Wednesday, July 23, 2014

Productivity Commission. Childcare is worth getting right even without an economic payoff

Ask the minister responsible to explain Australia’s present system of support for childcare and she can’t.

“It's impossible to explain,” she told ABC radio on Tuesday. “The current payments are so complicated.”

Sussan Ley isn’t alone. Curtin University Professor Alan Duncan is an econometrician.

When he ran the National Centre for Social and Economic Modelling he asked his programmers to produce graphs of the circumstances in which childcare support peaked and troughed. At first they couldn’t. He says they eventually produced a three-dimensional graph with contours “something like nose cone on a spacecraft”.

The Productivity Commission wants to simplify the graph. Instead of two overlapping benefits its wants one; means tested and related to the number of hours in care rather than what’s charged. Its preferred option would cost an extra $800 million a year. It would help out families on up to $60,000 with 90 per cent of the deemed cost, families on up to $300,000 with 30 per cent.

What it doesn’t do is to pretend its suggestion will much help the economy...

Despite all the talk about how many more women would work if only they could afford childcare it says the likely outcome is tiny, an extra 47,000 workers. As a point of reference an extra 20,000 Australian women gained jobs in the past two months. The claimed one-off benefit of 47,000 is minute.

Remarkably the Commission says it is worth doing anyway. To pay for it it suggests plundering the Abbott government’s proposed paid parental leave scheme. It too promises tiny economic benefits.

But the suggested tradeoff misses the point. Each scheme is worth doing in its own right. Neither is justified on the basis of economics. Paid parental leave at full salary is intended to become a workplace entitlement along the lines of sick leave and bereavement leave. The extra cost would be funded by a levy on big employers. Affordable childcare is intended to ensure that low and middle income Australians get reasonable returns from work. Some things are worth doing even without an economic payoff. Affordable childcare and paid parental leave are two of them.

In The Age and Sydney Morning Herald

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Tuesday, July 22, 2014

MH17. Why planes and financial systems crash

What does the crash of Malaysia Airlines flight MH17 have to do with the global financial crisis?

One was destroyed by a surface-to-air-missile, the other came about because huge numbers of American housing loans became worthless at once. Enabling each was a bet that the unlikely wouldn’t happen.

It’s usually a good bet.

Qantas, Korean Air, and Taiwan's China Airlines weren't prepared to take it. They rerouted their flights to avoid the Ukraine months ago. Their caution cost them fuel, travelling time and profits.

Airlines such as Malaysia, Singapore and Lufthansa took a punt.

“What logic, what lack of sensitivity, and what lack of basic decency influenced Singapore Airlines and Malaysia Airlines and others to expose their passengers to these risks?” asked aviation journalist Ben Sandilands on his blog Plane Talking.

The logic was that the unlikely probably wouldn’t happen, or at least wouldn’t to them. Being slaughtered while flying well above a war zone is what experts call a low-probability, high-impact event.

Coldly risking something catastrophic in the knowledge that it almost certainly won’t happen (at least not to you) is a way to deliver superior financial returns, right up the point when it is not. And it’s rife in the finance industry.

Fund managers get paid for performance. Well ahead of the financial crisis in early 2008 two academics from Oxford and Pennsylvania universities demonstrated that it was possible for a fund manager to consistently deliver superior performance by betting the fund that an unlikely catastrophic event wouldn’t happen.

If, as was highly likely, the catastrophe never occurred the bet would pay off and they would be rewarded for their superior performance. If it eventually did occur they would have already received their bonuses and could leave the fund to collapse, moving on to a new job.

Because fund managers keep their methods secret professors Peyton Young and Dean Foster said it was “virtually impossible to set up an incentive structure that rewards skilled hedge fund managers without at the same time rewarding unskilled managers and outright con artists”.

As they put it, “anyone can cobble together a car that delivers apparently superior performance for a period of time and then breaks down completely”. Airlines can do it, privatised electricity suppliers can do it by not investing in maintenance as Victoria has discovered to its cost during brownouts, and state governments can do it by continuing to allow building in flood prone locations as Queensland did before its most recent devastating flood.

The entire world can do it by acting as if climate change won’t be too serious (although that’s probably better described as a medium to high probability high-impact event).

And the manufacturers of financial products can do it...

In the leadup to the global financial crisis they created products sprinkled with loans that could never be repaid if housing prices fell. But they bet that prices wouldn’t fall, not all at once. Compliant ratings agencies produced estimates of how unlikely such an event was. When it happened the products and the financial institutions that created them became worthless. The government rescued the important ones and much of the world slid into recession.

There’s no quick fix to stop it.

Part of the solution is better regulation, something the world’s financial authorities are on to after the global financial crisis. But regulation usually only closes a door after a crisis. Then a different unforeseeable event occurs creating another crisis creating another regulation.

As strange as it seems rewards for performance are probably a bad idea. They are what encouraged reckless practices in the United States. If Qantas schedulers were paid bonuses for speed they might have been keener to flirt with danger.

On the other hand real ownership could help. Paying employees in shares that couldn’t be cashed in for years would encourage them to be careful, as would requiring maintenance engineers to engrave their names of the fuselage of the planes they repair - a practice that is said to take place in Japan.

The best antidote is probably a rigorous cost benefit and risk analysis performed by someone whose pay cheque doesn’t depend on the next month’s profit.

The Coalition embraced such an idea in its September election policy. All Commonwealth infrastructure spending exceeding $100 million was to be “subject to analysis by Infrastructure Australia to test cost-effectiveness and financial viability”. Even state government projects only partially supported by the Commonwealth were to face Infrastructure Australia scrutiny.

No longer. On Thursday the government rejected a Senate resolution that would have given effect to its own policy. Labor moved that the reward payments made to states that privatise assets and then use the proceeds for new projects be subject to Infrastructure Australia cost benefit analysis. It would have covered the Metro Rail project and anything else funded by the sale of right to use the Port of Melbourne.

The Coalition said no.

Commonwealth cost benefit statements were “red tape with no additional benefit”. They risked delaying “the delivery of critical infrastructure”. They would “stand in the way of the government building a stronger more prosperous economy and investing in new infrastructure,” according to the finance minister Mathias Cormann.

But when lots of money or lives are at stake, delay is often a good idea. There’s a lot to be said for caution.

In The Age and Sydney Morning Herald

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Thursday, July 17, 2014

The carbon tax is gone. Will prices come down?

The good news is that without the carbon tax you won’t paying $100 for a Sunday roast.

But you never did.

Ahead of the carbon tax in 2009 the present minister for agriculture Barnaby Joyce said the carbon tax would be “the end of Australia’s sheep industry”.

“I don’t think your working mothers are going to be very happy when they are paying over $100 for a roast,” he added.

In parliament this week asked whether he had found a $100 leg of lamb Mr Joyce dodged the question. At Woolworths this week a leg of lamb was on special for $15.10. It normally sells for $20.38.

As it happened the Treasury modelled the price of lamb when it modelled the carbon tax. It said the price would rise by 0.4 per cent, suggesting the price might have climbed 20 cents.

It’s impossible to tell what did happen, because for food the expected movements were so small as to be difficult to notice.

In the first consumer price figures released three months after the carbon tax the Bureau of Statistics says the price of lamb fell, sliding 2.3 per cent. It has since fallen a further 10 per cent, making any movement of 0.4 per cent difficult to discern.

This isn’t to say that lamb isn’t slightly more expensive than it would of been had there not been a carbon tax. It is merely to say to say that the effect is impossible to measure.

The Australian Competition and Consumer Commission had some power to restrain price rises attributed to the introduction of the tax. It could take action against false, misleading or deceptive claims linking price increases to the tax.

It has no such power over most prices on the way down. It can merely monitor.

Will the price of a leg of lamb come down by 20 cents because of the removal of the carbon tax? So long as the retailer doesn’t make any claims about the carbon tax it can charge whatever it likes. Last minute amendments to Clive Palmer’s carbon tax amendments make sure of that...

Insisted on by Liberal Democrat senator David Leyonhjelm and Family First senator Bob Day, they restrict penalties to just to just 60 or major energy suppliers.

“They are big enough and ugly enough to look after themselves,” Senator Day told Fairfax Media.

But the treasury expected the electricity and gas component of the carbon tax impost to add just add just $4.80 per week to a typical household budget ($3.30 for electricity, $1.50 for gas).

Total costs would climb $9.90 per week. Although big, the electricity and gas component didn’t account for the bulk of the $9.90. What did account for it was a multitude of small price changes. The treasury counted around 80, many of 0.4 per cent.

If the bulk of the price burden was made of adjustments too small to notice on the way up it will be impossible to notice on the way down. Whether or not retailers pass on lower costs will be up to them, and most of their customers will be none the wiser.

Electricity prices should come down by about 10 per cent, gas prices will be about 9 per cent lower than they would have been, except that the price of gas is unlikely to come down at all. Last week the NSW Independent Pricing and Regulatory Tribunal approved gas price rises of between 14.6 and 18.1 per cent.  A new processing complex at Gladstone in Queensland will allow eastern Australian gas to be sold at world prices for the first time. Eventually our gas price could double.

The prime minister says the saving per household from axing the tax is likely to be $550 per year. It’s more likely to be $250 or less, mostly on electricity. And don’t expect cheaper petrol. Petrol and the fuel used to produce and move it was carbon tax exempt.

In The Age and Sydney Morning Herald

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Wednesday, July 16, 2014

Superannuation. The financial system inquiry is talking about a revolution

And there were those who said it would favour the banks

The financial system inquiry has proposed a revolution in Australia’s superannuation system that would vanquish high fees and force Australians to take more super as income rather than lump sums.

Unveiling what are officially called “options” rather than recommendations, inquiry chairman David Murray raised the prospect of a 40 per cent cut in fees across the entire sector.

Such a cut would deliver a saving to members of around $7 billion per year. It would boost the average retirement payout by $40,000.

“I’ll take some flack for suggesting this, but it’s too important not to,” Mr Murray told the National Press Club.

Australian fees are twice as high as those in countries with similar sized systems. Superannuation itself is much more heavily weighted to riskier assets such as equities.

The report suggests banning borrowing by super funds and slowing down the process by which members can switch funds which it says encourages providers to hold more short term assets than they should.

Its most radical suggestion is that Australia follow the lead of Chile and auction off the right to be the nation’s default super fund. The firm offering to charge the the lowest fee would become the default provider for all new accounts until the next auction. Chile used the system to cut default fund fees by 65 per cent...

The inquiry also wants some sort of restriction on the ability of Australians to take and spend super lump sums knowing they can fall back on the age pension. It’s most extreme option would mandate the setting aside of a portion of lump sums for so-called deferred annuities which would pay out only after the age of 85 should the retiree live that long.

It is caustic in its findings about superannuation tax concessions observing that most go to the top 20 per cent of earners, people “likely to have saved sufficiently for their retirement even in the absence of compulsory superannuation or tax concessions”. It is likely to recommend changes to the system of super tax concessions that could form part of the white paper on tax reform to be developed next year.

Mr Murray refused to be drawn on whether if super fees come down there would still be a need to lift Australia’s compulsory super contributions from 9.5 of salary to 12 per cent as is presently legislated, saying the inquiry would be happy to receive submissions on the topic before it prepares its final report to be released in November.

Set up by treasurer Joe Hockey to to update the 1997 Wallis inquiry in light of the global financial crisis, the Murray inquiry finds the financial system is at risk from the perception that Australia’s big four banks are too big to fail and would be rescued by the government.

It floated several options to deal with what it calls “moral hazard” one of which is ring-fencing crucial bank functions such as taking deposits and writing home loans from other activities.

Although a former chief executive of the Commonwealth Bank Mr Murray is harsh in his criticism of the banks’ systems for rewarding their financial planners.

“The thing we have been very clear on is our view that conflicted remuneration can weaken advice,” he told Fairfax Media.

“There's not much we can do at the moment. The government is in the middle of having this voted on in parliament. But there is an information asymmetry between an advisor and a client, one we will be addressing in our final report.”

The interim report suggests outlawing the term “general advice” and replacing it with “sales” or “product information” if the people providing it continue to receive payments from the providers of financial products.

A spokesman for Mr Hockey said the treasurer would not be commenting on the report. It was Mr Murray’s and it was up to him to outline it. Labor’s treasury spokesman Chris Bowen said he would give it due consideration.

In The Age and Sydney Morning Herald

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Monday, July 14, 2014

FOFA. Your financial planner is about to send you a letter, but it's not enough

Expect letters. If you’ve had a financial planner steer you into a product in the last few years, that person is about to write to you. He or she will have to, even if they haven’t been in touch. He or she has been taking your money.

The first letter (due on the birthday of you accepting their advice) will do more than simply tell you how much the planner has been taking from your accounts. It’ll also ask if you want the withdrawals to continue. If you don’t you merely need to do nothing. The withdrawals will stop. If you do want your accounts continually drained you’ll have to send back a form. It’s called “opting-in”.

That’s what financial planners and the organisations that employ them have been engaged in a last-ditch battle to stop. Living off ignorance and amnesia, they’ve been desperate to ensure their long-forgotten clients don’t remember what’s being taken from their accounts and can’t easily stop it.

The Coalition has been backing them rather than us under the guise of stopping red tape. So keen has it been to do their bidding rather than ours that it waited until the parliament wasn’t sitting to introduce a regulation that would smother the requirement. The requirement had been due to become mandatory on July 1.

Then, when parliament resumed last week it delayed tabling the regulation. What’s not tabled can’t be disallowed. On Thursday it refused a formal request from the Senate to table it forthwith. Labor ended up tabling the government’s regulation itself and on Monday moved a motion to disallow it.

The disallowance motion is likely to pass. The Coalition’s attempt to appease financial planners will pass into history. Asked by the Australian Financial Review last week what he thought about its rear guard action Clive Palmer replied: “They can stick it up their arse and you can quote me on that.”

The Coalition meanwhile fulminates against “retrospective fee disclosure requirements,” even though the fees that will be disclosed aren’t retrospective, they’re ongoing. And it makes the - correct - claim that any investor who really wants to know what was being taken out of their accounts can look...

The payments are noted in the fine print of the annual statements for each product provider.  But for someone who has multiple annual statements (it is quite common to be signed up for multiple products) it’s quite a bit of effort to look up each one and then ask the provider to stop. One simple “opt-in” box removes the red tape. The Coalition says it’s against red tape, but it’s really against red tape for planners rather than their clients.

Older clients get no relief from red tape whatsoever. Before making explicit payments to planners from their clients’ accounts financial institutions used to pay implicit - hidden - payments known as upfront and trailing commissions. The planner typically received upfront 2 per cent of the amount to be invested and then a further 0.6 per cent per year for as long as the money stayed with the product provider. It provided a powerful incentive to advise in favour of the product paying the money and an even greater incentive not to recommend the client leave it.

Although the upfront part sounds bigger, it isn’t. Rainmaker research reckons that over the past five years upfront commissions have accounted for 8 per cent of annual commission payments, ongoing trailing commissions 67 per cent.

Most of the old trailing commissions aren’t disclosed to the clients. They don’t appear on their annual statements. The product providers say they don’t have the computer systems to recognise them (although curiously their systems recognise the planners to who they are being paid). Labor’s legislation ignored old fashioned ongoing trailing commissions. It applied only to new-fashioned explicit payments.

And the worst part is that many of those payments may be going to no-one at all. They are being taken out of accounts in order to reward long forgotten planners, but the planners themselves may have died or shut up shop.

Institutions remove the commissions, hang on to them and pay them to no-one. More often than not those institutions are owned by banks.

They are called “orphan commissions”. Rice Warner actuaries believes the old-style commissions untouched by both  the Coalition will cost consumers $6.1 billion over the next eight years. A staggeringly high proportion may be orphans. The financial institutions won’t tell us. Mortgage Choice found last month that 89 per cent of us “do not currently have a financial plan in place that was created by a financial planner,” suggesting that most commissions are orphans.

Neither side of politics has had the courage to tackle them. Industry Super has. It wrote to the Australian Securities and Investments Commission last month asking for an urgent investigation to at least determine the extent of orphan commissions.

The government’s financial system inquiry releases its first report on Tuesday. If it is serious about making the financal system work for us it’ll stamp out orphan commissions and stamp out commissions altogether, including the old ones. Anything less will suggest it works for the banks.

In The Age and Sydney Morning Herald

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Carbon tax going, but don't expect big savings

The carbon tax will be repealed within days after a breakthrough in talks between the government and cross bench senators who were concerned at what they believed were draconian provisions in the repeal bill.

An amended bill will be presented to the Senate and the House of Representatives as soon as Monday.

Liberal Democrat senator David Leyonhjelm and Family First senator Bob Day told the government on Friday they were prepared to walk away from the bill if it continued to include provisions that penalised small businesses that didn’t pass on any savings.

“No-one wanted the carbon tax gone more than I did,” Senator Day told Fairfax Media. “But we couldn’t have had those provisions in there. They would have been worse than the tax.”

Describing the penalties as “way over the top” and “just draconian” Senator Day said environment minister Greg Hunt agreed to remove them on Saturday.

“He sent the amendments through and they are fine. The penalties will now only apply to the 60 or so major energy suppliers. They are big enough and ugly enough to look after themselves.”

Mr Hunt said he had had “electronic engagement” with the crossbenchers over the weekend and had offered “some minor edits” to ensure any unintended consequences for businesses were removed.

“I know from my discussions with the Palmer team that they don't want to put impositions on small business,” he told Fairfax radio.

“I expect that by the end of the week it will done and dusted and everybody will have lower electricity bills from Friday onwards.”

A source close to Mr Palmer said although the amendments looked fine it would be up to Mr Palmer himself to approve them. He is holidaying in New Zealand. Independent senator Nick Xenophon said he would read them carefully before deciding how to vote.

The legislation is backdated to July 1, meaning some customers will get partial refunds on their electricity bills.

But they are unlikely to save anything like the $550 claimed by the prime minister Tony Abbott at the Queensland Liberal National Party convention on the weekend.

“It’s adding 9 per cent to your power bills, it’s a $9 billion handbrake on our economy and it’s costing average Australian families $550 a year,” Mr Abbott said, referring to the carbon tax. “So it must go.”

The $550 figure comes from Treasury modelling ahead of the introduction of the tax in 2012. But only $250 of it came from electricity and gas prices. The rest came from much smaller imposts on items such as food ($46), clothing ($29) and rent ($23). Many of the items modelled by the treasury had price impacts described as “less than 10 cents per week”...

The latest iteration of the legislation will include no penalties businesses who don’t pass their energy savings on, making a one-off saving of $250 per household more likely.

“I think that’s an overestimate,” Climate Institute chief executive John Connor said on Sunday. “Gas prices are climbing sharply for reasons unconnected with the carbon tax, so it’s unlikely there will be any cut in the gas price”.

Australia’s largest supermarket chain Woolworths has said that because it avoided price rises when the carbon tax was introduced there would be little room to remove them when it came off.

Coles says it is “working with suppliers to understand the implications of the change and if we identify any savings attributable to the tax changes we will pass them back to our customers”.

Qantas has removed the carbon surcharge on domestic flights but says market conditions do not allow it reduce its standard fares.

Mr Connor said there should be a review, before repeal, of the real price impacts and benefits. It should be conducted by the independent Climate Change Authority chaired by the former head of Reserve Bank Bernie Fraser.

A bill to abolish the Climate Change Authority also comes up for debate on Monday along with an amendment from Palmer United senators that would enable it to recommend a move to an emissions trading scheme when enough other countries came on board.

In The Age and Sydney Morning Herald

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Sunday, July 13, 2014

One day we'll laugh about how we used to use notes and coins...

Australia Post was always going to wind back mail deliveries. Think about the absurdity of it... thousands of trucks and bikes traversing the country in order to move something slowly that can be delivered quickly and cheaply by computer.

It’s the same for the newspaper you’re reading right now. Printing it and delivering it by trucks is enormously expensive compared to sending the text by computer.

And it’s the same for video, music and book stores. Why set up a network of trucks and warehouses to deliver something slowly that can be delivered instantly and near costlessly?

The only reason we’ve set up these hideously expensive systems in the past is that we didn’t have computers to do it for us.

But they are not the dated technologies facing obliteration at the hands of computers.

The next big one is so obvious it’s hard to see. It’s under your nose, or in our pockets.

It’s money itself, represented by cash.

If you think cash is costless you haven’t thought about it. It gets to bank branches and ATMs via trucks, warehouses and guards with guns. You might not notice that you’re paying for it because banks burying the costs in fees and retailers bury them in their prices. One of the reasons it’s rare to see a discount for cash is that cash itself is expensive, even compared to credit card fees which are exorbitant.

We ought to be able to do to cash what we are in the midst of doing to printed newspapers and record stores.

But we mightn’t be able to rely on the banks themselves to do it. In the early days of the internet Telstra resisted embracing DSL technology because it wanted to keep making money by renting out extra dial-up phone lines. It and the other phone companies are continuing to overcharge us for text messages when anyone who has ever used a smartphone knows that the real cost of sending a short message through the air is close to zero.

The solution might have come from outside. As unlikely as it seems, it might come from Africa...

Kenya has leapfrogged much of the so-called developed world because it never got too bogged down in banking. With only 6 bank branches per 100,000 adults (Australia has 32) cash is hard to come by in Kenya. It can involves travelling long distances and often getting mugged.

So Vodafone set up m-Pesa. The M stands for mobile, and “pesa” means “money” in Swahili. Villagers pay real money to an agent at a store, get their phone topped up and then hundreds of kilometres away use it to buy and sell produce with neighbours who also have m-Pesa on their phones. About half of Kenya’s population are said to have used it.

It has since spread to Tanzania, South Africa, the Democratic Republic of the Congo, Mozambique, Lesotho and beyond Africa to India, Fiji, Egypt and Romania.

Its anonymous, requiring no bank account, no identity documents and no permanent address.

We’ve already made our big transactions cashless, unless we’ve something to hide.

I confess to being not particularly squeamish about the privacy concerns of the Australians who use briefcases full of high denomination notes to buy houses and cars. And there must be a lot of them. An astounding 92 per cent of all the cash on issue is in the form of $50 and $100 notes. They are not often used for transactions by people I know and I have a feeling I am paying more tax than I should because the people use them are pay less.

In a submission to the financial system inquiry former Reserve Bank official Peter Mair suggests doing away with high denomination notes altogether. They would be given a use-by date. Anyone who didn’t hand them in within, say, five years would get nothing in return.

After that it would pretty easy to abolish small change. Many of us already top up parking meters or buy drinks from vending machines with a wave of our phones. It’s where privacy does matter. I’m not keen the bank or the police knowing where I’ve been minute by minute. But there’s no reason they should. Kenya has shown us how to keep mobile transactions anonymous.

Axing cash ain’t radical. A leading United States conservative economist Kenneth Rogoff has argued the case twice in recent months producing one study entitled Costs and Benefits to Phasing Out Paper Currency and another entitled Paper Money is Unfit for a World of High Crime and Low Inflation.

In The Age and Sydney Morning Herald

Of course it's been said before...

HT: @Don Arthur


. Izabella Kaminska, Negative interest in cash, or goodbye banknotes, FT Alphaville, May 20 2014

. Kenneth Rogoff, Costs and Benefits to Phasing Out Paper Currency, NBER Working Paper 20126, May 2014

. Kenneth Rogoff, Paper money is unfit for a world of high crime and low inflation, Financial Times May 28, 2014

. Chartered Alternative Investment Analyst Association, The End of Paper Money, June 8, 2014

. Ken Banks, The Invisible Bank: How Kenya Has Beaten the World in Mobile Money, National Geographic, July 4, 2012 

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