Thursday, September 22, 2016

The true cost of our insanely low Newstart allowance:

You'd be forgiven for thinking that money matters to everyone except those who don't have it.

Last week, after months of anguish, the government gave ground on its plan to to wind back the super tax concessions directed to the wealthiest 4 per cent of the population. It didn't want them to suffer too much.

This week, at the National Press Club, Social Services Minister Christian Porter dismissed suggestions that it needed to lift the Newstart unemployment benefit of just $264.35 per week.

"The fact that people who find it challenging to subsist on Newstart do so for short periods of time might actually speak to the fact that that's one of the design points of the system," he said. The low rate was "working okay because the encouragement is there to move off those payments quickly".

As it happens, there's nothing "designed" about the rate of $264.35 per week. If there was, it would stay constant relative to other payments instead of drifting lower. A decade ago Newstart was 20 per cent of full-time average earnings. This week, it'll be just 17 per cent; and that's after Thursday's increase. Newstart climbs each March and September in line with a more miserly formula than the pension and most rates of pay. This week's increase is just 55¢ per week. That's right: 55¢, taking the weekly rate from $263.80 to $264.35.

By contrast $271 is the minimum amount per night Porter has charged, on top of his wage, for travelling away from home according to the most recent set of records. At times he has charged up to $438 per night. Living is expensive.

For almost everyone, it's more expensive than $264.35 per week, which is why, on request, Centrelink will dole out the allowance weekly rather than fortnightly. There are people who can't wait.

Even those who can wait suffer, in ways that are more serious than generally imagined.

The latest set of Boyer Lectures on ABC radio are eye-opening. Michael Marmot, an Australian who lives in London, is perhaps the world's leading expert on what kills us: not just the immediate things such as cancer and heart disease, but the mental and physical conditions that bring them about.

"How can an older person lead a life of dignity, take their place in public without shame, if they cannot buy presents for their grandchildren?" Marmot asks. How can families with children live without stress if they can't buy them new clothes or entertain their friends?

In the Whitehall study, his most famous, Marmot examined the lives and deaths of 17,530 British civil servants. There is nothing particularly remarkable about civil servants, he explains in his lectures. They are "neither the richest nor the poorest in society".

Yet those public servants on the lowest rate of pay, with the least control over how they spent their days, were extraordinarily more likely to die in any given year than those at the top. Even when he controlled for risk factors (comparing non-smokers to non-smokers and so on), those at the bottom were twice as likely to die as those at the top.

Even those on step 2, just one rung below the top, were far more likely to die of all causes than those at the very top. His explanation is stress. Hormones such as cortisol can kill, through all sorts of mechanisms. People who don't know how they will make it through the week are loaded with them.

In their new book Scarcity: why having too little means so much, economist Sendhil Mullainathan and psychologist Eldar Shafir describe what they call "bandwidth tax". Many of us can easily cope with unexpected calls on our finances such as traffic fines or emergency visits to the dentist.

But if we are short of money our stress system kicks in. Worrying consumes our mental bandwidth as well as poisoning us. At an American mall, they asked high income and low income shoppers how they would cope if their car suddenly needed a $3000 service. The low income shoppers performed incredibly badly on a series of intelligence tests administered immediately afterwards; much worse – an incredible 13 IQ points worse – than low income shoppers who hadn't been asked to think about the $3000 service. The high income shoppers performed no worse.

Thirteen points is the difference between "superior" and average intelligence, it's the difference between average intelligence and "borderline deficient". It could be the reason why people stressed by trying to live on $264 per week (plus whatever they can scrounge) do so poorly at job interviews.

Porter wants to get people off welfare, which is fine. But getting them out of anguish-inducing poverty is important regardless. Instead he revealed at the press club that the Turnbull government plans to press ahead with the Abbott government's decision to extend the waiting period for Newstart from one to four weeks. It would be better off dropping the measure (which was never likely to get through the Senate) as a gesture of goodwill. Unemployed Australians might even believe the Coalition can imagine how they feel.

In The Age and Sydney Morning Herald

Tuesday, September 20, 2016

National default super could save $1.5 billion

The Turnbull government is considering a radical shake-up of Australia's superannuation system that would pit banks and industry funds against each other for the right to manage the deposits of every new entrant for at least two years.

The shift, detailed in an issues paper released by the Productivity Commission on Tuesday, would centralise the decision about which default fund new employees were placed into, taking it out of the hands of employers and making it the result of a national tender.

Calculations by the Grattan Institute suggest it could slice $1.5 billion per year from the fees charged by default funds and put downward pressure on the fees charged by other funds.

Treasurer Scott Morrison has asked the Commission to examine the idea of a formal competitive process, commended by the Murray financial system inquiry as likely to reduce the costs for funds and compliance costs for employers.

In Chile, which has had the scheme since 2010, the firm that won the first national tender charged fees 20 per cent lower than the previous average. The firm that won the second tender, in 2012, charged fees 43 per cent lower. The firm that won the third, in 2014, charged fees 65 per cent lower.

The Commission says existing default fund members would not be required to switch, but would have to be offered the same low fees as new default fund members if they chose to switch.

It says one model would be for the government to choose a single default fund for all new employees for two years, another would be for it to choose more than one fund and assign employees either randomly or on the basis of characteristics such as age.

Grattan Institute productivity growth program director Jim Minifie said his work suggested a national tender could eventually wipe $750 million off administration fees and up to another $800 million off management fees.

Big corporations already run tenders for default funds and get much better fees.

"Let me give you an example. One of the big mining companies put out for tender a very significant amount of employee super, and a retail fund won that it for an investment fee of 0.45 percentage points. That was well below the 0.61 points it charged on the retail market for an identical investment product."

A spokeswoman of the Association of Superannuation Funds said it was considering the issues paper and would be making a submission to the inquiry. David Whiteley, chief executive of Industry Super Australia was opposed to the change, saying it was "hard to justify redesigning a system that has not as yet been given the opportunity to operate".

The Fair Work Commission had been tasked with selecting shortlists of funds from which employers under each award could choose but had not begun the task because Government had not reappointed the required expert panel.

The Commission's paper says the simplest way of constructing a tender would be to conduct a reverse auction awarding the work to the firm offering to charge the lowest fee, as happens in Chile. However, that carried with it the risks that funds would offer "overly conservative investment strategies and poor-quality services in order to lower costs".

These could be overcome by stipulating asset allocation ranges or requiring that funds disclose their true costs as a condition of participating in the tender.

Dr Minifie said a refinement might be to publish the performance of each member's fund on their e-tax form alongside the performance of the winning default funds, inviting them to tick a box in order to switch.

In The Age and Sydney Morning Herald

Saturday, September 17, 2016

Meet Debelle and Lowe, the odd couple in charge of the RBA

On Friday nights in the late 1980s around 11 a long-haired Treasury official used to slip into the chair at what was possibly the grottiest collection of radio studios ever attached to a university campus.

2XX was built on the edge of an indoor basketball court at the unfashionable northern end of Canberra's Australian National University. The brown carpets were mouldy and coffee-stained, the programming resources were vinyl albums in blue milk crates. When it wasn't putting to air foreign language programs, it broadcast talks about Palestine, land rights and trade unions. It was known around town as the "communist radio station", except for when it played music.

In an unusually deep and resonant voice, Guy Debelle would introduce "Velvet Nights", a 90-minute homage to the Lou Reed-fronted band Velvet Underground, leavened with so-called "greasy pop" from Adelaide bands including the Spikes, Exploding White Mice and Mad Turks from Istanbul.

By day a foreign debt specialist in the federal Treasury, at night he would relive his university years in Adelaide rocking to music at the Thebarton Town Hall, the Tivoli Hotel and the Adelaide University Bar where he once lost his voice screaming as Midnight Oil played to an audience of just 100.

He wrote his thesis (on labour economics) to repeated playings of the 11-minute cataclysmic epic The End by the Doors. A science and maths student at school, he might not have studied economics at all were it not for the intervention of a family friend, Richard Blandy, an economics professor who acted as a mentor to him after his mother died of breast cancer when he was 17.

"He was casting around," Blandy tells BusinessDay. "I thought he would do very, very well in economics." His father, lawyer Bruce Debelle, who later became a Supreme Court judge and conducted a royal commission on sex abuse in South Australian schools, suggested law. Debelle told him he would prefer to have weekends.


Half a continent away and a few years earlier, a small boy with brilliant red hair, the oldest in a family of five, was blitzing two high schools in the NSW regional hub of Wagga Wagga. Philip Lowe was dux of St Michael's Regional High School, which went up to year 10, then dux of Trinity Senior High School in year 12. "He was very popular, the brainiest kid in the school – he stood out because of his red hair, if ever there was an award for maths or science he would win it," says Michael McCormack who followed him at both schools and later went on to edit The Wagga Daily Advertiser.

On graduation day his economics teacher wrote a citation. Lowe would one day be teaching his "latest brilliant theories" which would have "solved the international economic crisis".


There was more to Debelle than music. He was an extremely fast runner over 800 metres, an impressive AFL player, a swimmer and a distance cyclist. The holder of a first-class honours degree, he left the Treasury to briefly work at the Reserve Bank in Sydney before taking leave to study for a PhD at the Massachusetts Institute of Technology, inadvertently joining what would come to be known as the "MIT crew" who run the Reserve Bank of Australia. The bank's three top economists; Debelle, Lowe and Christopher Kent, who heads the economic division, obtained their PhDs at MIT. It's known for open inquiry, for taking nothing for granted, and for robust exchange of ideas.

By day Debelle worked on his thesis on inflation targeting under Stanley Fischer who later successfully steered the Bank of Israel through the global financial crisis and is now the vice-chair of the US Fed. At night in the seedier parts of Boston he checked out legendary local bands the Pixies (among his all-time favourites), Dinosaur Jr> and Buffalo Tom. He was later invited back to the MIT to lecture, and could have stayed, in such high regard was he held.


Lowe joined the Reserve Bank as a clerical assistant, moving to Martin Place in Sydney while a teenager straight out of high school. The RBA had found it hard to snare good talent so it hired promising school students early on bursaries and gave them menial work to do by day while they studied at university at night. His thesis supervisor, John Hewson, who later became opposition leader, describes him as shy and quiet, yet "confident in his own ability".

"He is not the sort of person who is going to make claims or put arguments that he doesn't actually personally believe," Hewson says. "He doesn't need to fall into line."

Lowe got a first-class honours degree and won the University Medal.

The term "moral compass" comes up repeatedly in interviews with contemporaries about Lowe, most of whom don't want even the details quoted. People go out of their way to point out that, even away from work, Lowe knows the difference between right and wrong and is prepared to stand up for it. He married a Reserve Bank colleague Jocelyn Parker, who now works at the Australian Prudential Regulation Authority.


Back at the RBA after a year at the Bank for International Settlements in Switzerland, Debelle gained a reputation for being blunt. While the divisions he ran were among the happiest, he had no compunction about telling people they were wrong.

Paul Bloxham, now with HSBC Australia, explains it this way:

"It comes down to the fact that he has already thought through a lot of the issues. What he is looking for is that next edge that someone might give him. His way of debating things is to have quite strong views, hold them, and let you convince him."

A different financial markets economist who has attended the quarterly lunches the RBA holds for fund managers, says that unlike Lowe, Debelle "doesn't hold back".

"Whereas Phil probably wouldn't even break a stride, if somebody wants to push a point that Guy thinks is wrong, he leaves the whole room in no doubt about what he thinks about that particular point of view."

Debelle found himself running the RBA's financial markets division during the 2008 global financial crisis as financial markets seized up. For a short time when it was literally impossible for foreigners to buy or sell certain Australian dollar assets. He would do enormous deals with other central banks to prise the markets back open, often juggling two phones at once, working from home through the night, and then driving in to Martin Place to use secure lines.

On the morning of October 8, in the aftermath of the collapse of Lehman Brothers, Governor Glenn Stevens prepared advice that would have seen the board cut its cash rate by double the usual amount: 0.50 points. He sought out Debelle who advised him to double it again. Rates should be cut by 1.00 points, the most since the early 1990s recession. They watched trading screens with relief as financial markets took the move as a sign the RBA was in control rather than panicking. The next month they cut again by 0.75 points and then by another 1.00, and then another 1.00. Debelle, as well as Lowe, who had approved of the cuts as head of economic research, had been right. Australia escaped a recession.


Treasurer Wayne Swan made Lowe deputy governor (one rung away from governor ) in 2012 after interviewing other internal candidates who probably included Debelle. He says Lowe is guarded, although with an inquiring mind, whereas Debelle is prepared to call a "spade a spade".

As deputy, Lowe has run much of the RBA. An insider says the deputy does the jobs the governor doesn't have time to, including managing staff.

"During his deputy governorship Lowe has taken ownership of all the tedious issues and got into the nitty gritty with staff and lived and breathed it," the insider says. "Everyone is amazed at his exceptional competence and his easygoing manner in pushing things through."

At times known as "Tintin" because of his red hair (now somewhat faded) and neat appearance, as governor from next week Lowe is likely to keep running the RBA as he has.

Bloxham says people who've read his speeches and characterise him as a hawk on monetary policy (not wanting low rates) misunderstand the transformation that takes place as a manager ascends to the top.

"It happens in all institutions, not just the Bank; you can afford to take stronger views, in one direction or the other, when you're not the final decision maker. Once you are the person who is making the call on what the recommendation should be, I think your approach gradually changes."

He says it will also happen with Debelle in his new position as Lowe's deputy.


There's thinking within the RBA that Debelle could succeed Lowe, even though Debelle, who turns 50 this month, is only a few years younger.

"The head of the US Fed, Janet Yellen, was around 70 when Obama appointed her," the source says. "Guy would be only 57 if he was to be appointed after Phil finished his seven-year term. That still leaves room for a seven-year governorship before he is 65."

And room for music. While also drawing up new rules for the financial system as head of a Bank for International Settlements committee, Debelle has managed to work punk rock references into his speeches. One concerned the 1978 Saints number: Know Your Product. The lyrics read: "Cheap advertising, you're lying, never going to give me what I want". In his role as head of the financial markets division he's had a lot to do with banks. The other was the Doors' Roadhouse Blues. The lyrics read: The future's uncertain and the end is always near." Debelle was describing forecasting. 

He plays rhythm guitar in the RBA's in-house band which he says performs only two types of numbers: "punk, and post-punk".

A recent set, attended by staff including governor Glenn Stevens, included numbers by the the Sex Pistols, the Ramones and the Clash.


Lowe also knows his music. These days McCormack is a government minister. Last year as parliamentary secretary to the finance minister he had to represent Australia at a G20 meeting in Istanbul. Lowe attended in place of Stephens. At the conclusion, for the benefit of the Australian delegation, they broke into song: the school song of St Michael's of Wagga Wagga.

It begins: "The Murrumbidgee's winding waters light the lives of Wagga's sturdy breed, like hope eternal, its waters bright flow on as our undying creed." McCormack says Lowe knew every line.

In The Age and Sydney Morning Herald

Friday, September 16, 2016

Never retrospective, the super changes are a win for Turnbull

Limiting the amount anyone could contribute out of their own money into tax-advantaged super on top of employer contributions was never retrospective, but those who thought it was can relax.

The government is imposing a limit by another means.

The plan was to impose a lifetime limit of $500,000 - a figure so large as to be of use to less than 1 per cent of the population. How many of us know someone who can afford to pay money into super over and above their employer contribution and has half a million to spare?

It was said to be retrospective by many on the Prime Minister's own side because high earners might have planned for something else. Which makes it about as retrospective as a tax cut, or a price rise: it applies to future actions, but someone might have planned for something else.

The replacement regime will be just as (non) retrospective, but it'll be harder to paint as retrospective. Anyone who wants to put extra into super from their own funds will be able to do it up to $100,000 per year, down from $180,000 per year. Because only the size of the limit has been changed rather than its form, it'll be harder to claim that the nature of it has changed.

Of course, not many of us have a spare $100,000 to put into super over and above our employer's contribution, so for almost all of us, there will effectively be no limit.

Even if we came into a windfall and wanted to put it into super, the rules will allow us to use three years' worth of the limit at once, as they do now.

To pay for the extra generosity to Australia's richest, the government will delay for one year until 2018 a change that will allow people who have gone a year or so without making contributions to "catch up" by having their employer take out extra to compensate when they are back at work.

It will also shelve a plan that would have made it easier for Australians aged 65 to 74 to make extra contributions even though they are not working, something most wouldn't have been able to take advantage of in any event. It's hard to make extra contributions when you're not working.

Malcolm Turnbull and Scott Morrison are set to achieve what they wanted. All up, the package will save what it would have before: $6 billion over four years, with the key features still in place. There will still be a limit of $1.6 million on what you can put into super to earn income tax-free in retirement, the amount you can put in per year will fall from $30,000 ($35,000 for ages 50 and over) to $25,000, and very high earners on more than $250,000 will pay 30 per cent tax on their contributions instead of 15 per cent.

Labor supported the package apart from the question mark over retrospectivity and will feel duty-bound to support this. Turnbull and Morrison will have taken a small step towards making Australia's super system fairer, the biggest in its 25-year history.

In The Age and Sydney Morning Herald

Thursday, September 15, 2016

The real cost of offshore detention: $573,100 is just the start

What if our government really wanted to save money?

As well as going after $6.7 billion in its omnibus savings bill, it could go after the billions more it costs to run our immigration detention centres: $9.2 billion in the past three years, $3.9 billion to $5.5 billion in the next four, according to the most complete accounting yet of the costs normally hidden in inaccessible parts of the the budget.

It comes as an Audit Office report identifies the cost per offshore detainee: a gobsmacking $573,100 per year.

For that price – $1570 per day – we could put them up in a Hyatt and pay them the pension 15 times over.

It costs less than half that, $200,000 a year, to house a typical onshore prisoner; a mere fraction of that, $72,000 including super, to pay a typical full-time worker, and just $20,700 a year to pay a full pensioner.

Ninety-nine per cent of the population don't come anywhere near $573,100 a year in income or cost. The census stops asking when income sails past $156,000.

But the comparison with wages isn't strictly valid. It understates the outrageousness of the $573,100 price tag. The $573,100 isn't being paid in return for a detainee's labour, in return for a contribution to society, as are wages. It is being paid to prevent the detainee contributing to society. It is what economists call a deadweight loss. We get nothing in return for it, apart from less of what we could have had.

And perhaps because it is not meant to make economic sense (and perhaps because the Department of Immigration and Border Protection has operated as something of a law unto itself), it hasn't even made financial sense.

The Audit Office says the department breached public service guidelines by not conducting proper tenders for the contracts to provide services to Manus Island and Nauru, at times falsely claiming it faced urgent and unforeseen circumstances.

"The available record does not indicate that urgent or unforeseen circumstances existed," the Audit Office says. "The record suggests that the department first selected the provider and then commenced a process to determine the exact nature, scope and price of the services to be delivered."

The department's approach to selecting one provider to service both centres from 2014 "removed competition from the outset". There is no record of staff completing conflict-of-interest declarations, no record of the checks that would have discovered that a director of one of the subcontractors had faced bribery charges and was later acquitted.

After being selected without a proper tender, the new provider extracted an extra $1.1 billion from Australian taxpayers, which was agreed to without going back to the contractors who had just been sacked. The price per detainee shot up from $201,000 to $573,100.

Astonishingly, the report says the department didn't tell its minister at the time, Scott Morrison, that the deal required the Commonwealth to pay a "significant premium over and above the historical costs". Nor did it tell him the price per head.

The department was not only shielded from public accountability, it also managed to hide things from its minister.

UNICEF and Save the Children get the $9.2 billion figure in their report At What Cost? from the numbers scattered around various parts of the official record. They say there are less specific other costs they haven't included, among them regular independent and senate inquiries, the defence of High Court challenges, and compensation for detention centre employees who have suffered as a result of what they have been exposed to.

Intriguingly, the cost of boat turnbacks, the part of the government's policy that has probably been the most effective in deterring asylum seekers, is tiny by comparison: just $295 million over three years, compared with $9.2 billion for continuing to hold asylum seekers in detention.

And there's a whole other set of costs, which At What Cost wrongly labels non-economic, hidden from the public by gag clauses: self-harm, suicide attempts and mental deterioration, especially among children. Economists would say they destroy human capital. Adam Smith, the father of modern economics, titled his magnum opus An Inquiry into the Nature and Causes of the Wealth of Nations because he had discovered that that's what gave nations wealth – not gold or notes or coins, but human beings who could provide goods and services.

Deliberately or carelessly deprecating human capital is perhaps the worst crime against humanity. The Commonwealth Treasury thinks so. Chief among the goals in its wellbeing framework is giving people "substantive freedom to lead a life they have reason to value".

It has fallen to Malcolm Turnbull to end a system that has passed its use-by date. Even criminals aren't locked up indefinitely on the pretence that their cases are being "processed". The decision of Papua New Guinea to close the Manus Island detention centre makes a decision more urgent. On Friday he meets the president of the Human Rights Commission, Gillian Triggs, to discuss the way forward. She says we should move from deterrence to prevention. It would cost so much less.

In The Age and Sydney Morning Herald

Wednesday, September 14, 2016

Turnbull promised economic leadership. We're waiting

Unveiling his surprise strike against Tony Abbott a year ago, Malcolm Turnbull identified just one reason for rolling a sitting prime minister: "economic leadership".

"It is not the fault of individual ministers," he told a packed press conference in a Parliament House courtyard. "Ultimately, the Prime Minister has not been capable of providing the economic leadership our nation needs.

"We need a style of leadership that explains complex issues, sets out the course of action we believe we should take, and makes a case for it. We need advocacy, not slogans. We need to respect the intelligence of the Australian people."

Twelve months on it's easy enough to assess the economy. It's improved. The unemployment rate has slid from 6.1 to 5.7 per cent. The economic growth rate has climbed from 2.5 per cent to 3.3 per cent. We've got jobs and growth.

But as for leadership ("advocacy, not slogans") the jury's still out.

There's no doubt that Turnbull consults. Within weeks of taking office he gathered together in the Cabinet room 25 leading economic advocates who had spoken earlier at a Financial Review summit and went around the table asking each what they thought should be the highest priority. In a complete break with the Abbott era, the group included union and social service representatives. A month later amid debate over the best shape for superannuation tax concessions, he phoned Deloitte Access director Chris Richardson at home and asked him to walk him through the arguments.

Yet his actions after consulting widely have been timid. His much-vaunted innovation statement included nothing extraordinary. A Turnbull insider who was proud of the statement sold this as its chief virtue. It did little harm.

On tax, after seriously considering the case for a 15 per cent GST, Turnbull said "no" on the basis that treasury modelling found it would do next to nothing for economic growth and would require very big compensation payments. His treasurer Scott Morrison was slower to reach the conclusion, talking up the idea even as Turnbull killed it.

Turnbull and Morrison inherited a budget deficit set to hit $33.7 billion in 2016-17 then blew it out to $37 billion by boosting spending and cutting tax in a pre-election budget full of talk, but little action, about controlling spending.

Even their omnibus savings bill, due to finally go before Parliament on Wednesday, will save just $1.6 billion per year, about 0.4 per cent of budget spending. That cautious approach is the right one, but it's hard to reconcile with talk about budget repair.

Where they have been bold is in their approach to company tax and superannuation. Independent modelling conducted for Treasury finds the promised company tax cuts will eventually cost $8 billion per year. The Parliamentary Budget Office puts the figure at $14 billion. Neither Turnbull nor Morrison have said how they'll pay for them. They've placed a lot of faith in modelling that shows the tax cuts will boost growth, but none has them boosting it enough to become self funding.

The superannuation changes will make back just a fraction of what the company tax cuts will lose: $770 million per year. They too are based on Treasury advice and ought to be saleable if much of an attempt was made to sell them.

For all his talk about explaining complex issues and building a case, Turnbull has done it rarely – usually after rather than before making a decision. More often he hasn't needed to, because he has decided (perhaps wisely) to leave things as they are.

To a large extent the economy has been improving of its own accord as commodity prices rebound and the impact of the lower dollar settles in. Two Reserve Bank rate cuts have helped as well. Really bold decisions of the kind the Reserve Bank has been urging such as borrowing big for infrastructure, haven't yet been made. It's easy to get the feeling that we are not being taken into Turnbull's confidence as he promised.

But he hasn't been in office long, and a big chunk of the year was taken up with a marathon election campaign. He'd like us to think there's time. We're waiting.

In The Age and Sydney Morning Herald

Sunday, September 11, 2016

Why going cashless is the next moral challenge

What with myki cards, Opal cards, e-TAGs, epay, payWave, bitcoin and mobile phones, we're using less cash than ever, right? Not on your life.

The latest Reserve Bank figures show there were seven $5 notes per person in circulation in 2015, well up from five per person ten years earlier, and four,10 years before that.

(If those numbers seem small, but climbing, it's because the same notes get used over and over. They are a bit like extras in a movie.)

We have around six $20 notes per person, close to a record high, and far more $50 notes than we used to (25 per person) because of their use in automatic teller machines. But it's the use of $100 notes – the kind most of us hardly ever see, and the kind bank transfers should have rendered redundant – that is exploding.

Twenty years ago there were only five $100 notes per person in circulation. They were less common than $20 notes, which was appropriate given they were far less used. A decade later in 2005 after the introduction of the goods and services tax (the one we were told would kill the cash economy) we had seven per person, and now we have 12. A graph included in the latest Reserve Bank annual report shows the number of $100 notes in circulation climbing faster than any other denomination.

Note that I said "in circulation". They are certainly not in day-to-day use. A few years back I was asked on ABC radio what colour they were. I had to guess, and I guessed wrong. Whereas the lobster-red $20 notes are always in and out of our purses and wallets and last about 12 years before being damaged and returned to the Reserve Bank, the Bank expects the typical $100 note to last 70 years. When they do come back they are often not even unbundled.

Who's got them? According to The Curse of Cash released this week by influential US economist Kenneth Rogoff, they are mainly in the hands of drug lords, human traffickers and tax evaders. We are actually worse than the United States, according to Rogoff. Ninety-two per cent of our currency is in large denomination notes, compared to 84 per cent in the US. Only Switzerland, Israel, Norway and Russia use big notes more than we do.

Rogoff wants us to go "cashless", at least for denominations above $10, and eventually he would turn the $10 note into a coin to make it harder to move around undetected. Phasing out high denomination notes would be painless, for those of us with nothing to hide. We would be invited to deposit them in banks in return for their full value up until a deadline, after which they would no longer be legal tender and worthless.

Naturally, there's a catch. Our Reserve Bank, like the US Federal Reserve, makes money from issuing $100 notes. It's conflicted, being in effect a silent partner in organised crime.

In The Age and Sydney Morning Herald

Thursday, September 08, 2016

"Special bonds". The snaring of UTS, and Sam Dastyari

Sam Dastyari had been in the Senate mere months when a ghost from his past came back to haunt him. He was sued by a marketing company over work it said he had commissioned and then abandoned while general secretary of the NSW Labor Party.

He settled the case for around $5000, but rather than pay it himself or get the Labor Party to help, he sent the bill to the Yuhu Group, reporting its support in the register of senators' interests.

The Shenzhen Yuhu investment development group was founded by Huang Xiangmo, a Chinese-Australian billionaire to whom $5000 was literally small change.

A few months earlier he had given $1.8 million to the University of Technology in Sydney to help establish an Australia-China Relations Institute, which supplanted an existing China Research Centre whose publications had at times been critical of China.

It emails journalists offering all expenses paid trips to China ("flights, accommodation, meals and internal transport") and, in an unusual approach for a university body, describes itself as taking a "positive and optimistic view" of the Australia-China relationship.

Click the "research" button on its website and you won't see research, but "fact sheets" urging Australia to approve the Australia-China free trade agreement, not to run freedom of navigation exercises in the South China Sea and not to block the takeover bid for an electricity network.

Huang chairs the Institute himself, or so he says, in another departure from normal practice. He says he personally chose Australia's former foreign minister Bob Carr to run it.

John Fitzgerald, a China specialist who directs philanthropy studies at Swinburne University, says it is the clearest departure from accepted university practice he has seen. Other research centres, such as those part-funded by the United States, critically examine what's happening in the US. Another academic familiar with the Institute who teaches in China says there is more questioning of the Chinese regime among his own Chinese students than there is at the University of Technology, which seems to be the way Huang wants it. A prodigious donor to both sides of Australian politics, he wrote in a Chinese newspaper last week that donors needed to learn how to have, "a more efficient combination between political requests and political donations, and how to use the media to push our political requests".

Huang sees donations as transactional. But the transactions aren't always in Australia. In China, where some of his associates have been under a cloud, giving money to Australian universities and politicians is seen as a way to do the right thing by Chinese officials. China itself has set up "Confucius Institutes" at 10 Australian universities including the University of Melbourne with the aim of promoting "Chinese language and culture in a friendly, accessible and educational way". They are also in high schools, 35 of them according to the former education minister Christopher Pyne.

To the Chinese Communist Party they are "an important part of China's overseas propaganda set-up". To Australian schools desperate for funds, they are a way to get teaching resources cheaply.

The Communist Party itself has ultimate control over their curriculum, budget and hiring and training of staff, according to a Parliamentary Library research note, creating "extra-territoriality" within Australian universities and schools.

In Canada the Association of University Teachers has urged universities to sever their ties with Confucius Institutes. In the US, the Association of University Professors has issued a report suggesting their governance arrangements are "inconsistent with principles of academic freedom", and at Chicago University the university senate has voted against renewing the institute's contract after receiving a petition from 100 staff complaining that an outside entity was "in effect seriously influencing who's teaching and what's taught under our name".

But here we don't seem to care as much, perhaps because, like Sam Dastyari, we believe we can take money without being expected to give anything back in return. That isn't how it's seen in China, that's not how it's seen by donors such as Huang, and it's not what the research shows. Yes: there is economic research into our response to gifts.

Oddly, and disturbingly for recipients such as Dastyari, it finds that small gifts can pack a bigger punch than big ones. For their study entitled You Owe Me, Ulrike Malmendier and Klaus Schmidt allowed bidders to give gifts to students deciding which firms to award contracts to in a laboratory experiment. The games weren't repeated, so there was no chance of ever encountering the gift-givers again. Yet the small gifts won them over, even when what the bidders were offering was a worse service. As the size of the gift grew the effect faded.

They explain their findings by saying gifts "create a special bond between the gift giver and the receiver". The more obvious the attempt, the more our guard goes up. It's why doctors surgeries are filled with branded pens and free samples rather than wads of cash.

But there's a caveat. Experienced China watchers say the gift needs to be just big enough to create a slight feeling of unease. Once the recipient feels they might have transgressed, they're hooked for next time.

In The Age and Sydney Morning Herald

Saturday, September 03, 2016

Tax cuts next month. Commissioner buckles

Taxpayers earning more than $80,000 are set to get their promised tax cuts from October, but only after a backdown by the bureaucracy.

After the $6 per week tax cut was announced in the May budget, Tax Commissioner Chris Jordan defied Prime Minister Malcolm Turnbull who said it would be implemented "administratively" because the Parliament wouldn't be able to sit before it was due to start on July 1.

Mr Jordan told the Treasury and Finance departments that he wanted "the relevant legislation to be passed before the change will be incorporated into the income tax withholding schedules".

This meant that although high earners might eventually get a refund of up to $6 per week, tax would be deducted from their pay packets at the old rate until the legislation had been approved by both houses of Parliament.

The Australian Tax Office backed up its stance in an email to journalists which said it amended deductions once each year in June and only in accordance with "enacted law".

"If the personal income tax cut measure is legislated by the incoming government, the ATO will at that time consider the administrative approaches available to implement the new individual income tax rates that apply," the email said.

That remained the ATO position until Friday, when newspaper reports warned that high earners might have to wait until the end of the financial year to get the tax cuts promised from July 1.

Within hours Treasurer Scott Morrison announced that they would get them from October 1. Although the legislation hadn't been passed, it been introduced into the lower house, and that was good enough for the ATO.

Asked why it had backed down, the ATO said though a spokeswoman it had made a political judgement. 

Public statements provided "confidence that it is likely Parliament will pass the amendments". The new deduction schedule would be registered on Friday.

Asked whether the ATO had ever previously changed an income tax deduction schedule ahead of a change in the law, the spokeswoman said she would check.

In 2013 the ATO told Fairfax Media it could "only take dollars from people and give dollars to people if there is legislation in place for us to do it". 

For other kinds of tax the ATO does have the authority to change schedules ahead of legislation, a latitude that has at times caused problems.

In 2008 the it boosted the rate of tax on luxury cars after an announcement by the treasurer. When the increase was voted down it faced the prospect of handing the tax back to buyers and had to negotiate a compromise.

In 2009 it boosted the rate of tax on so-called alcopops by 70 per cent only to see that legislation voted down, raising the prospect of a refund to distillers. Again, it negotiated a compromise.

In The Age and Sydney Morning Herald

Friday, September 02, 2016

Capex. Investment outlook the worst since 2010-11

New investment intentions figures point to a shocking financial year ahead with mining investment down 22 per cent, manufacturing investment flat, and other investment down 16 per cent.

The Bureau of Statistics figures, collected from the chief financial officers of the major companies, are bleaker than the soundings of the Reserve Bank board which in its last minutes pointed to "signs that non-mining business investment was rising in some parts of the economy".

They are also much bleaker than those of the federal Treasury, which in the May budget forecast a drop in total investment of just 5 per cent in 2016-17.

The ABS figures point to an overall drop in investment of 17 per cent, from $127.5 billion in 2015-16 to just $105.2 billion in 2016-17. They would make 2016-17 the worst year for business investment since 2010-11.

As is traditional, the June quarter estimates for the financial year ahead were higher than the March and September quarter estimates.

Actual investment slipped 5.4 per cent in the three months to June, to be down 17.4 per cent over the year and down 29 per cent from the peak in December 2012. Mining investment slid 36 per cent over the year and 16 per cent over the quarter. Non-mining investment was flat over the year and up 2.1 per cent over the quarter.

Western Australia accounted for the bulk of the slide over the past year, investing just $8.6 billion in the June quarter of 2016, down from $13 billion a year before. Investment in NSW climbed from $7 billion to $7.6 billion. Investment in Victoria remained steady at $4.8 billion.

Commsec chief economist Craig James said the weak figures meant the Reserve Bank might well cut interest rates again, at its Melbourne Cup Day board meeting in November.

"The question is whether it will do any good," he said. "Certainly retailers believe that cuts have lost their potency."

The figures will weigh on the June quarter economic growth number due out next Wednesday with many analysts forecasting quarterly growth of just 0.3 per cent, down from an unusually high 1.1 per cent in the March quarter.

Separate Reserve Bank figures released on Thursday may lend support to investment. Its index of commodity prices climbed a further 1.5 per cent in August after climbing 3.9 per cent in July. It has been climbing since February.

In The Age and Sydney Morning Herald

Thursday, September 01, 2016

How the government rounded on Newstart

Most of the really bad decisions made by governments are mistakes, ones they are reluctant to admit. The decision to withdraw $4.40 a week from unemployed Australians is one of them.

No credible organisation thinks it should. The Business Council says Newstart is so low it "presents a barrier to employment and risks entrenching poverty". The Organisation for Economic Co-operation and Development says it raises issues about its effectiveness in "enabling someone to look for a suitable job".

Even the Coalition-dominated inquiry into Newstart found there was a "compelling case" for boosting it, but refrained from recommending it for budgetary reasons. But actually cutting the payment ... no one has ever suggested it, not until the Coalition tried it.

It had its first go within weeks of taking office in 2013. In its sights was the twice-yearly $105.80 "income support bonus" added to Newstart by Labor as part of its "Spreading the Benefits of Boom" package.

Worth around $5.40 a week to someone on unemployment benefits, it had to go because it was funded by the minerals resource rent tax which the Coalition had promised to abolish. The Palmer United Party, whose votes it needed, agreed on one condition: that it stayed until after the next election. The bonus is scheduled to vanish on September 20, the first date after the election that it would have been paid.

Having encountered surprisingly little resistance in its attack on the incomes of the lowest paid, in May the Coalition went back for more.

Newstart recipients, along with pensioners, Austudy and Abstudy recipients, those on carers' allowances and seniors health cards, family benefits, parenting payments and youth allowances also get a small "energy supplement". It used to be called the Clean Energy Supplement, because it was brought in to compensate for the introduction of the carbon tax. For a single Australian on unemployment benefits, it's worth $4.40 a week.

Along with the Energy Supplement, it's the only increase beyond inflation Newstart recipients have received in a generation.

The logic for removing it is that the government should "no longer compensate people for a tax that no longer exists", as Treasurer Scott Morrison said when introducing the legislation on Wednesday.

But it's logic he has proudly failed to apply to better-off Australians, who get to keep their compensation – delivered as tax cuts – and were given more in the May budget.

As he boasted back then: "When you get rid of a carbon tax and then you keep the tax relief, that turns from being compensation to a tax cut."

What he and his advisors may not have realised back then (they certainly didn't point it out) is that what seems like simply returning Newstart recipients to where they would have been had the supplement not been introduced, it in fact makes them worse off. It represents a real cut to the incomes of unemployed Australians, the first ever.

All that's needed to understand how is some maths.

Newstart is normally increased twice each year in line with inflation. The next increase on September 20 will be one of the lowest ever, just 0.18 per cent, because inflation has all but stalled.

But when the carbon tax came in, inflation jumped. Rather than increase the allowance in line with that jump, the government withheld 0.7 percentage points, because that was the amount it believed was due to the carbon tax, which was to be compensated for separately by the Clean Energy Supplement.

Removing the Clean Energy Supplement without putting back the 0.7 points that was lost leaves new entrants to Newstart worse off than if their benefits had never been fiddled with. The increases in energy prices that flowed from the carbon tax were real, as the Coalition never tired of telling us.

Estimates prepared for the Australian National University by social security analyst David Plunkett suggest that new entrants to Newstart will be $3.60 a week worse off than had the whole thing never happened, in addition to being $5.40 a week worse off from the removal of the Income Support Bonus.

Most won't notice. Morrison confirmed on Wednesday that existing recipients would continue to receive the supplement. Only the new ones would suffer.

The split comes at a cost of introducing still more unfairness. If it gets through we are about to have two classes of Newstart recipients, existing ones on very low incomes, getting around $13,720 plus $4.40 a week, and newer ones on even less, getting only $13,720.

Most members of parliament get more for spending nights away from home. To its great shame Labor was sucked in during the campaign, apparently not doing its maths either. It backed the removal of the supplement and booked the savings for itself should it take office.

But it knows about the maths now, and it may be prepared to admit its mistake. The government should too. It'd hardly be its first backdown, but it would be nice if it offered it first as a gesture of goodwill. It surely can't have intended to leave unemployed Australians worse off than they were 10 years ago, can it?

In The Age and Sydney Morning Herald

Sunday, August 28, 2016

While the government dithers, millions can't read properly

In Hitler's Germany and Mao Zedong's China they burnt books. Here, we prevent people from reading them.

Government inaction and fear of doing anything to weaken copyright have denied millions of Australians with print disabilities ranging from blindness to dyslexia the kind of access to books the rest of us take for granted.

In the United States there's BookShare, a web platform that allows visually impaired Americans to listen to high-quality text-to-speech versions of books, to read digital braille and enlarged-font versions and to create physical braille and large-font books directly from the website. So far it has 460,000 titles. Here, our copyright rules restrict us to 193,000.

The best format for making audio copies of books is called DAISY. It allows readers to search, insert bookmarks and regulate speed. But here, if disability organisations try to convert a book into DAISY format the Copyright Act requires them to check first that there are no commercial audio or large-print versions already available. If there are, even if they are not searchable or useful like DAISY, its no dice. If there's a commercial large-print version available and the reader needs a larger-print version, it can't be done. If there's written music or graphs or diagrams in the book it's also no dice for those parts of the book. That's because our Copyright Act is painfully prescriptive, using rigid "blackletter law" rather than general principles such as the US "fair use" provisions. There, if it's fair, it's allowed. Here, it's only allowed if parliament specifically enactis a provision. It can take decades. In the US, home taping of TV programs was recognised fair use in 1984. Here it took until 2006.

Our system of specific copyright exceptions is also why a six-year-old girl might be entitled to save some music to a disk for homework, but it would be illegal for her parent to do it for her. Bizarrely, our blackletter law requires organisations making accessible copies for the disabled to check for commercial alternatives before every single download of the copies they make.

Educational libraries are similarly handcuffed. They are allowed to scan books for conversion into accessible formats, but only if they destroy the scans after each use, even if they know they'll need them for other students.

Last year after decades of lobbying, the government released a draft amendment that would have fixed most of the problems. Nine months on it still hasn't been before the parliament. Minister Mitch Fifield says he'll do it "at the earliest opportunity". He should. But it won't fix the broader problem.

Our current approach means we need to keep amending the Act every time there's a new technological development or use that ought to be permitted.It would be far, far simpler to adopt US-style fair use provisions, as the Productivity Commission recommended earlier this year in a draft report. It'll deliver its final report in September.

In The Age and Sydney Morning Herald

'Book famine' as government prepares to miss deadline

The Turnbull government has been accused of extending Australia's "book famine" by sitting on draft legislation designed to give blind, partially sighted and dyslexic Australians the sort of access to books available overseas.

Former disability commissioner Graeme Innes says he and other vision-impaired Australians can't import legally-produced audio and braille books without the specific permission of the publishers. He says when he asks, he often doesn't get a response.

The US-based Bookshare website offers almost half a million braille, large print and audio titles on line, but Australia's restrictive copyright rules mean only 193,000 are available here.

Draft legislation released in December would have opened up BookShare to Australians in one of the biggest ever shakeups of Australian copyright law. It would also have protected local organisations and carers who wanted to make their own accessible copies of copyrighted books.

It was designed to come into force with the introduction of the Marrakesh treaty on international access to published works on September 30, but it hasn't yet been introduced into parliament and isn't on the program for next week.

On Friday shadow attorney general Mark Dreyfus wrote to communications minister Mitch Fifield offering his support for an urgent passage through parliament. A spokeswoman for Senator Fifield told Fairfax Media that the bill wasn't essential in order to comply with the Marrakesh treaty, but said it would be introduced "at the earliest opportunity".

"It's pretty mean to suggest that it's not essential," Mr Innes responded. "It's easy to say if you are able to read books. I don't understand why it's not high up on the program."

Bruce Maguire, lead policy advisor for Vision Australia said the law was needed to allow accessible to be shared between countries as the treaty intended.

"Swift passage will be a great example of how the new Parliament can work for all Australians," he said.

The bill also removes an anomaly that has given perpetual copyright to historic letters and other unpublished documents, meaning that organisations such as the Australian War Memorial are unable to digitise them if there are no heirs left to provide permission.

In The Age and Sydney Morning Herald

Thursday, August 25, 2016

What's wrong with the Reserve Bank target we've got?

Ever been the victim of a poorly specified target?

I used to be, for years, when I had to change trains. The timetable indicated that the next one would arrive a few minutes after the first. And it nearly always did, except that it often sped past without stopping. It had a target to meet.

Hospitals do it with waiting lists. Told to get them down, they find excuses to knock people of the listf, even if they are still waiting. Chief executives do it with share prices. Incentivised to get them up, they bring forward income, skimp on actually looking after their customers, and act surprised when things collapse. Dick Smith  is an obvious recent example. The target - share price - has ended up driving the enterprise rather than what the target sought to achieve.

And the Reserve Bank might be another.

Until the early 1990s it didn't really have a target, just a feel-good vibe in its Act that directed it to work "to the greatest advantage of the people of Australia". To flesh things out, the Act says it has to work towards the stability of the currency, the maintenance of full employment and economic prosperity.

But too many targets means no target at all, so in the early 1990s, as part of a movement that began in New Zealand, our Reserve Bank joined a number of its international cousins and zeroed in on just one numerical target: inflation. Changes in prices as measured by the consumer price index had to be kept to between 2 and 3 per cent per annum on average over time.

When Glenn Stevens took over as governor in 2006 he formalised the target in a written contract or "statement on the conduct of monetary policy" signed by him and the treasurer Peter Costello.

It justified giving pre-eminence to what had previously been just one of several objectives by describing price stability as a "crucial precondition for sustained growth in economic activity and employment".

The words "over time" allowed it to delay adjusting rates to meet the target if it thought that, say, employment really mattered more. But by being placed at the centre of the document and being the only part of it that had a number attached to it, inflation came to be seen as the bank's number one target, in the same way that running on time came to be seen as the number one role of the railways, at least until commuters complained.

It has stayed the number one target because most of the time it has done the job pretty well. If inflation was climbing it usually meant that the economy was overheating and could do with higher interest rates. If it was falling, it usually meant employment was weak and would benefit from lower interest rates.

But not always.

When prices jumped on the introduction of the goods and services tax and then on the introduction of the carbon tax it meant no such thing. The Reserve Bank suspended its inflation target saying it would "look through" recorded inflation to adjust rates only in accordance with what it thought would have happened without the disturbance. It's done the same for changes in the cost of health insurance and the price of bananas. It has maintained fidelity to its target by suspending it, which gives a pretty good indication there's something wrong with it.

There've been five new contracts since the first (usually after each election or when the governor's term has been extended) and each has put inflation first. There's about to be a sixth, to coincide with the appointment of Stevens' successor, Philip Lowe. This time there's a push for something better.

Senate linchpin Nick Xenophon is the front person for a bevy of exceptionally bright economists including Warwick McKibbin, an internationally renowned member of the Reserve Bank board, and Danny Price of Frontier Economics in Melbourne, who want what bigwigs in the US such as former treasury secretary Larry Summers and former Obama adviser Christina Romer want – a target that explicitly acknowledges economic growth.

The best candidate is so-called nominal GDP, which is real growth plus inflation. The bull's-eye would be 5.5 per cent, which is about the long-run average. If real growth was weak even though inflation wasn't, the Reserve Bank would cut interest rates anyway in order to get either it or inflation up. It'd be a single number, as is the inflation target, but it would serve dual purposes.

Right now it would mean even lower official interest rates, perhaps even negative as happens overseas, in order to get businesses employing and consumers spending. During unsustainable booms it would mean higher interest rates than an inflation target alone would produce. As with the inflation target, it would be a goal to be achieved over time, giving the bank wriggle room to ensure the adjustments aren't too dramatic.

All Xenophon wants is a Senate inquiry to at least talk about it before the governor and the treasurer sign on the dotted line. A government genuinely committed to governance would grasp the opportunity.

In The Age and Sydney Morning Herald

Monday, August 22, 2016

Xenophon leads push to axe the inflation target

Senate powerbroker Nick Xenophon will move next week to upend the traditional contract between the treasurer and the governor of the Reserve Bank, ditching the longstanding inflation target and replacing it with a target for economic growth.

There have been six such contracts between the treasurer and the bank since Glenn Stevens took over as governor in September 2006. His successor, Philip Lowe, takes office on September 18.

Although the wording has varied, each contract has required the governor to keep underlying inflation at an average of 2 to 3 per cent over the business cycle.

When Parliament resumes next week, Senator Xenophon will move that the Senate economics committee investigate replacing the inflation target with one for nominal growth, with the most likely mid point being 5.5 per cent.

Writing in Fairfax newspapers on Monday, Senator Xenophon and Danny Price of Frontier Economics argue that Australia needs nominal economic growth of at least 5 per cent in order to stabilise debt and for businesses and households to feel able to invest and spend more.

Near 10 per cent at the height of the mining boom, nominal growth is now just 2 per cent. The bank feels unable to boost it unless inflation is low, and the steady increases in the prices of electricity, gas and alcohol and tobacco excise give inflation a floor.


"Right now we've got economic policy with the blinkers on," Senator Xenophon said. "By being one-eyed about inflation, we are ignoring the money in the pockets of Australians, unless the two happen to coincide."

Supporters of the shift from inflation targeting towards nominal growth include The Economist, former US treasury secretary Larry Summers, Christina Romer, a former chairwoman of the Council of Economic Advisers under President Obama, and Australian economists John Quiggin and Warwick McKibbin.

Professor McKibbin, a former member of the Reserve Bank board, said that before Australia formalised its inflation target in the early 1990s it effectively targeted both prices and growth, cutting interest rates if growth dipped even if prices did not. Since then, inflation targeting worked well enough until about five years ago, when weak productivity growth severed the link between inflation and growth.

"With a debt-laden society, both public and private, you've got to get nominal GDP growth, otherwise your revenue and your balance sheets get hit badly," he said. "You should be willing to risk inflation in order to get nominal growth up, but with an inflation target you get penalised if you try."

Professor McKibbin said inflationary expectations needed to climb to give people and businesses the confidence to lift wages and profits.

Mr Price said replacing the inflation target with a nominal GDP target would mean higher interest rates during booms when incomes were soaring and even lower rates at times, like now, when incomes and profits were stagnating.

Professor Quiggin said if nominal GDP growth rather than inflation had been targeted during the boom, central banks would have come down harder on the asset speculation that led to the financial crisis.

Former Reserve Bank board member John Edwards disagreed, saying nominal growth was driven by export prices, which the Reserve Bank was powerless to influence.

"I don't know how you would offset it, and I don't know why you would want to," he said. "I think it's a silly idea. Until now targeting inflation has worked well."

A spokeswoman for Treasurer Scott Morrison said a new contract would be signed after Mr Lowe took office.

In The Age and Sydney Morning Herald

Friday, August 19, 2016

We're moving part-time as the jobs market hollows out

An election-driven burst of part-time employment has pushed the unemployment rate down to 5.7 per cent, disguising a continuing slide in the number of Australians employed full-time.

Employment climbed 26,200 in July, according to figures released by the Bureau of Statistics on Thursday, but the jump was the net result of a 45,400 slide in full-time employment offset by an unusually large 71,600 jump in part-time employment.

Full-time employment has slid 64,500 since December while part-time employment has surged 136,600. The net result of 72,300 extra Australians in work reflects a hollowing out of employment rather than a boost in hours. There were scarcely any more hours worked in July than in December.

The international definition used by the Bureau of Statistics requires it to count someone as "employed" even if they work only one hour per week.

"With more than 86 per cent of total net jobs created over the last 12 months part-time, it is clear that Australia is becoming a nation of part-time employment growth with all the attendant negative consequences," said Bill Mitchell, director of the Centre of Full Employment and Equity at the University of Newcastle.

The Australian Electoral Commission employed around 70,000 polling officials for the July 2 federal election, many of whom kept working in the following weeks during the count.

A few weeks later, the Australian Bureau of Statistics employed 38,000 field officers to collect census forms, most of whom will show up in the August employment figures.

BIS Shrapnel economist Kishti Sen said there were other, longer-term, reasons for a surge in part-time jobs that has pushed up the part-time share of employment up from 28 per cent to 32 per cent of total over the past decade.

"Businesses that employ a greater share of part-time workers, including accommodation and food services, retail trade, and arts and recreation are doing well on the back of healthy household spending and a recovery in tourism expenditure," she said. "Part-time employment is also benefiting from a cautious approach by businesses. They are inclined towards taking on part-time workers to have the flexibility to bring workers on and off their books and to contain costs."

Employment minister Michaelia Cash welcomed what she said was evidence of a resilient economy that saw employers continuing to hire at record levels.

The figures show Western Australia and the eastern states swapping places with the state that once had Australia's best labour market recording an unemployment rate of 6.3 per cent, well above the Victoria and NSW rates of 5.9 and 5.2 per cent.

In The Age and Sydney Morning Herald

Thursday, August 18, 2016

Say no to Western Australia, the prodigal state

prod·i·gal (prŏd′ĭ-gəl)

adj. Rashly or wastefully extravagant: a prodigal nephew who squandered his inheritance.

Western Australia wants the rest of us to bail it out.

Without warning, the GST lifeline it needs to fund its operations has collapsed, or so it says.

Our Treasurer, Scott Morrison, seems to believe it. Here is he on Monday telling radio host Ray Hadley no one saw it coming: "The simple point that the Prime Minister is making is this, no one envisaged that the current way things are done would lead to a situation where Western Australia would just get 30 per cent of the GST that their people paid."

No one envisaged it, apart from Western Australia. Five years ago in 2011, when it got back 72 cents from each dollar of goods and services tax its residents paid to the Commonwealth, its budget papers predicted that by 2014-15 it would get just 33 per cent. In fact it got 38 per cent, a less severe downgrade than expected. A year later it predicted 25 per cent by 2015-16, and got 30 per cent.

You can say what you like about the Western Australians, but you can't say they didn't see this coming.

The Grants Commission distributes the GST pool according to need, and ability to pay. That's why the Northern Territory always gets back far more than it puts in: its highly disadvantaged Indigenous population means its needs are greater. It's why, ever since the start of the GST at the turn of the century, NSW and Victoria have got back somewhat less per person than they've put in: housing Australia's two most important cities and the businesses and real estate within them means they are able to raise more per head from their own resources.

Except that the Grants Commission moves slowly. By the time it has collected its evidence and divided up the pool, as many as three years can have passed, meaning Western Australians are suffering now because of the extraordinarily high revenue-raising ability they had earlier in the decade. But here's the good news: they knew back then it was going to happen and had time to prepare.

So what did they do?

Christian Porter was Western Australia's treasurer at the time. He is now a federal minister and is being talked about as a future federal treasurer, which makes his actions in Western Australia especially worth examining.

He spelled out the problem clearly enough. His 2011 budget said GST revenue would "fall dramatically" from $3.6 billion in 2011-12 to just $2 billion in 2014-15.

His response was to spend even more. He promised spending growth of 7.9 per cent in 2011-12, and achieved 10.2 per cent. And he borrowed more, boosting state government debt from $13.4 billion to $18.2 billion in two years. He borrowed for a new football stadium, a new purpose-built home for the Western Australian Institute of Sport, a new Perth Museum, a new hospital and new schools, and a $270 million Perth Waterfront Project, all in the middle of a construction boom when the cost of building was soaring.

He'd done some thinking about his looming revenue problem, and he'd come up with a plan. He spelled it out on page 64 of his budget paper 3:

"The prime minister has announced a review of the arrangements for distributing GST revenue grants among the states and territories," it said. "The review is likely to significantly alter Western Australia's GST grant share from 2013-14 onwards."

That was it. With one bound he would be free. All he would need would be Julia Gillard's agreement, and the agreement of the other states, and the problem would vanish. The system was "almost certain to change".

The other states laughed. Western Australia knew what was going to happen and had time to cut its coat according to its cloth. In the year that Porter announced his escape plan the Western Australian public service swelled 3 per cent. Public service numbers in the rest of Australia fell. In that year Western Australian public service salaries climbed 4.6 per cent. Even now, they are climbing 3 per cent. In the rest of the nation it's 2.4 per cent.

John Nicolaou runs ACIL Allen Consulting in Western Australia and was previously chief economist at the Western Australian Chamber of Commerce and Industry. He says the talk about changing the GST formula is a sideshow designed to draw attention away from financial mismanagement. During the boom years Western Australia got enough revenue to set it up for good. Instead it sprayed it around, even while it published forecasts of what was to come.

Turnbull and Morrison appear to have sympathy for the prodigal son, at least until after its state election. They shouldn't. Its latest forecasts show its GST share rebounding over the next three years in a delayed reaction to the end of the mining boom. A bailout, of any sort, would send the worst possible message about the views of Turnbull and Morrison and the consequences of governing badly.

In The Age and Sydney Morning Herald
Related Reading

. GST can’t fix flawed Budgets, Shane Wright, The West Australian


Sunday, August 14, 2016

Wondering whether to end a relationship? Toss a coin, seriously

What's the best thing to do when you are faced with one of those gut-wrenching decisions like whether to quit your job or have a baby or end a relationship?

When I was weighing up whether to leave the Treasury to work as a journalist a few decades back, my mother acted as if it was one of the most momentous decisions I would ever make. My father, who was more relaxed, said it would all be fine.

It turns out dad was right.

The perpetually curious Steven Levitt (best known as the author of Freakonomics) has just published an ingenious study titled Heads Or Tails: The Impact of a Coin Toss on Major Life Decisions and Subsequent Happiness.

Levitt was frustrated that most of the laboratory studies involved small decisions such as whether to take an inconsequential gamble.

So for months he set up his own high-stakes website:

His greeting read: Have a problem? We can help. Sometimes in life you face a major decision, and you just don't know what to do. In the end, whatever you choose will essentially be a flip of a coin. Help us by letting Freakonomics Experiments flip that coin for you.

If they went further they were invited to choose a question or write one of their own, take a survey which had buried in it a question about happiness ("How happy would you say you are on a scale of 1 to 10?") then get the machine to toss a virtual coin, and complete follow-up surveys two and six months later.

The most asked question was "Should I quit my job?" followed by "Should I break up?"

As unlikely as it seems, 3869 people used the website to guide them through those decisions. Another 415 asked whether to have a baby  and 22,511 used it in total.

Roughly 63 per cent of those who took part did what the coin said, more than the 50 per cent that would have been expected by chance.

After two and six months the people who had thrown their lot in with the coin were happier than those who had not and must have used some other means to make their decision. And it's not just that they said they were happier. They were also asked to nominate third parties who were asked about their happiness both before and after.

For the really important questions (those about jobs, relationships and babies) the difference in happiness was "especially large – around one full point on a 10 point scale".

Doing what the coin said seemed to really matter. Levitt thinks he knows why. The people who did changed more often than the people who did not. Left to our own devices we've an inbuilt bias against change. Yet more often than we realise it's the best thing we can do. Levitt's no counsellor (he leaves that to his machine) but his advice would be that it's often worthwhile taking a leap into the unknown – far more worthwhile than we think.

In The Age and Sydney Morning Herald

Saturday, August 13, 2016

Code Red: How the ABS bungled the census

In 2015, at what ought to have been the height of preparations for the 2016 census, its head, Duncan Young, sent his colleagues in the Bureau of Statistics executive a crisis memo.

"As most of you are aware, the census program has alerted its steering committee and board that it has assessed its status as RED," he wrote in February.

He put the word "RED" in capital letters.

"This means that we have assessed that the program will not be able to deliver on the current scope, timetable and/or budget. This status is as a consequence of both budget reductions since program commencement and program delays during 2014."

Young set out five options to shrink the census or save money, each "not taken lightly". One was to ask far fewer questions, another was to reach fewer people.

At the same time the Bureau's newly installed chief, David Kalisch, was war-gaming an even grander solution. Dubbed "Project Archer" after Keith Archer, the Australian Statistician who introduced computers to the ABS in the 1960s, it would make the 2016 census go away, freeing up $200 million to $400 million to upgrade the Bureau's aging computer systems, some of which ran code that was 30 years old.

His predecessor Brian Pink had left at the start of 2014, warning in his final annual report that the Bureau had barely enough cash to "keep the lights on".

When Pink arrived in 2007 the Bureau received $302 million in a non-census year. Seven years of growing expenses and relentless "efficiency dividends" later, it received scarcely any more, $312 million.

Pink had responded by axing or indefinitely postponing some of Australia's most loved surveys. One was the national time-use survey which records how Australians spend every 15 minutes. It hasn't been updated since 2006, before the arrival of the iPhone.

Kalisch was interviewed for the $705,030 job at the start of 2014 but wasn't appointed until December, leaving the Bureau without a leader during a year in which it was meant to be fine-tuning Australia's first predominantly digital census.

Tony Abbott and his treasurer Joe Hockey dithered because they didn't like the look of the candidate the selection committee had first recommended. Project Archer would deliver the census once every 10 years instead of five, directing the savings to buy new computers.

To sell the idea, Kalisch had to diss the census...

"There is a lot of, perhaps, misinformation about the value of census," he told a Senate hearing. "There is a sense in the community that a lot of the information is derived from the census, which is just not true."

The primary purpose of the census is indeed prosaic – it is to count the number of people aged 18 and over in order to determine the shape of electorates. It's why politicians are particularly keen on keeping it, and why cancelling it was always a big ask. The government said no, and gave the Bureau an extra $235 million over five years in order to upgrade its computer system.

But the census itself had to be cut-price, costing more like $200 million than the previous $300 million to $400 million. Work on the questions as good as stopped.

Every five years there's an additional special-interest question. It's incredibly valuable real estate, fought over in the same way as the payload on a mission to space.

In 2001 as Peter Costello was gearing up to replace John Howard as Australia's prime minister, he gave a speech about the "spirit of the volunteer" in an attempt to humanise himself.

As treasurer, he instructed the ABS to make the 2006 special question about volunteering, even though it already collected more detailed statistics on volunteering in another survey.

The Bureau reluctantly complied, and then when the Rudd government left it short of funds in the lead up to the 2011 census, left it in because it didn't have the money to devote to framing another question. By the lead up to this census it was short of money again and desperately short of time. It left in the ill-defined question for the third consecutive census.

Directed to actually conduct the census, and keen to extract some value from it, Kalisch and his team revived an idea categorically ruled out by his predecessor. Pink had said no to retaining names.

"It wasn't going to happen. I can tell you that," Pink said this week.

"I always used to say to my people: you can't kill the goose that lays the golden egg, and the golden egg is the census. In my view, you only need 20 per cent of Australians who are concerned about security and you put the census at risk."

When given the option of having their names and forms retained and stored in the archives for release a century later instead of being destroyed after processing, 39 per cent of Australians had said no. The immediate use of their names might have alarmed them more.

Names had always been retained for a short time in order to eliminate duplicates and establish the relationship between household members, but destroyed after checks, usually well before 18 months.

On October 19, Kalisch convened a meeting of his executive group. It agreed to conduct a privacy impact assessment into the permanent retention of names as well as exact addresses, which had also previously been destroyed after checking.

Whereas in Pink's day the privacy impact assessment had been conducted externally, and had savaged the proposal, this one would be conducted in-house "consistent with our practice with data integration projects and leveraging the experience and knowledge we have built since 2005".

Its publication along with a half-hearted endorsement from focus groups conducted by Colmar Brunton Social Research would be timed "to quickly follow" the release of the regular Trust in ABS survey which always produced impressive results.

Appearing before the Senate economics committee two days later, Kalisch said nothing about the plan to retain names and addresses. He made a short statement to "update the committee about our census preparations". Things were "on track" and momentum was building. A few months earlier he he had told the committee things were coming along "beautifully".

On December 8 the executive group considered the proposal in more detail. The ABS had published a statement of intent on its website on November 17, unreported in the mainstream press, and received just three responses, all negative, from what it termed "concerned private citizens".

The internal privacy impact assessment had given it a tick. The Bureau had sent a minute to the office of the assistant minister to the treasurer Alex Hawke, appointed a few weeks earlier by the new Prime Minister Malcolm Turnbull. A report prepared for the meeting said it had been "noted".

The Bureau wanted to build a reputation as Australia's "premier integrator of government data". If it couldn't retain names and addresses, potential users might see it as "unnecessarily constraining itself and therefore constraining whole-of-government data integration".

"There are many administrative datasets that are likely to have considerable statistical value," the report said. "In addition to the personal income tax data which has already been used in data integration projects, future data integration projects could include the use of welfare payments data, Centrelink unemployment benefits data, Medicare and Pharmaceutical Benefits Scheme data, Australian Immunisation Register, the electoral roll, and other nationally important datasets."

The report envisioned no limit on what the ABS could link and charge for, so long as the names and addresses themselves were kept within the ABS. Information from the census on ethnic or religious backgrounds could be linked to information from the immunisation register to work out what type of families on what types of incomes were the least likely to immunise.

Criminal records could be linked to census records, if permission were given, to see what sort of Australians were convicted of what sort of crimes.

Until that point the Bureau had mainly relied on "bronze" linkage – the rough linking of files using identifiers other than names and addresses. A move to "gold" linkage using names and addresses would get "maximum value for what is already one of the most valuable statistical assets the ABS holds".

On the Friday before Christmas, the Bureau released an eight-paragraph statement deceptively titled ABS response to Privacy Impact Assessment. Once more unreported in the mainstream media, it said the Bureau would retain the names and addresses collected in the census "to provide a richer and dynamic statistical picture of Australia through the combination of census data with other survey and administrative data".

In April, with the census imminent, after reports in Crikey and the Australian Financial Review, Kalisch backed down somewhat. Names would be kept for only four years, but the really useful linkage keys derived from them would still be kept indefinitely.

One of Kalisch's predecessors, Bill McLennan described what was planned as "without doubt, the most significant invasion of privacy ever perpetrated on Australians by the ABS".

"I am appalled that the ABS can think it can use the threat of prosecution to make me provide data that allows the ABS to set up what is, in effect, a statistical Australian Card," he wrote.

As it moved to counter declarations by Crikey reporter Bernard Keane and high-profile politicians including Nick Xenophon that they would either not complete the census or not provide their names, the Bureau emphasised the $180 per day fines. They applied for each day the forms weren't complete, without limit. Although the Bureau was also careful to point out that they applied only after September 23, the main message received was that the forms had to be completed on census night itself, August 9.

By 7.30pm, as millions of Australians tried to get online at once amid what may have been denial of service attacks, the system crashed and was taken down. It had been built by IBM for $9.6 million and load-tested by Revolution IT for $469,000. ABS robots, set up to automatically respond to tweets, encouraged Australians to continue to try to log on.

Kalisch had said just the day before the Bureau was "ready" with the best security features for which "you could ever ask".

The new minister, Michael McCormack, in the job for mere weeks, at first couldn't get through to Kalisch. McCormack had been appointed after an embarrassing interlude in which there seemed to be no minister responsible. Hawke's position had been abolished and neither treasurer Scott Morrison nor financial services minister Kelly O'Dwyer had been given the job. A fortnight after being appointed small business minister McCormack was told it was his.

Before the website went back online late Thursday Prime Minister Malcolm Turnbull promised an inquiry after which he said "heads would roll".

In The Age and Sydney Morning Herald

Thursday, August 11, 2016

Defenders of banks are the ones who don't get capitalism

Why on earth am I attacking the banks? "They make profits, that's the way the capitalist system works," or so I have been told repeatedly since I questioned their decision to hang on to a good chunk of last week's official Reserve Bank cut in interest rates instead of handing it to their customers.

"It's not the job of government to dictate the margins of business," one of their shareholders told me. "Profits are the basis of free-market capitalism," another wrote.

That second claim is only partly right. And yes, sometimes it is the job of governments to restrain profits.

The founder of modern economics Adam Smith was the first to mount a case for the pursuit of profit.

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner," he wrote more than two centuries ago. "But from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love."

The search for profits - the search for that extra money that exceeds the cost of production - is what motivates the brewer, the baker and the banker. Without it they wouldn't bother. Yet miraculously, in pursuing profits each of them (Smith believed they were each men) ends up providing almost exactly what we need.

"He intends only his own gain," the author of The Wealth of Nations went on, in the sentence that came to define him. "He is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention."

I'm with Smith, completely (as you would expect from an economics editor). But reread him and you'll see that he isn't actually defending high profits, or even profits at all...

He is defending the pursuit of profits. As the American satirist PJ O'Rourke notes in his excellent book about The Wealth of Nations, Smith thought attempts at super profits would be competed away. That was how the pursuit of profit benefited customers. Unrestrained profits were "always highest in the countries which are going fastest to ruin".

On Wednesday the Commonwealth Bank announced an unrestrained record profit of $9.45 billion. Its return on equity was well above 15 per cent at 16.5 per cent, way in excess of the 11 or 12 per cent typical of companies listed on the stock exchange, and far above the typical return for unlisted companies which is closer to zero.

The figures show the Commonwealth went out ahead of the other Big Four banks in announcing it wouldn't pass on the full cut because its net interest margin (the difference between what it pays for money and what it charges) had slipped from 2.09 to 2.07 per cent. It wanted to build the margin back up.

There was nothing to stop it.

In the United Kingdom a week later, greater competition and a sense of decency obliged all of the big banks to fully pass on the Bank of England's cut. The banks over there get by with returns on equity of less than 10 per cent.

There's something wrong with a culture in which investors expect such obscenely large returns in order to invest. Australian Competition and Consumer Commission chief Rod Sims sees it repeatedly when airports, ports and the like are privatised.

In order to get its sale of the Port of Melbourne over the line, the Victorian government at first offered to lift the rents charged by the port 750 per cent. The federal government got a magnificent price for the Sydney Airport by doubling landing charges, removing the regulation of landing charges and offering the new owner right of first refusal over any second airport. The new owners probably run the facilities better, but from the point of view of their customers, there's scarcely any point.

"I've always felt that commercial enterprises are better off in the private sector," Sims tells me. "But the only way the community benefits from that better operation is if either they are being sold into a competitive market, or if it's not competitive [as with electricity distributors], there's appropriate regulation in place.

Within months of taking over, the new operator of the port of Newcastle raised its fees 50 to 60 per cent. It then revalued the port it had bought for $1.75 billion to $2.4 billion. It did exceptionally well at our expense, but the government that sold the port did not.

Last year University of Queensland economist Paul Frijters and University of NSW economist Gigi Foster examined the make-up of the BRW 200 Rich List. More than half had made their money from property (where rezoning helps), from mining (where leases are granted) or from investments. They concluded most of Australia's richest got there in industries subject to political favours, hardly any by inventing something new.

It's a mentality that's holding Australia back while enriching those lucky enough to be in those industries. It's why shareholders get upset when I talk about our banks. It's why we need real competition, or regulation. To make them work for us.

In The Age and Sydney Morning Herald