Wednesday, September 29, 2010

"Suffice it to say, the Minister was not well served by his department" - Our mismanaged crisis

We got the big decisions right. But the small ones...

Extracts from the Auditor General's excoriating findings about Rudd's Green Loans scheme:

"22. The primary cause for the administration problems encountered by the program was, to a very large extent, an absence of effective governance by the Department of Environment (DEWHA) during the program’s design and early implementation. DEWHA had no previous experience in designing and delivering a program with features similar to the Green Loans program. As a multi-faceted ‘greenfields’ program with a fixed budget and variable (and untested) demand, the Green Loans program required greater oversight than the department’s business-as-usual activities. However, this did not occur.

23. From the start of the program, DEWHA assigned day-to-day program management responsibility to sub-executive level officers who had little program delivery experience. As such, program management was devolved to too low a level within DEWHA without sufficient active engagement by executive management. A steering committee was established in November 2008 to oversee the program in response to departmental concerns about the appropriateness of the procurement practices being applied... The committee became inactive at the time the Green Loans program was launched, and was not replaced.

24. The program’s visibility to DEWHA’s senior executives was poor. This was not aided by quarterly status reports providing a false sense of assurance that the program was being managed within an agreed planning framework. In addition, the former Minister received incomplete, inaccurate and untimely briefings on program design features and implementation progress, challenges and risks. Suffice it to say here, the former Minister was not well served by his department in this respect during the period from July 2008 to late 2009 due to the poor quality briefings he received.

25. Key program management plans, including in relation to risk management, procurement, IT and communications, were never finalised and endorsed by executive management. Subsequently, DEWHA encountered difficulties in all these areas. In addition, in the first 18 months of the program there was no accurate costing of the program or monitoring of its budget. An examination of the program’s budget in early 2010 led to the realisation that the program had exceeded its 2009–10 program budget and would require an additional $100 million to fully fund the Government’s policy commitments over the program’s life...

30. Given the considerable volume of transactions for assessments, loans and payments that would be undertaken under the program, appropriate IT support systems were critical to the effective management of the program. However, e-Gateway was procured too late to allow for its smooth introduction from the launch of the program. Consequently, DEWHA had to hastily establish temporary support systems (many of which are now permanent), which required greater manual processing, introduced greater room for error and came at considerable cost...

The unanticipated demand for assessments overwhelmed the temporary support systems in late 2009 and early 2010 leading to the delays experienced by assessors and householders. Alternative workarounds put in place to reduce pressure on the contact centre, did not have the desired impact and created booking backlogs and significant data integrity issues, some of which are yet to be fully resolved. Further, prepayment checks of assessor invoices have either not been completed or sufficiently documented to demonstrate that only valid invoices have been paid. DCCEE is currently undertaking data cleansing and payment reconciliation projects to identify and correct data errors, and has advised that paid invoices that do not meet program requirements will be referred to its compliance area for possible recovery action.

Read the full horrific Audit Office report.

It's making me think Godwin Grech was right.

Here's what Godwin said to an earlier audit inquiry.

"When I returned to Treasury in September 2008, just as the Global Financial Crisis got into full swing, it soon became clear that Treasury officers were being asked to prepare policy option papers on highly complex and economically significant issues at a speed that was, in my view, dangerous.

Policy papers would be commissioned in the morning, usually after a meeting or discussion between the Prime Minister, Treasurer, Dr Henry and a few others, and would then be considered by much the same group either later that day or the following day, with decisions often being taken on measures involving billions in actual expenditure or in contingent liabilities.

There was little, if any testing of alternative options, with often only rubbery estimates or forecasts prepared to support possible approaches.

The normal policy development disciplines had broken down, with many policy options, certainly those that I had exposure to, being developed without any real opportunity by the Department of Finance and Deregulation to undertake proper costings, if at all. Relevant portfolio departments were either not involved in the policy development process or were given very limited information or opportunity to contribute.

The OzCar SPV was developed in this environment. As I was very uncomfortable preparing policy papers which contained options that had not been properly costed and which I could not be sure would even be viable, I began to rely on a small network of 2 or 3 highly experienced former Treasury officers who I had known for the best part of 20 years and who had genuine policy expertise in the areas that I lacked. This was especially in costings and fiscal implications of options, as well as to the political viability of possible approaches.

I saw little point in putting up a policy option to the Prime Minister and the Treasurer if it could not ‘fly’ politically – even if the numbers seemed broadly accurate. I would therefore ‘roadtest’ a few ideas and options with my small trusted network so that the risks of developing half baked policy options involving contingent liabilities of $2 billion or more was reduced.

Although this may not have been consistent with normal practice, the operating environment was hardly normal. It was in many respects chaotic and dysfunctional and suffering from the stress of overload.

By comparison the much-criticised BER was exceptionately well managed.

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It's not just The Australian. "The ABC has a lot to answer for"

John Menadue. Listen here.

Here's an extract from his speaking notes at a New News conference.

Under-resourced mainstream media is not in a healthy state. It is failing significantly, with a few notable exceptions, in the health field as in most other fields. It is much more than just the shrillness of the Murdoch media. With so little news to break or analyse, it is not surprising that journalists spend such an inordinate amount of time-sharing opinions with each other.

Can online media fill the vacuum? Crikey/Croaky, Centre for Policy Development and others are in the field, but they will take time to grow. The important issue for online media to recognise is that technology is the easy part. The hard part is content both information and analysis.

In pay television for example, we have excellent new technology that has given us more channels and better pictures, but the improvement in content is marginal. We have more choices, but little increase in value. Online media is much cheaper to produce and deliver, but the continuing problem will be access to good content at reasonable cost. Bloggers give us worthwhile and diverse opinions, but are not particularly strong on the dissemination of factual information.

The Australian polity and the media are in a downward spiral, almost a death wish. Disappointment and disillusionment with politics and the media is widespread and growing.

Trivia and personalities prevailed in the media in the last election campaign. The best example of trivia that I can recall was the Australian Financial Review’s portrayal of Julia Gillard saying ‘Nauru’ instead of ‘East Timor’. As the AFR put it ‘Gillard’s Nauru gaff rocks asylum seekers’ stance’. Really? I have been getting my four children’s names confused for the last 50 years! Even Kerry O’Brien mis-speaks the ABC for the ALP.

Politicians are clearly running away from the big ticket issues – particularly climate change and the two or three track economy that the mining boom is foisting on Australia. Politicians listen closely to lobbyists on these big-ticket issues – 900 full-time of them, or 34 for every Cabinet minister. Journalists are under-resourced to examine policy issues and in many cases have become the mouthpiece of special interests with their well-funded public relations activities. The Australian Centre for Independent Journalism at UTS found in a survey of the 10 major metropolitan newspapers published in Crikey in March this year that 55% of content was PR driven, and 24% of content had little or no significant journalist input. In the specific field of health/science and medicine, the survey found that 52% of content was PR driven, with 23% of content having little or no significant journalist input.

Before I come specifically to health, let me mention the problem in the wider media context.

The Rudd Government introduced timid climate change proposals and then over-compensated the polluters. Frightened by a ‘big new tax’, the government ran away. The result of the power of special interests and the failure of the media to explain has resulted in what Ross Garnaut has described as a ‘diabolical problem’.

For a $7 m advertising campaign, the three wealthy foreign-owned miners saved themselves $7 b in taxes. There were some media commentators, Ross Gittins and Ian Verrender, who wrote cogently on the issues, but much of the media, which was the beneficiary of the miners’ advertising money, either diverted public attention from what was at stake or clambered in political support of the foreign miners. I wonder how those same journalists will react when Chinese state-owned enterprises follow BHP, Rio Tinto and Xstrata in running future political campaigns against the Australian government. The media was missing in action on this big-ticket item.

On asylum seekers, the government and the media, and particularly the ABC, failed to frame the debate with facts. Television news and current affairs obviously worked on the assumption that if there were no pictures, there was no news. It was easy to get pictures of asylum seekers’ boats floundering in the Arafura Sea, but it is hard to get worthwhile pictures of asylum seekers’ coming by air, despite the fact that over 90% of asylum seekers come by air and not by boat. Tony Abbott said that Australia was being ‘invaded’ by asylum seekers, yet neither the government nor the media took the trouble to point out that asylum seekers represented only 1% of our migration intake...

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Tuesday, September 28, 2010

No-one should be forcibly reduced to a single identity

Yes, this is a post about #groggate, #massolagate

I have several identities. I have one identity picking up my children at school, another at church, another when I buy a bus ticket, another at work, and so on.

Most of us do.

I wouldn't matter if I used a different name for each. All the bus company needs to know is that I am the person who paid for the ride. The prepaid ticket suffices, no need for a name there. (Bizarrely NSW tollways go further, wanting to know my credit card details and address in a classic example of overreach - the fact that I had bought a prepaid beeper ought to be enough).

Married women often use different names for different purposes, as is their right.

Human beings have two needs when it comes to identity. One is the need to interact with other people, names help here. The other is the need to keep our wholeness to ourselves, not letting everyone know everything about us helps here.

The energy company AGL doesn't get this. It not only demands date of birth info but also a drivers licence number (in defiance of NSW law) in order to get the gas on, not figuring that I would prefer to keep that between myself and the Roads and Traffic Authority.

Many people don't mind being reduced to only one identity, they have no problem with AGL. But many people do mind. No-one should be forcibly reduced to a single identity. It infringes what I and others believe to be a fundamental right - to only share with others what is needed in order to achieve what we want to achieve.

"Outing" homosexuals to their employers breaches this right. "Outing" a blogger using a pseudonym such as Grogs Gammut to his employer breaches this right.

George Orwell warned of a world in which this routinely happened. News Corporation believes in it. Phone taps, anyone?

James Massola's defence of his action in stripping bare Grogs Gammut is here. He asks "So why did I out Grog if I thought he should keep blogging?", fails to provide a compelling reason and then adds wistfully "I don't want him to lose his job."

Stephen Spencer of Channel 10 (who has other identities in other contexts like us all) writes:

It serves the interests of the gallery and various news outlets. He's silenced and anyone else who speaks out is now on notice.

I agree. For the record, I will never give away the other identities and occupations of the pseudonymous bloggers who routinely interact with me. I am deeply saddened.

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Questions for the NBN cheer-squad

Today's SMH:

"A high-speed rail line linking Sydney and Melbourne is not viable, the federal Department of Transport has told the government, claiming it is too expensive and will not attract enough passengers...

The department's brief says viable high-speed rail lines need about 6 million passengers a year to be viable when construction costs are low. More typically, they need about 12 to 20 million passengers to be able to recover their costs.

And while Sydney and Melbourne have large populations, an average speed of 250 km/h still demands a journey of three hours or more - which ''is the upper limit for the train to be competitive with airlines.''

''Other cities are more competitively distanced from each other but do not have the passenger and population base to warrant a new line,'' the brief says. For instance, fast trains linking Sydney with Newcastle and Canberra would have trip times well under two hours, but would be ''highly unviable'' due to their construction costs.

The briefing cites international construction costs for very fast trains rising from $16 million per kilometre on a rail link in Spain to $110 million per kilometre for the Channel Tunnel rail link into London. More densely populated areas produce higher costs, due to the price of buying land.

Some questions:

. This is only a departmental opinion about the high-speed rail proposal. It will be followed by a full cost-benefit analysis. Do they think it is worth bothering with one? (Given that they don't think it is worth bothering with one for the NBN)

. Should the high-speed rail go ahead regardless? (Perhaps because all analysis is crap, and the project will be nation-building)

. Should the project be abandoned? (Because it will use up resources and money that will be needed to build the NBN)

Just asking.

Oh and here's Conroy, it's his "response" to critics who have called for a cost-benefit analysis. But it fails to address the question. Perhaps it slipped his mind.

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Sunday, September 26, 2010

Henry reviews his review - and the answer is no

...for now. Weird.

Henry has said no to Henry. In a bizarre twist that endangers the coming tax summit Treasury boss Ken Henry has advised the incoming government it can't afford to introduce the personal tax system he recommended when he headed the Henry Tax Review.

Endorsed by Tony Abbott during the election campaign, the revolutionary system would tax almost all Australians at one simple flat rate - most likely 35 per cent - after exempting from tax the first $25,000 earned.

The very high tax-free threshold would eliminate most of the entanglements between the tax and welfare systems and ensure that low earners paid little.

Labor has pledged to put the plan up for discussion at the July tax summit and Tony Abbott commended it as as a plan "for lower, simpler, fairer personal taxes and an end to the money-go-round that traps people in poverty".

But in the so-called Blue Book prepared for the Coalition in the event it took office released under freedom of information laws Treasury says the plan now "may not be possible in the short term given tight fiscal circumstances".

The Henry scale now merely "provides a guide to movements in the right direction"... consistent with the Coalition's desire for lower and flatter taxes.

The Henry Scale
In for the moment rejecting his own idea Dr Henry is following a well-worn path. The TV series Yes Minister is said to be inspired by a British politician who rejected a petition he helped organise. As Shadow Finance Minister Lindsay Tanner introduced a private members bill to reform the Charter of Budget Honesty that he failed to proceed with as Finance Minister.

Dr Henry has bluntly told both sides in their incoming government briefings that giveaways - even well-intentioned ones - can no longer be afforded.

"When we briefed you shortly after the 2007 election we were forecasting a fiscal position that provided considerable scope for purchasing a number of difficult reforms," his briefing to Labor says. "Today, in very different fiscal circumstances, it is clear reforms will have to be largely budget-neutral."

In order to emphasise that in a budget-neutral world tax and other changes will be difficult if not impossible, Dr Henry says "budget-neutral reform is never easy, in large part because it more obviously involves losers as well as winners".

What we have now
A graph of Australia's present effective marginal tax rates resembles a series of staircases and bumps, meaning that many Australians at many points on the tax scale would stand to lose from a simpler flatter system unless the overall tax take was cut.

Dr Henry advises that some changes may now "only be possible when there is a stronger financial situation," but says the legwork should be done just in case.

So concerned is Dr Henry about Australia's financial situation he says there is a "real risk" events overseas could hit tax receipts "delaying or even eliminating the prospect of a return to surplus".

Needing urgent attention was Australia's superannuation system which "is increasingly leaking revenue, with self-managed super funds now the tax minimisation vehicle of choice".

Published in today's SMH and Age

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Saturday, September 25, 2010

It's not just the Red Book. Now the Coalition's got hold of the Blue Book

...and handed it to us. Thank you Joe.

Some background:

Oh to be a fly on the wall post-election Sunday morning.

That's when Treasury chief Ken Henry, Finance boss David Tune and a handful of senior officers could arrive in Melbourne or Sydney for days of intense talks about the real state of the nation's finances and the real worth of the winning party's promises.

In 2007 the talks began in Brisbane Sunday morning and lasted two days.

By the time they were finished Kevin Rudd and his incoming Treasurer Wayne Swan would have got a fair idea that a number of their promises were duds.

Henry and Tune will carry with them one of two books, either the so-called "red book" routinely prepared for a new government, or the "blue book," routinely prepared for government's returning to office.

The most famous handover of a red book took place in the deserted bar of Canberra's Lakeside Hotel early Sunday morning in 1983 when Treasury Secretary John Stone explained to the incoming Prime Minister Bob Hawke and Treasurer Paul Keating that they faced a budget deficit far bigger than had been admitted by their predecessors and they would not be able to fund all their promises...

Redacted Blue Book Part 1

Parts 2, 3 and 4 over the fold:

Redacted Blue Book Pt2

Redacted Blue Book Pt3

Redacted Blue Book Pt4

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Thursday, September 23, 2010

How would the Treasury analyse the NBN?

It certainly wouldn't be just about the money.

It would use the same five criteria as it does for everything else.

It has just republished and updated them, below.

We bring a whole-of-economy approach to our analysis and advice; we
recognise that the wellbeing of Australians encompasses much more than is
captured by traditional quantitative measures of economic activity; and we
complement and challenge the advice of other agencies on the effects of
policy proposals.

While the wellbeing framework is not a checklist to be applied in every
circumstance, it reinforces our conviction that trade-offs matter deeply. There are
five dimensions to the wellbeing framework:

The opportunity and freedom that allows individuals to lead lives of real
value to them. We have drawn heavily here on the thesis of economist,
philosopher and Nobel laureate Amartya Sen, that human development is
measured by the extent to which individuals have the capabilities necessary to
choose to lead a life they have reason to value.

The level of consumption possibilities available to the community over time.
This includes both market and non-market goods and services, such as the
character and quality of people’s engagement in the community, the physical
environment, health and leisure.

Distribution looks at the spread of all other aspects of wellbeing across the
Australian population. Distributional outcomes across different social groups,
geographic regions and generations are also considered.

The overall level and allocation of risk borne by individuals and, in aggregate,
by the community. Risk can be particularly harmful to wellbeing when people
who are clearly unable to manage risk are nevertheless required to bear it, or
are exposed to it unknowingly.

The level of complexity confronting Australians in making decisions about
their lives.

The NBN seems to provide some of each. The question would be whether it provided enough of each to be value for money given the amount being spent and the resources that would be moved from other activities.

But listen up. As I have been saying, it's not all about financial outcomes. So relax. Okay?

Treasury Strategic Framework 2010-11

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Wednesday, September 22, 2010

Governor Stevens pwned!

See Tim Colebatch this morning.

Governor Stevens this week argued that there were not really two Australias:

"While some events can lead to a divergence in economic conditions across Australia, overall these differences have not been especially large in recent times . . . What is remarkable, in fact, is that the differences are not, in the end, larger."

But here's what Stevens was saying back in February:

"Yes, I think it is going to be a two-speed economy . . . I think all those issues of geographical differences and industry differences are likely to re-emerge with a vengeance. The relative price of resources is high, that of manufactures is low. There are structural adjustment implications of this for our economy . . . they will, I think, probably intensify in the years ahead."

Some extracts from Tim Colebatch:

"In my next life, I want to be a central bank governor. People fawn on you, whatever you say is taken as gospel, and others rarely challenge it...

The Reserve chief played down the risk of that resources boom dividing Australia into a two-speed economy. Indeed, he tried to persuade his audience that this hadn't happened, and wouldn't happen.

The only evidence he presented was a handful of graphs demonstrating that over a 10-year or 15-year time period, movements in prices and unemployment rates had differed less in the six Australian states than in the 50 states of the US or the 27 countries of the European Union. You don't say. I wonder if that might have something to do with the fact that states are always more alike than countries. Or that six units of anything offer less scope for differences than 27 or 50.

The Guv's choice of time frame also missed the point. We were not a two-speed economy 10 or 15 years ago. This emerged in the past five years, as mining investment and export revenues grew exponentially, the Reserve responded by driving up interest rates, which drove up the dollar, which made significant parts of our manufacturing, agricultural and tourism industries uncompetitive.

That is why the two-speed economy became an issue. It is why we in Victoria fear the consequences of an even larger mining boom, and an even higher dollar, ahead.

It is why Stevens himself warned just seven months ago that the problems of a two-speed economy "are likely to re-emerge with a vengeance" and "will probably intensify in the years ahead"...

The new Glenn should listen to the old one.

Published in today's Age

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Reserve: If you haven't got the message, we'll help you join the dots

The breaking of the drought and a more than doubling of iron ore prices are set to deliver Australia's its biggest-ever pay cheque this financial year, pushing commodity export earnings above $200 billion for the first time.

The official forecast came as the Reserve Bank hardened its talk of higher interest rates declaring in its board minutes released yesterday "higher interest rates would be required" if its economic forecasts came to pass.

It is the first time board minutes have explicitly referred to the need for higher interest rates since December 2007, a declaration that was followed by two successive rate hikes taking rates to their highest point in more than a decade.

The Bank is determined that financial markets get the message that rates are likely to go up and stepped up the rhetoric because it believed they had failed to 'join the dots'.

It is particularly concerned that before the last board meeting the futures market was actually pricing in rate cuts when it should have been pricing in rate hikes.

The market is now pricing in a 40 per cent chance of a rate hike at the Bank's
next meeting in two week's time and a near certainty of a rate hike by Christmas...

The Bank expects the mining boom to push both economic growth and inflation above their long-term trends, something it believes is not sustainable.

It is prepared to act early rather than wait for evidence of above-trend growth or to wait for the official inflation figures due in late October.

It will make a judgment call meeting by meeting rather than be guided by official figures, making a hike at the October 5 meeting a 'live' possibility.

The the Bureau of Agricultural and Resource Economics is forecasting a hefty 26 jump in export earnings this financial year, itself a jump of 6 per cent on the forecast it released just three months ago.

It expects iron ore prices to be 114 per cent higher, coking coal prices to be 63 per cent higher, thermal coal prices 39 per cent higher and wheat prices 20 per cent higher as worldwide wheat consumption exceed production for the first time since 2007.

Boosting wheat production by one-third will be "ideal growing conditions over eastern Australia" with high soil moisture and rapidly rising dam levels along the Murray Darling Basin.

Total earnings form wheat are expected to climb 41 per cent, total earnings from coking coal 41 per cent, total earnings from iron ore exports 55 per cent, and total earnings from gold exports 38 per cent.

Cotton production is expected to jump 69 per cent as the water level in some Queensland and northern NSW dams approaches 100 per cent.

Farm export earnings are set to pass $30 billion for only second time in Australia's history, fuel export earnings are set to pass $70 million, and minerals earnings are set to pass $100 for the first time jumping well clear of the previous peak of $84 billion.

The Bureau is expecting minerals prices to steady from here on with future growth in export earnings coming from increased production.

Published in today's SMH and Age


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Tuesday, September 21, 2010

Brilliant new movie trailers (Don't worry, they relate to economics)


Going up, there's a boom on. The Governor says so

Reserve Bank Governor Glenn Stevens has spelled out plans to push up interest rates in order to manage "the largest minerals and energy boom since the late nineteenth century" and made it clear he won't hold off to protect cities such as Sydney distant from the big mines.

Addressing a business audience in Shepparton near the NSW Victorian border he said he had "very effective control over only one interest rate" and that he would need to push it up nationwide in order to manage a boom he conceded was emanating from Western Australia.

"We do not have different interest rates for certain regions or industries. We set policy for the average Australian conditions," he said.

"A given region or industry may not fully feel the strength or weakness to which the Bank is responding. It is this phenomenon people presumably have in mind when they refer to monetary policy being a blunt instrument."

"It is not possible to have different monetary policies by region or by industry within the country, at least not while we are all using one currency and funds are free to flow around," he said.

Baring unforeseen circumstances economic growth was set to climb above trend in coming months and the fall in inflation would not "go much further".

The Bank had only one instrument with which to manage the "fairly robust upswing". The entire nation would have to wear the consequences...

Interest rate futures moved swiftly on his words, the market pricing in a 24 per cent chance of a rate hike when the Reserve Bank board next meets in two weeks time, a 64 per cent chance of a rate hike at the Bank's Melbourne Cup Day meeting, an 80 per cent chance by December and a 120 per cent chance by February, meaning the market is betting on more than one hike.

The Australian dollar jumped from 94 US cents to 94.70 - its highest point since August 2008. It closed at 94.55 US.

"The Governor is preparing the market for higher interest rates," said TD Securities strategist Roland Randall. "He delivered the speech in regional Australia and spelled out why he would be unable to spare regional Australia."

"The speech was laced with strong language," said RBC Capital Markets economist Michael Turner. "He could have easily avoided strongly worded and forward looking comments."

The Bank last lifted its cash rate in May. A further increase would add another $48 to the monthly cost of repaying a $300,000 mortgage and $64 to the cost of repaying a $400,000 mortgage bringing the total extra costs since October to $283 and $340 per month.

If no more than fully passed on the 0.25 per cent hike would bring standard variable mortgage rates to around 7.65 per cent, still well down on the peak of 8.3 per cent reached under the Howard government and 9.6 reached before the global financial crisis under Kevin Rudd.

Governor Stevens used the speech to attack the notion that there were "two Australias" - one in the West benefiting from the mining boom, and the other impoverished and needing mercy.

Melbourne served as the corporate headquarters for many of the mining companies. Sydney housed companies that provided services such as air travel, consultants and geologists. Many remote mines operated on a "fly-in, fly-out" basis with workers commuting from the eastern states.

Mr Stevens produced graphs purporting to show that all Australian cities had experienced much the same increase in prices since the year 2000 in contrast to the United States where there was wide variation.

However a Herald analysis shows that if he had chosen a shorter time period the disparity would have been wider, with Sydney prices climbing 14.8 per cent since 2005 compared to 18.4 per cent in Perth.

Published in today's SMH and Age

Monetary Policy and the Regions - 20 Sep 2010

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Monday, September 20, 2010

We're spending a fortune on new wires. In case you don't want them, we'll disconnect the ones you have

Great business model, eh? Although probably not great enough when you are pouring in $43 billion.

The overwhelminq question is why? Why spend a fortune replacing wires most people probably don't want replaced. And why not properly examine the idea first in a cost-benefit study?

We've already got wires that keep doing more than we ever imagined (20 years ago no-one could have imagined what ADSL could do, even years ago no-one could have imagined the speeds it will do now  - and they are still increasing) and much of the urban population was actually offered shiny new sets of coaxial cable wires in the 1990s (they were strung up through entire suburbs) and said no. The new NBN cables will be strung next to them.

So why? Why spend a huge sum forcing on us what most of us would scarcely pay a cent extra for of our own volition?

The responses to this post and others provide some clues:

One is the view, satirised by The Onion, that Tax Dollars Only Be Wasted On Stuff That's Awesome.

I will say this once - clearly. Being awesome isn't an argument. I know the speed of light is the fastest there is. It's awesome. Get over it. The question is whether it is worth spending billions connecting 90 per cent of the country to it.

Oh, and there's build it and they will come. Stilgherrian says:

"Of course these speeds are adequate for current interactive services. If they weren't, these services wouldn't yet exist. New services will only emerge when the speeds exist to support them."

Build it and they will come! Except they didn't come for coaxial cable, didn't come for satellite, didn't come for HD TV. Not every bet on a new technology pays off. If it costs so much wouldn't it be wise to look before leaping?

There's the related march of progress argument. Kymbos says...

"When electricity became an option to people it was largely used for lighting... After a time, electricity became a common use for powering most things in the home or business, to the point that nowadays it seems ridiculous that it would even be questioned. I see broadband in that context. I think (although of course I do not know) that over the next 10-20 years it will become so ubiquitous to our lives that we will wonder why it was ever debated that we make investments of the magnitude of the NBN."

But the truth is broadband will become ubiquitous over the next 10-20 years regardless of whether we have the NBN. Progress has a way of happening. If you doubt this, check out the screamingly funny Accenture study from 2001 arguing for tax credits in order to get broadband penetration past 10 per cent.  Gee, how did it happen without those tax credits Accenture thought were essential.

There's the argument that value for money doesn't matter because it is free money. Grogs says it isn't right to think of 'opportunity cost' - money forgone.

"This is also a favoured tactic of those who dislike the NBN – ie every billion spent on the NBN is another hospital that could be built. It is a pretty weak argument. People know another hospital isn’t going to be built instead of the NBN. The argument may sound logical, but its much like smokers who quit knowing they are never actually going to go on the round the world holiday with all the money they will save."

Sorry Grogs. Fewer hospitals and the like will be built if the NBN goes ahead. The opportunity cost is real, regardless of what "people know."

There's the copper is on its last legs argument. Possum says:

"It is a decrepit, broken thing attempting to provide something it was never designed for, whose performance has already peaked and which will become increasingly degraded and prohibitively expensive to maintain over time. The net you get over copper today is as good as it will ever be."

Fighting words, which would have seemed true 20 years ago, would have seemed true 10 years ago, would have seemed true 5 years ago. And people like Possum accuse people like me of lacking imagination. All the while we have kept coming up with new and better ways to use copper. It is indeed doing things it was never designed for, over and over again. It's an unexpectedly versatile material. It'll do even faster speeds soon, and it is already laid. Sure it costs money to maintain, but how much?  Surely we wouldn't be planning to chuck it out without knowing how much?

And anyway Possum says we don't need a cost benefit study because the answer is unknowable.

Possum, that doesn't mean we don't need a cost benefit study. Governments do cost-benefit studies about things such as this all the time.  The range of likely outcomes would tell us a lot and the process would tell us a lot. We would gather information (the real state of the copper network, which suburbs and houses would well served by what they had) and explicitly lay out assumptions. It would be worth it - essential in my view -  given the scale of the project.

In evidence to the Senate Committee examining this question Dr Mark Harrison said

"The great thing about cost-benefit analysis is that it makes the methodology and the assumptions all clear and explicit and then you can argue about them."

And in any event, the people promoting the NBN undermine your argument by acting as if a cost-benefit analysis has been done!

Here's Treasurer Wayne Swan from Wednesday night:

"Access Economics forecasts that smart technologies like the National Broadband Network will add 1.5 per cent to the level of our GDP within a few years. It’s truly remarkable technology, and a truly important reform, and we can’t afford not to do it."

Err Wayne, "can't afford not to do it"? I thought the benefits were unquantifiable. And that Access Study you quoted. Have you read it? It's here. Access says there is "insufficient data to accurately quantify the full economic benefits of high speed broadband at this time," but in its view the benefits would be large. In other words it doesn't have a clue. Why on earth did you make it sound as if Access had come up with something?

And then there's Mike Quigley, the CEO of the NBN Co. You say he "is one of the most experienced and widely respected telecommunications professionals in the business, having most recently worked as Chief Operating Officer of Alcatel Lucent – one of the biggest telcos in the world".

Good. I would have more confidence in him if he didn't say stuff like:

"Recent studies have noted the substantial annual benefits that flow from broadband in terms of GDP. One such study of a fibre access network estimated a US$160 billion economic benefit over 4 years. This same study estimated an annual increase in jobs of more than 210,000."

He would have read the study he's referring to, right? It's by Navigant Economics. Much of the "benefit" it refers to is actually the cost. Its an analysis that would make the Ord River Scheme look good. The rest of the benefit comes from an "increase the number of U.S. broadband subscribers by between 216,000 and 6.0 million". That's right - an increase in the number of broadband subscribers is the important thing according to Navigant Economics, not speed for its own sake. The study was funded by the US Fibre to the Home Council.

Rather than quote fake or crappy studies, why not conduct a good one?

Otherwise, why not as one economist suggested "fund $43 billion artificial intelligence project on basis that we think robots might end up doing all the work for us?"

If there's really still something objectionable about the sort of studies that are commonplace where there are public costs and social benefits (not all of them quantifiable), why not implement Christopher Joye's alternative idea -- a randomised trial in one city to determine benefits after say 5 or 10 years. What would we have to lose? If one city (say Adelaide or Hobart) raced ahead because of the NBN we could take the idea nationwide. The rest of us would have 5 to 10 years of technology advance and the Adelaide or Hobart experience to advise us how to jump, or whether to.

Below are extras from a great column by Stephen Bartholomeusz in Business Spectator (subscription) and one from Joshua Gans who says he actually suggested a trial in Tasmania but that the government was "not interested in evidence based assessments".

So sad.

Testing Turnbull's NBN mettle

Stephen Bartholomeusz, 16 Sep 2010

"The government has committed to spending up to $43 billion of taxpayer funds, or whatever lesser or greater amount the NBN ultimately costs, without any meaningful analysis of its costs and benefits.

"The 546-page implementation study produced by McKinsey and KPMG earlier this year wasn’t a cost-benefit analysis – the firms explicitly said so in the introduction to their study. That study was a reverse-engineering exercise for a decision that had already been taken, and a rather unconvincing and rubbery one at that, built on ridiculously optimistic assessments of penetration and demand rates.

"Whatever the merits and nation-building potential of a ubiquitous fibre-to-the-premises network, the fact that a government has embarked on the single most expensive project in the nation’s history without undertaking an exhaustive analysis – indeed any, meaningful analysis – of its costs and benefits represents appalling governance. At least there was some obvious and urgent economic justification for the pink batts program.

"As Turnbull says, a case could be made that there are social and economic benefits beyond the financial value created or destroyed by the NBN, but that case hasn’t been made and, it appears, unless he can force a change of stance, won’t be made...

"If, as Kohler said in his response to Turnbull’s response to his column, the politics of the NBN were really about creating a new regional subsidy to replace the existing universal service obligation, why are we spending $43 billion, or whatever it ends up costing?

"Just give the bush subsidised high-speed broadband, whether fibre, satellite or wireless – at a cost of perhaps $5 billion or $6 billion – and save a few tens of billions of dollars to spend on health, education, transport infrastructure and other more obviously and more urgently vital services...

"In fact it would seem the politics are more complicated than simply supplying broadband to the bush. There is a large element of the urban population which just likes the idea of very high speed broadband. They may not have any idea of what they will do with it when they have access to it, but that’s part of its appeal.

"The US author and columnist, Michael Lewis, at the height of the dot-com bubble, wrote about the "state of pure possibility" in relation to the inflated value of the dot-com stocks. In a bubble (when emotion generally overwhelms commonsense) he argued a company had to be "ever so slightly unknowable" to be desirable. There an elements of that in much of the enthusiasm for the NBN."

NBN: A Little Summary

Joshua Gans, September 16, 2010

In the four years that I have been researching and debating broadband policy there is one thing I have learned, it is hard to take a position other than a straight “yes” or “no.” The Government and Opposition know this and have taken sides. Neither are entirely right or entirely wrong. Neither are really serious about gathering proper evidence. Anyhow, let me summarise what we know about the value of the NBN and what we still need to find out.

The NBN will be unlikely to earn a commercial return. The Cost-Benefit Analysis on this has been done but not by the Government but by Telstra and many other telecommunications companies. Telstra told us for years it was not viable. I’d be willing to bet they are right about that but they are silent now because they want it to go ahead. Given that, the Opposition’s call for a Cost-Benefit Analysis to be produced again is surely political grandstanding and a waste of time. But the Government’s continual claims without evidence that it will be commercially viable is a worse affront.

The NBN may earn a social return. This is a Cost-Benefit Analysis that might be done but the problem is that a social return depends on Government policies yet to be enacted or thought about. While the debate is off on the commercial side, the social side has been left for dead. As Peter Martin has reminded us, there is precious little evidence that there is a social return on things like eEducation, eHealth or what have you. But that does not mean the evidence can’t be gathered. The problem is there is no pressure to do so.

The largest immediate social benefit from the NBN is competition in telecommunications. As I wrote way back in 2008 when I first proposed all this, we have failed in telecommunications competition in this country. We have a monopolist and no real way of regulating it. The NBN is a way of doing so; the first real option proposed. It is expensive, to be sure, but it will do the job unless…

The biggest risk to the NBN is a bad deal with Telstra. The NBN will achieve competition by duplicating telecommunications infrastructure. Stop duplicating to save some money and you may kill the benefits from competition. That seems to be what the Government wants to do. Here is Minister Conroy from today: “And the deal we have with Telstra and the McKinsey report was based on no deal with Telstra. The debate about take-up has become completely irrelevant; the deal that we have with Telstra is that they are decommissioning, closing down the copper network. To have a fixed line in what we call the 93 per cent footprint, the only way at the end of this process you’ll have a fixed line is on the NBN’s fibre network.” This is outrageous and I hope the ACCC applies s45 properly and stops it. But the Opposition should get its act together and hold the Government to account here.

The NBN is superior to other alternatives like FTTN or some regional option but is currently being implemented in a manner that is way too costly to the taxpayer. There is no buts about it. As it stands the NBN is a massive subsidy to the rich and will likely cost the poorer half of Australia more than they get in benefits. This very fact should be an affront to any true believing Labor follower. It is to me. We can implement the NBN more cheaply if we put in a solution whereby in areas where it is commercially viable, it receives no subsidy. That is, we need an Austan Goolsbee like scheme here.

We should recognise that at the moment the Government and Opposition are just scoring political points and not really getting to the heart of the issue.

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Sunday, September 19, 2010

The paradox of mining

From an excellent new RBA paper Structural Change in the Australian Economy by Ellis Connolly and Christine Lewis.

Mining isn't much changing what we do:

But something is making the mining states more important:

The whole thing is excellent reading.

As is a magnificent paper on Interpreting Market Responses to Economic Data:

"It is interesting that the Australian equity market is more responsive to US inflation and employment news than to Australian employment news."

And a great primer on Economic Change in India.

They are all here.

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Friday, September 17, 2010

We're earning more without doing more - Reserve

Sort of like the "lucky" country
Australians have stopped trying, according to a senior Reserve Bank official. And we are becoming so rich we are scarcely noticing.

Assistant Governor Philip Lowe told a conference in Sydney that productivity growth had slowed to a crawl, halving from more than 2 per cent per year in the 1990s to a little over 1 per cent - despite a boost investment that would typically be expected to boost output per worker."

"Normally slower rates of productivity growth lead to slower increases in living standards," he told the conference. "But this has not occurred. Indeed, growth in income per hour worked has been unusually strong."

The answer to the mystery was extraordinarily high export prices, which were pushing up income regardless, something that would not continue.

"With the proceeds of a tonne of iron ore we now can buy more LCD TVs and domestic services than we could a decade ago," he said. "This has allowed our living standards to increase at a faster pace than if we had to rely on productivity growth alone. Looking forward, this situation cannot continue indefinitely."

Australia's near record commodity prices were likely to fall in the next few years taking living standards with them unless productivity growth returned.

Australia was more dependent than ever on the performance of China and would probably soon be more dependent than ever on the performance of India...

"It would be unrealistic to assume that the growth paths in these countries will be without bumps, perhaps large ones," Dr Lowe said. "These bumps will have an impact upon Australia, and there is always the possibility of new technologies reducing the demand for our main resource exports. There is very little we can do about these risks."

Making Australia more vulnerable was that it was already near full employment, using almost all of the available workers.

"For the next year I think we’ll be travelling along pretty much close to full capacity, but probably just a little under it," said the Assistant Governor. "My judgment would be we're almost at what would be considered full employment."

A newfound reticence to spend and borrow was to be welcomed.

"Despite the considerable optimism about the future, household spending has been relatively restrained over the past couple of years and the appetite for debt has declined," Dr Lowe said.

"One interpretation is that the household sector, after having increased its debt levels for many years and witnessed the problems elsewhere in the world, has a better appreciation of the risks."

The reticence would provide "some insurance against the possibility that things do not work out as well as expected".

Australia's minority government was not a cause for concern.

"I don't think it is particularly important,'' Dr Lowe said in answer to a question. "The investment that is taking place in the resources sector is really motivated by long term growth in Asia. Most of it has a horizon of decades."

The Reserve Bank decided at its September to keep interest rates steady noting that for the moment inflation was within its target band.

Published in today's SMH and Age

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