We need better teaching at every level

It's taken an eternity, but the econocrats have finally twigged that the big problem with the nation's education and training system isn't its high-cost to budgets, but its failure to provide enough of our youth with the skills they need to get and keep a decent job.

When the Productivity Commission set out to find a "new policy model" that could "shift the dial" on productivity improvement, the penny dropped. It decided that "if we had to pick just one thing to improve ... it must be skills formation".

That's because the adoption, use and spread of new technology – the long-run drivers of productivity – require people with the right skills.

As befits its obsession with productivity, the commission doesn't bother to acknowledge that knowledge is valuable for its own sake. Humans value knowing things about their world.

But the more prosaic role of education and training is to equip people with the skills that help them earn a living.

As economists go, however, the commission's more broad-minded than most: "There is additional value in improving skills formation – from foundational to advanced – because it gives people better job security, income and job satisfaction.

"These effects are not well measured in the official statistics, but have major implications for prosperity and quality of life more broadly."

Trouble is, the commission finds our present education and training performance – from schools to vocational education and training, to universities – is falling well short of what it should be.

"A good school system ensures that people have the key foundational skills – numeracy, literacy, analytical skills – and the capacity to learn so that they can easily acquire knowledge throughout their lives," the commission says.

What shocks me most about our schools' performance is their high failure rate. Evidence the commission doesn't quote is the Mitchell Institute's estimate that 26 per cent of students fail to finish school or a vocational equivalent.

It seems so many kids have been getting behind and dropping out for so long that schools and their teachers have come to accept this as part of the natural order, not as a sign something's going badly wrong with teaching.

The commission notes that, while the regular testing under the Organisation for Economic Co-operation and Development's PISA program shows Australian school students' academic achievement is still above the OECD average, our average scientific, reading and mathematical ability is falling in absolute terms.

We've gone for decades underpaying teachers relative to other graduates, so we shouldn't be surprised our brightest people don't go into teaching.

We have a growing proportion of lower performers and a falling share of high performers. Other evidence shows our rates of participation in year 12 physics and advanced maths fell by about a third between 1992 and 2012.

One of the worst inhibitors to  gains in learning is "learner [dis]engagement" – being inattentive, noisy or anti-social. About 40 per cent of our students are involved in such unproductive behaviour.

The commission fears our youth may now be less capable than earlier cohorts. For example, an Australian 15-year-old in 2015 had a mathematical aptitude equivalent to a 14-year-old in 2000.

"Australia's growing group of low performing students will be increasingly exposed to unemployment or low participation in the future world of work," the commission says.

Its review of the evidence on school performance concludes we need to focus on improving the quality of the teaching workforce and on methods of teaching that have been proved to be more effective.

We've gone for decades underpaying teachers relative to other graduates, so we shouldn't be surprised our brightest people don't go into teaching.

Many teachers are teaching "out of field" – subjects for which they have no qualifications.

We've done too little testing of the effectiveness of different ways of teaching, and too little dissemination of the results of what testing we've done. It's obvious our classroom teaching isn't as effective as it needs to be, but we've done little about it.

The commission has less to say about the failings of VET – vocational education and training – except that it's a "mess" and still recovering from a "disastrous intervention".

This was the utterly misguided attempt to drag TAFE into the 21st century, not by doing the hard yards with the teachers union, but by applying the magic answer of "contestability" – allowing private businesses to sell taxpayer-subsidised training for profit. Many rorted the system and cheated students until the government belatedly woke up.

Turning to universities, their performance is also falling short. In 2014, more than 26 per cent of students had not completed their degree within nine years of starting – a significant loss of time, effort and money for the students, as well as taxpayers.

And this is before we see any effect from the leap in uni admissions following Julia Gillard's (misguided) decision to provide government funding for any students the unis choose to enroll.

The proportion of recent graduates finding full-time employment is falling, with the under-employment rate among recent graduates rising from 9 per cent in 2008 to more than 20 per cent.

But the fact that graduate full-time starting salaries have fallen from 90 per cent of average weekly earnings in 1989 to about 75 per cent in 2015 suggests this has more to do with the weak state of the labour market than with a decline in the quality of degrees.

Which ain't to say quality hasn't fallen. More than a quarter of recent graduates in full-time jobs believe their roles are unrelated to their studies, with their degree adding nothing to their employability.

Australian unis continue to perform poorly on student satisfaction measures relative to unis in Britain and America.

There's a lot more to the commission's critique of the unis' performance, but I'll leave that for another day.

Sufficient to say the commission has convincingly demonstrated the case for putting the quality of the nation's teaching at the top of our list of things needing urgent improvement.

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Sorry, but Medicare needs to change

The apparent success of Labor's scare campaign on the Coalition's alleged plans to "privatise Medicare" at last year's election tells us many things – how much we care about the good performance of our healthcare system, how much we like the way healthcare is paid for under Medicare, and how suspicious we are of politicians' plans to change things.

But Medicare is showing its age. It was designed by health economists in the 1960s, implemented by Gough Whitlam in the 1970s, dismantled by Malcolm Fraser, then reinstalled by Hawke and Keating in the 1980s.

Our health has changed a lot since then. Whereas the system is designed to cope with acute illnesses – you catch a bug or have an accident, so you go to your GP, who fixes the problem or refers you to a specialist or, in the extreme, rushes you to hospital – these days we're more likely to suffer from chronic conditions, such as diabetes, mental illness, lung cancer or cardiovascular disease.

That's because higher living standards, improvements in public health and advances in medical technology have reduced the incidence of accidents and infectious diseases, leaving us living lives that are longer, but more anxious and overweight, while suffering from conditions that will stay with us until we drop off.

If you don't have a chronic illness yet, you probably will.

Trouble is, the ageing Medicare system isn't well-suited to this change. GPs are paid according to the number of patients they see for a few minutes – "fee for service".

They're not rewarded for helping patients change their behaviour in ways that prevent the onset of chronic diseases, nor for helping patients manage their conditions in ways that stop them getting worse over time, or needing to go to hospital.

As healthcare has become more expensive, it's clearer that visits to GPs and other frontline health professionals are relatively cheap, whereas visits to specialists are much dearer. Operations and stays in hospital are hugely expensive.

Get it? We could improve people's health and happiness and reduce expense if we made sure the "primary care" provided by GPs and others was as effective as possible in preventing and managing chronic conditions, reducing the need to call on specialists and hospitals.

All this is the thinking behind the Productivity Commission's advocacy of a "new policy model" that shifts tax changes, deregulation and privatisation onto the backburner, and shifts healthcare (and education and cities) to the forefront of economic reform.

The health system suffers from its division of responsibility between federal and state governments, with the states responsible for public hospitals and the feds for most of the rest.

Lack of co-ordination between the parts of the system generates much wasted time and money, not to mention inconvenience and frustration for patients.

So the commission wants a renewed effort to achieve an integrated system.

"The international and Australian experiences with integrated care indicate that, if properly implemented, it leads to gains in health outcomes for patients, improvements in the patient experience of care, reductions in costs, and improved job satisfaction for clinicians," the commission says.

The place for this integration to occur is at the local, regional level. There are about 30 regions in Australia. The commission wants regional health authorities to have freedom to modify national arrangements to suit local conditions.

Public hospitals have already been organised into "local hospital networks" but, after protracted disagreement between Labor and the Coalition, the feds are only now setting up private "primary health networks" contracted to co-ordinate patient care in their locality, including by working collaboratively with the local hospital network.

It's almost inevitable that big outfits like hospitals – but even doctors' surgeries – tend to be run for the convenience of the outfit, rather than the patient.

But the commission wants changes that encourage the system to focus on patients rather than suppliers.

"Patient-centred care gives prominence to the preferences, needs and values of consumers. In a better system, patients' time would be recognised. Patients would be given the information and power to be co-contributors to treatments and disease management," the commission says.

"Medical records would be owned by patients and they would be able to add comments. The commission sees such rights to data as a broad requirement across many public and private services. Where choice was feasible, it would be facilitated."

The digital age has largely eliminated the excuse for different parts of the system – including different doctors – not keeping each other fully informed, and doing so via the patient's own, digitised and portable medical record.

This idea isn't new, but doctors have been dragging their feet and governments need to renew their determination to make it happen.

Using fee-for-service as the main way of paying doctors encourages activity (more visits) whereas it would be better to reward outcomes – successful efforts at preventing chronic conditions or stopping people from needing to go to hospital.

Fee-for-service would continue under a regionally based integrated care model, but its role would diminish as primary health networks and local hospital networks found other ways to remunerate GPs for clinical outcomes.

Little of all this is new, and governments are unlikely to do it all next week. Rather, it's the commission setting priorities for economic reform in general, and healthcare in particular, and urging governments to get on with bringing it to pass.

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Economic rationalists regroup under populist attack

Reading the Productivity Commission's grand plan to "shift the dial" on micro-economic reform gives me a feeling of deja vu all over again.

When I started in this business in the mid-1970s, macro-economics had become a pitched battle between Keynesians and monetarists. It took years for a resolution of that conflict to emerge.

The monetarists didn't win the war, but they did win a lot of battles, and management of the macro economy was changed forever.

Today's great conflict in economics comes in the aftermath of the global financial crisis, as politicians in all the advanced economies abandon the "neoliberal consensus" under pressure from the populist revolt against privatisation, deregulation, austerity and all the rest.

You could say the global rethink of economics began immediately after the crisis, but it's just in the Productivity Commission's latest report proposing a "new policy model" for future change that we see our local "thought leaders" among economic rationalists shifting to an agenda that responds to the criticism of the old approach and proposes a new set of reforms aimed at improving productivity while giving voters far less cause to object.

Why so few commentators have perceived the significance of this "dial shift" is hard to fathom.

Read the report and it sticks out like organ stops. For some years since the crisis, the bosses of the International Monetary Fund, the Organisation for Economic Co-operation and Development, and even the Bank of England have said we need economic growth to be more "inclusive".

Now the Productivity Commission agrees and has reshaped its reform agenda accordingly.

The old agenda accepted the conventional wisdom that economic efficiency and equity (fairness) were in conflict. Since the crisis, however, economists at the fund and the OECD have been producing evidence that increasing inequality inhibits economic growth.

Now our commission agrees, arguing that its proposed shift in the reform dial will avoid "too great a dispersion in incomes, given evidence that this can, in its own right, adversely affect productivity growth".

In shifting reform priorities from changing tax incentives, moving the balance of wage-setting power in favour of employers, deregulating and privatising, to reforming healthcare, education and cities, the commission is attempting to humanise reform.

In setting its main priorities as improving the quality of services delivered to patients, students and commuters, the commission has made ordinary punters the main beneficiaries. What's that if it's not more "inclusive"?

Low and middle-income earners would be the chief winners because the better-off are better able to buy their way out of bad medical treatment, bad teaching and long commutes.

And get this: more efficient and effective healthcare, teaching and cities bring intrinsic benefits to the lives of ordinary people, whether or not they ever "shift the dial" of the measures of productivity that the commission takes so literally (which they quite possibly won't).

The commission's "new policy model" is far better fitted to an economy ever-more oriented to the services sector, and to an economy where the value of knowledge becomes more apparent as each year passes.

What seems to have bamboozled the commentators is the notion that nothing on the commission's new reform agenda is particularly new.

True, but silly. In economics, there's not much that's new under the sun. Sure economists have been rabbiting on for years about the need to reform healthcare and education and – much more recently – "urban economics".

What's new is not the topics but the priority and emphasis they've been given. What's new is sorting through a list of old potential reform topics to find those that tick the efficiency box and the fairness box.

Another uncomprehending reaction has been that many of the specific reforms the commission advocates – road-use charging, for instance – would be politically difficult, and most unlikely to be taken up by the Turnbull government.

True, but beside the point. What's significant is the radical change in thinking about the nature and direction of economic reform, not how long it will take for those reforms to be made.

I've been around long enough to see plenty of politically impossible reforms come to pass.

A more perceptive critique of the "new policy model" is that it takes us straight into territory where the states have as much say as the feds, if not more. No easy country.

And while it's true ordinary voters have much to gain from the new agenda, it's equally true that vested interests in the health, education and city industries have much to lose.

One further lesson from economic rationalism's poor record in recent times is that if you're not game to take on powerful rent-seekers, you won't get far.

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We're Closing the Gap, but far too slowly

The latest report on government spending on Indigenous people makes shocking reading. So let me explain it to you before some One Nation-type gives you her version.

The report estimates that federal and state spending on Aboriginal and Torres Strait Island Australians was more than $33 billion in 2015-16, a real increase of almost 24 per cent since 2008-09.

That amounts to spending $44,900 a year per Indigenous Australian, twice the equivalent spending per person on the rest of the Aussie population.

See? Proof positive of what many radio shock jocks and One Nation supporters have always said: Aborigines get a host of government benefits the rest of us aren't entitled too.

After the nation's vow to Close the Gap between Indigenous and non-Indigenous Australians on health, education and employment, it's hardly surprising Indigenous spending has grown.

Trouble is, there's little likelihood this apparently massive spending will see the Closing the Gap targets reached.

Bad, eh? Waste on a grand scale.

Fortunately, however, all is not as it seems. As associate professor Nicholas Biddle, a fellow of the Centre for Aboriginal Economic Policy Research, at the Australian National University, has explained in an article on my second-favourite website, The Conversation, a closer look at the figures shows there's no reason to swallow the rubbish peddled by the downward-envy brigade. ("Oh, Aborigines get it so much easier than we do.")

First point is that the $44,900 in annual spending per Indigenous person covers more than 150 spending categories, including social security payments, but also government spending on health, all levels of education, law and order, housing, community welfare, transport and even a share of the cost of the public service and defence.

So most comes in the form of services provided, rather than cash in hand. A bit over half of the spending comes from state and territory governments, leaving a bit less than half from the feds.

The report divides the $44,900 into "mainstream services" – services available to all Australians regardless of ethnic origin – and "Indigenous-specific services".

The latter account for just 18 per cent of the total – about $8000 a year per person. This proportion is down on earlier years.

But this still leaves the annual cost per person of mainstream services for Indigenous Australians exceeding the equivalent cost for other Australians by about $14,500. How's this explained?

Mainly by the greater intensity of Indigenous people's use of mainstream services. For instance, their rate of unemployment is higher. And, rightly or wrongly, a disproportionate share of law and order spending is devoted to Indigenous people.

As well, the Indigenous population is, on average, younger – meaning disproportionate spending on education.

The rest of the difference between the levels of spending on mainstream services is explained by the higher cost of providing those services in remote locations. Biddle says that 22 per cent of Indigenous Australians live in remote and very remote areas.

And remember this. While real spending on Indigenous Australians seems to be rising rapidly in absolute terms, so too is the Indigenous population. It's up by almost 16 per cent over the seven years to June 2016, compared with a little more than 11 per cent for the non-Indigenous population.

Biddle calculates that while real Indigenous spending per person has risen by 6.9 per cent over the seven years, real gross domestic product per person has risen by 7.5 per cent.

Sadly, it's true that the Closing the Gap targets set by the Council of Australian Governments in 2009 look unlikely to be achieved.

That's because progress to date has been so modest. The targets were worthy, but unrealistic. At this stage it's probable that setting revised, more achievable targets would do more to motivate governments to keep trying.

But this isn't to say we're making no progress. Biddle and a colleague at the Centre for Aboriginal Economic Policy Research, Francis Markham, have been examining last year's census for evidence on how we're going with the gap.

On employment they find no noticeable improvement since the previous census in 2011. On education, however, the news is more encouraging.

"Indigenous people are getting into the education system earlier and staying for longer," they say. "This is likely to lead to improved socio-economic outcomes in future."

The proportion of three to five-year-olds attending preschool is up from 43.5 per cent to 48.5 per cent. The proportion of 15 to 18-year-olds at high school is up substantially from 51.2 per cent to 59.7 per cent.

The proportion of Indigenous people who've completed year 12 has risen from 28 per cent to 34.6 per cent. And the proportion of 15 to 24-year-olds in tertiary education is up from 14.1 per cent to 16.2 per cent.

But let's get real in another sense. Checking the figures to see what's been happening to government spending on Indigenous people is fine, but it tells us nothing about whether that spending is efficient, effective or even adequate.

What's more, looking at how we've been going on the various indicators of progress during the same period tells us little about whether that money is being spent well or badly.

Why? Many reasons. Because spending in one year may take many years to have an effect. Because spending in one area can affect multiple outcomes. Because outcomes in one area can be influenced by spending in many areas.

We know we're spending more but not achieving the improvement we'd hoped for. What we don't know is whether we're wasting our money or need to be spending a lot more.

Why not? Because we know too little about the effectiveness of particular spending programs. We haven't done nearly enough research to see what works and what doesn't.

We won't get as far as we should in Closing the Gap until we do our homework. That includes making more data held by government departments available to researchers.

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Report heralds big change in economic reform priorities

Government reports come and go with great rapidity. Some are acted on, most are quickly pigeonholed. Last week Scott Morrison tabled a report from the Productivity Commission called Shifting the Dial, but it was soon lost amid all the excitement about raids on a union and politicians being thrown out of their jobs.

Despite this inauspicious beginning, let me make a fearless prediction: when the history of the economy in the early decades of the 21st century is written, this report will get prominence.

Why? Not because this government or the next will rush out to implement its recommendations, but because it will be seen as a turning point in the thinking of the nation's economic advisers.

The populist revolt against the doctrines of "neoliberalism" – or economic rationalism, as we've called it in Australia – has been apparent for most of this year. It's been apparent since the middle of the year that the long-running bipartisan consensus in support of neoliberalism in the advanced economies has collapsed.

But where to now? The economy and its apparatus are far from perfect and there's always something that needs working on. The econocrats need something to be working on to justify their existence, so what are they to do now that so many citizens are jack of deregulation and privatisation?

Well, now we know. Ostensibly, the commission's report is just the first of many five-yearly reports on ways to improve the economy's "productivity" – its ability to increase its outputs of goods and services faster than the increase in its inputs of land, labour and capital – the magic that's made us so much richer than our great-grandparents.

The Productivity Commission, would you believe, is preoccupied with productivity. Same old, same old.

Don't be deceived. The commission – formerly a leader of the economic rationalist charge – has taken the initiative in proposing an agenda for economic improvement that's quite different to what we've had so far.

Its new agenda attempts to restore public support for economic "reform" (a word it tries to avoid) by responding to popular criticism of the push that, while well-intentioned and necessary when it originated in the Hawke-Keating years, has since seemed to degenerate into "bizonomics" – what's good for big business is good for the rest of us.

Gone is the unending obsession with tax reform (cutting the rates of tax on companies and high-earning individuals) and industrial relations (cutting penalty rates and shifting bargaining power in favour of employers).

In their place, the commission focuses on three big issues: healthcare, education and cities.

On health, it argues there needs to be more emphasis on preventing and managing the growing incidence of chronic illnesses, such as diabetes. This may involve less reliance on paying doctors according to fee-for-service.

The health system – state-run public hospitals in one box, most doctors in another and pharmaceuticals in a third – needs to be better integrated so as to make it more centred on the needs of patients rather than the suppliers of health care.

This greater co-ordination should happen at the local level.

On education, too many students are being let down at every level.

The commission finds that school results are deteriorating, vocational education and training is "a mess" and universities are more concerned with publishing research papers than improving teaching standards.

As for cities, they produce a growing portion of our gross domestic product – about 80 per cent, with Sydney and Melbourne accounting for half of that.

By the time we reach 2050, almost 11 million extra people will be squeezed into our capital cities, according to Morrison.

The social costs of congestion in our capital cities will grow from almost $19 billion a year in 2015 to more than $31 billion a year by 2030, we're told.

See how different all this is to the economic reform talk we're used to?

It's shifted the focus from business to the "non-market economy" run mainly by government bodies. It's less concerned with mining, farming and manufacturing, and more with the services sector.

Its approach to reform is bottom-up – concentrate on the needs of patients and students, on getting to work – not trickle down.

Putting it another way, it's people-friendly, not business-friendly.

The three issues are two-sided: they directly affect the wellbeing of individuals, but also the nation's productivity, as a healthier, better-skilled workforce gets to work more easily.

This means the "reform agenda" ought to be a lot more relevant and appealing to ordinary voters. It also means it can be pursued by either side of politics.

One of the great objections to the old agenda was fear that it benefited the better-off at the expense of the rest of us.

Rest easy – the commission has got the message.

"A key issue will be to ensure that future economic, social and environmental policies sustain inclusive [note that word]growth – by no means guaranteed given current policy settings, and prospective technological and labour market pressures ...

"One of the advantages of better healthcare, education systems and cities is that they provide strong prospects for improving lifetime outcomes for people from all backgrounds.

"Indeed, improvements in these areas have the potential to decrease health inequalities, and reduce job insecurity and wage risks for those whose skills are at most risk from technological change," the commission concludes.

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Lure of globalisation battles our instinctive tribalism

What has caused the rise in populism that's threatening the mainstream political parties around the developed world, including here?

Economists tend to explain it essentially in economic terms – the bottom has been given a rough deal for years, and finally is rising up – but other scholars see it much more in social and cultural terms: people objecting to being overrun by incomers. Immigrants, asylum seekers, Mexicans, Muslims, Asians.

In his new book for the Lowy Institute, Choosing Openness, Parliament's most accomplished economist, Dr Andrew Leigh, also Labor's shadow assistant treasurer, readily acknowledges the role of xenophobia in explaining why "openness makes us uncomfortable".

He sees our fear of foreigners as part of our evolutionary make-up, and I don't doubt he's right.

Drawing on the work of British anthropologist Robin Dunbar, he argues that "for most of history, humans lived in groups of about 150 people" – a figure known as "Dunbar's number".

Such groups were big enough for some specialisation, but small enough for everyone to know and trust everyone else. People were born, mated, hunted and died within their small community.

"In this environment, there were two kinds of people: those in your tribe and those not in your tribe," Leigh says.

"It made sense to take care of your tribal members. You shared a lifelong relationship with them. Thanks to inbreeding, the rest of the tribe probably looked a lot like you and you certainly all dressed alike.

"Conversely, outsiders were likely to look a bit different and were probably dangerous. While some groups traded, killing was extremely common."

One in seven people in these kinds of societies met their end as a result of violence by another person, he says.

For about 99 per cent of the time that homo sapiens have been on the planet, most of us have lived in small groups. As a species, that is what we evolved to do.

"Each of us is here today because our primitive ancestors were skilled at either fighting outsiders or avoiding conflict. The rule that 'different equals dangerous' kept our forebears alive."

But while hunkering down in the face of difference might have been a useful evolutionary strategy in the past, the growth of cities changed the equation, Leigh argues.

Cities are bound together by not by familial relationships, but by rules and norms of acceptable behaviour.

For hundreds of years, the most productive cities have been those that welcome visitors. In a primitive tribe, a dislike of difference can keep you alive. In a city, it's likely to just make you poorer.

"In this sense, a distrust of diversity is a bit like wisdom teeth – an evolutionary vestige that once helped us grind up plants, but now are more likely to take us on a trip to the dentist's chair."

Today's backlash against openness, Leigh argues, shows how humans' natural discomfort with difference can be exploited for political gain.

In a seminal study of the politics of hatred, the Harvard authority on urban economics Edward Glaeser noted that the key to building a powerful coalition around hate is to focus voters' anger on an "out group" that is sufficiently large to be taken seriously as a threat, but too small to be electorally decisive.

Remind you of any redheads you know?

So Leigh says that populism – the idea that politics is a conflict between the pure mass of people and a small vile elite – is the product of four main forces.

First, slow growth in living standards when the proceeds of economic growth haven't been shared.

"In societies where prosperity is broadly shared, a cosmopolitan outlook steadily replaces traditional values of religion, deference to authority, and an exclusive focus on the security of our family and tribe," he says.

Second, populism is fostered by the pace at which society and technology are changing. Voters may turn to extreme politics as a way of saying "Stop the world – I want to get off."

Third, populism has benefited from canny political entrepreneurs – Duterte, Erdogan, Trump – able to generate massive free media coverage by attacking rivals and breaking taboos.

Fourth, populism has grown because of a loss of faith in mainstream centrist parties. (Their ever-declining standards of behaviour would have nothing to do with this, of course.)

In the late 1960s, seven out of 10 Australians said they always voted for the same party. Today, the share of party loyalists is down to four in 10.

Seems to me that, though much of the problem is manifest in fear of foreigners, the best way to strengthen cosmopolitan values is to ensure the benefits of globalisation and technological change are shared more fairly.

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