A better, more economic budget

Of the government's four goes so far, this is its best budget. For a budget aimed squarely at improving Malcolm Turnbull's ailing political fortunes, its economics is much better.

At long last it completes the Coalition's 180 degree turn away from its toxic first budget of 2014.

It heeds mainstream economists' advice and abandons the Coalition's misguided professed concern about a "debt and deficit crisis".

It is, however, a lot stronger on principle than practice.

It accepts the repeated urgings of the Reserve Bank, the International Monetary Fund and the Organisation for Economic Co-operation and Development that the government distinguish between borrowing for worthwhile infrastructure – which raises the economy's productivity – and continuing to borrow to cover recurrent deficits long after the downturn has passed.

It abandons the Coalition's smaller government ideology and accepts economists' advice that all successful attempts to return the budget to surplus involve a combination of spending cuts and tax increases.

In short, it's a big spending, big taxing, big borrowing budget.

Smarties may call it "Labor lite" but, in truth, it contains measures Labor wouldn't have dared to take: increasing the Medicare levy, imposing a much bigger tax on the big banks, and standing up to the Catholics schools' demand to continue their special treatment compared with other private and government schools.

Scott Morrison is right to say the budget is a fair and responsible path back to surplus.

It better aligns government policy with the voters' wishes, does a better job of managing the economy and puts the budget on a sounder basis – but all without bringing closer the time when Morrison expects the budget to return to surplus.

In truth, whether his prediction this will happen in 2020-21 proves accurate turns on economic forces beyond his ability to forecast, let alone control.

Without doubt, the budget measure that will do most to increase economic efficiency – not to mention fairness – is the government's belated embrace of needs-based school funding.

Getting funding right is the first step towards raising the poor academic performance of the nation's schools and narrowing the achievement gap between students from advantaged and disadvantaged families.

David Gonski's new inquiry will guide us in the second step: improving what happens in the classroom.

The success of Labor's "Mediscare" at last year's election has prompted the government to abandon its claim that healthcare spending is growing "unsustainably".

It is phasing out its freeze on Medicare rebates to doctors and adding expensive drugs to the pharmaceutical benefits scheme, while searching out efficiencies to slow the rate at which spending is growing.

The budget relies far more on tax increases than spending cuts to offset its higher spending.

The main tax increases are a (delayed) 0.5 percentage point increase in the Medicare levy, a big new tax on big banks and crackdowns on the black economy and multinational tax avoiders.

Little there for voters to object to, especially as the higher Medicare levy will pay for the widely supported but hugely expensive National Disability Insurance Scheme.

All this is marred, however, by a list of bad measures: the Melbourne to Brisbane inland freight railway is a waste of money, the housing affordability package combines minor measures with a counterproductive superannuation saving scheme, the regional growth fund is a National Party pork barrel, it would have been fairer to continue the 2 per cent deficit levy on high income-earners, and the Medicare guarantee fund is an accounting trick.

But you can't have everything – especially not from our flawed political system. This budget is much better than we have come to expect.

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How Medicare needs to be improved

It's the time of year when treasurers and finance ministers, asked about the content of the budget, reply with righteous indignation that we'll just have to wait, as though they've been asked to break the official secrets act, while their ministerial colleagues are busily leaking or even announcing large slabs of what's to come.

Why do politicians indulge in this tiresome charade? Because they want to be sure we know about the nice bits, while delaying our knowledge of the nasty bits as long as possible.

They haven't yet leaked much about what lies in store on healthcare, though what we have been told is benign. The government, which in its first budget told us healthcare spending was growing "unsustainably", is adding a lot of hugely expensive new drugs to the pharmaceutical benefits scheme.

And it seems the freeze on the rates of Medicare rebates – including bulk-billing payments to doctors – is to be eased, at a cost of $500 million over several years.

There's sure to be some bad news on health hidden in the budget but, after the success of Labor's scare campaign at last year's election, alleging the Coalition wanted to "privatise" Medicare, it's a safe bet it won't be too terrible. No one got a bigger scare than Malcolm Turnbull.

Voters have always been strongly attached to Medicare – by which they mean not having to shell out when they go to a bulk-billing GP – and Labor was trying to reawaken voters' resentment when, in its first budget, the government proposed a GP co-payment of $7 a pop.

The element of truth in Labor's scare was that, if you froze bulk-billing rebates for too long, GPs would begin to break out and start charging their own co-payments.

That's the political reason the freeze is to be eased. The Turnbull government will never again make controversial changes its opponents could characterise, however wrongly, as "privatising" Medicare.

Most of the things you could do to limit the growth in healthcare spending involve cutting the incomes of doctors, or at least restraining the rate at which they're growing.

So, whenever governments try, the doctors resort to their own scare campaign, telling their patients – the older and more pitiable the better – the government is forcing them to charge, say, $3000 for having their cataracts fixed.

Few people could afford to pay such prices – which is why, in reality, they'd never happen – but that doesn't stop old ladies taking their indignation to a slavering tabloid media or beating down the doors of their local member.

But it's a great pity to have the government running scared of making changes to Medicare. There's a lot of inefficiency in our present arrangements which, if we could reduce it, would slow the rate at which the healthcare bill is growing and so ease the burden on taxpayers, without harming patients.

Indeed, as Dr Stephen Duckett (a real doctor, not a medico), of the Grattan Institute, argues in a new report, Building better Foundations for Primary Care, a more efficient system could give some patients better care by reducing the need for them to go into hospital.

Much has changed since Medicare was first installed in the 1970s. It needs to be brought up to date without weakening its key features.

One thing that's changed is the rising average age of the population, meaning that more doctor visits are about chronic (lasting) conditions – such as diabetes, asthma or heart disease – rather than acute (temporary) problems.

So GPs need to spend more time helping their patients manage their chronic conditions (older patients will often have more than one), which requires longer but (we hope) fewer consultations.

But, as Duckett and his colleagues explain, Medicare's present system of rebated fee-for-service, acts to discourage such better assistance to chronic sufferers.

It gives GPs a financial incentive to increase the number of services provided, but also keep them short.

It would be better to pay GPs a (higher) fee for successfully managing a patient's chronic condition. But that's well down the track. First things first.

"Primary care" is the medicos' term for a patient's first point of contact with the healthcare system. It could be a hospital emergency ward or an "allied health service", but mainly it's GPs.

Health experts have long known that the key to an efficient and effective health care system is to get primary care working well. GPs get paid a lot less than specialists, but they're probably more important to ensuring good patient care.

Our primary care doesn't work well enough to be called a "system", mainly because of squabbling between federal and state governments and the absence of clear lines of responsibility.

Duckett says we need a primary care agreement between the two levels of government and the primary health networks, which should be given more resources, responsibility and accountability.

But first we need much more information about what happens in general practice, so sensible targets can be set for improved performance.

Since almost all GPs use a computer program when seeing patients, such (de-identified) information could be supplied with little additional effort or cost.

If the government is about to ease the screws on GPs' incomes to the tune of half a billion dollars, it should make this conditional on them providing the information needed.

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THE EFFECTIVENESS OF FISCAL AND MONETARY POLICIES IN THE AUSTRALIAN ECONOMY

May 2017

The global economy is enduring a long period of strange and tricky developments, and so is our economy. The world is still recovering from the global financial crisis of 2008, the Great Recession it precipitated, and the very high levels debt that linger as a result of heavy borrowing before, during and after the crisis. Growth has been weak, as has measured productivity improvement. Growth has been so weak for so long that America, Britain, the euro zone and Japan have all resorted to “quantitative easing” – central banks creating money. This unconventional monetary policy has not been very effective at stimulating demand for goods and services, but it has done much to inflate prices in asset markets such as share markets.

Our economy has had to exist in a global environment of low growth, weak productivity improvement, low inflation and weak wage growth, while we cope with the transition from the decade long resources boom – the biggest and most economy-changing boom since the Gold Rush. We’ve had a long period of below-trend economic growth, low business investment and falling real national income, as the income gained from growing production of goods and services, GDP, was reduced by the deterioration in our terms of trade (the prices we receive for our exports relative to the prices we pay for our imports), which has raised Australia’s international cost of living, so to speak.

Our official rate of unemployment is not particularly high, but our rate of under-employment is. Employment growth hasn’t been strong, and most of the extra jobs have been part-time. Young people leaving education have suffered longer than usual waits before finding suitable full-time jobs. Wages have been growing at their lowest rate since the severe recession of the early 1990s – less than 2 per cent a year – and although price inflation has also been unusually low, wages and prices have been running neck and neck, meaning real wages have been stagnant. This is at a time when the productivity of labour has been improving, which you would normally expect to be reflected in rising real wages.

Stagnant real wage growth is bad news for workers, but it also for retail businesses, whose sales don’t grow much, and for governments, whose tax collections don’t grow as fast, especially as no real growth in wages means little bracket creep (fiscal drag). This, in fact, does much to explain the difficulty the Turnbull government is having returning the budget to surplus.

And while all this is going on, the Reserve Bank has been having a lot of trouble using conventional monetary policy to get demand growing more strongly and get the inflation rate up into its target range of 2 to 3 per cent. For some years, the Reserve has been appealing to the government for help from fiscal policy in stimulating demand, and in this year’s budget the government signalled a change.

I want to bring you up to date on recent developments in monetary policy and fiscal policy, and then discuss the effectiveness of the two policies. 

The monetary policy “framework”

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. It is the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over time. The primary instrument of MP is the overnight cash rate, which the RBA controls via market operations.

Recent developments in monetary policy

The RBA cut the official interest rate hard in response to the GFC in 2008, but then put rates back up once it became clear a serious recession had been averted.

In November 2011, the Reserve decided the resources boom was easing and would not push up inflation. It realised growth in the non-mining sector of the economy was weak - held down particularly by the dollar’s failure to fall back in line with the fall in export prices – at a time when mining-driven growth was about to weaken. So it began cutting the cash rate, getting it down to a historic low of 2.5 per cent by August 2013.

For the next 18 months, the Reserve sat back and waited for this very low interest rate to work through the economy and have its effect. Not all that much happened, with the economy continuing to grow at a below-trend rate. The dollar did start falling in the first half of 2013, and by June 2015 it had dropped to about US77 cents (from its peak of US1.10 in mid-2011), but this would have been explained much more by the continuing fall in coal and iron ore export prices than by our lower interest rates relative those in the major advanced economies. The Reserve continued to note that the exchange rate hadn’t fallen by as much as the fall in commodity prices implied it should have, explaining this as a consequence of the major advanced economies’ resort to quantitative easing, whose main stimulatory effect on their economies came by forcing their exchange rates lower (thus causing ours to be higher than otherwise).

So in February 2015, after a gap of 18 months, the Reserve resumed cutting rates, dropping the official rate twice in 2015 and twice in 2016 to record low of 1.5 per cent. There have be no further cuts so far this year.

The total fall of 3.75 percentage points since November 2011 has helped boost economic growth somewhat. In particular, it prompted the boom in the housing market, causing big increases in house prices and new home building, particularly in Sydney and Melbourne. How much the lower rates contributed to the fall in the exchange rate is debatable.

Monetary policy’s reduced effectiveness

The continuing below-trend economic growth despite a major easing in monetary policy, and plenty of time for it to work its way through the economy, suggests monetary policy easing no longer has as much effect as it used to in stimulating demand. Similar conclusions drawn in the major economies may be explained by their need to resort to the less-effective quantitative easing once official interest rates had been cut to zero. But that doesn’t apply to Australia, and there is no reason to suppose monetary policy has become less effective simply because interest rates here are a lot lower than they used to be.

You know that changes in monetary policy affect demand and, eventually, inflation, via various “channels”. In his last speech before retiring, the former Reserve Bank governor, Glenn Stevens, said he’d long held the view that monetary policy’s main effect on demand was via households, rather than businesses. This was because businesses’ decisions about investment were influenced more by their assessment of the outlook for growth and profits than by the cost of capital – interest rates. So the main channel through which expansionary monetary policy works is to use lower interest rates to encourage households to borrow and spend more. Stevens then argued that this hadn’t been as effective in recent years because our very high level of household debt (most of which is for housing) was making people reluctant to borrow a lot more. It seems clear the new governor, Philip Lowe, agrees with this assessment. He has made the point that monetary policy’s reduced effectiveness is likely to be asymmetrical: if households’ high debt stops cuts in interest rates from encouraging much additional demand, this should mean that increases in interest rates were a lot more effective in discouraging demand (because households’ high levels of debt mean a rise in rates causes a bigger hit to their cash flow).

There is little doubt that the long period of unusually low mortgage interest rates has done much to encourage increased borrowing for housing, particularly in Sydney and Melbourne, making already high levels of household debt even higher. House prices have risen at huge and worrying rates, with competition from housing investment buyers making it a lot harder for young people to afford their first home. In some other state capitals, however – notably, Perth – house prices have been weak. This is a reminder of one longstanding drawback in using monetary policy to control demand: you can have only one, uniform interest rate for the whole economy, even though demand is too strong in some states and too weak in others.

There is continuing speculation in markets and the media on whether the Reserve will cut rates further – to get demand growing stronger and inflation back up into the target range – or whether it will start raising rates to stop the rapid rise in house prices and Sydney and Melbourne. My guess is the Reserve wouldn’t mind being able at do both at the same time. Since this is impossible, it is pleased to have help from “macro-prudential” measures taken by the bank regulator, the Australian Prudential Regulation Authority, APRA, in tightening its direct controls over banks’ lending for investor housing.

At the same time, however, the new governor, Philip Lowe, stepped up his pressure on the Turnbull government (echoed by the IMF and OECD) for fiscal policy to give more assistance to monetary policy in encouraging demand. The government has been preoccupied with achieving fiscal policy’s primary goal of “fiscal sustainably” (ensuring the level of government debt doesn’t get too high) by attempting to get the budget back to surplus - though with little success because of the weak growth in tax collections.

Lowe has argued that the government should draw a clearer distinction between its spending for capital (infrastructure investment) and its spending for recurrent (day-to-day) purposes. It should focus on getting only the recurrent or “operating” balance back to surplus, which would leave it free to give more support to demand, as well as do more to improve productivity, by continuing to borrow for worthwhile infrastructure projects. In this year’s budget the government responded to this pressure, giving more prominence to the net operating balance – the NOB - and by initiating two big infrastructure projects, the second Sydney airport and the Melbourne to Brisbane inland freight railway, with more capital city road and rail projects to come.

Fiscal policy “framework”

Fiscal policy - the manipulation of government spending and taxation in the budget - is conducted according to the Turnbull government’s medium-term fiscal strategy: “to achieve budget surpluses, on average, over the course of the economic cycle”. This means the primary role of discretionary fiscal policy is to achieve “fiscal sustainability” - that is, to ensure we don’t build up an unsustainable level of public debt. However, the strategy leaves room for the budget’s automatic stabilisers to be unrestrained in assisting monetary policy in pursuing internal balance. It also leaves room for discretionary fiscal policy to be used to stimulate the economy and thus help monetary policy manage demand, in exceptional circumstances - such as the GFC - provided the stimulus measures are temporary.

Recent developments in fiscal policy

This year’s budget was aimed at restoring the Turnbull government’s ailing political fortunes. Economically, its objective was to put the budget and the return to surplus on a stronger footing by accepting that this would require tax increases as well as spending cuts. It removed from the budget’s forward estimates expected savings from the “zombie” spending cuts – cuts announced in the 2014 budget, but not passed by the Senate. This book entry worsened the expected budget balance by $2 billion in the budget year, 2017-18, with a total worsening of more than $13 billion over four years. The new policy decisions announced in the budget – mainly involving tax increases - will have a negligible effect on the budget balance in the budget year, but yield a $20 billion improvement over four years.

The main revenue-raising measures are a small indirect tax on the liabilities of the five biggest banks; a further 0.5 percentage point increase in the Medicare levy in two years’ time, intended to cover the rising cost of the national disability insurance scheme; and increases in university fees, plus a lower income threshold at which former students must start to repay their debt.

The budget papers project the underlying cash budget deficit falling from $38 billion (2.1 pc of GDP) in the old financial year to $29 billion (1.6 pc) in the coming year and reaching a tiny surplus in 2020-21, unchanged from last year’s budget.

However, these figures exclude a net increase in infrastructure spending – on the national broadband network, the second Sydney airport and the inland railway of about $5 billion, which has been hidden in the headline cash deficit. Allowing for all these factors suggests the “stance” of fiscal policy adopted in this budget is expansionary, but only mildly so. This does, however, represent a positive response to the RBA’s request for more help from the budget in stimulating demand, help that will grow as new projects get underway.

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Disadvantaged should rate higher than rich and powerful

I shouldn't say it, but the thing that annoys me most about the readers of this august organ are those who want to consign me to a party-political pigeonhole. "He's only saying that because he's Liberal/Labor/Green/Callithumpian."

Sorry. I have a lot of strong views, and I hope it isn't hard to detect an internal consistency in them, but they're not driven by loyalty to any party.

Like many old journos, the older I get the more disdainful I become of both sides of politics. They're not identical, but they have far too many bad habits in common.

But if my views come from a consistent set of values, where do those values spring from?

It's no secret. If you must pigeonhole me, I don't mind you saying this: "He's only saying that because he grew up in the Salvos – and hasn't managed to shake it all off."

I certainly inherited from my father a penchant for preaching sermons. So, since it's Easter, here's the latest.

Earlier in my career as a commentator my mission was to convert readers to the one true faith of economic efficiency.

As I've got older and wiser, however, I've realised that, though economic inefficiency has nothing to recommend it, efficiency isn't the only worthwhile goal of public policy, and there are often times when other objectives should take priority.

Such as ensuring the fruits of our economic success are distributed fairly between all the participants in the economy, not hogged by the rich and powerful.

Such as ensuring the poor – these days we're supposed to say the "disadvantaged" – are given a helping hand, even if they're the political path of least resistance when trying to fix the budget deficit.

The more unimpressed I've become with party politics and economic orthodoxy, the more I've fallen back on the values I imbibed as a youth, reading about the Salvos' daring, disreputable and sometimes law-breaking exploits in their early days.

I've been reminded of all this by a four-DVD box set, Boundless Salvation, produced by my coreligionist and mate, John Cleary, late of the ABC religion department, to celebrate the Salvos' 150th anniversary.

The Salvation Army was founded in the East End of London in 1865, when the Rev William Booth broke away from the Methodists. As a protestant church, its doctrines are identical to Methodism.

As Cleary explains, what distinguished the Salvos was Booth's preoccupation not just with saving souls, but saving "the worst", and the way he matched spirituality with practicality.

As soon as you were saved you were set to work, not just spreading the word, but helping the downtrodden escape the economic bonds that enslaved them.

Consider this recorded sermon from late in Booth's life: "Amidst all your joys don't forget the sons and daughters of misery. Do you ever visit them? Come away and let us make a call or two.

"Here is a home, six in family. Bathe and drink and sleep and sicken and die in the same chamber.

"Here is a drunken hovel, devoid of furniture, wife a skeleton, children in rags. Father maltreating the victims of his neglect.

"Here are the unemployed, wandering about, seeking work and finding none. Yonder are the wretched criminals cradled in crime, passing in and out of the prisons. All the time.

"There are the daughters of shame, deceived and wronged and ruined. Travelling down the dark incline to an early grave.

"There are the children, fighting in the gutters, going hungry to school. Growing up to fill their parents' places.

"Brought it all on themselves, you say? Perhaps so. But that does not excuse our assisting them.

"You don't demand a certificate of virtue before you drag the drowning creature out of the water.

"Nor the assurance that a man has paid his rent before you deliver him from the burning building.

"But what shall we do? Content ourselves by singing a hymn? Offering a prayer? Or giving a little good advice?

"No! Ten thousand times no! We will pity them, feed them, reclaim them, employ them.

"Perhaps we shall fail with many. Quite likely. But our business is to help them all the same. And that in the most practical, economical and Christlike manner."

Never heard that sort of talk from the pulpit? Here's a verse from Psalm 82 a reader sent me:

"Give justice to the weak and the orphan; maintain the right of the lowly and the destitute.

"Rescue the weak and the needy; deliver them from the hand of the wicked."

It all helps me know whose side I'm on in the great self-centred battle for government largesse.

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How our penchant for magic numbers gets us into trouble

A lot of the problems we cause ourselves – whether as individuals or as a community – arise from the way we've evolved to economise on thinking time by taking mental shortcuts.

We are a thinking animal, but there are two problems. First, we have to make so many thousands of decisions in the course of a day – most of them trivial, such as whether to take another sip of coffee – that there simply isn't enough time to think about more than a few of them.

Second, using our brains to think requires energy, in the form of glucose. But glucose is not in infinite supply. So we've evolved to save energy by minimising the thinking we do.

As Daniel Kahneman​ – an Israeli-American psychologist who won the Nobel prize in economics for his work with the late Amos Tversky​ on decision-making – explains in his bestselling Thinking, Fast and Slow, our brains solve these two problems by making all but the biggest, non-urgent decisions unconsciously.

This is Thinking Fast. We don't think about taking another sip of coffee, we just notice ourselves reaching for the cup.

But even when we are Thinking Slow, carefully considering a big decision – such as which house to buy, or whether to marry the person we've been seeing – we still have a tendency to save glucose by relying on what Kahneman and Tversky dubbed "heuristics" – mental shortcuts.

They stressed that our use of such shortcuts is, in general, a good thing. We fall into the habit of jumping to certain conclusions because, most of the time, they give us the right answer while saving brain fuel.

But they don't give us the right answer in every circumstance, and it's the classes of cases where they lead us astray that are most interesting and worth knowing about.

Kahneman and Tversky kicked off a small industry of psychologists thinking up different potentially misleading mental shortcuts and giving them fancy names.

I have a couple of my own I'd like to add to the list.

I call the first one "box labelling" – saving thinking time by consigning things or people to boxes with particular labels.

For example: "I regularly vote Labor/Liberal, therefore I don't have to think about the rights and wrongs of all the policy issues the pollies argue over, but can get my opinion just by checking which side my party's on."

You can see how common this is if you look those media opinion polls that show you how many people support or oppose a particular policy – say, curbing negative gearing – then show you who those people would vote for in an election.

Much more often than not, people take their lead on an issue from the position their favoured party takes.

You also see it by watching what happens to the index of consumer confidence when there's a change of government. Almost all those who voted for the losing party switch from optimism to pessimism, while those who voted for the winner switch from pessimist to optimist.

My second mental shortcut is "magic numbers". Experts develop and carefully calculate some economic or financial indicator, based on various assumptions.

The indicator measures changes in something we know is important, so we get used to watching it closely for an indication of how things are going.

Trouble is, we end up putting too much reliance on the indicator, using it as a mental shortcut – a substitute for thinking hard about what's going on.

We turn it into a magic number – a single figure that tells us all we need to know. We use it to inform us about things it wasn't designed to measure.

But, above all, we forget about all the assumptions on which it's built, assumptions that can become inappropriate or misleading without us noticing. That's when our magic numbers hit us on the head.

The American economic historian Barry Eichengreen attributes part of the blame for the global financial crisis to Wall Street's excessive reliance on a financial indicator called "value at risk" or VaR.

As Wikipedia tells us, VaR "estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses."

Eichengreen tells of the banking boss who, late each afternoon, would call for the figure giving the investment bank's VaR. If it fell within a certain range, the banker would go home content. If it was outside the range, he'd stay until he'd done whatever was needed to get it back into range.

The problem was his neglect of the assumptions on which the calculation was based, in particular, "given normal market conditions". Conditions stopped being normal without him realising and – like all its competitors – his bank got into deep trouble.

But the most notorious magic number is gross domestic product, GDP. It was developed by economists after World War II to help them manage the macro economy, but has since been widely adopted as the single indicator of economic progress.

Economists know that GDP is good at what it measures, but was never designed to be a broader measure of wellbeing. This, however, doesn't stop them treating the ups and downs of GDP as the be-all and end-all of economics, as a substitute for thought.

Another word for this is "bottomlinism" – don't bother me with the details, just give me the bottom line.

But never inquiring beyond the bottom line will often end up misleading yourself or getting you into trouble. That's particularly true of people who hear the words "deficit" and "debt" and immediately assume the worst.

In business, however, the most dangerous magic numbers – the most egregious substitute for the effort of thought – are known as KPIs – key performance indicators.

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The local school is in decline, reducing social cohesion

I love living in my suburb. I shop locally, just so I can run across friends and neighbours on a Saturday morning, and be greeted with a smile – even a name – by shopkeepers who know me.

I figure the best ways to get to know people in your suburb is to own a dog – you get to talk to other dog-owners as you stand around in the local park – and send your kids to the local school. You can't help getting to know the other parents in your kids' classes.

But all that was some years ago, and times change. The local school isn't the institution it used to be.

Perhaps it won't surprise you to be told that, over the years, our capital cities have become more stratified, with a greater tendency for better-off people to live in better-off suburbs – the ones with water and views and, these days, those closest to the centre – and for the less well-off to live in less well-off suburbs far from the centre.

This is most true of Sydney, then Melbourne – which is catching up with Sydney in size – but less true of the other capitals.

But maybe this will surprise: something similar is happening to our schools, particularly secondary schools.

We have a widening divide between the schools attended by the offspring of better-educated, better-off parents, and those attended by, well, the not so well educated and paid.

This is happening partly in consequence of the increasing stratification of suburbs, but also because of the education policies pursued by federal and state governments.

Unlike almost all other rich economies, Australia runs three school systems rather than one.

This array has tempted us to treat school as though it was a market, where government, Catholic and independent schools compete for youthful customers, thus providing parents with greater choice and obliging government schools to lift their game.

John Howard was big on choice. Julia Gillard left Howard's pro-choice funding arrangements running until Labor's last year, while emphasising competition between schools.

She introduced the NAPLAN testing of literacy and numeracy and, to ensure parents were well-informed before making their choice, she introduced the My School website, loaded with detailed information about every school.

We got a lot of choice, but no improvement in measured performance. Moral: schools aren't a market.

One benefit, however, is that researchers can collate the My School data to give us a much clearer picture of what's happening to our schools. Leaders in this research are two retired high school principals, Chris Bonnor and Bernie Shepherd.

Everyone knows there's been a decades-long drift of students from government to non-government schools.

What our not-so-retired principals have discovered, however, is that this has masked a big shift from schools with low socio-educational advantage to those with high socio-educational advantage. (A school's socio-educational advantage is rated largely according to the socio-economic status of its students.)

My School shows that, over the five years to 2015, average enrolments at all schools grew by more than five students a year. But enrolments at schools with high socio-educational advantage grew by an average of 11 students a year, whereas enrolments at disadvantaged schools grew by just more than one student a year.

When choosing schools, many of us think of a hierarchy of excellence – in teaching and results – running from government to Catholic to independent. But that's just what you see on the packet. (Echoed by the prices of the packets.)

Studies estimate that 78 per cent of the variance in the performance of schools is explained by differences in their socio-educational advantage – that is, by the socio-economic status of their students.

Independent schools tend to get good exam results because most of their students come from well-educated families. Catholic schools get better results than you might expect because the days when their classrooms were full of working class kids are long gone.

You'd expect this to mean public schools increasingly full of disadvantaged kids getting poor results. True, but they retain a higher proportion of advantaged students than you'd expect.

Why? Partly because public schools in posh suburbs still have lots of smart kids, but mainly because – particularly in Sydney and, to a lesser extent, Melbourne – state authorities have responded to the demand for greater "choice" by creating more selective schools.

But this means greater stratification on the basis of socio-economic status even within the government system, coming at the expense of disadvantaged government schools.

Choice, however, isn't available to all parents. To have a choice you need either brains or money (which usually comes with brains attached).

The vogue for choice has also allowed greater stratification of students on the basis of religion. These days, Jewish kids go to Jewish schools, Muslim kids go to Muslim schools and Baptist and Pentecostal kids go to "Christian" schools.

Trouble is, high socio-educational advantage schools aren't always located in high-status suburbs. So these days, a lot more traffic congestion is caused by a lot more students and parents travelling longer distances to and from school.

Leading to the decline of the local school. Less than a third of schools now have an enrolment that resembles the people in their local area.

Sounds a great way to reduce the nation's social cohesion.

What did the rich kid say to the poor kid? Nothing. They never met.

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Too many stuff-ups about to put economic reform into reverse

I have bad news and worse for advocates of micro-economic reform. First, the jig is up. There'll be few if any further major reforms. Second, the backlash against mounting wreckage from failed reforms is about to begin.

Since the reform push has degenerated into little more than business rent-seeking – let's cut tax on business and increase it on consumers; let's push the legislated balance of power in industrial relations further in favour of employers – it's neither surprising nor regrettable that voters have called a halt.

Micro reform has lost all credibility with voters. Most oppose company tax cuts for big business, cuts in penalty rates and a freeze on the minimum wage. Neither side of politics will pursue these "reforms" with any enthusiasm.

Economic rationalists will blame all this on irrational populism, but if they were more honest with themselves they'd admit the economic case for bizonomic​ reforms – what's good for business must be good for the economy – is debatable and often unconvincing.

And who could blame the public for holding economists accountable for all the stuff-ups committed in the name of reform over the years: the implosion of the deregulated wool price scheme, the wasteful public-private partnerships, the dubious effectiveness of the Job Network, the disastrous admission of for-profit providers of childcare.

The dodgy education businesses selling access to permanent residence to foreign students, the "contestable" pink batts scheme, the failure of encouraging competition between government and private schools, the huge rip-offs of students and taxpayers arising from federal and state efforts to make vocational education and training "contestable", the privatisation of airports and ports with their monopolies intact.

Economic rationalists are so heavily into confirmation bias they've managed not to notice this record of disasters, but they'll be hard pressed not to see the next one, when for-profit providers rip off the disabled in the name of making the National Disability Insurance Scheme "contestable".

Last week the former high priest of micro reform (and Productivity Commission boss) Gary Banks attacked a politician for daring to blame the failures of energy policy on the private sector's lack of enterprise.

Leaving aside his one-eyed criticism of government subsidies for renewable energy (while just happening not to notice the implicit subsidy of fossil-fuel generators arising from the absence of a price on carbon), Banks was right.

The blame must go to the econocrats who designed the national electricity market and the politicians who took their advice.

That we've gone from about the cheapest to about the dearest electricity – and that without a price on carbon – can be blamed on the malfunctioning of micro reform.

The "market" is the utterly artificial creation of government, run by several government agencies with a 6000-page rule book, responsible to a committee of nine governments.

The reformers' wholesale electricity market seemed to be working well, but now lacks the flexibility to cope with energy emergencies. The price regulation of largely privatised natural monopoly network operators was gamed for years before the regulators woke up, and price competition between electricity retailers is weak and margins high.

Historically, economic rationalists under-rate market failure, but are highly conscious of "government failure" – where government intervention intended to correct market failures ends up making things worse.

This is the rationale for micro reform. Governments have mixed objectives, with little motivation to keep things efficient. Much better to leave it to the private sector, driven by the profit motive to put efficiency above all else.

Really? Economic rationalists and econocrats are naive, partly because many of them have never actually worked for the private sector, and are shocked to discover how powerful is the profit motive in motivating business people to game the system, look for loopholes and, far too often, simply break the law.

Private businesses are always overbidding for privatised businesses and underbidding for contracts to provide government services. Governments think this is terrific, until the businesses wake up to their error and try to extract some profit by overcharging or cutting quality, exploiting the incomplete contracts they signed.

Much of this is bureaucratic incompetence, but it's also conservative governments seeing privatisation and out-sourcing in partisan rather than efficiency terms: it's about moving economic assets and activities from the "them" column to the "us" column, so more businesses are beholden to your party and happy to donate.

Turns out the push to reduce "government failure" has produced reverse government failure. We start out trying to stop government intervention to correct market failure that's making things worse, but end up making them worse than they already were.

Then we wonder why the punters want no more "reform".

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Why we needn't worry about our massive foreign debt

When you consider how many people worry about the federal government's debt, it's surprising how rarely we hear about the nation's much bigger foreign debt. When it reached $1 trillion more than a year ago, no one noticed.

That's equivalent to 60 per cent of the nation's annual income (gross domestic product), whereas the federal net public debt is headed for less than a third of that – about $320 billion – by June.

Similarly, when you consider how much people worry about the future of the Chinese economy, American interest rates and all the rest, it's surprising how little interest we take in our "balance of payments" – a quarterly summary of all our economic transactions with the rest of the world.

Note, I'm not saying we should be worried about our foreign debt. We already do more worrying about the federal government's debt than we need to.

No, I'm just saying it's funny. Why do we worry about some things and not others?

Short answer: the politicians don't want to talk our "external sector" because it sounds bad. The economists don't want to talk about it because they know it isn't bad.

But since we're on the subject – and since Reserve Bank deputy governor Dr Guy Debelle gave a speech about it this week – let's see what's been happening while our attention's been elsewhere.

If you're unsure of the difference between the two debts, it's simple. The federal net public debt is all the money owed by the federal government to people, less all the money people owe it (hence that little word "net").

According to Debelle, about 60 per cent of all bonds issued by the feds is owed to foreigners and 40 per cent to Australian banks and investors. About a quarter of all bonds issued by the state governments is held by foreigners.

In contrast, the nation's net foreign debt is all the money Australian businesses and governments (and any other Aussies) owe to foreigners, less what they owe us. (For every $1 we owe them, they owe us 52¢.)

But how did we rack up so much debt?

Long story. Let's start with the balance of payments, which is divided into two accounts. The "current" account shows the money we earn from all our exports of goods and services, less the money we pay for all our imports, giving our "balance on trade".

Our imports usually exceed our exports, giving us a trade deficit. This deficit has to be funded (paid for) either by borrowing from foreigners or by having them make "equity" (ownership) investments in Australian businesses or properties.

Of course, when we borrow from foreigners, we have to pay interest on our debts. And when foreigners own Australian businesses, they're entitled to receive dividends.

The interest and dividends we pay to foreigners, less the interest and dividends they pay us (actually, our superannuation funds and Australian multinationals), is the "net income deficit".

We've been running trade deficits for so long, and racking up so much net debt to foreigners, that the net income deficit each quarter is much bigger than our trade deficit.

But add the trade deficit and the net income deficit (plus some odds and ends) and you get the deficit on the current account of the balance of payments.

The money that comes in from various foreign lenders and investors to cover the current account deficit is shown in its opposite number, the "capital and financial account".

Because the price of our dollar (our exchange rate) is allowed to float up and down until the number of Aussie dollars being bought and sold is equal, the deficit on the current account is at all times exactly matched by a surplus on the capital account, representing our "net [financial] capital inflow" for the quarter.

It turns out that, in the years since the global financial crisis of 2008-09, the current account deficit has narrowed.

In the 14 years to then, it averaged 4.8 per cent of GDP. In the years since then it's averaged 3.5 per cent. And in calendar 2016 it was just 2.6 per cent.

Why has it narrowed? Well, Debelle explains it's mainly a reduction in the net income deficit component of the overall deficit, which is at its lowest as a percentage of GDP since the dollar was floated in 1983.

The rates of interest we're paying on our foreign debt are lower because Australian – and world – interest rates are a lot lower since the crisis. And our dividend payments to foreign owners of Australian companies fell as the fall in coal and iron ore prices hit mining company profits.

That's nice. But while ever we have any deficit on the current account, our foreign debt will grow, and it already exceeds $1 trillion. Isn't that a worry?

Not really. It's not growing faster than our economy (GDP) is growing, and thus our ability to afford the interest payments.

More to the point, the current account deficit is just the counterpart to all the foreign capital flowing into Australia and helping us develop our economy faster than we could without foreign help.

The proof that such a massive debt doesn't mean we're "living beyond our means" is, first, that the nation – households, businesses and governments combined – saves a high proportion of its income rather than spending it on consumption.

Everything the nation saves each year is used to fund new investment in houses, business structures and equipment, and infrastructure. This investment is further proof we're not living beyond our means.

In fact, the nation invests more each year than we save. Huh? Well, the extra funding is borrowed from foreigners.

You can call it the surplus on the capital account of the balance of payments, or the "net foreign capital inflow" or – get this – the current account deficit.

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How politicians use claims about 'jobs' to mislead us

What's the four-letter word politicians of both stripes most use to bamboozle voters? Jobs. Or, as Neville Wran, former NSW premier and never given to understatement, used to say Jobs, Jobs, Jobs.

Economists and business people worship at the shrine of Growth because it raises their material standard of living. Materialism is the god of our age.

But growth is rarely what the pollies try to sell the public on. No, what presses the right button with ordinary folk is jobs.

Just as most of us don't know much about art, but know what we like, so most of us don't know much about economics, but do know there's an eternal shortage of jobs. We can just never hope to have enough of them.

So the sleaziest, most obviously self-aggrandising business person knows to say about whatever money-making project they want permission to undertake that it will create loads and loads of new jobs.

No matter what damage your scheme would do to the surrounding environment – and thus to the prospects of other industries – nor how great the risk you'll skip town if it's not working out, promise jobs and you're already half way in the door.

You can always find a friendly economic consultant who, for a small consideration, will do some modelling of your proposition and produce a generous – even exaggerated – estimate of the many thousands of jobs your plan will generate. Directly and, not forgetting, indirectly. Thousands.

Then there's a high chance government politicians will take up your cause, accepting without question or qualification you inflated job estimates, and castigating all those who lack the vision to see how much your scheme will contribute to the community's wellbeing (not to mention their re-election).

This, among many other instances, is the story of the resources boom, which our leaders applauded all the way and made little effort to control.

Think of all the jobs created. The main price we paid was that the dollar, caused by the boom to stay way too high for too long, prompted a slab of our manufacturing sector to give up the struggle.

Perversely, the highly-publicised loss of jobs that followed has served only to reinforce the public's conviction that we can never have enough jobs and that anyone claiming to want to create a few should be welcomed without further question.

It's true, of course, that a healthy rate of growth in employment is the most important thing we should expect of our economy, given our growing population.

Trouble is, our uncritical obsession with jobs – any jobs – leaves us open to manipulation by business people and politicians with their own barrows to push.

Promoters of projects exaggerate the number of jobs they will create secure in the knowledge that politicians and the media will repeat their claims without bothering to check them.

And no one but no one will return a few years later to check the gap between what was promised and what was delivered.

With mining projects, too little is done to remind people that almost all the promised jobs are for the construction, not running the thing. As soon as the project's completed, the construction workers go back where they came from – often overseas – leaving the nearby towns as flat as a tack.

Many development projects require skilled workers. But workers with particular skills are usually in short supply, meaning the project doesn't create additional jobs for plumbers or whatever so much as create vacancies that have to be filled by attracting plumbers away from their existing jobs elsewhere.

Every dollar anyone spends has indirect, flow-on effects beyond what was originally spent on. But these indirect effects are hard to measure and easy to exaggerate.

My rule of thumb is that whenever you hear the promoters of projects talk about all the jobs to be created indirectly, they ain't to be trusted.

As you recall, the centrepiece of Malcolm Turnbull and Scott Morrison's "plan for jobs and growth" was their desire to cut the rate of company tax from 30 to 25 per cent over 10 years.

Last week the Senate agreed to cut the rate to 27.5 per cent for companies with turnover under $50 million a year.

Turnbull and Morrison have chosen to regard this a big win, and are already assuring us it will do wonders to encourage small and medium businesses to expand and create jobs.

ScoMo​'s demanding to know whether Labor would reverse the tax cut and spend the money on other things, such as education and health, accusing it of "playing cynical politics all along with no regard for the jobs and wages that are at stake".

Get it? Cutting company tax creates jobs; not cutting it doesn't. Nor does spending the money on education and health create jobs.

This is economic nonsense. ScoMo regards it as a self-evident truth that cutting taxes creates jobs whereas raising taxes destroys jobs. Unfortunately, no one's told the Scandinavians.

In fact, there's no empirical evidence of a relationship between countries' level of taxation and their success in creating jobs.

ScoMo's own Treasury modelling predicts that the full company tax cut would do almost nothing to increase employment.

Beware of politicians trying to sell propositions on the basis of all the jobs they'll create. They just know which of your buttons to press.

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Politicians addicted to the appearance of economic success

I realised Australian government was fast approaching peak fake when I read Laura Tingle of the Financial Review's revelation that Malcolm Turnbull's Snowy 2.0 announcement was timed to favourably influence the imminent fortnightly Newspoll result.

When our leaders progress from being mesmerised by opinion polls to trying to game them, that's when we know the country's in deep, deep trouble.

It's long been clear that, acting on their belief that "the perception is the reality", the political class – Labor and Coalition – has focused less on attempting to fix problems and more on being seen to be fixing them.

But trying to game the political polls takes faking it to a new level: being seen to be seen to be trying to fix things.

It hardly needs saying that Snowy 2.0 was just a stunt, designed to excite the media and portray Turnbull as the great Nation Builder, while being no more than a feasibility study of a scheme that's probably not feasible, would end up costing at least double what we were told it would and, if it did eventuate, would come years too late to help with the energy crisis.

Since faking progress – conning the media into conning their voting customers – is a lot less time-consuming than pondering real solutions, you fill the vacuum by attacking your opponents' policies and record – even though such attacks rate sky-high on the hypocrisy Richter scale.

The pollies must know from their focus groups how this slagging off of opponents serves only to alienate the voters – and discourage most young people from taking any interest in politics.

But since they have little in the way of genuine policies to outline and explain, and have to keep burbling on about something, they don't seem able to stop themselves saying things that make the public change the channel.

Veteran Australian National University political scientist Professor Ian McAllister says trust in politicians is at its lowest than at any time since he started surveying it all the way back to 1969.

The other group whose perceived trustworthiness has declined badly are the media. Purely coincidental, I'm sure.

Sometimes I wonder if the pollies haven't turned the hostility between them up so high that it's no longer possible for any flesh-and-blood prime minister to survive for more than a year or two. When every day is a minefield, the sharpest leader will often put a foot wrong.

Certainly, the leadership instability we've seen since the ejection of John Howard shows no sign of abating. Whoever's leading the Coalition by the time of the next election – likely to be late next year because of last year's double dissolution – it's hard to see the Coalition surviving.

But who could convince themselves Bill Shorten's the man to restore stable government and the steady pursuit of good policy?

The superficiality of the way we're governed these days has made our politicians even more prone to short-term thinking, to the quick fix.

This explains the difficulty we're having getting both sides to accept a more disciplined, objective approach to the selection of infrastructure projects.

Infrastructure isn't something you use to improve the nation's productivity – its ability to move people and goods around efficiently; its accumulation of human capital – it's something you use to buy votes in particular electorates for particular reasons.

Speaking of getting a fix, pollies on both sides and levels of government have become addicted to announcing new mining projects, notwithstanding that the resources boom turned to bust long ago.

No one in their right mind would think now is a good time to build a mega coal mine in the Galilee Basin, but that hasn't stopped either the Turnbull government or the Palaszczuk government from offering huge subsidies to get one going.

And when politicians are waving their cheque books, you can usually find some enterprising miner – usually foreign and often tax-haven-based – confident of their ability to extract more from the government than the government extracts from them, even if history tells us most go out backwards.

There's a large element of con trick in mining projects. Their supposed attraction is the many jobs they're said to create. But these numbers are invariably hugely exaggerated and, in any case, relate only to the construction phase.

The one thing new mines don't do is create many jobs, barring the first few years.

What they do is create short booms and long busts for nearby towns. They're the bringer of all the joys of going cold turkey.

Viewed from the front, however, they look like Christmas. No wonder our vision-bereft politicians are addicted.

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