Tuesday, July 31, 2007

Thuesday column: What is it with doctors? The economics of terrorism.

Two questions went through my mind as I looked into the eyes of Dr Mohamed Haneef during his 60 Minutes interview on Sunday night.

One was what damning information the Immigration Minister Kevin Andrews could possibly have on him. It was apparently enough to prevent Mr Andrews from giving him back his visa, but not enough to stand up in court. Or maybe it was too sensitive to reveal at the time, in which case I can’t understand why the Minister plans to reveal it today.

Or maybe Dr Haneef is completely innocent. He certainly looked it on 60 Minutes.

The other question concerns doctors...

Dr Haneef gave his mobile phone card to a cousin suspected of involvement in the Glasgow car bombing, Doctor Sabeel Ahmed.

What is it about doctors, I wondered as he explained that the British wing of his extended family were respected medicos.

Five of the nine people arrested over the Glasgow bombing had the word ‘doctor’ in front of their names. One was a PhD, another was a medical student.

What is it about doctors? They spend their time saving lives and they are usually better educated and better off than the people around them.

And terrorists tend to be uneducated and poor, right?

The US President thinks they are. After the September 11 attacks he declared his determination to “fight against poverty because hope is an answer to terror”. His wife said that “educated children are much more likely to embrace the values that defeat terror.”

After the 2005 London transit bombing Britain’s Tony Blair proclaimed that “where there is extremism, fanaticism or acute and appalling forms of poverty in one continent, the consequences no longer stay fixed in that continent.”

The Archbishop of Canterbury said terrorism flowed from “economic powerlessness”. In this country Tim Costello declared, “we cannot win a war on terrorism unless we wage a war against poverty”

And Kevin Rudd announced that it was “in our own interests to tackle poverty in our own region as part of a wider strategy to deal with the impact of terrorism”.

If seems universally obvious that poverty and poor education breed terrorism. But it’s wrong.

Alan Krueger from Princeton University was at first inclined to believe the conventional wisdom. As an economist specialising in occupational choice it made sense to him. Some people were able to get jobs as doctors or lawyers or economists, others with more limited means would choose crime, or terrorism.

Until he went in search of evidence for the terrorism part of the proposition and found next to none.

He has set out his findings in a book entitled What Makes A Terrorist: Economics and the Roots of Terrorism to be published next month.

He says the myth that poverty breeds terrorism can be traced back to 1933 and a landmark study entitled The Tragedy of Lynching. It linked the number of lynchings each year in the US South to the price of an acre of land and each acre’s yield of cotton. As economic conditions improved, the number of lynchings fell and from this flowed near universally accepted idea the idea that poverty led to frustration and aggression.

But the study was flawed, and this wasn’t discovered until this decade when a group of sociologists reexamined the data using more modern techniques. It turned out that lynching and poverty had been merely moving in the same direction, they hadn’t been connected. And the data stopped in 1929, the year of the great depression. We now know that after that the US economy collapsed, but the number of lynchings continued to fall.

Krueger examines opinion polls in Jordan, Morocco, Pakistan and Turkey and finds that suicide attacks against Americans have more support the more educated is the person answering the question.

He reports the findings of a UN aid worker who interviewed 250 militants in the West Bank and Gaza Strip and concluded that “none of them were uneducated, desperately poor, simple minded or depressed. Many were middle class and, unless they were fugitives, held paying jobs. Two were the sons of millionaires”. Another survey compared suicide bombers with the general Middle East population found them less than half as likely to come from families below the poverty line.

(Northern Island is an apparent exception. There in the late 1960s the members of the Irish Republican Army were disproportionately poor and less educated. Krueger can’t explain this except to suggest that the most educated most unhappy Irish Catholics may have left the country. Or the Irish may have seen themselves as involved in a civil war rather than terrorism.)

What conclusion does Krueger draw from the near overwhelming evidence that terrorists are more, not less, privileged than those around them?

It is that rather than being an occupational choice attractive to poor people in the same way as is crime, terrorism is better understood as a political statement with the same characteristics as voting.

In countries in which voting is voluntary it is usually the better educated and higher income citizens who take the trouble to vote, despite the fact that their time is more valuable.

“Why? Because they care about influencing the outcome and consider themselves sufficiently well informed to want to express their opinions. Terrorists also care about influencing political outcomes,” Krueger says.

He finds that terrorism tends to flourish where civil liberties and political rights are suppressed. “When nonviolent means of protest are curtailed, malcontents appear to be more likely to turn to terrorist tactics”.

If cutting poverty helps fight terrorism at all it is only by raising the likelihood that a country can guarantee civil liberties and political rights. But that isn’t automatic. “There are many examples of countries with low living standards that provide their citizens with civil liberties and political rights, and enough examples of rich countries (like Saudi Arabia) that restrict civil liberties and political rights.”

What Kruger really can’t understand is why the belief that terrorism is triggered by poverty has been so persistent in the West in the face of so much evidence.

He says it may be because that belief allows us to avoid confronting terrorists’ grievances.

Krueger believes that we should fight poverty. But we should do it for its own sake, not in the false belief that we are fighting terrorism.

Then we won’t abandon the poor when we discover that the strategy hasn’t worked. And we won’t continue to be surprised when doctors pack cars with explosives.

Click to Read More...

Monday, July 30, 2007

So, is inflation soaring, or is it zero?

Thousands of retired Canberra public servants were jolted last week by news suggesting that Australia’s underlying rate of inflation had climbed to a generational high.

They’d just heard from Comsuper that for the first time they would be getting no half yearly increase in their CSS and PSS pension payments because inflation was too low.

The letter told them "the Australian Bureau of Statistics has recently announced that there was no upward movement in the Consumer Price Index over the six months from September 2006 to March 2007"...

The Finance Minister has confirmed that the Comsuper decision is correct.

Since 2002 pensions have been adjusted half-yearly instead of annually in a move welcomed by beneficiaries.

Until this year there has never been a negative half-yearly rate of inflation.

But in the six months to March this year the freak combination of lower banana and petrol prices helped push the CPI down by 0.01 per cent.

Before then prices were moving strongly. December’s six monthly review pushed up the pension payments by an impressive 2.5 per cent.

The way that prices have taken off since March suggests that next December’s pension increase will be healthy as well.

But in the six months to March used to calculate the June increase measured prices fell. (This does not mean that the pension payments will fall – they can’t be adjusted down.)

A spokesman for the Minister Nick Minchin said yesterday that it had always been recognised that moving from annual to half-yearly adjustments would make the movements more volatile.

And he said that he could understand why many people might not believe that prices actually fell in the six months to March. It was human nature to notice petrol prices when they rose, but not when they fell and to remember when the price of bananas became ridiculously expensive but not when it returned to earth.

In the three months to March the price of food is said to have fallen by 2.3 per cent, the price of clothing by 0.4 per cent and the price of household contents and services by 0.9 per cent.

Surveys by the Australian Bureau of Statistics had confirmed that the consumer price index moves pretty much in line with a separately calculated index of the prices of goods and services bought by retirees.

It might be of further consolation to recipients of Commonwealth and Public Sector Superannuation pensions to know that if they are entitled to seniors benefits cards they will have just received a timely $500 bonus from the government distributed as part of the Budget.

It’ll be a darker consolation to know that the Reserve Bank is so worried about the strength of inflation down the track that on Wednesday week it is likely to push up interest rates in an attempt to hold it at bay.

The Reserve Bank isn’t expecting a zero rate of inflation again any time soon.

Click to Read More...

Sunday, July 29, 2007

Sunday dollars+sense: What makes a tax evader?

I grew up on the music of Johnny Farnham, Masters Apprentices, Little River Band, and later John Farnham.

Through it all behind the scenes and sometimes in front of the scenes was the bass guitarist and rock industry manager Glenn Wheatley. He mortgaged his house to fund Whispering Jack.

Now that he's in jail after being convicted of dodging $318,092 in tax through a series of fake Swiss loans, I'm wondering whether other people I've admired have acted the same way.

In fact I am wondering whether all of us would, given the opportunity..

It seems that the answer is no. An Australian academic now teaching in the United Arab Emirates has just co-authored an international study of attitudes to tax evasion. Dr Sanjoy Bose finds that Australians are less approving of it than are our cousins in the US and New Zealand. But he finds that our overseas cousins are not particularly impressed with it either. In each country, the women were more opposed to tax evasion than the men, but again even the men weren't particularly keen on it.

Then he tried to work out why the people who did approve of tax evasion thought it was okay. In an Australia-only survey he fired 18 questions at university students along the lines of "is tax evasion ethical if the tax rates are too high?", "is tax evasion ethical if much of the money is wasted", "is tax evasion ethical is everyone else is doing it?" and so on.

He found that the questions didn't much matter. For most Australian students the answer was always "no".

But then he discovered that not all types of students thought the same way. The Melbourne students most likely to approve of tax evasion were those studying business and economics. The students least likely to approve of tax evasion were those studying for religious ministry.

(There was no category for aspiring rock musicians so we can't draw any conclusions about the attitudes that shaped Glenn Wheatley.)

The findings fit in with other research suggesting that economics students are more self-centred and less generous than are other students.

What I want to know is why they are like that. Did studying economics make those students more greedy, or were they always like that and so naturally drawn to the study of money?


Robert W. Mcgee, Barry University - Andreas School of Business, Sanjoy Bose, Zayed University
The Ethics of Tax Evasion: A Survey of Australian Opinion, April 2007

Robert W. Mcgee, Barry University - Andreas School of Business, Sanjoy Bose, Zayed University
The Ethics of Tax Evasion: A Comparative Study of Australian, New Zealand and U.S.A. Opinion, April 2007

Clive Hamilton ,
Paying our dues to society, The Age July 23, 2007

Hat Tip: Andrew Leigh

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Saturday Forum: Why Labor's Housing Summit left me optimistic

Just as Thursday's Labor-organised Housing Affordability Summit appeared to be reaching some sort of consensus, a plain-spoken charity worker rose to make a statement.

“We have been talking today about strategies, and St Vincent de Paul thoroughly agrees,” John Wicks said. “We put out a paper last week with a lot of those points in it.”.

“But the fact is that is there are thousands upon thousands of homeless families right now in crisis. The question is: What are you all going to do about it?”

“It's a bit like talking to a starving man in the street and saying, 'don't worry fella, we're developing a strategy and in one year we will have a complete bread supply strategy, and that will fix your problem in a year's time'”.

“What are we going to do about the crisis now?...

“As I kid I was bombed out three times in London, so I know what it is like to go around without having a roof over your head. In London they set up demountables. But they didn't have a city of a thousand - a ghetto. They had a bomb site and three or four went there, two miles away another bomb site.” “In Australia we've got millions of half acre blocks, all over the place. We've got a very good demountable industry. You can go down to Sydney and buy one for $12,000 to $15,000 second-hand. Why can't we - in the short-term, I am talking about dealing with people now - put some demountables on these? Those people would never own the land, they would pay a rent and it would go to the owner. When they left to go into public housing or affordable housing as priorities, the demountables would be taken away.”

The incident both jarred with and underlined the consensus that had been emerging at the Parliament House Summit. After some early talk about middle-class housing affordability (the sort of concerns that politicians use to win votes and publishers use to sell newspapers) the conference moved on to the much more important problem of people for whom housing is next to unaffordable or unattainable.

One of the first speakers, the ANZ Bank's Saul Eslake made it clear that when it came to middle class affordability, the house had bolted. He said that the late 1980s the problem for middle-income buyers was largely caused by high interest rates. The solution - lower interest rates - was something to which no one could possibly object. This time the problem had been largely caused by high housing prices. The 'solution' - lower housing process - would make the bulk of Australian households worse off.

Prices had jumped because buyers could now afford to borrow more and because of an “ill-advised” government decision in late 1999 to halve the headline rate of capital gains tax. It turned negative gearing from a strategy that only deferred tax to one that permanently cut it. The resulting rush of investors into property pushed prices up to a higher plane.

But despite Kevin Rudd's invitation to the 100-odd guests at the summit to “walk on the wild side”, it was clear that he had no enthusiasm for removing the tax concessions that have contributed to the mess (negative references to them appear to have been airbrushed out of the Labor document prepared ahead of the conference). So attention turned to the sort of things that could be done.

What astonished me as I sat behind Kevin Rudd at the summit was the way in which the developers, welfare workers, financiers and academics who spoke moved toward agreement on what needed to be done.

What impressed me even more was that the Labor leader - most likely Australia's next Prime Minister - stayed for the entire summit, listened intently, asked questions and indicated in his summing up that he had understood and drawn lessons from the consensus that emerged.

At least one million Australians fit the definition of housing stress, and around 100,000 sleep rough every night.

As the relevant Commonwealth Minister Mal Brough confirmed at a press conference more than a thousand kilometres away in Brisbane while the Labor's summit was underway there has been a woeful lack of public investment in public housing. There are now fewer such houses than there were ten years ago.

South Australia's Housing Minister Jay Weatherill lamented that public housing used to be provided almost universally. At one point 15 per cent in the houses in South Australia were publicly owned. Darwin and Canberra were built on public housing. But then government's got frightened about debt, sold many of the houses and introduced extreme targeting. This meant that only the really disadvantaged could get into public housing, it became stigmatized. It became no longer possible to cross-subsidise it by charging market rates to better-off tenants.

Adrian Pisarski from the peak body Shelter said that what was needed was a broader concept he called “social housing” - aimed not only at high-needs people but at people who were merely stretched and some who had no difficulties with repayments.

Significantly he said this should be privately provided in return for an explicit Commonwealth government subsidy. At the moment Commonwealth rent assistance is paid to tenants and finds its way only indirectly to landlords.

Speaker after speaker said that what was needed to reinvent the idea of low-cost housing was “scale” - massive mixed housing developments to be privately built in return for very straightforward subsidies - one subsidy for a 20 per cent reduction in market rent, another for a 30 per cent reduction, and so on.

A 20 per cent reduction in market rent may not sound like much, but to a person on a low income whose rent would otherwise take up most of what they earn it can make a big difference.

Hamish MacDonald of the Becton Property Group is already developing such a project in partnership with the NSW government, Westpac, Spotless Property and St George Community Housing at Bonnyrigg in Sydney. The $700 million development will provide 900 houses and possibly double that number down the track. He is considering similar projects in Melbourne and Canberra.

He said that low income housing was expensive to maintain. It is not always certain that the rent will be paid, and his partner organisations often need to work with the tenants on issues such as employment to get it paid. As well investment bankers are reluctant to lend for such projects believing that “poor people trash houses”.

The rents Becton will get from the developments will only pay for the running costs. It will get its profit from government subsidies. The more straightforward and the more certain those payments are, the easier he will find it approach other financiers.

Australia's superannuation funds are an obvious source of funds. But the final speaker, Garry Weaven of Industry Fund Services brought what the Labor leader Kevin Rudd later described as a “refreshing brutality” to that notion.

Super funds are in the business of making money for their members. He said the industry funds that he assists have made an average of 10 per cent per year for the last 10 years. It is not a record he is about to give up just to help fund the sort of housing that governments have been reluctant to fund.

As a rule rental housing was “not attractive to super funds”. It was complicated to manage, the returns varied and it had no scale.

However, very big projects with guaranteed government subsidies over very long timeframes could well suit the funds.

Super funds need massive scale and so does low-income housing. While the returns from subsidies for low income housing may not be great, if they could be made stable as a result of guaranteed long-term contracts they could be valuable to funds as a low-risk part of their asset mix.

That became the basis for an agreement on some sort of solution to Australia's low income housing crisis and Kevin Rudd seemed genuinely excited by it.

In closing, he promised not only to install Australia's first Commonwealth Minister for Housing as he had previously announced, but to consider naming that person the Minister for Housing Affordability and giving him or her Cabinet rank. He couldn't have known that as he was making that promise, much further north in Brisbane, Australia's present Minister responsible for housing, Mal Brough, was saying the same sort of thing. “Clearly, more of the same won't work. It will not help those in need,” the Minister said.

Mr Brough called for immediate expressions of interest from governments, non-government organisations and major builders and financiers about how the Commonwealth money directed at housing could be used better.

It is a result that may not have been achieved without the Summit. That both the Government and the Opposition are now thinking about new ways to get Australia's most vulnerable citizens into secure housing, and appear to be thinking along the same sort of lines may be this week's lasting legacy.

Click to Read More...

Friday, July 27, 2007

Breaking news...

Steve Bracks has announced his resignation at Victoria's Premier...

"For me it is the right time to step down. I leave with a clear conscience knowing that I could not give any more than I have given."

Kerry Stokes has LOST Channel Seven's long-run court case against Channel Nine and others...

Click to Read More...

Thursday, July 26, 2007

(Affordable) Housing Wars

What's really good is that - despite the Government's obvious cynicism in suddenly becoming a keen supporter of the provision of low-income housing- both sides of politics are now treating affordable housing very seriously.

Today's Labor Summit on Housing Affordability at Parliament House was a magnificent meeting of the minds. I was impressed.

Here's my story for tomorrow's paper:


The 50-year old Commonwealth-State Housing Agreement is dead.

The Families and Community Services Minister Mal Brough yesterday threw open to tender the $1 billion in housing grants the Commonwealth hands to the states and territories each year under the Agreement, inviting the private sector, the not-for-profit sector and major builders to compete for the money if they thought they could use it better.

He said that despite $10 billion in Commonwealth housing grants paid to the states over the last decade there were now fewer public houses in the states and territories than there were ten years ago.

His sentiments were echoed by participants in the Labor Party’s National Housing Affordability Summit underway in Parliament House who described the 50-year old agreement as complex and in need of reform...

The summit discussed new ways of funding affordable housing involving both the private and the public sectors working together to create large scale quality housing developments without the stigma attached to public housing.

Closing the summit the Labor leader Kevin Rudd spoke of the need to streamline the development process saying he had been shocked to discover that one council in Sydney took six months to approve applications and another charged developers an extra $11,000 per new block to fund the provision of library books.

He said that the Commonwealth and the states and local authorities had to work together to synchronise the roll-out of large scale new housing and the associated infrastructure. He would draw up a new agreement with the premiers, chief ministers and the Local Government Association within months of taking office.

He would also appoint Australia’s first Commonwealth Minister for Housing, most probably to be known as the Minister for Housing Affordability and would consider giving that post Cabinet rank. The Minister would be supported by a new National Housing Supply Research Council which would produce an annual state of supply report.

“For too long there has been a problem of declining housing affordability and for too long the debate has been characterised by a blame game,” he said. “It is time we brought that to a stop”.

“The whole purpose of us forming the next government if we are so elected is to do things, not just be there. When it comes to housing affordability it is out intention to make a real difference. It is for us a core part of dealing with the future challenges facing this country. Literally millions of Australians are depending on us.”

The Labor leader listened attentively to every one of the more than 20 speakers at the Summit - among them state ministers, developers, economists and financiers - at times them questions about what they thought he should do if he was in government. He said there would be censorship in what anyone had to say and that he wanted a “walk on the wild side”.

Only one suggestion met with his explicit disapproval. The Managing Director of Meriton Apartments Harry Triguboff suggested that the Reserve Bank impose a two-year moratorium on further interest rate hikes. Mr Rudd said he was “not taken” with the proposal.

The Convenor Australians for Affordable Housing David Imber congratulated Labor for organizing the summit but said afterwards that it was now up to Mr Rudd to deliver concrete proposals before the election.

The Government’s Mal Brough signaled further announcements before the election saying he wanted developers and non-government organisations to present him with proposals for the use of the grants presently allocated to the states by September 28.

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Wednesday, July 25, 2007

It's on: A pre-election interest rate hike!

An unexpected boost in inflation has made a pre-election hike in mortgage rates a near certainty.

The board of Australia’s Reserve Bank will meet to consider the increase in twelve days time on Tuesday August 7, the day that parliament resumes after the winter break.

The rate increase – the fifth since the 2004 election fought and won by the Coalition on a promise of keeping interest rates low - would be announced the next morning at 9.30am...

It would take the Bank’s target cash rate up to 6.50 per cent from 5.25 per cent at the time of the last election, and the standard variable mortgage rate up to 8.30 per cent for borrowers not enjoying a discount, adding a further $60 to monthly repayments on a $400,000 mortgage - $380 more than at the time of the election.

The so-called “core” rate of inflation, which excludes volatile prices jumped from 0.6 per cent to 0.9 per cent in the June quarter, pushing the annual rate to 2.8 per cent, right at the top of the Reserve Bank’s target zone.

The news pushed up the Australian dollar more than half a US cent to 88.60 US, its highest level in 18 years.

A frenzy of trading in bank bill futures pushed up the market’s implied probability of a rate hike on Wednesday week to 80 per cent. The implied probability of a rate hike within the following four weeks is 100 per cent.

Both the Prime Minister and the Treasurer yesterday played down the prospect of an rate hike. Mr Howard said that at 2.8 per cent, Australia’s core rate of inflation remained within the Reserve Bank’s target band of 2 to 3 per cent. “What I am saying to you and what is obvious it that it is still well within that range”, he said.

The Treasurer Peter Costello said that prices were increasing more slowly than at any comparable period in Australian history.

Asked whether he accepted the right and responsibility of the Reserve Bank to increase interest rates in order to keep inflation in check regardless of the imminence of an election, he replied, “You are asking the Pope whether he agrees with Catholicism. I put in place the independence of the Reserve Bank.”

The 0.9 per cent June quarter increase in the Reserve Bank’s preferred core measure of prices is one of the highest since the 1980’s. In the last 12 years it has been topped only once, in June 2001, in the lead up to the GST.

The Commonwealth Bank’s chief economist Michael Blythe said that was surprised him was the breadth of the price increases – extending to items such as furniture and clothing and footwear that the high Australian dollar had been expected to make cheap. Rents were up by 1.6 per cent in the quarter, 5 per cent over the year, the biggest increase in about two decades.

The Macquarie Bank’s Rory Robertson, himself a former Reserve Bank staffer, told clients in a note that the decision facing the Bank was not at all complicated.

“The Australian economy is enjoying once-in-a-lifetime commodity price and terms of trade booms. Unemployment has pushed down to a new three-decade low with the labour market is unusually stretched. Consumer and business confidence are elevated, and city-average home prices are rising at or near double-digit rates in most capitals.”

He said the Governor Glenn Stevens had as good an opportunity as he ever would to kill forever the myth that the Reserve Bank did not hike in an election year.


ANALYSIS

Why is it as good as certain that Reserve Bank will push up interest rates within a fortnight notwithstanding the looming election?

Because it has been minded to do so for months.


Back in March the Bank dropped very broad hints that it would act as soon as it saw a hint of runaway inflation. In June the Governor agreed in answer to a question that Australia’s economic growth rate had become “unsustainable”.

But until now, so far this year Australia’s official inflation figures have remained stubbornly low – failing to provide the smoking gun the Bank needed to make the case for a rate hike unassailable.

Yesterday’s June Quarter inflation figures provide it on a platter. Officially prices (and probably wages, although we won’t know for sure until those figures are out on August 15) are now accelerating as the Bank would expect in a once in a generation economic boom.

There is next to no risk of another hike bringing on a recession, and every risk that if the Bank does not hike, inflation will get away from it.

The Treasurer Peter Costello has successfully insulated the Bank Governor Glenn Stevens from any prospect of political interference. In September last year he placed him on a seven-year contract. Charged with containing inflation until 2013 the new 49-year old Governor knows he is likely to outlast Peter Costello as well as John Howard and perhaps both of their successors.

The hike in interest rates that he is about to inflict will cause pain, and the Labor Party is certain to dwell on it in its exquisitely-timed housing affordability summit to be held this morning.

But the Reserve Bank isn’t charged with avoiding pain. It is charged with maintaining full employment and price stability. Full employment is not at risk. The Bank may even take the view that employment is over-full.

A breakout in inflation is very much a risk, and much of it can be sheeted home to the Government and the way it has handled its once-in-a-generation resource boom bounty. It has delivered tax cuts in 2003, 2004, 2005, 2006 and 2007 and budgeted for more cuts in 2008. Party in order to restrain the spending those cuts would engender the Bank has had to hike rates in 2002, 2003, 2005, 2006 and now almost-certainly 2007.

The Bank might well feel that if the Government had genuinely wanted to avoid interest rate hikes it wouldn’t have annually stoked the fires of consumer spending.

Only one thing has any real prospect of stopping the Bank what doing what it has long felt the need to do when its Board next meets on August 7 – some sort of international economic meltdown, perhaps emanating form a crisis in the US home loan market.

That such a prospect, in the next fortnight, is now considered the most likely obstacle to an August 7 rate hike shows just how much of a sure thing it has become.

Click to Read More...

Today is inflation day: D-day for Australian interest rates

Australian political operatives will take a greater than usual interest in the inflation figures for the months to June due out this morning.

A low result will effectively remove the threat of a pre-election interest rate hike.

A high result will, in the language of the Reserve Bank, make a rate hike a “live issue” when the Bank’s board meets in two week’s time...

The Bank is edgy about what its Governor sees Australia’s unsustainably high rate of economic growth. Asked last month whether Australia’s present rate of growth in non-farm GDP of around 4.5 per cent was sustainable the Governor Glenn Stevens replied “Not forever, no. The economy’s trend capacity to produce output is probably 3 point something”.

His concern is that will eventually push Australia’s underlying rate of inflation up above the Bank’s target of 2.5 per cent.

He said that the lower than expected inflation result reported in March had bought the Bank “more time”.

Market economists expect a relatively high headline inflation rate this quarter fueled by higher petrol prices and more scarce fruit and vegetables as a result of the drought.

But they expect the more important “underlying” inflation rate excluding volatile prices to remain low, increasing by perhaps as little as 0.5 per cent over the quarter and 2.4 per cent over the year.

Such a result is unlikely to tempt the bank to push rates up.

But if it is much higher than that – the Reserve Bank won’t give an indication of how much higher – the Bank has signaled that it is prepared to act.

It would lift its so-called cash rate by 0.25 per cent on Wednesday August 8, the day after the next board meeting, adding an extra $60 a month to repayments on a $400,000 mortgage.

The move would push up the monthly repayment on such a mortgage to almost $3,000 - $320 more than at the time of the last election fought and won by the Prime Minister John Howard on a promise of “keeping interest rates low.”

It would also lend credence to Labor’s claim that under the Coalition housing affordability has hit an all-time low.

On Thursday Labor’s leader Kevin Rudd will host a national housing affordability summit at Parliament House aimed at drawing attention to the problem.
He has pointed to census data suggesting that last year more than half a million households were having difficulty with their mortgage payments, almost double the number at the start of the decade.

Mortgage repayments now account for 9.5 per cent of all household income - a record high, although some of that is due to the greater proportion of households taking out a mortgage. As recently as March 2000 the proportion was 5.5 per cent.

The Reserve Bank has signaled that the high Australian dollar will not stand in the way of it increasing interest rates should it believe that the inflation outlook gives it a reason to do so. Governor Stevens indicated to a gathering of business economists in Sydney last week that he was relaxed about the climbing dollar, now approaching 89 US cents saying "I don't think it's surprising that we have a high effective exchange rate, given what is going on with relative prices of import and export baskets."

His comments were taken as a signal that the Bank would not hold interest rates down in order to prevent the dollar from climbing higher.

Click to Read More...

Tuesday, July 24, 2007

Tuesday Column: Why Thursday's housing summit will fail

"Labor’s housing summit on Thursday will try to work out how to do the apparently impossible – make housing more affordable without making it much cheaper."

You are on a good income, you live in the national capital, and yet you can barely make ends meet.

Welcome to Canberra’s fastest-growing club.

David Tennant has helped run the Care financial counseling service in Aukna Street Civic for more than a decade.

He says five years ago his only customers were low to middle income earners. None earned more than $45,000...

These days he says 1 in 8 of his clients earn at least that much. In the first half of this year he received calls from more than 100 financially stressed Canberra residents on incomes higher than $45,000 – some of them a good deal higher.

Financial stress in order to afford housing is no longer exclusively a low-income problem, and no longer a rest-of-Australia problem.

In a report released yesterday the St Vincent de Paul Society outlined the case of a ACT mother and father with three children who have been evicted by a landlord who wanted to redevelop their home and forced into crisis accommodation. They can’t afford the rents now being charged; they are living on food stamps and with only one car between them are finding it difficult to travel the long distances from their crisis home to school and work. Their relationship is under stress and their oldest son is developing behavioural problems.

This Thursday in Parliament House the Labor leader Kevin Rudd will host a National Housing Affordability Summit to try to get to the root of the problem and what can be done to fix it.

It will fail on both counts.

Labor doesn’t really want to know the root of the problem, and nearly every one of the solutions proposed to fix it either won’t work or is politically unpalatable.

Labor has devoted an entire section of its pre-summit paper New Directions for Affordable Housing to what it says are the reasons for declining affordability. It lists rising interest rates, demand outstripping supply, land release processes and the cost of building.

Nowhere in the Labor document is what the Macquarie Bank’s housing specialist Rory Robertson rightly describes as “the elephant in the living room” – the trigger for the post-1999 surge in housing prices that neither side of politics will acknowledge.

In that year the government halved the headline rate of capital gains tax. From then on any profit earned as a result of selling an investment such as a house at a was taxed at only half the rate as money made from employment, interest or dividends.

Robertson bought an investment house himself. As he said a few years later: “Since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.”

The Tax Office says that in that financial year the number of extra Australians piling into the housing market as investors topped 88,000. The Reserve Bank described the surge of real estate investment by Australians who already owned homes as “unprecedented, both in terms of previous experience in Australia and experience overseas”.

Although the new superannuation tax concessions that came in to force this month have since opened an even more generous tax dodge investors are still piling into housing keeping prices high.

As Robertson puts it, “middle-aged investors still are out there buying well-located family homes that otherwise would have been home to first home buyers. Around the country after each Saturday afternoon’s round of auctions, younger would-be first home buying couples still are trudging back to their rented accommodation as disappointed underbidders.”

Australian house prices have doubled since 1999. Sydney has become the world’s sixth most expensive city. Refugees fleeing those prices have pushed up prices in every other city.

The businessman John Ralph, who recommended the tax cut to the Treasurer back in 1999 (in line with some very specific terms of reference) didn’t see it coming.

His report predicted instead a boom in investment in “innovative, high-growth companies.”

Instead Australians bid up the prices of the things they understood.

(And for which they could get a “depreciation allowance”. I have never understood why an asset such as a home unit designed to appreciate in value should get a concession for depreciation. In the lead up this week’s summit the Housing Industry Association has even called for a doubling in the depreciation allowance in a manifesto it has shamelessly entitled a Fairer and Affordable Housing Plan.)

Only one politician went on the record at the time predicting what would happen. Labor’s Mark Latham, then a backbencher, described the proposed capital gains tax cut as “the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value-adding in the information technology sector.”

Latham was prescient. As Labor leader he asked Access Economics to investigate the economics of reinstating the full rate of capital gains tax. He panicked and abandoned the idea when news of it became public.

Under Kevin Rudd, Labor won’t even acknowledge the trigger for the boom that has made houses unaffordable for most of the Australians who don’t already own them. Removing the capital gains tax concession (even removing only it for new investors) would depress housing prices.

The sad truth is that none of our political leaders want that, although they rarely say so. The Coalition’s Ross Cameron, then the member of Parramatta, was a candid exception when he explained in 2003 that rising house prices “makes for happy voters.”

“It does create this problem of how you get in for the younger people but, on balance, it's a positive thing” he said at the time.

More than two-thirds of Australian households already own or are buying the place in which they live. They have a clear interest in prices rising. Census figures suggest that they are digging into the increased equity higher prices have given them in order to continue to fund their lifestyles, in some cases remortgaging previously unmortgaged properties. They would be devastated if prices seriously fell.

Labor’s housing summit on Thursday will try to work out how to do the apparently impossible – make housing more affordable without making it much cheaper.

Economists have a name for the sort of process that got us into this mess: “hysteresis”, a one-way change that once made is impossible to completely undo – as impossible as unscrambling a scrambled egg.

Click to Read More...

Thursday, July 19, 2007

Why so much economic and financial 'news' is crap


I shouldn't speak badly about the practices of my former employer.

So I'll let Andrew Charlton do it for me.

Below the fold is a telling extract from his just-released book Ozonomics.


Here's a highlight:


I have to admit that while I understand the meaning of
these market movements, I can't explain their significance,
because ... well, they don't seem to be very significant at all.

I can't imagine many people watching the news from their
living rooms would be thrilled by minor movements in
the price of gold. Maybe a few traders working in financial
markets are excited by this stuff, but they have their own
sources and don't rely on the six-o'clock news for their
pricing information. At least, I hope they don't.



Here's the full extract, in wonderful prose:


"On the television screen in the corner of our living room,
a doe-eyed presenter is reading the economics and finance
news, animatedly reporting that the price of gold has risen
two cents today.

'Huh?' Jo sniffs.

The price of gold is followed by charts reporting to day's
stock exchange figures, and an economic pundit is being
interviewed to explain the causes and consequences of these
numbers.

Most days this information passes unconsciously over Jo's
head - perhaps her eyes and ears disengage to allow her mind
to shift focus onto more interesting thoughts. But today she
wants answers, and she presses me for them.

'Does this mean anything to you?'

'Well, yes and no: I reply feebly.

I have to admit that while I understand the meaning of
these market movements, I can't explain their significance,
because ... well, they don't seem to be very significant at all.

I can't imagine many people watching the news from their
living rooms would be thrilled by minor movements in
the price of gold. Maybe a few traders working in financial
markets are excited by this stuff, but they have their own
sources and don't rely on the six-o'clock news for their
pricing information. At least, I hope they don't.

Most normal, intelligent people probably approach these
issues in the same way my housemate does. They are exposed
to a huge amount of economic information, but it doesn't
sink in. The reason, as far as I can tell, is that very little of it
makes sense.

Today, I checked the 'breaking news' section of the website of a
top-selling daily newspaper, looking for exciting
and meaningful reporting of economic issues. Today's
finance headline reads 'Dollar down on jobs data'. The
article gravely reports the apparently troubling news that the
Australian dollar has fallen against the US dollar. Somewhere
on Wall Street in downtown New York, some all-powerful
investment bankers have decided to downgrade our national
worth - and thereby insult us in the great beauty contest that
is the international currency market.

Today's article includes a quote from one of these
ubiquitous financial-sector pundits. He confidently explains
that the dollar's drop is due to 'soft employment numbers'
(by which he means that more people were looking for work
this month than last month) and 'ambiguity in commodity
prices' (by which he means that he doesn't know the price
of wheat and metal and he's worried that nobody else does
either). The pundit gravely notes, 'These are important
numbers, there's no question about that.'

By how much has the dollar fallen today, you might ask?
Well, before anyone folds up the deckchairs and declares a
banana republic, closer inspection of the article reveals that
yesterday the dollar bought 73.39 US cents, and to day's
'fall' brings it down to 73.31 US cents. This is not the kind
of plunge that should cause you to cancel your New York
shopping vacation - it is less than one-tenth of one cent.

Given that the Australian dollar oscillates frequently in
a thirty-cent range,3 one-tenth of one cent is not a fall of
very much importance at all. In fact, it's almost completely
insignificant, and is certainly completely unworthy of the
column space it occupies.

Even more confusingly, that piece of 'breaking news' was
posted at midday, but when I scroll down the page I find
another alarming headline posted at 7 am that morning,
with the title 'Dollar up as $US retreats'. It turns out that
before the Aussie dollar went pear-shaped in the afternoon,
the newspaper was reporting on its triumphant rise against
the US currency that morning. The earlier article quotes yet
another financial pundit, who perceptively explains that the
reason for the rise was a 'stronger fixed-income market in
the US'. Again, before anyone gets too excited, the size of the
change was almost the same -less than one-tenth of one
cent - and, as I had already discovered, the good news had
been reversed by midday.

Scrolling back through the breaking-news archive of the
last few days reveals that the dollar has been on a veritable
rollercoaster ride - some news is good and some, is bad,
but all these urgent stories, on closer inspection, are utterly
insignificant. Two days previously the pessimists had been
vindicated by the headline 'Dollar closes weaker', and the day
before that the champagne corks had popped to the tune of
'Dollar rises off lows'. It's enough to make concerned readers
chew their fingers to the bone and tear out their hair.

Well, it would be, if any of it mattered - and if anyone
cared. But fortunately, non-economists take no notice
because they don't know enough about financial markets to
make any sense of this information, and economists know
enough to realise there is no sense in it. This week's financial
headlines are a waste of everyone's time. They look like news
and they sound like news, but they're not news.

The day-to-day movements of stock prices and currencies
don't tell us much about historical or future trends, and are
fairly likely to be reversed tomorrow and never remembered
again. These financial news segments tend to be so boring
that networks usually scramble to follow them with visually
emotive stories about fluffy cats stuck up trees - presumably
to wake their audiences up. It's the kind of news that
makes people feel informed without really conveying much
information at all.

Economic information like this isn't informative.
It floats around us every day like space-junk, orbiting
in perpetual, directionless motion: up and down, back
and forth. It has a mesmerising rhythm - it's the
financial equivalent of elevator music.


Australia has some great economic journalists, but
their insights are easy to miss among the frenzied crossfire
of daily information about the economy. It's hard to sort the
news from the noise, to uncover which headlines are genuinely
important to our daily lives and which are merely the flotsam
and jetsam that media outlets raft together into recycled news
and churn out to fill their columns and segments."



Click to Read More...

Talking to Telstra.

Nicholas Gruen has been trying to talk to Telstra.

An extract from its series of emailed responses:


"I can assure you that all of our plans are fixed and are non-negotiable.

I will most certainly forward your concern on to our products and services team to ensure that they are aware of your concern. We most definitely value your custom....

Click to Read More...

Sunday, July 15, 2007

Sunday dollars+sense: Short working hours kill men's marriages, not long ones.

A couple of weeks back I mentioned that we are not working the long hours that we used to. Whereas in the late 1990s around one in five of us worked more than 50 hours a week, it’s now down to one in six.

Whereas in 2002, 8 per cent of all jobs were held by people working more than 60 hours a week now just 0.3 per cent of the new jobs are like that.

So our family lives are improving, right?

That’s what you’d think...

Everyone knows that long working hours kill family life and kill families.

That’s what Professor Mark Wooden expected to find when he tracked what had happened to people who worked extremely long hours as part of the household income and labour dynamics project at the Melbourne Institute.

Entitled Long Working Hours And Its Consequences For Marriage, his study found that there weren’t any, or at least none that he could find. The average annual divorce rate among men who worked more than 50 hours a week was 1.7 per cent, the same as for men who worked standard hours. Moreover, they and their partners seemed to be about as satisfied with their marriages.

What he did find was unexpected, and much more significant.

The men who worked part-time (less than 35 hours a week) were far more likely to get divorced. These part-time workers had an average annual divorce rate of 2.7 per cent, almost double that of the men who worked standard or long hours.

For men and for their relationships, there appears to be something far worse than working excessive hours – and it is not working enough hours.

For women it is different. For married women, long hours rather than short ones seem to lead to marriage breakdowns – interestingly by about as much as do short ones for men, although Professor Wooden cautions that there weren’t enough women in his survey working long hours to be sure.

Professor Wooden says it looks as if for men full-time work is an important part of their identity. They need to have somewhere to go in the day in order to feel okay. For women, it is an optional extra.

Many of them have too much to do around the house.


Mark Wooden, Long Working Hours And Its Consequences For Marriage, Melbourne Institute, June 2007

Click to Read More...

Friday, July 06, 2007

Sunday dollars+sense: Why the cashless tunnel costs

If you are in Sydney these school holidays, watch out for the harbour tunnel.

It’ll cost you money. But unless you have an e-tag or similar device you won’t be able to pay it.

From today the tunnel will be cashless, as are a number of other toll roads in Sydney and Melbourne already.

It’s inconvenient if you don’t have a tag, and it deprives you of your privacy. Although technically it would be easy to sell pre-paid tags that didn’t add your name to a database every time you used the road, it hasn’t been done.

And it’ll cost you more. Hear me out...

I don’t mean that the price of using the harbour tunnel will go up as soon as it becomes cashless. I do mean that it is more likely to go up some time after it becomes cashless.

An economist named Amy Finkelstein from the Massachusetts Institute of Technology has just examined 50 years of toll data from more than 100 toll roads in 22 different US states.

She finds that after a decade or so of using tags a toll road will charge around 30 per cent more than will an otherwise similar road that doesn’t use them.

Her theory is that we don’t pay as much attention to what we are being charged when we don’t pay cash, or at least we don’t pay as much attention at the time we use the road, so the price bugs us less.

Being an economist she has a fancy name for the concept – “salience”.

She also finds that are more willing to make trips when we don’t’ have to find the cash, even where the tolls are higher. As she puts it – we experience a decline in the short-run price elasticity of driving.

It’s a concept other suppliers already know about.

My mobile phone company sends me bills electronically, which I never read, and takes the money straight out of my bank. Amy Finkelstein has got me thinking that they’re doing it as much for themselves as for me.

And then there’s the government itself. I pay PAYE tax. I never notice it, which is how the government wants it. (Except when it comes to this month’s tax cut. I won’t notice that either.)

And there’s the GST. It’s illegal to display a sign indicating the before and after tax price.

I am getting an idea as to why.


HT: Joshua Gans

Amy Finkelstein, E-ZTax: Tax Salience and Tax Rates. MIT and NBER. February 2007

Click to Read More...

Taking it easy.


I won't be writing much for the next two weeks.

You get the idea.

Back to full speed on July 23.

Click to Read More...

Thursday, July 05, 2007

Australia's focus-grouped pay rise.

The head of the Fair Pay Commission Ian Harper says he had to strike a balance. On one hand he wanted the wage floor low enough to make it worth employers’ while to take on more low-paid workers. On the other he wanted it high enough to provide a safety-net and keep work competitive with benefits.

To help him, he did something his predecessors setting wages in the Australian Industrial Relations Commission never would have done. He turned to focus groups - 20 of them.

There was a group of young low-paid parents in Whyalla, a low-paid older childless group in Brisbane, a group on unemployed benefits in Burnie, and so on.

What he says they said is all though yesterday’s decision...

Are the jobs created by keeping the wage floor low worth having? Yes, because for many in the groups “low-paid jobs were seen as a stepping-stone. Being able to get your foot in the door and having something on your resume and recent work experience was a motivator.”

Does the after-tax wage matter when it comes to a decision as to whether or not to get off benefits? You bet. “For many people the interaction with the tax/transfer system influences their decision to participate.”

It’s not quite the same as when arguments were presented in open court and each side had the opportunity to cross-examine each other. We have to take the Commission’s word about what happened in the focus groups and we are left in the dark as to the questions that they answered.

The headline result is exactly as predicted – focus groups in Tamworth, Bendigo, Geraldton Cairns and elsewhere notwithstanding.

$10.26 a week on the lowest wage after 10 months works out at 2.4 per cent over 12 months, which happens to be exactly the rate of inflation. Anything less than inflation, and the wage floor would not have kept pace with indexed benefits.

Higher wages will clim by only $5.30 per week, but after tax they will probably keep pace with benefits courtesy of the July tax cuts.

The Commission did do something unexpected – it exempted severely drought affected farmers from the need to pay some of the increases for 12 months or until they are no longer severely affected. It’s as first and opens the door to any industry doing it tough to ask for special treatment.

The Commission has directed that the wage increase be paid on October 1, which happens to be just before the election.

But it would be wrong to expect it to sway votes. The extra 2.4 per cent for Australia's least-advantaged employees looks slight alongside the 6.7 per cent awarded to their representatives. Members of Parliament will get an extra $9,000 from their Remuneration Tribunal this year. The Fair Pay Commission is givng their low-paid constituents $533.

Click to Read More...

Tuesday, July 03, 2007

Treasury documents by the houseload!

An unprecedented release of previously secret documents suggests that the Treasury believes that households face a higher mortgage repayment burden than they did when interest rates peaked under the Labor government in the late 1980’s.

The Treasury documents released to the Seven Network in response to a Freedom of Information request also indicate that the Treasury expects the mortgage burden to worsen.

But the Treasury says there are some benefits from our increased indebtedness – higher home ownership, and “bigger and better houses”.

It is also skeptical about the measures suggested to improve housing affordability.

The Seven Network had asked for information relating to housing affordability, mortgage defaults and trends in repayments...

A previous Freedom of Information request by The Australian newspaper for treasury information about bracket creep and wealthy recipients of the First Home Owners’ Scheme was refused by the Treasury and the Treasurer who issued what is known as a conclusive certificate, declaring that their release would not be in the public interest.

The Australian fought that case all the way to the High Court and lost.

The 180 pages of documents released to the Seven Network and put up on its website last night appear to have been released by the Treasury itself without reference to its Minister.

The Treasury identified 81 documents as relevant to the Seven Network request and released all but 17 of them, in some cases with deletions.

The documents indicate that:

. interest payments as a proportion of household disposable income are “some 2 percentage points higher than the previous peak” under the Labor government in 1989

. one reason is that more households now have mortgages, 35 per cent in 2003-04 versus 27 per cent in 1993-94

. many of these are investment mortgages

. and many are mortgages “to buy bigger and better houses”

. repayments per new mortgage still take up a lower share of disposable income than in the previous peak

. also the net worth of the household sector is much higher – around 6.5 times annual household disposable income, up from 4.5 times annual income in the mid 1990’s

. the aggregate debt servicing burden for households will increase in the short to medium term because new mortgagees typically take on more debt than existing ones

.many of measures suggested to improve housing affordability will have little effect

. in particular claims that releasing more land would boost affordability “probably overstate” the effect because the stock of the sought- after land is fixed

. the effect of abolishing stamp duty would be partly offset by a resulting increase in house prices

. and abolishing stamp duty would hurt some first home buyers, given that in some states they receive stamp duty concessions

. increasing rent assistance would “only further increase rents”

. removing negative gearing and depreciation allowances would supress rental investment, pushing up rents

. and there is no need to review the concessional tax treatment of capital gains made by landlords because there is “no conclusive evidence that the tax system has a significant effect on house prices”

The Treasurer Peter Costello last night made no comment on the release of the documents by the Treasury.

The Shadow Treasurer Wayne Swan released a statement highlighting the Treasury’s observation that the mortgage repayment burden is at an all time high but not its conclusion that repayments per new mortgage remain below their previous peak.

Click to Read More...

There is no longer a law to prevent it, so Fairfax gets back into radio.

In Sydney it'll be the Sydney Morning Herald and 2UE, in Melbourne it'll be The Age and 3AW. Not bad real estate. Here's how I explained the thinking in the Canberra Times:.

Australia’s quality capital city broadsheets - the Age, the Sydney Morning Herald and the Canberra Times - abandoned radio some 20 years ago.

The Fairfax newspaper group was forced to sell their iconic radio sisters 3AW, 2GB and 2CA in order to keep the company afloat.

An ill-thought-out takeover bid by the 27-year old Harvard-educated family heir Warwick Fairfax had pushed it to the brink of insolvency.

Along the way it also ditched its TV stations and the Canberra Times itself.

Until this year media laws introduced by the Hawke-Keating Labor government in the 1980’s prevented it from buying radio or TV stations back...

Keating famously declared that media proprietors could “become princes of print or princes of television, they cannot be both.”

Fairfax is the first media company to attempt to own both an electronic media outlet and a newspaper in a city since Helen Coonan and John Howard made it legal again this April.

It needs to because the “rivers of gold” that it was long believed would sustain the Age and the Herald are drying up.

The internet has turned the company’s near total reliance on classified advertising for jobs, cars and real estate each Saturday from an asset into a liability.

In order to continue to publish its quality capital city newspapers it needs to reduce its reliance on revenue from them.

Its aim has been to get their contribution to its revenue down below 50 per cent.

Figures prepared by a stockbroker yesterday suggest that its move back into radio, buying back premier talk stations in Sydney and Melbourne (but not this time in Canberra) will achieve that.

Along with its earlier merger with Rural Press, owner of the Canberra Times, it may have reduced the importance of its revenue from the Age, Sydney Morning Herald, Sun Herald and Financial review from 64 per cent to 38 per cent.

Those papers are more likely to survive.

Click to Read More...

Tuesday Column: What matters about WorkChoices is not unique to WorkChoices

Neither side of politics is telling the truth about industrial relations.

Here's the truth as I see it.

Were it not for the changes to Australia’s industrial relations system we would be enjoying nothing like the extraordinarily good economic times we are living through.

What happened in the past was that whenever workers became scarce in a particular industry or region (perhaps as a result of a boom in the mining industry) those employers offered them higher wages and the centralised wage-fixing system pushed those wage increases through to all the workers doing that job in every part of the nation.

The result was inflation, which brought on interest rate rises and killed the boom.

The current treasurer Peter Costello describes what happened this way:

Every time Australia had an improvement in its terms of trade from the Korean wool boom on - you had wage settlements in profitable areas of the economy being transmitted across the general economy, you had general inflationary outbreaks, and you had the inevitable response”.

If we still had centralised wage fixation, if trades were getting big wage settlements in the mining industry and then transmitting them across the general economy you would be having a general wages and inflation breakout by now. If a fitter working in the mine at Hammersley who can justify a pay increase because the mine is so expensive had a variation to the Metalworker’s Award which went back into Moorabbin and went back in to Mooloolaba and went back into every small metal shop – you would have general wages breakout, you would have inflation.”

Peter Costello gives the impression WorkChoices killed centralised wage-setting early last year. But it didn’t...

Centralised wage-setting was strangled more than a decade earlier when the Labor Prime Minister Paul Keating and his Industrial Relations Minister Laurie Brereton rammed through a new system of enterprise-by-enterprise bargaining.

It didn’t make him popular with the union movement or with the Industrial Relations Commission. As he said this year:

I was the guy who had to get the ACTU in a headlock and pull its teeth out with a pair of pliers. It was like administering, pulling a set of rotten teeth out. Comparative wage justice couldn't last”.

In introducing the enterprise bargaining legislation Brereton proclaimed a “break with the past”, putting “the onus on the industrial parties to take responsibility for their own industrial relations.”

From then on, to use Treasurer Costello’s example, if the fitters in the mine at Hammersley wanted a pay rise they could try to get it from their bosses. They couldn’t pass it on to fitters in Moorabbin and Mooloolaba.

It is that switch away from Australia-wide wage fixing, a switch far more radical than the move to Workplace Agreements under WorkChoices, that has to be protected at all costs if our low-inflation prosperity is to continue.

If Labor removed AWA’s, the balance of bargaining power within workplaces would change. It will move back towards workers and their representatives and away from their employers. (Right now an individual worker often faces a company’s entire human resources department). But wage setting would continue to take place at the enterprise level.

The big advance industrial relations, the one rightly identified by our current Treasurer as essential to our present prosperity, would stay.

But what if Labor also had a semi-secret plan to wind back enterprise bargaining? The government certainly isn’t talking about one, perhaps because it does not want to emphasise how really important the Labor reforms of the early 1990’s were.

Professor Mark Wooden fears he sees such a plan. The acting director of the Melbourne Institute, and one of Australia’s leading experts in the dynamics of labour markets, he isn’t too worried by Labor’s promise to abolish AWA’s.

But he has told me he is extremely concerned by one little-understood clause in Labor’s new industrial relations policy.

Headed “Labor’s fairer system” the clause confirms that Labor’s new umpire Fair Work Australia would ensure that the process of enterprise bargaining and the resulting enterprise agreements were fair.

But then it adds: “Fair Work Australia may also facilitate multi employer collective bargaining for low paid employees or employees who have not historically had access to the benefits of collective bargaining.”

“Multi-employer collective bargaining” is a new and unexplained term in Australia’s industrial language. On its face it opens the door for a return to centralised bargaining away from the enterprise, undoing Australia’s most important industrial relations reform.

The Labor document also says that “where more than one employer and their employees or unions with coverage in the workplaces voluntarily agree to collectively bargain together for a single agreement they will be free to do so”.

The use of the word “single agreement” sounds alarm bells to the likes of Keating and Wooden. As a clearly concerned Keating put it in his Lateline interview last month when talking about Labor’s industrial spokesman Julia Gillard: “She doesn't quite understand the difference between the centralised system I inherited, the old rigid system of compulsory arbitration and comparative wage justice, the leapfrogging, and the enterprise bargaining system of 1993.”

If union leaders such as the secretly-taped John Robertson make good their pledge to “pull Kevin Rudd on once he's prime minister” the big danger would be that they pulled on a move back to Australia’s pre-1993 system of wage fixing. Julia Gillard’s policy document appears to give them room.

Much what passes for political debate about industrial relations policy is of little consequence economically.

Both sides support the idea of an umpire setting minimum wages. Labor would call it Fair Work Australia; the Coalition calls it the Fair Pay Commission. It hands down a decision this week.

John Howard claimed unwisely that WorkChoices would “unleash a new burst of productivity growth”. It hasn’t, but then serious economists didn’t think it would.

Mark Wooden said at the time: “There is not a lot of evidence that individual contracts produce productivity. The biggest gains for productivity still revolve around a system which is collective based, okay? Enterprise agreements, with or without unions.”

Employment has grown (although not by as much as in the financial year before WorkChoices) and our national income has soared. But that’s to be expected given the worldwide surge in prices for the things Australia sells. Our terms of trade have soared by more than any other country’s since 2001, including the oil-rich ones.

More of that income is going to profits and a lower proportion to wages than ever before, and that may well be due to WorkChoices. But economists aren’t too interested in such things. They’re about dividing the cake up rather than baking it.

Click to Read More...

Sunday, July 01, 2007

Sunday dollars+sense: The more men are paid, the fewer hours they work

The London Times has just carried a report of a meeting of the New York branch of Workaholics Anonymous. It says four people turned up. Two were late. It says there used to be another branch, but it closed. Its members couldn’t find the time to attend meetings.

A lot of the time it feels as if we are like that – too busy working to worry about whether we are too busy working.

That’s why you might be surprised to discover that in the midst of all the hype about overwork, Australians are winding back.

Professor Mark Wooden from the Melbourne Institute outlined what’s been happening at a seminar in Canberra during the week...


We began ramping up our hours of work from 1983. We didn’t ease off until the mid-1990’s. In that time the proportion of us putting in more than 50 hours a week soared from 13 per cent to 18 per cent. The proportion remained broadly steady for a few years and then began to fall from the year 2000. It’s now down to 16 per cent.

So why only in this decade have we begun to see sense? Mark Wooden believes that we’ve seen it all along.

His theory goes against what a lot of us take to be economic wisdom. But here it is anyway.

Australians never much liked working long hours. (Two-thirds of the women working more than 50 hours a week want to work less. More than half the men do). But throughout the 1980’s and early 1990’s they felt economically pressured to. After 1983 the Hawke-Keating government put into place the Accord aimed at cutting real wages. Australians felt squeezed.

In the 1990’s the wage-setting system changed to enterprise bargaining and real wages began to climb again.

Wooden believes that as soon as it no longer became economically essential to work excessive hours Australians began winding back.

What’s so revolutionary about his thinking? It is normally believed that the more someone is paid the harder they will work.

Wooden believes that it is the reverse. An increase in our pay encourages us to work less.

It turns the rhetoric of the tax cut lobby on its head. Tax cuts might not incentivise us to put in more hours as they previously argued.

They might instead give us the freedom the take it easy.

Except perhaps for women who have or are likely to have children.

As I explained a few weeks back pay matters for them. If it is not high enough, it is not worth their while to get into work at all.

Click to Read More...

If you can have "unemployment", can you have "overployment"?


There are now more job vacancies in the ACT than there are people looking for work.


The latest estimate from the Bureau of Statistics suggests that in May 7,000 jobs were vacant in the ACT, but only 5,606 people unemployed. It makes the ACT the tightest labor market in Australia.

Nationwide there was 1 vacancy for every 3 job seekers, the tightest jobs market since the survey began three decades ago...

Western Australia had the next tightest jobs market with 35,485 job seekers chasing 27,000 jobs.

The extreme tightness of the ACT jobs market revealed in yesterday’s figures might explain why for the last year employment in the ACT has been growing at half the national rate. Many of the right workers to fill the jobs are be unavailable.

In the last year the number of Australians employed nationwide soared by 307,000. Employment in the ACT climbed by just 3.000.

Other figures released by the Bureau yesterday suggest that employment amongst aboriginals is increasing. 50.4 per cent of adult Aboriginal and Torres Strait Islanders had jobs in 2006, up from 47.6 per cent in 2005.

By contrast across the nation as a whole 61 per cent of adults had jobs.

Employment of indigenous Australians was better in the cities than in remote areas, but still well below well below the Australian average.

The indigenous employment rate reported by the Bureau was 14.3 per cent in 2006. However the Bureau cautions that the figure may have little meaning, as in remote parts of Australia there is little work and so little incentive to look for work and identify as unemployed.

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