Wednesday, February 22, 2017

HOW WE CAN DO BETTER ON EDUCATION

Jean Blackburn Oration for the Australian College of Educators, Melbourne, February 22, 2017

I’m honoured to be invited to deliver the Jean Blackburn oration, especially to follow the inaugural oration by someone whose name will long be synonymous with education policy, David Gonski. David’s name will return in what I have to say, but let’s focus on Jean Blackburn, whose contribution we are here to acknowledge. I never had the pleasure of meeting Jean and, no doubt, hearing her frank assessment of the weaknesses in whatever argument I’d been mounting. But from all her many friends and colleagues have said about her, including my friend Lyndsay Connors, it’s clear she was both formidable and likeable. Jean was a high school teacher who became a leader in the development of school education policy from the time of the Whitlam government. Her potential was uncovered and encouraged by a friend from her uni days, Peter Karmel. As a member of the Australian Schools Commission she worked with him on the hugely influential Karmel report, staying on after he left the commission. According to Dean Ashenden, she was “among Australia’s most influential shapers of policy and thinking about schooling and about the condition and education of women and girls. She was charismatic, passionate and ferociously intellectual, and was widely admired and loved. A woman of the Left, she hated cant, loved tough thinking and insisted absolutely on open debate and hard facts.” According to Lyndsay, she was both blessed and cursed with an ability to see both sides of every argument, as well as the potential for unintended consequences from the policy changes she was part of proposing. She seems to have been among the first to realise that, far from dispensing with the problem of “state aid”, the Whitlam government was giving the place of sectarianism in Australian education a new lease on life - one that has kept it thriving to this day.

Jean Blackburn trained as an economist. She had an honours degree in economics and worked as an economist with the War Office of Industry, planning post-war reconstruction. This fact is a comfort to me as I, an economic journalist, speak to you about education. It’s likely that all of you know more about education than I do. I agreed to give this speech almost a year ago because I knew it would oblige me to get up to speed on the economics of education. Economists have a big say in education - particularly its funding - and it’s obvious that economics is important to education, just as education is important to the economy. But to acknowledge that education is important to the economy is not to imply that is the only or even the main reason education is important. Far from it. I think even the little I’ve said about Jean Blackburn will have convinced you she wore her economics training lightly, seeing it - and education - in a much broader context. According to Ashenden, she believed the job of schools was not just to prepare young people for life and work, but also to introduce them to “important achievements of the human mind, imagination and spirit to which all have the right of access”.

Why education matters more than ever

Economists are right to think of education as an important means to the end of economic growth and greater material prosperity. But they - and our business people and politicians - keep forgetting education is also an end in itself. People working in education should be shameless advocates of knowledge for its own sake. Humans are a curious animal, we want to know as much as we can about how we, and everything around us, tick. In the back of our minds we know this knowledge may one day be of practical use but, whether or not that proves the case, we still want to know. We want to know how the universe can be growing, what the invisible bugs in our stomach do to us, and how humans evolved over the millennia. The more comfortable we are materially - and don’t be misled, we’re more prosperous than we’ve ever been - the more we can afford to spend on pushing out the boundaries of human knowledge and on passing on knowledge to the next generation.

But economists are also inclined to forget that education is a means to ends other than just our material prosperity. There’s little reason to doubt that education allows us to live emotionally richer, more fulfilling lives. As NSW’s now-sadly-missed minister for education Adrian Piccoli has said, education has the power to transform lives. Recent research by the OECD has found that greater education is associated with being more satisfied with life.

And then there’s the link between education and health. The same OECD study found that both education and skills are associated with better health. The percentage of adults in member countries who report being in good health is 33 percentage points higher among those with high literacy skills and a high level of education. Of course, as we were taught at uni, “correlation is not causation”. But research by academics at the Melbourne Institute has established a causal link between education and health. It used the increase in the minimum school leaving age from 14 to 15 to study differences between those who left a year earlier and those who didn’t, and found the extra year of schooling had improved overall health and physical functioning.

That education allows us to live more intellectually satisfying, fulfilling lives has always been true, but it’s more significant now we have succeeded in raising the level of girls’ educational attainment to the level of boys’, and beyond - something that would no doubt have given Jean Blackburn much satisfaction. This major social advance has left us with much work to do in modifying the institutions of a male-oriented labour market. But that’s a subject for another day, except to the extent that the need for the provision of adequate childcare opens the opportunity for this to be combined with a big improvement in the quality and availability of early childhood education. Our need to improve our performance on education starts with much better and widespread early childhood education.

I said in my teaser for tonight that “the reasons education is central to Australia’s social and economic future keep increasing and becoming more urgent”. Here I’m referring to the effects of globalisation and technological advance - and the adverse reactions to these developments we’ve become more conscious of since just last year.

Globalisation - and improvements in transportation, and information and telecommunications - has moved many of the developed world’s manufacturing jobs to China and other developing countries. There was a time in Australia when young people could leave school with an inadequate education and still easily find unskilled jobs in manufacturing, construction and elsewhere. Not today. Notwithstanding the flurry of the resources boom, we’ve already moved a long way towards an economy that doesn’t make things so much as perform services - for each other, and for foreigners, in the form of tourism and education and exports of business services. Many of the jobs in primary industry and manufacturing are now done by machines. So far, the growth in service-sector jobs has been sufficient to keep employment high and unemployment low. Many jobs in the services sector are low skilled - in hospitality and retailing, for instance - but the fastest growth has been in jobs requiring tertiary qualifications. This, of course, underlines the growing importance of education - and of doing as well as we possibly can. Two of the biggest and fastest growing industries in the modern economy are education and healthcare. Both of those things are what economists call “superior goods” - the more our real incomes grow over time, the more of them we wish to devote to improving our health and improving our education.

All this is another way of saying we’re moving into to the “information economy” where the plentiful provision of high-quality education and training to increase the “human capital” of individuals and the workforce is of paramount importance. We’re often told that robots are about to take huge numbers of jobs in the services sector, leading to the mass unemployment the prophets of future shock have been predicting since businesses began using computers in the 1980s. Maybe it will happen this time, but I remain doubtful. Many of the jobs in the services sector are “personal service” jobs that either can’t be done by robots or that we choose not to have done by them. I find that the people who know a lot about what machines will soon be able to do don’t know a lot about human nature.

But let’s say there is a lot of disruption in the job market and people being required to change jobs and even occupations many times throughout their working lives. That says two things of relevance to educationists. First, we need to do more to ensure people leave school and university with strong foundational, generalisable and transferable skills. And, second, we need to have a VET system capable of providing the retraining so many people are likely to need.

Now let’s say it’s much worse than that and we end up with far less work needing to be done than we have workers to do it.  One possible consequence is mass unemployment, but another is most people being employed, but for much shorter hours per week - as Keynes predicted almost 100 years ago we’d end up with. The surprising fact is that many workers find the prospect of large amounts of extra free time a bit frightening. What on earth would they do with it? Two take-aways for educators. First, many people would end up doing courses and degrees for essentially recreational purposes. Second, you’d expect that the better a person’s education, the less trouble they’d have finding activities more worthwhile than watching telly or hanging around the pub.

One of the consequences of globalisation and technological advance - the move to the knowledge economy - has been to widen the gap between the wages of high-skilled and low-skilled workers. This is probably the main cause of the marked increase in the inequality of household income observed in all the English-speaking economies since the early 1980s. It’s worse in America, where real wages in the middle and at the lower end have been stagnant for 30 years, meaning almost all the benefits of economic growth have been captured by the top 10 per cent or so of income-earners. It hasn’t been nearly than bad in Australia because our institutions - such as the regular adjustment of minimum wages - and governments have done more to counter it.

The French economist Thomas Piketty has drawn much attention to his thesis that inequality is being driven by inherited wealth, thanks to high returns on capital. But The Economist magazine has advanced an alternative spectre I find more plausible. It combines the knowledge economy and high returns to high-skilled labour with a social phenomenon the better education of women has made more prevalent, “assortative mating” - the tendency for men and women to marry people of the same socio-economic status and level of education. When two highly educated, highly paid people marry and form a two-income household, they have the values, behaviours and wherewithal to ensure their offspring go to the best schools and end up with the qualifications most likely to ensure they, too, get the best-paying jobs. Thus do we end up with a new education aristocracy. If we want to diminish such a likelihood, the obvious first step is to fund schools - public and private - on the basis of need, so that schooling plays the greatest part in our pursuit of that unattainable but worthy goal: equality of opportunity.

Another consequence of globalisation is high levels of immigration, mainly from poor countries to rich countries. You can see that in the Mexicans pouring into the United States, the Poles and other eastern Europeans moving to Britain and, in Australia, the many Asian immigrants, including a fair share of Muslims. You see where this is leading. When you do so little to require the winners from economic change to compensate the losers, and then, whether by accident or design, you have an influx of immigrants, you end up with Trump, Brexit and the resurrection of One Nation.

Trevor Cobbold, that great warrior for public schooling, has said that “greater social equity in education would help reduce social alienation and division, and strengthen the social fabric of Australian society”. He’s right.

So far we’ve had a highly successful multicultural society, but instances of intolerance are growing. Distrust of foreigners and people with unfamiliar religious practices is growing, and being fanned by radio shock jocks and the tabloid press. Our cities are becoming more stratified geographically, so that anglos live in well-placed suburbs and immigrants live in outer suburbs. Schools are becoming part of this stratification, with higher SES parents increasingly sending their children to higher SEA schools - no matter how much daily driving this involves - leaving lower SES students going to increasingly lower SEA schools. Almost all non-government schools have a religious affiliation, so that, increasingly, Jewish kids go to Jewish schools, Islamic kids are able to go to Islamic schools, and Baptist and Pentecostalist kids go to “Christian” schools. This trend is being assisted by our three-sector funding system, which has continued under the Gillard government’s version of Gonski. It’s becoming increasingly possible to go through schooling without meeting people very different to yourself. And then we wonder why social cohesion is fraying.

I rest my case. The reasons education is central to Australia’s social and economic future keep increasing and becoming more urgent.

Have we been spending a lot more on education?

So, let’s get down to cases. Ever since its election, the Abbott-Turnbull government has repeated the line that “for so many years we spent more and more on school education and the results did not improve: in fact they got worse”. I’ll look at what’s been happening to results in a moment, but let’s start with whether we’ve been spending a lot more on education.   The federal minister, Simon Birmingham, has claimed repeatedly that federal funding has increased by 50 per cent since 2003. But is it true?

After more than 40 years as an economic journalist, I have some experience in fact-checking the statistical claims politicians of all sides keep making. They’re always claiming that spending on X has greatly increased and never been higher. You run such claims through a check list: have they allowed for inflation? Have they allowed for growth in the population? Are they talking about total government spending or just the spending by their own level of government?

According to Cobbold’s fact checking, when you allow for all those factors, the real increase in total government spending per student over the nine years from 2004-05 to 2013-14 was just 4.5 per cent, or 0.5 per cent per year. But it’s worse than that. Although the non-government sector enrols less than 20 per cent of all disadvantaged students, the nine-year increase for non-government schools was 9.8 per cent, whereas the increase for government schools was only 3.3 per cent. Doesn’t sound like needs-based finding. It turns out that, while the federal government was increasing its funding to government schools, the state governments took the opportunity to limit their funding to their own schools, while increasing their grants to non-government schools.

To put Australia’s funding in an international context, Peter Goss of the Grattan Institute has checked Tanya Plibersek’s claim that “Australia is slightly below average when it comes to international funding for our schools”.  She drew this conclusion from the OECD figures showing spending per student as a percentage of GDP per person, and she’s right. Although including private spending on school fees puts us slightly above the OECD average, looking just at government spending puts us at 3.2 per cent of GDP in 2013, compared with the average of 3.4 per cent. So, we haven’t had rapid growth in government spending on schools over the past decade and nor are our governments spending more than other countries are. But what about the other side of the argument: what’s been happen to the measured performance of our schools?

What’s happening to our schools’ measured performance?

The performance of our schools on literacy, numeracy and science is now measured regularly by PISA and NAPLAN. Before we start, I have to acknowledge that there’s a lot more to what schools impart to students than literacy and numeracy. These standardised tests are an imperfect way to measure the performance of schools. But I have to say they are key competencies, part of the essentials with which our children need to be equipped. It’s possible that, while not doing well in these measured subjects, our schools are doing much better in imparting “soft skills” that are harder to measure. It’s possible, but I don’t think it likely.

A good summary of what PISA tells us about our performance, using the 2015 figures released late last year, has been provided by Cobbold. Wisely, I think, he focuses not on the media’s favourite of our ranking on the league table of countries, but on how our own performance has changed over time. He finds that our results have fallen significantly over the past 15 years. We remain one of the high-performing countries in reading and science, but our maths results have slipped to about average. The results show continuing declines in the proportion of students at the most advanced levels and also significant increases in the proportion of students below the international standard. This includes high proportions of low SES, Indigenous, provincial and remote-area students. He finds continuing very large gaps between the achievements of the highest and lowest performing students after 10 or more years of learning.

Tim Dodd, the Financial Review’s education editor, summarised the results a different way: they found the standard of Australian 15-year-olds’ maths is a year behind where it was in 2003, reading standards are 10 months behind compared with 2000, and science is seven months behind compared with 2006.

A good review of the latest NAPLAN results comes from Chris Bonnor and Bernie Shepherd, two retired high school principals who’ve done a fabulous job in “data mining” the MySchool website. They say NAPLAN results have mostly drifted up over the years, whereas the latest results for literacy and numeracy show a plateauing. They note the haste with which Simon Birmingham seized on this one year of poor results to repeat his claim that money doesn’t buy improved results.

Peter Goss and colleagues, of Grattan, have pioneered the technique of converting NAPLAN data into “years of progress”, using the results of Victorian students to reveal some worrying trends. They note first that the NAPLAN “national minimum standards” are set very low. A Year 9 student can meet this standard even if they are performing below the typical Year 5 student - that is, a stunning four years behind their peers. They find that the spread of student achievement from highest to lowest more than doubles as students move through school. Low achieving students fall ever further back. They are two years and eight months behind in Year 3, but three years and eight months behind by Year 9. Students in disadvantaged schools make about two years less progress between Year 3 and Year 9 than similarly capable students in high-advantaged schools. And get this: bright students in disadvantaged schools show the biggest learning gap. High achievers in Year 3 make about 2½ years less progress by Year 9 than if they had attended a high-advantage school. They actually make less progress than low achievers in high-advantage schools.

Does spending more money buy better school performance?

This brings us to the key political question of the hour: does spending more money buy better school performance? Short answer: not if you spend it on more of the wrong things. But first, it’s surprising to have the claim that “money doesn’t matter” coming from the conservative side of politics, and even from, of all people, some economists. It’s surprising to have people who fight tooth and nail to protect and increase their personal income assuring us that spending more money on any category of spending yields no benefit. Do they follow this precept in their own spending on education? Does it mean they’re happy to send their children to the local public school, or are they sending them to expensive private schools, similar to those most of the cabinet ministers attended?

The truth is that we haven’t been spending a lot more in recent times but, in any case, much of what we have been spending hasn’t been spent effectively. Between the federal and state governments, we’ve given more to advantaged schools than don’t need it at the expense of disadvantaged schools that do need it. When you study the standardised test results, the answer to how the money could be spent more effectively - that is, in a way that increases the probability it will produce better school performance - leaps out at you: we need to spend more per student on disadvantaged schools and less per student on advantaged schools, where parents have demonstrated their willingness to supplement the school’s finances by paying fees, sometimes very high fees. In other words, the obvious way to make government spending on schools more cost-effective is to put it on a needs basis.

As an economic journalist I know exactly why Birmingham and his colleagues keep saying that spending more money on schools would be a waste of money. It’s because the Coalition government’s project is to return the budget the surplus, but do it by curbing government spending rather than increasing taxes. If saying this implies that schools’ performance could be fixed simply by schools and teachers trying harder, this is not an interpretation that would discomfort the Coalition and its heartland supporters. But on one matter I do sympathise with Birmingham: the version of “Gonski” he has inherited from Labor is far too expensive a way to move to needs-based funding. As David Gonski gently reminded us in the first of these orations, and his colleague Ken Boston more forcefully reminded us in a speech just last week, what the Gonski panel wanted was a redistribution of schools spending to make it needs-based. Its recommendation of greatly increased spending arose from Julia Gillard’s stipulation that “no school should be a dollar worse off”. One matter on which I don’t sympathise with Birmingham’s government is its quite unreasonable cost-shifting and politically unsustainable plan, announced in the 2014 budget, to reduce the indexation of federal schools grants to the consumer price index. Nothing less than indexation to the expected rate of growth in teachers’ wages is politically sustainable.

The ideal would be for Gonski’s original proposals to be implemented but, since these were quite unacceptable even to Gillard, we’re likely to be waiting some time to see that happen. But Labor’s line that Gillard’s bastardised version of “Gonski” must be honoured to the letter, in veneration of the great reformer, is dishonest and manipulative. Peter Goss of Grattan has proposed a compromise arrangement which, without requiring any more spending than the temporary extra the government has agreed to, would get a lot more schools closer to the “schooling resource standard” a lot earlier even than envisaged under Gillard’s Gonski. It seems clear that Birmingham is working on his own compromise plan, which would involve better-resourced schools’ grants increasing by less than provided for by Gillard’s Gonski - which is still law. Birmingham has hinted that he may be interested in introducing the national schools resources body that Gonski recommended, but Gillard wouldn’t touch. This could be a big step forward. But the Labor opposition is unlikely to accept any compromise, virtuously holding out for “the full Gonski” as it poses as the one true believer in needs-based funding.

Beyond the eternal fight over money: what works and what doesn’t

We’re unlikely to get far in improving school performance until we get closer to the ideal of needs-based funding - that is, until we direct more of total funding to those disadvantaged students and schools that most need additional resources. But it’s important to realise that better-targeted funding is a means rather than an end in itself. If all we did was give disadvantaged schools a big bucket of money to spend, there would be no certainty that all of it was spent in ways that actually benefited disadvantaged students.

It’s a great pity that the crazy way we fund our schools - two levels of government funding differently three different school sectors - keeps us so preoccupied that we rarely turn our mind to the more important question of how we can improve our schools’ ever less-impressive measured performance. The truth is that we have tried a lot of things that didn’t work. Dean Ashenden reminds us there was a time when we really did increase spending on schools. Over the 40 years to 2004, real spending per student grew by more than 80 per cent. What was that extra money spent on? Mainly on reduced class sizes. Smaller classes seem an obvious improvement to teachers and parents, but any amount of research has shown this does little to improve outcomes.

Next comes the Howard government’s experiment with “choice and competition”. Howard increased federal grants to non-government schools using several funding formulas biased in their favour and encouraged the establishment of many more, low-income independent schools. The justification was that greater choice - particularly choice between public and private - was one of the Liberals’ great values. It would encouraged greater competition between the sectors, obliging public schools to lift their game. It didn’t work. But it did subsidise the drift of higher SES parents who could afford private school fees away from low SEA schools, leaving them with a much harder climb to improved performance.

I think Howard’s advocacy of “choice” was much more about conservative political values - and his penchant for providing middle-class welfare to the Liberal heartland - than about economic fundamentalism. The “economism” came, paradoxically, more from Julia Gillard throughout the Labor government’s six years in office. Along with good measures such as a national curriculum, a universally accessible year of pre-school and maybe professional standards for teachers and principals, came economist-inspired measures such as standardised national assessments through NAPLAN, national reporting on schools through the MySchool website, and dabbling in performance pay for teachers. There is no evidence that this more information-based attempt to use increased competition between and within sectors to raise performance has worked. Geoff Masters, of ACER, has concluded the belief that “improvement will occur if schools are given incentives to improve” - including rewards, sanctions and the need to compete for students - is mistaken. I think that, to the extent that standardised testing encourages teaching-to-the-test and other gaming of the system - as with all KPIs - this is regrettable and to be discouraged. But you’d never convince a journalist that, because statistics can be misinterpreted and misused, we’re better off suppressing them or leaving things unmeasured. And though MySchool seems to have done little to encourage better test results, it has provided people such as Bonnor and Shepherd with a rich data set for drawing highly enlightening, evidence-based conclusions about what’s happening to our schools over time.

Conservative governments have been attracted by the idea of school autonomy - including the “charter school” variation - but research has not confirmed their success.  Similarly, the earlier fashionable, very economist-appealing idea of giving people vouchers they can take to a school of their choice, has not been supported by the many studies conducted.

What then is more likely to work?  Ken Boston reminds us that, in its last chapter, the Gonski report set out priorities for the extra funding to be provided to disadvantaged schools, including “innovative approaches to teaching and learning”. We were cognisant, Boston said, of what research was saying about the critical classroom factors for success: “instructional leadership by the principal and senior staff, diagnostic assessment, differentiated teaching, and tiered interventions to extend high-achieving students and support those falling behind”.

Adrian Piccoli has told how NSW has been using its extra Gonski funding, including that: “Our reforms focus on quality teaching - getting the best and brightest into teaching and better supporting them throughout their careers; providing more time for early career teachers to hone their skills and be mentored by experts . . .”

Gill Callister, Victoria’s Education department secretary, has said that “the wave of international evidence from the successes of the world’s very best school systems shows unequivocally that investing in teaching quality, capability and development makes the single biggest difference to outcomes.” She added that “there is strong evidence that spending on early-years education has huge impacts down the line”.

Geoff Masters says we should built the “capacity” of teachers and school leaders and ensure “high quality practice across the system”. Such an agenda would involve: a higher-status and more academically capable teaching profession; a 21st century curriculum aimed at high levels of reading, maths and scientific literacy; more flexible learning arrangements focused on “growth”; early and extra attention for children “at risk of being locked into trajectories of low achievement”; and a narrower gap between the best and worst performing schools.

Part of what Masters is advocating is “targeted teaching”, which involves careful monitoring and evaluation of individual student’s progress. The greatest exponent of targeted teaching and the “growth” approach is Peter Goss of Grattan. Teachers should be provided with the time, tools and training they need to collect robust evidence of student learning, discuss it with other teachers, and use it to target their teaching to the wide range of student learning needs in their classroom. Higher achieving students should be stretched, lower achieving students should be supported to catch up, and no student who stalls should go unnoticed. The “growth” approach means a student is benchmarked against him or her self, not just against other students. The school fosters a culture of progress, in which teachers, students and parents see learning success as being about effort and improvement, not ability and attainment, and assessment as a way to improve, not to expose student failures. The best schools in Australia are not necessarily those with the best ATAR or NAPLAN scores, but those that enable their students to make the greatest progress in learning. The goal is for each student to have made at least a year’s worth of progress every year.

According to research by the Mitchell Institute at Victoria University, 26 per cent of students fail to finish school or a vocational equivalent. I’m sure some of these people catch up in later life, while others lead perfectly rewarding lives without benefit of further education. But I fear most of the 26 per cent lead lives of economic insecurity and limited personal fulfilment. They are the shockingly high proportion of students our school system has failed. I don’t believe in KPIs, but if I were to set one for schools, it would be to get that appalling indicator of our society’s failure very much lower.


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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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Monday, February 20, 2017

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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Saturday, February 18, 2017

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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Wednesday, February 15, 2017

OUTLOOK FOR AUSTRALIAN POLITICS AND GOVERNMENT IN 2017

Talk to Australian Business Economists Annual Forecasting Conference

As a confirmed optimist who almost always obeys Monty Python’s injunction to always look on the bright side, I’m sorry to say I can’t think of many cheery things to say about the outlook for politics and government in Australia in 2017. Our political leadership has been in a bad way for the six or seven years since Labor decided it couldn’t stomach Kevin Rudd for a moment longer, and I don’t foresee it getting much better over the “forecasting horizon”.

The most hopeful prediction I can think to make is that federal parliament is likely to run most of its term (probably to late 2018, to get the Reps and Senate back into sync after the double dissolution, but May 2019 at the latest), with the next election being fought between Malcolm Turnbull and Bill Shorten. This would be the first time two leaders had faced each other for two elections in succession since 2001. This ought to be a sign of returning stability in federal politics - an end to the disposable leader syndrome - except that I’d also be expecting Shorten to beat Turnbull and thus give us yet another new prime minister.

I’m going to start by discussing Turnbull’s performance and prospects before I turn to Shorten’s and then look at the record and prospects for economic management and reform.

Turnbull the disappointing

I’m not telling you anything you don’t know when I say that, as prime minister, Turnbull has been surprisingly disappointing to all those - myself included - who held such hopes for him after the erratic and disturbing performance of Tony Abbott. And even to those who didn’t have high hopes for him. Apart from his pointing out that Abbott had been behind in the polls almost continuously since the disaster of the government’s first budget in 2014, Turnbull’s justification for overthrowing Abbott was the need to get on with reforms - particularly tax reform - and to have an articulate leader capable of explaining and justifying politically controversial changes with more than three-word slogans.

It hasn’t worked out like that. He’s turned out not to be particularly brave on the reform front, nor particularly good at explaining counter-intuitive policy proposals. I can’t think of any modern politician who’s smarter intellectually than Turnbull. Economists tell me he asks the most informed and penetrating questions when he turns his mind to a particular policy proposal. But he’s always had an EQ problem - suffering fools gladly (a key character trait of successful politicians), making other people like him and want to do his bidding. I think he’s a lot better at this than he was - concealing his temper tantrums, for instance; turning on the charm - but it turns out he lacks a good feel for politics. The most obvious example was his decision to deal with the problem of the micro-party preference whisperers in the Senate by changing the voting procedures and then cleaning out the micro-party ragtag by holding a double dissolution. He ended up with a much bigger and better organised number of minor-party Senators holding the balance of power.

Turnbull is always having “a bad week” in politics. Only some of the things that spoil his weeks are of his own making. But if you have too many such weeks, after a while the causes don’t matter. You’re expected to have more, and the media’s expectations tend to be self-fulfilling. I often bemoan the advent of politics as a life-long career, where people become political flag-carriers straight out of uni, and never have a career in the world outside politics. But Turnbull’s case - along with that of his father-in-law, Tom Hughes, and with John Hewson’s - makes me wonder whether it’s still possible for people to enter politics after a successful career elsewhere and be just as successful.

A lot of people explain Turnbull’s poor performance as happening because he’s allowed himself to become captive to his party’s hard Right. I think it’s more complicated than that. It’s true that, to get the votes he needed to defeat Abbott, Turnbull had to promise the Right in his party to persist with the most extreme of Abbott’s policies, particularly on climate change and the same-sex marriage plebiscite. Unusually, the National Party made him write those promises into its renewed Coalition agreement with the Libs.

Turnbull’s hope was that if he won the 2016 election convincingly - which looked quite plausible in the first months after he became prime minister - this would give him greater authority within the party, allowing him to mould it more to his liking and find ways of quietly softening policies such as the scepticism on climate change. But, as we know, it didn’t happen. He squeaked back with a one-seat majority and a worsened position in the Senate.

You’d usually expect greater discipline in a party teetering so close to defeat on the floor of the Parliament, but in Turnbull’s case it’s led to greater in-discipline. Apart from the Rudd-like behaviour of Abbott, supported by the two old fogeys Turnbull dropped from the cabinet, the hard Right has felt free to speak out whenever it thought Turnbull was in danger of going soft. The more Turnbull has pandered to these people, the more demanding they’ve become. And the more pressure Turnbull has felt under, the more he’s behaved like other politicians do, sticking to the day’s “talking points”, resorting to scare campaigns, criticising his political opponents rather than explaining his policies, and mouthing empty three-word slogans, such as Jobs and Growth.

But why is he being so indulgent? Why doesn’t he assert himself and be more like the leader he promised to be and many of us were hoping we’d get? Short answer: because he wants to stay prime minister. You need to remember that Turnbull’s party trick as a precocious youth was to introduce himself to people he met as a future prime minister. More significantly, you need to remember that when Turnbull was ousted by Abbott as opposition leader in 2009, he took his colleagues’ censure very hard and, for a time, contemplated quitting politics altogether. Although climate change and Turnbull’s support for Rudd’s carbon pollution reduction scheme where the advertised reason for Turnbull’s overthrow, the underlying reason was his arrogant treatment of his colleagues and failure to consult them. Today Turnbull is obsessed by ensuring his colleagues never creep up on him again. His government is highly consultative, and the policies it pursues are those the parliamentary party is comfortable with.

Like Rudd, Turnbull may have allies of convenience in the party, but he has no factional base nor any mates. The great majority of those sitting behind him neither like him nor trust him. This is what makes Turnbull so susceptible to discontent on the part of his followers. Having stayed on in politics and finally triumphed over the man who triumphed over him, he has one all-consuming desire: to stay on as prime minister. Is he willing to abandon his own long-held policy positions in favour of those his party is more comfortable with if that will prolong its willingness to retain him as leader? Yes.

That willingness, combined with the lack of an obvious replacement, is likely to keep him in the job until the next scheduled election in 2018-19. The qualification to that is the politicians’ obsession with the opinion polls, which come fortnightly. If Turnbull stays well behind in the polls for long enough, his followers will get restive and start talking about alternatives. If he’s still behind as the election approaches, those in seats with low margins will get panicky and - as was the case with the second coming of Rudd in 2013 - will switch from wondering who’s more likely to get them back to office to who’s likely to lose fewer seats (including their own).

If they reach that point, the man they’re most likely to turn to is Abbott - which would be yet another parallel with Rudd. Abbott is not popular with his colleagues, who see his regular interjections in the political debate as self-indulgent and contrary to the government’s interests. Nor is there ever in politics, or anywhere else, much enthusiasm for recycling failed leaders. Nevertheless, in recent times we’ve seen them recycle Rudd (a man I’m sure they all hated with a passion) and Turnbull (ditto). They do so when the polls make them desperate enough, and those are the only circumstances in which the Libs would turn back to Abbott. One factor counting against Abbott is that his personal popularity in polls has never been high. He became prime minister not because anyone much liked him, but because voters were so anxious to get rid of Labor, with its unending internal brawling.

But what makes me so sure Turnbull will lose the next election? Turnbull’s appeasement of his hard Right is the right strategy to hang on as leader of the party, but the wrong strategy to get it re-elected. There are a least two certainties about the Australian electorate’s preferences: its aversions to party disunity and to extremism. Turnbull has a problem with both. First, backbenchers going public to put pressure on him and, second, the hard Right’s obsession with fringe issues of little importance to the public, such as using any means to delay recognition of same-sex marriage and reform of section 18C of the Racial Discrimination Act.

The plan truth is that, over the past decade or two, the Liberal Party rank and file and its parliamentary party have drifted to the Right, away from the centre ground where elections are won or lost. There are a lot of quite Right wing members of the parliamentary party and, if there are many moderates, they keep very quiet and seem to have done nothing to exert a countervailing influence against the hard-liners.

The hard Right is a mixed bag of often conflicting values: social conservatism, libertarianism and populism - combining xenophobia and a desire to return to our glorious manufacturing past. For as long as it takes most Americans to become thoroughly ashamed of their spoilt-child president, Trump’s triumph will encourage the Australian Right to be more outspoken about their extreme views and racial hatreds. The Coalition’s (correct) belief that One Nation is attracting more of its voters than Labor’s will add to its nervousness and drift towards more extreme policies. Many on the Libs’ hard Right have convinced themselves the party is out of touch with voters, but this just serves to demonstrate how out of touch they themselves are with mainstream voters.

I’ll be surprised if this rightward drift is rewarded at the ballot boxes. The more the Coalition sees its task as preventing regional voters drifting to One Nation, the more it risks losing moderate voters in the cities. After all, polling shows a majority of Liberal voters support such things as same-sex marriage and climate action. Another problem is that the Coalition is turning itself into the party of the elderly, of little attraction to younger voters, with its resistance to same-sex marriage, its defence of fossil fuels and hostility towards renewable energy, its defence of negative gearing and unwillingness to tackle housing affordability, its desire to raise university fees and its ever-harsher treatment of the young unemployed, not to mention the income tax system’s continuing biases on the basis of age rather than income level.

The public is too alienated by the way the modern political game is played for many people to take much interest in the detail of policy arguments. They have little interest in fact-checking. What they do is gain general impressions from the totality of events going down. They rely on their assessments of the rival politicians’ character - whether they seem competent, sincere and genuine. They like to feel they know what a leader and his party stand for. And that is Turnbull’s big problem. He’s been in politics a long time, everyone knows what he believes in and everyone knows he doesn’t actually believe many of the things he’s now saying. What’s more, he’s not a good liar. This is the sort of man Australians want as their leader? I doubt it.

Shorten the overachiever

 Bill Shorten is not a particularly attractive figure. He’s not particularly tall or good looking, nor is he obviously likeable. His union background doesn’t help - though it hasn’t damned him the way the Coalition hoped it would. His personal popularity in the polls has never been high, making him - like Abbott - someone who’ll win government only when the electorate is desperate to toss the incumbents out.

At the last election Labor knew it was unlikely to be returned to office after just one term in the wilderness, the more so after Turnbull won the Liberal leadership and was initially riding so high in the polls. Labor also knew that, unlike the Abbott opposition facing the unpopular Gillard government, it wouldn’t be able to get away with the degree of obstructionism and negativity Abbott resorted to. So, with so little to lose, Labor did something unusual, even laudatory: rather than make itself a small target, it made itself a big one, going into the election with some big and controversial “positive policies” - such as its superannuation reforms, crackdown on tax-dodging multinationals, and reform of negative gearing and the capital gains tax discount.

So, although neither side could resist the temptation to resort to scare campaigns, last year’s election campaign was about rival policy issues. That Shorten, against all expectations, went within a whisker of winning, shows two things. First, how politically inept both Abbott and Turnbull turned out to be in government. Second, how dogged Shorten provide to be in opposition. He’s an overachiever - he never gets disheartened, just keeps plugging away.

Politicians react to past failures, either their own or their opponents’. They’ll learn a surprising number of lessons from Turnbull’s surprisingly poor showing. It will be a long time before a government is tempted to think it could improve its position by holding a double dissolution. Similarly, it will be a long time before it’s tempted to hold a long campaign - or assume a “boring” campaign would work in the incumbent’s favour. The supposed potency of two favourite bogeymen was disproved - the union bogeyman and the negative-gearing bogeyman. The government’s tough proposals to curb the superannuation concessions of high income earners annoyed the richest part of its support base (and the hard Right of the parliamentary party) but didn’t seem to cost it many votes. And the high voter disapproval of company tax cuts suggests Turnbull’s Jobs and Growth package would have cost him more votes than it won. Finally, the effectiveness of Labor’s Mediscare means it will be a long time before the Coalition again proposes any health spending reforms that involve reducing bulk-billing or other cost-shifting to patients. This is a pity because, as a careful reading of any federal or state intergenerational report makes clear, the growing cost of hospitals, doctors and drugs is by far the greatest single threat to balanced budgets in coming years.

Shorten’s surprisingly good performance at the last election is my first reason for expecting him to stay as Labor leader until the next election. My second is that Labor’s new practice of giving its rank and file a say in the leadership vote makes the hiatus involved in changing leader mid-term a high price to pay. My third reason is there’s no obvious alternative leader. Tanya Plibersek may look a good prospect, but she hasn’t yet had the blowtorch on the belly. But, again, the qualification: should Turnbull’s Coalition get ahead in the fortnightly polls and stay there for months, the mutterings against Shorten would start up. The days of gratitude or loyalty in politics are long gone.

Prospects for economic management and reform

It’s a good thing that primary responsibility for day-to-day management of the macro economy long ago passed to the central bank and monetary policy, because the Abbott-Turnbull government has shown little enthusiasm for taking up the challenge. This is despite regular public requests from Glenn Stevens and now Phil Lowe that fiscal policy take more of the burden at a time when monetary policy’s potency has been greatly reduced by high household indebtedness. What they - and the IMF and the OECD - want is for the government to get on with balancing the recurrent budget while increasing its spending on worthwhile infrastructure projects.

Abbott and Hockey did have a red hot go at getting the budget back on track in their first budget of 2014. Had all its measures been implemented and persisted with, it would have got us back to surplus in time, mainly because of all the fiddling with indexation arrangements, no doubt at Treasury’s instigation, which would really have built up over 10 years. But little thought was given to the fairness with which the pain was shared between high and low income-earners and this, combined with the blatant breaking of election promises, caused the budget to be summarily rejected by the public and the Senate. The new government’s high standing in the polls collapsed and never recovered until Abbott was overthrown by Turnbull.

After than setback in the polls, the government lost interest in budget repair.  Abbott’s second budget, in 2015, was devoted almost wholly to attempting to restore the government’s popularity, with reform of childcare payments, paid parental leave and tax breaks for small business. Its next budget, Turnbull’s first, was devoted to letting down gently the government-created expectation of major tax reform. It contained various tax measures, the most notable of which was the largely unfunded 10 year phase-down of the company tax rate. This is certain to get through the Senate to the extent that it goes to small and medium businesses, but I think a flow-through to big business is unlikely.

The government has essentially given up on speeding the budget’s return to surplus. Though last year’s budget did contain various measures to increase tax collections, these seem to have been intended to partially cover the cost of its proposed company tax cut, not positively improve the bottom line. And, despite all the fuss it makes about getting spending cuts through the Senate, these are intended only to offset the cost of new spending measures, not make more than a nominal dent in the bottom line. Its only policy to reduce the budget’s structural deficit is to rely on bracket creep by delaying across-the-board tax cuts. But this hasn’t worked because price and wage inflation have been so weak.

Sorry to be the bearer of bad tidings, but the era of major microeconomic reform is over. That’s, first, because the electorate has no stomach for it. Polling shows strong majorities against company tax cuts, higher GST, reduced penalty rates, reduced protection and all privatisation. And, second, because no party or politician of either side shows the desire or the ability to carry major reform to fruition. The era of explaining and defending controversial policy proposals ended with the departure of Keating and Howard. The third reason times have changed is that the reform push has degenerated into rent-seeking by big business. All the reforms business pushes involve direct benefits to them, plus the assurance that this will do wonders for the wider economy, including workers. Sorry, people are too cynical to believe in trickle-down economics.

What we will continue to see, however, is occasional instances of limited, specific reforms, most of them motivated by budget pressures. If the company tax cut for big business fails to go through this time, but Trump’s big cuts in America’s corporate tax rate do become a reality, the pressure on us to reciprocate may intensify, but even that I wouldn’t regard as a certainty.

I believe we have seen a few worthwhile reforms from the Turnbull government: the new diverted profits tax trying to extract more revenue from multinationals, and the reduction in superannuation tax concession to high income-earners. An important point to note here is that they happened because Labor had made the first move in proposing similar measures (plus the further big hikes in tobacco excise, which the government simply copied). Once Labor had committed itself, the government became confident it could adopt similar measures without its opponents rallying any losers against it. The government also went close to doing something on negative gearing, but in the end decided not to, to give it some product differentiation with Labor. It’s easy for outside observers to underestimate how much the behaviour of governments is influenced by the behaviour of the opposition.

Let me finish by saying that the area of economic reform where the government’s performance has been most egregious is on policy to ease our transition to a low-carbon economy and honour our commitments at the Paris conference. Leaving aside Abbott’s role in our policy regression, Turnbull’s disservice to the nation was to swear off introducing a carbon intensity scheme the moment his hard Right party members, led by the now departed Cory Bernardi, expressed their disapproval. This scheme had been carefully worked up by people of goodwill hoping to provide Turnbull with a face-saving way of returning to a form of carbon pricing, which would help ease the transition from coal power to renewables and do it with only a small increase in retail electricity prices. Since then, Turnbull has done nothing but dig himself in deeper, in the process creating great uncertainty in the power industry, something that could easily end up adding to blackouts and price rises.


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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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Monday, February 13, 2017

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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Saturday, February 11, 2017

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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Wednesday, February 8, 2017

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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