Saturday, December 29, 2007

A gentler, more cautious Cabinet

The one in which John Howard first served, as seen in its 1977 Cabinet papers, released this morning by the National Archives of Australia under the 30-year rule.

Howard was Business and Consumer Affairs Minister and then Treasurer at the time.

Anyone can examine the papers

By 2007 the modern Howard government had completely overhauled Australia’s system of industrial relations, almost fatally weakened student unionism at universities and made economically-unwise tax cuts an annual event.

But 30 years ago the government of which John Howard was a junior minister adopted a far more cautious approach.

The 1977 Cabinet papers, released today by the National Archives, show that the Fraser Government considered decentralising Australia’s system of industrial relations but decided against it...

...noting that central wage cases “provided a focal point for government efforts to influence wage decisions” and provided employers with a “ready defence against industrial claims”.

Concerned that there was “an element in the trade union movement which has decided on a course of deliberate confrontation with the trade union moment” the Employment Minister Tony Street nevertheless advised his colleagues that while they might have to introduce emergency legislation (“already drafted”) they should first attempt to talk to the unions using the National Labour Consultative Council.

The President of the Australian Council of Trades Unions Bob Hawke was a member of the government’s reserve Bank Board (appointed by the previous Prime Minister Gough Whitlam). Prime Minister Fraser reappointed him when his term expired in 1978. The two held regular discussions about industrial relations and the Malcolm Fraser sought out the trade union leader whenever there were problems.

On student unionism the Education Minister Senator John Carrick acknowledged the “extremist” nature of university students’ union but warned against removing the compulsory fees that funded it.

Abolishing the fees “would be likely to have the effect of giving moderate and extremist students common cause,” he said.

Also it was “desirable that any solution should allow student political activities to continue as these form an important part of the tertiary educational experience”.

In any event it remained uncertain as to whether the Commonwealth had any power over universities outside of the two territories.

On tax cuts the Treasurer Phillip Lynch warned against them in January saying they would put upward pressure on interest rates.

“Major tax cuts now would add to the budget deficit and thereby compound the difficulties already confronting the effectiveness of monetary policy,” he said.

“In so doing they would be adding to – not subtracting from – the underlying problems of the economy and in the end, making their solution more difficult.”

The Cabinet decided against tax cuts for the August budget, but by November he had resigned from the Ministry over his taxation arrangements and been replaced as Treasurer by the Business and Consumer Affairs Minister John Howard.

The subsequent election promised big tax cuts promoted with memorable advertisements featuring a fistful of dollars. After the election in his first budget as Treasurer Mr Howard announced that the tax cuts couldn’t be paid.

Interest rates were set differently in 1977 as well. On hearing news of a drop in the rate of inflation in October 1977 the Prime Minister Mr Fraser asked for a report “by lunchtime” on how the government could “move quickly to reduce interest rates”.

The Treasury told him that it could be done straight away. Fraser asked the Bank to cut long-term rates by 0.2 per cent and short-term rates by 0.5 per cent “as quickly as practicable” with the cuts to be made “by Tuesday October 25 at the latest.”

Also from the Archives this morning:

As early as 1977, just a decade after Australia had introduced dollars and cents, they were becoming expensive to produce.

A Cabinet submission warned that the one-dollar note (eventually replaced by a coin in 1984) was no longer paying for itself.

Its short life meant it was “costing more to print and issue than it returns to the Reserve Bank by way of an earning rate on the investment.”

The submission, from the Mint and the departments of Finance and Treasury asked the government to introduce a law that could allow coins to be replaced by regulation rather than by a specific act of parliament.

Other changes the submission thought necessary would be the replacement of the 1c and 2c bonze coins with cheaper aluminum versions (instead the 1c and 2c coins were abolished in 1991) and the replacement of the 5c, 10c and 20c silver-coloured copper-nickel coins with brownish bronze ones.

The 50c silver coin, originally containing silver, had been converted to cheaper copper-nickel some years before.

The 1977 Cabinet also agonized over how rapidly to withdraw official sanction for imperial measurements such as the pint (about half a litre) and the foot (about one third of a metre) rendered redundant by Australia’s conversion to metric currency in 1970.

It decided to proceed quickly noting that “previous experience with and the withdrawal of units such as the reputed pint (425 ml) and the peck (9092 ml) suggests that when it has been done the change will be accepted with equanimity.”


Sunday dollars+sense: When the hand nears twelve...

New Year ’s Eve is when you make a resolution to do something you won’t enjoy, right? That’s how it is for most of us. We decide to stop smoking, get fit, actually save money – to do the sort of things we won’t enjoy.

To help us we often pre-commit. We flush our cigarettes down the toilet, buy a long-term gym membership, hide our credit cards in the freezer - anything to lock us in to a pattern of behaviour that we normally can’t stand.

But for another smaller group of people it’s entirely different...

And until recently those of us who resolve to do unpleasant things at this time of year knew nothing about them.

They are called “joyless consumers”. They never spend frivolously, find it hard to pamper themselves and experience something close to physical pain if cash unnecessarily leaves their wallets.

Ran Kivetz and Itamar Simonson from Columbia and Stanford universities described them in a study entitled Self-Control for the Righteous.

On a day-to-day basis their behaviour makes sense. As the professors note: “Spending on necessities has a distinct advantage over luxuries because one cannot do without necessities whereas spending on luxuries is often seen as wasteful, irresponsible, and even immoral.”

But as a way of living every day their lifestyle sucks. That’s why they sometimes pre-commit to a splurge in order to break free.

Kivetz and Simonson caught them at it.

They offered 6000 Americans the chance to take part in a lottery. They were given a choice of what to accept as a prize should they win. They could pick cash ($85) or a luxury prize of lesser value (a one hour facial worth $80).

The best financial decision is to go for the cash. It’s worth more and if you really want a facial you can buy it with the cash and have $5 left over.

And yet an astonishing one quarter of the Americans they tested passed up the cash to go for the facial.

Asked why, they said things like: “If I chose the cash, I would probably spend it on something I need rather than something I would really enjoy” and “This way I will have to pamper myself”.

These people have a control problem every bit as serious as the people who can’t give up smoking, who can’t save, and can’t lose weight.

Some of them will be making their own resolutions tomorrow night, resolving to loosen up, be a bit bad - just for once.

Raise them a glass as the hand nears twelve.

Ran Kivetz, Itamar Simonson, Self-Control for the Righteous: Toward a Theory of Precommitment to Indulgence, Journal of Consumer Research 2002 29:2, 199-217


Tuesday, December 25, 2007

Boxing Day is always a big news day.

And not only because it's the start of the Sydney to Hobart.

Believe it or not the number of pages of news in a newspaper is usually determined not by the amount of worthwhile news that has just happened, but by the total number of pages in the paper that day which is itself determined by the number of pages of advertising.

That's why Boxing Day is always a HUGE news day. There has to be a lot of it to fill the pages created to balance the advertising.

All through last week my colleagues and I have been spiriting away "holders" stories saved up for the big day.

Last year I did tax expenditures.

This year it's hidden unemployment (below the fold)

Have a great one!

Around 10,000 ACT residents are available to work, but haven’t yet found a job. 8,000 of them can start within four weeks.

The new survey from the Australian Bureau of Statistics casts doubt on the widely held belief that the ACT labour market is “as tight as drum”.

Officially there are only 5,374 people unemployed in the ACT residents, fewer than the 6,100 job vacancies on offer.

But the latest ABS survey on Barriers and Incentives to Labour Force Participation finds that there are another 9,600 ACT residents not working who want paid work but haven’t bothered to describe themselves as unemployed.

Nationwide there are about one million people not working and not regarded as unemployed who would like paid work - 720,000 of them available to start within four weeks.

In addition there are about 273,000 part-time workers who would like to work longer hours.

Taken together with the official unemployment numbers the figures suggest that around 1.7 million Australians are available for extra work, 1.3 million able to start within weeks.

Of those not able to start quickly the most important reasons are childcare and long-term sickness or injury.

85,700 would-be workers, mostly men, said they had given up looking because they were “considered too old by employers.”

77,000 would-be workers felt they didn’t have the right training, qualifications or experience.

The figures suggest that the pool Australia’s under-used workers has barely changed in the past few years of rapid employment growth.

Taken at face value they suggest that WorkChoices has been unsuccessful at enticing into the labour market people who have remained outside it.

They give ammunition to the new Employment Minister Julia Gillard who wants who wants to use training and job-ready programs to get more Australians into the labour force.

The previous government abolished Labor’s Working Nation programs shortly after taking office in 1996.

The latest employment figures show that jobs growth stood still in the ACT in 2007 with the number of Canberra residents in work actually falling over the year while increasing in every other state.

In November a net 52,600 new jobs were filled nationally, none of them in the ACT.

Over the year to November an extra 298,800 Australians found work, with substantial increases in every state and territory other than the ACT.

Over the year an extra 8,100 Tasmanians found jobs, an extra 7,100 Northern Territorians, an extra 15,900 South Australians, an extra 33,500 West Australians an extra 74,700 Queenslanders, an extra 92,200 Victorians and an extra 68,200 residents of NSW.

Amongst ACT residents employment fell by 895.

The results appear to indicate a mismatch between the type of jobs on offer and the people making themselves available to fill them.

With the ACT’s housing market tight it is difficult for the right candidates to find the accommodation that they would need to fill the jobs.

Recent Commonwealth Public Service job advertisements have stated that the successful applicant “may choose to commute”.

The latest national accounts suggest that that ACT economy stopped growing between the June and September quarters, possibly as a result of the stalled labour market.

The Territory's seasonally-adjusted state final demand slid 1.9 per cent between the two quarters. In trend terms it was flat.

Two quarterly contractions in a row would be regarded as a “demand recession”. The next quarterly national accounts are due for release in March.


Sunday, December 23, 2007

Sunday dollars+sense: The true cost of those twelve days: $100,000

Got a spare $100,000? That’s how much it now costs to get your true love the complete gift set for Christmas – more than ever before.

On the list are turtledoves, calling birds, geese-a-laying, maids-a-milking… everything immortalised in the song The Twelve Days of Christmas.

Each year the US financial services firm PNC totals up the cost of the list and its findings not only tell us a lot about inflation, but also about the changing nature of the things we value.

This year’s total for the complete list (including the repetitions in the song) is $US78,100 – about $100,000 in Australian money...

Most years it has moved up in line with the general rate of US inflation – a finding that might seem odd. Piper’s piping, partridges and pear trees aren’t the sort of things that usually make their way into the consumer price index.

But it has been found time and time again that unless a shopping list is extremely obscure its total will usually move in line with prices in general.

The best example is the price of a Big Mac.

We think of a hamburger as one product, but actually it is its own shopping list containing within it labour, rent, electricity, farm produce and so on.

When, noting its standardised nature, the Economist magazine began (as a joke) comparing price movements in Big Macs across nations it discovered that they closely tracked more complicated measures of prices.

That’s because if ever one part of a big Mac was to became especially expensive people would buy fewer of them, their price would moderate and the prices of things people spent their money on would climb.

The other thing that PNC has discovered about the Twelve Days shopping list is that the importance of goods and services has changed places.

Goods (in this case birds and trees) used to account for most of the cost. Back two decades ago seven swans-a swimming cost $US7,000. Now it’s only $US4,000.

These days it’s the services that cost the money. The lords a leaping (sourced from the Pennsylvania Ballet) used to cost just $US1,680. Now they cost $US4,285.

Goods have become relatively cheap to source. We have become so much better at making them. But in Western countries we have paid ourselves more as well.

That’s why it’s the personal things - be they pipers piping, ladies dancing, or any service that requires face-to-face contact - that have become valued and rather more rare.


Saturday, December 22, 2007

Summer reading: Could John Howard have formed the view that his Deputy, Peter Costello was not a fit person to ever become Prime Minister?

That appears to have been Eisenhower's view of his Deputy Richard Nixon in the US.

Andrew Probyn, political editor of the
West Australian takes up my post-election story about Peter Costello's behaviour as Treasurer and asks whether Howard knowingly risked the Coalition's term in government and his own place in history in order to prevent Peter Costello becoming Prime Minister.

Maybe ex-PM knew best in thwarting Costello’s ambition

Losing office not only means you are out of a job. It also means you are no longer the chief storyteller of the Government narrative.

Before his November 24 election loss, John Howard predicted that Labor would seek to rewrite history should it win. He was pointing out the bleeding obvious, really. Victors always write history.

But so far it’s not been Labor that has been rewriting history, having made history by booting out a government when the economy was purring along quite nicely.

Rather, it’s been the defeated who have been rewriting history, not so much by giving us their spin on past events but by illuminating events which had until recently gone untold.

Nick Minchin told us that he had asked Mr Howard to step down as prime minister soon after the previous government celebrated its 10th anniversary in March 2006.

We’ve heard from Alexander Downer, who said he thought the government was doomed long ago (perhaps that’s why he mused to reporters from the Adelaide Advertiser in September that he would consider a switch to State politics to become the South Australian premier).

And on WorkChoices we’ve had all sorts of damaging circumspection from the Liberals too.

The minister whose last job was to sell the virtues of the industrial relations regime, Joe Hockey, would appear to be comfortable with the prospect of the coalition disowning the controversial laws, acknowledging Labor had a mandate to overturn them.

And there’s a story going around the traps that the fellow Mr Hockey replaced as workplace relations minister, Kevin Andrews, wanted protection from unfair dismissal laws to extend only to small businesses employing 30 or fewer workers but that he was overruled in Cabinet.

There have also been stories from outside government circles that have only come to light because of the Howard government’s defeat...

Chief economist at the ANZ Bank Saul Eslake gives a fascinating insight into the character of Peter Costello, the man who would have eventually been PM if Mr Howard had prevailed over Kevin Rudd.

It’s been known for ages that Mr Eslake had a testy relationship with the former treasurer over the past few years but few knew why. He vowed to keep it secret until after he left his job or Mr Costello left his, whichever came first.

Here is his tale, recounted this week to The West Australian. In March 2002, Mr Eslake was giving a presentation to a conference of chartered accountants in Hobart. From the floor came a question from a wire reporter asking whether, in his view, the Howard government had engaged in any creative accounting.

“I said yes they had,” recalled Mr Eslake, “and gave three examples of that: the way they accounted for the GST in the face of contrary advice from the Auditor-General and the stats bureau; the fact that on two occasions — although they since did it a third time — they had mucked around with the timing of the Reserve Bank’s dividend, delaying the receipt of part of it so that in cash accounting, as distinct from accrual accounting, they improved the Budget bottom line for one year at the expense of the preceding one.

“And third, that when they sold land and buildings, they classified that as negative expenditure rather than as they did with selling Telstra, an asset sale, and excluded from the underlying Budget balance.”

A few hours later, Mr Eslake was in a taxi coming back from Melbourne Airport when to his astonishment he got a phone call from ANZ CEO John McFarlane.

“He said he had had Peter Costello, the treasurer, on the phone complaining about what I had said and threatening to take what John McFarlane paraphrased as ‘regulatory action that ANZ would not like’,” he said. Mr McFarlane told him he was not going to tell the bank’s chief economist how to do his job but that it was important from the ANZ shareholders’ perspective that the bank got on well with the treasurer given that he might be the next PM. He asked Mr Eslake not to talk about the government’s accounting policies again and, if it was possible, to patch it up with Mr Costello. So Mr Eslake dutifully rang the treasurer’s office, told Mr Costello’s secretary to tell her boss that it was nothing personal and that if he was offended by what he had said, he apologised. He left his contact details hoping to put his case personally but Mr Costello never called. Meanwhile, a senior Costello aide, Nikki Savva, had sent a copy of the wire reporter’s story — with the “offending” paragraph circled — to ANZ chairman Charles Goode. “Given that Costello had known me personally at that stage for almost 20 years (they’d first met in the early 80s when they were both members of the Young Liberals), he could have, or he could have had one of his advisers, ring me to debate the point,” Mr Eslake said.

“But rather than debate the point, he sought to use regulatory powers conferred on him by virtue of his position as treasurer to see if he could get my boss to intimidate me, intimidate my boss to see if he would silence me, or worse.”

Mr Eslake says he is not the only person in economic circles to have got this sort of attention from Mr Costello while he was treasurer and he says he knows Mr Howard later became aware of the incident.

It’s his view that the former PM had marked Mr Costello’s card and that this had contributed to Mr Howard resisting his deputy’s overtures to step down for so long and, as it turned out, at considerable risk to his own place in history.

“Although John Howard has never lightly tolerated dissenting opinion in his own ranks, in his second incarnation as leader he was quite willing to work with people who had occasionally disagreed with him about things,” Mr Eslake said.

“Howard accepted that from time to time people he would see as being of sound judgment and friendly disposition would disagree with him or the government and have the temerity to say so, without that marking them as traitors for life.

“Peter Costello, on the other hand, appeared to have trouble operating within the same frame of mind.

“The Prime Minister had no doubt concluded that Australia is too small a place for its would-be leader to cut off from ever providing advice or counsel anyone who’s ever disagreed with him about anything.

“This kind of behaviour — because I was by no means unique in this regard — to Howard’s mind may not have been the kind of thing that you would want in the leader of the Liberal Party.”

When John Howard finally records his version of history, perhaps he’ll reveal even more about why he put his legacy in peril by clinging on to power. And Peter Costello may have to put his own thoughts to paper.


Friday, December 21, 2007

Spare us! Where's the razor?

From today's Crikey, the last for the year.

This is an
actual current Australian Public Service job ad. Not a hoax.

Closing date: Thursday, 20 December 2007. Apply now, before someone asks what the job actually does.

"The Design Leverage Director will be an important, contributing member of the senior management team and will have accountability for leading the integration of design thinking across the organisation, aligning design principles with business strategies that enhance operational performance and fostering a collaborative, innovative culture that generates creative solutions. Facilitating as the "voice of design", the Director will effectively embed best practice project management processes and procedures as required in an evolving, complex environment. In essence, the Director will champion design as an agent for change, innovation and collaboration. Our candidates will need to have a proven track record in a strategy-driven design executive position, with experience working in large, complex organisations. A holistic, highly motivated, creative problem-solver, they will need to be well rounded in terms of skills, project types, and work and life experiences. Our candidates will need to be able to demonstrate success in challenging the status quo, leading strategic and operational change initiatives, and adding value to business decision-making. The role requires excellent relationship management skills, coupled with strong project leadership expertise. Tertiary qualifications are highly desirable. In order to be eligible you must be an Australian citizen. The successful applicant will be required to undergo a security assessment. The position will be based in Canberra (though the incumbent may choose to commute). The appointment may be offered either on a career basis or a fixed term basis of up to 5 years."

Thursday, December 20, 2007


It's the name of the game.

Experience this entirely new way of doing it here.

HT: Joshua Gans, Bobby Darin

Wednesday, December 19, 2007

Update: "WorkChoices is dead"

Brendan Nelson after thisafternoon's Opposition front bench meeting:

"We've listened to the Australian people, we respect the decisions they have made, and WorkChoices is dead."


Unfair dismissals laws are coming back. Some exemptions are being removed (and others imposed).

From AM this morning:

JULIE BISHOP: Julia Gillard must now commission a proper independent inquiry of the impact of removing the current exemptions.

* See my account of history, below.

Don't doubt it... the Reserve Bank wants to push up rates

Australia’s Reserve Bank would have increased official interest rates this month, lifting the standard variable mortgage rate to close to 9 per cent, were it not for a number of lenders beating it to the punch and lifting their rates first.

That’s the picture painted in the minutes of the Reserve Bank’s in the minutes of the Bank’s December 4 board meeting, released yesterday as part of the Bank’s new measures to improve communication.

The minutes say that the meeting attended by members including the Governor Glenn Stevens and the Treasury Secretary Ken Henry concluded that “higher interest rates were likely to be required”.

However, independent action by lenders in passing on higher borrowing costs to businesses had done some of the Bank’s work for it...

In time household borrowers were likely to face additional costs as well.

The minutes note that without those changes “there would have been a strong case on domestic grounds for a rise in the cash rate at this meeting.”

But they say that an increase by the Bank taken together with the actions of commercial lenders would have resulted “in quite a significant tightening of overall financial conditions over a short period. On the evidence currently available, and given the uncertainty over the global outlook, this did not appear to be immediately warranted.”

The Board decided to maintain the existing rate “for the time being, pending evaluation of financial market developments and new data at the next meeting”.

That meeting will take place on Tuesday February 5, after the release of the next inflation figures due on January 23.

The minutes say “the question to be addressed at that time will be whether the interest rates faced by borrowers as a result of the combination of policy action and market developments would exert sufficient restraint to contain inflation over the medium term”.

They describe the December decision as “finely balanced”.

The Treasurer Wayne Swan said he fully supported the Bank’s decision to release the minutes and that inflationary pressures had been building for a long time.

“They will take a long time to turn around, but with strict fiscal discipline and investments in the productive capacity of the economy, we can tackle inflation over the long term,” he said.

The interest rate strategist at TD Securities Joshua Williamson said the minutes suggested that the Bank dearly wanted to increase rates in order to restrain a rate of inflation set to climb to 3.5 per cent. But it was worried about whether the economy could withstand such an increase when piled on top of other increases.

The economics team at Westpac noted that the Bank appeared increasingly pessimistic about economic growth in Australia’s major markets calling attention to its statement that it was “uncertain whether the increases pace of growth in East Asia would be sustained in 2008.”

The ANZ Bank’s Mark Rodrigues said, “reading the minutes gives a strong sense that, one way or another, the Bank believes interest rates need to move higher to moderate inflation from unacceptably high levels. While heightened risks around the global outlook at present have prevented
it from tightening, it has not dented its inclination to tighten”.

The chief economist at JP Morgan Stephen Walters said the minutes made it clear that a February rate hike was “all but a done deal”.

“There is considerable pressure on capacity, the labour market remains very tight, the terms of trade is providing a boost to local incomes, wage growth has accelerated albeit modestly, and Australia is less affected by global credit market dislocation than elsewhere," he said.


How to cut the price of petrol... the right way

The retail margin charged for petrol could shrink by 1.9 cents per litre within months under a radical scheme set to be introduced by the Rudd Labor government.

The “FuelWatch” scheme, already in force in Western Australia freezes the price of petrol at each service station for 24 hours each day and publicises it the evening before.

It allows drivers with access to the internet to know with certainty before they set out each morning which service station will be charging which price...

Assistant Treasurer Chris Bowen yesterday promised to investigate taking it national as part of a response to an Australian Competition and Consumer Commission investigation into fuel prices commissioned by the previous Treasurer Peter Costello.

He also gave the ACCC Chairman Graeme Samuel the formal power to monitor petrol prices and wrote to his state and territory counterparts asking them for nominations for the new post Petrol Commissioner within the ACCC.

FuelWatch, introduced in Western Australia in 2001, requires each service station to notify a central authority of its next day’s prices by 2.00pm. The prices are made available by an automated telephone service, by email and by the internet from 4.00pm and have to apply from 6.00am the next day for 24 hours.

The series of 24-hour price freezes makes it hard for stations to tacitly collude by pushing up their prices, seeing whether others follow and then quickly bringing them back down if they do not.

The ACCC Chairman Graeme Samuel said yesterday that in other states petrol retailers had an unfair advantage over consumers through the use of an information service called Informed Sources.

It allowed each station that subscribed to see minute-by-minute what each other station was charging. Sellers could lift their prices “with reduced risk.”

“If others do not respond the leader knows quickly and can reverse the price rise with little loss of price
sensitive consumers,” the report said.

Conversely retailers who might be tempted to cut their prices would know that that cut could be instantly matched making them “more reluctant to decrease
prices in search of greater sales than they otherwise would be.”

An econometric analysis conducted for the ACCC found that FuelWatch had cut the average price margin charged to Western Australian motorists by 1.9 cents per litre.

The scheme had not eliminated the weekly price cycle, but had made it less extreme.

The Assistant Treasurer Mr Bowen said he hoped to take FuelWatch national “within months”.

It would be a way of helping consumers through the provision of information rather than heavy-handed intervention.

The ACCC report found that while there was "no obvious evidence" of price fixing or collusion amongst retailers or refiners Australia’s petrol companies operated in a "comfortable oligopoly".

Caltex, BP, Mobil and Shell enjoyed “buy-sell” arrangements under which each undertook to supply petrol to the others in states in which they did not have refineries.

The arrangements reduced the incentive for the refiners to “take each other on” as wholesalers.

The Commission fund that while there was insufficient evidence “at this stage” to conclude that the buy-sell arrangements were illegal the refiners might “be well advised” to seek explicit authorisation for them under the Trade Practices Act.

The report also found that there ware significant impediments to the independent importing of petrol and recommended an audit of terminals suitable for importing.

It found that the use of Coles and Woolworths shopper dockets had on balance cut petrol prices. They were unlikely to have lifted supermarket prices.

Australia’s petrol was the world’s forth-cheapest and our taxes on petrol were the world’s third-lowest.

BP yesterday disputed the Commission’s contention that the West Australian FuelWatch scheme had lowered prices saying that its analysis showed it hadn’t cut prices at all.

Tuesday, December 18, 2007

Tuesday column: Bring on the evidence.

"Labor’s guiding principle appears to be that any promise made during the campaign - no matter how stupid, no matter how dangerous, no matter how bereft of supporting evidence – will be kept."

To technocratically-minded types such as myself the new government is a dream come true. Its leader Kevin Rudd says his decisions will be “evidence-based”.

It’ll mark a change. The previous government axed what it said were “job-destroying unfair dismissals laws” without first asking its Treasury to find out whether they were in fact job-destroying.

It ordered its Employment Advocate to stop collecting information about the award conditions that were being stripped out of Workplace Agreements when it became embarrassed by the information that he was coming up with.

It introduced “media reforms” that hugely enriched moguls such as James Packer and Kerry Stokes without conducting a single piece of economic research on their impact and $10 billion worth of “water reforms” that hugely advantaged existing irrigators without even running the idea past the departments of Finance or Treasury until it was too late.

Its Treasurer Peter Costello derided the econocrats in his own department who could have given him advice about the best way to spend $10 billion of taxpayer’s money by declaring that his department was “no water expert”.

“Treasury is good at Treasury, but Treasury has not been engaged in water,” he said.

Until the Prime Minister changed course this time last year, the Treasury had also not been asked for an economic assessment of the impact of climate change.

Where Treasury advice did get through it was at times ignored, suppressed or misrepresented. The Treasury told the government in the lead-up to the May budget that Australia’s productivity growth had fallen to zero.

When asked after the budget whether he had received such advice the Treasurer replied with apparent pride: “Well, you can look all the way through the budget papers and you won’t find any figure like that”.

The centerpiece of the Coalition’s reelection campaign was a tax package that included a slashing of the top personal rate from 45 to 42 per cent and eventually to 40 per cent.

The Treasurer said he had access to Treasury modeling that showed it would “boost the estimated workforce by around 65,000”.

But he wouldn’t release the modeling. Last week we found out why. The new Treasurer Wayne Swan who had put forward an identical tax plan but without the cuts to the top rate said that Treasury modeling showed that showed his plan would also “encourage around 65,000 people into the workforce”.

It was the same modeling. What the Treasury had found was that there was no extra benefit to employment from cutting the top rate. None whatsoever. But the Coalition didn’t allow the design of its campaign centerpiece to be guided by that evidence. It preferred to misrepresent it.

So it’s a genuine relief to discover that from here on decisions are about to be evidence-based. Note the use of my qualifying words “from here on”.

The new Finance Minister Lindsay Tanner gave the game away in a Lateline interview last month...

He said he wouldn’t blatantly ignore Treasury analysis “like the previous government did, for example, announcing a $10 billion water program written on the back of a serviette yet after a long lunch without being adequately costed or assessed by Treasury or finance and without even being taken to Cabinet. We won't do that sort of thing, I can assure you.”

He was then asked whether he would keep the water program anyway.

His reply: “Yes”.

Labor’s guiding principle appears to be that any promise made during the campaign - no matter how stupid, no matter how dangerous, no matter how bereft of supporting evidence – will be kept.

The requirement for evidence relates only to the future.

Wayne Swan demonstrated last week that his $31 billion of proposed tax cuts were almost completely bereft of supporting evidence when he said they were good value because they would entice an extra 65,000 Australians into employment.

Right now employment is growing by an average of 22,000 Australians a month. Last month it grew by 53,000.

The new Treasurer is proposing to spend $31 billion over three years in order to buy (at most) an extra three months of employment growth.

At around $500,000 per job it’s expensive. That might be good value if there were other reasons for cutting tax, but as Access Economics made clear this week at the moment those tax cuts will actually do the economy harm.

Labor’s $2.3 billion Education Tax Refund is similarly bereft of supporting evidence. Labor says it will ensure parents spend money spent on books and computing equipment for children in need. In fact the parents who already spend that money will simply pocket the refund, and the ones who are too poor to spend it on their children will remain too poor. The partial refund won’t be paid until well after they spend the money they still won’t have.

There is doubtless evidence available as to how $2.3 billion could be well spent on education. Labor either didn’t seek it or didn’t publish it.

Labor has also been tardy in producing evidence to support its contention that every child in upper secondary school needs their own classroom computer.

In fact for years now study after study has failed to find any link between access to computers and classroom performance.

The most recent British study, released just last week after the campaign did find a link but only a slight one. A doubling of computing funding was found to boost the number of students doing well in English by 2 percentage points, the number of students doing well in Science by 1.6 percentage points, and the number doing well in Maths not at all.

Is it worth doing? Perhaps. Might there be a more effective way to spend the money on education? Probably.

And don’t get me started on solar cells on schools.

Labor’s election policies were shockers when it came to evidence.

The good thing is that from here on the new Prime Minister and Treasurer have promised to do things properly. I’ll remind them of it every chance I get.


Stephen Machin, Sandra McNally, Olmo Silva New technology in schools: is there a payoff? 14 December 2007


Monday, December 17, 2007

Is the public service thrilled at the change? You bet.

Stephen Bartos, in today's Crikey.

"Treasury is hard put to contain its pleasure at being publicly elevated to a more influential position in the new government, and is relishing its enhanced role. When Julia Gillard paid a surprise visit to her department, she was treated to a rock star’s welcome, with enough chants and hollering to shake anyone’s preconceptions of a staid public service. There’s nothing like being given greater influence to bring out the enthusiasm in public servants."

"The rivets are popping!"

Access Economics has urged the new government to abandon the tax cuts it promised during the election for the sake of the economy. In a merciless critique of the previous government's record released this morning Access has also labeled its spending decisions “positively Whitlamesque”.

“Although it is usual for bad spending decisions to cumulate over the life of a government, the quality of spending decisions of late worsened more than usual,” this morning's Access Budget Monitor says.

Since the Howard government released its Intergenerational Report in 2002 making the case for spending restraint Access says it has boosted spending by an extraordinary $40 billion per year and handed out tax cuts worth $45 billion per year and set to climb...

The Access report says in many circumstances tax cuts are welcome.

“For 30 years, politicians have been able to pump out tax cuts in an election year, confident that the increased demand from lower taxes would lead to a bigger Australian economy and more people in jobs.”

“But that’s not what you get when the rivets are already popping. When we’re already at full stretch, and we add another tax cut, we don’t get a bigger economy and more people in jobs, we get a bigger import bill and higher prices.”

The report says that under current conditions the tax cuts promised during the election campaign “will equal interest rate increases”.

Asked by the Canberra Times whether the incoming government should abandon the $31 billion of cuts it promised in solidarity with the Coalition the chief economist at Access Chris Richardson replied: “the economic answer is yes.”

But he said “the political answer is that it probably has no choice but to go ahead with them”.

“That means that its razor gang is going to have to cut harder”.

Mr Richardson described the fiscal largess of the Howard Government as “huge”. Whereas the Keating Government had been criticised for promising away tax cuts well in advance in return for wage moderation, the Coalition had promised away tax cuts well in advance “in return for nothing really”.

The tax cuts meant that when the minerals boom slowed in a few years' time the budget surplus would drop from its present 1 per cent of GDP to 0.6 per cent “and then head further south”.

This would happen at a time when the Intergenerational Report had made clear that the increasing cost of health care was set to “bugger the longer term budget position”.

Labor should be attempting to improve its budget position by about $85 billion a year – the amount that the Coalition had allowed it to worsen since 2002.

This would mean cutting spending by about one-third, unless the government also also increased taxes or withdrew its promised tax cuts.

Fortunately “this incoming government has before it a particularly rich vein of potential savings to improve the value for money being offered to the public”.

The more that Labor succeeded in trimming waste the more it would take pressure off interest rates.

On Friday the new Treasurer Wayne Swan committed himself to a root and branch review of government spending but said the promised tax cuts would be delivered.

He defended the $31 billion of extra cuts as needed to bring an extra 65,000 people into the workforce.

The outgoing Treasurer Peter Costello on Friday declared Mr Swan the “luckiest lotto winner in the history”.

He said there was “no incoming Treasurer in the world” that would inherit a set of books like that the ones the Coalition had handed over.

Sunday, December 16, 2007

Sunday dollars+sense: Good looks matter...

When I mentioned last week that people who are ugly do badly in job interviews I might have frightened you. I should have. In two decades of studies in Asia, Europe, the United States and Australia economists have consistently found that being good looking pays off.

It can get you votes in an election, get you a job that you would have otherwise not have got, or win clients.

And here's the surprise...

...good looks help men more than women.

A 1986 study using photographs and hypothetical job applications found that good looks helped men get on the short-list for both high and low level jobs.

For women they helped for only secretarial jobs.

A 1991 examination of MBA students found that the better they looked the more they earned on graduation, if they were male.

Good looks didn't help women at all on graduation, although they did help later when it came to earnings growth.

A landmark 1994 survey of thousands of Americans found that the men who the researchers assessed as having “below average” looks or “homely” looks earned 9 per cent less than the average. “Above average” or “handsome” men got 5 per cent more. For women the effect was more modest.

From advertising agents in Holland to lawyers in Michigan to university tutors in Texas - study after study has round that if you are good looking you'll get more customers and be better rated by your customers – all the more so if you are a man.

And looks are hard to change. A study of women in China conducted in part by Xin Meng of the Australian National University found that the use of cosmetics did very little to even the balance. The payoff in terms of additional earnings from buying make-up and the like was only 15 per cent of the amount spent.

Determination and gravitas can help. John Howard was assessed in a survey conducted by the ANU's Andrew Leigh with Amy King as being less attractive than 95 per cent of House of Representatives candidates.

He did alright. Until he was up against an especially good looking man.

Leigh and King found that good looks typically win you 1.4 per cent of the vote; less if you are a woman.

The ACT's new Opposition Leader looks good. They might at last be in with a chance.


Daniel S. Hamermesh, Jeff E. Biddle:
Beauty and the Labor Market NBER Working Paper 4518 National Bureau of Economic Research November 1993.

Jeff E. Biddle, Daniel S. Hamermesh:
Beauty, Productivity and Discrimination: Lawyers' Looks and Lucre NBER Working Paper 5366 National Bureau of Economic Research November 1995.

Ciska M. Bosman, Gerard Pfann, Jeff E. Biddle, Daniel S. Hamermesh:
Business Success and Businesses' Beauty Capital NBER Working Paper 6083 National Bureau of Economic Research July 1997.

John Cawley: Body Weight and Women's Labor Market Outcomes NBER Working Paper 7841 National Bureau of Economic Research August 2000.

Daniel S. Hamermesh, Xin Meng, Junsen Zhang:
"Dress for Success - Does Pump Priming Pay?" NBER Working Paper 7167 National Bureau of Economic Research June 1999

Daniel S. Hamermesh,
"Beauty in the Classroom: Instructors' Pulchritude and Putative Pedagogical Productivity," Economics of Education Review, August 2005

Daniel S. Hamermesh
"Changing Looks and Changing 'Discrimination': The Beauty of Economists," Economics Letters, December 2000

Andrew Leigh, Amy King
Beautiful Politicians Australian National University 2007

Mirror, Mirror on the Wall: The Effect of Time Spent Grooming on Wages, Elon University, August 27, 2007


Saturday, December 15, 2007

The previous Treasurer couldn't have lied to us about the economic outlook could he?

The Treasurer Wayne Swan has promised a root and branch review of public service spending in the wake of a new Treasury forecast of eighteen months of excessive inflation.

The Treasury forecast, revealed by Mr Swan in his first public address in the role has underlying inflation running at or above the top of the Reserve Bank’s target band until shortly before the year 2010.

In his address to the Australian Industry Group yesterday Mr Swan said that underlying inflation was already running at 3 per cent and that the Treasury had warned him that worse was to come.

“In my discussions with Treasury, they have advised me that, following the September quarter CPI and National Accounts, inflationary pressures are likely to put further pressure on the underlying inflation rate over the next 18 months"...

The assessment sharply contradicts that of the previous Treasurer Peter
Costello who claimed during the election campaign that inflation was “very

Mr Swan said he wanted to be “upfront” with his business audience and warn
that Australia faced an extended period of elevated inflation and that he
had no “magic wand” with which to beat it.

What he would do was impose “a new era of fiscal discipline” to replace the
“flabby undisciplined fiscal policy settings of the past”.

By keeping a “tight reign on spending” he hoped “ease some of the burden
that has been placed on monetary policy in recent times.”

Since 2004-05 Commonwealth spending had grown by more than 4 per cent each
year in real terms.

“This is more rapid growth than at any time in the last decade and a half,”
the Treasurer said. “There has been no energy put into finding savings.”

“In the face of strong domestic inflation, even with a strong fiscal
outlook, we must monitor spending to ensure it is well targeted, and
complements other macro-economic policy settings.”

“That is why we are implementing a rigorous review of existing spending — a
new era of fiscal discipline.”

“We have already found more than $10 billion of savings, but we need to do

Mr Swan said he would be in a position to announce “substantial additional
savings” in his first budget in May.

In the lead-up to the Budget he would identify and root out the spending
items that did little to expand the productive base of the economy.

“Wasteful spending will be a thing of the past — our savings will strengthen
the budget and make room for better investments in the future,” he said.

In a subsequent interview with ABC radio Mr Swan he was prepared to boost
the budget surplus beyond the previously agreed bipartisan target of one per
cent of GDP.

“It is important in the current environment to have further savings,” he
said. “We will get our spending priorities right for the economic
conditions that we currently face, and we won’t shirk our responsibility
when it comes to finding further savings in this budget by eliminating
wasteful spending and wrong priorities.”

The $31 billion of tax cuts promised by Labor during the election campaign
would be quarantined from the review. Mr Swan said they would be delivered
in full.

“Our tax plan fits well within the bounds of a responsible fiscal envelope,
and maximises the participation incentives for those groups that we know are
most responsive to tax cuts,” he told the business audience. These groups
included Australians entering the workforce on low incomes and those facing
a 30 per cent marginal tax rate.

“Treasury modelling suggests these key components of our tax plan will
encourage around 65,000 people into the workforce in the medium-term,” he

Thursday, December 13, 2007

The nation's capital "flatlining"

Employment growth has flatlined in the ACT with the latest official figures showing that the number of Canberra residents in work has actually fallen over the last year while increasing in every other state.

The national employment figures released yesterday show that a net 52,600 Australians gained in jobs in November, none of them in the ACT.

The Acting Prime Minister and Employment Minister Julia Gillard welcomed the national news saying that workforce participation and employment had hit a record high, reflecting the underlying strength of Australia's economy...

Over the year to November an extra 298,800 Australians found jobs, with substantial increases in employment in every state and territory other than the ACT.

While an extra 8,100 Tasmanians found jobs, an extra 7,100 Northern Territorians, an extra 15,900 South Australians, an extra 33,500 West Australians an extra 74,700 Queenslanders, an extra 92,200 Victorians and an extra 68,200 residents of NSW, amongst ACT residents employment fell by 895.

The results lend weight to claim made by Access Economics this week that the ACT economy had “hit the wall” with its spending growth “stalled”.

Access forecast that spending growth in the ACT would fall from 4.0 per cent this financial year to 2.5 per cent in the next one and 0.1 per cent in financial year after - by far the lowest growth rate in the nation.

An Access director David Rumbens blamed the ACT's accommodation shortage which he said had throttled employment growth. “Quite literally the ACT has hit a supply side wall,” he said.

The most up-to-date measure of the ACT's economic health contained in national accounts released last week suggests that that ACT economy stopped growing between the June and September quarters.

In seasonally adjusted terms the Territory's state final demand contracted 1.9 per cent between the two quarters. In trend terms after rounding the growth rate was 0.0 per cent.

In every other state and territory the growth rate was clearly positive.

Economists contacted by the Canberra Times yesterday were at a loss to explain the apparent contraction.

Westpac senior economist Anthony Thompson said he was “puzzled” by the slide in employment. The ANZ's specialist in Australian economics Riki Polygenis said it was “quite surprising”.

Amanda Tan from the St George Bank that the result might reflect the small sample size of the Bureau of Statistics employment survey in the ACT.

The chief economist at HSBC Capital Markets John Edwards said it was possible that people leaving the public service were not being replaced because the Territory's tight housing market and good employment conditions elsewhere made it hard to attract people to the ACT.

The ACT is the only state or territory in which there are more jobs vacant than unemployed people available to fill them. Yesterday's figures suggest that there were 5,374 unemployed ACT residents in November. The latest job vacancy figures (for August) suggest there were 6,100 jobs going unfilled.

The ACT's unemployment rate of 2.8 per cent is by far the lowest in the nation. In November every other state of territory had an unemployment rate of 3 per cent or greater. The national rate climbed from 4.4 to 4.5 per cent.

Canberra's economic boom... explodes

The ACT economy has “hit the wall” with its best growth behind it for the foreseeable future in the view of Australia's leading private forecaster Access Economics.

In retail forecasts to be released this morning Access says shop keepers in most of the country can expect “a corker of a christmas” thanks to strong wage growth, tax cuts and share prices at close to record highs.

But the document says spending growth in the ACT has “stalled”.

An Access director David Rumbens said yesterday ahead the report's release that spending in the Territory actually went backwards in the three months to September when adjusted for inflation. By contrast spending in the rest of mainland Australia grew strongly.

He blamed the ACT's accommodation shortage which he said had throttled employment growth.

“Quite literally the ACT has hit a supply side wall,” he told the Canberra Times...

“There are not enough people coming into the ACT to fill the jobs that are vacant. Your employment gains have gone from perhaps around 2 per cent a year to around 1 per cent - that's one percentage point off retail spending growth because you just don't have the extra population to do the spending.”

The latest Bureau of Statistics figures show that there has been no employment growth in the ACT over the last year. Nationwide, employment grew by 3 per cent. The ACT is the only state or territory in which there are more jobs vacant than unemployed people available to fill them.

Mr Rumbens said Canberra had enjoyed extraordinarily fast employment and spending growth in recent years “but the best growth is probably behind the ACT for this cycle”.

“The Chief Minister Mr Stanhope can help by releasing a bit more land,” he said. “Canberra housing prices are pretty close to those in other cities that are more than ten times its size. It's not something you would have expected given that the amount of land available.”

Steadily increasing housing prices and mortgage rates were also biting into retail spending in Canberra in a way that they were not in other cities.

“Home mortgage payments are relatively high even taking account of the higher incomes in Canberra,” Mr Rumbens said.

“I know the Chief Minister says Canberra's housing is the most affordable in Australia given the incomes but what he is missing is that there are more people with mortgages in the ACT than there are elsewhere. This means that mortgage increases eat into retail spending more than they would in other places.”

“In other cities there are a lot of people who have paid off their mortgage, paid it off generations ago, and are still in the same house. In the ACT people are exposed.”

Labor's promised razor gang set up to prune the public service was likely to dent retail spending further. “It is not a prospect that will encourage public servants back to the shops any time soon. For the foreseeable future the Territory's fastest growth is behind it,” Mr Rumbens said.

Access has forecast that retail spending growth in the ACT will fall from 4.0 per cent this financial year to 2.5 per cent in the next and 0.1 per cent in the one after - by far the slowest growth rate in the nation.

The Australian National Accounts released last week suggest that the Territory's economic growth slowed to zero in the September quarter. In trend terms the ACT's state rinal demand grew not at all after rounding. In every other state and territory the growth rate was positive.


Wednesday, December 12, 2007

What kind of idiots does the NSW government think we are?

Here's the promise, in today's Daily Telegraph:

"A train every five minutes, whisking millions of struggling commuters from the inner west into the Sydney CBD on an underground metro rail link.

It sounds like a fantasy. But this is Premier Morris Iemma and Treasurer Michael Costa's promise to the long-suffering people of western Sydney - if they secure the $15 billion sale of the NSW electricity industry."

Here's the reality, as explained by John Quiggin:

"There is no meaningful sense in which selling an income-generating asset allows you to pay for anything.

As a matter of public policy, either a metro rail line is a good investment or it isn’t.
Whether or not electricity assets are sold can make no difference to this."

Glenn Stevens opens the minutes book

Really. He's released the minutes of every Reserve Bank board meeting going back a year.

Can you have too much openness?

Nick Gruen has more on the prisoner's dilemma Bali.

Tuesday, December 11, 2007

Tuesday Column: The prisoner's dilemma, in Bali

In almost every police interrogation movie there's this classic scene: The good cop walks into the cell housing one of the suspects and says: “We know the pair of you did it, your mate in the other cell has just confessed. Now why don't you fill us in on the details?”

Unable to confirm whether or not his or her partner really has spilled the beans the prisoner will be tempted to blab.

More than half a century ago researches at the RAND Corporation in the United States came up with a more complex version of the problem and named it the Prisoners Dilemma...

In it the police don't have enough evidence to nail either of the pair on the big charge that carries a ten-year jail term - only a lesser charge carrying six months.

They keep the prisoners apart and offer each an identical deal.

“I you betray your partner we will give you immunity and you won't spend an extra day more in jail. Your partner will get 10 years.”

“The only exception is if you each betray each other. Then you each get 5 years.

“So what's it going to be? Remember, if your partner blabs and you don't, you are facing a decade in jail.”

It is in the prisoners interests for neither to blab. Then each would be each out in months.

But if they each try to look after their own interests each will blab and be up for 5 years.

Economists have long been intrigued by the dilemma because it suggests that there's an exception to the more general truth that if everyone acts in their own interests society as a whole will be better off.

Ross Garnaut has been wrestling with it for months.

He's the economic guru appointed by Kevin Rudd and Australia's eight state governments in April to produce Australia's version of Britain's Stern Report on climate change.

He'll deliver his first progress report, to the Queensland Cabinet, today.

But a fortnight ago in the HC Coombs Lecture Theatre at the ANU he gave Canberra residents an early insight into his thinking.

He said that climate change was a “genuine international prisoners' dilemma”.

It is in most country's individual interest not to cut emissions. It would cost it money and by itself would do little to halt climate change.

But if every country acts in what it sees as its own individual interest, the end result - for all of them - will be catastrophic.

He said by contrast trade negotiations, often thought of as a prisoners dilemma, were not the real thing.

The truth is that opening a country up to imports almost always benefits it, even if many of the citizens of the country don't believe it.

It makes sense for nations such as Australia to cut tariffs even if others are not. Garnaut himself helped demonstrate that in the mid-1980's when he advised Bob Hawke to begin dismantling our tariff barriers without waiting for the rest of the world.

But climate change is different. It really wouldn't make narrow economic sense for Australia to cut its own carbon emissions if other nations didn't, a point made repeatedly by John Howard until he switched sides and set up his prime ministerial task force on emissions trading this time last year.

Climate change negotiations area all about getting everyone to put aside what appears to be their self interest in order to actually look after their interests – and Garnaut doesn't think it will be easy.

(I like to think of it not as a dilemma faced by prisoners, but as a dilemma about milk. My father told me this story when I was a boy. A village decides that on a special day its fountain will spout forth milk instead of water. All each family has to do is pour a cup of milk into the fountain overnight. Each family figures that it will save scarce money if it pours in a cup of water instead. No-one will notice and it won't make much difference. When the fountain is turned on in the morning, there is no milk, only water.)

But things aren't completely bleak. The surprising thing about the prisoner's dilemma is that when it takes place in the real world (actually in the world of the economics laboratory, where real people are invited to play a real version of it for real money against real people who they can't even see and will never see again) a very large proportion of people don't act as the economists say they will. They co-operate against what appears to be their narrow self-interest and find their trust repaid.

The other finding, very relevant to the Bali negotiations, is that where games involving the prisoners dilemma are repeated the co-operation rate jumps. It becomes in players' long-term self interest to develop a history of co-operating even if doesn't help them in the short-term.

And there's something else that will help. While it will be costly to a nation such as Australia to cut carbon emissions and while we will get little benefit unless the big emitters such as the United States and China do so as well) the best guess suggests that for Australia those costs are small.

The latest, produced by economic modellers from Monash University and the CSIRO looks at a range of options from cutting Australia's net emissions by 40 per cent to 100 per cent by the middle of the century.

It finds that whatever option is adopted by the middle of the century Australia's real incomes will be roughly three times as big as they are today.

Our grand children will be much better off than we are now whatever we do, just as we are much better off than our grand parents were.

But there is a caveat. Their analysis looks only at the costs of cutting carbon emissions - not at the potential benefits in terms of tragedies avoided if the entire world cuts them.

Those potential benefits are huge. They make Australia's decision look like not much of a dilemma at all.

Monday, December 10, 2007

"The time has come now to roll our sleeves up and get to work"

Bloody hell!!!

Kevin Rudd has called on a full Council of Australian Governments meeting for December 20, just days before Christmas!

Announcement follows:

"I have asked the Premiers, Chief Ministers and the Australian Local Government Association to attend a Council of Australian Governments meeting in Melbourne on 20 December 2007.

The Government has a plan to move Australia forward by boosting long-term productivity growth for the future.

The Government has a plan to tackle Australia's future challenges and I want to begin implementing that plan as soon as possible...

I want to use this COAG meeting to set a new framework for co-operative Commonwealth-State relations and take practical steps to end the blame game.

The time for buck-passing must come to an end. The time for real work to deal with real problems facing the nation must begin.

Discussions at the Melbourne COAG will include:

1. The future of Health and Hospitals in Australia, including:

. Tackling elective surgery waiting lists
. Investing in aged care, especially in transition care
. Investing in public dental programs
. Preventative healthcare

2. Education, Skills and Training – The Productivity Agenda, including:

. Lifting the Year 12 retention target
. Investing in Early Childhood
. Promoting the study of Asian languages in our schools
. Establishing Trades Training Centres in Secondary Schools
. Implementing the Government’s National Secondary School Computer Fund
. Developing a National Curriculum

3. Climate Change and Water, including:

. Establishing a National Emissions Trading system
. Establishing a single national renewable energy target

4. Infrastructure:

Establishment of Infrastructure Australia to audit Australia’s infrastructure bottlenecks.

5. Business deregulation, including:

· Cutting red tape for Australian business

6. Housing, including:

· More streamlined development approval processes and measures to reduce infrastructure charges and developer costs

. Addressing rental affordability

· Homelessness

7. Other National Reform Initiatives

The purpose of the 20 December meeting is to agree on a comprehensive program of work for COAG for 2008 with agreed objectives and reporting timelines.

In a departure from past meetings, I have invited Treasurers to also attend this meeting in Melbourne.

I do not under-estimate the degree of difficulty involved in this ambitious agenda.

But the time has come now to roll our sleeves up and get to work. "

Sunday, December 09, 2007

Sunday dollars+sense: Don't you just hate job interviews?

Halleluiah! The University of Queensland is to scrap the use of interviews to decide who gets into its medical course.

It has done what most such organisations never do and actually conducted research into whether a candidate’s performance at an interview is at all related to their subsequent performance if they are successful.

The answer, according to the head of the school of medicine David Wilkinson quoted in The Australian this week: “All the evidence shows that the interview is useless"...

Other medical schools haven’t caught on, including the new one at the ANU. It is setting itself up for the sort of embarrassment faced by Adelaide University which some years back was found to have rejected students with Tertiary Entrance Scores of 99.9 and family backgrounds in medicine, apparently because its interviewers didn’t like they way they presented.

Adelaide has been charged with using interviews to socially engineer its student mix, ensuring that it is not overwhelmed by the children of doctors or the products of private schools or brainy Chinese and Vietnamese.

But the charges miss a more important point, well known to the only psychologist ever to win a Nobel Prize in Economics, Daniel Kahneman.

It is that even when well-conducted, interviews are usually useless.

Kahneman says any process that relies on human judgment will almost always produce a worse result than one that simply relies on data.

Take stock-picking. Last financial year our super fund managers did better than most. They made us 15 per cent. But the share market itself soared 23 per cent.

We would have been better off had the process been automated.

Kahneman says we would get better results picking candidates for jobs by using almost any objective measure – length of service, academic qualifications, it doesn’t really matter – rather than by subjecting them to interviews.

He says we appear programmed to believe that we are good at picking talent – “delusional optimism” he calls it – and impervious to evidence that suggests we are not.

In the US a few years back one of the poorest baseball teams the Oakland A's decided to ditch the traditional method of picking talent by using scouts - old hands who relied on judgment.

Instead they plugged batting averages and the like into a laptop and offered places based on stats.

They shot from bottom of the league to near the top using players the scouts would have rejected.

In his book Moneyball Michael Lewis describes the players the laptop picked. They were ugly, lanky, fat and old. They never would made it through an interview.


Friday, December 07, 2007

Saturday Forum: How serious is the US financial crisis becoming?

You know things are serious when the most pro-business US president in living memory promises to freeze mortgage interest rates for half a decade.

That’s what George W Bush did on Thursday. Everything he had said about personal responsibility and about getting the government out of Americans’ lives was put on hold.

We saw it in this country at the end of the 1980’s.

The ultimate deregulator – the man who had floated the Australian dollar, let in foreign banks and abolished the ceiling on bank mortgage rates announced that henceforth they would go no higher.

Paul Keating as Treasurer declared that 17 per cent was high enough. It would be illegal for banks to charge any more, whatever their underlying costs.

Within months we had plunged into a recession that lasted years. Things had indeed been serious...

Bush’s announcement, like Keating’s roughly two decades ago, is symbolic rather than particularly helpful. The loans whose repayments will be frozen are those at low honeymoon rates that were due to jump to market rates next year. Borrowers judged able to pay the market rates won’t get access to the freeze and nor will those who are judged unable to pay the starter rate because they are behind in their repayments.

The real problem looks unsolvable and its extent unknowable.

What is known suddenly looks worse.

Our Reserve Bank’s groundbreaking decision this week to release the minutes of its monthly board meetings makes clear how sudden.

Just one month ago our Bank painted a relatively benign picture of global economy. The minutes for its November board meeting report that despite a downturn in the US housing sector, “other parts of the economy had been resilient”. Although the US economic growth would slow, other nations including China, Singapore and Korea would grow very strongly. Global growth would remain “still well above the average of the past three decades”.

Not by December. The report of this week’s board meeting declared that “market sentiment had deteriorated after an earlier improvement and that prospects for growth in the major economies appear to be weakening”.

“It is unclear to what extent that will affect Asia, where conditions at this point look quite strong. But overall, it now appears likely that global growth will be closer to trend in 2008, after several years of above trend growth,” the Bank reported.

This week a former US Treasury Secretary Paul Samuelson, now in his nineties, is regarded as one of the fathers of modern neoclassical economics. He holds a Nobel Prize and he wrote the best-selling textbook that explains how everything is meant to work.

Last month he wrote that the tools that have worked for most of his lifetime may no longer do so.

“It used to be enough for a central bank to ‘lean against the wind.’ That means lower interest rates when unemployment is too high and when deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation.”

He said that right now it no longer clear that the mechanism works, and it is no longer even clear in which direction rates should be moved.

“This is surprising, but true. Interest rates are indeed low. But financial panic engendered by the burst bubble of unsound US and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory.”

The implications for Australia of such a development here would be awful.

Our governments have effectively outsourced management of our economy to the Reserve Bank. At its first Cabinet meeting this week the Rudd government increased the Bank’s status still further making its Governor a statutory official safe from the sack and giving him a partial veto over new appointments to his board.

In his quiet moments the new Treasurer Wayne Swan might be prepared to concede that the tax cuts he promised in the election were unwise, but he has been able to feel confident that if they do cause trouble, the Reserve Bank will be able to adjust interest rates and fix things up.

Veteran Australian economist Fred Argy, a visiting fellow at the ANU and an advisor of prime ministers from Menzies to Keating says that in recent years we have come to regard it as “unthinkable that we will have a serious recession ever again. The Bank will always come to the rescue.”

He isn’t sure that Samuelson is right about the growing impotence of central banks. But he says the prospect “makes one think”.

It would mean that Australia might be powerless to prevent the next recession when it loomed and that government’s would have to use its own tools – tax and spending powers – in an attempt to stop it happening.

This might mean aggressively going into to deficit to pump money into the economy, regardless of Labor’s formal pledge to run surpluses over the business cycle.

It’s a view put forward by Larry Summers in the United States. He says the crisis facing its financial system is too important to take second place to the aim of long-term deficit reduction.

Not everyone thinks that what is happening in the US will turn out to be that serious. The Organisation for Economic Co-operation and Development painted a relatively upbeat picture of the US in its Economic Outlook report released on Friday.

It says that while the housing market problems will drag US growth down to low levels it will “not trigger a recession”.

As well Europe, China and Japan are not as dependent on the US as they once were. A good deal of China’s economic growth is now being fuelled by its own citizens as their living standards rise.

Although its OECD growth forecasts have been revised down “the baseline scenario is actually not that bad in view of the recent shocks”.

But it says the risks to its forecasts are heavily weighted to the downside.

The most important things to avoid catastrophe are for every country to do all that it can to make sure financial markets continue to function, and to avoid permanent tax cuts.

Yes. What we think of as a domestic issue, and what leaders on both sides during our election campaign regarded as an irritation, is actually one of the top priorities identified by the OECD to stave off a worldwide economic collapse.

Its reasoning goes like this. Throughout the OECD budgets have come in above expectations in recent years because of better than expected revenue.

But “part of this revenue bonanza is likely to be temporary, reflecting among other things high profits in business activities related to finance and housing”.

Its warning: “There is a risk that decisions could be taken in countries that cannot afford it to permanently raise spending or reduce taxes on the basis of temporarily high receipts.”

There’s no doubt that the OECD is thinking about Australia in delivering the warning because it makes the same point in the section of its report devoted specifically to Australia.

It says to permanently give away extra revenue in tax cuts when a downturn might come and take that extra revenue away “would imply a weakening of the underlying budget position”.

“Were the downside risks subsequently to materialize, such weaknesses would likely surface and could impede the full working of the fiscal stablisers at a time when they were needed.”

In other words, because it will have given away its (probably temporary) mining-fuelled revenue bonanza in $31 billion of permanent tax cuts our government won’t have the store of money it will need to splash around to get us out of a recession when one hits.

Even if the mining boom ends without recession our government will find itself having to continue to fund historically low rates or personal income tax rates without the necessary revenue.

It’ll have to slash its own spending or push up other taxes to compensate at a time when such action will not be helpful.

On taking office this week Kevin Rudd and his Treasurer Kevin Rudd spoke of making “evidence-based” decisions as if with good management Australia’s future would be secure.

But right now the evidence is anything but clear and it’s not particularly clear whether the traditional tools of economic management will continue to work.

They’ve taken office at a challenging time.