Monday, April 30, 2007

Tuesday column: Labor's other idea. Let's lend money to millionaires so they can increase the value of their houses.

Labor’s plan to have one of the doyens of Australian public sector economics perform a Stern Commission style inquiry into the effects of climate change on Australia is inspired. Its promise to lend us money in order to make our houses environmentally friendly is not.

I am sure there are good intentions behind the loans scheme unveiled by Kevin Rudd on Sunday, but the lack of attention to detail in preparing it is disturbing.

(And part of a pattern. Remember Labor’s broadband announcement that touted up to $30 billion of economic benefits? The $30 billion figure derived from an obscure dated lobbying document that the authors of the policy hadn’t read.)

First there’s the question of who the $10,000 loans for environmental purposes are aimed at. Kevin Rudd says they will go to “working families struggling hard to make ends meet”. He defines them as households with a combined annual income of up to $250,000. Yes, $250,000. How many families do you know earning that much? Are they struggling?

The Labor leader seems to think they are. Perhaps blinded by the Rudd family’s particularly high household income his first instinct on Sunday was to defend the figure.

“When you look at the income profile of families in western Sydney, when you’ve got one partner or another working, then you often have incomes which are getting close to $200,000,” he said.

When told that in all parts of Australia $250,000 was a considered serious money Rudd dug himself in deeper replying that “In parts of Sydney I’m advised, it’s not necessarily the case. It depends where you live"...

His co-author of the environment policy actually comes from Sydney but is also out of touch. Asked in February whether he was a millionaire, Labor’s Peter Garrett replied: “Well, anybody who owns a house in Sydney or around Sydney probably qualifies for that.”

Not so. Sydney’s median house price is half of what Garrett thinks it is, and about half of those “owners” haven’t paid off their loans and so aren’t even half millionaires.

As for Kevin Rudd’s idea of what constitutes “struggling”, work by Dr Andrew Leigh of the ANU suggests that the typical Australian adult earns just $27,000 a year. The figure looks low because it takes into account the number of Australians who aren’t working at all or are in part-time jobs. Disregarding those people (which there is no obvious reason to do) the typical annual Australian income looks higher at $56,000 – still a lot less than Kevin Rudd imagines. Only some 4 per cent of Australian households earn more than $250,000.

Labor says it will cap the number of cheap loans for environmentally useful home renovations at 200,000. When that number is reached the program will stop and be reassessed. Until then it looks to be first-come first-served - perhaps a stampede. And who will get to the money first? The Labor leader says he assumes it will be “those families who are experiencing difficulties right now in making ends meet”.

I’ll make a more realistic forecast. It’ll be those well-resourced families with financial advisors who recognise the value of and are able to quickly take advantage of a $10,000 loan with a zero real rate of interest. As Kevin Rudd says, it will “increase the value of their homes”.

Another detail of the scheme that I find disturbing is the use to which the low-interest loans can be put. Among them is rainwater tanks. The Labor Party must know that even at a zero rate of interest tanks make no financial sense for most households. A report prepared for the National Water Commission last month found that in every city examined the cost per kilolitre of water from household tanks was “greater than the price currently charged”. In its words: “the typical property owner who installs a tank will, in most cases, face a net financial loss over time”. And that’s with free money.

Well-advised families will stay away from tanks and use Labor’s money for something worthwhile such as solar hot water heating which has an excellent pay-off. Labor will offer such advice as part of its policy. But to the extent that including rainwater tanks in Labor’s scheme does persuade struggling families that they are a worthwhile it will do them no favours.

And also disturbing is the part of the sales pitch for Labor’s loans program that says they will “benefit the small business sector – especially tradespeople”. Hasn’t Kevin Rudd been listening to the Secretary to the Treasury Ken Henry? He has. He quoted from him extensively and with approval in his inaugural Press Club address as Labor leader last month.

But he must have missed Ken Henry’s central point.

Henry told Treasury officials in that celebrated speech leaked last month that in an economy operating at near to full capacity as ours is now, schemes designed to benefit one particular sectors of the economy will usually only do so by harming another.

Nowhere is this more apparent right now than in the market Rudd is talking about - tradespeople. We don’t have enough of them. Spending $300,000 of government money encouraging them to install rainwater tanks, solar panels and so forth is merely going to take them away from other jobs.

There’s the germ of a good idea in Labor’s plan. The loans for environmentally worthwhile household improvements would have a zero real interest rate and be “income-contingent”, as are loans made under the Higher Education Contribution Scheme. Repayments would be limited to 2 per cent of income. As with HECS repayments, they could not become onerous.

Income-contingent loans are an Australian idea (in fact a Canberra idea) sweeping the world. They are the brainchild of Professor Bruce Chapman, once with the Keating and Hawke governments, and now with the Crawford School of Economics and Government at the ANU.

Last month in a paper co-authored with an economist from the Treasury he developed a HECS-style scheme that would provide the same opportunities to TAFE students. They would pay their fees through the tax system if and when they were able.

In a book just released by Routledge, Chapman and a galaxy of co-authors have proposed extending the idea – among other things using the tax system to collect income-contingent repayments from farmers in return for drought support and payments from fine defaulters who would otherwise go to jail.

Chapman’s book reads like a guidebook for an incoming Labor administration searching for exciting ideas.

So long as it thinks through the details.

Inspired. Labor hires Garnaut to conduct Australia's Stern review.

Here's the press release:



Federal Labor and the States and Territories have today commissioned the Garnaut Climate Change Review to examine the costs of inaction and impact of climate change on the Australian economy and jobs.

The Garnaut Climate Change Review - the equivalent of the UK Stern Review - will focus on economic opportunities for Australia to become a regional hub for the technologies and industries associated with low carbon emissions.

Federal Labor has repeatedly called on the Howard Government to undertake such a review...

Federal Labor announced at the Climate Change Summit in Canberra in March this year that it would undertake such a review.

Following the rejection by the Federal Government, the States and Territories together with Federal Labor will undertake this review.

The Review will be conducted by ANU Economics Professor and former Ambassador to China, Professor Ross Garnaut.

Professor Garnaut has agreed to head this Review. This Review will commence next month and will be conducted in collaboration with the States and Territories – which will provide resources for it.

A draft Report is to be distributed for comment by 30 June, 2008. The final Report is to be completed and published by 30 September, 2008.

Federal Labor today released the terms of reference (attached) for the Garnaut Review.

The Stern Review on the Economics of Climate Change was published on 30 October, 2006.

That review, which reported to the Prime Minister of the United Kingdom, was carried out by Sir Nicholas Stern, Head of the Government Economic Service and former World Bank Chief Economist.

Federal Labor met with Sir Nicholas Stern on 28 March, 2007.
The Stern Report to the British Government sent a clear warning that left unchecked, climate change will have catastrophic economic consequences.

The Garnaut Climate Change Review builds on Federal Labor’s comprehensive approach to dealing with climate change.

Other Federal Labor measures on climate change include:

· Setting up a national emissions trading scheme;

· Setting up the $500 million National Clean Coal Fund;

· Low interest rate loans to help make existing homes greener and more energy and water efficient – Federal Labor’s $300 million Solar, Green Energy, and Water Renovations Plan for households is a practical way for Australian families to make a real difference on climate change;

· Funding the $50 million Solar Home Power Plan, allowing about 12,000 Australian households to install solar panels;

· Setting up a $500 million Green Car Innovation Fund designed to generate $2 billion to secure jobs in the automotive industry and tackle climate change by manufacturing low emission vehicles in Australia;

· Substantially increasing the Mandatory Renewable Energy Target;

· Ratifying the Kyoto Protocol;

· Cutting Australia’s greenhouse gas emissions by 60 per cent on 2000 levels by 2050;

· Establishing a Diplomatic Initiative with China – sending a delegation of Labor Shadow Ministers and leaders from science and business to China;

· Set a target of making half of all Commonwealth cars in its fleet environmentally friendly by 2020; and

· Establishing an Office of Climate Change within the Prime Minister’s Department.



To report to the Governments of the eight States and Territories of Australia, and if invited to do so, to the Prime Minister of Australia, on:

1. The likely effect of human induced climate change on Australia’s economy, environment, and water resources in the absence of effective national and international efforts to substantially cut greenhouse gas emissions;

2. The possible ameliorating effects of international policy reform on climate change, and the costs and benefits of various international and Australian policy interventions on Australian economic activity;

3. The role that Australia can play in the development and implementation of effective international policies on climate change; and

4. In the light of 1 to 3, recommend medium to long-term policy options for Australia, and the time path for their implementation which, taking the costs and benefits of domestic and international policies on climate change into account, will produce the best possible outcomes for Australia.

In making these recommendations, the Review will consider policies that: mitigate climate change, reduce the costs of adjustment to climate change (including through the acceleration of technological change in supply and use of energy), and reduce any adverse effects of climate change and mitigating policy responses on Australian incomes.

This Review should take into account the following core factors:

· The regional, sectoral and distributional implications of climate change and policies to mitigate climate change;

· The economic and strategic opportunities for Australia from playing a leading role in our region's shift to a more carbon-efficient economy, including the potential for Australia to become a regional hub for the technologies and industries associated with global movement to low carbon emissions; and

· The costs and benefits of Australia taking significant action to mitigate climate change ahead of competitor nations; and

· The weight of scientific opinion that developed countries need to reduce their greenhouse gas emissions by 60 percent by 2050 against 2000 emission levels, if global greenhouse gas concentrations in the atmosphere are to be stabilised to between 450�and 550ppm by mid century.

Consult with key stakeholders to understand views and inform analysis.

A draft Report is to be distributed for comment by June 30 2008. The final Report is to be completed and published by September 30 2008.

Interim draft reports on particular issues may be released before that time for public discussion.

The Report will embody the independent judgments of its author.

Sunday, April 29, 2007

Sunday dollars+sense: The more clever you are...

Worried you’re not smart enough to become rich? Don’t be. The dumbest people get rich. The bright ones max out their credit cards, find it hard to pay bills and go bankrupt.

It’s beyond doubt that bright people earn more. Research just published in the journal Intelligence by Jay Zagorsky from Ohio State University finds that for each point that a US baby boomer’s IQ test score is higher, that persons income is likely to be between $280 and $740 per year higher, other things being equal.

Other studies find the same sort of result. Zagorsky used data from a long-term US study that measured the IQ score, and later the financial situations, of more than 7000 Americans born between 1957 and 1964.

Those with above-average IQs scores were three times as likely as those with below average IQs to earn more than $125,000.

But when it came to wealth, intelligence counted for next to nothing... As Zagorsky put it: “There are few individuals with below-average IQ scores who have high income but there are relatively large numbers who are wealthy.”

How could it be that bright people earn more, but don’t end up with more money? Are they in some sense “dumb” when it comes to managing money, or are they bright enough to realise that income is for spending, not keeping?

It is probably a bit of both.

Zagorsky examined the relationship between IQ and having maxed out credit cards, missed loan repayments and declared bankruptcy. He found an odd relationship. It went up, then down, then up again. For people of below average intelligence, as their IQ rose, their financial trouble increased. Above average intelligence, a higher IQ meant less likelihood of financial trouble, and further above that (above an IQ of 120) higher intelligence meant worse financial strife.

How to make sense of this? The brighter you are, the worse you are with money, unless your intelligence is merely somewhat above average – then you are probably sensible.

Zagorsky says he doesn’t have an explanation, and I don’t either. He says it is possible that as your intelligence increases over certain ranges you become busier and less focused on paying bills. Or maybe the smarter you think you are the more you think you don’t need to be careful.

People not blessed with intelligence and earning power know they have to be careful. That’s their advantage.

Do you have to be smart to be rich? The impact of IQ on wealth, income and financial distress. Jay L. Zagorsky, Center for Human Resource Research, The Ohio State University,
Intelligence, 28 March 2007.


Saturday, April 28, 2007

Saturday Forum: Climate Change wars. Labor vs the Coalition vs the Greens.

Within months at the ballot box we will be asked to choose between competing environment policies that are almost impossible to compare. How for instance do you compare Labor’s promise to cut Australia’s greenhouse gas emissions to 60 per cent below year 2000 levels by 2050 with the Greens' promise to cut them to 80 per cent below 1990 levels?

How do you evaluate the Prime Minister’s promise that Australia is on track to meet its obligations under the Kyoto Protocol (which it hasn’t signed) when those obligations involve an increase, not a decrease in emissions?

And what guarantees do we have that any of the policies put forward would be effective in meeting the desired targets, and what do we know about the likely economic cost?

The parties themselves are not helping.

On Monday The Greens put forward by far the most comprehensive of the environment policies released to date. It contained not a word about the likely economic cost.

On Lateline on Tony Jones asked the Greens'Christine Milne why she had commissioned no economic modeling whatsoever.

She replied that was the job of the government.

He asked her whether she would be prepared to guess at the likely cost of what she was proposing.

She replied, “I don't think this is about a guessing game and I think a political football is not a good idea when it comes to climate change and oil depletion”.

She later put out a statement claiming that California’s Governor Arnold Schwarzenegger had also set targets for cutting emissions without examining their impact, implying that made it a good idea.

Labor has been little better.... Until its change of leader and environment spokesman late last year it refused to acknowledge that its policy of targets and emissions trading would involve any economic cost.

The Prime Minister pounced on both opposition parties on Monday noting that “you cannot commit yourself to reduce greenhouse gas emissions by a specified amount unless you know what you are doing, unless you know the consequence of that commitment, unless you know what that target means to each and every industry”.

“The decision taken on a long term target will be the most important economic decision that Australia takes in the next decade. And I want to ensure that any decision is made very carefully in a way that takes full account of jobs and investment in Australia, of climate change action by others and of global technology developments,” Mr Howard said.

It is hard to take issue with the Prime Minister’s point that it is better to look before acting. But the Treasury’s admission to a Senate Committee earlier this year that it has carried out no economic analysis of the effects of climate change, and its virtual exclusion from the preparation of this year’s $10 billion water plan suggests that the Prime Minister himself is not altogether keen on thorough economic analysis when it comes to preparing his own environmental policy.

Behind the scenes though the Prime Minister is much better informed that these recent disclosures suggest.

In 2003 his department actually approved a proposal for an emissions trading scheme that would have forced polluters to pay $5 for every tonne of greenhouse gas they emitted in excess of an allowance.

The plan was presented to Cabinet as a joint submission from four departments: Prime Minister and Cabinet, Treasury, Foreign Affairs and Environment. Two other departments - Finance and Industry - were also consulted. They had concluded that the proposed impost would not have unacceptably damaged Australian industry and would have set up the framework for a putting a price on carbon that could be adjusted up later.

The reason that the proposed price of $5 per tonne would have caused little disruption is that is that it too low to make alternatives to coal-fired power economic. It would have lifted the price of price of power by just half a cent per kilowatt hour.

The Cabinet rejected the proposal. The joke being told in official circles at the moment is that the Prime Minister’s emissions trading taskforce, set up in December and due to report at the end of May, will find the work easy. It is chaired by the head of the Prime Minister’s department and has on it the heads of Environment, Industry and Treasury. They have already done the work.

One of the reasons that the Cabinet decided against the very modest scheme given a tick by its top officials in 2003 is that at the time Australia seemed on track to meet the obligations imposed on it by the Kyoto Protocol regardless.

Although the government says it will not sign Kyoto and is wary of the targets adopted by Labor and the Greens it itself has undertaken to meet the Kyoto target.

As recently as this week the Prime Minister boasted that “unlike many of the European countries who regularly lecture us on this issue, we are in fact on track to meet that target by our own efforts”.

But the Kyoto target is slippery, and the latest information suggests that it is slipping out of Australia’s grasp. Kyoto requires Australia to limit emissions to 108 per cent of 1990 levels by the loosely-defined time period 2008 – 2012.

Some people think the target requires those emissions by 2008; some adopt a middle course, assuming they are meant to apply by 2010; the Prime Minister thinks they require compliance by 2012.

The bad news, contained in calculations using the government’s own methodology released by the environmental umbrella group the Climate Institute, is that with between one and four years to go Australia is already bumping up against that target. Kyoto limits Australian annual emissions to 596 million tonnes of carbon dioxide equivalent. The Institute calculates that by February this year Australian emissions had probably climbed to 588 Mt – just 8 Mt short of the target.

The Kyoto target is mild and easily achieved compared to those now adopted by Labor and the Greens. Translated into million tonnes this is what Labor is proposing by promising a 60 per cent reduction in year 2000 levels by 2050 – emissions of just 223 Mt, compared to the present 588.

The Greens are proposing even less - 110 Mt, with an interim target of 386 by 2020.

Both Labor and the Greens are propose an emissions trading scheme in order to achieve their targets. Neither has hazarded a guess as to how high the price of per tonne of emissions would have to rise in order to do the job. It would certainly be long way north of the $5 once considered by the government.

Gas-fired power stations are thought not to begin to become competitive with coal until the cost of producing electricity from with coal increases by 2 cents a kilowatt hour, implying a carbon tax of $20 per tonne. Wind farms would not begin to become competitive until the carbon tax hit $30 to $40 per tonne.

At that level the retail price of electricity in the ACT would climb from its present level of around 10 cents per kilowatt-hour to 14 cents. And in order to achieve Labor’s or the Greens targets it would have to climb much higher still. No-one knows how high, in part because it would depend on what other measures were put in place to curb emissions.

The Greens are proposing a raft or other measures, all of them with unspecified economic costs.

They would set up a national energy efficiency targets, impose mandatory renewable energy targets to ensure that renewable electricity contributes at least 15 per cent of national demand by 2012 and 25 per cent by 2020, and remove the GST from public transport.

Labor is promising a raft of financial supports to assist coal-fired power stations become “clean” by burying their emissions, support explicitly rejected by the Greens on the ground that the technology is unproven. It will also require all power stations built after 2030 to produce near-zero emissions.

The other reason why it is impossible to tell how high the price of power would have to rise in order to meet Labor and the Green’s emissions targets is inherent in the nature of most emissions trading schemes: the government sets caps on emissions and lets a market - similar to the share market - determine the price of emissions. All markets are unpredictable.

That’s why the Prime Minister’s emissions trading task force, beavering away with just one month to go until it reports is thought likely to shy away from targets or caps and go for a price instead. That price, expected to be $10 per tonne of carbon dioxide emitted, would be low enough to easily absorbed (it would push up each ACT power bill by about 10 per cent) but would do little to make alternatives to coal attractive to generators.

But the report will be important. If, as looks very likely, its recommendations are adopted by the Prime Minister, it will put in place an emissions trading scheme that Labor could adjust later (or Labor with the Greens, should the Greens hold the balance of power in the Senate). It will also provide the kind of information that Labor, the Coalition and the Greens will need to refine their policies further, and the kind the information that we will need to decode those promises.

Whatever its recommendation, its central message is certain to be that Australia can not cut greenhouse gas emissions without pain, most of it in the form of higher power prices. It’s a message to date all three political groups have shied away from.

FairWork Australia: Fair and balanced

This is getting worse!

Rudd and Gillard have just released this statement:








"Fair and balanced"?

Where do they get these ideas from?


Friday, April 27, 2007

Update: Labor's $30 billion broadband furphy

Joshua Gans writes: Beware the mythic study

In the Sydney Morning Herald Labor's Communications spokesman Senator Conroy declines to stand by the $30 billion figure Labor repeatedly quoted but says the economic benefits remain "in the billions of dollars".

Thursday, April 26, 2007

Revealed: Labor's $30 billion broadband furphy

The Labor Party's boast that its national broadband network will expand the Australian economy by as much as $30 billion a year is based on an obscure and dated report that fails to substantiate the claim.

An investigation by The Canberra Times has revealed that the figure is drawn from a little known presentation by a firm of consultants which described the work as ''evangelism''.

The firm's estimate of the $30 billion annual benefit was made in 2001 when Australia had next to no broadband and it appeared to confuse cost with benefit.

Labor's communications spokesman, Stephen Conroy, acknowledged last night that Labor had not checked out the original source of its claim. He said Labor had consistently quoted a range of figures that demonstrated substantial benefits to the economy from the widespread adoption of broadband.

But in launching Labor's plan to build a $4.7 billion national broadband network last month, Mr Conroy and finance spokesman Lindsay Tanner claimed it would deliver ''up to $30 billion in additional national economic benefits''. One week later, Labor's treasury spokesman, Wayne Swan, defined the benefit as ''productivity gains of up to $30 billion per year''.

In his first speech as Labor leader to the National Press Club this month, Opposition Leader Kevin Rudd sourced the claim to the Government saying, ''the Government's own advisors have estimated that the economic benefits from such infrastructure could be up to $30 billion each and every year''.

The estimate does not come from Government advisers. Labor has sourced it from a 2003 report to the Government from its Broadband Advisory Group. The report makes no estimate of the economic benefit itself but merely reports a claim in a 2001 presentation by Accenture, formerly known as Andersen Consulting.

The Accenture claim has been widely quoted but little seen...Consultants ACIL Tasman, the Allen Group and Engineers Australia have all cited the Accenture study but cannot produce it. Neither can Accenture itself, which has searched for the presentation both in Australia and the United States. It makes the point that the presentation appears to have been screen-based and that its computer archiving system missed it. The staff that produced it moved on.

The Department of Communications cited the Accenture study in its Broadband Blueprint prepared launched last year by its Minister Helen Coonan. The department, too, had been unable to locate a copy until late last week when, after repeated requests from The Canberra Times, it found one on a disc in a box that contained the records of its 2003 Broadband Advisory Group inquiry.

The Accenture study, now seen by The Canberra Times and not seen by the Labor Party in the preparation of its broadband policy that used its figuring, fails to back that figuring up. Entitled Broadband for Australia, An Economic Stimulus Package, the Accenture study is based on an international study by the firm entitled Reinvigorating the Global Economy: The Broadband Stimulus Package.

That study, produced at a time when ''the global economy continues to flounder'' is heavy on photos and inspirational quotes and describes itself as a piece of ''evangelism''. It calls for tax credits for broadband use in order to ''lead the global economy out of recession''.

Both studies were produced at the turn of this century when broadband penetration was tiny.

The only paragraph in the international report that makes an estimate of the economic benefits of more widespread broadband states: ''Whether working from our own estimates or looking at analyses of various research groups, the impact of broadband on US GDP could represent an increase of $208 billion and possibly up to $520 billion.'' It says factoring up the US estimate, widespread penetration of broadband could boost the world economy by in excess of $1 trillion per year.

The Australian study seems quaint from the vantage point of 2007 when about 90 per cent of the population can get access to some form of broadband and the proportion of households using it has passed 40 per cent. Produced in 2001 and arguing for tax credits to kick-start broadband. it says ''broadband can accelerate past the 10 per cent adoption rate within two years with a change in approach''.

The study proposed a tax credit worth $400 for each Australian household that spent more than $1000 a year on home broadband used for work and well as an additional payment of $400 to the employer. It cautioned against policies that would allow the price of broadband to fall, calling on the Australian Government to ''fight deflationary practices repeated price drops hurt''.

The graphs in it indicate that broadband in Australia grew far more quickly than Accenture expected, either with or without tax credits.

The study produced both a high and a low estimate for the economic benefit to Australia of widespread broadband. The high estimate of $30 billion per year, the one quoted this year by the Labor Party appears to be a measure of the projected spending on broadband rather than the benefits received. It is derived by adding the projected spending on computer equipment per household per year to the projected spending on broadband subscriptions.

The low estimate of economic benefit $12 billion per year is said to be based on ''Accenture propriety analysis'' but appears to be derived by assuming the economy will benefit by one-third of GDP growth.

Even if soundly based at the time, both Accenture's high and low estimates of the economic benefits of the widespread adoption of broadband are inappropriate as estimates of the benefit that would flow from Labor's proposal. They are estimates of the additional benefit that would flow to Australia from adopting broadband from a point where it had next to none. The benefits of extending Australia's present broadband penetration would be lower.

Importantly, the international Accenture study argues that what matters for economic benefit is not the speed of broadband. It wants decision-makers to look beyond the idea ''more speed, only speed''. It says what is important is the ''always on'' nature of broadband; something that Labor's broadband plan would do less to enhance.

The Labor Party is not the only organisation to have quoted Accenture's estimate of economic benefits of up to $30 billion a year without examining what Accenture means. Telstra did so in its Broadband Australia Campaign launched last month. In brochures delivered to its shareholders, customers and employees, it espouses the line that would later become Labor's, saying ''an independent report to government has estimated high- speed broadband will bring economic benefits to Australia of $12 billion to $30 billion per year''.

Telstra was unable to confirm that it had seen the Accenture study or produce a copy.


"Fair Work Australia" - a Labor mistake

From last night's 7.30 Report:

In the build up to the ALP national conference this weekend, Deputy Labor Leader Julia Gillard has revealed to this program that a Labor Government would abolish the Australian Industrial Relations Commission and set up a new, expanded and pro-active industrial relations umpire to be called Fair Work Australia.

It spells the end of an institution Labor has supported for 100 years and is a key element of the industrial relations policy the ALP will take to the next election.

What's wrong with this?

People are twigging to the Orwellian nature of the Coalition's names for things.

The Fair Pay Commission is explicitly not required to consider fairness in setting minimum wages.

When in 2002 it tried to limit unfair dismissals protections it introduced a bill for a Fair Dismissal Act.

The Coalition now owns the word Fair and has has given it a new and sinister meaning.

I reckon Labor would be better off owning the use of plain language. It'd make me less suspicious of them.

Tuesday, April 24, 2007

Rate rises off the agenda

Interest rate rises are off the agenda for next week’s Reserve Bank board meeting and are set to stay off until after the election.

The reprieve for the Government comes after spectacularly good inflation figures showing that in the three months to March aggregate prices barely moved. The underlying inflation rate calculated by the Reserve Bank is steady at 0.5 per cent implying an annualised underlying rate of just 2 per cent.

In the early months of this year the Reserve Bank became alarmed at what it saw as signs of an acceleration in economic growth not yet reflected in the official inflation figures. But two well-behaved inflation figures in a row have convinced it that the strong growth is not flowing through into prices...

Inflation appeared to peak in the September quarter last year and is now heading lower, notwithstanding healthy non-farm economic growth.

Next Tuesday’s Reserve Bank board meeting will be told that all of Australia’s economic indicators are pretty much where the bank would want them to be, albeit with economic growth a touch on the high side.

Financial markets yesterday cut their estimate of the probability of a rate rise after Tuesday’s meeting from 50 per cent to close to zero. The Australian dollar slid almost one complete cent from $US83.4 cents to $US82.4.

The Reserve Bank’s assistant governor Malcolm Edey put the markets on high alert last month when he delivered a speech in Sydney declaring that Australia’s inflation outlook was “higher than ideal” and that the board would review inflation “month by month”.

The Bank delivered that warning because wanted to nip in the bud what it feared would be a resurgence in inflation. It is now of the view that that that resurgence is no longer a danger.

The Bank board will keep interest rates on hold at its meetings in May, June and July. It will examine the next quarterly inflation figures at its meeting in September, but does not expect figures bad enough to justify a hike in rates.

That will mean no interest rate hike before the election expected in October, and most probably no interest rate hikes this year.

Interest rates have increased four times since the 2004 election fought and won by the Coalition on a promise of “keeping interest rates low.” The typical repayment of a $400,000 mortgage is now $260 per month higher.

If the Coalition is hoping for an interest rate cut before this year’s election to ease some of that pain, it will be disappointed. The Bank believes that although Australia’s rates are high by international standards they cannot be cut while the economy retains its present strength.

Australia’s headline inflation result was pushed toward zero by a return to normal in banana prices one year after Cyclone Larry destroyed crops in far north Queensland. Banana prices fell 73 per cent in the first three months of this year, driving down the index of fruit prices by 34 per cent, enough by itself to knock 0.5 percentage points off the headline inflation rate.

The higher Australian dollar also helped, contributing to a cut of 3.3 per cent in furniture prices and 1.7 per cent in holiday prices.

Pushing the other way were increased rents (up 1.4 per cent) and higher home purchase costs (up per cent). Childcare costs soared 5.4 per cent in the three months, and are up 13 per cent over the year.

The Families Minister Mal Brough insisted yesterday that the official figures didn’t tell the whole story, saying they left out the effect of the Child Care Tax Rebate , worth up to $4,000 per child, per year.

But the rebate is received by families with children in care more than 18 months after their out of pocket expenses, often at times when their children are no longer in care.

The Treasurer Peter Costello welcomed the good news on inflation saying the rate was “well within the band that we are targeting”. He said the inflation that had been building towards the middle of last year “seemed to have decelerated”.

Tuesday column: Can media proprietors such as Rupert Murdoch swing elections?

Rupert Murdoch’s apparent decision to endorse Kevin Rudd caused some panic at News Corporation’s Australian headquarters. On Sunday morning the websites of Murdoch’s Sydney, Melbourne, Adelaide and Perth papers all carried stories headlined: “Murdoch endorses Rudd as PM”.

By the next morning the headline on those web pages had changed. It read “Murdoch just being polite: Rudd”.

But the computer coding remained unaltered. This means that search engines such as Google News still think the stories say “Murdoch endorses Rudd” and will find them if you specify those words. Specify “Murdoch just being polite” and you won't get them.

Was Rupert Murdoch only being polite? My feeling is that there were other ways he could have been polite... When asked by a Channel Seven news crew whether Mr Rudd would make a good prime minister he could have replied: “That’s up to the voters”. Instead he answered: "I'm sure”.

And don’t tell me that Rupert Murdoch of all people doesn’t know that his every utterance on the subject of leadership will be examined in much the same way as soothsayers examine tealeaves.

He’s doing it for 40 years.

He has endorsed Australia’s Jack McEwan, John Gorton, Gough Whitlam, and Malcolm Fraser; Britain’s Margaret Thatcher and Tony Blair, and America’s Ronald Reagan and George W Bush – each one a later leader.

In fact it is widely believed that Rupert Murdoch only switches sides after the weight of public opinion has already shifted – that a Murdoch endorsement is more of an electoral weathervane than a election mover.

Whatever it is, the Labor Party is keen to get it.

Its broadband policy released last month cites Rupert Murdoch twice as an authority, notwithstanding his clear commercial interest in the topic.

Kevin Rudd didn’t just bump into Murdoch outside the heavily fortified News Corporation complex on the Avenue of the Americas. He would have to have arranged the meeting well in advance. It appeared to have been more important to him than a meeting with his likely future opposite numbers - Hillary Clinton and Barack Obama. Even the fact of the meeting was certain to qualify as some sort of endorsement, as would the casual stroll out of the door and down the street in front of cameras the two must have suspected would be there.

I don’t know whether Murdoch’s cozying up to Rudd will affect the coverage in his papers (although the hurried rearrangement of their websites on Sunday seems to indicate some nervousness on their part). But I am interested in what difference it would make if it did.

Does a shift in the slant of a newspaper or television news service change the way people vote?

There are reasons for believing it does not, and that political advertising doesn’t much work either.

At the National Film and Sound Archive on the weekend I looked again at the Liberal party’s famous “turn on the lights” TV ad for the 1975 election campaign. It was so perfunctory, so uninspired that I find it impossible to believe it switched votes. Voters already knew they wanted to kick out Whitlam.

Last year two Chicago University economists Matthew Gentzkow and Jesse Shapiro attempted to examine whether newspapers influenced people or whether people influenced newspapers by putting their dollars with the papers whose slant they agreed with.

They constructed what is probably the world’s most objective measure of newspaper bias. First they used the Congressional Record and a computer to identify the phrases most uttered by Republican and by Democratic politicians. They found for example that Republicans kept repeating the phrases “tax relief” and “war on terror”. Democrats by contrast talked about “tax breaks” and the “war in Iraq”.

Then they examined the phrases most used in the news pages of 400 American papers during 2005. Some preferred Democratic terminology, others Republican. The Washington Post for instance referred to the “estate tax”. The Washington Times was more likely to call it the “death tax”.

They assigned each newspaper a point on a Republican to Democrat scale. And then they examined whether or not the papers were merely serving up the slant the readers wanted.

Zip code by zip code they examined demographic data, political donations and even information about church going in order to determine how Democratic or Republican its citizens were likely to be. They worked out what would be ideal slant for the papers serving each zip code if they were merely trying to reinforce local prejudices.

Their results explained roughly 20 per cent of the slant that the papers actually had. In other words, to a large extent those papers appeared to be telling their readers what they wanted to hear for commercial reasons. (And it seemed that the more they told their readers what they wanted to hear the higher the newspaper price they could charge.)

The views of the proprietors, as measured by their political donations, appeared to be unrelated to their papers’ slants. Indeed, many proprietors ran papers with different slants in different cities.

If we are to believe Gentzhow and Shapiro it doesn’t matter much what Rupert Murdoch thinks. For commercial reasons the slant in his papers won’t move too much out of whack with the views of his readers.

But Gentzhow and Shapiro don’t have the last word.

An even more ingenious piece of research by economists from the University of California Berkley and Stockholm University has taken advantage of one of the most dramatic natural experiments in media bias of modern times.

Rupert Murdoch’s blatantly pro-Republican Fox News Channel burst onto the US scene in 1996 - but not to everywhere at once. Some towns were still without it by the time of the Al Gore – George Bush contest in the year 2000.

Fortunately for the researchers, Stefano DellaVigna and Ethan Kaplan, there was no rhyme or reason as to which towns had Fox and which did not – it wasn’t related to their likely politics.

They found the overall vote for George Bush was 0.4 to 0.7 per cent higher in those towns that had introduced Fox News. Fox had persuaded 3 to 8 per cent of the individuals watching it to change their vote.

DellaVigna and Kaplan conclude that “a vote shift of this magnitude is likely to have been decisive”.

Of Course Rupert Murdoch can’t do the same thing here. He doesn’t own a TV station. And he is most unlikely to do with his newspapers what he did in 1975. He is probably beyond caring much these days. John Howard should be hoping so.

With friends like these... Small business is unenthusiastic about WorkChoices

The government’s WorkChoices legislation has received a thumbs down from small business, described by the Prime Minister earlier this month as its biggest beneficiaries.

Of those small businesses taking part in the latest MYOB quarterly survey only 18 per cent agreed with the statement that WorkChoices had made them more likely to hire new workers. 30 per cent disagreed, most of them strongly...

Earlier this month John Howard declared WorkChoices a success saying “It was always my opinion that the unfair dismissal laws frightened small business out of taking on more staff, and now that those unfair dismissal laws have been removed, people are being taken on”.

The MYOB survey suggests that in the sector believed to have the most exposure to WorkChoices - accommodation, cafes and restaurants, only 15 per cent of small businesses agree it will make them more likely to hire new workers, with only five per cent agreeing strongly.

Yet the survey finds that one in every four small businesses plan to hire more staff in the months ahead. More than half say they plan to invest in their business, and almost three quarters say the sales outlook is positive.

The Opposition’s spokesman on small business and the service economy Craig Emerson said last night the survey showed that in the view of small business itself, its job hiring intensions were not related to WorkChoices or to its unfair dismissal provisions.

“Four fifths of respondents do not support the proposition that that WorkChoices will promote employment in their businesses. Yet the government has categorically stated that WorkChoices is unanimously supported by small business,” he said.

The MYOB survey shows that 44 per cent of small businesses were dissatisfied with the federal government’s contribution to the health of their business, and only 25 per cent very or somewhat satisfied.

31 per cent of small businesses were concerned about the outlook for interest rates, only 7 per cent were concerned about the outlook for their sales.

Asked who would make a better Prime Minister, 42 per cent preferred John Howard and 35 per cent Kevin Rudd. The balance either didn’t know or wouldn’t say.

Monday, April 23, 2007

Hoaxed: The Australian Conservation Foundation cons the media on rainwater tanks

If you turned on the radio or opened a newspaper last Monday you would have been forgiven for thinking that a group of economists had stumbled upon a solution to Australia’s urban water crisis.

A massed rollout of suburban rainwater tanks – at the rate five per cent of households each year - would apparently be cost competitive with dams and desalination plants as a means of securing access to water.

The claims were made by the Australian Conservation Foundation, which with two other environment groups had commissioned an examination of tanks by Marsden Jacob Associates, Australia’s leading consultants on the economics of water.

Not only would a tank in nearly every house be cost competitive, it would also store water more efficiently than dams, “creating a virtual dam from the rooftops across our suburbs”.

The ABC loved the story.

On Radio National breakfast in the morning, on the TV news at night, and on our own 666 ABC Canberra in the mid-morning the Conservation Foundation spruiked the benefits of suburb to suburb rainwater tanks and lent heavily on the reputation of Marsden Jacob to give the idea weight.

The ACF’s Kate Noble told Canberra’s ABC: “What we are suggesting in our report that we commissioned by Marsden Jacob, very respected economic consultants, is that we have a targeted tank program to roll them out broad scale.”

Asked whether there were real economics behind the idea she replied.... “This is exactly why we have done this report and why it has been put out by Marsden Jacob because they are respected economists. They do the research for the National Water Commission.”

In research for the National Water Commission Marsden Jacob have twice found that rainwater tanks are a very uneconomic means of obtaining urban water, and absolutely useless for finding water during in a crisis.

Perhaps unbeknownst to the ABC and some of the newspaper journalists who wrote up the ACF press release, Marsden Jacob also said it in their 30-page report to the ACF.

Table 2 early in the report makes clear that in all but exceptional circumstances suburban rainwater tanks obtain water at a greater cost per kilolitre than dams, desalination and recycling. They can even be more expensive than the cost of pumping water long distances, which reaches $9 a kilolitre. By contrast reusing storm water and buying rural water costs less than $2 per kilolitre.

The ACF told interviewers that if governments put rainwater tanks in 5 per cent of households each year Sydney could delay the need for a desalination plant for a decade.

Marsden Jacob had told it that could only happen if 70 to 78 per cent of properties got rainwater tanks. Many of those tanks would catch water at a very high cost per kilolitre.

The ACF late last week defended its treatment of the report. Its urban water campaigner Kate Noble said that in publicising these sorts of report groups such as the ACF “always emphasise some parts and not others”. She said the ACF had been trying to get rainwater tanks onto the agenda and was not responsible for the actions of the media.

Marsden Jacob’s principal John Marsden said last night that he was disappointed with the “enthusiastic” treatment of his report by the ACF. He said he had gone out of his way not to publicly criticise the ACF and that it remained an organisation for which he had great respect.

Sunday, April 22, 2007

Destroy 600,000 guns , save 1,000+ lives

This story in tomorrow's CT derives from this research.

Andrew Leigh himself explains the modern way it came about:

I never would have gone to read the paper in question if it wasn’t for my father picking up the phone to say ‘you should have a look at this study and see if it’s right’. That led to a couple of blog entries, after which commenter Christine Neill and I (egged on by Justin Wolfers, who has done some great work re-analysing dodgy death penalty research), decided to write up a brief comment paper.

New research suggests that the gun-buyback introduced in the wake of the 1996 Port Arthur massacre has saved between 1,150 and 2,500 Australian lives.

The research, to be published today by economists Andrew Leigh of the Australian National University and Christine Neill of the Wilfrid Laurier University in Canada reinterprets the data used in a widely-publicised released last year by the British Journal of Criminology.

That study found that Australia’s gun-buyback had had no statistically significant impact on Australian homicides...

On the morning of April 28 1996 a lone gunman Martin Bryant went on a shooting spree at the site of Tasmania’s historic Port Arthur prison killing 35 people and injuring many more. It was Australia’s worst mass killing and worse than last week’s Virginia Tech Massacre in the United States.

In response the newly-elected Prime Minister John Howard pushed through tight restrictions on who could own guns and removed 600,000 guns from a population of 20 million.

Last year’s British Journal of Criminology study found that although Australian gun deaths fell after the buyback this was part of a pre-existing trend. It found no evidence that the buyback accelerated the change.

Dr Leigh and Dr Neill discovered that the British study examined only a 25-year time period even though it could have examined the sweep of gun deaths over a century. The time period began at the start of the 1980’s – a time Leigh and Neill say was unusual because gun deaths were historically high and diving. The British study projected that trend forward and concluded that gun deaths would have fallen dramatically with or without the buyback.

But Leigh and Neill find that the maths was flawed. It projects negative deaths by 2010, something they refer to as a “resurrection problem”.

“An effective modeling strategy should place a zero probability on the occurrence of a logically impossible event,” they conclude.

Using a modeling strategy that does not predict resurrections and using all the data available Leigh and Neill find that without the 1996-97 National Firearms Agreement many more Australians would have died by gunfire in the following decade than actually did.

Whereas the British Journal of Criminology study found that the buyback prevented a statistically insignificant number of homicides and prevented 126 deaths per year from suicide, Leigh and Neill find that it prevented between 14 and 35 gun homicides per year and between 142 and 233 gun suicides.

“We find reductions in both gun homicide and gun suicide rates that are statistically significant, meaning that they are larger than would have been expected by mere chance,” Dr Leigh said. “Our best estimates are that the gun buyback has saved a total of between 128 and 282 lives per year.”

Economists typically place a financial value of each life saved of around $2.5 million. Leigh and Neil say in their study that that suggests the $500 million spent on the gun buyback was a good use of public money.

“Murdoch endorses Rudd as PM”

Christopher Sheil has the story here.

Does Murdoch influence the result of elections? That's an interesting question.

What is much more certain is that he only changes sides if he thinks there will be a change of government.

A bit like the opinion leaders I profiled here, but more Machiavellian.

Saturday, April 21, 2007

Sunday dollars+sense: beware the mansion.

Want to know if a company you own shares in is about to tank? A few years back a visiting American gave a tip to a Securities Institute conference in Sydney. He said: "Beware the stadium". As soon as a company names a stadium after itself, it tanks.

They audience tittered nervously, and he didn’t know why. Telstra had just spent $70 million naming both the Telstra Dome and the Telstra Stadium.

(As it happens, Telstra’s share price did tank.)

Now, thanks to another two American professors of finance we know that it’s not just stadiums - its also CEOs mansions.

Actually, this shouldn’t come as a surprise to Australians who remember Brian Quinn. Ten years ago the once mighty Coles Myer Chief Executive and Reserve Bank board member was sentenced to jail for conspiring to defraud his firm of almost $4.5 million which he used to extend his home.

It is not so much the fraud that would worry the professors; it’s the extent of the renovations...

Covering the equivalent of five suburban blocks, Brian and his wife’s house ended up with 4 bathrooms, a family room, a billiard room and a eight-car garage, a tennis court, cricket pitch, swimming pool and spa house, and grand entrance with chandeliers.

Actually it was modest by the standards of the homes that Crocker Liu and David Yermack have documented. They’ve managed to discover the acreage, floor area, number of rooms and value of the homes of 488 of the nation’s top 500 Chief Executives.

It wasn’t easy. Many were in their partners’ names or owned by trusts. The professors used Google Maps and land titles records. The typical top American CEO lives in a house with 11 rooms plus 4 - 5 bathrooms covering more than 500 square metres.

They found that the bigger the home a CEO bought while in the job, the worse his company’s subsequent performance.

So reliable was this guide that they constructed two share portfolios. One only owned shares in companies whose CEOs lived in houses bigger than 1,000 square metres or on more than 4 hectares of land. The other only owned shares in companies whose CEOs had smaller homes.

After 3 years the ‘smaller’ portfolio outperformed the ‘larger’ portfolio by 46 per cent.

Perhaps we should head down to our own land tiles offices and get busy with our local version of Google Maps.

Liu, Crocker H. and Yermack, David, Where are the Shareholders' Mansions? CEOs' Home Purchases, Stock Sales, and Subsequent Company Performance (March 2007)


It's art. Another very Canberra story

If you are one of the people outside of Canberra or London, or Melbourne or the many many parts of the world where this is being reported, you might not have heard of Canberra's Steve Pratt.

Sydney's Daily Telegraph was unkind enough to caption this photo with the words "Pratt by name". Actually, you may have heard of him in more serious context.

To summarise what others have reported more extensively, he faxed my office among many others with this statement promising that he would tomorrow "endeavour to remove long standing graffiti and politically themed posters".

It noted that: "Mr Pratt will be at the following locations..."

He turned up and was captured on film painting over the paint with white paint. Only problem was he had vandalised a commissioned work of art.

And the police have the evidence.

I just love the story! Don't know why I love it so much. Something to do with the nature of "art".

To me its an echo of Ern Malley.

Wednesday, April 18, 2007

It is not so much how much you spend, it is what you spend it on.

UPDATE: The Industry Minister announced some indefensible spending today.

So Australia's Finance Minister says Labor is racking up $147 million worth of promises a day. Senator Minchin is keeping count, and perhaps a bit more seriously than he did when the Prime Minister announced $10 billion of spending on Australia day without having it properly costed by his department.

In compiling the list of 23 Labor spending promises the Minister has done us a favour. He has enabled us to cast an eye over what really maters, which as the Treasury Secretary Ken Henry is at pains to point out is not how much money is spent, but what it is spent on.

In his address to Treasury staff leaked this month Dr Henry said that what was important was spending built productive capacity. Money spent “creating jobs” by moving resources from one part of the economy to another was money wasted.

On that criteria Labor’s 23 spending promises appear to stack up extraordinarily well. There are plans to pipe, recycle and desalinate water, plans to encourage Australians study and teach maths and science and plans to boost early childhood education. Kevin Rudd made the point yesterday that the rate of return on investments in early child development is believed to be as high as 10 to 1...

It is hard to find in the Labor promises collected by the Senator spending that clearly fails Dr Henry’s test, although its $500 million “green car partnership” with Australian carmakers probably comes close.

Senator Minchin is to be commended for keeping count. I am looking forward to the next update, and for an update on Coalition promises. It is shaping up to be an election like no other.

WorkChoices 12 months on: Howard has won.

WorkChoices is now a fact of Australian life. Just as is the case for the GST, WorkChoices may be changed, but it will never be dismantled. Labor promised to tear up one and roll back the other. It will leave the architecture of both in place because they are too valuable to it as they are.

The new Australian tax system will bequeath to an incoming Labor government a big and growing tax with little public opposition. The new Australian industrial relations system will hand to Labor the ability to central control private sector industrial relations. Despite Kevin Rudd’s early promises to “rip up”, “repeal” or “rid us” of the new system, it was always too valuable as it was...

Labor will now manage a central industrial relations system rather than disband it. Kevin Rudd plans to be in office for a long time, and so plans to manage the system in a way that he believes will be fair for both employers and employees.

Never before has an incoming federal Labor government been handed that opportunity.

Employers don’t like onerous and complex unfair dismissals requirements, so he will simplify them and exempt the employees they are most likely to want to dismiss.

The public doesn’t much like industrial action, so he’ll make it all but impossible.

And many ordinary Australians are disturbed by the thought that the secret one-on-one employment contracts known as Australian Workplace Agreements can remove their rights to penalties, holiday pay and the like.

They would like those rights re-enshrined in law and they would like the pay-setting process to be more open and obviously fair.

John Howard has handed Kevin Rudd the power to do all of those things, and as he made clear yesterday, he’s not going to let it go.

The surreal world of industrial relations under Kevin Rudd

Labor leader Kevin Rudd has walked away from his pledge to "rip up” the Coalition’s WorkChoices law, adopting much of it as Labor policy.

Declaring “no going back to the industrial culture of an earlier age” Mr Rudd promised yesterday to keep the national industrial relations powers the Coalition grabbed from the states, to outlaw industrial action without secret ballots, to make strike pay illegal, and to permit employers to unfairly dismiss workers during the early months of their employment.

The Labor leader retained his party’s pledge to abolish Australian Workplace Agreements and to restore minimum conditions including penalty rates, overtime and holiday pay.

The union movement professed to be pleased with the change. The ACTU President Sharan Burrow said it “showed Labor was ready for government” and offered voters “a clear choice”.

Mr Rudd told the Press Club his new stance would allow Australia to “go forward without throwing the fair go out the back door”.

Last year five Labor state governments challenged the Commonwealth’s takeover of industrial relations powers in the High Court and lost...

Mr Rudd said that while some in the labour movement wanted a Labor government to hand back industrial relations powers to the states, he would not be doing so.

“I reject that view because we must recognise that business is increasingly operating across state borders. Under Labor, whether your employees are in Bundaberg, Bright or Bunbury the same system of laws will apply,” the Labor leader said.

Federal Labor would work to create a single uniform, national industrial relations system for all private sector employers, either by taking over extra powers from the states or by working with them to harmonise regulations.

The NSW government immediately ruled out handing extra powers to a Labor federal government, but said it was prepared to discuss harmonisation.

State public sector and local government industrial relations would continue to be regulated by the states.

Mr Rudd promised to retain the provisions of WorkChoices that limit industrial action to a specified bargaining period and require a secret ballot before it can go ahead. As well, strike pay would remain illegal.

“Labor has never before required mandatory secret ballots to authorise the taking of industrial action. Labor’s new laws will require it. Industrial action comes at a cost to the economy. It therefore should not be without cost to those engaged in it,” Mr Rudd said.

Labor would restore protection against unfair dismissals, but would streamline the process drawing up a simpler “Fair Dismissals Code” in consultation with small business. Claims will need to be filed quickly – usually within 7 days – and no lawyers would be involved. If employer complied with the Code, the dismissal would be considered fair.

Unfair dismissal would be permitted during the first few months of employment. Firms employing fewer than 15 workers would be free to dismiss them for any reason during the first year, big businesses within the first six months.

The turnaround puts Mr Rudd at odds with positions previously taken by Labor and the union movement. His present industrial relations spokesperson Julia Gillard claimed in parliament in 1998 that allowing some employers to unfairly dismiss workers was “fundamentally bad public policy, shortsighted and ridiculous.” The ACTU President Sharan Burrow claimed in 2002 that it would be “unfair and discriminatory to remove the legal rights and job security of one class of workers simply because they have worked for a small business for less than 12 months”.

But Mr Rudd defended 12 and 6-month unfair dismissal windows saying that “employers take a while to sort out whether in fact, a person is appropriate to the needs of customers, whether they’ve got the right manner etc.”

“Will there be therefore, unfairness at the margin? I fully concede that, but you’ve got to draw the line somewhere.”

Mr Rudd said that he expected his proposals to withstand any challenges at next week’s ALP National Conference.

“Obviously various members of the trade union movement will have reservations about this. Some have expressed those reservations to us. If that becomes a matter for dispute or dissention at National Conference, well, that’s what National conferences are for. We’re quite prepared to roll with that and see where it goes. But I’m pretty confident that the outcome will be okay.”

The ACTU cautiously welcomed the new stance on unfair dismissals. Its president Sharan Burrow said she was “of course waiting for the details but this is a good start.”

The Australian Chamber of Commerce and Industry also said it was too soon to pass judgment. “Critical issues such as whether Labor will increase mandatory employment conditions on employers, or compulsory arbitration, or union powers of entry into businesses have not been explained,” its chief executive Peter Hendy said.

Tuesday, April 17, 2007

Tuesday column: "I'm from Telstra, I want you to campaign for higher prices"

If you are ever asked to join a “grassroots movement”, run. It’ll be no such thing.

A year ago Coca-Cola launched a fake “zero movement” in order to make it seem as if its latest soft drink was part of a social phenomena.

Now Telstra is bombarding its shareholders, customers and employees with glossy brochures, fact sheets and DVDs promoting a “Broadband Australia Campaign”.

It's a “grassroots” campaign. The brochures say so..

They ask us to “talk to family, friends and colleagues, contact local federal MPs, organize community meetings, set up supporters groups, write letters to the editor and ring talkback radio”.

In my view they’ve got about as much chance of building such a movement as Coca-Cola had of creating “the zero movement”. And they could be spending as much of their shareholders, customers and employees’ money trying.

Telstra’s complaint, apparently serious, is that someone in Australia is holding up the development of Broadband.

Gee – I wonder who that would be. Much of Gungahlin can’t get broadband at all. What was the name of the telecommunications company that wired those suburbs?

Even where Telstra has installed high-speed broadband equipment in its exchanges, it won’t allow it to run at full speed until someone else, another company, puts in competing equipment. Really.

Telstra confirms this. In the words of its website and glossy brochures: “Today BigPond broadband is available at speeds up to 20Mbps in some areas. That’s pretty quick compared to what we’ve been used to. However because of regulatory constraints, the up to 20 Mbps service is limited to exchanges where competitors are also offering those speeds.”

Telstra is prepared to speed things up, but it’ll only do so where someone else is offering high-speed competition.

What was that question again? Oh yes. Who is holding up the development of Australian broadband.

Telstra says it is “regulatory constraints”. What it means is that if it does turn on its high-speed equipment it will be forced to allow other internet companies to buy the high speed service from it at wholesale rates and compete against it.

If it doesn’t turn up the speed it won’t have to give what it sees as a leg-up to a retail competitor. But where a competitor goes to the expense of installing its own competing equipment, it will turn up its speed in order to match the competition.

It’s the commercial equivalent of a strike - the sporting equivalent of taking home its bat because it doesn’t like the rules.

Telstra’s Broadband Australia Campaign is about scaling up that tactic.

It is holding out the promise of spending what it says would be $4 billion building a state-of-the-art fibre to node network with a maximum speed of an impossibly fast 100 Mbps, about 100 times what fibre-to-node operations such as TransACT offer.

But it says it won’t build it if it has to provide wholesale access at prices decided by the Competition and Consumer Commission.

In its words, it wants a price “that enables Telstra to fully recover its costs and achieve a competitive rate of return on its investments.”

Oddly for an organisation so keen about putting forward its case, it hasn’t said what that price is, but the industry talk is that it wants $90 per line per month. That’s right: $90. Any competitor bold enough to take up the offer would have to charge more than $90 per month retail.

Telstra’s competitors would prefer to pay something closer to $20 per month, which they say would represent the actual cost to Telstra of adding them on to the service, and in any event they would like the ACCC to adjudicate, as the present law requires.

To an economist it is a straightforward debate over the merits of charging the average cost versus the marginal cost.

To Telstra, it is case of: give us what we want or we won’t build it.

The average cost would be the $4 billion Telstra says it would spend, divided by the likely number of customers. The marginal cost would be much lower - the cost to Telstra of adding another customer to an existing service.

Good economic arguments can be made for either charge, and most probably the ACCC would settle for a charge somewhere in between.

It might be interested in looking at the arguments made across the Tasman.

There a relatively small telecommunications provider is seeking access to the infrastructure built by the bigger Telecom New Zealand.

In its 2005 submission to New Zealand’s pricing regulator it has argued for “a lower, rather than a higher” price arguing that that will bring about lower prices to end-users, strengthen competition, promote innovation and reduce the need for competitors to needlessly duplicate Telecom NZ’s infrastructure.

That relatively small NZ telecommunications provider is TelstraClear, a wholly-owned subsidiary of Telstra.

Perhaps unwisely in these days of increasing use of the internet, Telstra is mounting one argument on one side of the Tasman and another on the other.

What’s disturbing for computer users on this side of the Tasman who don’t want to pay $90+ per month for high-speed internet, is that it looks as if Telstra is about to win.

Ever since Labor announced its own $4.7 billion broadband plan last month Telstra is thought to have been hunkered down with the Communications Minister working out a response.

So worried are Telstra’s competitors that Senator Coonan is about to give Telstra what it wants that 11 of them came to Parliament House last week to try to stir up opposition.

There was one notable exception. Optus – Australia’s second biggest telecommunications company declined to take part.

It is feared that the Minister will announce that Telstra has been given a holiday from the requirement to charge low access prices in return for building a fibre-to-node network in the cities and that Optus has been given $600 million to build a rudimentary network in the bush.

The plan would trump Labor’s because it would start straight away and would be seen to cost much less.

But anyone who was in a hurry to use high-speed broadband would end up paying much more.

Telstra would do what any company granted near monopoly pricing power would do. It would charge an extraordinarily high price at first to gouge money from the early adopters, and then lower the price slowly - just as it did 20 years ago when it introduced mobile phones to Australia.

The customers that Telstra is recruiting to its “grassroots” campaign may not fully understand what they are campaigning for.

Sunday, April 15, 2007

Going up! The rise and rise (and rise?) of the Aussie dollar

The Australian dollar is set to climb even higher after breaking through the 83 US cents barrier for the first time since 1990. The surge to a new 17-year high of 83.35 US cents late on Friday has sent bankers scurrying to update their forecasts, with one now speaking of an 88 US cents dollar.

Westpac issued urgent advice to its clients saying that whereas it has treated the 80-US cent mark as “an elastic but relatively binding ceiling for the currency, recent events have disproved that theory”.

The Australian dollar has been climbing against both the US dollar and the Japanese yen for six consecutive weeks, gaining 8 per cent against the dollar and 10 per cent against the yen. On Friday it hit 99.02 yen, its highest level in a decade.

Our dollar is being driven up in part by record high commodity prices that show no sign of easing and in part in reaction to emerging signs of weakness in the US economy.

TD Securities has told its clients that so high have commodity prices climbed that if the Australian dollar had maintained its traditional relationship to them it would by now by worth “around $US 1.40”. On this basis it says it believes that at its current level of around 83 US cents the Australian dollar “is probably still under-valued”...

Takeover bids already underway for Australian corporations including Qantas, Rinker and Coles are expected to boost the foreign demand for Australian dollars by up to $60 billion if as expected the money is largely sourced from overseas.

Also at issue is the future of Australian interest rates, already amongst the highest in the developed world. Australian rates are currently 1 percentage point above US rates and 5.75 points above Japanese rates.

Traders expect a further rate hike in Australia within weeks. Betting on futures markets points to a 63 per cent chance of a rate hike after the Reserve Bank board next meets on May 1.

The Commonwealth Bank says if that happens the Australian dollar could climb as high as 85.5 US cents.

TD Securities has told clients that 88 US cents is possible over the next 12 months if, as it expects, interest rates climb further still.

It sees the May 8 Budget as a risk to inflation, “especially if the government spends or gives away the bulk of the budget surplus”.

TD’s global strategist Stephen Koukoulas has told his international clients that the Australian government “has form in terms of beefing up spending and giving tax cuts ahead of elections.”

“The government is well behind in the polls and is the outsider in all the betting markets on the election. This means that Budget surpluses close to $A15 billion in both 2006-07 and 2007-08 are likely to be directed at buying votes. This is perfectly understandable, but there are consequences for the economy and other arms of policy. Given that inflation is already high and growth is strong, a pro-cyclical easing in fiscal policy runs the risk of forcing the Reserve Bank to hike more than once.”

The government’s mid-year economic outlook forecast a budget surplus of 11.8 billion in 2006-07 and 9.7 billion in 2007-08.

In an interview from London with the ABC’s Lateline program on Thursday night the Treasurer Peter Costello appeared to acknowledge that eating in to these surpluses would put further pressure on interest rates and the Australian dollar saying that “if you went out and spent $10 billion, I have no doubt that would put a lot of pressure on the financial markets.”

Sunday dollars+cents: Unrealistically optimistic with credit cards

If “unrealistic optimism” leads Bridget Jones to pay far too much not to go to gym as I outlined here last Sunday, it may also be leading you and me to pay far too much not to pay off our credit cards.

I’ll explain.

The great mystery surrounding credit cards is why their interest rates remain so stubbornly high – around 17 per cent for cards from the major Australian banks – despite credit card fees and years of competition.

In the language economists use, credit card interest rates are “sticky downwards”...

It’s not just here. In the US the big banks charge card interest rates of up to 20 per cent, sometimes more. In Brazil they charge 50 per cent.

Dr Sha Yang of the New York University School of Business believes she knows why. She has just published her findings in a paper entitled Unrealistic Optimism in Consumer Credit Card Adoption. She says good many card users are wishful thinkers. Like Bridget Jones taking out a gym membership, they plan to do the right thing but can’t follow through.

To optimist who intends to always pay off his or her card on time, then the interest rate doesn’t matter. What does matter is the fee.

Using data from a survey conducted by a US credit card company she found that unrealistic optimists were indeed less likely to care about the interest rate (even though they ended up paying it) and likely to place far too much emphasis on getting a low fee.

In rough terms they cared about the interest rate only half as much as they should have, and paid twice as much attention to the fee.

For card providers, who make most of their money from the interest rate they charged when bills aren’t fully paid, these deluded customers are worth their weight in gold.

Dr Sha Yang then she used psychological tests to determine whether these sorts of customers were generally wishful thinkers (“hoping a miracle would happen” and so on). They were.

Our banks are on to this. That’s why they don’t much compete on credit card interest rates and why credit card interest rates don’t much move.

When a US bank released an "Elvis card" its response rate tripled. The National Australia Bank has done well out of an ipod-sized mini credit card.

The banks will offer us anything other than a mini credit card rate.

Until we wise up.

Yang, S., Markoczy, L. & Qi, M. (2007). Unrealistic optimism in consumer credit card adoption. Journal of Economic Psychology, 28, 170-185.

Dollars+cents,Sunday, April 08, 2007 Paying Not to go to the Gym

SMH, Wednesday, August 25, 2004 Credit Card interest rates: no competition