Why we've never had 'Gonski funding'

It turns out Christopher Pyne was right: Julia Gillard's version of the Gonski school funding reform was indeed "C​onski".

The con was that the funding changes Gillard put into law in 2013 – which Labor and the teacher unions christened "Gonski" and have virtuously defended from Coalition attack ever since – bore only a vague resemblance to what leading company director David Gonski's panel recommended in its report to the government in 2011.

In a speech last week, Dr Ken Boston, a member of the panel and former NSW Education Department director-general, argued that much of what people think they know about "Gonski" is wrong. He listed four common beliefs that are mistaken.

First, many people believe the Gonski report said additional funding was the key to improving education.

Wrong. "The Gonski report did not see additional funding as the key to improving Australian education. It's most critical recommendations were about the redistribution of existing funding to individual schools on the basis of measured need," Boston said.

"The report envisaged the amount allocated to independent schools being based on the measured need of each individual school, and the amounts allocated to Catholic and government systems being determined by the sum of the measured needs of the individual schools within each system – a process of building funding up from the bottom."

This was in sharp contrast to the process of the last 40 years: top-down political negotiation by the federal government with state governments, independent school organisations, church leaders, teacher unions and others, he said.

The outcome had been that the funding allocations to the three sectors – independent, Catholic systemic and government – were arrived at without any agreed and common system of assessing real need at the level of each individual school.

School funding has been "essentially based on a political settlement, sector-based and largely needs-blind", whereas the Gonski report proposed that it be determined on an educational, not political basis, be sector-blind and entirely needs-based, as well as being bottom up, not top down.

But Gillard rejected Gonski's recommendations and stuck with the old, religion-based arrangements.

"We concluded that an additional $5 billion might be needed on top of the $39 billion being spent annually by the state and federal governments, because of the commitment given by the federal government [Gillard], after the review had started, that no school would lose a dollar as a result of the review.

"This was an albatross around our necks," Boston said.

The second common misunderstanding was that the Gillard and second Rudd governments, having adopted Gonski's approach, then reached "Gonski agreements" with the states, promising additional "Gonski funding" over six years.

Nothing Gonski about it. Gonski recommended that the loading for non-government schools as a proportion of "average government school recurrent costs" – a biased formula that meant public funding for new places for children in disadvantaged government schools automatically increased the federal government grants to non-government schools, without any consideration of disadvantage – should cease.

Gillard, supposedly that great champion of needs-based funding, kept the biased formula alive.

Gonski recommended that the basis for general recurrent funding for all students in all sectors be a "schooling resource standard" for each school, set at a level comparable with schools with minimal educational disadvantage.

To this should be added loadings for schools according to their social disadvantage – low socioeconomic status, English language proficiency, school size and location, and indigeneity​.

Calculation of the resource standard and the size of the loadings should be done by a "national schools resourcing body", similar to the former Schools Commission. Gillard wouldn't touch it.

"Like the Coalition government, Labor has ducked the fundamental issue of the relationship between aggregated​ social disadvantage and poor educational outcomes, and has turned its back on the development of an enduring funding system that is fair, transparent, financially sustainable and effective in promoting excellent outcomes for all Australian students," Boston said.

The third misunderstanding – which Boston labels "the Fairfax view" (not this time, Ken) – is that most of the problems facing Australian education would be solved if we got the last two years of "Gonski funding".

It's true that, so as to disguise the true cost of Labor's politically gutless, bastardised version of Gonski, it was to be phased in over six calendar years, with the bulk of the cost loaded into the last two years, 2018 and 2019.

This was $4.5 billion, which the Turnbull government has cut to $1.2 billion over the four years to 2021.

Even so, "providing the so-called 'last two years of Gonski funding' will not deal with the fundamental problem facing Australian education. Neither side of politics is talking about the strategic redistribution of available funding to the things that matter in the schools that need it, on the basis of measuring the need of each individual school," Boston said.

The fourth common misconception is that the two sides of politics are poles apart. At one level, yes. What they have in common, however, is that neither is genuinely interested in moving to needs-based funding.

"The government and opposition are fluffing around the margins of the issue, and neither appears to understand the magnitude of the reform that is needed, or – if they do – to have the capacity to tackle it," Boston said.

"Equity and school outcomes have both deteriorated sharply since we wrote the Gonski report. Some stark realities now shape the context in which governments – state and federal – must make decisions two months from now about how Australian education might recover from its long-term continuing decline.

"The present quasi-market system of schooling, the contours of which were shaped by the Hawke and Howard governments, has comprehensively failed.

"We are on a path to nowhere. The issue is profoundly deeper than argument about the last two years of 'Gonski funding'," he concluded.

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Cost-of-living talk provokes bulldust

I read that the Turnbull government has decided to make the cost of living its focus for the year. Oh dear. In that case, brace yourself for a year of con jobs and flying bulldust.

There's a long history of politicians professing to be terribly concerned about "the cost of living" and nothing good ever comes of it. It's always about saying things to keep or win your vote and rarely about doing anything real – let alone sensible – about prices.

Politicians start "focusing" on the cost of living when the spin doctors running their party's focus groups report that the cost of living keeps coming up in the things the punters are saying.

But this is a strange time for the cost of living to be high on people's list of complaints. The rate of inflation has been below the 2 per cent bottom of the Reserve Bank's target range for two years.

My theory is that the cost of living is what you complain about when you've got no bigger worries. Say, that unemployment is shooting up and you're worried about losing your job.

Politicians' professed concern about the cost of living invariably leads to bulldusting because, where prices are set by private businesses operating in the market, pollies have neither the ability nor the desire to do anything about them.

Any price you have to pay is a price some business receives. And it'd be very lacking in generosity should any government want to lower that price.

That's why so often pollies limit themselves merely to continually repeating "I feel your pain".

It seems, however, that Malcolm Turnbull's spinners are using "the cost of living" as a catch-all for "focusing" on three prices in particular: for energy, childcare and housing.

Particularly in the case of childcare, these are prices heavily influenced by government policy. The government has never wanted to talk about housing affordability, so the focus groups must be telling it to do something.

As for childcare and energy, my guess is the government has thought of these itself, believing them to offer it an edge against Labor in the eternal blame game.

If the government's latest omnibus bill passes through the Senate, it will be able to trumpet the late arrival of the big cuts in the cost of childcare first promised in the budget of May 2015.

If the omnibus doesn't make it through, the government will be loud in blaming the high cost of childcare on Labor.

There's no industry more heavily government regulated than energy. Indeed, the "national energy market" was artificially created by federal and state governments in the late 1990s. It's governed by a rule book of more than 1000 pages.

The government has three goals in energy, with plenty of room for conflict between them: to keep energy flowing without blackouts, meet our Paris commitment to reduce carbon emissions, and keep price rises to a minimum.

The industry is going through huge disruption as renewables replace fossil fuels, and the government hasn't yet come up with a policy to achieve its conflicting goals, but that's not the point.

It believes it has more credibility with voters on energy prices than Labor has, so it will have little trouble shifting the blame for price rises and blackouts to Labor. That's especially so since responsibility for energy is shared with the states, and most of the premiers are Labor.

Focusing on energy prices will also divert attention from a topic where the Coalition's credibility with voters is much less than Labor's: climate change.

Do you buy "energy"? People I know buy electricity and maybe gas as well. The pollies have switched to talking about "energy" because they don't want to mention that three-letter word "gas".

That's because the big price hikes in recent times have been for gas. It's gone from being a third of the price of gas in America 10 years ago, to three times the American price today.

When the boss of BlueScope Steel warns of a looming "energy catastrophe", that's what he's referring to. Our manufacturers now face hugely higher prices for the gas they use.

Politicians on neither side want to talk about gas prices. Why? Because federal governments of both colours were responsible for letting it happen. They allowed the development of a liquefied natural gas export industry in Queensland.

Now, all the gas produced in eastern Australia can be exported to Japan or China for much higher prices. If we want some, we have to pay the "export parity" price.

This has given a huge windfall gain to our gas producers. But it's also disrupted the electricity market by making our gas-fired power stations uneconomic.

But please don't think about that. The real problem, we're told, is too much renewable energy which, though it's been encouraged by the renewable energy target begun by John Howard and continued by Tony Abbott, is all Labor's fault.

It appals me the way first, climate change, and now energy policy have been turned into partisan, salute-the-flag issues. If you vote Liberal you're expected to be dubious about climate change and have a grudge against renewable energy, particularly wind turbines; if you vote Labor it's compulsory to love both.

There'll be a lot of game playing on energy this year, but much less effort put into fixing the problems while minimising price increases.

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How Shorten is wedging Turnbull at our expense

Eighteen lobby groups ranging from the Business Council to the ACTU have pleaded with political leaders on both sides to "stop partisan antics" and reach agreement on reform of the energy market, ending all the uncertainty. Fat chance.

They're quite justified, of course. When businesses are making hugely expensive investments in generation plants that may last for 50 years, they need to know what the government's rules are – and that the other side won't come along and change everything.

But such a plea assumes our politicians are prepared to give the good government of the nation top priority.

They're not. On both sides top priority goes to winning the next election.

These days, the two sides of politics are quietly busy getting issues lined up in a way that gives them the advantage in that election.

The pollies play an unending game of "wedge and block". You try to take a position on a particular issue that drives a wedge between the different wings of the other party.

It has to decide whether to be pragmatic and take the position it knows is popular with voters, or stick with the position it nominally stands for and favours the interests and prejudices of the party's base.

If it takes the popular position you've taken, it's successfully blocked your move (but left its heartland unhappy). If it stands its traditional ground, its base is happy, but it's lost votes to you.

You've successfully driven a wedge between it and the voters, putting you on the way to winning.

Each side's goal is to manoeuvre the other side into a situation where the election campaign is dominated by those issues that favour you.

You seek to wedge the other side on those issues where you have a natural advantage (your biases align with the voters') while blocking the other side's attempted wedges on issues where it has the natural advantage.

Labor voters are proud of its advocacy of the national disability insurance scheme and the Gonski schools funding reform, yet Julia Gillard damaged both by trying to use them to wedge Tony Abbott at the 2013 election.

She belatedly proposed an increase in the Medicare levy to help fund the NDIS, hoping Tony No-tax-increases Abbott would oppose it, so she could accuse him of hating the disabled.

Abbott woke up and quietly agreed to the tax increase.

Gillard delayed the introduction of Gonski until the election year (meaning most Coalition states wouldn't sign up) hoping Abbott would oppose it and she could accuse him of hating public schools.

Abbott and his elite private-school shadow cabinet denigrated "Conski" until he woke up and claimed he was on a "unity ticket" with Labor on schools funding – a commitment he ditched the moment he'd won the election.

Look behind all the present argy-bargy between the pollies and you see Bill Shorten trying to keep alive all the key policy issues that got him so close to winning last year's election.

He's having remarkable success retaining last time's wedges against the government because Malcolm Turnbull is hamstrung by the dominant hard right faction on his backbench, which is insisting on doctrinal purity.

Last week internal party pressure caused Turnbull to disown talk of tightening the capital gains tax discount for rental properties, even though this would have blocked Labor's use of opposition to negative gearing to attract younger voters (as well as helping the budget).

Far more voters' kids go to government than non-government schools. We desperately need to move to needs-based funding regardless of school sector, so we can get on with the more pressing issue of lifting students' performance.

But Gillard's version of Gonski is way too expensive (incongruously, because of Labor's visceral fear of offending elite private schools).

It's clear the minister, Simon Birmingham, is working on a compromise, but Labor is refusing to countenance anything but "the full Gonski".

It wants to keep the issue alive and the Coalition successfully wedged.

Most voters accept the reality of climate change and want effective action to help limit it, but with the minimum increase in energy prices.

People of goodwill developed a face-saving way for Turnbull to make progress on emissions reduction without much increase in retail prices, called an "emissions intensity scheme".

Since Labor has a similar scheme, Turnbull could have blocked the climate change wedge without political risk. But the disguised deniers sitting behind him were so opposed he had to swear off it.

Neither side of politics has any interest in finding a compromise that would give our energy sector the policy stability needed for it to adjust to the world's low-carbon future.

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Our new comparative advantage: renewables

The old joke says the questions in economics exams don't change from year to year, but the answers do. Welcome to the economics of energy and climate change, which has changed a lot without many people noticing - including Malcolm Turnbull and his climate-change denying mates.

They've missed that the economics has shifted decisively in favour of renewable energy, as Professor Ross Garnaut​, of the University of Melbourne, pointed out at an energy summit in Adelaide last October.

Garnaut is chairman of Zen Energy, a supplier of solar and battery storage systems. But there aren't many economists who know more about the energy industry and climate change than Garnaut, who's conducted two federal inquiries into the subject.

He says that, since his second review in 2011, there have been four big changes in the cost of renewable energy relative to the cost of energy from coal or gas.

First, the cost of renewable energy generation and energy storage equipment has fallen "massively".

The modelling conducted for his inquiry assumed the cost of photovoltaic solar generation would fall by a few per cent a year. In practice, costs have fallen by about five-sixths since that assumption was made.

"Similarly large reductions have occurred in the cost of lithium ion batteries and related systems for storing energy," he says.

There have been less dramatic but substantial reductions in costs of equipment for electricity from wind and other renewables.

The cost reductions come from economies of scale in the hugely increased production by China and others, plus savings through "learning by doing". Advances in technology will keep prices falling after scale economies have been exhausted.

Second, there have been "transformational improvements" in battery storage technology, used at the level of the electricity grid, to ensure balance between supply and demand despite renewables generators' "intermittency​" (inability to operate when the sun's not shining or the wind's not blowing).

Third, there's been a dramatic reduction in the cost of borrowing the money needed to cover the capital cost of generation equipment.

Real interest rates on 10-year bonds are below or near zero in all developed countries, including Australia.

"These exceptionally low costs of capital are driven by fundamental changes in underlying economic conditions and are with us for a long time," Garnaut says.

Low interest rates reduce the cost of producing, storing and transporting renewable energy more than they reduce the cost of fossil-fuel energy because renewable costs are overwhelmingly capital (sun and wind cost nothing), whereas fossil fuel costs are mainly recurrent (digging more coal out of the ground).

Fourth, there's been a dramatic increase in the cost of gas - and thus gas-fired electricity.

Ten years ago Australia had the developed world's cheapest natural gas - about a third of prices in the US. Today, our prices are about three times higher than in the US.

Why? Because the development of a liquid natural gas export industry in Queensland has raised the gas prices paid in eastern Australia to "export parity" level - the much higher price producers could get by selling their gas to Japan or China (less the cost of liquefaction and freight).

It's worse than that. Because foreign investors were allowed to install far too much capacity for LNG exports - meaning none of them is likely to recover their cost of capital - they've been so desperate for throughput they've sometimes bid gas prices well above export parity.

Apart from making gas-fired power more expensive relative to renewables, this has implications for how we handle the transition from "base-load" coal-fired power (once you turn a generator on, it runs continuously) to intermittent solar and wind production.

It had been assumed that gas-fired power would bridge the gap because it was cheap, far less emissions-intensive than coal, and able to be turned on and off quickly and easily to counter the intermittency of renewables.

Now, however, without successive federal governments quite realising what they'd done, gas has been largely priced out of the electricity market, with various not-very-old gas-fired power stations close to being stranded assets.

What now? We thank our lucky stars the cost of energy storage is coming down and we get serious about storage - both local and at grid level - using batteries and such things as "pumped hydro storage" (when electricity production exceeds immediate needs, you use it to pump water up to a dam then, when production is inadequate, you let the water flow down through a hydro turbine to a lower dam).

In other words, the solution is to get innovative and agile. Who was it who said that?

Turnbull's party seem to be pro coal and anti renewables partly because they know we have a comparative advantage in coal.

We can produce it cheaply and we've still got loads in the ground. The rest of the world is turning away from coal and the environmental damage it does, but let's keep opening big new mines and pumping it out, even though this pushes the prices our existing producers get even lower.

If the banks are reluctant to finance new coal mines at this late stage, prop them up with government subsidies. Join the international moratorium on new mines? That would be unAustralian.

But get this: Garnaut says we also have a comparative advantage in the new world of renewables.

"Nowhere in the developed world are solar and wind resources together so abundant as in the west-facing coasts and peninsulas of southern Australia. South Australian resources are particularly rich...

"Play our cards right, and Australia's exceptionally rich endowment per person in renewable energy resources makes us a low-cost location for energy supply in a low-carbon world economy.

"That would make us the economically rational location within the developed world of a high proportion of energy-intensive processing and manufacturing activity.

"Play our cards right, and Australia is a superpower of the low-carbon world economy."

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Don't worry, climate change is just imaginary

As we've sweltered through this terrible summer – and lately, as bushfires have raged – what a comfort it's been to know that climate change doesn't exist and isn't happening.

Or, if it does exist, it's not caused by anything humans have done, so there's nothing we can do about it.

Or, if it is caused by humans burning fossil fuels for the past 200 years, let's say we've got a policy to deal with it, go to international conferences and make pledges to act, then come home and not do much about it.

That way, we'll have all bases covered: something to calm the consciences of those still silly enough to believe climate change is real, but not enough to annoy the party's many climate change deniers, nor our generous donors in the coal industry.

And, just to make you feel better, let me remind you of the big win the deniers have had. The Coalition's leading, longest-standing and most articulate supporter of action on climate change has changed sides.

Malcolm Turnbull, the man who lost his job as party leader because was so keen to see action he supported the Labor government's emissions trading scheme, is now keen to ensure it never happens again.

The squeakiest wheels in the party want him to demonise renewable energy, blaming it for all the blackouts and price rises?  Introduce new government subsidies for coal while making the future for power generation so uncertain no one's game to invest in anything?

Sure. Whatever it takes.

(Don't worry, Malcolm, I'm sure all the people inside and outside the Liberal fold who were so pleased when you became Prime Minister – me included – will learn to accept your need to abandon everything we know you believe and start doing Tony Abbott impressions.)

It's the easiest thing in the world for people to imagine that whatever's been happening lately is much bigger and more terrible than ever before.

Trouble is, the scientists keep confirming our casual impressions.  A report this month prepared by top climate scientists for the independent Climate Council, is all bad news.

They say all extreme weather events in Australia are now occurring in an atmosphere that's warmer and wetter than it was in the 1950s.

"Heatwaves are becoming hotter, lasting longer and occurring more often," they say.

"Extreme fire weather and the length of the fire season is increasing, leading to an increase in bushfire risk."

This fits with the findings of the latest biennial CSIRO and Bureau of Meteorology State of the Climate report.

According to the bureau's Dr Karl Braganza, Australia is already experiencing the effects of climate change, with record-breaking heat now becoming commonplace across the country.

"Australia experienced its three warmest springs on record in 2013, 2014 and 2015," he says. "Temperature and rainfall during this period is critical to southern Australia's fire season.

"We've already seen an increase in fire weather and a longer fire season across southern and eastern Australia since the 1970s.

"In these regions the number of days with weather conducive to fire is likely to increase.

"Whilst the observations show us increased rainfall in some parts of Australia, we have also seen significant seasonal decline, such as in the April-October growing season, where an 11 per cent decline in rainfall has been experienced in the continental southeast since the mid-1990s.

"The changing climate significantly affects all Australians through increased heatwaves, more significant wet weather events and more severe fire weather conditions.

"Some of the record-breaking extreme heat we have been seeing recently will be considered normal in 30 years' time."

Oh, good.

Of course, none of this is having any effect on agriculture. It must be a great comfort to our farmers to know that, by order of Barnaby Joyce and the National Party, climate change is a figment of the climate scientists' imagination.

This is good news, since I read that reliable rainfall and predictable temperature ranges are critical to agricultural production, and these are the very factors affected by a changing climate – if it was changing, which it isn't.

A new CSIRO study, led by Dr Zvi Hochman, has found that Australia's average yields from wheat-growing more than tripled between 1900 and 1990 thanks to advances in technology, but have stalled in the years since then.

The study found that, since 1990, our wheat-growing zone had experienced an average rainfall decline of 2.8 millimetres, or 28 per cent per cropping season, and a maximum daily temperature increase of about 1 degree.

Australia's "yield potential" – determined by climate and soil type – which is always much higher than farmers' actual yields, has fallen by 27 per cent since 1990.

So all the efforts farmers have made to improve their yields with better technology and methods have served only to offset the effects of climate change, leaving them no better off.

"Assuming the climate trends we have observed over the past 26 years continue at the same rate, even if farmers continue to improve their practices, it is likely that the national wheat yield will fall," Hochman says.

He says these findings would be broadly applicable to other cereal grains, pulses and oilseed crops, which grow in the same regions and season.

But not to worry. They're only scientists. What would they know that our pollies didn't want to know?

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Reserve Bank chief gently reproves Turnbull’s failings

Reserve Bank governor Dr Philip Lowe's economic policy to-do list for 2017 contains a lot more implied criticism of the Turnbull government's weak performance than it has suited some in the national press to report.

It's true that, in his speech last Thursday, Lowe was clear in his support for a cut in the company tax rate and, by implication, the government's plan to cut the rate from 30 per cent to 25 per cent over 10 years, at a cumulative cost to revenue of $48 billion, and then a continuing net cost of $8 billion a year.

Last among the four items on Lowe's to-do list was "rebuilding our fiscal buffers", by which he meant getting the budget back into surplus.

Our former good record of successive surpluses and negligible net government debt "provided us with a form of insurance", he said.

"It meant that when difficult times did strike last decade, fiscal [budgetary] policy had the capacity to play a stabilising role. We had options that not all other countries enjoyed."

Note to the government's media cheer squad, Treasury revisionists and Professor Tony Makin: this leaves little doubt about Lowe's rejection of your minority view that fiscal policy is ineffective in stabilising the economy during downturns.

Lowe went on to say that the task of returning the budget to surplus is complicated by our simultaneous "need to make sure that our tax system is internationally competitive".

"One example of this complication is in the area of corporate tax, where there is a form of international tax competition going on in an effort to attract foreign investment," he said.

"Like other countries, we face the challenge of responding to this, while achieving a balance between recurrent spending and fiscal revenue."

Since Labor is using its senators to oppose passing the government's tax cuts to big businesses, one Australian newspaper headlined this "Reserve Bank chief slams Labor on company tax block". Some slam.

I'm unpersuaded by the need to cut the company tax rate at a time when many multinational companies have already found ways to pay far less than 25 per cent, but that's for another day.

A point to note, however, is that whereas the government argues cutting company tax would do wonders for "jobs and growth", Lowe's argument is more negative: if we don't do it while other countries are doing it we'll lose foreign investment – and, presumably, jobs and growth.

Not nearly such an attractive selling proposition.

Another point worth noting is Lowe's implication that the budget needs to achieve balance in spite of the huge cost of cutting company tax.

Maybe we should headline this: Reserve Bank chief slams Coalition's failure to show how company tax cut will be paid for, and so not further delay our return to surplus.

Note, too, Lowe's reference to "achieving a balance between recurrent spending and fiscal revenue" (my emphasis).

This isn't the first time he's quietly taken issue with Treasury's longstanding practice of exaggerating the size of budget deficits by lumping spending on capital works in with recurrent spending – unlike the state governments.

Borrowing part of the cost of building infrastructure that will deliver economic and social benefits for 30 or 50 years is in no way "living beyond our means".

And, indeed, one place higher on Lowe's to-do list than achieving budget surplus in spite of company tax cuts is the task of "providing adequate high-quality infrastructure to help our citizens be as productive as they can be and enjoy a high quality of life".

He notes we've got a strongly growing population which, if we fail to invest in sufficient infrastructure, including transport infrastructure, can "impair our ability to compete and be as productive as we can be".

It's surprising how many people are great advocates of high immigration levels, but won't countenance the increased spending and borrowing needed to provide the additional infrastructure – roads, public transport, hospitals, schools – used by all the extra people.

Then they wonder why our productivity performance is weak.

Which brings us to the first item on Lowe's to-do list: "reinvigorate productivity growth".

"There is no shortage of things that could be done to lift our performance. The challenge is that most of these ideas require difficult political trade-offs." Just so.

Lowe's second issue on the list is "how best to capitalise on the opportunity that the economic development of the Asian region provides".

I'd have thought the answer was obvious: our business people should sit round waiting until our hopeless politicians provide them with tax incentives sufficient to induce them to get off their arses.

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Now the transition phase is ending, wages can start rising

This year should see the end of the economy's protracted "transition" back to business as usual. You beaut.

Resources booms - or any other booms - are nice, but the subsequent busts are always hard. We'll know the bust is over when the fall in investment in mining construction - which began in late-2012 - tails off at the end of this year.

According to Reserve Bank governor Philip Lowe, we've already come 90 per cent of the way.

As a matter of simple arithmetic, the removal of this "negative contribution" to quarterly growth in gross domestic product will leave the figures a lot stronger.

This will be a triumph for the managers of our macro economy, particularly at the Reserve Bank.

Back in 2014, some of the biggest names in Australian economics were predicting that, in the absence of major reform leading to a huge boost in our productivity, we'd end up in recession.

To get back to normal we needed not only a big fall in our exchange rate from the heights it reached during the boom, but a period of weak wages growth to ensure the fall in the nominal exchange rate became a fall in our real exchange rate, thus yielding a lasting improvement in the international price competitiveness of our export and import-competing industries.

This is the bit the big-name economists didn't believe we'd pull off.

But we have. Which serves as a reminder that the weak wages growth we've experienced since mid-2012 isn't just some random bit of bad luck for workers, but a key part of the process by which the economy gets back to normal.

The economist who's long made a close study of Australia's commodity booms, past and present, and the problems they've caused when they bust, is Dr David Gruen, now deputy secretary, economic, of the Department of Prime Minister and Cabinet.

In a speech he gave last week, Gruen reviewed the progress of our transition phase.

He started by reminding us of just how big an "economic shock" to our economy the resources boom has been. The size of the improvement in our terms of trade (export prices relative to import prices) makes it easily the biggest sustained boom in our history.

Since their peak in September 2011, however, they've deteriorated by more than 30 per cent.

The boom in mining construction saw it increase from less than 2 per cent of GDP to a peak of about 9 per cent in 2012-13.

This resulted in something like a quadrupling in the mining industry's stock of physical capital, and a tripling in its production capacity, in the space of a decade.

"The largest investment was in liquefied natural gas production capacity, with Australia on track to overtake Qatar as the world's largest sea-based exporter of LNG," Gruen said.

The economic activity and employment that accompanied the investment boom caused a significant re-alloc​ation of labour across industries, but this has now been largely unwound as mining projects reach completion.

The improvement in the terms of trade caused sustained growth in real income per person (much of it coming in the form of lower prices for imports and overseas travel).

Since their peak in 2011, the terms of trade have subtracted from income growth by so much that, even with reasonable improvement in the productivity of labour, real gross national income per person has been falling.

"This is reflected in gradually falling real average earnings per hour over the past four years - for the first time in living memory," Gruen said.

With an end to the trend deterioration in the terms of trade now in prospect - they've been improving for the past three quarters - it shouldn't be long before real incomes start growing again, with the size of that real growth strongly influenced by the rate of improvement in labour productivity.

It's important to note that the unusual ease with which overall real wages have adjusted to, first, the boom and then the bust, is explained by the way relative wages in particular industries (relative to the economy-wide average wage) have behaved in a textbook-like fashion.

As the resources boom gathered strength from 2004, strong demand for labour in the resources, construction, and professional services sectors saw wages strengthen relative to those in other sectors.

Relative wages in healthcare and manufacturing stayed close to the economy-wide average, while relative wages in retail trade, and accommodation and food services, grew more slowly than the average.

But then, as the resources boom receded after 2011, wage growth in the resources, construction, and professional services sectors slowed to less than the average, enabling wages in other sectors to catch up somewhat.

Gruen expects this pattern to continue as the resources investment downswing runs its course.

"This sort of relative wage adjustment didn't occur in the [commodity booms of the] 1970s or early 1980s, and the result was significant increases in unemployment - an outcome we've succeeded in avoiding during the latest episode," he said.

So how come the big-name economists' forebodings proved misplaced?

I think they underestimated the extent to which the micro-economic reforms of the 1980s and '90s, combined with the improved "frameworks" for the conduct of macro-economic management, have made the economy more flexible - better able to roll with punches from economic shocks; less inflation-prone and unemployment-prone - and hence easier to keep growing at a reasonably stable pace.

In particular, they underestimated the way the moves to a floating exchange rate, an independent central bank and decentralised wage-fixing would help us cope with our periodic commodity booms.

In their enthusiasm to urge more micro reforms on us, they failed to realise how much we'd benefited from those we'd already made.

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Shorten's New Year's resolution: practice what I preach

People are always complaining that our politicians – on both sides – are "out of touch". They're too high and mighty to understand the things that are annoying ordinary people in ordinary life.

This is a big part of the reason almost one person in four voted for a minor party in last year's election. The political establishment just doesn't get it.

But one of our pollies does claim to have got the message. Wading through all the usual guff in the start-of-the-year speech Bill Shorten gave last week, I came upon a passage so surprising I thought it worth recording.

"Restoring ... faith in the system is the threshold challenge for politics today. Rusted-on supporters and deep tribal loyalties are not what they once were," he said.

"There is one certainty in 2017: people are disengaged from politics and they're distrustful of politicians.

"To many Australians the political system is broken – and more than a few don't trust us to fix it.

"I say 'us' because virtually everyone in this room [at the National Press Club] is considered part of the problem, part of the political class.

"Rightly or wrongly, fairly or unfairly, we are seen as members of the same insider club, letting down the rest of Australia.

"This sense of alienation isn't a local curiosity – it's a global phenomenon. Strong enough to take Britain out of Europe – and put Donald Trump in the White House.

"And in these unusual times, politics-as-usual doesn't cut it any more.

"Yes, we are an adversarial democracy, built on the clash of ideas – I honour that. My job, as Leader of the Opposition, is to oppose what I believe is wrong. My job ... is to put positive ideas forward.

"But this year I am going to remind myself as often as possible: people first, politics last. I can't guarantee I'll always get that right – but I'm certainly going to try.

"Because Australians are sick to their core of the petty schoolyard bickering, he-said she-said, the tit-for-tat.

"They're not opposed to genuine debate about the future – but they are over the smallness of so much of the national political conversation ...

"Mind you, that counts for nothing if [scandals over politicians' expense claims make] people think we are acting in our own interests, instead of theirs."

Wow. But this column is no free ad for Team Shorten. I wanted to record it because it was so true, but also to help the man stick to his New Year's resolution.

Actually, it shouldn't surprise that Shorten "gets" all that. Our politicians aren't "out of touch" because that's why their parties (and sometimes, we taxpayers) spend thousands every year conducting focus groups with ordinary voters.

I bet that some of the phrases Shorten used were lifted straight from Labor's market research. Someone in the group blurts out some pithy opinion, everyone else says "Yeah, that's right!" and the researcher writes it down for future use.

As the "political class" knows, the punters love having their own opinions fed back to them. I'd also bet that both parties' rival researchers tell them much the same things about what voters like and dislike.

But if the pollies know how much we hate the way they carry on, why do they keep doing it?

Because some of the things they do still work, even though we hate them. Because they want to win the next election at all cost, and so are willing to do things that bring them immediate advantage, even though they add to the long-term fouling of the collective political nest.

Because many of the unconvincing things they say are intended to shore up the faith of the party faithful, not persuade the rest of us.

Because both sides are afraid that if they're the first to stop behaving badly, the other side will wipe the floor with them. Economists call this a "collective action problem", which can only be fixed by some outside authority imposing a solution on both sides.

Back to Shorten's resolution. It would certainly be a big change to Labor's behaviour since its success at last year's election left Malcolm Turnbull with such a tiny majority.

Labor has followed a sneaky strategy of giving the appearance of co-operation and positivity while quietly seizing opportunities to frustrate the government's program, making it look impotent and unstable.

To keep same-sex marriage alive as an issue for the next election, it has blocked Turnbull's plebiscite, using the excuse that the gay community wanted to avoid the risk of an abusive debate.

Were it less self-interested it would have advised gays that few great social advances come without pain, and that failing to take advantage of the public's present mood of approval risked having to wait many years for what they want so badly.

Just to make life hard for the government, Labor has ignored its principles and sided with Liberal dissidents and rich superannuants claiming Turnbull's super reforms were "retrospective" and sided with asset-rich oldies opposing Turnbull's reform of the age pension means test.

And now, it seems, Labor's preparing to side with elite private schools objecting to the government redirecting some of their lolly to more needy students.

What were you saying about voters being sick of rival politicians playing tit-for-tat, Bill?

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Real energy problem is our secret gas parity-pricing policy

Malcolm Turnbull wants us to believe he's an energy magician, able to pull off a "policy trifecta" of eliminating blackouts and greatly reducing our emissions, all without much increase in the price of electricity and gas.

The main trick magicians use is to direct the audience's attention away from the place where they're doing their sleight-of-hand. That's what Turnbull's up to.

He wants to shift the blame for blackouts away from the feds and onto the states, while doing exactly the same for the big jump in gas prices.

He wants to blame our problems on a too-fast shift to renewables, to justify a new subsidy for new coal-fired power stations.

But the main thing he – and the gas industry – desperately wants to stop us noticing is that the leap in gas prices is a consequence of long-standing federal government policy and has nothing to do with the states' reluctance to let the gas producers frack all over their farmlands.

The balance of supply and demand for natural gas on our eastern seaboard was fine – and would still be today, were it not for the feds' earlier decision to allow foreign investors to build (too many) liquefaction plants near Gladstone in Queensland.

As the feds understood full well, once you can liquefy natural gas you can ship it overseas. And once you do that you've taken the relatively tiny, closed eastern Australian gas market and opened it up to the huge East Asian gas market, where prices are much higher.

The inevitable consequence was a leap in the price of gas on the eastern seaboard – plus a huge windfall gain to our eastern gas producers.

Now do you see why the gas industry and federal politicians of both stripes keep repeating the economic lie that the problem has been caused by the states' bans on fracking, and could be solved by lifting them?

No amount of increased gas supply on our part would be sufficient to lower the East Asian price of gas, which means no new producer of coal seam gas would be prepared to sell it to local consumers and manufacturers for anything less than they could get by selling it to Japan or China.

Unless, of course, the federal government obliged them to.

I don't object to the policy of export-parity pricing but, like its predecessors, the Turnbull government wants to keep the policy a deep, dark secret because it's so much harder to defend a super-rational policy in these days of populist indulgence than it was when Malcolm Fraser did something similar to petrol prices.

Turnbull wants to keep the super-rational policy, but shift the blame for its economic and political consequences to others.

Had he the courage, he could oblige the gas industry to use its windfall profits to compensate the household and business losers for losses arising from an implicit government policy change.

Turnbull blames South Australia's blackouts on its excessive enthusiasm for renewable energy which, pending the development of storage arrangements, has a problem with intermittent production.

He doesn't admit his parity-pricing policy is contributing. It was expected that gas-fired power generation would ease the transition from coal-fired to renewable generation.

That's because gas-fired power stations emit far less carbon dioxide and can be turned on and off as required to counter renewable energy's intermittency.

Guess what? South Australia has a new and big gas-fired generator at Pelican Point, near Adelaide, but it's been mothballed.

Why? Because the operator had a long-term contract for the supply of gas at a price set at the pre-export-parity level, and decided it was more lucrative to sell the gas into the East Asian market.

Last week Turnbull had the effrontery to argue that now gas-fired power had become uneconomic, we needed to fill the gap by subsidising new-generation "clean" coal-fired power stations.

Small problem. They're hugely expensive, only a bit less emissions-intensive than existing coal-fired stations, can't easily be turned on and off, and would supposedly still be operating 60 years later.

If there's a case for subsidising any fossil fuel-powered generators the obvious candidate is the gas-fired plants the feds' export-parity pricing policy has rendered uneconomic.

So great is the coal industry's hold over the Coalition that, not content with subsidising increased supply of coal from Adani and others at a time when coal is a sunset industry, Turnbull is now making up excuses to subsidise increased demand for coal by local electricity producers.

Economists are always telling politicians not to try picking industry winners. In reality, the politicians are far more inclined to back known losers.

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Let's do our sums on mining's economic contribution

With Malcolm Turnbull desperate to keep burning coal for electricity, just how important is the mining industry to our economy? Short answer: not nearly as much as it wants us to believe, and has conned our politicians into believing.

Because people like me have spent so much time over the past decade and more banging on about the resources boom, we've probably left many people with an exaggerated impression of the sector's importance.

It's true that, thanks to a quadrupling in the value of its physical capital, mining now accounts for about 7 per cent of our total production of goods and services (gross domestic product), compared with less than 5 per cent in 2004, at the start of the boom.

But 7 per cent ain't all that much, and if you measure mining by how much of our workforce it employs, it's even less: 2 per cent.

That's just 230,000 people, about as many as are employed in the arts and recreation.

It compares with 300,000 workers in agriculture, 400,000 in financial services, 800,000 in accommodation and food services, 900,000 in manufacturing, almost a million in education, a million in construction, another million in professional services, 1.2 million in retailing and 1.5 million in healthcare.

Still think the economy revolves around mining?

How can an industry account for 7 per cent of our production but only 2 per cent of our jobs? Because it's so "capital intensive" - it uses a lot of expensive equipment, but not many humans.

Because it employs so few people directly, the industry is always paying "independent" economic consultants to estimate how many people it employs "indirectly" as dollars earned from mining are spent in other parts of the economy.

This is always a good way to impress judges - who know a lot about law, but little about economics - when you're trying to persuade them to let you despoil the environment.

It's true that money earned from mining has a "multiplier effect" when spent. But it's just as true of money earned from any other industry. Or money spent by the government.

Normally I'd be happy to defend an industry against the idea that it didn't contribute much because its capital intensity meant it directly employed few workers.

That's because what matters most is how much income the industry earns from its production. When that income is spent - by employees, suppliers, tax-receiving governments or profit-earning shareholders - jobs will be created somewhere in the economy.

In the case of mining, however, there's weakness in the argument. Our mining industry is about 80 per cent foreign-owned - mainly by BHP Billiton, Rio Tinto and Glencore - which, in econospeak, adds a huge "leakage" to the "circular flow of income" around our economy.

(Another leakage is that most of the heavy equipment the miners and natural gas producers use is imported.)

If most of the profits made by our (highly profitable) mining industry don't belong to us and end up being spent in some other economy, this greatly reduces the economic benefit we get.

Which makes it doubly important the mining companies are paying a fair rate of tax on their earnings in Oz.

Here, the industry often pays "independent" economic consultants to write reports showing what huge amounts of tax it pays.

But these usually rely on the legal fiction that the minerals royalties the miners pay to state governments are a tax. In economics, a tax is something you pay the government for nothing specific in return (if you are paying for something specific, it's a "user charge").

Royalties are a user charge. The miners are buying access to valuable mineral deposits owned by us. Royalties are levied on different bases but, overall, they're probably charging less than the minerals are worth.

So the miners shouldn't expect brownie points for paying for the minerals we hand over to them. The Rudd government did try to ensure we taxed their profits more fairly and adequately but, as you recall, the miners objected and so Tony Abbott abolished what was left of the tax.

But, whatever their profits, they're paying 30 per cent of them in company tax, right? Right in theory but, as we've realised, in practice not so much.

Our big foreign mining companies are heavily into minimising the tax they pay by moving profits offshore, claiming to do their "marketing" in Singapore, where the tax rate is lower.

All of which makes you wonder how well we do from our foreign-dominated mining industry, considering all the environmental and economic disruption we have to put up with.

But it's worse than that. Our politicians, state and federal, are so desperate to create the temporary appearance of progress and jobs that mining projects bring - and, no doubt, to say thanks for the generous political donations the miners make - that they often use the offer of hefty subsidies to attract them.

The subsidy comes in the form of governments building railways, ports and other infrastructure on the miners' behalf. (Not to mention the federal government's exemption of mining from paying the diesel fuel excise, worth billions a year.)

Take the Indian Adani company's proposed Carmichael coal mine in central Queensland, which is so huge it would lower the world price of coal, to the disadvantage all existing Australian coal miners.

Queensland's Newman government was so keen to use the project as proof of progress it offered Adani a "royalty holiday". Now the Turnbull government is offering a $1 billion-plus concessional loan in the name of developing Northern Australia.

Both the miners and the politicians indignantly deny the industry receives any subsidies. But that's not what the West Australian and Queensland treasuries say in their submissions to the Commonwealth Grants Commission, revealing how poor the mining companies keep them.

If the nation is ahead on the mining deal, it ain't by a lot.

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Australians of the Year utterly out of step with the rest of us

How moving it was to watch Malcolm Turnbull presenting the Australian of the Year awards last week. What impressive people they were. Made me proud to be an Aussie.

I can't help liking Turnbull. At a show like that he's all we could hope for in a Prime Minister. He looked the part and spoke it well. He was completely at ease, someone we can be proud to have represent us to the world.

In his introduction he said all the right things. The "extraordinary finalists" for the various awards – Young Australian, Senior Australian, Local Hero and Australian of the Year – "light the way for us – shining examples of our best selves".

"Generous and compassionate, selfless, never daunted by seemingly impossible odds, brilliant, curious, entrepreneurial, innovative, building bridges to reinforce the mutual respect which secures our harmony and diversity.

"They include First Australians and those who have dedicated their lives to working with them" – such as the wonderful Sister Anne Gardiner, who's spent her life serving the Tiwi people on Bathurst Island.

"They include migrants and refugees who have fled horrors barely imaginable ...

"Yet, however much we celebrate the remarkable, peaceful and diverse nation that we have built together, we always strive to be better. Our Australians of the Year have always shown us how ...

"Respect for women, respect for each other, in all our magnificent diversity, is the foundation on which our harmonious society depends, is the platform which enables every Australian to realise their full potential."

And yet I confess that in the days since that proud night I've suffered a bad hangover. It seems our One Day of the Year has moved from April 25 to January 26.

We celebrate these "shining examples of our best selves" for one night and day before we revert to being far from our best selves for the rest of the year. We hunt up a handful of people who remain "selfless" so we don't feel so bad about the self-seeking lives the rest of us lead?

Far from retaining a strong sense of community, of helping each other and working for the greater good, we live in an era of every person for themselves, where the material almost always gets priority over the social, where our ambitions centre on personal advancement rather than making the world a better place.

If our politicians – of both stripes – are so keen for us to be "generous and compassionate" as well as "respectful" and part of a "harmonious society" why aren't they setting a better example?

What's generous and compassionate about sending social security recipients bills for "debts" owed to Centrelink that you haven't checked properly, then making them prove they don't owe that much with payslips and other documents from past years that you hadn't warned them to retain?

What's "respectful" about treating invalids, the aged, and young workers down on their luck in such a way? What's Australian about denying point blank there's any problem with what you're doing?

Why when you've gone out of your way to honour the place of First Australians do you, the very next day, curtly brush aside their request that the white majority run to the huge inconvenience and expense of changing the date of Australia Day? Respect, eh?

Do we honour the work of the Sister Annes because they salve our consciences? Thank God they're willing to put themselves out, because the rest of us ain't.

Some of us – including many in Turnbull's own electorate – are the children or grandchildren of "refugees who have fled horrors barely imaginable".

Much worse, apparently, than the way we've been treating refugees on Nauru and Manus Island.

Turnbull is right to say we've built a highly successful multicultural society.

Lately it's been fraying at the edges, however, with intolerance of people with unfamiliar religious practices – women's head coverings; halal – fears that all Muslims are terrorists, fears we're being overrun by Asians, and downward envy of government help for disadvantaged Indigenous people.

But it's not just that our political leaders fail to set an example, it's that too often they seek partisan advantage from our moral weaknesses. Rather than seeking to calm our fears of foreigners they compete to pander to them. Let's protect ourselves from the resurgent One Nation by aping its rhetoric, even its policies.

As for respect being "the platform which enables every Australian to realise their full potential" it's sentimental claptrap – especially coming from a government that seems to have set its face against funding the nation's schools on the basis of student need rather than established privilege.

It's schools and pre-schools that should be "the platform which enables every Australian to realise their full potential".

The most worrying message we got from the latest bad news on NAPLAN and PISA testing of students is the wide gap between our best and worst students and the large minority of kids the system is failing.

As Peter Goss, of the Grattan Institute, has demonstrated, we can go most of the way to needs-based funding quickly and without extra spending, provided we're prepared to shift funding from the less-needy to the more-needy.

But that would require Turnbull to exhibit the undaunted, entrepreneurial and bridge-building character traits he so admires in others.

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Lord save us from being governed by bankers

With Our Glad Berejiklian – the archetypal girl who works harder than the boys – replacing pin-up boy Mike Baird as Premier of NSW, should the citizens of other states be envious? Don't be too sure.

True, Berejiklian, like Baird before her, came to public office from a job in banking, rather than a post-uni career as a political apparatchik, though she did spend time as a ministerial staffer. Baird didn't even have that.

Politics is becoming a priesthood – a lifetime calling, culminating in elected office – with ever fewer politicians having spent most of their lives working in a normal job with normal people.

I doubt we're better governed under this development.

One thing making NSW different from other states is that, until Baird's resignation, it was a state governed by former bankers: premier, treasurer and Treasury secretary Rob Whitfield, shipped in after a 29-year career as a deal maker at Westpac.

With Baird gone, NSW may seem one banker down. Except that Berejiklian's successor as Treasurer, Dominic Perrottet, was a solicitor specialising in "banking restructuring".

I suppose one good thing about having a government dominated by bankers is they can be relied on to keep the budget shipshape. They'd be the last pollies to send us bankrupt.

Indeed, Berejiklian's proudest boast is that the NSW government (narrowly defined) is now debt free.

But is that the highest achievement of a government? You'd expect bankers to know better than to regard an institution like NSW without any debt as a joy to behold.

What about all the infrastructure the state still needs? Why boast about having no debt at time when debt is exceptionally cheap and governments' size and taxing powers make them ideally placed to borrow?

Though the fashionable fatwa against debt is atypical of bankers, what it does reveal is a weak grasp on the tenets of economics.

It's a mistake to imagine bankers and economists think alike. That's been my greatest reservation about the financially virtuous Baird government and my greatest fear about its Berejiklian successor.

Its only leading light who can be counted on to have a better grasp on the ways the powers and obligations of governments differ from those of a business is the secretary of the Premier's Department, Blair Comley, a former top federal Treasury officer.

Historically, state governments have had responsibility for owning a lot of profitable businesses, which have been government-owned only because they're natural monopoly networks – electricity, gas and water – as well as managing huge service-delivery organisations: public transport, roads, hospitals, schools and prisons.

This has led to the common notion that running a state government is pretty much about running a collection of businesses. The main thing you need is efficiency.

Sorry, wrong.

First, where governments deliver services with "public good" characteristics – services whose supply would be insufficient if customers had to pay market prices – the quality of the service, reflecting the multiple objectives in supplying it, is just as important as the cost of supplying it.

Second, when you're owning – or selling – a profitable business, profit should never be maximised at the expense of the wider community. You have to take an "economy-wide" perspective.

I fear a banker-dominated government is too likely to adopt a simple, business approach towards an endeavour that that has much wider objectives and obligations; to see the state budget as akin to a business's profit and loss account – as an end in itself rather than just a means to an end; to imagine that maximum benefit to the state's finances equals maximum benefit to people of the state and their economy.

Every instinct of a deal-making banker tells them the object of the exercise is to privatise a business for the highest price possible, this being in the best interests of taxpayers.

You do this by packaging the business up with government-conferred competitive advantages.

But this comes at the disadvantage of taxpayers-as-customers of the business, any present or potential private competitors, and business customers of the privatised business.

Rod Sims, boss of the Australian Competition and Consumer Commission, has been highly critical of the NSW government's privatisation of its ports which, of course, enjoy a degree of geographic monopoly.

I supported privatisation of NSW's electricity "poles and wires" mainly because ownership of a key natural monopoly presented the government with too much temptation to look the other way while its trading enterprises fattened their profits by gouging their customers.

Damaging the state's economy in the interests of improving the state government's finances is something only an ill-educated banker could think was a good idea.

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Think you're pretty sharp? Try this simple quiz

It's the last (unofficial) holiday weekend of summer before the new year really gets down to business on Monday. So let's have some fun. Try yourself on this simple quiz.

Q1: Linda is 31 years old, single, outspoken and very bright. At uni, she majored in philosophy. As a student she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which of these two is more likely: that Linda is a bank teller or that Linda is a bank teller and is active in the feminist movement?

If you went for a feminist bank teller - sorry, wrong.

Q2: As an investor you're trying to decide between buying shares in three listed companies when you notice that one of them's been chosen as company of the year by a business magazine. Would that make it best bet of the three?

Q3: You're trying to decide which super fund to put your savings in, so you look up the figures to see which one had the highest returns last year. Would it be the best bet?

If you answered yes to those questions you're likely to be disappointed.

Q4: The instructors of fighter pilots found that pilots who were praised when they'd flown well always performed worse the next time, whereas those who were criticised for performing badly always performed better the next time.

The instructors concluded that criticism was more effective than praise. Were they right?

If you answered yes - sorry, wrong.

Q5: You flip an unbiased coin and it comes up five heads in a row. Which is more likely from the sixth throw: heads or tails?

Q6: Which is the more likely birth order in a family of six kids: B B B G G G or G B B G B G?

In the first case the sixth throw is just as likely to be another head as a tail. In the second, the two birth orders are equally likely.

Q7: Which would you prefer, an operation with a 90 per cent success rate, or a different one with a 10 per cent failure rate?

Answer: Have another think about the question.

Apart from the investment questions (which I threw in to please the business editor) all those questions come from best-selling business writer Michael Lewis' latest book, The Undoing Project.

It's the story of two Israeli-American academic psychologists, Daniel Kahneman and Amos Tversky, who demonstrated how wide of the mark is the assumption of conventional economics that we're all "rational" - coldly logical - in the decisions we make, thus giving a huge push to the new school of behavioural economics.

A lot of their experiments involved our understanding of maths. Don't feel bad if you failed many of them. Most of us do, even people good at maths.

The moral is, however much or little people know about maths, particularly the rules of probability, we have trouble applying this to our daily lives because we let our emotions distract us.

Q1 was about the rules of probability. Linda certainly sounded like a feminist, but a lot of bank tellers aren't feminists so, statistically, there was a higher probability that she was a bank teller than a bank teller and a feminist.

All that guff about her interests at uni engaged our emotions and distracted us from the simple probabilities.

The questions about investment choices and fighter pilots were about a key statistical regularity most of us haven't heard of, called "reversion to the mean".

The performance of companies, super funds or fighter pilots in any year is a combination of skill and luck. We're always tempted to attribute good luck to high skill.

The luck factor is random, so a performance that's way above average is likely to have been assisted by luck, just as a really bad performance is likely to have been worsened by bad luck.

If good luck and bad luck average out over time, an outstandingly good performance is more likely to be followed by a performance closer to the average than by another rip-snorter. Similarly, a really bad performance is more likely to be followed by one not so bad.

Note that we're only accounting for the luck factor in performance, so a policy of always predicting reversion to the mean gives you a slight advantage in the forecasting stakes, not a sure thing.

The pilot trainers were observing reversion to the mean, but falsely attributing it to their own efforts in awarding praise or criticism.

Sadly, this has left many of the world's bosses suffering the delusion that criticism works better than praise.

The questions on coin tosses and baby order were about the "law of large numbers", which says that if events have equal probability of occurring, eventually they'll occur an equal number of times.

We all know that if you toss a coin enough times you'll get a roughly equal number of heads and tails. And we all know the numbers of boys and girls being born are almost equal.

Trouble is, you need thousands of samples to be sure of getting that result. By expecting to see equal numbers in a sample as small as six, we've turned the statisticians' law of large numbers into our own imaginary "law of small numbers".

Remember, probability theory applies to independent events, where what's gone before has no effect on what happens next.

Humans are pattern-seeking animals, but sometimes we go too far and see patterns that aren't real. Five heads in a row, or three boys followed by three girls, may look unlikely but, because the law applies only to large numbers, are perfectly consistent with a random draw.

Whether it's heads or tails, boy or girl, the safest bet remains 50/50. In the case of the five heads in a row, no one told the coin its duty was to make its sixth toss a tail.

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Heartless government sools computer onto needy citizens

Of the loads of films I saw last year, the most memorable was Ken Loach's I, Daniel Blake. I go to the movies for escapist entertainment, not to give my emotions a good workout but, even so, it left a lasting impression.

It was the story of a 59-year-old carpenter in Newcastle, England, whose cardiologist told him not to go back to work for a few months after he'd had a heart attack on the job.

What we saw was Blake's mistreatment at the job centre he went to for social security payments at the height of the Cameron government's austerity spending cuts.

It was run like an assembly line, with "clients" processed as fast as possible, with a complete lack of flexibility or consideration.

Nothing Blake said was listened to, but at his first sign of frustration he was rebuked for his utterly unacceptable behaviour and threatened with removal by security guards. He was repeatedly threatened with the "sanction" of having his dole suspended for such crimes as being late for his appointment.

He got nowhere when he visited the centre, had to hang on for ages when he phoned, and was always being told to fill out forms online. Small problem: he didn't have a computer and didn't know how to use one.

Sorry, online forms are "mandatory".

Why would a government treat its citizens so badly? Well, reading between the lines you saw the centre had been handed over to a private business. It probably underquoted to get the contract and had turned the centre into a sausage machine in the hope of saving enough on staff to make a profit.

I thought of Daniel Blake when I read of the way the Turnbull government is using an "automated debt recovery program" to harass former users of Centrelink.

It's using a computer program to go back several years, checking Centrelink benefit payments against records from the Tax Office, to look for apparent overpayments and demand the money be repaid.

Trouble is, the exercise is hugely prone to error. Eligibility for social security benefits is assessed on a fortnightly basis, whereas tax information is annual. The machine merely divides the annual figures by 26 and often gets the wrong answer.

Where the same employer's name has been recorded differently, the machine treats them as separate businesses, sometimes calculating "debts" that are thousands of dollars out.

The machine may send its demand to an old address, even though failure to respond within 21 days is taken as acceptance that the figure named is correct, and the trigger for debt collectors to be called in, with the addition of a 10 per cent "recovery fee".

The many leaks from appalled Centrelink staff suggest they've been discouraged from correcting obvious errors before the machine-generated demands are sent out, and discouraged from helping people in person, rather than just telling them to use the website.

It's clear this is a fishing expedition. You make what you know may often be erroneous claims for repayment, shift the onus of proof onto people with few records or resources, give them a scare, then sit back and see how much you rake in.

I confess to feeling much empathy for people struggling with the many digital tentacles of the ironically named MyGov website. I'm an accountant but I still struggle with its online tax return.

Its requirement for you to supply your spouse's income sets up a Catch 22 where neither you nor your spouse can submit a return without saying something you know isn't true.

This year I'm stuck on a section of the return which, when I try to save it and move on, just says ERROR. OK, what's the error? Doesn't say. But I know what it's thinking: that's for us to know and you to find out.

So far I've spent ages searching the site for the answer, to no avail. I'm waiting for the time and courage to do battle with the Tax Office's phone system - assuming that's still permitted.

Back on the Centrelink debacle, I've been amazed by the way the Centrelink boss, the junior minister, Alan Tudge, and the senior minister, Christian Porter, have each denied there's any problem.

Really? This is the way bureaucrats and politicians get their names into the history books for contributing to their government's demise.

So far they've mainly been picking on young people on the dole, but now they're moving on to invalids and age pensioners. Really? Courageous decision, minister.

What on earth is motivating them? Partly it's that, having made so much fuss about debt and deficit while in opposition, the government is having enormous trouble getting the budget deficit down.

It lacks the courage to tackle the big sources of rent-seeking by business interests, but is confident it can get away with cracking down on the tiddlers in social security.

It's worse than that, however. Porter and Tudge are from the Liberals' hard Right. You can see from their speeches and remarks they have little sympathy for people poor enough to need social welfare, and every sympathy for their own class, groaning under the weight of a tax rate of supposedly "almost 50 per cent".

Their sacred mission is to prevent the need for higher taxes by ensuring none of their department's "clients" get away with a dollar more than they're supposed to get.

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Have a touchy-feely holiday break from the economic grind

I hope your "face time" with family and friends over the holiday break wasn't done using a mobile phone.

A phone call may be better than nothing, but it turns out that regular, in-the-flesh, face-to-face communication reduces the risk of depression in older adults.

That's according to research by Alan Teo, a psychiatrist at the Oregon Health and Sciences University, and others.

"Meeting friends and family face-to-face is strong preventive medicine for depression. Think of it like taking your vitamins, and make sure you get a regular dose of it," Teo advised.

Thanks to my own painstaking research (I googled it), I can tell you we know from previous studies that having social support and staying connected with people is good for your physical and mental health. It even helps you live longer.

Teo and his mates examined the results of a survey of about 11,000 people aged 50 or more between 2004 and 2010.

They found a correlation between the types of interactions people had with others and their likelihood of showing symptoms of depression two years later.

"We found that all forms of socialisation aren't equal. Phone calls and digital communication with friends or family members do not have the same power as face-to-face social interactions in helping to stave off depression," Teo said.

But what, pray tell, has this to do with the economics I'm paid to write about?

Well, in the silly season it doesn't have to. But as it happens, it does. One of the most important discoveries of economists in the past decade or so is the almost magical economic properties of face-to-face contact.

For this new knowledge we're indebted mainly to the guru of urban economics, professor Edward Glaeser, of Harvard, as set out in his important 2011 book, Triumph of the City.

Economic geographers have long understood the significance of "economies of agglomeration". We crowd into ever-bigger cities because close proximity between a business, its workers, its customers, its suppliers and even its competitors does wonders to improve productivity.

Unfortunately, what's good for our material standard of living isn't necessarily good for the soul.

Glaeser's contribution was to realise that, in the era of the knowledge economy, firms want to crowd together in the very centre of the biggest cities – regardless of sky-high rents – because knowledge spreads most effectively though face-to-face contact between the smartest people.

Here in Oz, pioneering empirical work by Jane-Frances Kelly of the Grattan Institute, has shown how more and more of our gross domestic product is being generated in the CBDs of our four biggest cities.

While she was at it, she publicised Reserve Bank research showing convincingly that, in every capital city, house prices are rising fastest in those suburbs closest to centre and slowest in those suburbs furthest out.

So if you think the golden rule of real estate is position, position, position, you're behind the curve. In big cities these days its proximity, proximity proximity. And that gets back to the economic value of face-to-face contact.

Unfortunately, however, what's good for our material standard of living isn't necessarily good for the soul.

When we're crammed in together in trains, lifts or waiting rooms, we know almost instinctively to avoid invading people's "personal space", avoid conversation and even eye contact.

But research by Nicholas Epley, of the University of Chicago's Booth School of Business, and Juliana Schroeder, of the University of California, Berkeley's Haas School of Business, shows our instincts are wrong.

In a series of experiments, those commuters who were instructed to strike up conversation with a stranger reported having the most positive experience, compared with those instructed to sit in silence or behave as they usually would.

When it comes to the advent of the knowledge economy, the information revolution and digital disruption, there are two errors we can make: underestimating the extent to which it's already changing the way the economy works (see above), and overestimating the extent to which it's changing the way humans work – and are happiest working.

You can be sure the world's model-bound economists will make – are making – the first error. And since their model copes with human nature only by assumption, they won't even be conscious of the second.

For the rest of us, however, the thing is to remember new technology raises three distinct questions: first, what new tricks is it actually capable of doing for us, second, do we really want it to do that trick for us and, finally, assuming we do, what will we eventually feel about the wisdom of that choice? See intro.

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