The era of neoliberalism is ending and reversing

If there's some trend in the world that we don't much like but has been happening for ages, there's a human tendency to assume it will keep on forever and just get worse. Occasionally, however, this moment signals it won't be long before it starts going away.

I'm a great believer in the pendulum theory of history: trends in human activity go on and on until they reach an unacceptable extreme, and then one day they turn and start going back the way they came.

That's certainly the way fashions in economics and government policy work. Consider the story since the end of World War II, using Britain as our guide.

There was a great reforming spirit after the war, and much that needed fixing. The economy wasn't working well and ordinary people – who'd done their duty so selflessly during the war – weren't getting a fair share of the economic rewards.

So the Brits set about installing the welfare state – comprehensive social security payments and a national health service in which most doctors became government employees – and "nationalising" many troublesome but important industries.

This new trend of nationalisation was copied in other countries including, to an extent, Oz.

But as the years rolled by it became clear that Britain's economy wasn't working well. Eventually, a new Boudica rose up, name of Maggie Thatcher, to set things right.

The problem was obvious: too much of the economy owned and run by the government and all those civil servants. Too many rules and regulations. The economy was inflexible and unresponsive. The unions had too much power and were abusing it, always on strike until they got their way.

The answer was to "privatise" most of the nationalised industries and get the unions back in their box.

We need to unshackle the power of the market, with its much greater ability to respond to changing times, greater desire to satisfy customers' needs and motivation to root out inefficiency.

This new trend of privatisation and deregulation – also pushed by Ronald Reagan in the US – has been copied in many developed economies, not least here.

By the early 1980s our economy wasn't working all that well. In a world of floating currencies, we were still trying to fix our exchange rate, battling speculators who always won.

Our banks were a joke, never able to lend enough for a home loan, so you went to a building society or they fitted you up with an expensive second mortgage from their finance company.

We'd been trying to cut ourselves off from the world with high barriers against imports, but been left with an economy that was highly inflation-prone, with much higher unemployment to boot.

Paul Keating and Bob Hawke set about modernising the economy, opening it up to a rapidly globalising world. They didn't ape Thatcher so much as start listening to the advice Treasury had been giving governments for years.

You've detected history's pendulum at work, I trust. Look at it over the decades and you see the fashion in management of the economy swinging from one extreme to the other.

Why does it swing so far? Because the truth – the happy medium – is somewhere in the middle but, because it's some combination of market forces and government management, is devilishly hard to find.

Much easier and more satisfying to champion one extreme or the other.

Why bring this up now? Because, if you hadn't noticed, this particular pendulum has just started swinging back.

As no less an authority than The Economist magazine has judged, the "neoliberal consensus" has collapsed.

For almost 40 years in the English-speaking economies, both sides of politics have accepted that businesses and individuals should be allowed to go about their affairs with as little restriction as possible.

But now both sides are stepping back from that attitude, doing so under pressure from voters growing increasingly unhappy about the state of the economy – in Oz, low wage growth, high energy costs, a seeming epidemic of business lawlessness and a lengthening list of government outsourcing stuff-ups – and the special treatment accorded to business.

You can see it overseas in the electoral popularity of Bernie Sanders and Jeremy Corbyn, and the anti-establishment revolts in the Brexit vote and the election of Donald Trump.

It didn't do her any good, but you see it in Theresa May's Conservative Party election manifesto: "We do not believe in untrammelled free markets. We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality."

Here, you see it in Malcolm Turnbull's reaction to the failed reform of the national electricity market, with his willingness to impose export restrictions on gas companies, buy Snowy Mountains hydro back from the states and contemplate federal construction of new coal-fired power stations.

You see it in Bill Shorten's policy of curbing negative gearing and the capital gains tax discount, his opposition to cuts in the company tax rate and willingness to legislate to restore and protect weekend penalty rates.

I reckon there's a lot more government assertiveness to come. You don't fancy a lifetime of precarious employment in the "gig economy" for yourself or your kids?

Don't worry, before long governments will legislate to protect employees rights at work – just as they used to in the old days.

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Worsening school performance is everyone’s business

Amid all the uncertainty about where we'll be left by the many pressures bearing on us and our economy – climate change and digital disruption, for starters – there's one truth we can cling to: the more we enhance our natural capital and our human capital, the better placed we're likely to be.

Unfortunately, seeing the sense of this is a lot easier than ensuring it happens.

On natural capital – the preservation of species and physical resources, and the healthy functioning of the ecosystem – we've got one whole side of politics still struggling to get its climate-change deniers back in their box.

Even on human capital – the acquisition of knowledge and know-how – there's plenty of conflict, ranging from economic rationalists who think constraining the growth in government spending and taxation more important than accruing human capital, to people in the education system who think the adequacy of their present performance is no one's business but their own.

On the one hand, we've got the smaller-government brigade saying the performance of, say, school education can be fixed without spending an extra dollar.

On the other, we have teachers – some of them, anyway – arguing there's no problem that having taxpayers hand over a lot more bucks wouldn't fix.

How would the extra money be spent? That's for teachers and education departments to decide, and for everyone who isn't a teacher – and therefore knows nothing about schools – to mind their own beeswax.

The smaller-government brigade closes its eyes to the need to improve the performance of our schools and to the significant economic and social gains we stand to make by improving that performance.

The size of these gains can be demonstrated using the Fairfax-Lateral Economics index of Australia's wellbeing, compiled by Dr Nicholas Gruen and published every quarter upon the release of the national accounts.

The index overcomes the limitations of gross domestic product as a measure of economic progress by starting with the most appropriate modification of GDP – real net national disposable income – and adding to it estimates of the value of human capital, natural capital, the effects of distributional inequality, environmental amenity, health and employment-related satisfaction.

The measure of human capital takes account of early childhood risk, school performance, tertiary education, innovation (multi-factor productivity) and skills atrophy from long-term unemployment.

The indicator used to measure our progress in school education is the change in our score from the regular testing of our 15-year-olds' reading ability under the OECD's Program for International Student Assessment.

Our kids' reading score has fallen almost continually since 2000, from 528 to 503, or 4.7 per cent. By comparison, Canada's score has declined only marginally over the period, from 534 to 527.

The index's estimates suggest that, were we able to lift our score only to Canada's level, this would increase the value of our human capital by almost $17 billion a year.

That's equivalent to about 1 per cent of GDP – far more than promised by almost any other proposed economic reform, including cutting the company tax rate.

Putting it another way, had our 15-year-olds' performance not deteriorated since 2003, the estimated value of the human capital – know-how – in the heads of this year's 15-year-olds would be $17 billion greater than it is.

Our kids' academic performance in each of the areas measured in the PISA tests – reading, maths and science – has been deteriorating, though at differing rates. This is worse than the picture shown by successive NAPLAN test results, summarised as flat to down.

This is why teaching is a problem too important to be left to teachers. The more so because some teachers – a minority, I trust – have become hyper-defensive, refusing to acknowledge there's a problem, telling themselves that, if there is a problem, it's everybody's fault bar their profession's, and branding any non-teacher who dares to offer an opinion a "teacher-basher".

Julia Gillard's attempt to use the measurement (via NAPLAN) and publication (via the My School website) of students' and schools' academic performance to raise standards by fostering competition between schools was misguided – pseudo-economic – and has failed.

But too much of the resistance and criticism of NAPLAN and My School arise from some teachers' desire to continue avoiding public accountability for the quality of their work.

It should go unmeasured (because fault can be found with every form of measurement humans have tried) and, to the extent that performance information exists, it should remain confidential to insiders, because outsiders lack the expertise to interpret it correctly.

Sorry guys, but more money comes at the price of greater accountability to, and scrutiny by, the mug taxpayers who cough it up.

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Why global trade growth has slowed

One thing you can be sure of is that international trade grows much faster than the world economy. It's the classic proof of growing globalisation, and it's been happening for ages. Except that it seems to have stopped.

For two decades from the mid-1980s, world trade – measured as exports plus imports – grew at more than double the rate of growth in gross world product.

Between 1986 and 2007, the volume of trade grew at an average annual rate of 3.4 per cent of world real gross domestic product, meaning it went from being equivalent to almost 30 per cent of gross world product to almost 60 per cent.

But then it dipped sharply in 2008 and 2009, thanks to the fall-off in trade after the global financial crisis and the onset of the Great Recession.


It bounced back in 2010 but, since 2011, its growth has been only a little faster than world production of goods and services.

In the decades before 1986, the volume of trade grew faster than production, but at much slower rates than in the two decades that followed. That's how we know to date the modern era of globalisation – the breaking down of economic barriers between national economies – from the mid-80s.

So, why has trade growth slowed so noticeably, and is this merely cyclical (temporary) or is it structural (lasting)?

According to a study by the Organisation for Economic Co-operation and Development, a fair bit of both.

The study estimates that about 40 per cent of the slowdown between 2011 and 2015, as compared with the period from 1991 to 2007, is explained by the weak growth of demand in the global economy.

In particular, the crisis saw a sharp fall-off in businesses' investment spending on new physical capital – which happens to be import-intensive – but it hasn't recovered all that much in the years since then.

But that leaves roughly 60 per cent of the slowdown explained by deeper, more structural forces, ones that won't just go away if we wait a few more years.

Part of the explanation is that, in the two decades before the crisis, certain factors contributed to making trade growth exceptionally strong, but these factors have now lost their force.

The biggest cause of this exceptional growth in trade was various measures to reduce tariff and non-tariff restrictions on trade.

In 1989, and partly at Australia's instigation, the Asia Pacific Economic Co-operation partnership between 21 countries was established to promote free trade.

The European Union moved to a single market in goods, services, labour and capital in 1992, increasing trade between its members. Because Europe consists of a number of separate countries, it's highly (international) "trade intensive" in a way that America – composed of states rather than countries – or even Australia, isn't.

In 1994, the "Uruguay round" of multilateral negotiations – the biggest of the many rounds of reductions in protection organised by the General Agreement on Tariffs and Trade since World War II – was reached.

This round extended membership of the GATT from the developed countries to about 150 developing countries – thus doing much to increase trade between the two groups. It also reached trade agreements covering new areas such as textiles, agriculture, services and intellectual property.

And, for good measure, the round turned the GATT into the World Trade Organisation.

The North American Free Trade Agreement between the US, Canada and Mexico began in January 1994.

And also hugely important to the growth of trade, China – now the world's second-largest trading nation – joined the WTO, cutting much of its protection as a condition of entry.

A second factor promoting the growth of trade in the two decades before the crisis was the widespread development of "global value chains" – value as in "value-added" – under which manufactured goods (cars, for instance) are assembled in one country using parts from many countries.

As trade liberalisation measures slowed in about 2000, continued growth in trade was supported by China's rapid emergence into the world economy.

By the second half of the noughties, however, these structural sources of growth had waned.

In this century, the WTO's Doha round of multilateral negotiations, launched in November 2001, has ground to a halt. According to the study, this halt in liberalisation explains about a quarter of the slowdown in the growth of trade between 2011 and 2015, compared with 1991 to 2007.

Many bilateral and regional trade agreements have been signed since then, but the only really significant agreement, the Trans Pacific Partnership, signed in February 2016, has since been scuttled by US President Donald Trump.

Add to this, "creeping protectionism from myriad small measures" in various countries, which has put trade liberalisation into reverse.

The spread of global value chains seems to have reached its limit, even declined.

Meanwhile, China's period of export-led growth has ended, with its authorities now aiming for growth led by domestic demand.

So what happens next, and what should be done?

The study says some cyclical recovery in the growth of trade is likely but, without further trade liberalisation, a return to the glory days seems unlikely.

"Trade", it reminds us, "and the related expansion of global value chains, boosts [economic] growth through increased productivity, by improving resource allocation, increasing scale and specialisation, encouraging innovation, facilitating knowledge transfer, fostering the expansion of more productive firms and the exit of the least productive ones."

All true. But, as the study acknowledges, the benefits of increased trade aren't spread evenly between or within the countries involved.

As a consequence of this – and the politicians' failure to ensure the losers from globalisation were compensated by the winners – the electorate in many rich countries is "increasingly polarised into pro- and anti-globalisation groups".

We have a lot of ground to make up before much enthusiasm for further globalisation returns.

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Where to next with The Great Gonski

I was in Moscow, recovering from a 12-day train trip from Beijing via Mongolia and Siberia, when I heard that Malcolm Turnbull's Gonski 2.0 shift to needs-based funding of schools had been passed by the Senate in the early hours of the morning.

So forgive me for being late to the party, but I can't let this key economic and social reform – surely one of the Coalition government's greatest achievements – go without acknowledgement and explanation.

The new act seeks to allocate government funding to schools, public and private, on a rational basis – the needs of individual students – rather than on what you got last year and what special deals you've done with politicians.

It seeks to phase out the decades-long sectarian basis for funding, where how much government assistance a student gets varies with the denomination of the church – or religion, or secular state – running their school.

Remarkably, Turnbull's success was achieved against the implacable opposition of the very people who spent the past four years professing to want "the full Gonski" – Labor, the teachers' union and, in the end, the Greens.

I'm still deciding whether Labor and the Greens were subservient to the union, or the union was staying loyal to Labor in hope of future largesse.

That Turnbull and his capable Education Minister, Simon Birmingham, were nevertheless able to win sufficient support from the minor parties, tells us the Senate isn't as unworkable as many suppose.

And whereas efforts to win minor-party support usually involve watering down the proposed measures, this time they significantly strengthened them – paradoxically, thanks largely to the efforts of Greens Senator Sarah Hanson-Young.

These improvements included a new independent body to review the accuracy of the various measures of student disadvantage (as recommended by David Gonski's review, but rejected in Labor's "full Gonski") and shortening the phase-in from 10 years to six (so that all schools reach their proper funding levels long before they would have under the "full Gonski").

Because the act will unwind the special deals the previous Labor government did with particular state- and private-school systems, moving federal funding on to a uniform basis across the country, it produces both winners and losers among the states and religious school systems. Be sure we'll be hearing more special pleading from them.

To acknowledge the Turnbull government's achievement isn't to suggest its job is done.

For a start, although the amended act includes a mechanism that would claw back federal funding to the states should they fail to maintain their own funding, the states need to realign their own funding of public and private schools to fit with the new formula under which, by 2023, the feds will fund 20 per cent of the assessed needs of government schools and 80 per cent of the needs of private schools.

So the states should provide 80 per cent of the funding needed by their own schools and 20 per cent of that needed by their private schools. This will require increasing grants to some schools, but cutting them to others.

More importantly, ensuring public funding goes to schools on the basis of their students' needs is just the first step towards the ultimate objective of improving our schools' performance.

As we well know from the regular local NAPLAN and international PISA ratings of students' academic performance, our schools' performance hasn't improved, and in some respects has deteriorated from earlier years, while slipping back in comparison with other countries.

To me, however, the clearest evidence of our schools' poor performance is the shockingly high proportion of students – about a quarter – who leave school without an adequate education. That's a terrible failure rate.

Doing more to help our most disadvantaged students do better is almost certain to require more money. That's why basing our school spending on the needs of particular students is essential.

But it's just step one. If we could be certain the extra money going to needy students would be spent well without further intervention, our schools' performance wouldn't be as poor as it is.

No, the next step is to ensure the redirected money is spent as effectively as possible, on teaching techniques and interventions proven to be most effective.

There is, for example, a lot of evidence that "targeted teaching" – where teachers keep checking to ensure particular students have actually learnt what they've just been taught, and don't press on until they have – stops kids falling behind.

Similarly, there's evidence that using expert teachers to help younger teachers improve their teaching style, and to help introduce new teaching methods, works to lift performance.

The need to ensure taxpayers' money is being spent as effectively as possible is, of course, the object of the new inquiry Turnbull has asked The Great Gonski to perform.

It would be good to see him recommend setting up a national outfit to develop a body of evidence on the most effective teaching techniques, pass this to schools, and also conduct independent evaluations of new approaches tried in particular states or schools, making the results public.

And once we've lifted our schools' ability to teach conventional academic subjects, we should turn our minds to helping kids gain the softer skills – to communicate well, think critically, be creative and resilient – they'll need to survive in an ever-changing working world.

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How Treasury lost its way on economic reform

From the almost stony silence of the nation's economists, you'd never know that Malcolm Turnbull's successful move to needs-based funding of schools is the most significant economic reform in many a long year.

It's notable, too, that this reform seems to have been achieved with little or no involvement by the high priests of economics at Treasury and the Productivity Commission.

Only a few economic reform projects are more important than raising the efficiency and effectiveness of federal and state spending on primary and secondary education.

Allocating that spending according to student need is the necessary first step towards the ultimate goal of reducing the shockingly high proportion of students who leave school without an education sufficient to go on to further study – in a trade course, for instance – or even to a life in which the normal state is employment, not recurring periods of unemployment.

The Australian economics profession's slowness to see the economic – not just the equity – significance of "Gonski" is a sign it's yet to learnt the lessons leading economists in America and Britain are drawing from the populist revolt against the way developed countries' economies have been managed during the era of "neo-liberalism" – better called economic fundamentalism.

Consider how well needs-based funding fits with former US Fed chairman Ben Bernanke's list of the economic managers' "errors of omission" in recent decades:

They failed "to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase the access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like."

It needs to be said that the first decade or so of "micro-economic reform" in Oz – floating the dollar, financial deregulation, eliminating protection, reforming the tax system, decentralising wage-fixing and reducing intervention in a host of highly regulated industries – was necessary, often unavoidable given what was happening in the rest of the world, and on balance, of great benefit to the populace.

It's impossible to imagine returning to the bad old pre-reform economy. Treasury and the Productivity Commission's predecessor body must be given most of the credit for promoting and designing these reforms.

But it's equally impossible to avoid the thought that, sometime been then and now, Treasury lost the plot, allowing the reform push to degenerate and be captured by business rent-seekers, politicians with ulterior motives and other government departments that didn't understand what they were doing.

To a fair extent the present populist revolt is explained by Bernanke's errors of omission: governments' failure to help the victims of the structural change their policies promoted and to ensure most of the cost of that assistance was borne by the winners from the change.

How could Treasury forget such an obvious way to minimise popular resistance and resentment of government-promoted change in the structure of industry?

Because it was misled by the mistaken notion that economic efficiency and distributional fairness are always at daggers drawn, and by the dubious ethic that economists should stick to promoting efficiency in the allocation of resources and leave fairness for others to worry about.

But also because Treasury allowed itself to be seduced away from strictly economic objectives to the essentially political objective of "smaller government".

We've got an economy heavily affected by multiple forms of market failure – including huge areas with public goods characteristics – but our overriding goal must be less government intervention in markets, less government spending and lower taxes, particularly on high income-earners.

There's little empirical evidence that economies with large public sectors perform worse than those with small ones, and no evidence that high marginal tax rates do much to discourage economic activity among high-paid full-time workers.

But Treasury's embrace of the smaller government objective does much to explain the Abbott-Turnbull government's loss of interest in budget repair (because cutting government spending turns out to be politically impossible), the neglect of measures to assist the losers from structural change (because they would add to government spending) and the lack of interest in reform of spending on education (because the need to go easy on the losers from spending reallocation means greater spending during the transition to more rational, cost-effective arrangements).

In the new era of populist backlash against the mounting evidence of stuff-ups in the later years of micro-economic reform, Treasury will continue to flounder and its influence wane until it switches its goal from smaller government to more effective government.

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How economic neglect has fed the populist revolt

Recent political shocks – Brexit, Trump and the failure of Theresa May – are prompting much soul-searching and rethinking among the world's leading economists.

Last week, for instance, Ben Bernanke, former chairman of the US Federal Reserve, gave a speech to a forum of the European Central Bank in which he admitted that "recent political events" had "cast a bright light on some disturbing economic and social trends in the United States".

"Unfortunately, policymakers in recent decades have been slow to address or even to recognise these trends, an error of omission that has helped fuel the voters' backlash," he said.

"If the populist surge we are seeing today has an upside, it is to refocus attention on both the moral necessity and practical benefits of helping people cope with the economic disruptions that accompany growth."

It's true that the American economy's cyclical recovery has entered its ninth year and appears to have room to run, Bernanke says.

Although the Great Recession was exceptionally deep and the recovery was slow, real gross domestic product is now up about 12.5 per cent from its pre-crisis peak and real disposable income is up more than 13 per cent.

Since the trough in employment in early 2010, more than 16 million new jobs have been created – compared with a workforce of about 160 million – bringing the rate of unemployment down from 10 per cent to 4.3 per cent, its lowest since 2001.

Fine. But Bernanke's new insight is in the title of his speech, "When growth is not enough".

Americans seem exceptionally dissatisfied with the economy and have been for some time, he says. Those who tell pollsters that the economy is "on the wrong track" consistently outnumber those who believe that America is moving "in the right direction" by about two to one.

Bernanke highlights four "worrying trends" that help explain the sour mood. First, stagnant earnings for the median worker.

"Since 1979, real output per person in the US has expanded by a cumulative 80 per cent, and yet during that time, median weekly earnings of full-time workers have grown by only about 7 per cent in real terms."

And almost all of that tiny growth is explained by higher wages and working hours for women. For male workers, real median weekly earnings have actually declined since 1979.

So despite economic growth, the middle class is struggling to maintain its standard of living.

Second, declining economic and social mobility. One of the pillars of America's self-image is the idea of the American Dream, that anyone can rise to the top based on determination and hard work.

But upward economic mobility in the US appears to have declined notably since World War II. One study of census figures found that 90 per cent of Americans born in the 1940s would eventually earn more than their parents did, but only about 50 per cent of those born in the 1980s would do so.

The trend to increased inequality of income and wealth is worse in the US than other advanced economies. This tends to impede economic mobility by increasing the relative educational and social advantages of people in the upper percentiles.

Third, increasing social dysfunction in economically distressed areas and demographic groups. Studies show that rates of midlife mortality among white working-class Americans (those with only a high-school education) have worsened sharply relative to other groups.

These are often "deaths of despair" because of their association with declines in indicators of economic and social wellbeing and the important role played by factors such as opioid addiction, alcoholism and suicide.

Indeed, in 2015, more Americans died of drug overdoses than died from car accidents and firearms-related accidents and crimes combined.

Among the most worrying economic trends is the decline in labour force participation among prime-age men – 25 to 54 – from 97 per cent in 1960 to 88 per cent today. The fall has occurred across demographic groups (an American euphemism for racial groups).

Studies suggest most of these men are idle – neither looking for work nor caring for family members. One part of the explanation is that America's high rate of incarceration leaves many men, particularly African-Americans, with prison records, which hurts their employment opportunities for many years.

Fourth, greater political alienation and distrust of institutions, both public and private. Americans generally have little confidence in the ability of government, especially the federal government, to fairly represent their interests, let alone solve their problems.

"Stagnant median wages, limited upward mobility, social dysfunction and political alienation are a toxic mix indeed. The sources of these adverse trends are complex and interrelated. But at a fifty-thousand-foot level, they appear to be the product of some broad global developments ... together with the US policy response (or lack thereof) to those developments," Bernanke says.

Missing from the response was a comprehensive set of policies aimed at helping individuals and localities adjust to the difficult combination of slower growth and rapid economic change.

Whatever the reason for this failure, "it's clear in retrospect that a great deal more could have been done, for example, to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase to access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like".

Bernanke concludes that "the credibility of economists has been damaged by our insufficient attention, over the years, to the problems of economic adjustment and by our proclivity towards top-down, rather than bottom-up, policies.

"Nevertheless, as a profession we have expertise that can help make the policy response more effective, and I think we have a responsibility to contribute where we can."

That's putting it mildly.

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Labor’s professed preference for policy purity is phoney

For the growing number of us who care more about good policy and effective governance than party loyalties, the news isn't good. With one main exception, Labor is allowing the supposed perfect to be the enemy of the good.

The exception is a good one: although the "clean [or low] emissions target" for the national electricity market recommended by the Finkel report is far from perfect as the chief means by which the Turnbull government seeks to reduce our carbon emissions in line with our Paris commitment, Bill Shorten has indicated that the opposition would be open to supporting a "well-constructed LET" in the Senate.

There aren't many issues more important than filling the policy vacuum left by Tony Abbott's abolition of the carbon tax three years ago. And, in the process, greatly assisting efforts to fix the ailing electricity market, reducing the risk of blackouts and further price rises.

Everyone bar the Coalition's crazy backbench climate-change deniers knows coal's days are numbered, which is why both sides of the electricity industry – fossil fuels and renewables – are desperate for greater certainty about how the government plans to manage the transition.

But it's not just that the government needs to make up its mind. It's also that the alternative government isn't planning to change the Coalition's arrangements.

This explains why pretty much all the adults involved have agreed that a CET or LET is the best way forward, given the aforementioned crazies' rejection of anything more sensible.

And why Labor deserves a tick for seeking bipartisanship by moving from its own, better policy for an "emissions intensity scheme" and accepting a LET, provided it isn't too badly compromised.

Now it's up to Malcolm Turnbull to get his troops' agreement to a "well-constructed" LET – which won't be easy.

Sorry, but it occurs to me to wonder whether, should Turnbull fail, Labor isn't positioning itself to claim the moral high ground on both climate change and a workable electricity market.

I wonder about Labor's motives because, on most other policy issues, Shorten is putting his electoral ambitions well ahead of the nation's interest in good policy and effective governance.

All in the name of more nearly perfect policy, naturally.

It's hard to avoid the suspicion that, though he wants to be seen as positive and co-operative, his true motive is to pay the Coalition back for the way Abbott tried to destabilise and neuter the Gillard government and to keep alive the policy differences – on health, education and budget fairness – that brought him so close to unseating Turnbull at last year's election.

Take Shorten's utterly unreasonable position on needs-based funding of schools, that because Labor's version is supposedly superior to the Coalition's, Labor should do all in its power to block the government's legislation in the Senate and leave needs-based funding in limbo until Labor's re-election.

Shorten professes to care deeply about disadvantage students, but it makes you wonder.

As Dr Peter Goss, of the Grattan Institute, has argued, "Gonski 2.0 is a precious opportunity to lock in fairer deals on school funding. It should be seized by all sides of politics.

"Australia's long and toxic funding wars must end so we can move onto other much-needed education reforms."

In any case, Goss's analysis suggests that most of the extra $22 billion over 10 years that Labor says should be spent wouldn't be directed to student need.

Next is Labor's opposition to covering the rising cost of the National Disability Insurance Scheme with a 0.5 percentage point increase in the Medicare levy, in two years' time.

Since such an increase would be roughly proportional – hitting high and low income-earners by a flat percentage increase – Shorten wants to impose the increase just on those earning more than $87,000 a year.

For good measure, he wants to continue the Coalition's temporary 2-percentage-point budget repair levy on income above $180,000 a year, beyond its promised expiry at the end of this month.

All very virtuous (and I wouldn't object to paying either impost). But not if it's used as an excuse to block the government's increase in the Medicare levy.

It's easy for those out of power to advocate making the tax scale more progressive, but this would be a first for Labor in office.

Should Shorten win the next election, I wouldn't hold my breath waiting for him to reimpose the 2 per cent levy. And he doesn't want us to remember that funding the disability scheme with a 0.5 percentage point Medicare levy increase was perfectly fair enough for the Gillard government.

Somehow, I don't think these guys are fair dinkum.

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We've slowed a lot, but we're not about to go backwards

There's no denying the economy has slowed down, by far more than we were expecting. But don't conclude it's likely to subside into recession any time soon.

This week's national accounts for the March quarter, from the Australian Bureau of Statistics, show real gross domestic product grew by a pathetic 0.3 per cent during the quarter, and by just 1.7 per cent over the year to March. This compares with its "potential" annual growth rate of 2.75 per cent.

This time last year, the government's budget forecast was for growth averaging 2.5 per cent in the financial year just ending, accelerating to 3 per cent in the coming year.

So what's gone wrong? And why is it unlikely get a lot worse?

First point: don't think the economy's running down like a battery-powered toy. Looking back over the past four quarters, we see OK growth of 0.7 per cent in the June quarter of last year, then a contraction of 0.4 per cent, then super-strong growth of 1.1 per cent and now weak growth of 0.3 per cent.

This unnatural, saw-tooth pattern says some transactions may have been recognised in the wrong quarter. For instance, investment spending by federal and state public corporations leapt by 37.8 per cent in the December quarter, but then contracted by 20.9 per cent in the March quarter.

Neither figure should be taken literally.

Two major drivers of activity at present are home building and exports of coal and iron ore. Both have been disrupted by unusual weather that's not been smoothed away by normal seasonal adjustment. Climate change?

Home building has been growing strongly for several years, but it contracted by 1.2 per cent in September quarter and by 4.4 per cent in the March quarter. Most of this is explained by unusually wet weather in some parts of the country.

The volume (quantity) of exports was up 2 per cent in the June quarter, then slowed to growth of 1.4 per cent, then leapt by 3.7 per cent and now has actually fallen by 1.6 per cent.

Much of this volatility is explained by extreme weather disrupting shipping carrying coal from Queensland or iron ore from Western Australia.

We could expect the figures for the present quarter to be boosted by a catch-up from the weak March quarter – were it not for the further disruption in April and May we know has been caused by Cyclone Debbie.

Note that a sudden build-up in business inventories contributed 0.4 percentage points to growth in the March quarter. Much of this was a jump in mining industry stockpiles, suggesting a lot of coal was produced, but couldn't be shipped.

But to explain much of the quarter-to-quarter volatility in GDP growth in terms of misallocation and wild weather doesn't alter the fact that, when you add up the four quarters, you get only to utterly weak annual growth of 1.7 per cent.

One major component of growth that's unlikely to be affected by either factor is consumer spending. It's been unusually weak in all quarters bar December, growing by a pathetic 1.3 per cent over the year to March.

And this despite households cutting back their rate of saving from 6.9 per cent of household income to 4.7 per cent over the year.

This weakness in consumption ain't hard to explain: growth in household income has been held back by weak growth in employment and, more particularly, negligible growth in real wages, notwithstanding a 1.2 per cent improvement in the productivity of labour over the year.

Real labour costs per unit – a measure of the race between real wages and labour productivity – fell 1.7 per cent in the quarter and 6.3 per cent over the year to March.

Wanna know why the economy's growth is so weak? You won't find a more powerful explanation than that.

Remember, however, that the weakness isn't spread equally across the country.

State final demand is a poor substitute for gross state product, but the best we get each quarter. Across the whole economy, domestic final demand also grew by 1.7 per cent over the year to March.

But state final demand grew by 4.5 per cent in Victoria, 3.3 per cent in South Australia and Tassie, an above-par 1.9 per cent in NSW, and a below-par 1.6 per cent in Queensland.

Now get this: in Western Australia, final demand contracted by 6.6 per cent. So the West is still bearing the brunt of the bust in the mining construction boom. This explains a fair bit of the weakness in the national average.

The West's contraction in the March quarter was just 0.2 per cent, however, suggesting the inevitable end to its contraction phase isn't far off. That's the first reason things won't continue weakening nationwide.

As part of that, the long-running fall in mining investment spending must also be within a few quarters of ending. You need to be good at arithmetic to see that, when our focus is on rates of growth, "the removal of a negative is a positive".

The housing construction boom has a few more quarters to run, and strong grow in infrastructure spending is in the pipeline.

But much depends on what happens to real wages. Certainly, the government's forecast of economic growth returning to our potential growth rate of 2.75 per cent in 2017-18 as a whole, rests heavily on a resumption of real growth in wages.

To the extent the present weakness in wage growth is merely cyclical, wages will recover soon enough. This is hardly the wildly optimistic expectation that some, who've forgotten the economy moves in cycles, have claimed.

But to the presently unknown extent that the weakness in wage growth has deeper, structural causes, we won't get back to a decent rate of growth until the government acts to fix the problem.

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Turnbull must act on climate if he's not to be a Trumpette

We are trying – admittedly, without much success so far – to make our home a Tr*mp-free zone. It's just too depressing. Watching a great nation disgrace itself before the rest of the world.

The former proudly self-proclaimed leader of the free world suffering a loss of confidence and applying for early retirement.

A nation that every year scoops the pool of Nobel prizes, electing a crazy, ignorant, wilful old man, not so much Trump as Chump.

His latest stroke of genius – reneging on America's commitment to the Paris climate agreement – has been almost universally condemned, including by a great number of Americans, especially many business leaders.

But, congenital optimist that I am, I see some perverse comfort in all this. The American people are being brought face-to-face with what it means for their future when the world's second biggest emitter of greenhouse gases decides that the minor disruption of doing something to protect itself from the huge disruption of continuing global warming just isn't worth it.

This rational self-interest?

I'm prepared to bet that the next elected president will have climate protection at the top of his to-do list. Indeed, Donald Trump's becoming such an embarrassment to his compatriots I'd bet the next president's platform will be to do the opposite to Trump on 'most everything.

Then there's the band of American state governments – led by the two most powerful, California and New York – willing to step into the leadership vacuum their federal government has left. And the mayors of many cities.

Of course, as we know from earlier this year – when our federal government sought to use South Australia's blackouts for political point-scoring rather than a cue for policy correction, thus obliging the SA Premier to step in with expensive local interventions to a national problem – having states try to make up for a federal government's refusal to accept responsibility is far from ideal.

Which bring us to Malcolm Turnbull, whose statements and actions as Prime Minister contrast markedly with what every voter knows are his long-held views on climate change.

One thing to be said for Trump is that at least he's made an honest man of himself. He has no concern about global warming and isn't willing to do anything to combat it, but doesn't pretend otherwise.

Here, Turnbull professes eternal loyalty to the Paris Agreement and reaffirms our (inadequate) target to achieve a 26 to 28 per cent reduction in emissions by 2030 from 2005 levels, without having any credible policy by which to achieve it.

Actually, we haven't had a credible policy to reduce emissions since Tony Abbott abolished Julia Gillard's carbon tax-cum-emissions trading scheme in July 2014.

Abbott's professed reason for doing so was the claimed huge increase in the price of electricity and gas the scheme caused, and the massive economic damage this would lead to.

Prices did come down a bit, but soon continued on their upward way. Truth is, the carbon tax – and the renewable energy target – were never a major part of the reason for the big increases in energy prices since the turn of the century.

Even so, concerns about climate change are at the heart of the problems we're having maintaining an energy system that avoids blackouts without costing the earth (in the earlier sense of that phrase).

That, plus the various problems that have emerged with that finest flower of micro-economic reform, the national electricity market (the greatest source of price increases).

Ancient coal-fired power stations are being closed down, while no business in its right mind would invest in new coal-fired stations that are unlikely to be used for much of their 30 to 50-year potential working lives.

At the same time, however, businesses are reluctant to invest in industrial-scale renewable energy when the Coalition government has displayed such hostility to renewables and created such uncertainty about their future.

Have you noticed how our response to climate change and our problems with electricity have morphed into the same issue?

There's little concern to limit emissions except from the generation of electricity. And there's no solution to reliable, reasonably priced power that doesn't involve controlling emissions.

On Friday the chief scientist, Professor Alan Finkel, will deliver his long-awaited report on "the future energy security of the national electricity market".

What's needed is a mechanism to regulate the transition from fossil fuels to renewables in a way that reduces emissions while providing certainty to both kinds of energy providers.

Last year all the key players agreed the best approach would be an "emissions intensity scheme". All bar the Turnbull government, which ruled it out the moment its climate-change denying backbenchers objected.

So now, we're told, Finkel has come up with a compromise, a "low emissions target", or LET, which sets the proportion of electricity production that must come from low-emission sources.

It's similar to the present RET – renewable energy target – except the list of low-emission sources would be expanded to include gas-fired power and "clean" coal-fired power with carbon capture and storage (should such a thing ever exist).

This compromise has been widely canvassed, and has a lot of support in business. Even the Labor opposition has indicated its willingness to accept some form of mechanism rather than continuing inaction.

The heat will now be on Turnbull to get his Trumpettes across the line.

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Radical policy change may be needed to fix wages

It's too early to be sure, but not too early to suspect that, if we and the other developed economies keep travelling the way we are, conventional wisdom about what constitutes good economic policy may soon need to be turned on its head.

We're living through very strange times. Each developed economy has its own story, but there are strong similarities. One is exceptionally low inflation, which doesn't seem temporary.

Another is surprisingly weak rates of measured productivity improvement, although our rate of improvement in the productivity of labour isn't too bad.

My guess is a fair bit of this is mis-measurement arising from our quite radical shift to a digital economy.

But the other explanation may be a decline in price competition in many industries, thanks to several decades of both natural and government-facilitated rent-seeking by big businesses, in ever-more concentrated industries.

Next, wages. It's too soon to conclude that wage growth – which in Oz has been slowing since mid-2012 and been pathetically weak for three years – is down for the count.

We don't yet know how much of the weakness is merely cyclical and how much is due to deeper, longer-lasting, structural causes.

Even so, it's hard not to suspect that a fair bit of the wage weakness is structural. My guess is that while we've been busy decentralising wage-fixing and removing all provisions thought to favour unions, globalisation and technological change have conspired to rob the nation's employees of any collective bargaining power.

This may sound like a dream come true for business and its high-paid executives but, if it's true, it's deeply destabilising overkill.

Wages are a key variable in the economy. Allow them to be either too high or too low and the economy gets out of kilter.

Allow the profits share of national income to keep continually expanding at the expense of the wages share and expect to pay a price economically, socially and politically.

And that's before you remember that wages are the chief source of governments' tax revenue. Not only personal income tax, but all the indirect taxes – notably, the goods and services tax – that households pay when they spend their labour incomes.

Low nominal wage growth isn't necessarily a worry if, at the same time, the rise in consumer prices is low.

What matters to working households and the rest of the economy (but not governments) is what's happening to real wages.

In a healthily functioning economy, real wages should rise pretty much in line with the improvement in the productivity of labour.

That way, both labour and capital get their fair share of the fruits of economic progress.

Trouble is, in the US this relationship broke down maybe 30 years ago, explaining why the top few per cent of households have captured most of the growth in the nation's real income over that time.

This doesn't just widen the gap between rich and poor. By directing so much income growth away from the high spenders at the bottom and middle to the high savers at the top, it slows growth in consumption and thus production.

It also adds to the disillusionment of ordinary voters, making them more likely to lash out and vote for the cunning wacko celebrity-de-jour candidate, such as Clive Palmer, Pauline Hanson or Donald somebody​.

Get this: there are tentative signs the relationship between real wage growth and labour productivity may be breaking down in Oz.

The relevant indicator, the index of real labour costs per unit, should hover around 100. It fell by 3.3 per cent during 2016, reaching 98.1, equal lowest since the series began in 1985.

If this weakness persists, it will raise the question of whether the formerly healthy relationship was a product of market forces, or the industrial relations system's achievement of a fine balance between employer and union bargaining power.

If it does persist, how could we return to a healthy relationship? By reversing the dominant wisdom of many decades, that governments must never do anything that adds to the regulatory burden on employers. By acting (very carefully) to strengthen the hand of union collective bargainers.

Final point: governments of all colours secretly rely on bracket creep to help tax collections keep up with the inexorable growth in government spending.

But bracket creep depends on both reasonable inflation and real wage growth to work its barely noticed fiscal magic.

What happens if inflation stays low and real wages stop growing? You have to junk your rhetoric about smaller government and keep doing what Malcolm Turnbull did in this budget: justify explicit tax increases.

Either that, or get wages growing properly.

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How and Why we've escaped recession for so long

When Glenn Stevens took over from Ian Macfarlane as governor of the Reserve Bank in September 2006, both men knew the new boy was being handed a poison chalice.

By the time of the deep recession of the early 1990s, Australians – like the citizens of most developed economies – had got used to enduring a recession roughly every seven years.

But Macfarlane had been governor for 10 years, and had been extraordinary lucky to get through all that time without a severe downturn.

It was obvious to both men that Stevens wouldn't be as lucky. We were overdue for a recession and it was bound to occur sometime during Stevens' term, probably early on.

Except that it didn't. When, after his own 10-year stint, Stevens handed over to his government-chosen successor as governor, Dr Philip Lowe, in September last year, he was leaving the job with his record unsullied.

This time there were no forebodings about a doomed inheritance, even though it's only natural to fear that each successive quarter of this world record run must surely increase the likelihood of it coming to a sticky end.

Certainly, there would be few economists so foolhardy as to predict that their profession had finally conquered the booms and busts of the business cycle. Most remember that such bouts of hubris had afflicted – and in the end, mightily embarrassed – the dismal scientists before.

No one wants ultimately to be caught having made that stupid mistake a second time. So, a commercial message sponsored by your local friendly economist: rest assured, we'll have another bad recession sooner or later.

Human nature being what it is, keeping in the forefront of their minds the very real risk of another recession is the best way the managers of our economy can avoid the negligent overconfidence that could bring our record run to an ignominious end.

Of course, the politician with the strength of character to avoid complacency and self-congratulation for a remarkably good performance has probably yet to be born.

That's why this story began, and will continue, as a story about the people who have most say over the day-to-day management of the economy: not the politicians, but the bureaucrats in our central bank.

It's important to remember that Australia's run without a severe recession became a personal best, so to speak, many years ago, and for many years has exceeded the records achieved in all other developed countries – bar the Netherlands, with its freakish record of 103 quarters, almost 26 years, of continuous growth. Until now, as the world record passes to us.

An obvious question to ask is how Australia managed to avoid serious damage from the global financial crisis of 2008, when almost every other advanced economy was laid so low by the Great Recession.

The short answer is first that, thanks partly to the bureaucratic bum-kicking Peter Costello did after the collapse of the HIH insurance group in 2001, our bank regulators kept our banks under a tight rein, preventing them from doing all the risky things the American and European banks were allowed to.

Second, the Reserve Bank positively slashed interest rates the moment it realised the severity of the crisis, while the Rudd government ignored the dodgy advice it was getting from then-opposition leader Malcolm Turnbull and sections of the media, and splashed around a lot of cash.

Both the rate cuts and the cash splash had the intended effect of steadying the badly shaken confidence of businesses and consumers, thus quickly arresting the self-reinforcing downward spiral of fear and belt-tightening that causes all deep recessions.

Third, whereas many employers had previously responded to a downturn in demand for their product by laying off staff, this time many of them, hoping the downturn would be temporary, limited themselves to putting all their staff on a period of short-time working.

This restraint on the part of business proved a much less damaging approach for everyone.

But remember this: most advanced economies have suffered not one, but two or three deep recessions since the world recession of the early 1990s.

So there has to be more to our 26-year record than just our deft response to the GFC.

The deeper reasons for our success start with the factor already alluded to: our politicians' decision in the first half of the 1990s to hand control of interest rates to the central bank, acting independently of the elected government.

Turns out moving interests rates up and down in response to the business cycle, as opposed to the proximity of elections, is a big improvement in keeping the economy chugging steadily along.

The other beneficial change was all the "micro-economic reform" undertaken mainly during the term of the Hawke-Keating government, often with bipartisan support from the opposition, led by John Howard and Dr John Hewson.

Deregulating the financial system, floating the dollar, rolling back protection against imports, decentralising wage fixing and the deregulation of many particular industries had the combined effect of making the economy more flexible, less inflation-prone and better able to reduce unemployment.

The era of micro reform didn't achieve the hoped for continuing improvement in productivity, and had various adverse side-effects, but it did make it much easier for the central bankers to keep the economy on an even keel.

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How Treasury hides big infrastructure spending

One of the most significant, but least remarked upon, features of this year's budget is Malcolm Turnbull's decision to greatly expand the federal government's involvement in the construction of public infrastructure.

He did so under unprecedented and sustained public pressure from the Reserve Bank, seconded by the International Monetary Fund and the Organisation for Economic Co-operation and Development.

But how could the government be stimulating demand at a time when it still had a big budget deficit it needed to get back to surplus ASAP?

By distinguishing between the deficit arising from recurrent spending on its day-to-day operations, and the deficit arising from its investment in capital works, whose benefits to the community would flow for decades.

With the economy's downturn long past, the government should certainly be striving to get its recurrent finances – summarised by the budget's "net operating balance" – back to a healthy big surplus.

But no such stricture should apply to borrowing to improve the nation's infrastructure – always provided the money is well spent.

There's nothing new about this. The state governments have divided their budgets between operating expenses and investment in capital works for years. The national governments of New Zealand and Canada do the same.

So why haven't the feds been doing it? Because Treasury's never liked the idea. That's why, if you read the budget papers carefully, you find Treasury's found a way to do it and not do it at the same time.

The papers say they've always told us what the recurrent budget balance is, it's just that it's been buried somewhere up the back and called the net operating balance, or NOB.

But Treasury has had to admit that, for reasons that make sense only to accountants like me, the NOB regularly overstates recurrent spending by treating as an expense the cost of the feds' annual capital grants to the states to help with their infrastructure spending.

In the coming financial year, this overstatement is worth more than $12 billion, meaning the true recurrent deficit is actually quite small –  $7 billion – and expected to be back in balance in the following year, 2018-19.

So, no great worries there.

For the first time, Treasury has been obliged to reveal clearly exactly how much the feds have been, are, and expect to be, spending on capital works for the 14 years from 2007-08 to 2020-21 (see budget page 4.10).

In 2007-08, the last of Peter Costello's budgets, total federal capital spending was allowed to fall below $10 billion, but generally it's been between $30 billion and $40 billion a year. That's roughly 10 per cent of all the feds' spending.

But here's the big news: in the coming financial year, it's expected to rise to a (nominal) record of more than $50 billion, up from about $43 billion in the year just ending.

This will represent 12 per cent of total federal spending, and be equivalent to 2.8 per cent of gross domestic product.

Again for the first time, the budget papers give us the breakdown of the feds' total capital spending. First there's "direct capital investment" of $13.5 billion, which is mainly spending on defence equipment.

Next is "capital grants" of $14.2 billion. This is money given to other entities – predominantly, the state governments – to help them pay for their own capital works spending, mainly roads.

Last is an odd one, that Treasury usually prefers us not to notice: "financial asset investment (policy purposes)" worth $22.9 billion, up almost $6 billion on the year just ending, and the main cause of the coming big increase.

What's that financial asset investment thingy​? It goes back to 1996 and a loophole Treasury carefully built into the budget figuring at the time of the Charter of Budget Honesty (!) and the introduction of the "underlying cash balance" as the preferred measure of the budget's deficit or surplus.

Get this: if the government simply pays some private construction company to build some infrastructure for it, the cost is counted as part of the underlying cash deficit.

But if the government sets up its own company and gives it the same money, in the form of share capital or a loan, so the company builds the infrastructure (or pays another company to do it), the cost isn't counted in the underlying deficit.

Rather, it's tucked away in the "headline cash balance" that few people notice (see budget page 3.36). (The other big item stashed in the headline deficit is the net increase in the stock of HECS HELP student debt owed to the government, expected to be an extra $8 billion in the coming year.)

It's by this means that the Labor government was able to spend many billions constructing the national broadband network without a cent of it showing up in the underlying deficit.

In the coming year, the Turnbull government expects to buy $1.5 billion more in NBN shares and lend it $9.3 billion – all to finance further construction spending.

As well, it's setting up a company to own and build the second Sydney airport, and another to own and build the Melbourne to Brisbane inland freight railway.

Combined, these two new projects are expected to cost $1.8 billion in the coming year, rising to an annual $3.2 billion in 2020-21.

But if spending on infrastructure is now regarded as "good debt", why is Treasury still using this legal hair-splitting to conceal the cost of the new infrastructure spending push?

Because it's fighting a rear-guard action. Although it's agreed to give the NOB "increased prominence" in the budget papers, the underlying cash balance "will continue to be the primary fiscal aggregate".

And just to prove Treasury's lack of repentance, no modification has been made to the wording of the government's "medium-term fiscal strategy" to "achieve budget surpluses, on average, over the course of the economic cycle".

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Governments share power with multitudinous lobbyists

You may think the media is full of the argy-bargy of politics, full to saturation point. There is, however, a level of politics we rarely hear about. You may not have noticed, but it raised its ugly head at the time of the budget earlier this month.

One sign was the anger, almost outrage, of the big banks when, on budget night, Scott Morrison surprised them by announcing a small new tax on them. Why weren't we consulted about this, they shouted.

Just a few days earlier, Education Minister Simon Birmingham surprised us by announcing the government's conversion to needs-based federal grants to schools, a la St David of Gonski.

The Catholic school authorities were deeply saddened. Birmingham's plan was to gradually unwind decades of special sectarian deals, the most recent of which had been made with the previous Labor government.

Why in Heaven's Name weren't we consulted before this unholy decision was made public, they cried.

When I heard both interest groups making their loud complaints I reacted the same way. Who the hell do these guys think they are?

You and I don't expect to be consulted before governments announce their policy decisions, so what gives these people the right to special treatment?

Well, I'll tell you: it's because that's the way they're used to being treated. Governments are considering making changes affecting a powerful and vocal interest group, so they – and more particularly, the top bureaucrats in the relevant government department – engage in private discussions with industry leaders and lobbyists.

If Birmingham decided on a new school funding arrangement without consulting the most-affected interest groups, it must have been because he knew they'd move heaven and earth in their efforts to ensure it didn't happen.

And, come to think of it, it's not all that unusual for new tax measures to be announced in the budget without prior consultation. You could justify this as necessary to ensure people aren't able to profit from inside information.

But I suspect it happens also because Treasury likes it that way. In the annual preparation for the budget, which goes on for months, Treasury ensures decisions about tax changes are made just days before budget night. That way, there's no time to consult and no time for ministers to be dissuaded from acting.

So the consultation happens after the move has been announced, when the government would lose face if it backed down too far.

Indeed, major tax and policy changes are invariably put into an industry consultation phase before being legislated. You can justify this practice by saying the world's become a complicated place and that the affected industry will always have an understanding of the practicalities of implementation that's superior to the bureaucrats'.

But there's more to it. I think industry representatives are routinely consulted on policy matters affecting them because, in practice, elected governments have come to share their power with a multitude of lobby groups.

You and I don't see the huge extent of contact that occurs between peak industry groups, consultant lobbyists and visiting executives, on one hand, and ministers, parliamentarians and bureaucrats on the other.

Indeed, we non-Canberrans don't realise the extent to which lobbying has become that city's second-biggest industry. That's particularly so if you include Canberra's small army of economic consultants, who earn their living by concocting "independent" modelling which, purely by chance, always seems to prove their clients' case.

And that's not counting the big four accounting firms which, when they're not doing "independent" modelling for the small fee, give extensive – and no doubt expensive – consulting advice on policy questions to government departments.

Why do they need such advice? Why is policy expertise moving from the public service to outside consultants? Because the yearly imposition of "efficiency dividends" on government departments means they keep getting rid of their policy experts. The words "false economy" spring to mind.

For an idea of just how big the lobbying industry has become, consider this. Buried in the budget was an announcement that the government had accepted the recommendations of a review of the financial system's arrangements for resolving external disputes.

Some lobby groups were unhappy with this decision, so last week they issued a press release saying so. It was issued in the name of six industry groups: the Mortgage and Finance Association of Australia, the Customer Owned Banking Association, the Australian Collectors & Debt Buyers Association, the Association of Securities and Derivatives Advisers of Australia, the Australian Timeshare and Holiday Ownership Council, and the Association of Independently Owned Financial Professionals (each with their own logo).

But if all the industry groups and other lobbyists did was issue press releases there would be little to worry about. Lobbying in public is just the tip of the iceberg. What matters is all the private contact with bureaucrats, ministers and politicians, particularly crossbench senators, we know nothing about.

Late last year I wrote prematurely about an eye-opening book by Dr Cameron Murray and Professor Paul Frijters, Game of Mates, which has finally been published.

The book reminds us that one way moneyed interests gain influence in the halls of power is by rewarding co-operative senior bureaucrats and politicians with post-retirement patronage. You too could be gamekeeper-turned-lobbyist.

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Our universities aren’t earning the money we give them

Sorry, but the small funding cuts imposed on the universities in the budget don't rouse any sympathy from me.

In an ideal world we'd be investing more in our universities, but our world is far from ideal. And so are our unis. They're inefficient bureaucracies, with bloated administrations and over-paid vice chancellors.

To hear them talk, you'd think unis were the fount of all economic virtue. According to Sydney University's Michael Spence, the budget was "an opportunity missed, because the government's done nothing about the significant cost of research and, of course, university research is fundamental to the innovation economy about which the government is so enthusiastic".

Sorry, prof, but the electorate's too well-educated to swallow such spin. The unis contribute to innovation, but it comes from other sources as well, and the unis' contribution should be better than it is without extra funding.

It's true our unis are obsessed by research, but any innovation this leads to is almost accidental. The research the unis care about is papers published in prestigious foreign journals, which they see as the path to what they're really striving for: a higher ranking on the various international league tables of universities.

Education Minister Simon Birmingham boasts that, on one table, six of our 43 unis are in the top 100, with nearly half in the top 300.

The pollies should stop doing this. It just encourages our "sandstone" unis – the self-dubbed Group of Eight – in their crazy, self-absorbed race.

Had Birmingham's predecessor succeeded in deregulating fees and let the sandstones exploit their monopoly pricing power, they would have delighted in overcharging their students and increasing students' cross-subsidy of the academics' research.

All of us should strive for excellence in our work, but when you start trying to force the pace with league tables and the dreaded KPIs – key performance indicators – you lose the plot.

You shift the rewards from intrinsic to extrinsic, and almost as much effort goes into trying to game the indicators of excellence as being excellent. The big rewards go to those who excel at appearing excellent.

Our big unis are so obsessed by research that academics' promotion is determined almost solely by how many papers you've had published and how prestigious were the journals you got into. Plus how much in research grants you've brought to the uni's coffers.

Apart from the time they spend thinking of ways to turn the same bit of research into more than one paper, our sandstone academics seem to spend more time applying for research grants than doing research.

Then there's the cultural cringe. The sandstone unis are filling their upper positions with sunshine-seeking Poms, Canadians and the odd eccentric Yank, in the belief they'll do better than the locals at getting published in prestigious international journals.

Our academic economists have even conned the federal government into spending taxpayers' money in ways that penalises those economists foolish enough to want to research the Australian economy.

That's because American journals won't publish articles about a small and boring country like ours, but our own journals don't rank in the unis' eternal quest for a higher international ranking.

Notice anything missing? Ah yes, all those students hanging around universities.

The unsatisfactory state of our unis is partly the product of our federal politicians' – Labor and Coalition – decades-long project to quietly and progressively privatise our universities via the backdoor.

Like so much misconceived micro-economic reform, this project hasn't worked well. Put a decades-long squeeze on unis' government funding and what happens? The unis intensify their obsession with research status-seeking and do it by exploiting their market power over students – while building ever larger bureaucracies.

There are some excellent teachers in universities, but they're the exception. The unis pretend to value good teachers – and award tin medals to prove it – but, in truth, there are no promotions for being a good teacher.

Students are seen as a necessary evil, needed because the public thinks teaching their kids is the main reason for continuing to feed academics.

Since Julia Gillard's spendthrift decision to remove the limits on how many uni places the government is prepared to fund, the unis have slashed their entrance requirements so as to rip as much money off the feds as possible.

Are they producing more would-be teachers or journalists or candlestick makers than the economy needs?

Who cares? All the unis know is that cramming more students into lecture theatres yields economies of scale that can be diverted to pay for more research – and pay for some part-time casual to do your teaching for you.

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How our budget repair problem has been exaggerated

Before the budget Scott Morrison promised us "good debt" and "bad debt". What we actually got was less radical but more sensible.

The government has come under increasing pressure from the Reserve Bank to draw a clear distinction between its borrowing to cover "recurrent" spending (on day-to-day operations) and borrowing to cover investment in capital works ("infrastructure").

It was wrong to lump them together and claim the combined deficit constituted the government "living beyond its means", as the Coalition often has.

Government borrowing to pay for infrastructure that will deliver a flow of services to the community for many decades to come is not in any way irresponsible.

The Reserve's reason for pressing the government was its desire for "fiscal policy" (the budget) to give its "monetary policy" (low interest rates) more help trying to stimulate faster economic growth.

Make the recurrent/capital distinction and the government can move to repair its budget and avoid unjustified borrowing, while still investing in new infrastructure projects that both add to demand in the short term, and later – provided the projects are well chosen – add to the economy's potential to supply more goods and services by improving our productivity.

In this budget Malcolm Turnbull finally capitulated to this pressure, overturning decades of Treasury dogma.

Sort of. Treasury's fought a rear-guard action, retaining the old world while seeming to move to the new.

In the process it's been obliged to make clear all the budgetary cupboards in which it hides the government's spending on capital works.

In so doing it has revealed that the line between budget accounting and creative accounting is thin.

Let's start with what in accounting passes as theory. There are two main ways you can measure the financial performance of an "entity" such as a business or a government: the rough-and-ready "cash" basis, or the more careful "accrual" basis.

The private sector has been using accrual accounting for more than a century, whereas Australia's public sector moved from cash to accrual only in 1999, after the United Nations Statistical Commission shifted the national accounts framework to an accrual basis in 1993 and the Australian Bureau of Statistics complied.

The cash basis measures the government's financial performance merely by comparing the cash it received during a period – usually a financial year – with the cash it paid out during the period.

By contrast, the accrual basis puts much effort into ensuring the incomings and outgoing are properly "matched", so they are allocated to the accounting period to which they rightly apply.

If, say, on the last day of the year you paid for an insurance policy to cover you for the following year, an adjustment would be made to shift that cost to the following year's accounts.

When the feds moved their accounts and budget onto an accrual basis at the turn of this century, however, Treasury declined to play ball.

It stuck with cash, making the debatable argument that recognising government transactions according to when the cash changed hands gives a better indication of those transactions' effect on the macro economy.

(It couldn't admit the real reason. The cash basis leaves much more scope for creative accounting: quietly moving receipts and payments between periods so as to make the books look better or hide something the government finds embarrassing.)

So, to this day, the budget papers are written in two different financial languages. The bit prepared by Treasury is written in cash, whereas the much bigger bit prepared by the Finance department is written in accrual – as it's supposed to be.

Get this: our bilingual budget means the budget papers offer us four different measures of the budget bottom line to pick from.

There's the "underlying cash" balance (the one Treasury wants us to focus on), the "headline cash" balance (please don't ask questions about this one), the "fiscal" balance (the close accrual equivalent of underlying cash) and, buried up the back, the accrual-based "net operating balance".

The news is that Treasury is sticking with underlying cash as "the primary fiscal aggregate" – the one it will make sure we focus on – but will ditch the fiscal balance (always just a face-saver cooked up by Treasury) and replace it with – give "increased prominence to" – the net operating balance, henceforth known as the NOB.

Bringing the NOB from the back up to the front will "assist in distinguishing between recurrent and capital spending" because, in accountingspeak​, "operating" and "recurrent" mean the same.

Point is, the biggest practical difference between cash and accrual is their treatment of spending on capital works. In cash, it's lumped in with recurrent spending, whereas in accrual it's not. Instead, accrual includes as a recurrent or operating expense an estimate of a year's worth of "depreciation" (wear and tear) of the feds' stock of physical capital – as it should if you believe in "matching" (which Treasury doesn't).

With this unprecedented casting of a spotlight on its accounting practices, Treasury has had to admit that the NOB actually overstates the recurrent balance because it includes as an expense the feds' capital grants to the states to help cover their spending on infrastructure.

Correcting for this reduces the coming financial year's NOB from a deficit of almost $20 billion to one of just over $7 billion (just 0.4 per cent of GDP). So we're already close to a balanced recurrent budget and should be there in 2018-19, after which (if Treasury's economic forecasts prove reliable) we'll be up to a recurrent surplus of $25 billion by 2020-21.

Turns out that, from the time the budget dropped into deficit in 2008-09 until the year just ending, focusing on the underlying cash deficit rather than the corrected NOB has exaggerated the extent of our budget repair problem by a cumulative $150 billion.

So how much have the feds been spending on infrastructure? Long story. Watch this space.

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Why I don't feel sorry for fee-paying students

I have my heroes among leading American economists and psychologists, some of whom I know. One I don't is Alan Blinder. But when he wrote a book called Hard Heads, Soft Hearts, I knew I'd found my guiding star as an economics writer.

There are plenty of lovely souls whose heart bleeds freely for all manner of people who want us to believe they're being treated badly.

But hanging around with economists has left me imbued with the harsh reality of opportunity cost, my version of which says you can have anything you want, but you can't have everything you want. So be careful deciding.

The hard-headed truth is, feeling sorry for almost everyone is little different from feeling sorry for no one. I have only so much compassion to go around.

So, sorry, but among all the people claiming to have been hard done by in this month's budget, I don't have much sympathy to spare for the university students complaining about the increase in their debts.

By contrast, I have much sympathy for all those unemployed people hoping and searching for jobs that don't exist – unless, of course, the government's own figures for job vacancies are grossly understated.

Had industrial fate not intervened to prevent me attending my 43rd successive budget lock-up, I planned to wear my jumbo size JOB HUNTER NOT DOLE BLUDGER T-shirt, put up to it by friends at the admirable Brotherhood of St Laurence.

How prescient that would have been. The budget turned out to include an attempt to traduce the reputation of all job hunters by launching the government's umpteenth Crackdown on the Crackdown on all those "leaners" who lounge about taking drugs when they should be out pounding the pavement.

Did you know that some people are being given the dole before any savings they have are completely exhausted? It's an outrage on us upright citizens, groaning under the weight of massive taxation.

Isn't Centrelink bright enough to understand that forcing the jobless to go cap in hand to the Salvos whenever some large and unexpected expense occurs is part of their punishment?

Not content with cracking down on the unemployed, this budget cracks down on those lazy loafers at Centrelink. Do you realise there are days that pass without people on benefits being harassed in some way?

Do you realise that older people, some just a few years from pension age, aren't hassled nearly as much as young people are? It's wrong, it's discriminatory, and the ironically named Christian Porter and his hardworking sidekick Alan Tudge are just the punishers and straighteners we can trust to stamp it out.

I don't understand those two. Do they enjoy beating up the poor, or is it a hateful job they must do to keep their jobs in the ministry, to gratify all those pathetic voters desperate to feel morally superior to someone?

Nor do I get Malcolm Turnbull. He produces a surprisingly good budget intended to convince us he's not the pale imitation of Tony Abbott we thought he'd become, that the Coalition is committed to fairness after all, but can't resist adding the most lurid attempt to stigmatise anyone of workforce age who can't find a job.

Is Turnbull that much in fear of losing votes to the Redheaded One? Malcolm, you're a rich man, you don't have to sink so low.

(But let's not have too much righteous indignation from the Laborites. They're the crowd who went for six years without affording a significant discretionary increase in our pathetically low unemployment benefits. Perhaps they had to spend too much trying to prove they could punish asylum seekers with just as much relish as the Liberals.)

Back to the revolting uni students. You'd never know it from their cries of woe, but Education Minister Simon Birmingham has thrashed them with a pillow.

Their tuition fees – and hence their debts to the government - are being increased by just 7.5 per cent on top of indexation to consumer prices, spread over three years. When fully implemented, this will increase total fees for a four-year degree by between $2000 and $3600 – with that range roughly aligned with the likely earning-power of the particular degree.

We keep being told that the level of income at which people with debts begin having to start repaying them has been lowered from $52,000 a year to $42,000. What we're rarely told is that the bottom rate of repayment has been lowered from 4 per cent of their income to 1 per cent.

Combining the two changes, the time it takes to repay loans will increase by less than a year.

Uni students come mainly from the comfortable middle class and go to uni to get a certificate that pretty much guarantees them a well-paying job, including a much lower risk of becoming unemployed or staying jobless for long.

It's true the wider public benefits from the money governments spend educating people to graduate level, but equally true that the personal benefits to the particular graduate are about as great.

On average, Birmingham's changes will increase the graduate's share of the cost of their degree from 42 per cent to 46 per cent – and, thanks to the unchanged design of the loan scheme, do so without discouraging students from poor families from bettering themselves.

Sounds fair enough to me.

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Labor-like budget ticks all the boxes for Turnbull

For students of the politics of economics – my special subject – this clothes-pinching budget has been a feast. Oh no, it's "Labor-lite". Shocking!

Actually, it's a budget that ticks all the boxes for Malcolm Turnbull and, by extension, his parliamentary followers – something their silent acquiescence suggests they realise.

You don't need brains to see a Labor-lite budget. What's harder is to see that it's not as out of character as some suppose.

True, the song Turnbull and Scott Morrison are singing now is very different to the one they sang in last year's budget.

But the beginning of wisdom is to see that, these days, what each side of politics offers is an ever-changing mixture of ideology and pragmatism.

The bedrock is pragmatism: what must I say or do to win the next election? Pragmatism rules because of the way politics has been professionalised, becoming a career ladder you climb from newly graduated ministerial staffer to (you hope) prime minister.

But ideology has its uses. Mainly, to gratify the prejudices of the party base and enhance your supporters' loyalty to the tribe. It gives then a warm feeling. It also helps to jolly along union or business donors.

Then there's the third, usually unmentioned factor: Consistency, no need for.

When you're constantly changing the mix, increasing or decreasing the pragmatism component, you can't be too worried about getting caught changing your story from what you said before.

Since the responsibilities of office change little from year to year – similarly, the advice of the econocrats – the two sides' rhetoric while in government is more similar than when they're in opposition. Everyone changes their tune when they come to power.

As for the boxes this year's budget ticks for Turnbull, the first is it shows him taking firm steps to get the trajectories of budget spending and taxing heading in a better direction, giving the budget substance at a time when its forecasts and projections would soon be exposed as optimistic, even fiddled.

It shows Turnbull having the sense to cast off the wishful ideology foisted on him by the economically uninterested Tony Abbott (egged on by the Business Council's lesser geniuses, to whom he foolishly outsourced the commission of audit) that, despite eight income tax cuts in a row, only cuts in spending were needed to get the budget shooting back to surplus.

By doing so, Turnbull was accepting the budgeteers' orthodoxy that budget repair always involves tax increases as well as spending cuts, and joining ranks of all previous successful Liberal prime ministers, starting with John Howard and his goods and services tax.

Nor is Turnbull the first PM to succeed partly by pinching the best of their opponents' policies.

Second box: it shows Turnbull coping with the bills left by Labor – the National Disability Insurance Scheme, schools funding and (eternally) Medicare – in ways that are politically shrewd and not terribly distorting economically.

Solving the NDIS cost problem by linking it to a barely perceptible increase in the Medicare levy in two years' time. Switching to a cheaper version of Gonski-style needs-based school funding. Imposing a new $1.5-billion-a-year indirect tax on the hated big banks – for whom he's been leaking votes by running cover against a royal commission – to help reduce the structural budget deficit.

Third box: this budget neutralises two of the greatest areas of voters' concern, where Labor is permanently perceived by them to have the comparative advantage: health and education.

And this at a time when, largely thanks to factors beyond their control, we're not travelling too well in the areas permanently perceived by punters to be the Libs' comparative advantage: managing the budget and managing the economy.

Fourth box: this budget takes a Liberal party drifting ever-further to the hard right, and yanks it back to the sensible centre, where elections are won.

Fifth box: this budget shows Turnbull as leader rather than follower of his ever-more reality-detached backbench.

It at last gives voters a glimpse of the fair-dinkum Malcolm – the one saying what we all know he really believes – and whom many people whose vote is up for grabs were hoping and expecting to be led by after the unlamented demise of Abbott.

Last box: Turnbull's return to the centre has at last wrong-footed the formerly sure-footed Bill Shorten, exposing his pretence of putting the public interest ahead of partisan advantage – if we can't have our version of needs-based school funding, let's block the Libs' version – and prompting him to shift to left of centre, with his plans to increase taxes on high income-earners.

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How needs-based school funding would work

In education economics, the hot question is whether Malcolm Turnbull's Gonski 2.0 plan for school funding yields a better and more cost-effective combination of fairness and economic efficiency than Labor's Gonski 1.

Since both sides of politics seek to sanctify their funding approach by labelling it with the sacred name of David Gonski, the businessman who chaired the 2011 government inquiry into school funding, remember both sides' plans fall well short of what he recommended.

He started by recognising that, at least since the Whitlam days, government funding of the nation's schools had no rational basis.

Funds came from both federal and state governments, and were spent on three differing sectors – government, Catholic "systemic" and independent schools.

This meant funding differed by state, and by sectarian status. Politicians on both sides and at both levels did special deals aimed at currying favour with Catholic voters. Many governments favoured non-government over government schools, in the name of giving parents greater "choice" (provided they could afford private school fees).

In other English-speaking countries, religious schools get no special treatment. If they want government funding, they play by government rules. If that's not acceptable, they can do their own thing without government funding.

Gonski's key proposal was to allocate government funding on the sole basis of the needs of particular students, doing so in a way that was "sector blind".

An independent "national schools resourcing body" should be established to set a needs-based "school resourcing standard" for each of Australia's 9500 schools.

The standard would start with a uniform basic amount per student, to which loadings would be added to cover their students' disadvantage in the categories of low socioeconomic status, English language proficiency, school size and location, and indigeneity.

In this way, the allocation of funds would be determined from the bottom up, not from the top down in negotiations with states and sectors.

Julia Gillard required Gonski to reallocate funding in a way that ensured "no school would lose a dollar". This necessitated him proposing that total spending be increased, creating the impression he thought schools needed a lot more spent on them.

The Gillard government rejected the proposal for an independent body to oversee the reallocation and came up with its own figures for the school resourcing standard.

Labor also stuck with the top-down approach, going around the states and sectors trying to persuade them to sign up before the 2013 election.

As a result, some states and sectors did much better deals than others, which they now resent Turnbull trying to unwind.

Labor's reallocation was to be phased in over six years, with much of the cost delayed until the last two calendar years, 2018 and 2019.

Tony Abbott claimed to have accepted the plan's first four years, but reneged immediately after the election, saying the states could spend their grants however they chose.

In the 2014 budget Abbott announced that, after 2017, funding for schools would simply be indexed to consumer prices, yielding a huge saving to the budget. But he couldn't persuade the Senate to amend the act implementing Labor's funding plan.

Just before last year's election, Turnbull agreed to funding increases for 2018, 2019 and 2020 that were more generous than Abbott had wanted but less that Labor's plan.

And now, Education Minister Simon Birmingham surprised everyone by unveiling the Coalition government's own version of needs-based funding, dubbed Gonski 2.0.

It involves adjusting all schools' federal funding at different rates over 10 years so that, by 2027, all of Labor's disparities and anomalies would be removed, leaving all government schools (which are mainly funded by the states) getting 20 per cent of their school resourcing standard – up from an average of 17 per cent at present.

All private schools (whose government funding comes mainly from the feds) would be getting 80 per cent of their school resourcing standard, up from an average of 77 per cent at present.

Total federal funding of schools would grow from $17.5 billion this year to $30.6 billion in 2027, an increase of $2.2 billion over already-planned spending over the first four years, rising to an extra $18.6 billion over the 10 years.

You see from this that Gonski 2.0 would take a lot longer than Gonski 1 to reach full needs-based funding. Like Labor's six-year plan, the Coalition's 10-year plan is heavily "back-end loaded".

Of course, on Labor's calculations, a hypothetical continuation of its scheme would cost $22 billion on top of the extra the Coalition plans to spend.

Much of Labor's extra spending above the Coalition comes from its built-in higher rate of annual increase in funding, relative to the Coalition's assumed average indexation rate of 3.3 per cent a year.

Some of Labor's extra would go on higher grant increases for already overfunded private schools, and some on bigger pay rises for teachers.

Unlike Labor, the Coalition would make small cuts in grants to 24 highly overfunded private schools, while another 350-odd somewhat overfunded private schools would get smaller increases until, in 2027, every school's federal funding was aligned with its own needs-based school resourcing standard.

A big weakness in Gonski 2.0 is the way it gets federal funding sorted but ignores the eight states and territories' role in achieving needs-based funding overall. The states would merely be required to maintain the real value of their funding per student, allocated however they chose.

A weakness both schemes share is that though state-based school systems (including government systems) will receive grants based on the individual needs of each of their schools, they will be left to determine the basis on which it's actually allocated to particular schools.

My conclusion is that the opportunity Gonski 2.0 presents to have both sides politics accept and entrench needs-based federal funding, and an end to sectarian deals, should be grabbed with both hands.

There's nothing to stop Labor, or anyone else, coming along later and fixing its weaknesses.

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