Saturday, August 8, 2009

GIVE MY REGRETS TO WARATAH HIGH

Newcastle Boys’ High School Old Boys’ Association annual dinner
August 8, 2009


I’m honoured to be invited back to my home town to speak to the Old Boys of my old school. I’ve lived in Sydney for 40 years this year, but I’m always proud to say I’m a Novocastrian and particularly proud to say I went to Boys’ High. However, I’m not sure how well qualified I am to talk to you. Of course, in a sense no one’s qualified to talk. We’re here to do a little reminiscing about our school days, but Boys’ High existed for many years, and I’m conscious that some of you would have left the school long before I arrived and many of you would have arrived long after I left. So the scope for talking about people and events that don’t ring any bells for you is great.

I guess I should start by putting myself in the context of the school’s existence. The first high school I went to was Fort Street Boys’, then my parents - who were Salvation Army officers - were moved to Bathurst for a year before being moved back to the suburb in which I’d been born, New Lambton. That means I was at Boys’ High only for my last three years of high school, 1962, 63 and 64 - which was the second last year of the five-year leaving certificate before the introduction of the six-year HSC. The fact that two years after I left school no one left school in NSW proved particularly fortunate for me because, by then I’d finished my second part-time year of a commerce degree at Newcastle Uni. I wanted to switch to full-time, so I applied for a Commonwealth scholarship and, despite a checkered academic record, I got one - purely because they were going begging that year.

One respect in which I’m not well qualified to talk to you is that, although I was obviously smart enough to make it to a selective school, I wasn’t diligent enough to get anywhere once I’d arrived. I was always well down in the year and usually in the E class - in the days when all classes were ‘streamed’ (graded) and teachers made no effort to protect your fragile ‘self-esteem’ by disguising how poorly you were doing in the competition. At the Intermediate I just scraped through maths and failed English. I can’t remember doing much study for the Leaving, and the results I got were pretty undistinguished - two As and four Bs - but in those days that was enough to get you into uni. I can remember being quite over-awed as I walked around the old campus at Tighes Hill - I thought I was surrounded by people who were much brighter than I was - so I resolved to work a lot harder. It worked for the first year, but then I eased off. I actually failed macroeconomics at my first attempt (and failed commerce stats twice) but in those easy days failing a few subjects earned you only the minor inconvenience of having to ‘show cause’.

So I’m hardly the finest example of Boys’ High’s academic excellence. I guess I’m proof that there’s life after an undistinguished academic career. But another respect in which I’m not well qualified for this talk is that there’s a lot about my school days I can’t remember. For instance, I can’t remember ever playing any sport at Boys’ High. I guess I must have, but it’s just a blank in my mind. All I can remember was being keen to be a Library Boy because they were allowed to skulk in the Library on Wednesday afternoons. And I would much rather have been covering library books than playing sport. The only school prize I ever got was for being a Library Boy.

But it’s not just that I’ve forgotten so much, it’s also that my memories aren’t always accurate. When I attended our year’s 20-year reunion at the Rugby Club in 1984, I was looking forward to meeting our old headmaster, Harold Beard, and was completely nonplussed when the principal in our final year was introduced as Mr Richardson. Who was he? Where had he sprung from? It took me a long time to remember that Mr Beard had retired in our second last year and been replaced in our final year by the much less memorable Mr Richardson. But that’s not all. One thing I had intended to say tonight was my clear, indelibly imprinted memory of where I was when I heard the news of President Kennedy’s assassination: in the playground at Boys’ High. But when I mentioned this to a friend he said I’d better check it because his clear memory was that JFK died on a Saturday. I checked, and he was right. So all I can do is borrow from Clive James and say that what follows is my Unreliable Memoirs.

Rather than talk about the other boys in my year I thought it might touch more chords if I mentioned the teachers I remember, most of whom were there for many years. This should be the point where I wheel out my personal fund of stories about Charlie Goffet - who was there when my brother went to Boys’ High in 1947 and still there when most of you went through. Unfortunately, however, I never had Charlie - my last year of French was with the mild-mannered Mr Jackson. My first maths teacher was Jacky Shield - a nice guy but not a great maths communicator, who later turned up in Sydney as an organiser for the Teachers Federation. But the maths teacher I remember most was young Tony Abraham, who had a Triumph sports car he was very proud of and spoke with a strange British accent I later realised was Welsh. If he wanted you he’d say, Come Cheer!

I remember the head of the English department, Mr Judd (Pinhead), Mr Blunden (Chrome Dome), who was a leading light in the Youth Hostels Association, the librarian, Mr Rigby, and, of course, the man who rose to fame in various Channel 10 soap operas, Vic Rooney. I remember our history teacher, Mr Carter (Orsen Carter) who said something one day I never forgot: that for an exemplary example of written English we should follow his example and read the editorials in the Newcastle Morning Herald. I thought of that many years later when I was writing editorials (or ‘leaders’) in the Sydney Morning Herald. I guess my prose wouldn’t have been up to Mr Carter’s standards, but I hope I knew a bit more about the subject matter than most editorial writers did. Seeing the leader-writing process from the inside is like watching sausages being made - it’s better not to know what goes into them.

My last English teacher was Mr Kerr (Cat’s Eyes). I was in the E class, but one day I put up my hand and asked him if he thought it was worth me trying to get an A in English. He unhesitatingly told me not to bother - but as it turned out, I got one. Some tiny inkling of my future career was starting to peep through. Mr Kerr was also the careers adviser, but I don’t blame him for the careers advice I got which typically in those days was uninspired and uninspiring. I probably told them I wanted to be an accountant (which was true), they looked at my academic performance, saw I was quite good at a subject called accountancy but not much else, and grudging suggested that, if I tried really hard, I could probably manage a part-time tech course in accounting. Perhaps all the tough love we got from teachers in those days - all the negative comments on report cards - had a useful effect in making us determined to show we were better than our teachers assumed. I enrolled in accounting at uni rather than tech, and had no trouble doing well in it. It was only the economics that gave me trouble.

But Mr Kerr ended up doing me a favour. A local chartered accountant, Ray Patrick, came to the school saying he needed to employ a junior audit clerk. Mr Kerr recommended me, I took the job with alacrity and worked for Ray Patrick for two years before going to uni full-time and then moving to Sydney to work for one of the big chartered accounting firms.

That brings me to Lyle Abell, who taught me both accountancy (in which I got my other A) and economics (only managed a B). Took me a long time to see the point of economics, as you can tell. Many years later, after I was economics editor of the Herald, I was invited to come back to Newcastle to talk to a lecture day for HSC economics students from various schools held in the main lecture theatre at Newcastle Uni, one I had sat in many times as a uni student, the fragrantly named BO1. As I held forth to the school kids it suddenly struck me that, when I was studying economics at school, I wouldn’t have understood a word of what I was saying to those students. The modern HSC is a lot more intellectually demanding than the Leaving was in my day.

Then there was Harold Beard’s deputy, Tom O’Connor, known by his initials as TOC. He was the complete antithesis of the mild, intellectual Mr Beard. TOC was perpetually red-faced and shouting, a stern disciplinarian and wielder of the cane. Mr Beard was the good cop; TOC was the bad cop. Years later in discussions with teachers I discovered this was pretty much the standard formula for high schools: a principal who acts as the intellectual leader with a soul above the mundane, and a down-and-dirty deputy who does the enforcing.

But that didn’t stop us fifth-years having a little fun at TOC’s expense. I guess it wasn’t an original wheeze, but someone got the idea of taking an item of school clothing, marking on it the owner’s name, Mike Hunt, and handing it in as lost property. TOC would stand in front of the school assembly with the offending item of property and bellow at the top of his lungs, Where’s Mike Hunt!? while the fifth-years sniggered and the rest of the school looked puzzled. Then we played a more subtle game, inventing someone called Duncan Abercrombie - I guess we just liked the name - who, too, was always losing his uniform and having to be searched for. It took the authorities quite a while before they realised there was no such boy.

Everyone is supposed to have a memorable teacher who inspired them with ambition or a love of learning. All told I attended five primary schools and three high schools, but only one heroic, outstanding teacher sticks in my mind: Harold Beard. If you didn’t experience Mr Beard in the flesh during his 16 years as Headmaster then I’m sure you must remember his name from the F.H. Beard library.

He was probably the most eccentric man I’ve ever observed - not in his dress or demeanour, but in his beliefs and practices as a teacher. He had his own ideas - his own educational priorities - he was in charge of exactly the right school to implement those ideas, and so he did, not caring for a moment that others may have considered him odd (as I’m sure many did). In this he set a great example to us boys. He was a pioneer in the field of sex education, with his endlessly repeated showings of the battered and scratchy film, Human Reproduction, from which kids, by the time they were in fifth year, could recite long passages by heart.

He was a great believer in current affairs and public speaking. Two days a week would be divided into nine periods rather than eight, and the last period of the day would be devoted to this purpose. The senior or junior half of the school would go to the assembly hall to listen to a guest speaker, while the other half would go to their roll teacher who would take them in ‘speech training’. Sometimes we’d do debating, other times we’d each give two-minute speeches in front of our school mates on a topic we’d been given only a few minutes to think about. I think that was excellent training for boys likely to end up in positions of leadership. Nothing could be better calculated to help people overcome their fear of public speaking.

Mr Beard did all he could to encourage our interest in current affairs. We would memorise the names of Asian political leaders for his regular current affairs tests - Lee Kuan Yew, Tunku Abdul Rahman, Sukarno, U Thant and many more. He conned many of us into subscribing to Sydney University’s Current Affairs Bulletin, and every month or so the school corridors would be awash with bulk copies of the latest CAB, that none of us were keen to read. Then there was his enormous faith in the ability of the United Nations to deliver world peace. We had a loud-speaker system in every classroom and, at times of international tension, Mr Beard would listen to the radio and then excitedly break into our lessons to bring us the latest uplifting news from the world. It was only years later that I realised how few people shared Mr Beard’s faith that the UN would solve all our problems.

My favourite guest speaker at the assemblies was Professor Brinley Newton-John, the vice principal of Newcastle University, who’d been in the British secret service during the war. He used to tell us he was sworn to secrecy about his wartime exploits, but still managed to tell us enough to keep us interested. Only later did I realise we should have been more interested in seeing and hearing his daughter Olivia.

As a boy I thought the Second World War had happened in the olden days. Only much later did I realise how recent the war was when we were growing up in the 50s and early 60s. Most of our teachers were ‘returned men’ - and by today’s standards it’s remarkable to think how many of them were men. In my first two years at Boys’ High there was only one woman on the staff, the music teacher Mrs Hindmarsh. But by 1964 she’d been joined by three other women. Perhaps that was Mr Richardson’s doing. I note that whereas Mr Beard was always referred to as the Headmaster, Mr Richardson was the Principal. When you remember how comparatively rare university degrees were in those days - a lot of returned men had the qualification ASTC (associate of Sydney Technical College) - it’s surprising that almost all our teachers had BAs. Perhaps that was Mr Beard’s doing - or perhaps in those days, unlike today, the Education Department accepted that a selective school needed highly qualified teachers.

When the guest speaker didn’t turn up to school assemblies, Mr Beard, who was a pianist, would lead us in community singing from a special school songbook he’d had printed. These were riotous fun. Mr Beard’s problem was that, from the piano on the stage, he needed one set of glasses to see the music and another set to see us. So while he was frantically juggling his owlish glasses, the fifth years would be up the back demanding to sing our favourite, the Drinking Song from the Student Prince - Drink, drink, drink! Let every true lover salute his sweetheart - let’s drink!

Perhaps because of his great interest in human reproduction, Mr Beard still had a young family to support after he retired, so he became a representative of World Book Encyclopaedia, and used his extensive contacts with other school principals to sell a copy of the encyclopaedia to most of the schools in Newcastle.

One event that sticks in my mind was when, in 1963, the Minister for Education, Mr Wetherell, came to open the new library. I’ve never seen a place so on edge; the staff were beside themselves. The school had been cleaned and polished from top to bottom and a collection potted of aspidistras had been acquired from somewhere and distributed strategically along the corridors. It was all so pristine that any boy who dared set foot in the school was roared at and we were kept out in the playground for the whole day until the Minister arrived. But then it rained during the opening ceremony and everyone had to rush inside. I often thought of that day 11 years later when I was a cadet reporter in the press gallery at Parliament House in Macquarie Street. The then minister for education could have been an old Labor lag, a drunk and a buffoon, a figure of derision around the House, but were he to visit a particular school, everyone from the principal down would quake in their boots.

I was very sorry not to be able to make it to my year’s 40-year reunion in 2004; I didn’t hear about it until after I was committed to flying out to Europe the next morning. But I did attend the 20-year reunion and found it quite memorable. I know that only those confident of their success are inclined to show up to reunions, but even so I was struck by how many people in my year seemed to have ended up as barristers and medical specialists. I suppose I shouldn’t have been surprised - when you take the brightest kids in a city as big as Newcastle it’s not surprising a lot become professionals - but I guess I hadn’t realised what a high-powered group we were. Our year and every year at Boys’ High.

But the thing I found really disconcerting about that night at the Rugby Club was the way the whole show was taken over and run by our prefects, with the school captain presiding, wearing his school blazer, lovingly preserved by his mother and which he could still fit into. What disconcerted me was that this arrangement instantly re-established the social hierarchy that had existed in my last year at Boys’ High: prefects on top, followed by the first XIII, then the first XI, and so on down to the misfits, Choir Boys and Library Boys. I’d spent the previous 20 years fighting to get myself a bit of social status and here I was cast right back to the bottom of the pecking order.

In the years since leaving Boys’ High I’ve often considered the rights and wrongs of selective schools. They’re hugely popular with parents these days - and no politician would dare do anything other than add to their number - but the Teachers Federation has long been implacably opposed to them and, as you well know, there was a time when that opposition was in the ascendancy and some selective schools were deselected, so to speak. I still remember the disappointment I felt when I learnt that Boys’ High was now nonexistent, with Waratah High taking its place. As I pondered this over the years I realised that most of the big-name Sydney selective schools had been left intact - Sydney Boys, Sydney Girls, North Sydney Boys, North Sydney Girls, although the two Fort Streets had been merged. Indeed, just about the only other selective school to bite the dust that I heard of was John Howard’s old school, Canterbury Boys. How come we got the chop when so many others survived? My own theory is that many of our most influential old boys rose in the ranks of BHP and so were all down in Melbourne and thus unavailable to do what I suspect the influential old boys of the surviving schools did - have a quiet word with the Premier: ‘of course, Premier, the new rules won’t be applying to my old school will they?’ ‘Oh no, Sir John, not to your old school.’

I once met a university education lecturer who was very much opposed to selective schools arguing, among other things, that they were bad for the confidence of the kids selected. These kids had come from being first or second in the class at their primary school, only to discover that at high school they were well down in the year, and this would lead them to doubt their abilities and stop trying so hard. I don’t think I accept that. I didn’t see much evidence of it at Fort Street or Boys’ High, and it ought to be counteracted by the fact that you’re thrown into a whole group that’s travelling much faster than the individual kid would be travelling back at the comprehensive high school, as well as having a lot more expected of them by their teachers at the selective school.

If anything, I think going to a selective school frees bright young kids from the peer-group pressure at comprehensive schools not to act brighter than the others and not to do nerdish things like bringing a violin to school.

I think kids in selective schools are more tolerant of individual differences - you can be a bit odd and no one thinks much of it. Certainly, that was my experience at Boys’ High. I realised this years later when I went to work for a big Chartered Accountant firm in Sydney, which was staffed by a lot of private school boys. They just couldn’t help themselves remarking continually on the respects in which I differed from all of them: my oddball religion and even what they regarded as my odd political opinions.

I think what we had at Boys’ High was a good mix of classes. There must have been plenty of middle-class boys who were the bright sons of bright fathers who were the town’s business and professional people, but there was also a high proportion of boys who were the bright sons of fathers who were just ordinary workers. We had a mixture of classes but we weren’t terribly conscious of it. People were different in some way, but what of it? The denizens of the NSW Right look on the Labor Party not as party trying to advance the interests of all the battlers and disadvantaged, but as a ladder the bright sons of workers can climb to achieve their overwhelming goal in life: escaping the working class. I think Boys’ High filled that ladder role for many of the boys who attended it - including me.

How well did the experience of starting your career through life at a school like Boys’ High equip you for the fight to get ahead in the world? Did going to Boys’ High heighten your ambition? Well, I suppose it must have provided a good base and made many of us more ambitious. Although we didn’t have famous old boys paraded before us as was the case with Fort Street, I think you can find running through the rhetoric of Mr Beard and Mr Richardson the expectation that we were bright, intellectually privileged boys who would go far and had an obligation to contribute to the advancement of our nation.

I think that growing up in the working-class town of Newcastle left many of us feeling like we were outsiders with something to prove; many of us with a burning desire to prove we could make a better fist of material advancement than our fathers had. That’s certainly the way I felt - it was a big part of my motivation - though a lot of that came from my family circumstances. We didn’t have the natural self-assurance, the born-to-rule mentality of the kids attending private schools, but we did have a belief that we lived in a meritocracy, where those who were bright enough and worked hard enough could get ahead. It was the very opposite of The Old School Tie. Perhaps it was that positivity that Boys’ High added to our attitudes as boys growing up in a working-class, anti-boss town like Newcastle.

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Monday, August 3, 2009

THE CONSCIENCE OF A PUBLIC SERVANT

Dinner speech to Department of Resources, Energy and Tourism Corporate Planning Day
August 3, 2009


I note I’ve been invited to be the dinner speaker rather than the after-dinner speaker, so I take that as a sign the desire is for me to say something thought provoking rather than just entertaining. I’d like to give you some of my thoughts on the role of government and the role of the public service.

When you look past simple party loyalties, there’s no greater divide in politics than the philosophical divide over the appropriate role for government. You can say the great divide is between individualism and communitarianism - but that ends up being an argument about the role of government. There’s a vocal school of thought that’s simply anti-government. The anti-government camp has two interrelated strands: the libertarian strand where governments are seen as limiting people’s freedom, both by passing laws that constrain their behaviour and by using taxation to require them to subsidise the provision of income and services to others. Then there’s the economic, neo-liberal strand that sees markets as the ideal - often idealised - way of allocating resources and government intervention as a highly unsatisfactory way to allocate resources. The two strands - political philosophy and neo-classical economic - fit together well, which is why economic rationalism has a much bigger right wing than left wing. These people see market failure as a minor problem, but government failure as a major problem. They’re not opposed to all government, of course. They do accept the need for law, order and defence - the need for the government to ‘hold the ring’ in which markets operate - and I guess most would accept the need for government to provide a minimal social safety net, but the more that can be left to the individual and to the market, the better it will be for society. From this we get a suspicion of government intervention - even in the form of assistance to industry - and a desire to keep government as small as possible. In practice, this is manifest in an insatiable desire for tax cuts, even in the absence of sufficient political will to cut government spending to fit - as we saw with the Bush administration, and the Reagan administration before it.

I have to tell you that I’m not a supporter of the anti-government position. I think government needs to be bigger rather than smaller, that taxes ought to be higher rather than lower, that we ought to do more to redistribute income from the top to the bottom and that there are cases where greater government restrictions would leave us better off. I reject the fundamental proposition that provides the rational for the philosophical and economic anti-government position: that there’s no way a government could know what’s in my best interests better than I do myself. I reject that proposition because I reject the key assumption on which it’s based: that humans are rational decision-makers rather than being highly emotional, instinctive social animals with a tendency to herd behaviour. Just about all of us have significant problems with self-control - making ourselves do the things we know we should do in our own longer-term best interests - and we often welcome the constraints governments impose on us that help us with our self-control problem. Road safety is just one example.

But I’m not here to expound on all that. I mention it only to demonstrate that I’m not anti-government and not a public-service basher. I think my original profession as a chartered accountant has left me with a lot of sympathy for Treasury - the people who often have to say no when everyone else wants to say yes - but my family background has left me in sympathy with the people accepting the ultimate responsibility for keeping the show on the road. The people who sweep up after the dance is over and everyone else has gone home. That used to be my family and I know how it feels. And years of hanging around with econocrats have left me with the opposite prejudice to most of the public: I think rent-seeking is rife and I’m suspicious of special pleaders and sympathetic to public servants trying to ensure the wider public interest prevails over sectional interests. So though I intend to say some things I hope you’ll find challenging, don’t think I’m unsympathetic.

Before I go on, let me add some qualifications. Although I have no in-principle objection to government intervention, I’ve been around too long to be na├»ve about the ease with which intervention can correct market failures. Intervention is a very tricky business, with enormous potential for creating perverse incentives and other unintended consequences. Economists delude themselves that they’re in the incentive business but, in fact, they often come unstuck because they’re conscious only of monetary incentives, whereas non-monetary incentives - motivations, would be a better word - are often pervasive. For instance, people can work hard because they’re ambitious for power and promotion independent of the extra salary, because they love what they’re doing, because of a work ethic or a sense of duty, because of the institution’s esprit de corps. Sometimes the creation of monetary incentives - paying people to do things - can be counterproductive if it crowds out pre-existing non-monetary motivations. SES performance bonuses may be a case in point. So, yes, intervening in ways that help rather than hinder isn’t easy.

The part of economics known as ‘public choice’ has influenced many in the anti-government camp to believe that, however well-intentioned government intervention may be at the outset, it’s virtually inevitable that the regulators end up being captured by the regulated - by the big firms in the industry, or by the industry association. The regulated have a huge incentive to get to the regulators so as to modify the regulation in ways the industry finds more congenial, or even to advantage the existing players against new entrants or rival industries. Now, if I fully believed that, I wouldn’t be a believer in intervention. But I do have to admit that there’s more than a grain of truth to the accusation: there is considerable scope for regulatory capture. And I’ve often suspected that the way most bureaucracies are organised - where the department of agriculture looks after the farmers, the industry department looks after the manufacturers, the environment department looks after the greenies, the resources and energy department looks after the miners and the tourism department looks after the tourist industry - could have been purpose-built for regulatory capture. In the various industries’ battle for their share of industry assistance, in the inter-departmental battle for influence and resources, each industry has its own special champion, the people whose true role is supposed to be to keep the industry acting within the bounds of the wider public interest. Is the bureaucracy divided up this way just to gain the benefits of specialisation, or is each department’s real role to keep their particular industry happy and not making trouble for the elected government?

Terry Moran gave a speech recently where he quoted Peter Shergold on the role of the public servant. The public service, he said, provides ministers . . . with frank, fearless and robust policy advice - and it does so in a confidential manner. The confidentiality of advice is critical to our ability to be professional. Ministers carry accountability for policy decisions. Our role is to assist them to make good decisions, not launch alternative policy proposals into the public domain. We do not therefore advise the Opposition, backbench members . . . or the media. The community perception, however, is that public servants have some duty to the public interest, something beyond, and greater than, the interests of the government of the day, and where the public interest and the government’s interests are perceived to conflict , public servants should speak out. This is a view encouraged by the media, which has a strong self-interest in public servants doing just that. Unquote.

The Crikey email newsletter conducted an interesting debate about all this, and I’d like to add some observations of my own. First, I do accept that, for policy advice to ministers to be frank, fearless and robust, it does need to remain confidential. However, it doesn’t automatically follow that because it’s confidential it will be frank and fearless. And, precisely because it is confidential, it could be weak, servile and overly accommodating of the government’s short-term political interests without anyone in the public ever knowing. A great set-up for public servants - a case of a ‘strong self-interest’ you might say - but a poor one for the public. In other words, the public just has to take it on trust that the advice we are paying you to give ministers is frank and fearless. There have been times in recent years when I’ve wondered how much of it was. And this puts a moral onus on public servants to ensure they deliver high quality, apolitical advice, even though no one will ever know whether they did. So it gets down to a moral, ethical duty - a matter between you and your conscience. You may be surprised to hear an economic journalist saying something so touchy-feely as that, but I mean it quite seriously. After all I’ve seen first about the failures of regulation and now the failures of deregulation, what’s left? For me it’s personal morality, professional ethics, a sense of duty. Consider this: given the problem - in the interests of ensuring frank advice we keep that advice confidential, so we can’t be sure it’s actually happening - what incentive would you suggest to encourage the continuing provision of frank advice: performance bonuses?

The thing that worries me most about Mr Moran’s remarks is the potential implication that public servants don’t have a duty to the public interest beyond and greater than the interests of the government of the day. Of course they have such a duty. And if the frank and fearless advice isn’t about putting before the minister the policy advice the public servant genuinely believes - rightly or wrongly - to be in the greatest long-term public interest, what else is there to be frank and fearless about? I solemnly warn you, minister, don’t pursue this policy because it would cost the government too many votes? Even though their advice remains confidential, public servants are servants of the public, not just of the government of the day. They do have a higher calling: to advance the public interest as best they discern it within all the constraints of our system of democracy. If most public servants didn’t agree with me - if they didn’t see a public service career involving the pursuit of a higher purpose than just salary and advancement - I think there’d be a lot fewer people living in Canberra. I think most senior people are attracted to the public service precisely because they believe they’re helping to make the world a better place. And my observation suggests that the happiest and most successful departments, those with esprit de corps, are those with a well defined sense of purpose, who see their role as about more than just helping the government get re-elected or keep on top of the 24-hour news cycle.

Mr Moran said the public service doesn’t advise the Opposition, backbenchers or the media. Perhaps not in the narrowest, most formal sense of ‘advice’. But public servants do provide (closely supervised) briefings to the Opposition in certain circumstances, and when you look at the farce the costing of election promises under the Charter of Budget Honesty has become, you quickly conclude that good government would be served if access to costing advice wasn’t so hugely unequal. As for advising the media, let me say that, because I promptly forgot most of the economics I learnt at university, most of what I know about economics was taught to me by infinitely patient econocrats. Why did so many of these now-senior people devote so much of their time to my edification? Because of a sense of public duty. Because they believed the public debate about policy needed to be well-informed. So if you think my work plays a generally positive role in the public policy debate, you can thank public servants.

The great temptation for public servants providing confidential advice to ministers is to cross the line between public policy and political tactics. Stick to policy; leave the politics to the politicians. Often, however, it’s not that simple. In this I think your choices are similar to mine as a commentator. I, too, give advice to governments - what’s more, mine costs the taxpayer nothing (ie it’s gratuitous). Do you give advice so pure that it’s dismissed as utterly unrealistic, or do you make it ultra-realistic because you know this mob is neither high-minded nor very brave? I think you’ve got to give advice you can be proud of, advice that discharges your daily obligation to help make the world a better place. You have to be in the ballpark of realism, but you can’t tacitly condone short-sighted political self-interest. You have to always err on the side of encouraging politicians to be just a little more far-sighted and a just little braver. As a columnist, I don’t want to waste my life writing columns that say no more than: what would you expect? Boys will be boys. To the tiny extent that anything I write has any effect on what politicians do, my goal is to encourage them to jump just a little higher in the direction of the public interest.

Before we finish with Mr Moran I want to make one further point: confidentially of ministerial advice is fine, but it has to be matched by accountability, and accountability is crippled without sufficient disclosure. If the public is inadequately informed about government actions then the electoral process can become just a caricature of the democratic ideal. The plain truth is that most ministers would prefer to keep most information about their department’s activities completely out of the public eye. It’s not hard to see why; it makes life so much simpler. It must be terribly tempting for senior public servants to see it just the same way. This becomes an issue when the department, not the minister, makes decisions about FOI requests. My point is: make sure you’re acting in the public interest, not just the short-term interests of the government of the day, nor yet the department’s own convenience.

When you hear the silly things oppositions say - all oppositions - it’s tempting to think them a waste of space. But consider how our system of government would perform without oppositions to keep on the government’s hammer. How much worse our governance would be without opponents making eight unjustified criticisms out of 10. It would be appalling. So this is something to remember when making speeches about how public servants don’t advise the opposition. Whatever their failings, they have an indispensible role to play in ensuring good government and public servants should avoid sharing the same distain for the opposition’s role as their current masters do.

Similarly, despite the many crimes committed by the media, consider how our system of government would perform without the media pursuing its ‘strong self-interest’ in digging up stories that will embarrass the government of the day. Do you really believe the public interest would be served by a much higher proportion of the government’s dubious decisions going unnoticed by the electorate? If you do, you’re too close to your political masters.

No matter how debased the process becomes on occasion, good governance requires that oppositions and the media play their part in keeping governments on their toes. Governments - and their public service agents - have some of the characteristics of a monopoly. Monopolies are almost always bad, becoming lazy, unresponsive, self-serving and high-handed in their treatment of the individual members of the public they are supposed to serve, who can be seen as ignorant inconveniences. Good public servants resist the temptation to exploit their monopoly position.

Mr Moran sees public servants as having no obligation to ‘advise’ anyone but the minister. But public servants are responsible for the dissemination of information. We’ve mentioned FOI, but there are also departmental reports and publications. It can be argued that a departmental report is really the government’s report, which gives it the right to include whatever self-serving statistics and arguments it sees fit. But I can remember a day when departments took a pride in ensuring their reports to the public were very straight-up-and-down, carefully factual affairs, with as little spin as possible. I mention it because I think I’ve detected a decline in the standards of reports in recent years. I hope that’s not true of this department.


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Friday, July 17, 2009

THE ABS: A VIEW FROM THE MEDIA

Talk to ABS seminar, Canberra
June 17, 2009


When Geoff Neideck invited me to talk to you he said you’d be interested in getting a perspective on the use of ABS data in the media, and I’m happy to oblige. I’m happy to be here talking to the bean counters because I’ve been a bean counter all my working life. I started as an accountant, then graduated to the economy. As that epithet implies, people concerned with the intricacies of counting things are not highly regarded. The glory goes to those who make the beans, or those who use the counts to draw interesting conclusions.

But years in the counting business have convinced me of an under-rated truth: what gets measured gets taken seriously, whereas things that aren’t measured tend to be ignored. The problem is that we tend to measure what’s easily measured, but many things difficult to measure are more important. The problem is compounded when we seize on a readily available measurement without bothering to inquire of the boring bean counters whether it measures what we think it does.

I want to talk about the media’s use and abuse of ABS statistics, but first I want to make a qualification. Among journalists there are two kinds of users of your statistics, the professionals and the amateurs. The most intensive users of ABS stats are the economic journalists, who are professional users. These are people such as me, Tim Colebatch, Alan Mitchell, Michael Stutchbury, Alan Wood, Peter Martin, David Uren and Stephen Long who, by both education and experience, can be expected to use and interpret your stats with care and accuracy. If you see us misinterpreting your data we’d be most grateful for a quiet phone call explaining where we went wrong. We have younger economic reporters working for us, often with less experience of the intricacies of economic statistics, but rest assured that we’re training them in those mysteries and drawing to their attention any misunderstandings we find in their copy, even if (as in my case) it’s after they appear in print.

That’s enough about the professional, specialist users of ABS data. You’re entitled to expect high standards from them and, for the most part, I think you get it. All the rest of what I’ve got to say about the media’s use and abuse of statistics applies to the amateur users: journalists whose use of your data is infrequent and quite unqualified. These users range from political journalists here in Canberra to reporters in the state capitals who occasionally get hold of social statistics, right up to the editors. The main thing I want to do is explain why the media so often use stats in ways you disapprove of. I want to give you an insight into how it is from our perspective. This will contribute little to reducing the misuse of statistics, but it will help you understand what you’re up against.

Many of the complaints about misuse of stats arise from the headlines on stories and the truth is that the headline on a story heavily influences a reader’s perception of what the story is saying. But headlines are written by sub-editors, not reporters, and sometimes there’s a gap between what the story actually says and what the headline says it says. If there is, most readers won’t notice it. Such gaps can occur for three reasons: because the hard-pressed sub doesn’t accurately comprehend what the story’s actually saying; because the reporter has left some ambiguity in his copy and the sub, who generally knows far less about the topic than the reporter, has jumped the wrong way; or because the sub knowingly writes a headline that makes the story sound more exciting than it actually is. The first two explanations - misunderstandings - are more likely to be the case on broadsheet newspapers; the third - misrepresentation - is more likely to be found in tabloid newspapers.

In one offending Herald story, the NSW Bureau of Crime Statistics issued a report and an accompanying press release saying that the prison terms for most offences had increased, whereas the headline on the story said they’d fallen. The interesting question is why the reporter wrote his story in a way that encouraged that error to be made - why he focused on unrepresentative falls rather than the representative rises. I’ll try to answer that when we get to the question of motive - why the media behave the way they do. Perhaps here I should remind you that journalists have to draw the essence from sometimes long and complex reports or events in just an hour or two - under pressure from bosses to make it quick and make it sexy - so it’s not surprising errors and misinterpretations occur.

Now let me give you some relevant background information. Much of the news the media publish comes to them in the form of press releases. The ABS’s releases have some of the characteristics of a press release, and sometimes they’re accompanied by an actual summarising press release. It’s often alleged that the media are so lazy they largely publish uncritically the press releases sent to them by powerful government, business and other interests. In my experience that’s usually not the case; quite the reverse. These days most interest groups seek to use the media to advance their own interests. They employ PR people to put their own spin on the information they release to the media. Most journalists aren’t lazy and they see it as their job to get past the spin, finding the news their audience would like to know about but which the powerful interest would like to conceal. When they receive a report or a press release they think: there’s probably an interesting story in here somewhere, but I’ll have to dig for it; certainly, it won’t be the one the people who put out the press release put at the top of the release. There’s so much spin in the world that many journalists come to the conclusion that everyone’s trying to pull the wool over their eyes. You may regard the ABS as a beacon of independent truth-seeking, but I guess many journalists would suspect it’s just another government agency pumping out bromide at the behest of its political masters. There’s a saying in journalism that news is anything somebody somewhere doesn’t want you to know. My guess is that the Herald journalist in question waded through the crime bureau’s report until he found the bit he thought the NSW Government wouldn’t want people to know: that in the case of five significant offences, rates of imprisonment are going down not up.

Much of the misrepresentation of ABS data arises from statistical misinterpretation. You can misrepresent a time series in a host of obvious ways: by choosing a convenient time period for your comparison, by ignoring random variation (ie failing to ignore outliers), by ignoring seasonal variation, by ignoring base effects (eg saying some rate has doubled when it’s gone from 2 a year to 4 a year) and by ignoring the effect of government policy.

The question is whether the journos who commit these statistical crimes are knaves or fools. I couldn’t deny there’s a lot of knavery - journos who know they’re distorting the statistics’ message, but don’t care - but there are more fools than you may imagine. Most journalists are arts-degree types with a very weak grasp on maths and little clue about how to interpret statistical information. If they did understand those things they’d be an economics editor by now. But the question goes deeper: many journalists wouldn’t be sure the diligent performance of their job required them to take account of those statistical niceties. The rules of statistical interpretation aim to ensure the user draws from the stats an accurate or representative picture of the aspect of the world the stats relate to. But that’s simply not the objective of journalism. Journalism pays no heed to the scientific method.

So let’s turn to the question of why the media sometimes misuse statistics and misrepresent their message. Let’s look at motive. Much of the criticism of the media rests on the unspoken assumption that the media’s role is to give us an accurate picture of the world around us. We don’t have first hand experience of much of what’s happening around us and we need the media to inform us.

If that’s the role you think the media play - or should play - I have shocking news. The news media are on about news. What is news worthy? Anything happening out there that our audience will find interesting or important, although the interesting will always trump the important. Paris Hilton is interesting but of no importance; the latest change in the superannuation rules is important but deadly dull - guess which one gets more media overage?

Maybe 99 per cent of what happens in the world is of little interest: 99 per cent of the motorists who crossed the Sydney Harbour Bridge today made it without incident; someone you’ve never heard of went to work as usual and sold a new ring to someone you don’t know; Australia didn’t declare war on New Zealand . . . the list of uninteresting things that happen is endless. Journalists sort through all the things that happen looking for things they believe their audience will find interesting: the 10-car pile-up on the Bridge, Brad Pitt bought a ring for Angelina Jolie to make up after a fight, the Dutch withdrew their troops from Afghanistan.

When social scientists take a random sample they may examine the sample and discard any outliers that could distort their survey, throwing them on the floor. A journalist is someone who comes along, finds them on the floor and says, ‘these would make a great story’. I happened to be in the Herald’s daily news conference last February on the day Kevin Rudd’s $42 billion stimulus package was announced, with all its (then) $950 cash handouts. We discussed searching for a farmer who’d get $950 because he was in exceptional circumstances, $950 because he paid tax last year, $950 because his wife also works, $4750 because he has five school-age kids, and maybe another $950 because one of the kids is doing a training course. And, of course, he’d have a big mortgage, meaning he’d also save $250 a month because of the 1 per cent cut in interest rates announced the same day. Had we found such a person and taken a good photo of him he’d have been all over our front page. The point is that we were search for the most unrepresentative person we could find. Why? Because our readers would have been fascinated to read about him. It’s reasonable to expect the media to be accurate in the facts they report but, even if they are, it’s idle to expect them to give us a representative picture of the world.

And that takes me to an even more shocking thought: if the media aren’t on about giving us a representative picture of the world around us, why would journalists bother adhering to the rules of statistical interpretation? Why not highlight a quite unrepresentative statistical comparison if it happens to be the most interesting comparison?

It’s often claimed that the media focus heavily on bad news, often ignoring good news. Guilty as charged. But we do so for a simple reason: we know our audience finds bad news a lot more interesting than good news. So I’m not particularly apologetic for this state of affairs: our failings are the failings of our audience, which are the failings of human nature. Why do people find bad news more interesting than good news? As I’ve written elsewhere (SMH 12.4.2006), I believe the explanation can be found in our evolutionary history. Our brains are hardwired to perpetually scan our environment for threats, and now the chances of our being eaten by a lion have diminished we’re left with a strong appetite for bad news about, for instance, the threat of crime.

Communications research tells us we read much more for reinforcement than enlightenment. While there’s a niche market for columns that challenge the conventional wisdom, and news about some new and unexpected twist in a standard story will be found interesting, journalists know the news that goes down best is the news that confirms people prejudices. Perhaps thanks to the efforts of the media themselves, most people know as a self-evident truth that crime is increasing. Most stories about crime are intended to reinforce that belief.

The media’s defence against criticism is that their failings are those of their audience; they do what they do because their audience demands it of them. But shouldn’t we hold the media to a higher standard than we hold ourselves? Yes we should. We can expect less crass commercialism and more professionalism. Doctors, for instance, don’t ask patients what disease they want to be told they have and don’t let patients pick the medicine they want prescribed.

And there’s a limit of inaccuracy and sensationalism below which market punishment sets in. Mediums that play too lightly with the truth eventually lose their credibility and their audience’s respect. This means there are checks and balances. Mediums that value their credibility - in commercial as well as ethical terms - often employ commentators who set a high store on making sure their audience isn’t misled, even when those commentators spend a fair bit of time highlighting the media’s own failings and trying to beat down some of the things that get beaten up on the front page. My guess is that, as information overload and infotainment continue to grow, at least the better-educated audience will gravitate to those journalists and journals they perceive to be committed to the search for truth. What’s more, it is possible to be truthful and interesting at the same time.

Turning to the question of community expectations and perceptions of the ABS, from where I sit the community knows little about the role and functions of the ABS and spends very little time thinking about it. In particular, people have no understanding of the bureau’s independence and see it as just another government department doing what the government tells it to do.

Some years ago someone from the bureau came to the Herald’s office to give a few of our senior people a little seminar on the virtues of the trend estimates over the seasonal adjusted figures. After it was over the editor at the time said to me: ‘Well, we won’t be using trend figures - they’re only estimates.’ He was quite surprised when I explained that almost all the bureau’s figures were estimates. When I was an economic reporter in Canberra 34 years ago, the chief sub-editor told me not to use seasonally adjusted figures because the Herald only reported the real figures, not figures some statistician had played around with. These days, of course, we use the seasonally adjusted figures as a matter of course without even bothering to say we’re doing so.

But you will have noted that, notwithstanding all the bureau’s efforts to give greater prominence to the trend figures, the media - like the business economists - largely ignores them and continues to highlight the seasonally adjusted estimates. We do this mainly because, like the financial markets, we have a vested interest in volatility. The more the figures bounce around, the more interesting the stories we can write - and the more exciting the markets’ betting games. But the econocrats prefer the seasonally adjusted figures, too. And whatever our true motives, we all have a good statistical excuse: our interest is in the figure for the most recent month or quarter, and here the trend estimate runs into the ‘end-point problem’ - the inability to centre the moving average.

You probably know that many people - maybe most - regard the CPI as something that’s made up in a government department somewhere with the intention of understating the true inflation rate. That’s because their own mental estimate of price increase is so much higher than the bureau’s. The question of why that’s the case is one to which I’ve given much thought over the years. You can say that, were I to carefully calculate a personal CPI it would differ from the official figure because the weights in my basket would differ from the eight-capital average. You can say that I may not adequately distinguish between quality improvements and pure price increases.

That’s true, but it doesn’t get to the heart of the disparity. A bigger problem is that people don’t weight the price changes they encounter. An even bigger problem is what psychologists call the ‘availability heuristic’. Large prices rises stick in our mind more than small increases and price rises are easier to remember than price falls. And get this: in most people’s mental CPI, prices that don’t change would get a weighting of zero.

There’s probably not a lot the bureau can do about that, but there’s one key economic indicator whose low credibility with the public it can act to improve - the measure of unemployment - and now it has. A large number of people believe the official unemployment figures are a fraud and have been manipulated by the Government to understate the true position. They have a vague but firm memory of the Howard government changing the definition of unemployment. They get muddled between being unemployed and being on the dole. They have no perception of the bureau’s independence and no notion of international conventions that haven’t changed in decades.

I have to tell you, however, that I’ve tired of trying to dispel the public’s misconceptions on this issue and my sympathy for the bureau has run out. The unvarnished truth is that, for whatever reason, the official unemployment figures are misleading, they do significantly understate the true extent of the problem, and the bureau could publish less misleading figures if it wanted to. The fact is that the international rule that doing an hour’s work a week means you’re not unemployed may have made sense once and may still make sense in some countries, but it makes no sense in a country like ours where part-time employment accounts for 28 per cent of total employment. And if the bureau can publish estimates of underemployment once a year it’s hard to see why it can’t publish broader estimates of labour underutilisation every month. I’m here to tell you I can’t think of an issue that has done greater damage to the bureau’s credibility with the public, so I’m delighted to see your latest decision to publish the underutilisation rate monthly.

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Saturday, July 4, 2009

ECONOMICS AFTER THE GLOBAL FINANCIAL CRISIS

Talk to The New Institute, Merewether
July 14, 2009


I want to deal briefly with the origins of what we’ve come to call the global financial crisis and its consequences for economies around the world before I focus on the underlying causes of the crisis and the role of economics. Then I’ll look at what needs to be done to avoid another such monumental failure of economic management. I’ll be talking mainly about the global scene - particular the scene in America, where the crisis had its origins - and much of what I say won’t apply to Australia, though I will talk about how Australia managed to escape the worst of the madness.

The origins of the crisis can be found in America’s huge housing boom, in which house prices rose greatly, many hundreds of thousands of new homes were built and the rate of home-ownership rose significantly. One factor that made the boom so big was the issuing of loans to sub-prime borrowers - people with bad credit histories who had no hope of servicing their loans. This irresponsible lending was encouraged by the securitisation of loans - that is, because the banks that made these dubious loans didn’t retain them but converted them into mortgage-backed securities, which they then sold to investment banks, hedge funds and pension funds, not just in America but in Europe and even to some Australian local councils. Inevitably, the housing bubble burst and it was suddenly realised that many of the sub-prime loans would never be repaid. House prices fell dramatically - because the Americans had built far more houses than they actually needed - and a lot of big investment banks and other institutions found themselves holding possibly worthless mortgage-backed securities. But it wasn’t clear which banks were holding large amounts these securities and were thus in trouble. This uncertainly generated a great deal of fear and reluctance among the banks to continue dealing with each other.

This wouldn’t have been so bad - it would have led just to a housing-led recession in the US - were it not for the fact that it brought unstuck a huge and long-running expansion in the financial sectors of all the developed countries. The financial markets had been inventing complicated new financial contracts known as derivatives that supposedly shifted various forms of risk on to the shoulders of people more able and willing to bear that risk. Because this trading of risk was believed to have reduced the risks financial institutions were facing, they were emboldened to borrow heavily to buy more of these derivatives that were proving so profitable. As part of the globalisation of financial markets, financial institutions in Britain and Europe - and Australia to some extent - participated fully in this decade or two of frenzied trading and expansion.

The sub-prime problem acted as the bump that caused this whole house of cards to collapse. The crisis reached its culmination in mid-September last year, when the US authorities decided to allow one of America’s five big investment banks, Lehman Brothers, to collapse under the weight of its debts. This caused a wave of panic among financial institutions on both sides of the Atlantic. They refused to deal with each other, financial markets temporarily stopped functioning, and banks and insurance companies started falling over. For a period of several weeks governments had to step in to prop up these institutions, all of them granting government guarantees of their banks’ deposits and wholesale borrowings. The global financial system came perilously close to collapse. The whole world watched these frightening events unfolding on television every night, resulting in a synchronised blow to the confidence of consumers and business people in almost all the developed economies. The considerable losses faced by banks in the US and Europe greatly reduced their ability and willingness to continue lending to ordinary businesses. From that point it became clear that the world had entered its most severe recession since the Great Depression. Deep recessions in the US, Britain, Europe and Japan, plus sharp slowdowns in China and the other major developing economies, have seen a marked decline in world trade. Despite optimistic talk of ‘green shoots’, the likelihood is that unemployment in these economies will continue rising for some time before it begins a very slow fall.

Who’s to blame for all this? Well, you can blame it on the greed of bankers and other participants in the financial markets, but that doesn’t get us far. I’d prefer to say that the crisis was caused by the failures of human nature, compounded by the economic managers’ reliance on a model of human behaviour that fails to take account of many aspects of that human nature.

Human beings aren’t rational as the economists’ basic, neo-classical model assumes, but are highly emotional. Even economists themselves are more driven by their emotions than many of them realise. Particularly because people are so influenced by the behaviour of those around them, the people who make up an economy are prone to an alternating cycle of optimism and pessimism. So much so that this is now - and probably always has been - the main factor driving the business cycle of boom and bust. During the optimistic phase people happily take on ever-increasing risks and obligations. They spend rather than save, expanding their possessions and activities, pursuing status symbols, piling into the markets for property and shares, forcing prices up, then piling in some more just because prices are rising.

They do all this confident in the belief that the good times will roll on forever and prices will only go higher. But, of course, as we all know but keep forgetting, some event inevitably causes the boom to end and, when it does, the prevailing mood flicks from optimism to pessimism. People become afraid, they worry about all the commitments they’ve taken on, they abandon their plans for expansion and tighten their belts. In many asset markets (but probably not our housing market) prices go from being unrealistically high to being unrealistically low. The result is business failures, lay-offs and rapidly rising unemployment. This causes the fear to deepen into a pessimism which assumes the world will stay bad forever.

My first point is that, though economists know full well that the economy moves in cycles of optimism and pessimism, boom and bust, and a large branch of economics is devoted to studying the management of the business cycle - macro-economics - economists don’t have much of a handle on the factors that drive the cycle, especially those that derive from human psychology. They accept that ‘confidence’ is a major influence on the cycle, but they can’t get confidence into their mathematical equations, so they end up underrating its importance. A big part of the problem is that conventional micro-economics has no place for psychology or the business cycle, assuming the economy is always at full employment because it is self-equilibrating, self-correcting. Alan Greenspan admitted he’d made a mistake in believing the banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. He had too much faith in the economy’s self-correcting powers because he assumed we’d behave rationally, not emotionally.

My second point is that this chronic underestimation of human failings tempted economists and regulators to run a partially deregulated financial system and not to worry about weaknesses in the remaining regulatory system, such as the US’s multiple regulatory agencies sharing responsibility for the system, and the operation of the hedge funds completely outside the regulatory regime. Here we have a fatal combination of model-blinded thinking on the part of the economics profession and blatant self-interest on the part of powerful vested interests in the financial markets. When they’re in optimism mode, business people always want to be completely free to do as they please in their push for profits.

But because the big banks and other players in the financial markets aren’t rational and are capable of getting carried away in a boom and doing stupid things they later come to regret, they do need fairly close supervision to protect them from themselves and to protect us from them. In the absence of that supervision it was inevitable the episode would end in disaster.

In Australia, our econocrats - particularly those at the Reserve Bank - have been an honourable exception to this naivety. They’ve been a lot more worldly wise, always being very conscious of the problem of asset bubbles. The former governor, Ian Macfarlane, was highly conscious of the risks involved in our long housing boom. He devoted much effort to studying and trying to talk down the boom, with some success. So we avoided making the same errors with our banking system, partly also because of two accidents: first, the four-pillars policy banned mergers between the big four banks because politicians fear the displeasure of the electorate more than the displeasure of the banks and, second, our Australian Prudential Regulation Authority was riding herd on the banks because it was still smarting from the caning it got over its inadequate supervision of the HIH insurance company.

In their drive for profits, people in the financial markets invented these ever more sophisticated and artificial - weird and wonderful - financial contracts known as derivatives. In theory, these synthetic contracts were about ‘risk management’ - spreading and shifting risk to those most able to bear it. In practice, the risk was spread to those least able to understand it. Even the inventors of these derivatives didn’t fully understand how they worked and the circumstances under which they could come unstuck. Individual financial institutions didn’t understand the extent of the risks they were taking on and no one - neither other institutions nor the regulators - knew where the risk was accumulating. So my third point is that derivatives were a case of the market being too smart by half and not nearly as smart as it imagined itself to be.

The story of the origins of the global financial crisis is littered with references to excessive gearing or leverage or plain old excessive borrowing. The reason booms go on for so long and get so big is that they’re fed by excessive borrowing. While everything is on the up and up, borrowing is a very easy way to magnify your gains from investment. Trouble is, once prices start falling, being highly geared is a way to magnify your losses and risk your own survival.

The thing about debt - or ‘credit’ as economists prefer to call it - is that it’s like fire: a wonderfully useful and beneficial thing, but also something that, if not understood and carefully controlled, can do immense harm. Yet economic theory focuses almost solely on the benefits of credit, hardly acknowledging how dangerous it can be if allowed to get out of hand. Why such a cavalier attitude towards debt? Because of the assumption that we’re all rational; because of the economic model’s unrealistic assumptions about human nature.

So my fourth point is that a primary cause of the crisis was the failure of regulators to understand the need to impose constraints against excessive gearing. The sudden discovery of all the trouble derivatives had got us into wouldn’t have caused nearly so much devastation had not the institutions that found themselves holding the parcel when the music stopped been so precariously geared. Indeed, some of the derivatives were themselves aimed at helping people gear up.

In the past 15 or 20 years, central banks have become proficient at controlling the former scourge of inflation by means of inflation targeting. What they have not managed is to find a way to prevent the build-up of speculative asset price bubbles. That’s because the instrument they use to fight inflation - the manipulation of interest rates - can’t simultaneously be used to fight asset bubbles. But all this means is that, as part of the move back to a more carefully regulated financial system, we need to revert to direct controls over borrowing levels.

It’s overly dramatic to imagine we’re facing the death of capitalism. We’re not because there is simply no practical alternative to the use of markets to coordinate the production and consumption of goods and services. Similarly, it’s a crude caricature to imagine that in the past 20 or 30 years we moved to ‘free markets’. No market has remotely approached the position of being entirely free of government intervention and regulation. What’s true is that - particularly in the case of the financial markets, and particularly in the US - we greatly reduced the degree of regulation and allowed much of the regulation that remained to be ineffective.

So the choice we face is the degree to which we regulate markets and the activities of businesses. And there’s little reason to doubt that the pendulum will now swing back in favour of more regulation of markets, particularly the financial markets. We’ll need to do more to limit excessive borrowing, more to regulate the use of derivatives, more to make their use more transparent to regulators and to other players in the financial markets, more to include hedge funds within the regulated framework. We need tax reform to eliminate the tax advantages of debt funding over equity funding, including the tax advantages of negatively geared property investments.

It’s important to remember, however, that regulation offers no easy answers. The very reason we dismantled regulation and gave up public ownership of businesses in the 1980s and 90s was that they weren’t working well, partly because they were being widely circumvented. It’s now clear we went too far in that direction, but the answer isn’t to go to the opposite extreme. Rather, it’s to find a mid-way position where carefully judged regulation can keep things under better control. And here, in the example of Australia, the world does have proof that sensible, less-than-onerous regulation can keep the banks out of trouble, to their own benefit as well as ours.

I think it’s a mistake, however, to see the curbing of excessive executive salaries as central to the need for reform. To some extent it’s true that these salary packages were structured in a way that encouraged executives to take excessive risks with other people’s money. Something needs to be done about that. But the fact that these obscene salaries were grossly unfair - that they greatly overestimated the value of those executives’ contribution to their company’s success; that they were the product of market failure rather than market forces - shouldn’t cause us to overestimate their importance in the scheme of things. Say we were able to magically reduce all executive salaries to quite modest levels. When that saving was distributed between all the company’s many customers, the reduction in the prices they were paying would be fairly minor.

I believe we’ve been living through an era of heightened materialism where a revival of faith in the near infallibility of markets - the benefits of deregulation - has contributed to a breakdown in the norms of acceptable business behaviour. Business leaders now feel free to behave in self-aggrandising ways - the ruthless treatment of employees, customers and shareholders - that formerly were regarded as beyond the pale.

I believe it’s possible for us to return to a period of less self-seeking, more principled, ethical behaviour by our business leaders. This not an area that economists know much about - it requires an understanding of the drivers of human behaviour that’s outside their field of study. But social attitudes aren’t fixed; if they can change for the worse they can also change for the better. The economic and social devastation wrought by the global financial crisis - of which we’ve so far seen only the start - may be sufficient to motivate such a change of direction. And carefully judged reregulation may have a valuable part to play in that change.

Economists’ faith in rationality leads them to believe that to change people’s behaviour you must first change their attitudes. But psychology teaches that, in reality, the process works the other way: if by changing regulation you can oblige business people to change their behaviour, they will adjust their attitudes to fit their behaviour.


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Tuesday, May 26, 2009

CAUSES OF THE GLOBAL FINANCIAL CRISIS

Talk to Whitlam Institute public forum, Parramatta
Tuesday, May 26, 2009


David Gruen has given us a highly competent and comprehensive economists’ exposition of the causes and consequences of the global financial crisis and the global recession it has precipitated, both for the globe and for Australia. I disagree with very little of it. So using David’s exposition as a base, I want to give you my take on the causes of the crisis and, in doing so, step back from all the detail and try to identify the more general patterns of behaviour involved.

In a nutshell, my take is that the crisis was caused by the failures of human nature, compounded by the economic managers’ reliance on a model of human behaviour that fails to take account of many aspects of that human nature. If that sounds so general as to be saying very little, let me try to give it some substance.

Human beings aren’t rational as the economists’ basic, neo-classical model assumes, but are highly emotional. Even economists themselves are more driven by their emotions than many of them realise. Particularly because people are so influenced by the behaviour of those around them, the people who make up an economy are prone to an alternating cycle of optimism and pessimism. So much so that this is now - and probably always has been - the main factor driving the business cycle of boom and bust. During the optimistic phase people happily take on ever-increasing risks and obligations. They spend rather than save, expanding their possessions and activities, pursuing status symbols, piling into the markets for property and shares, forcing prices up, then piling in some more just because prices are rising.

They do all this confident in the belief that the good times will role on forever and prices will only go higher. We now see more clearly than we did at the time just how much this mentality drove the Howard Government’s response to the way its coffers overflowed during the resources boom. But, of course, as we all know but keep forgetting, some event inevitably causes the boom to end and, when it does, the prevailing mood flicks from optimism to pessimism. People become afraid, they worry about all the commitments they’ve taken on, they abandon their plans for expansion and tighten their belts. On many asset markets (but probably not our housing market) prices go from being unrealistically high to being unrealistically low. The result is business failures, lay-offs and rapidly rising unemployment. This causes the fear to deepen into a pessimism which assumes the world will stay bad forever.

My first point is that, though economists know full well that the economy moves in cycles of optimism and pessimism, boom and bust, and a large branch of economics is devoted to studying the management of the business cycle - macro-economics - economists don’t have much of a handle on the factors that drive the cycle, especially those that derive from human psychology. They accept that ‘confidence’ is a major influence on the cycle, but they can’t get confidence into their mathematical equations, so they end up underrating its importance. A big part of the problem is that conventional micro-economics has no place for psychology or the business cycle, assuming the economy is always at full employment because it is self-equilibrating, self-correcting. Alan Greenspan admitted he’d made a mistake in believing the banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. He had too much faith in the economy’s self-correcting powers because he assumed we’d behave rationally, not emotionally.

My second point is that this chronic underestimation of human failings tempted economists and regulators to run a partially deregulated financial system and not to worry about weaknesses in the remaining regulatory system, such as the US’s multiple regulatory agencies sharing responsibility for the system, and the operation of the hedge funds completely outside the regulatory regime. Here we have a fatal combination of model-blinded thinking on the part of the economics profession and blatant self-interest on the part of powerful vested interests in the financial markets. When they’re in optimism mode, business people always want to be completely free to do as they please in their push for profits.

But because the big banks and other players in the financial markets aren’t rational and are capable of getting carried away in a boom and doing stupid things they later come to regret, they do need fairly close supervision to protect them from themselves and to protect us from them. In the absence of that supervision it was inevitable the episode would end in disaster.

In Australia, your econocrats - particularly those at the Reserve Bank - have been an honourable exception to this naivety. They’ve been a lot more worldly wise, always being very conscious of the problem of asset bubbles. The former governor, Ian Macfarlane was highly conscious of the risks involved in the long housing boom. He devoted much effort to studying and trying to talk down the boom, with some success. So we avoided making the same errors with our banking system, partly also because of two accidents: first, the four-pillars policy banned mergers between the big four banks because politicians fear the displeasure of the electorate more than the displeasure of the banks and, second, our Australian Prudential Regulation Authority was riding herd on the banks because it was still smarting from the caning it got over its inadequate supervision of the HIH insurance company.

In their drive for profits, people in the financial markets invented ever more sophisticated and artificial - weird and wonderful - financial contracts known as derivatives. In theory, these synthetic contracts were about ‘risk management’ - spreading and shifting risk to those most able to bear it. In practice, as David said, the risk was spread to those least able to understand it. Even the inventors of these derivatives didn’t fully understand how they worked and the circumstances under which they could come unstuck. Individual financial institutions didn’t understand the size of the risks they were taking on and no one - neither other institutions nor the regulators - knew where the risk was accumulating. So my third point is that derivatives were a case of the market being too smart by half and not nearly as smart as it imagined itself to be.

I don’t know whether you noticed, but at many points in David’s exposition of what went wrong he alluded to the consequences of excessive gearing or leverage or plain old excessive borrowing. His story was littered with references to debt. The reason booms go on for so long and get so big is that they’re fed by excessive borrowing. While everything is on the up and up, borrowing is a very easy way to magnify your gains from investment. Trouble is, once prices start falling, being highly geared is a way to magnify your losses and risk your own survival.

The thing about debt - or ‘credit’ as economists prefer to call it - is that it’s like fire: a wonderfully useful and beneficial thing, but also something that, if not understood and carefully controlled, can do immense harm. Yet economic theory focuses almost solely on the benefits of credit, hardly acknowledging how dangerous it can be if allowed to get out of hand. Why such a cavalier attitude towards debt? Because of the assumption that we’re all rational; because of the economic model’s unrealistic assumptions about human nature.

So my fourth point is that a primary cause of the crisis was the failure of regulators to understand the need to impose constraints against excessive gearing. The sudden discovery of all the trouble derivatives had got us into wouldn’t have caused nearly so much devastation had not the institutions that found themselves holding the parcel when the music stopped been so precariously geared. Indeed, some of the derivatives were themselves aimed at helping people gear up.

In the past 15 or 20 years, central banks have become proficient at controlling the former scourge of inflation by means of inflation targeting. What they have not managed is to find a way to prevent the build-up of speculative asset price bubbles. That’s because the instrument they use to fight inflation - the manipulation of interest rates - can’t simultaneously be used to fight asset bubbles, a point Guy Debelle of the Reserve Bank reiterated recently.

But all this means is that, as part of the move back to a more carefully regulated financial system, we need to revert to direct controls over borrowing levels.
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Wednesday, May 20, 2009

PUBLIC HEALTH CONSEQUENCES OF THE GLOBAL FINANCIAL CRISIS

Talk to AFPHM Congress, Sydney
May 20, 2009

Because I’m no expert on public health, I’m going to focus on the nature, size and duration of the crisis, and say something about the likely impact of the crisis on the developing countries and on Australia, leaving Steven Jan to focus on what the crisis will do to the social determinants of health.

I must start by warning you that economists are hopeless at forecasting what will happen in the economy. All they - or I - can do is offer you educated guesses, which will probably be wrong for reasons we haven’t thought of. But humans are incurably curious animals, with an insatiable desire to know what the future holds, so they go on asking economists for their predictions, and economists go on pretending to know what will happen. Now I have your informed consent, I’ll get down to it.

I’m going to skip explaining the origins of the financial crisis and take up the story at the point where the crisis reached its climax in mid-September last year with the collapse of the US investment bank Lehman Brothers. This prompted panic in global financial markets, which froze. The global banking system rocked on its foundations as governments in the US, Britain and continental Europe struggled to avert the collapse of various banks. The whole world watched these frightening events on television every night and the effect was a sudden loss of confidence among businesses and consumers in many countries. Around the world, fearful consumers tightened their belts and abandoned plans for big purchases, while businesses postponed expansion plans and wondered about laying off staff. In consequence, the global economy hit a wall at that moment. It dropped off a cliff. Just about every developed country contracted - went backwards - in the last quarter of 2008, and the contraction continued in the first quarter of this year. Over that six month period, the US economy contracted by more than 3 per cent, Europe by more than 4 per cent and Japan by maybe 6 per cent.

Those are huge figures. Australia would also have contracted over that six months, but by a lot less (we’ll get the figures for March quarter a fortnight today). Most developed economies had been slowing (as we had) or were in already in recession before the crisis reached that climax in September, but from that point it became indisputable that the global financial crisis had become a global recession, that the problem had spread from Wall Street to Main Street, from the financial markets to the ‘real’ economy of production and consumption that you and I inhabit.

As the immensity of the global contraction slowly dawned on officials, the IMF - the International Monetary Fund - revised down its forecast for growth in the world economy in 2009 five times in seven months. Its latest prediction is that the world economy will contract by. 1.3 percent in calendar 2009. This would be the first annual contraction in 60 years. It compares with record world growth of more than 5 per cent just two years earlier (2007). Virtually every advanced economy is in recession and the advanced countries as a whole are expected to contract by 3.8 per cent. The developing countries should grow, but by just 1.6 per cent. Normally, any rate of global growth below 2 per cent is regarded as a world recession, because recessions usually roll around the world, hitting different countries at different times, because the developing countries always grow a lot faster than the advanced countries (because they’re coming off a low base) and because they aren’t as closely connected to the advanced countries as the advanced countries are to each other.

The IMF is predicting that the world economy will grow by 1.9 per cent the following year, 2010, with the developing countries recovering to 4 per cent (still weak by their standards), but the advanced economies just breaking even. This, of course, would still be in recession territory.

The IMF is uncharacteristically gloomy about this recession. It’s worried by two unusual features of the present episode: first, unlike most recessions, this one has been caused by a crisis in the financial system, and second, it’s highly synchronised - everyone’s going down together, partly because of shared trauma of the events in September-October. History tell us that recessions brought on by financial crises are deeper and longer, with a weaker recovery. History says the same about synchronised recessions. Put those two negatives together and you’ve got a particularly bad prospect.

The IMF has legitimised the comparison of this recession with the Great Depression, suggesting that this episode be known as the Great Recession. However, economists are confident we won’t see anything as bad as the Depression because we’ve learnt from the gross mistakes we made then. In particular, we have four factors going for us. First, we haven’t stood around watching banks collapse, but have done everything necessary to prop them up. Second, we’re well aware of the risk of deflation (widespread and continuous falls in prices) and will resist it, understanding that, in such circumstances, printing money helps rather than harms. Third, we don’t see any virtue in balanced budgets at such a time, and are applying large amounts of timely fiscal stimulus. Fourth, no one imagines a resort to competitive currency devaluations or higher trade barriers offers a viable solution to a global problem, even if domestic political pressures make them tempting.

How bad and how protracted will the Great Recession end up being? I don’t know. Even if it’s not as bad as some people fear, it will be plenty bad enough. The main risks are, first, a new crisis somewhere in the global financial system, and second, inadequate efforts to fix the balance sheets of ailing banks, so that businesses and households fail to receive the flows of credit necessary to allow them to resume normal activity.

On the positive side, world financial markets are a lot more settled than they were, there are reasonably convincing signs that the US, which has already been in recession for a record 17 months, is stabilising and could start recovering later this year - although it could still be a year or more before there was any improvement in unemployment - and there are convincing signs that China is recovery, just as the recovery from the Asian crisis of 1998 was much stronger than (more V-shaped) than we expected. Developing economies are more resilient than advanced economies; they have a greater ability to bounce back.

Last week’s budget argued that Australia’s recession - which has hardly got started yet - will be much less severe than those of the major developed economies and much less severe than we experienced in the recessions of the early 1980s and early 1990s, even though the recession itself will last longer: three years, rather than one year in the 80s and two years in the 90s. But whereas the rate of unemployment peaked at 10 per cent in the 80s and almost 11 per cent in the 90s, this time it will peak at only 8.5 per cent, in the second half of next year. Treasury is certainly right in arguing that, when recovery finally arrives, the usual pattern is for the economy to bounce, achieving surprisingly high rates of growth as it comes up off the floor. There are three good arguments for Treasury’s relative optimism. First, thanks to the four-pillars policy and strong regulation, our banking system is in very good shape. Second, the alacrity with which we slashed interest rates and applied budgetary stimulus to the economy after September last year will prevent the economy from descending too far into the depths. Third, the recovery in China, as it switches its engines of growth from export demand to domestic demand will limit the fall in our export income. The counter argument is that we haven’t yet felt anything like the full effect of our loss of income arising from the collapse of coal and iron ore prices, nor from the rise in unemployment and the debilitating and hence compounding effect this will have on business and consumer confidence.

Edging closer to our goal of assessing the consequences of all this for public health, let me just make the obvious point that the burden of recessions is shared most unequally, with the increase in unemployment concentrated heavily on the unskilled, early school-leavers and the disadvantaged, including Aborigines and the mentally ill. Considering what we know about the social determinants of health, this does not bode well. However, though an increase in health problems as a result of the recession may lead to the overstraining of unchanged levels of provision, I don’t believe that explicit cutbacks in government health spending will represent a significant addition to the problem.

Finally, let me turn to the problem in the developing countries. On the face of it, their economies will grow faster than those of the advanced countries, but this is misleading. The developing countries’ rapid population growth means they need to grow at faster rates just to stop going backwards. In these countries I think we will see both an increase in the demand for medical assistance and a decrease in its supply. The reduction in supply will come from increased pressure on government budgets (less revenue but more spending demands), reduced official and unofficial aid, and less ability on the part of patients to bear out-of-pocket costs. In 23 developing countries more than 30 per cent of their total health spending is funded by donors. I am hopeful, however, that, where countries are obliged to apply to the IMF for financial assistance, the criticism the fund received for its mishandling of the Asian crisis will make it less inclined to provide assistance conditional on ultra-harsh cutbacks in government social spending.

According to the World Bank, each 1 per cent decline in growth causes 20 million people to be pushed into poverty. After for once enjoying a period of decent growth - a half-decade above 5 per cent a year - Africa is forecast to manage growth of just 2.8 per cent this year. So I don’t doubt that the Great Recession will lead to great suffering among the world’s poor. In developing countries as in Australia, the burden of economic downturn will be distributed unequally and unfairly, with the poor bearing most of the brunt. Similarly, in any competition for inadequate public health resources, you’d expect to see the better-off elbowing out the poor.

Even before the onset of the global recession, only a handful of African countries were on track to meet the Millennium target of halving the share of the population living on less than a dollar a day by 2015. But the gloom and doom is not total, however. One small mercy is that, at a time of global recession, you’d at least expect to see food and energy prices coming down. Another is that the African economies’ generally improved economic management in recent years leaves them better positioned to weather the crisis than they were a decade ago. It’s also fortunate that so many of the world’s poor live in China and India, which are likely to recover fastest.

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Thursday, March 19, 2009

THE GLOBAL FINANCIAL CRISIS AND ITS EFFECT ON AUSTRALIA

Sydney Secondary College
March 19, 2009


The Global Financial Crisis

What we now call the global financial crisis had its origins in a bubble in the housing market of the United States economy. The bubble had been caused partly by the issue of housing loans to ‘sub-prime’ borrowers with doubtful ability to repay. Most of these sub-prime loans had been turned into mortgage-backed securities that were sold to many banks in America and Europe (and some Australian local government councils). From July 2007 it became clear that many of these securities were now worth much less than they had been bought for, but for a long time it was unclear just what these securities were now worth and how much of them particular banks were holding. So the sub-prime debt crisis touched off a sudden lost of confidence in US financial markets which led to the unravelling of a two-decade long boom in US financial markets, a boom that had been built on the invention of highly complex derivative contracts and high levels of ‘leverage’ (borrowed capital relative to equity [share] capital) by commercial banks, investment banks and hedge funds.

US Banks became reluctant to lend to each other on the short-term money market, and various financial markets seized up so that, for example, Australia’s non-bank mortgage lenders, such as RAMS, could not renew the short-term loans they had borrowed in the US market and so their businesses collapsed. Thus financial globalisation meant that problems in the US loan markets - and falls in Wall Street’s sharemarket - were quickly transmitted to other countries’ financial markets, particularly in Britain and Europe, where banks had bought large quantities of sub-prime debt, had engaged in derivatives transactions they didn’t understand and had borrowed excessively.

What began as a ‘sub-prime crisis’ and became a ‘credit crunch’ (where even sound businesses had great difficulty borrowing the money necessary to continue in business) turned into a fully blown ‘global financial crisis’ from mid-September 2008 after the failure of a large American investment bank, Lehman Brothers. In the panic that followed, credit markets seized up, many banks, mortgage lenders and big insurance companies in the US and Europe had to be prevented from collapsing by government intervention. Governments around the world had to guarantee their banks’ deposits and other borrowings. While all this was happening the world’s sharemarkets were plunging. And with the whole world watching the financial crisis unfold every night on television, the result was sharp blow to business and consumer confidence in almost all countries at the same time.

The US economy has been in recession for more than a year. A severe recession in the US has an adverse effect on most other economies because the US is the world’s biggest economy. But there is a lot more to this episode than just a severe recession in the world’s biggest economy. What makes it much worse is the crippled state of so many major banks in the US and Europe, which has largely prevented those banks from continuing to lend to viable businesses. Until businesses (and households) can get the credit they need to continue trading and start expanding, no amount of fiscal stimulus will get an economy back on its feet. Because the financial shock has hit all major economies - developed and developing - at the same time, this is the most highly synchronised world recession we have experienced for many years, thus making it more severe. The latest forecast is that gross world product will actually contract in 2009, the first time this has happened since World War II.

Channels through which the global crisis affects the Australian economy

It’s all very well to talk about the global financial crisis and assert that it will adversely affect our economy. A good student of economics has to be able to explain exactly how developments in the global economy affect us. In what ways? What are the mechanisms - or channels - by which the downturn is transmitted to Australia? You can’t just wave your arms in the air, you have to be specific.

We can identify three main channels through which the global crisis and recession has been - and is being - transmitted to our economy:

1) the financial channel has two aspects:

a) debt markets. Developments in US and other debt markets (markets for the borrowing and lending of money) have raised the interest rates our banks must pay to continue borrowing from overseas and made it much harder for non-bank borrowers to raise any more funds from overseas. Remember that almost all of Australia’s considerable net foreign debt has been borrowed by our banks. Our banks have passed their higher borrowing costs on to their business and household customers. This problem has been eased by the Government’s guarantee of inter-bank lending between our banks and their foreign counterparts.

b) equity markets. Developments in US and other equity markets have led to sharp falls in share prices on the Australian stock exchange. This has had two adverse effects: i) it has reduced the capacity of Australian businesses to raise new share capital, and ii) it has had a ‘negative wealth effect’, particularly on people with superannuation and other share investments who are in or approaching retirement. They now feel poorer than they were, which encourages them to consume less and save a higher proportion of their incomes.

2) the trade channel has two aspects:

a) reduced export volumes. Reduced consumption and investment in our trading partners’ economies reduces their imports from the rest of the world and thus the volume (quantity) of our exports.
b) reduced export prices. Reduced demand for mineral and energy commodities in the developed world and China and India is sharply reducing the prices we receive for our commodity exports, particularly coal and iron ore. Whereas until the second half of last year commodity prices were rising strongly and producing a large improvement in our terms of trade, which represented a big increase in the nation’s real income, now commodity prices are falling rapidly, which is worsening our terms of trade and reducing the nation’s real income.

3) the confidence channel: news of the global financial crisis, the global fall in sharemarkets and now the global recession has struck a blow to the confidence of our business people and consumers (and it has in almost every other economy). They are uncertain and fearful about the future, making them reluctant to take on new commitments (even though interest rates are so much lower) and anxious to reduce their exposure by cutting their spending and paying down their debts. Treasury says ‘the effects of the crisis on confidence are the hardest to quantify but arguably the most important’.

The policy response to the global crisis and recession

From the time the credit crunch worsened into the global financial crisis in mid-September last year, both the Reserve Bank and the Rudd Government have responded with speed and vigour.

Monetary policy: In the early part of last year the Reserve Bank was worried about growing inflation pressure and was still raising interest rates. By early September, the official cash rate had reached a peak of 7.25 per cent and the stance of monetary policy was quite restrictive. But the economy was slowing rapidly and the global environment was threatening, so the Reserve began easing policy, cutting the cash rate by just 0.25 percentage points. By early October, however, the financial crisis was at its height and it was evident that both financial markets and confidence had suffered a major blow. The Reserve was the first central bank to respond decisively, cutting the cash rate by a full percentage point. Further big cuts followed in November, December and February. The combined effect was to cut the cash rate by 4 percentage points in just five months. In that short time the stance of policy was switched from ‘quite restrictive’ to ‘highly expansionary’. At 3.25 per cent the cash rate is the lowest it has been for 45 years.

Although the Reserve paused to take stock in March, it is clear it will cut the rate somewhat further - perhaps by as much as another 1.25 percentage points - in the coming months.

Fiscal policy: In mid-October the Rudd Government announced its first fiscal stimulus package, worth $10.4 billion, or 1 per cent of GDP. Most of the cost went on cash bonus payments to pensioners, carers and parents. The other main measure was temporary increases in the first home owners grant, particularly for those buying newly built homes. Treasury estimated that spending of 1 per cent of GDP would cause GDP to be between 0.5 and 1 per cent higher than otherwise. This lower multiplier is explained by leakages into imports and saving.

Next the Government announced various small increases in spending on capital works, but then in February it announced a second stimulus package worth $42 billion over three years, but with most of the money to be spent in calendar 2009. This will be equivalent to 2 per cent of GDP. Less than a third of the money will go on another round of cash bonuses - this time to taxpayers, parents, farmers and some students - with more than two-thirds going on small, ‘shovel-ready’ capital works, including at every school in Australia. This package is expected to cause GDP to be higher than otherwise by about 0.5 per cent in 2008-09 and 0.75 to 1 per cent in 2009-10.

Two things are clear. First, the stance of fiscal policy is now clearly expansionary. Second, as could long have been predicted, the turn in the business cycle has prompted the Government to shift to an overtly Keynesian approach to fiscal policy. It has stated that it will ‘allow the automatic stabilisers to support economic stability’ - that is, to operate unhindered - and it has acted to add discretionary fiscal stimulus on the top. Both points are, of course, consistent with the medium-term fiscal strategy, which represents a policy of what I call ‘symmetrical Keynesianism’.

Both stimulus packages were carefully designed and represent state-of-the-art Keynesian policy in that they comply with the Three-Ts rule of fiscal stimulus: measures should be timely, targeted and temporary. The timely principle says governments should apply their stimulus as early in the downturn as possible to prevent the economy unravelling. A stitch in time . . . . The targeted principle says the stimulus should go to those people or on those purposes most likely to get the money spent quickly. The temporary principle says measures should be of a once-only nature so they do nothing to slow the budget’s return to surplus when the economy recovers.

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Wednesday, February 18, 2009

USES AND ABUSES OF CRIME STATISTICS

NSW Bureau of Crime Statistics and Research annual symposium
February 18, 2009


When I was at university many years ago I read a fascinating little Pelican by Darrell Huff called, How to Lie with Statistics. It’s proved invaluable in my career as a journalist. In talking about the uses and abuses of crime statistics I could focus on the misdemeanours of the politicians, but instead I’m going to concentrate on something I know a little about, the failings of journalists.

In June last year the bureau put out a report showing no link between the heroin shortage and the rise in the use of amphetamines such as ice. The study was reported on the front page of the MX newspaper with the banner headline ‘Users switch to ice - heroin blitz forces drug change’. MX is Murdoch’s afternoon giveaway paper - I guess you get what you pay for.

On another occasion the bureau gave a newspaper figures showing that the number of eight and nine-year olds coming to the attention of police had fallen from 130 a month to 94 a month over the two years to 2007. The bureau also told the journalist that less than 1 per cent of the population aged eight or nine had some contact with the police. The headline on the journo’s story was ‘Kid Crime Rampage’.

On a third occasion the bureau gave the media figures showing there was no upward or downward trend in knife attacks in Sydney or the rest of NSW. One newspaper’s report of this study attracted headline ‘Stabbings skyrocket as knives plague city’.

A fourth example involves a paper called the Herald. The bureau put out a report showing that the percentage of convicted offenders receiving prison sentences had risen substantially since 1993. The study also showed that prison terms for most offences had increased, as had the proportion of defendants refused bail. The headline on the Herald’s report of the study said, ‘Prison population rises despite lower jailing rates’.

I could quote more examples, but that’s enough. What I want to focus on is how this misuse of crime statistics is brought about and then why it occurs. We’ll start with the how.

I quoted headlines to you and the truth is that the headline on a story heavily influences a reader’s perception of what the story is saying. But headlines are written by sub-editors, not reporters, and sometimes there’s a gap between what the story actually says and what the headline says it says. If there is, most readers won’t notice it. Such gaps can occur for three reasons: because the hard-pressed sub doesn’t accurately comprehend what the story’s actually saying, because the reporter has left some ambiguity in his copy and the sub, who generally knows far less about the topic than the reporter, has jumped the wrong way, or because the sub knowingly writes a headline that makes the story sound more exciting than it actually is. The first two explanations - misunderstandings - are more likely to be the case on broadsheet newspapers; the third - misrepresentation - is more likely to be found in tabloid newspapers. In the case of the Herald story I quoted, the reporter focused on all those offences where the rate of imprisonment had fallen. Since he noted but didn’t highlight that, overall, rates of imprisonment had risen, this left the opportunity for the sub-editor who didn’t read the story as carefully as he should have to conclude from the early paragraphs that the overall rate of imprisonment had fallen.

The interesting question is why the reporter wrote his story in a way that encouraged that error to be made - why he’d focus on the unrepresentative falls rather than the representative rises. I’ll try to answer that when we get to the question of motive - why the media behave the way they do. Perhaps here I should remind you that journalists have to draw the essence from sometimes long and complex reports or events in just an hour or two - under pressure from bosses to make it quick and make it sexy - so it’s not surprising errors and misinterpretations occur.

Now let me give you some relevant background information. Much of the news the media publish comes to them in the form of press releases. All of the bureau’s reports, for instance, are accompanied by a summarising press release. It’s often alleged that the media are so lazy they largely publish uncritically the press releases sent to them by powerful government, business and other interests. In my experience that’s usually not the case; quite the reverse. These days most interest groups seek to use the media to advance their own interests. They employ PR people to put their own spin on the information they release to the media. Most journalists aren’t lazy and they see it as their job to get past the spin, finding the news their audience would like to know about but which the powerful interest would like to conceal. When they receive a report or a press release they think: there’s probably an interesting story in here somewhere, but I’ll have to dig for it; certainly, it won’t be the one the people who put out the press release put at the top of the release. There’s so much spin in the world that many journalists come to the conclusion that everyone’s trying to pull the wool over their eyes. You may regard the bureau as a beacon of independent truth-seeking, but I guess many journalists would suspect it’s just another government agency pumping out bromide about the receding crime wave at the behest of its political masters. There’s a saying in journalism that news is anything somebody somewhere doesn’t want you to know. My guess is that the Herald journalist in question waded through the bureau’s report until he found the bit he thought the NSW Government wouldn’t want people to know: that in the case of five significant offences, rates of imprisonment are going down not up.

Much of the misrepresentation of crime stats arises from statistical misinterpretation. You can misrepresent a time series in a host of obvious ways: by choosing a convenient time period for your comparison, by ignoring random variation (ie failing to ignore outliers), by ignoring seasonal variation (eg the number of assaults peaks in January each year and troughs in May or June), by ignoring base effects (eg saying some crime rate has doubled when it’s gone from 2 a year to 4 a year) and by ignoring the effect of police activity. For instance, when the number of arrests goes up because we’ve got more police on the job arresting people, you call it a crime wave; when the number of arrests goes down you say police aren’t out there on the job countering the crime wave.

The question is whether the journos who commit these statistical crimes are knaves or fools. I couldn’t deny there’s a lot of knavery - journos who know they’re distorting the statistics’ message, but don’t care - but there are more fools than you may imagine. Most journalists are arts-degree types with a very weak grasp on maths and little clue about how to interpret statistical information. If they did understand those things they’d be an economics editor by now. But the question goes deeper: many journalists wouldn’t be sure the diligent performance of their job required them to take account of those statistical niceties. The rules of statistical interpretation aim to ensure the user draws from the stats an accurate or representative picture of the aspect of the world the stats relate to. But that’s simply not the objective of journalism. Journalism pays no heed to the scientific method.

So let’s turn to the question of why the media misuse crime statistics and misrepresent the extent of crime. As the coppers would say, let’s look at motive. Much of the criticism of the media rests on the unspoken assumption that the media’s role is to give us an accurate picture of the world around us. We don’t have first hand experience of much of what’s happening around us and we need the media to inform us.

If that’s the role you think the media play - or should play - I have shocking news. The news media are on about news. What is news worthy? Anything happening out there that our audience will find interesting or important, although the interesting will always trump the important. Paris Hilton is interesting but of no importance; the latest change in the superannuation rules is important but deadly dull - guess which one gets more media overage?

Maybe 99 per cent of what happens in the world is of little interest: 99 per cent of the motorists who crossed the Bridge today made it without incident; someone you’ve never heard of went to work as usual and sold a new ring to someone you don’t know; Australia didn’t declare war on New Zealand . . . the list of uninteresting things that happen is endless. Journalists sort through all the things that happen looking for things they believe their audience will find interesting: the 10-car pile-up on the Bridge, Brad Pitt bought a ring for Angelina Jolie to make up after a fight, the Dutch withdrew their troops from Afghanistan.

When social scientists take a random sample they may examine the sample and discard any outliers that could distort their survey, throwing them on the floor. A journalist is someone who comes along, finds them on the floor and says, ‘these would make a great story’. I happened to be in the Herald’s daily news conference a fortnight ago on the day Kevin Rudd’s $42 billion stimulus package was announced, with all its (then) $950 cash handouts. We discussed searching for a farmer who’d get $950 because he was in exceptional circumstances, $950 because he paid tax last year, $950 because his wife also works, $4750 because he has five school-age kids, and maybe another $950 because one of the kids is doing a training course. And, of course, he’d have a big mortgage, meaning he’d also save $250 a month because of the 1 per cent cut in interest rates announced the same day. Had we found such a person and taken a good photo of him he’d have been all over our front page. The point is that we were search for the most unrepresentative person we could find. Why? Because our readers would have been fascinated to read about him. It’s reasonable to expect the media to be accurate in the facts they report but, even if they are, it’s idle to expect them to give us a representative picture of the world. And that takes me to an even more shocking thought: if the media aren’t on about giving us a representative picture of the world around us, why would journalists bother adhering to the rules of statistical interpretation? Why not highlight a quite unrepresentative statistical comparison if it happens to be the most interesting comparison?

It’s often claimed that the media focus heavily on bad news, often ignoring good news. Guilty as charged. But we do so for a simple reason: we know our audience finds bad news a lot more interesting than good news. So I’m not particularly apologetic for this state of affairs: our failings are the failings of our audience, which are the failings of human nature. Why do people find bad news more interesting than good news? As I’ve written elsewhere (SMH 12.4.2006), I believe the explanation can be found in our evolutionary history. Our brains are hardwired to perpetually scan our environment for threats, and now the chances of our being eaten by a lion have diminished we’re left with a strong appetite for bad news about, for instance, the threat of crime.

Communications research tells us we read much more for reinforcement than enlightenment. While there’s a niche market for columns that challenge the conventional wisdom, and news about some new and unexpected twist in a standard story will be found interesting, journalists know the news that goes down best is the news that confirms people prejudices. Perhaps thanks to the efforts of the media themselves, most people know as a self-evident truth that crime is increasing. Most stories about crime are intended to reinforce that belief.

Let me conclude. The media’s defence against criticism is that their failings are those of their audience; they do what they do because their audience demands it of them. But shouldn’t we hold the media to a higher standard than we hold ourselves? Yes we should. We can expect less crass commercialism and more professionalism. Doctors, for instance, don’t ask patients what disease they want to be told they have and don’t let patients pick the medicine they want prescribed.

And there’s a limit of inaccuracy and sensationalism below which market punishment sets in. Mediums that play too lightly with the truth eventually lose their credibility and their audience’s respect. This means there are checks and balances. Mediums that value their credibility - in commercial as well as ethical terms - often employ commentators who set a high store on making sure their audience isn’t misled, even when those commentators spend a fair bit of time highlighting the media’s own failings and trying to beat down some of the things that get beaten up on the front page. My guess is that, as information overload and infotainment continue to grow, at least the better-educated audience will gravitate to those journalists and journals they perceive to be committed to the search for truth. What’s more, it is possible to be truthful and interesting at the same time. So don’t slit you throat yet.


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