing for the tax cuts). It raises the bottom quintile’s average tax rate by 1.1¢ in the dollar, then the second and third’s by 5.4¢, but the fourth’s by 3.7¢ and the top quintile’s by just 2.9¢ in the dollar.

Leaving aside the bottom quintile (where most people rely on benefits and earn little income), the big net losers - bracket creep less tax cut – are those in the second and third quintiles. That is, those earning between 30 percentage points below the median income and 10 points above it.

Another name for such people is “low to middle income-earners” – the very people Morrison claimed his cuts were aimed at helping most.

But before you get too steamed up, remember that the budget office is merely exposing the previously hidden implications of the government’s medium-term projection and the rosy assumptions it depends on.

The key assumptions are “above-trend economic growth for much of the period” – which contains a hidden assumption that our record of 27 years without a severe recession will roll on for another 10 – and, in particular, “a return to trend wage growth”.

That is, it will take only a few years before wages are back to growing by 3.5 per cent a year – a percentage point faster than prices – and will stay growing that fast for the duration.

It’s this strong wage growth that does most to produce the bracket creep. So, if you’re not as optimistic about wages grow, you don’t need to be as concerned about bracket creep. By the same token, however, we wouldn’t be making as much progress reducing public debt.

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There are delusions for young and old

There are things oldies tell young people that the youngsters should believe, and things they shouldn’t. One thing I wouldn’t believe is the confident predictions about the huge number of different jobs and careers they’re likely to have.

One thing I would believe is that eligibility for the age pension is likely to have risen to 70 by the time they get there, whatever Prime Minister Scott Morrison says about it being off the table.

I’ve lost count of the number of times I’ve heard adults – usually teachers - assuring school kids they’ll end up having 17 changes in employer across five different careers.

It sounds as if it’s the conclusion of some careful scientific study by experts. But as far as I can tell, if there is such a study it’s been lost in the annals of time.

Which is a pity because other experts need to go back to such a study and tell us just how careful and scientific the study was. Doesn’t sound it to me.

Rather, the line’s become an urban myth – widely repeated and accepted as true because it’s so often repeated.

Those who peer into the “future of work” are always telling us the rising generation needs to be endowed with “21st century skills” such creativity, team work and critical thinking. True.

And our youth could start by applying some critical thinking to the prediction of exactly how many jobs and careers they’ll be having in a working life that hasn’t even started. More critical thinking than the silly adults who keep repeating a finding of whose origin and authority they know nothing.

A key critical-thinking question is: how on earth would you know? How could anyone, no matter how expert, look 45 or 55 years into the future and count the number of jobs and careers young people will end up having, even on average?

We can’t forecast with any confidence what the next five years will hold, let alone the next 55. Any genuine expert would hedge any guess they made with a dozen caveats and qualifications. Anyone who can be as certain as 17 and five is more entertainer than expert.

Do you remember when Julia Gillard dispatched Kevin Rudd in 2010? She had a to-do list of problems inherited from Rudd – including his mining tax and emissions trading scheme - that needed to be dispatched forthwith in readiness for an election.

Malcolm Turnbull’s successor seems to have a similar to-do list. Actually, the plan to raise the age pension age to 70 is inherited from Tony Abbott. It’s one of the few cost-saving measures remaining from the many included, but since abandoned, in Abbott’s first budget in 2014 – a budget so politically disastrous it has blighted the Coalition government throughout its life.

The higher pension age proposal was implacably opposed by Labor and Senate crossbenchers alike. It was already a dead letter and it’s no surprise Morrison has dumped it.

You can believe that, should Morrison be elected, he’ll stick to his promise. But the eligibility age wasn’t to reach 70 until July 2035, and a lot could change between now and then. Say, 17 prime ministers and five changes of ruling party.

We’ve been raising the pension age since the early 1990s and we still are. This has raised little controversy. So it’s not hard to believe that, by the time today’s school students are approaching 70, the age pension age will have drifted up from 67 to 70.

In 1993, the Keating government decided to increase the pension age for women from 60 to 65, phased in over 20 years.

In 2009, the Rudd government decided to phase up the pension age for men and women from 65 to 67, starting six years later. At present we’re up to 65 and six months, and it will rise by six months every two years until it reaches 67 in 2023.

Abbott’s plan was to wait a further two years then, from July 2025, raise the age by six months every two years until it reached 70 by 2035.

A point to ponder is that it was Labor governments that are getting us up to 67, even though Labor has so righteously opposed adding a further three years. Maybe it’s OK if they do it.

There’s no age at which people must retire. The rationale for raising the age at which we become eligible for retirement assistance from the taxpayer is we’re living ever longer, healthier lives.

That’s a good thing. But it comes at a cost to the community – particularly to younger taxpayers – if we insist that those extra years of healthy life must be spent in longer years of retirement rather than work, thus raising the proportion of non-workers to workers.

As I’ve noted recently, one way we’ve used to slow the ageing of our population is high levels of younger immigrants – but this too carries costs many people don’t want to pay.

The notion that retirement beats working is the great delusion of middle age. If the ever-diminishing minority of workers doing hard physical labour fear their bodies won’t last the extra few years, that’s partly why we have the disability support pension. We should stop stigmatising it.

If it’s too hard for older workers to find jobs, that’s an attitudinal problem among employers we should be – and are – reducing.

If workers find their jobs so unpleasant they can’t wait to retire, that’s a communitywide problem of misguided employers we should be correcting directly, to the benefit of all wage slaves.

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The social sciences: so essential we neglect them

As I’m sure you’re only too well aware, today is the first day of the inaugural Social Sciences Week. Just as I’m sure you knew that someone somewhere in America declared a day last week to be Read a Book Day.

Why do people name days, weeks, months and even whole years after worthy causes? Perhaps because there are so many worthy causes, and they’re hoping to gain theirs a little more attention amid the tumult.

We just want to be sure our fellow citizens are aware of who we are and what wonderful things we do, the organisers tell you. And once they’ve got their higher profile, there just might be a message or two they’d like to get through to the government and keeper of the purse strings.

What lifts Social Sciences Week above the ruckus is that last year by some mischance one of its sponsors made me a member of their club – shades of Groucho Marx – thus converting me to the cause. You have been warned, dear reader.

But just what are the social sciences, I hear you cry. Glad you asked. The week is being sponsored by the associations representing sociologists, criminologists, anthropologists and political scientists, plus the Academy of Social Sciences in Australia (whose members include demographers, geographers, accountants, economists, statisticians, historians, lawyers, philosophers, educationalists, psychologists and specialists in linguistics, management and marketing) and the Council for HASS – humanities, arts and social sciences.

In short, social scientists study human behaviour in all its dimensions. Nothing of much importance, then.

Not being ones to boast, the social scientists would like you to know their former students pretty much run the world. They’ve produced the majority of ASX-listed chief executives. Probably just as true of the public service and politicians.

Add the arts and humanities, and most of the tertiary-educated workers in Australia have HASS degrees. Almost three-quarters of university students are in HASS courses. Most of the overseas students paying full freight for their degrees – and now constituting one of our top export earners – do HASS courses, particularly business courses.

But though the social sciences and humanities dominate the work of universities, they don’t dominate their leadership. That honour more often goes to academics from a STEM – science, technology, engineering and maths – background.

And ratios of students to academic staff are much higher for HASS than for STEM courses. Truth is, law and more particularly, business, are the milch cows of universities, used to cross-subsidise subjects considered more worthy.

And you thought STEM was the neglected, put-upon Cinderella of academia? You’ve been spun. Just as every pollie wants you to believe they’re the underdog in the election, so the academics compete to be seen as hard done by. In that comp, STEM is winning. Its trouble is a shortage of customers to justify all the money it gets.

When it comes to research funding, there’s a hierarchy of perceived worthiness. The research aristocrats are the medicos. Since they devote their lives to saving ours (sometimes without thought of reward), we bow down before them.

They get their own special source of federal research funding – the National Health and Medical Research Council – plus money from bequests, philanthropists and patients with say, diabetes, being asked to kick the tin for diabetes research.

The rest of academia fights for a share of the funding distributed by the feds’ Australian Research Council. Here STEM is the upper class, the social sciences come a long way back as the middle class, leaving humanities as the poor relations.

A study from 2012 found that HASS produced 34 per cent of university research, and accounted for 44 per cent of the fields of research judged worthy of research funding, but got just 16 per cent of the lolly.

In this year’s hugely competitive funding round, 423 STEM projects got up, but only 113 social science projects did. This isn’t so surprising since none of the research priorities nominated by the council falls into the social sciences.

It makes no sense. As Senator Arthur Sinodinos said while minister for industry, innovation and science, “the advancement of the Australian economy relies on robust research from physical science and social science alike.

“The social sciences ... provide valuable insight into how to turn a scientific discovery into an informed policy for the nation, and how to implement that policy to ensure effectiveness.”

Just so. The Medicare funding system we value so highly was designed not by any medico, but by two professors of health economics. The huge expansion of university places we’ve seen was made affordable to taxpayers by an economics professor’s discovery of the income-contingent loan, known as HECS.

If applied to research grants, such loans would allow increased funding for social science research without cutting the funding to STEM. That’s what social science can tell you that STEM can’t.

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