Monday, March 31, 2008

Tuesday Column: Ditch the spin. It's a record-sales record!

Downloading is killing recorded music, right?

It must be. The music industry is so worried that it has asked the Communications Minister Senator Conroy to introduce a three-strikes and you’re out policy for people who illegally download their favourite tracks.

They say Strike One would be a warning. Strike Two would earn you a suspension of your internet access and Strike Three would result in the removal of your internet access altogether.

It's needed because the music industry is losing sales. Or so it says, under oath, in court cases. I’m here to let you in on its guilty secret. It isn't...

The latest Australian Recording Industry Association sales figures released very quietly on the eve of Good Friday show that in fact the legal sales of recorded music climbed to an all time high in 2007 - a high that could only have been dreamed about in the years before the advent of downloading and CD burning.

It's uncomfortable with the fact. Most industry associations would crow about an all-time record high in sales. Not this one. It’s grown up believing that the sky is about to fall in.

Remember the introduction of the cassette tape in the 1970s and those skull and crossbones stickers on album covers warning that “Home Taping is Killing Music”?

In reality the exact opposite was happening. Before the advent of home taping Americans bought around 2.5 long-playing records each per year. After two decades of home taping they were buying 4.5 recorded cassettes and LPs year.

Stan Liebowitz, a Professor of Economics at the University of Texas argues forcefully that the explosion in recorded music sales wasn’t accidental. It was caused by the introduction of the cassette.

Before then, music listening was generally limited to one room in each house; the one with the record player. The advent of the cassette made it possible to listen in the car, while jogging, in the garden - practically anywhere.

With more of each day available to listen to recorded music people needed to buy (or copy) more music to fill it. Music sales (and also “illegal” home copies) skyrocketed.

I have been collecting Australian sales figures going back to 1982.

In that year we bought a total 29 million units (cassettes, albums and singles) – around 2 per person.

Ten years later after almost a decade of the compact disk we were buying 42 million units. Five years after that at around the time the internet was taking off we were buying 50 million.

Another five years later after the introduction of CD-burners and file-sharing services such as Napster we bought 59 million.

And after the most recent five years of sustained CD-burning, intensive file swapping, the introduction of the iPod and near continuous hand wringing by the industry, we bought 99 million – easily an all-time record and an impressive jump of 23 per cent on the year before.

Australia's recorded music industry is literally moving ahead in leaps and bounds.

Why is that we are now buying roughly 5 pieces of recorded music per person whereas back at the start of the 1980s we only bought 2?

Increased wealth has got to have something to do with it, particularly amongst the first generation that grew up on pop music - those of us now in our 40s and 50s.

But increased wealth by itself wouldn’t help much if we didn’t also have ever-increasing opportunities to listen to recorded music. Devices such as the iPod and home computer (just as with the portable CD player and the cassette tape player before them) have expanded those opportunities.

There is no doubt that we are downloading more music for free than ever – the industry keeps saying so. What it doesn't say (loudly) is that we are also buying and paying for more music than ever.

We are doing much of it in new forms. The sales figures I quoted include include ring tones, digital albums and tracks and music videos – formats that weren't around before the new technologies that the industry claims is ruining it.

We bought 17 million digital tracks in 2007, up from 11 million in 2006.

But even the old formats are doing well. The sales of physical CD albums peaked at 49 million in 2006 – way above anything ever achieved before the internet. Even last year's total of 44 million is well above anything achieved in the 1990s and 1980s.

The industry will argue that it would be selling even more if it wasn't for illegal downloading. It's hard to prove. Certainly it would be selling less if it turned back the clock to before illegal downloads began. And it is highly likely that illegal downloads stimulate sales. That used to be the function of CD-singles - loss-making samplers that would introduce consumers to new music and new bands.

CD singles are all-but extinct. At the start of the decade the industry sold 12 million. It now sells just 2.5 million, having ceded the promotional business to the file sharing sites it claims to hate.

Without those sites we would be exposed to a lot less new music and we might buy less.

The industry will also make the point that it is earning less from music sales. At the start of the decade it earned $648 million. By 2007 it earned only $462 million.

It has cut its prices, which is normally regarded as a good thing, not an evil necessitating government intervention to undo.

In the face of zero evidence that illegal downloads are hurting music sales or drying up the supply of music, the industry wants the Minister for Communications to empower our internet service providers to give us warnings and then cut us off from the web if it finds we have been downloading something it does not want us to.

It is a proposal that flies in the face of the presumption of innocence and grants special status to an organisation that would have difficulty proving its economic loss in court.

And it flies in the face of everything that the Minister Conroy has said about the importance of access to broadband. Didn't his election policy document say that it was as important as access to water and electricity?

The Minister should tell the industry to stick to making and selling music. It is doing well at it.

ARIA recorded music sales 2001 - 2007.

Stan Liebowitz,
Will MP3 downloads Annihilate the Record Industry? The Evidence so Far, School of Management. University of Texas at Dallas, June 2003.

Kimberlee Weatherall,
Notice and terminate/three strikes/here we go again, More on a proposed ‘three strikes and you’re out’ copyright/ISP policy, at Lawfont, February and march 2008

Peter Martin, Forget the spin, taping is not killing music, Sydney Morning Herald December 31, 2003

Peter Martin, Forget the spin! It's a record record, March 18, 2004


Sunday, March 30, 2008

Sunday dollars+sense: For some of us buying things hurts...

For some people, buying a house or a car or a mobile phone plan is anything but pleasant. They are worried they will make the wrong decision and then as soon as they have made it they are certain they did.

“How could I have been so stupid” and “the other one would have been better” are among the cries we hear from the perpetually regretful.

They become engulfed by a almost physical torment that eats away at the enjoyment they should be getting out of the decision they have made.

Sometimes they are right...

If you just spent thousands on the now-abandoned HD DVD format, you are correct to feel upset. If you bought a Beta video player (or a Leyland P76) in the 1970s you have become the butt of never ending jokes.

But most of the time the anguish is self-created. And thanks to new research just published in the British Journal of Social Psychology help is at hand.

Frenk van Harreveld and colleagues from the University of Amsterdam deliberately created feelings of regret in the minds of first-year psychology students by manipulating the outcome of a betting game.

They gave the students real money and asked them to bet either a big or a small amount on how well they would perform in a trivia quiz.

Unbeknownst to the students, those who placed small bets were given easy questions and those who placed big bets were given hard ones. All were given reasons for regret.

Then they were shown (fake) results purporting to show how other people had fared in the betting game. Those who discovered that others had done badly too lost their regret. Intriguingly, those shown that other students had done well felt no worse.

The results suggest that the antidote to regret is information (which might explain why people who have just bought cars or computers or houses continually scan the pages of newspapers for information about the deals on offer AFTER they have made their purchase).

If the information shows you are in good company, it will help. If it doesn’t, it won't hurt. In the researchers words, “misery loves company”.

But the company needs to be real. When they tried the same thing showing each student how just one other student had performed, and when they asked each student to merely imagine that others had done badly, it didn’t help at all.

HT: BPS Research Digest.

van Harreveld, F., van der Pligt, J., Nordgren, L. (2008).
The relativity of bad decisions: Social comparison as a means to alleviate regret. British Journal of Social Psychology, 47(1), 105-117.

Peter Martin,
Anticipated regret. Life Matters ABC Radio National. January 28, 2002.


Friday, March 28, 2008

Containing mortgage rates - I hesitate to endorse this idea

The last time I endorsed an unarguably good idea, the Minister rejected it.

That's why I am wary about endorsing this one.

It is another nobrainer - harnessing the reputation of the Commonwealth to reassure foreign investors that Australian mortgages are of uncommonly good quality.

But what if the Treasurer has about as many brains as the Health Minister appeared to have?

I am worried. The 2020 participant Joshua Gans is the co-author of both.

The other co-author of the mortgage proposal is the impressive Christopher Joye.

Reserve to banks - its okay to lift your rates

A rift has developed between the Treasurer and the Reserve Bank over interest rates with the Bank defending the banks the Treasurer has attacked for excessive rate rises.

Addressing the Euromoney Financial Markets Innovation Congress in Sydney the head of the Reserve Bank Glenn Stevens said yesterday he could understand why Australia's banks had increased their rates by more than the Bank had increased its cash rate and said it would be unrealistic to expect anything else.

“The presumption that their lending rates should and could move only in line with the cash rate isn't really realistic,” Mr Stevens said.

“We have of course seen bank lending rates moving independently of the cash rate. I think that's just life in this environment"...

The cost to banks of raising funds internationally had moved independently of the Reserve Bank's cash rate “in a way which was that that uncommon over the longer run of history but has not been that normal in the last five or six years.”

Earlier this month Westpac, the Commonwealth, the ANZ, the National Australia and the St George Bank lifted their mortgage rates by between 0.30 per cent and 0.38 per cent, well in excess of the 0.25 per cent increase in the Reserve Bank's cash rate.

In January - without any trigger from the Reserve - they lifted their rates by between 0.10 and 0.20 per cent.

At the time the Treasurer Wayne Swan attacked the banks and the ANZ Bank in particular alleging that its 0.20 per cent increase was “excessive and could not be justified”.

He called on the bank's customers to “vote with their feet” and shop around for a better deal.

At his instigation the Treasury and the banks are developing a new procedure that will make it easier to switch mortgages between banks.

But the Reserve Bank Governor's remarks, backed up in the text of his 70-page Financial Stability Review also released yesterday explicitly endorse the actions of the private banks.

The Review says that had Australia's mortgage lenders not increased their rates by as much as they had “their mortgage business would be unprofitable”.

The Governor also said that the Reserve Bank had “taken account of these shifting relationships” in setting its cash rate, implying that the Bank would have tightened interest rates by more had the private banks not done some of the work for it.

“The Reserve Bank is certainly not unhappy with the banks raising rates,” said the chief economist at Lehman Brothers Stephen Roberts on hearing the Governor's remarks.

“If the banks hadn't raised their rates by more than the Reserve, it would have had to raise its cash rate further.”

The Treasurer refused to back away from his condemnation of the private banks in the face of the Governor's support, saying that “rising interest rates hurt working families”.

“That's why we have acted to boost competition with our bank switching package - so customers can vote with their feet,” he said.

“We believe the community will reward those banks who best shield families from the increased costs of borrowing flowing from the US sub-prime crisis.”

“Similarly banks who don't act in a way which their customers think is reasonable will now run a greater risk of losing customers.”

In its Financial Stability Review the Reserve Bank also

. said that the global financial system was under more strain than at any time since at least the early 1990s;

. claimed interest rate margins had widened significantly in many developed countries; and

. said that the Australian financial system was better positioned to deal with the current difficulties than those of many other countries.

Thursday, March 27, 2008

More on the negative side of negative gearing

From Tim Colebatch in Tuesday's Age.

"Treasury estimates that even now two-thirds of Australians' wealth is invested in houses — and in the past six years, that wealth has doubled as house prices soared.

But house prices are a zero sum game. When prices rise, those who own houses grow richer, while those who don't grow poorer.

The crisis in housing affordability, over the long term, owes more to house prices outpacing income growth than to rising interest rates.

And what sent house prices soaring was the invasion of the investors, driven by the tax breaks for negative gearing and capital gains. Landlords used to own 20% to 30% of the housing market. But by 2003 they were taking almost 50% of housing loans (excluding refinancing), and even now, they take close to 40%, outbidding the first-home buyers."

Read the full thing.

Wednesday, March 26, 2008

Labor's stupid promise on tax

Labor made one really, really stupid promise during the election campaign. Not to allow the tax take to increase as a proportion of GDP.

What if the economy booms? Will this mean it will have to cut tax, at exactly the time it should not? What if it needs to spend the income from its carbon tax (read: emissions trading scheme) on activities that assist in the adjustment to global warming?

Malcolm Turnbull, the otherwise accident prone Shadow Treasurer, has spotted the weakness and is zooming in on it:

The Opposition has stolen a march on the Treasurer Wayne Swan, commissioning a public inquiry into Australia’s tax system – a measure so far not contemplated by the Rudd Labor government.

The inquiry will be headed by Canberra economist Dr Henry Ergas, the Australian Vice President of the consulting group CRA International and a leading expert in telecommunications and regulatory economics.

Dr Ergas will examine all levels of taxation – federal, state territory and local – and seek submissions from the public.

Announcing the appointment in an address to the Committee for the Economic Development of Australia last night the Coalition’s Treasury spokesman Malcolm Turnbull said the Coalition would not return to government if in defeat it merely aped “the manners and rhetoric of the victors”...

“Deep in the DNA of true Liberals we know that every dollar the Government spends was earned by someone else and that this money –other people’s money – must be spent as prudently and effectively as possible.”

“There is no virtue, none whatsoever, just in spending taxpayers’ money,” Mr Turnbull said. “There is virtue in spending taxpayers’ money and achieving real results as long as the benefits exceed the costs.”

“The real benchmarks are not how much money can be spent on any given good cause, but how much can be done and how efficiently taxpayers’ money can be deployed. Put another way, we need more bang for less buck.”

The Treasurer Wayne Swan has so far declined to argue the case for widespread tax reform, concentrating his efforts instead on championing the personal income tax cuts tax cuts he promised during November election.

Mr Turnbull said last night that 92 per cent of those tax cuts had been photocopied from the Coalition’s election policy. He said that true tax reform, “like painting the Harbour Bridge” was never complete.

He said some of the billions of dollars to be raised by auctioning permits under the emissions trading scheme should be directed to encouraging Australia’s state and territory governments to cut some of their inefficient taxes, among them the stamp duties on insurance and property transactions.

But the man who will head up his tax inquiry, Henry Ergas has previously argued against “paying states to do the right thing”.

In an opinion piece published in January Dr Ergas argued that “bribing the States into doing the right thing diverts tax dollars to State governments that often make poor use of resources”.

Mr Turnbull said that the money raised from auctioning emissions permits should also be directed to ensuring that low income and pensioner households were not made “overall worse off by reason of the trading scheme.”

He signaled that he would hold the Labor government to its election promise not to allow tax revenue to increase as a percentage of GDP, and said that for that purpose he would regard the revenues from the emissions trading scheme as a tax.

“This means that the emissions revenues must be matched by a reduction in other taxes,” Mr Turnbull said.


Tuesday, March 25, 2008

Tuesday Column: Lets incentivate Australians... to lose money

It is true that Australia is just about the only country country in the world whose name rhymes with 'failure', but I mean, really!

As business people, Canberra residents make good public servants.

The latest tax figures show that around 31,000 of us are in the business of being landlords.

Taken together, we are not only not making money, we are losing a fortune.

ACT landlords lost $144 million from the business of renting during 2005-06, a performance all the more staggering when you bear in mind that six years earlier we only lost $38 million.

We appear not to be learning from our mistakes.

Perhaps you think this is an unfair way to describe the perfectly respectable, and ever more popular practice of negative gearing.

But it is the way the Tax Act sees it - as a way of making money gone wrong. Those of us who actually made money by renting out our properties will be taxed on those earnings. There aren’t many of us...

In only two of the ACT’s 25 postcodes do the landlords make money in net terms.

The rest of us who (accidentally or even deliberately) lose money renting out houses will be taken pity on.

Because we have unfortunately stuffed up and are earning negative income from rent, the rest of our income will be reduced for tax purposes, so that we are no longer as badly off.

Looking through the tax figures just released it is hard not to get the feeling that a provision originally introduced to cover an unusual and unfortunate circumstance has become mainstream.

This needn’t be a problem if it is providing the sort of incentive we want. But as a general rule an incentive that encourages someone to lose money is a bad idea.

And don’t doubt that money will be lost. When, as is likely, real estate prices turn down and there are no capital gains to be made to compensate, a good many of those 31,000 Canberra landlords are going to find their finances looking sick.

Nationwide more than one million Australians are now losing money as landlords – an extraordinary figure given the size of Australia’s population.

All up they are losing $8.7 billion.

It didn’t used to be like that.

Back in 1999 before a little-publicised but highly important change to the tax law there were only 650,000 landlords and they weren’t losing anything like as much.

In the midst of all the publicity about the impending Goods and Services Tax, the Treasurer Peter Costello more quietly commissioned another tax review. When it reported its guesses about who would win and who would lose as a result of the change it recommended were never made public - in contrast to guesses about the effect of the GST that were everywhere.

Actually its recommendation was more of less forced on it. Peter Costello gave the Ralph review of business taxation one very specific non-business term of reference.

He asked it to examine the scope for “capping the rate of tax applying to capital gains for individuals at 30 per cent.”

In fact the committee went further and recommended that only half of each capital gain be taxed - effectively cutting the rate of tax on the sale of houses and units and the like to 24 per cent.

Labor had no apparent problem with the idea, just as it doesn’t seem to now. The briefing papers it prepared for last year’s housing summit were actually rather funny. They listed a whole suite of reasons for declining housing affordability - including rising interest rates, slow land releases and the cost of building - but nowhere mentioned tax.

But Mark Latham, in 1999 a backbencher in self-imposed exile, saw things clearly and made some pretty accurate forecasts.

He told parliament that the cut in the rate of capital gains tax was “the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value-adding in the information technology sector.”

The Macquarie Bank’s Rory Robertson also saw what was about to happen early.

He bought a rental property himself and then advised clients in a note that “since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.”

Why bother earning money by producing something when you could borrow to the hilt to buy a rental property, make sure that your repayments exceeded your income from rent, cut the tax you paid on your other income along the way, and then sell the property for a very-lightly-taxed capital gain?

It’s a rort crying out for reform.

At various times the Productivity Commission, the Reserve Bank and Access Economics have said so.

And its getting worse. Throughout 2005-06 an extra 49,200 Australians got into negative gearing; 1,200 of them in Canberra.

The Reserve Bank has described the surge as “unprecedented, both in terms of previous experience in Australia and experience overseas”.

And don’t accept uncritically the argument that it has kept rents low. While negative gearing has encouraged individual landlords to charge rents low enough to lose money, its surge in popularity has also ramped up the price of rental and other properties as more and would be loss-making landlords tried to climb on board.

As well, any rents that it might hold back are likely to be those at the upper and middle sections of the market. Negatively gearing landlords want good properties, and tenants they believe will look after them. They are not in the business of providing low-income accommodation.

I am expecting the Rudd Labor government to move against negative gearing, despite its apparent timidity.

Rudd, Swan and the rest of the senior ministry are very serious about making sure Australia uses its scarce resources productivity. And there’s little productive about losing money.

A start would be to push the rates of tax on capital gains back up to the standard marginal rates. If at the same time the rate of company tax was cut, perhaps to as low as 20 per cent, money might start to flow instead to where it where it could actually make money.


What I was about to ask the Health Minister

Meet The Press on Channel Ten is a very fast affair. At a certain point (shortly before each commercial break) the presenter Paul Bongiorno raises his hand (in a way that can't be seen on the TV) and the questions have to stop.

My co-panelist Emily Rice had just asked this question of the Minister Nicola Roxon:

EMILY RICE: Minister, just on another issue - the baby bonus is set to rise to $5,000 coming in June. In the past, some women have delayed the birth of their children to ensure they get the full financial windfall. Two economists have written to you, I understand, asking you to phase in the next bonus so we don’t have this occurring again. Are you considering a phase-in of the baby bonus next month?

I was gobsmacked by the Minister's reply...

NICOLA ROXON: No. Look, we’re not. The dates are fixed for when that change occurs on July 1. I must say, I think this is a little bit overstated. I would be absolutely confident that doctors will be giving their patients the best clinical advice. It’s obviously not sensible for people to make decisions based on financial arrangements rather than what’s in the best interests of the child. But I really think that this is around the margins, probably a matter of a day or two, rather than there being some serious issues of doctors advising women to wait an extra month. This is just - nature doesn’t allow it, and it would of course be a risky thing to do for the purposes of an adjustment just in the baby bonus.

I didn't get to ask the follow up questions, which would have been:

1. That's what your predecessors said! But we now know that that changes to the bonus do not just delay births by few days. In 2004, more than 300 births were delayed by more than a week. 150 were delayed by more than two weeks. You are right about that being risky. Will you act to stop it?

2. Maternity wards are not designed to cope with sudden surges in traffic. You have it in your power to prevent the next surge. Why not exercise it?

Beats me, and the economists Andrew Leigh and Joshua Gans.

Maybe the Minister knows something we don't. Or, more disturbingly, perhaps she doesn't.


Saturday, March 22, 2008

Suunday dollars+sense: Here's to holidays

Enjoying the break? It's important. Perhaps even more important than your annual holidays. Every holiday we that take gives us time to rest, and (after a day or two of adjustment) time to appreciate that there is more to life than work.

But public holidays do something else as well. They allow us to socialise with friends we can't easily catch up with during our ordinary leave. Over Easter, and especially on Good Friday, almost every workplace is shut.

And the benefits appear to spread.

Two years back two German economists, Joachim Merz and Lars Osberg examined the ways in which two different groups of Germans used their ordinary working days and weekends...

One lived in the parts of the country that had many public holidays – up to 17 per year - and the other in parts that had comparatively few – as little as 13 per year.

The published their findings in an evocatively titled paper - Keeping in Touch - A Benefit of Public Holidays.

Using diaries kept by 5,400 households they found that those in
regions with lots of public holidays spent 37 per cent more time going
out for entertainment and 21 per ent more time going to community
meetings throughout the rest of the year.

Put another way they found that an extra 3 days of public holidays
created an extra 7.5 days of social engagements.

Friendships are like plants. They need tending in order to survive.

As more and more of us have been working unsociable hours and as some
of us (under WorkChoices) have sacrificed a fortnight of holidays in
return for more pay, friendships have become harder to tend.

Public holidays allow us to tend friendships at the time when our
friends are also on holidays. In the words of the economists, they
give us "somebody to play with".

We don't have many public holidays in Australia. Most states have 11,
there are 12 in the ACT. As I mentioned, Germany has 13 as a minimum
and up to 17; Israel has 34.

A few more couldn't harm our productivity. (Productivity is measured
as output per hour worked).

And they would enhance what makes us human.

A few years back for the ABC on a special public holiday I phoned the
heads of Australia's leading employer organisations who were
complaining about its effect on their output. I couldn't get in touch
with most. They were out on the Harbour, in the sun.

Joachim Merz and Lars Osberg , Keeping in Touch: A Benefit of Public Holidays, IZA Discussion Paper No. 2089, April 2006

Andrew Leigh


Garnaut's Emissions Trading Scheme: I like it!

Faced with demands from business for a simple emissions trading system, Professor Ross Garnaut has come up with just about the most simple one possible.

And the key to its simplicity?

All Australian carbon emitters - every one - will have to pay for their permits.

As he told me, "the complications in most schemes are about free allocation of permits"...

"You need very elaborate processes to give things away."

Some polluters will be compensated for the cost of the permits - those
that are trade-exposed, such as aluminum producers that compete with
plants in nations where they're aren't emissions trading schemes.

But they will be paid in cash, and they are they are going to have to
front up each year and make a case for that cash. As more and more of
our competitors introduce trading schemes those cases will be harder
to make.

Garnaut is none too complementary about the ideas presented to the
previous Prime Minister by the head of his emissions trading taskforce
Dr Peter Shergold.

"The Howard-Shergold arrangement had some genius working out in
advance what the loss of profits was going to be through some
clairvoyant process and then handing out permits. I actually think
that would have been administratively impossible, but had it happened
it would have been some enormously long elaborate process."

Business also wanted certainty and Garnaut is keen to deliver.

He says right at the start the government would set out not only a
target for emissions reductions but also a trajectory outlining by how
much emissions will be introduced along the way.

Business had been worried that down the track the targets and
trajectories would be made tougher.

So Garnaut has proposing letting business know right at the start what
the tougher targets and trajectories would be. Businesses would know
for that for the moment they are operating on Trajectory A, but that
if (or when) other countries come on board Australia would move to
Trajectory B. They would be given five year's notice of the change.

As he told me, "businesses want information, I am proposing to give it
to them. They can make their commercial decisions accordingly".

Spelling out the future trajectories up front makes it hard for
businesses to later lobby for weaker trajectories than would otherwise
be the case.

By spelling them out up front her saves them the bother, or as he
tells me, "reduces uncertainty".

Any by spelling out Australia's alternative trajectories to the world
we would be putting something valuable on the table in our
international negotiations.

The biggest problem in such discussions is that neither side knows
that it can trust the other. Garnaut has provided a way out. Under
the scheme he is proposing Australia would be able to say to China or
India, "look, we are telling the truth. If you sign up to an
emissions trading scheme, we will increase our target, and here's by
how much. It's already on our books."

Garnaut has also dealt with the unpleasant reality that Labor wouldn't
acknowledge as it stood for election in November: That the carbon
trading system it is planning to introduce will bring about much
higher energy prices.

He has asked the government to set aside some of the substantial sums
it will raise from auctioning carbon permits to compensate the
low-income households who are going to see their electricity bills

Climate change helped win the election for Kevin Rudd.

Appointing Ross Garnaut to advise him how to fight it looks like one
of the smartest decisions he has made.

Saturday Forum: What if the money runs out?

The heads of the US Federal Reserve and the Australian Reserve Bank come across as cautious and unexcitable. Except for when they are driven by their deepest, most primal fear.

Then they work so fast and act so brutally that the banks they regulate won’t see them coming.

A private bank can be outwardly healthy, rich and respected during the week. Its revered chairman and chief executive can be hauled in to the Reserve’s headquarters over the weekend and ordered to immolate and surrender to an immediate takeover for a mere fraction of what it’s former worth.

I’m talking about the Australia’s Reserve Bank and the then Bank of Adelaide back in 1979...

Not to be confused with the unrelated entity The Adelaide Bank Limited, which itself was subject to rumors about its solvency last year and was later taken over, the Bank of Adelaide was in 1979 the seventh biggest bank in the Australia.

It was having trouble with a subsidiary that had got too deeply into real estate finance. But it had just reported a healthy profit and its establishment chairman Sir Arthur Rymill had arranged a rescue package for the subsidiary.

In his book Two Centuries of Panic, the doyen of Australian financial journalists Trevor Sykes describes what happened next.

Harry Knight the Governor of the Reserve Bank rang Rymill out of the blue and abruptly directed him to fly to Sydney and meet him at the Reserve Bank’s HQ “on the unbankerlike day of Saturday May 5”.

Rymill and his General Manager were let in through the back door and went up to Knight’s office.

Knight asked to see Rymill alone.

As Rymill later recounted it:

“The Governor said that he had a decision tree – he talks in metaphors – and he said that at the top of that tree – the tree apparently being what he saw as the possibilities – at the top of that tree was a merger of the bank with another larger Australian trading bank and at the bottom of that three, which he regarded as the last option he wished to exercise, was entry into and taking possession of the bank. The Governor told me: ‘I propose to enter if I deem it necessary, whether it is lawful or not.’”

It was, in Sykes’ words “not so much a shotgun wedding as a shotgun funeral”. Had the Bank of Adelaide been given more than just a few days in which to choose who took it over its shareholders might have got a high price. Instead the ANZ bought them out for a song.

Reserve Bank staff have since made it clear that this wasn’t accidental. They were determined to send two messages about what would happen if ever an Australian bank got into trouble; its deposits would be honoured, and its shareholders would be punished to the maximum extent possible.

That’s how it worked for Bear Stearns in the New York headquarters of the US Federal Reserve over the weekend.

The Wall Street Journal spoke to an insider at the negotiations that led to the instant demise of America’s fifth largest investment bank. “We thought they had given us 28 days,” he said. “Then they gave us 24 hours”.

Bear Sterns, with a history almost as long as Australia’s Bank of Adelaide was told to sell out to JP Morgan for a pittance.

Its shares had been worth around US$100 each at the start of this year. They were worth US$30 going into last weekend, and by the end of the weekend and the Fed’s ultimatum, just US$2 each - the price at which JP Morgan agreed to buy them.

Its employees, who own around a third of the shares, will lose billions.

In theory it would be possible for the shareholders to try to block the deal (as some of them tried to do at the Bank of Adelaide), but if they succeeded the share price could fall to zero if the Fed withdrew support or assumed command (as our Reserve Bank apparently threatened to do back in 1979).

On one measure the Fed has cut the Bear Stearns price to less than zero. The purchase price is US$240 million. But he building that houses the bank’s corporate headquarters (which goes to JP Morgan whether or not Bear Stearns shareholders approve the deal) is said to be worth five times that much.

The frequently-heard suggestions this week that the Fed “bailed out Wall Street” couldn’t be further from the truth.

Like our own Reserve Bank in the late 1970s the Fed tried to inflict maximum pain on the bank’s shareholders, while at the same time not losing track of its overriding goal.

That goal is not, as is sometimes claimed, to avoid a recession. Recessions come and go (just as a downturn in the South Australian economy would have come and gone had the Bank of Adelaide failed).

The goal is to keep the financial system functioning.

Most of the time most of us don’t think about money. We think about the things it can buy or the things that we can sell to get it.

That’s especially so when we think about trade. China needs our resources, the argument goes. Australia has the resources, and so will be able to dig them up and sell to China for as long as China wants them.

It’s a way of thinking suggests that Australia has little to fear from the collapse of a US financial institution. Most of the goods China makes are now sold to its own citizens, and so it will continue to need our iron ore and gas whatever happens in the US.

But it ignores the role of money.

There’s a display in the foyer of the Melbourne University’s Department of Economics that makes the role of money clear.

It’s a billiard table sized model of the Australian economy made out of perspex pipes. If interest rates go up more water flows from one pipe into another, and so on.

The most important point unintentionally illustrated by the pipes is not where they go but that they need water to operate.

Without access to money, or “liquidity” as it’s called, the model won’t work.

Australian miners may well be keen to sell more resources to China, and China might well want them, but if they are unable to borrow money to develop new mines, they won’t be able to.

The deepest fear of central banks right around the world is that people with money will simply refuse to lend it.
Lenders and borrowers will be so traumatised by what’s happened to the financial system that they’ll refuse to take part.

If that happens even the deepest cut in official interest rates won’t make any difference. Our Reserve Bank, the US Federal Reserve and central banks worldwide will have lost control.

The Nobel Prize winning economist Paul Samuelson warned of the possibility late last year.

He said it used to be enough for a central bank to “lean against the wind.”

They could cut interest rates if they needed to stimulate the economy or hike them if they needed to wind inflation back.

But if people with money became so worried about the financial system that they refused to part with it, the system would dry up.

“The safest bond interest rates are indeed low,” Samuelson observed. “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.”

A collapse of Bear Stearns or an institution like it might dry up the flow completely.

Anyone doubting that this is possible need only look north to Japan.

An avalanche of Japanese bank collapses in the early 1990s destroyed the trust of would-be lenders and borrowers in the Japan’s financial system.

No matter how low the central bank pushed the indicator lending rate – it got down to 0.25 per cent – borrowers simply wouldn’t borrow and lenders simply wouldn’t lend.

The Japanese literally stashed their money under floor boards.

Disturbingly, last Wednesday’s 0.75 per cent cut in the US indicator lending rate is bringing it closer to the low reached in Japan. At 2.25 per cent it is approaching the level below which there is nothing to cut.

Japan’s government was at one point semi-seriously advised to hire a helicopter, fly it low over Tokyo and keep throwing out bundles of 10,000 yen notes until people grabbed them and began to spend.

Instead it pumped ever-increasing amounts of money into the economy by building ever newer and bigger roads, power stations and so on.

It didn’t work. The economy stayed stalled, in a “liquidity trap” for a decade.

If the same thing happened worldwide, Australian economic growth would collapse as well.

The ANZ’s chief economist, Saul Eslake, says something like that is beginning to happen.

He says the international debt securities market - on which home lenders such as Aussie and Rams have relied - has “effectively closed”.

The big Australian banks are able to fill the gap for the moment, but they too have only limited access to foreign finance, and will soon reach the limit of their ability to lend their own money.

As perhaps as much as $200 billion of international borrowings by our non-bank financial institutions fall due and are not renewed our banks will find themselves increasingly unable to step into the breach.

As Eslake puts it, “Clearly, the banking system cannot both meet ‘normal’ growth in demand for credit and absorb maturing securitized debt that can no longer be rolled over in the capital markets. Hence credit rationing, at least for business borrowers, is becoming a reality.”

Credit rationing would mean that some borrowers would find it hard to access money at any price. In Eslake’s words, part of our financial system would have “seized up”.

Eslake has wound back his forecasts for economic growth in anticipation of the capital shortage and says there is a “non-trial risk that the slowdown could begin earlier and be deeper” than he has forecast.

It’s the main reason why Eslake is no longer predicting any further interest rate hikes in Australia. He says the impending gumming-up of the worldwide financial system should slow things down here without the need for further work by the Reserve Bank.

Indeed the Bank might find that it needs to cut interest rates and do all it can to encourage our banks to lend to the maximum of their abilities if the worldwide capital strike deepens.

A collapse of any of the US investment banks would be enough to do it.

There is already evidence that what has happened so far is stalling worldwide growth.

Europe’s Bureau for Economic Policy Analysis reported on Friday that growth in global trade has stood still since the start of this year and is threatening to turn down.

Without ready access to money, or ‘liquidity’ as the economists call it, trade can’t take place even where it should.

Any politician wondering whether or not that frightens the Governor of Australia’s Reserve Bank can ask him.

Glenn Stevens will subject himself to his semi-annual grilling from the House of Representatives economics committee on Friday.

It is telling that the last time he appeared before the committee, in August, the US financial crisis had only begun.

He said at the time that the problems were generally “embarrassing rather than fatal” for the institutions concerned.

It was “extremely unlikely that the sub-prime mortgage exposures could significantly damage the core banking system in any significant country”.

He is likely to be less relaxed this week.

His counterparts in the United States worked through last weekend with scarcely any sleep and committed US$30 billion of public money to make sure the Bear Stearns takeover worked.

They’re worried indeed.


Wednesday, March 19, 2008

Australia's next rate hike might be a cut

Just like in the United States. Our Reserve Bank opens up the possibility here.

Struggling mortgagees have been presented with a glimmer of hope by the Reserve Bank whose board minutes released yesterday suggest that the next move in interest rates could be down.

The indication comes as the Treasurer Wayne Swan has warned that the turmoil engulfing US financial markets presents a “significant risk” to the Australian economy.

The board’s minutes released yesterday 14 days after the meeting in accordance with the Bank’s new rules indicate that the decision to lift rates in March was finely balanced.

They say that although “standard macroeconomic considerations” continued to suggest the need for rate hike, there was “some evidence, albeit tentative, that a slowing in private demand was starting to emerge”...

The board members were presented with staff forecasts of inflation somewhat lower than those previously made public.

After making their decision to lift the cash rate by a further 0.25 per cent to 7.25 per cent the board members described the overall tightening since the middle of 2007 as “substantial”, and said that if the private banks tightened their lending standards the effect would be even greater.

In an indication that the board members were uncertain about whether the next move on interest rates would be up or down the minutes concluded by noting that the members felt the higher rate “would leave adequate flexibility to respond as necessary” over the months ahead.

This is a sharply different form of words to that used after the February meeting, which said that the board would continue to review whether policy was “sufficiently restrictive”.

The ANZ’s chief economist Saul Eslake said that on his reading the words used by the bank conveyed “the possibility that the next movement in rates, whenever it occurs, could actually be downwards rather than inevitably being upwards” as the bank had been suggesting in its February minutes.

He said that the big slide in consumer confidence reported since the March meeting had increased the likelihood that the next move in interest rates would be a cut.

The equities economist at Commonwealth Securities Savanth Sebastian added that the likelihood of a further rate hike had also been cut by an extra fortnight of weakness in global share markets.

“Fear driven sentiment remains a common theme amongst investors, and speculation of further write downs in the US is likely to keep credit markets tight,” he said.

Commsec believed that although the Reserve Bank might not need to raise rates again one more rate hike was a possibility given inflationary expectations and an expected strength in commodity prices.

The Treasurer Wayne Swan told parliament that the deteriorating global outlook presented “a significant risk to the Australian economy”.

“There is no doubt Australia's financial system has been affected,” the Treasurer said in a Ministerial statement. “I do not want to downplay the severity of the global financial developments.”

The US Federal Reserve is expected to slash its federal funds rate by up to one complete percentage point early this morning Australian time, leaving the rate as low as 2 per cent.

On Monday in an emergency decision the Fed cut its so- called discount rate by one quarter of a percentage point and agreed to back JP Morgan’s takeover of the troubled Bear Stearns investment bank for less than one tenth of its previous price.

Wayne Swan said he was “in almost-daily discussion” about events in the US with the Reserve Bank and other Australian authorities and business leaders.

The outlook was “beyond our control, but we are vigilant”.

Who earns the most, and pays the most tax?

We do, in the Australian Capital Territory, according to Taxation Statistics 2005-06, a goldmine of information just released by the Australian Tax Office.

Residents of the ACT not only earn more on average than those of every other state, we also appear to pay more tax.

The latest figures on taxation by postcode released by the Tax Office yesterday confirm the Chief Minister’s frequent claim that the ACT has the highest average income in the nation.

The average taxable income reported by ACT residents in 2005-06 was $52,780 - well clear of the next highest state, NSW which reported $49,833...

Western Australia jumped into third place reporting an average taxable income of $48,692.

The totals are weighed down by the inclusion of people in part-time work and the use of tax arrangements to cut reported income. They include earnings from all reported sources including rents, dividends and capital gains in addition to wages.

Residents of the Northern Territory earned about the Australian average of $47,064. Victorians earned slightly less at $46,482.

The lowest earning states were Queensland, South Australia and Tasmania, reporting average incomes of $44,308, $42,778 and $40,446.

The state and territory averages disguise very high incomes in individual Australian postcodes. For instance, taxpayers living in the postcode 2027 which takes in Sydney’s Darling Point, Edgecliff and Point Piper appear to earn $146,243 – far in excess of what is earned in any ACT postcode.

In Perth taxpayers living in the postcode that takes in Peppermint Grove and Cottesloe Beach earn an average of $104,038.

The highest-earning Canberra postcode, 2603, reports an average income of $80,666. It takes in Forrest, Griffith, Manuka, and Red Hill.

The next highest earning psotcode, 2600, reports $70,753. It takes in Barton, Deakin and Yarralumla.

Canberra’s lowest earning postcode is 2615 which takes in the West Belconnen suburbs of Charnwood, Dunlop, Florey, Flynn, Fraser, Higgins, Holt, Latham, Macgregor, Melba and Spence. The average earned is $46,775.

ACT residents pay more tax on average than do those of other states. The mean Canberra tax payment in 2005-06 was $13,310 – well above the Australian average of $11,554 and comfortably above the NSW average of $12,720.

Canberra landlords appear to be particularly bad at making money. In every postcode but two their net rent earned was negative in 2005-06, presumably because of negative gearing suggesting that they are very exposed to any future downturn in property prices.

Around 14,000 of us appear to be resistant to the attractions of private health insurance to the point where we are prepared to pay extra tax not to take out cover. A total of 14,020 high earning Canberra residents chose to pay the Medicare levy surcharge rather than join a fund.

They were most likely to be found in the West Belconnen postcode of 2165 and in 2602 which takes in the inner-north suburbs of Ainslie, Dickson, Downer, Hackett, Lyneham, O'Connor and Watson.

The Tax Office says 9.4 million Australians paid tax during the year; around 185,000 of us in the ACT.

We claimed a total of $27 billion in deductions, including $13.1 billion in work-related expenses - a jump of 9.5% on the previous year.

Around three quarters of us chose to lodge our tax returns through a agent. But the use of e-tax is growing. It climbed 17 per cent during 2005-06 with the highest growth rate recorded among those Australians aged 55 to 74.

Update: Baby bonus lump sums scrapped...

...for parents who neglect or abuse their children

Today's Daily Telegraph:

Exclusive by Sue Dunlevy

PARENTS who neglect or abuse their children will have their $5000 baby bonus controlled to ensure the money is spent on the child.

Under a Federal Government plan, parents who are drug addicts or problem gamblers will receive the payment as vouchers for prams, nappies, baby furniture, rent, electricity bills and food so the money cannot be misused.

Women who are victims of domestic violence may also benefit if welfare workers ask for the bonus to be paid in vouchers to prevent abusive partners getting the money. Department of Community Service workers will be responsible for identifying problem parents under the new regime promised by Prime Minister Kevin Rudd...

Continued at

Tuesday, March 18, 2008

Tuesday column: Axe the baby bonus

So the carers’ and seniors’ bonuses are safe.

Despite the fact that when each was introduced the government of the day declared it a “one-off” and set aside no money for it to be ever paid again.

Whatever else this past week's repositioning of the Opposition as the “party of compassion” and the Government’s capitulation has demonstrated, it hasn't included good decision-making.

Which is a pity because it has made good decision making even more important.

Before the guarantee to seniors and carers, Lindsay Tanner’s razor gang needed to cut spending by $4 billion in the upcoming budget. It now needs to cut it by $5.7 billion.

Where should it look?

I would start with the $1 billion baby bonus. Not because it will be easy to cut...

Kevin Rudd said it was safe just last week.

But because cutting it might save lives.

Do you think that’s too strong a charge to make? I think it’s justified, and in any event there are other reasons for abolishing the baby bonus.

One is that it goes to the wives of millionaires who can’t possibly be thought of as needy. James Packer’s wife Erica will get $4,187 if her baby is born before the end of June and more if it is born in or after July when the payment jumps to $5,000.

On The Insiders on Sunday the Finance Minister Lindsay Tanner defended the payment saying it was helping to boost the population.

Barrie Cassidy responded by asking whether $1 billion a year was a steep price to pay for a few extra babies.

Tanner replied: “Look, it's important to keep in mind that extra babies do matter in this regard. And it's relatively early days too. We've only seen it in place for a few years.”

It has actually been four years, and it is possible to form some pretty firm conclusions.

One is that Erica Packer and wives like her are highly likely to provide their husbands with heirs whether or not they get a taxpayer-funded bonus. Labor has already promised to withdraw Family Tax Benefit Part B from families earning more than $250,000 a year. It should do the same with the baby bonus.

Another conclusion is that the bonus doesn’t really seem designed to lift the birth rate. Nearly all of it goes to families who were going to have a baby anyway (just as nearly all of the $3.6 billion annual Private Health Insurance Rebate goes to families who were always going to take out private health insurance anyway).

If the bonus was going to boost the birth rate it would probably be paid only to parents who were having a second or a third child, or it might be graduated as it is in Singapore – the more children you have, the higher the payment for each extra one.

And in any event it is not clear that we should be trying to boost the birth rate. There are cheaper ways to increase the population, if that’s what we want to do. Immigrants are keen to boost our population for free.

It would be good to think that a government that claims to be “evidence-based” as this one does would be able to cite evidence that the baby bonus did any good, and it would be good to think that it paid attention to the growing body of evidence that suggests that it in fact does harm.

Something odd happened when the bonus – initially $3,000 - was introduced on July 1, 2004. That day, a Thursday, was the busiest in Australian labour wards in three decades. A record 1,005 babies were born on July 1, compared to only 500 the day before – which happened to be one of the quietest Wednesdays on record.

It can’t have been because people timed their decisions to become pregnant with the bonus in mind. It was only announced two months before it began to be paid.

But can be because, in the quaint word used by Dr Andrew Leigh of the Australian National University, they took actions that would “overcook” their babies.

Dr Leigh and Professor Joshua Gans of Melbourne University can show that around 1,000 births were moved from June to July in 2004, most of them by delaying inductions and cesareans.

Since they published their raw findings back in 2006 they have obtained more detailed data from hospitals that confirm this is how the births were moved.

For many of the later-born babies, the delay was only slight, but for 300 it amounted to more than a week. For 150 it amounted to more than two weeks.

Are those babies as healthy as they would have been without the baby bonus effect? Leigh and Gans say probably not. They tended to be born heavier. Whereas normally around 11 per cent of babies are born weighing an unhealthy 4 kilos or more, during the first week of July the proportion approached 14 per cent.

Leigh says that’s around an extra 140 babies born unhealthily heavy as a result of Peter Costello’s baby bonus, something the former Treasurer might have liked to consider as he posed for the cameras surrounded by smiling healthy babies to celebrate the success of his scheme.

In fact the former Treasurer had an opportunity to reconsider the scheme in 2006 when Leigh and Gans and medical professionals implored him not to go ahead with the plan to boost the bonus to $4000 on July 1.

The Treasurer was unmoved, and Leigh and Gans say 687 births were shifted, about four per cent of the children who would have otherwise been born in June.

Their concern now is that the bonus is due to increase again - to $5,000 - on July 1 this year.

They are certain we are in for another bout of heavy babies and mayhem in delivery wards as perhaps another 500 women attempt to move births from one month into another.

They are this week writing to the Health Minister Nicola Roxon begging her to change things.

Dr Leigh says there are three ways to do it. Abolish the baby bonus or the planned July increase, increase the bonus immediately, or phase in the increase week by week.

As he told me: “If you want to give out middle class welfare because that's how you feel you are going to win the next election, that’s fine. But please don’t do in a way that endangers babies health”.

A government concerned with evidence would listen.

A boosted baby bonus means...

bigger babies.

The Health Minister Nicola Roxon will this week be asked to intervene to prevent the planned increase in the baby bonus from $4,187 to $5,000 on July 1.

Economists Andrew Leigh from the Australian National University and Joshua Gans from Melbourne University will write to the Minister to warning her to expect another bout of unhealthily heavy babies if the increase goes ahead.

Babies born weighing more than four kilograms are statistically more likely to be born with low scores on the Apgar scale which measures muscle tone, heart rate, reflexes and respiration...

The economists will tell the Minister that in July 2004, the month the baby bonus was introduced, 680 babies were born weighing more than four kilograms - 140 more than in a typical month.

“People are aware that premature babies are unhealthy,” Dr Leigh said yesterday. “They are less aware that overcooked babies are unhealthy.”

Dr Leigh and Professor Gans research suggests that around 1,000 babies that would have been born in June 2004 had their arrival delayed until July in 2004, mainly by postponing cesarean sections and inductions.

Only 42 per cent of births in the final week of June were cesareans or inductions. The rate jumped to 52 per cent in the following week.

Data from the Bureau of Statistics suggests that the rate of infant deaths increased in July 2004, but the economists are unable to back up this finding with the more detailed data they have so far obtained from state health authorities.

“Getting the data out of the states and territories is like getting blood out of a stone. Only Western Australia gave us data for both births and deaths and it points to no demonstrable effect,” Dr Leigh said.

When the bonus last jumped, to $4,000, in July 2006 around 680 births were delayed.

“We were struck by how big the 2006 effect was,” Dr Leigh said.

When the bonus jumps again to $5,000 in July this year, the economists expect another bout of heavy babies.

“The sudden jump creates an incentive to overcook your kids,” he said.

“Our general view is that we probably shouldn't have the baby bonus at all, but if we are going to have one, and if we are going to increase it, lets do it in such a way that doesn't create incentives to time births for non medical reasons”

Saturday, March 15, 2008

Sunday dollars+sense: Why do we love private schools?

So you think the inflation figures are wrong? That could be because you do the supermarket shopping. Food prices are climbing relentlessly. Or it could be because your children are in private schools.

Whereas the official inflation rate is around 3 per cent (3.6 on an underlying basis) the cost of private primary and pre-school fees jumped 5 per cent last year. The cost of secondary school fees jumped 7 per cent.

And according to a study released on Friday by the ANZ Bank the paradox is that we seem more willing than ever to pay them...

Private school enrolments have jumped 22 per cent in the last decade. By
contrast public school enrolments have climbed less than 2 per cent.

Some 30 per cent of our primary students are now in private schools
Australia wide, up from 26 per cent. Around 39 per cent of secondary
students are private, up from 34 per cent.

The Bank says that there are economic explanations for the shift in addition
to sociological and political ones.

It says more of us are in jobs than ever before and we are earning more than
ever before. Education is one of those things that people want to pay more
for the more they earn.

As evidence it cites the ACT. It says we have the highest average incomes
in the land and happen to have the highest proportion of our students in
private schools, even though our government schools are good.

At the last count 39 per cent of our primary students were in private
schools and 45 per cent of our secondary students.

The bank says by contrast the low-earning Tasmanians and Northern
Territorians had the lowest proportions of students in private education in
the country (25 per cent and 28 per cent.)

So we’ve ourselves to blame for what is about to happen. The Bank says the
more we shift our students into private schools, the more those schools are
forced into expensive expansions, and the more they have to push up their

It says in addition teachers - the raw material of teaching - are about to
become very expensive. Every state is Australia is short of them. At the
start of this year there were 600 vacancies in Western Australia alone.

Only things might take the pressure off private school fees. They are
higher interest rates and higher unemployment.

We might soon feel forced to take our children out, doing our wallets and
also our state education systems an overdue favour.


Saturday Forum: Has the economy "snapped"?

There is an evocative moment in John Edwards’ 1996 biography of Paul Keating, the Treasurer who stood by in the late 1980s as the Reserve Bank kept pushing up interest rates until it brought on a recession.

Edwards says a few years later Keating’s principal advisor, the tall completely bald former Treasury official Don Russell confided that he “had heard the economy snap, not a slowdown or a steady decline, but an audible snap, something he heard in his office in Canberra not over a period, but at a certain moment on a certain day towards the end of 1989.”

The economy might have snapped again on Wednesday this week.

Mark the date in your diary just in case, Wednesday March 12, 2008...

Until Wednesday the Australian economy seemed unstoppable. Inflation was roaring skywards notwithstanding a near continual run of interest rate rises, investment was soaring and our spending in shops and on houses had hardly faltered.

Then came the consumer confidence survey conducted just after the most recent interest rate hike – the fourth in eight months, or the fifth counting the hike imposed by the banks themselves in January.

Confidence vanished, in a way that it hadn’t with any of the eleven preceding rate hikes.

The index imploded 9.1 per cent, moving well into negative territory where the number of people worried about the future outnumbered the number optimistic.

Over the three months since December the index was down 21 per cent, a sharper fall than ever happened when the economy “snapped” at the end of the 1980s, and the sharpest such fall since the mid-1970s oil crisis and the financial mismanagement of the Whitlam government in 1975.

Assessment of family finances slid 25 per cent. Assessment of whether now was a good time to buy a major household appliance slid 29 per cent.

Australia’s most canny shopkeeper Gerry Harvey of Harvey Norman heard the snap two weeks before. He told Dow Jones Newswires at the time that his earnings were about to slide.

“It doesn't look like it's going to be as strong as it was because you've got all this media every day on interest rates, stock market crash, the whole environment is being affected,” he said.

“If you feed the public that sort of stuff every day of the week, it has to have some effect. We're seeing signs of it.”

What would a post-snap environment mean? It would mean that the pressure was off inflation, however high the inflation rate was at the time. The Reserve Bank could relax and turn its attention to making sure that the downturn didn’t snowball into a recession.

Interestingly the Reserve Bank Governor himself may think that that is what has happened.

He told a meeting of state, territory and Commonwealth Treasurers this week that Australia was beset by the sort of policy disagreements that “tend to recur each time we reach the top end of the inflation cycle”.

This doesn’t mean that unemployment won’t continue to fall, perhaps for months to come, as it did again, spectacularly, in figures out on Thursday.

Australia’s new unemployment rate of 3.97 per cent (the document put out by the Bureau of Statistics perhaps misleadingly rounded the figure up to 4.0 per cent) has plunged unemployment into new territory.

Not since 1974 has Australia’s unemployment rate been below 4 per cent, and there is every likelihood it will fall further for a while.

The Statistician says it would only take the creation of a further 28,000 jobs (about one months average growth in recent times) to push the unemployment rate down to 3.9 per cent.

But that won’t mean, as a number of commentators have been asserting late in the week, that the Reserve Bank will be under pressure to push up rates once again.

If we are near a turning point the unemployment rate is about the last piece of information the Reserve Bank would look at to get evidence of the direction in which we are moving.

Job offers react to spending and investment with a lag – six months is one estimate. They tell you where you’ve been, not what lies ahead.

It’s a lesson the Macquarie Bank’s Rory Robertson says he learned painfully when he worked for the research department of the Reserve Bank at the time the economy snapped in the late 1980s.

He says once a month on the 14th floor of the Reserve Bank’s headquarters in Martin Place Sydney a gaggle of economists (often including the present Governor Glenn Stevens) would huddle around the single news-screen to read the employment numbers, often marveling at the ongoing strength of full-time employment and still-sliding unemployment.

“Later, it turned out that the economy actually was heading south, not waiting for the jobs data to catch up,” he said this week.

The economic chiefs at both Westpac and the ANZ believe that that economic growth is now heading south.

Neither expects any more interest rate hikes in this cycle and both expect a cut in rates next year in order to moderate the impending slowdown and stop it turning into a recession.

They say it isn’t only the relentless run of rate rises that has finally made the economy snap, it is also the collapse in the share market and the sudden world-wide shortage of capital.

The immediate impact of the capital shortage has been sharper increases in mortgage rates than the Reserve Bank intended and also much sharper increases in fixed rates. The ANZ’s Saul Eslake says as people come off expiring fixed-rate contracts and move onto new ones they are experiencing “sticker shock”.

And the rates charged to business have been soaring, climbing far faster than mortgage rates.

Most importantly as other sources of money dry up, the banks are approaching the limits of their legislated ability to lend.

Saul Eslake says it seems increasingly likely that the Australian economy is approaching or may have reached a “tipping point”, where the impact of tighter finance begins to outweigh the boost from higher commodity prices.

While he is emphatically not forecasting a recession he says he acknowledges “that the risk of one is now greater than at any time since Australia last actually had one in 1990-91”.

No-one wants that to happen. It is widely acknowledged that the Reserve Bank mad a major error at the end of the 1980s by continuing to push up rates for months after the economy had “snapped”.

It won’t make that mistake again. If this past Wednesday March 12 was indeed the day Australia’s longest-ever economic boom snapped, our Reserve Bank won’t be pushing up interest rates again for a very long time.


More trouble for Malcolm (Turnbull)

The head of the Reserve Bank has taken aim at critics including the Coalition Treasury spokesman Malcolm Turnbull who have argued that he shouldn’t be hiking interest rates in order to fight inflation.

In a speech released yesterday but delivered in private to a Treasury seminar earlier this week the Bank’s Governor Glenn Stevens belittled the claim made by the Opposition spokesman that the final figures for last year showed inflation under control.

On the release of the figures in January Mr Turnbull referred to “a lot of fairy stories about the important challenge of inflation” and said that the Coalition had bequeathed to Labor a headline rate “just a fraction below 3 per cent”.

In the speech released yesterday the Governor said that the figure Mr Turnbull referred to had held down by both an unusually low result in March 2007 and a change in the way childcare costs had been calculated in the September 2007.

He said the next figure, to be released in April would be free of those influences and would most likely show an annual rate “more like 4 per cent”...

Mr Turnbull had argued that the costs of housing and financial services should be excluded from the Bank’s calculations of inflation because higher interest rates would only push them up.

Without mentioning the Coalition Spokesman by name the Governor said that some Australians had argued that monetary policy in fact “makes the problem worse by actually raising prices”.

He said while this might be true as rates began to rise, after they began to bite, landlords and financiers would find themselves unable to pass on the higher costs.

“All the historical evidence is that monetary policy is quite effective in that regard,” he said.

Responding to what he said was the common expression that that interest rates were a “blunt instrument” the Governor asked: “Where are the sharp instruments? It is not obvious that there are all that many.”

He also had unwelcome words for the Treasurer Wayne Swan who has undertaken to deliver the tax cuts promised during the election campaign.

The Governor said that while there was a structural case for taxes to fall over time, at the moment there was “a cyclical case for them not to”.

Although keen to suggest that demand from China would keep the Australian economy strong for years to come Governor Stevens hinted that the worst on interest rates could be over, saying Australia’s economic debate was taking the course it usually took at the “top end of the inflation cycle”.

He said many of the arguments being mounted against the actions of the Bank were familiar.

“They tend to recur each time we reach the top end of the inflation cycle and monetary policy has to control it,” he said.


Malcolm Turnbull's Life on Mars

Was he set up? Is he mad? (he is not) Or are the Government and its Treasury involved in a cover up, including the falsification of documents?

It would seem to be one of them.

Here's the story as it unfolded yesterday:

Malcolm Turnbull claimed that at its February 25 Cabinet meeting, the government rejected Treasury advice to seek a specific dollar-figure wage increase for low-paid workers before the fair pay commission.

“We know that the Treasury recommended a specific number - $18,” he said.

He asked the Minister to release the Treasury advice.

The Treasury Secretary Ken Henry refuted the story in a public statement.

“I refer to recent claims that the Treasury recommended to the Government that it nominate a specific dollar figure in the Government's submission to the Australian Fair Pay Commission on minimum wages, These claims are false."

Turnbull responded: "I think you’ve got to read that statement very carefully. What we said was that the Treasury gave that advice prior to the February 25th Cabinet meeting, at which the government decided to make no submission as to the level of increase."

Then the Government leaked to the media the actual Treasury submission, dated February 21 which does indeed make no mention of a specific increase ($18 or anything else) and in fact says "recommending a specific quantum is highly problematic".

So was he set up? Is he mad? Have the documents been forged? Is there Life on Mars?

Below read yesterday's excruciating transcript:


Well today we’ve received confirmation that the government lacks the courage to tell the Fair Pay Commission what it regards is the appropriate increase for Australia’s lowest paid workers, for the minimum wage. And it’s refusing to give that advice, that assistance to the Fair Pay Commission; even though it says that the fight against inflation is its number one priority, even though it says that it’s concerned about the position of Australians on the minimum wage. When the Fair Pay Commission is looking for guidance, for assistance from the Australian Government, it’ll receive nothing. Mr Rudd is not providing any new leadership, he’s providing no leadership. He’s had advice from the Treasury that the appropriate figure is $18 and he is not prepared to provide that advice to the Fair Pay Commission.


Mr Turnbull, you never actually nominated a specific figure yourself when you were in Government.


Well, that is true, on the two… the Australian Government always made recommendations, in the days before the Fair Pay Commission, to the Industrial Relations Commission, but they didn’t make submissions before, that is true. But Mr Rudd has offered new leadership, he has said that looking after the interests of the lowest paid and the fight against inflation are his key priorities and we know that the decision of the Fair Pay Commission will have considerable ramifications both for the fight against inflation and of course for those on the lowest wages. Now why does he have nothing to say? When the Fair Pay Commission says, “what do you think the increase should be?” the Australian Government is going to stand there and say nothing. It’s just gutless.


Mr Turnbull, Ken Henry from Treasury this morning took the unusual step of saying your claims that Treasury recommended an $18 a week increase to the Labor Party were I quote “false”, that’s a pretty emphatic….(inaudible)… Why did you make this claim?


Ok I think you’ve got to read that statement very carefully. What we said was that the Treasury gave that advice prior to the February 25th Cabinet meeting, at which the government decided to make no submission as to the level of increase. I put this to Mr Rudd twice, at eleven-minutes past two and forty minutes past on Wednesday afternoon, in the House of Representatives. He declined to contradict me. He did not correct me. If I was so wrong, why didn’t he correct me on Wednesday? You have to ask yourself.


(inaudible) Wayne Swan though?


He was sitting next to Wayne Swan. If Wayne Swan had known that what I was saying, or thought what I was saying was false he could have said to Kevin Rudd, lent across to Kevin Rudd and said “Turnbull’s wrong. Correct it”. This is very fishy. The only way we will know what really happened is if the Government produces all the Treasury advice. They’ve got to table all of the advice. It’s not good having a carefully worded statement here, and a few lines out of context there. Let’s find out what that advice is. Look, Mr Rudd said he was opening up a new era of openness and honesty and transparency and yet on this vital issue, instead of providing new leadership, he’s providing no leadership at all. When this vital issue of what should the Fair Pay Commission do, he has got nothing to say. That’s not leadership. It’s not courage. It’s not honest. It’s gutlessness.


You’re not embarrassed at all by the false claim of $18?


No, I assure you. The $18 was the subject of the advice from the Treasury prior to the 25th of February. If he wants to contradict that, table it all. Get all of that advice there, every document. We’ll put in an FOI request. Let’s see if they respond to it. Let’s see if they produce all the documents.


Can you produce documents to back up your case?


No, well, I can’t because I am the Shadow Treasurer, not the Treasurer. The Treasurer’s got the documents and what he’s not doing is producing them so he can know what the position really is.


When you say it’s fishy, are you suggesting that you’ve been set up?


No, what I’m saying is, it is fishy because if the Treasury had never given that advice prior to the 25th February Cabinet meeting, why didn’t the Prime Minister say so in question time on Wednesday? He had two opportunities. I asked him the same question twice. He could have contradicted me or corrected me on either of those occasions, and he didn’t. And its not until today, after the Parliament has risen for a few days, its not until today we find out that what I was putting to the Government, namely that they were not going to make any submission as to what the outcome of what the Fair Pay Commission should be, its only now that we know that in fact what I put to them in Parliament is correct.


Are you embarrassed that Ken Henry took the unusual step to provide a clarification?


No, I’m not; I’m neither embarrassed nor am I surprised. The person that should be embarrassed is Kevin Rudd. He is the one that said he was going to provide new leadership, he is providing no leadership. He was the one who said he was going to be transparent; he’s not producing any of these documents. He is the one who said he would put the Treasury front and centre, at the heart of the Government’s policy agenda. Where’s the Treasury advice?


So the suggestion from you is that he didn’t know on Wednesday when you put it to him that he wasn’t across it? Is that what you’re suggesting?


Well look, if what I had put to him on Wednesday was wrong, why didn’t he say so? He never loses an opportunity to correct me if he thinks I’m saying something wrong. Why didn’t he correct me? He quite deliberately did not contradict that point and the only reasonable inference from that is that what we were putting to him was correct.


What lesson have you taken out of this Mr Turnbull given Treasury’s come down pretty heavily today in terms of further statements and questions in the House?


Look, the only answer, the only response to issues like this is openness and transparency. If Mr Rudd is genuinely ushering in a new era of open government, then it all hang out. Let’s have all of the Treasury advice. Come on this is a big issue. This is a really big issue that our economy depends upon and the lives and livings of many Australians, particularly the lowest paid depend on. Let’s see that Treasury advice. Put it out there, let’s see what they said. If he puts all the advice out there and it turns out that what we’ve been told is wrong then we’ll say so. But we’re not going to back off until he puts all the information out in the public domain.