Wednesday, December 31, 2014

Ridiculous, but they work. Why we continue to make New year's resolutions

New Year's resolutions are ridiculous.

Think about it. People who want to change their behaviours  decide to change their behaviours and then all do so at once at midnight. But if they really wanted to change their behaviours they would do it of their own accord, without waiting.

At least that's what anyone who has ever studied economics has been taught. People are meant to be straightforward, literally single-minded.

But we're not, and the success of New Year's resolutions proves it. That's right, success. Because despite all of the jibes the truth is that New Year's resolutions work, and work far better than alternative of simply deciding to change behaviour and then changing it.

The reasons why give us an insight into what it means to be human and into why many of us are never quite sure who we are.

Here's the evidence, assembled by a US psychologist John Norcross. In the leadup to New Year's Eve 1995 he and a team from the University of Scranton in Pennsylvania phoned hundreds of Americans at random and asked whether they were planning to make a specific measurable resolutions at midnight or whether they weren't but still had measurable goals they would like to achieve.

Half a year later an impressive 46 per cent of those who had made resolutions claimed to be meeting their goals, compared to only 4 per cent of those who had not.

Conceding that self-reported success might be exaggerated, he said his findings should be seen "in a comparative context - compared to what".

"In this case, the success rate of resolutions is approximately 10 times higher than the success rate of adults desiring to change their behavior but not making a resolution."

His findings have been replicated repeatedly: resolutions work.

And they suggest that rather than being single-minded many of us are better thought of as having at least two minds, each fighting for control. One might be the saver, the other the spender; one the worker, the other the shirker; one the dieter, the other the eater.

Economist Richard Thaler had his epiphany when he invited a group of graduate students to his house for dinner. While he was cooking he brought out a bowl of cashews.

"We started devouring them," he later explained. "I could see that our appetites were in danger. After a while I hid the bowl in the kitchen. Everyone thanked me."

And then it hit him. He was being thanked by graduate economists. They wouldn't be thanking him at all if they really believed human beings were rational. "After all," he recalled in his biography, "if we wanted to stop eating cashews, we could have done that at any time".

Economics has traditionally explained away what appear to be two separate selves by saying each of us is one self with stable preferences moderated by a discount rate. Because we care most about the present we "discount" whatever good or bad things are likely to happen in the future when comparing them to the good or bad things we are facing now. We are said to have a constant discount rate of around 8 per cent per year.

But the explanation doesn't stand up. Rather than being constant, our discount rate seems to climb the closer we get to the choice we have to make.

Ask someone today to choose between working seven hours on April 1 or eight hours on April 15 and that person will almost certainly choose the easier day on April 1. But ask again when April 1 arrives and the same person will almost certainly choose the harder day in a fortnight's time.

The example comes from US economists Ted O'Donoghue and Matthew Rabin who in 1999 published a paper in the American Economic Review eviscerating the traditional idea of a constant discount rate and proposing instead a model of two selves in which the first was concerned only about the present (always wanting to put off anything unpleasant) and the second was concerned about where that would lead.

The two fight it out. There's no single 'self' always in command.

If they are right it explains the success of resolutions - they are a tool the long-term self can use to trap the short-term self into acting.

And it explains why certain types of resolutions are more likely to succeed than others - those that are specific and are made in public and no room for backing out.

John F Kennedy did it most famously in 1962 with his commitment to send a man to moon "before this decade is out" and just as effectively a year earlier declaring that the US would regard any attack on West Berlin "as an attack upon us all".

In both he was influenced by Thomas Schelling, an adviser to President Truman who later won the Nobel Prize in Economics and probably invented the concept of Mutually Assured Destruction, which against all odds has kept the world free of nuclear attacks for seven decades.

His insight was that closing off options can be empowering. The US was formidable when it declared that it would send a man to the moon no matter what, frightening when it declared it would defend Berlin no matter what and terrifying when it declared it would respond to nuclear force with nuclear force no matter what.

His advice for tonight is to eschew vague resolutions and go for absolutes: "Just as it may be easier to ban nuclear weapons from the battlefield in toto than through carefully graduated specifications on their use, zero is a more enforceable limit on cigarettes or chewing gum than some flexible quantitative ration."

And say it out loud. Lock yourself in. You might be surprised at what you can achieve.

In The Age and Sydney Morning Herald

Related Posts

. New Year's 2004. Why Scrooge wouldn't take the cash

. New Year's 2007. When the hand nears twelve...

. New Year's 2014. Sugar: It could be why you can't lose weight


Tuesday, December 16, 2014

Advice for Hockey: Slug super and fix the budget in one hit

Sooner or later Joe Hockey is going to do what's needed.

He is running out of other options. In opposition he said returning the budget to surplus would be easy: "Based on the numbers presented last Tuesday night, we will achieve a surplus in our first year in office and we will achieve a surplus for every year of our first term," he promised just 18 months before the election.

As the election came closer he became more cautious, refusing to set a date. And then in his first budget, in May this year, he said he would deliver a surplus in 2018-19, a deadline now a mere memory.

Many of the things he thought would be simple turned out to be difficult. He was going to axe 12,000 public service positions before discovering Labor had already set in train processes to axe 14,000. He hemmed himself in with promises not to cut health, education or pensions, each of which he has had to honour in the breach.

Some of his promises made things needlessly hard. Axing the carbon tax (while keeping the associated compensation measures) will cost the budget $7 billion.

And the iron ore price collapsed. It'll rip $14 billion from the budget over the next four years. It's a truly massive problem, yet rather than find a massive fix Hockey has so far used piecemeal measures such as shaving foreign aid, indexing petrol excise, penalising job seekers, giving less to universities and trying to charge for previously free visits to the doctor.

Each doesn't save much, and each arouses so much opposition as to make it scarcely worth his while, even if it gets through the Senate.

What he needs instead is one really big tax hike (spending cuts won't raise enough), but one won't rip money out of wallets and purses. It needs to be easy to justify (attractive to Labor), invisible on a day-to-day basis, and simple. And it needs to raise, say, $12 billion. Per year....

Labor's own tax review has already pointed the way, but at the time Labor was too scared to take any notice.

What Hockey needs to do is to tax compulsory superannuation contributions as income, which is what they are. At the moment after the employer pays them they are taxed from the fund at 15 per cent, which is a very good deal if you are on a marginal tax of 37 per cent, quite a good deal if your rate is 19 per cent, and an appalling deal if you earn so little your tax rate is zero.

Instead of being paid by the fund the tax would be paid by the employee at the same time as all their other tax, in the same way as other tax and at the same rate as other tax. Nothing could be simpler.

The Treasury says the present tax arrangement will cost the budget $17.8 billion this financial year, $19.15 billion next financial year and $20.7 billion the following year. The figures exclude the incredibly generous concessions for the income earned within super funds, which needn't be touched. But they do include the tax concessions on extra contributions made over and above what's compulsory. To the extent that they are made merely to avoid tax they will vanish, cutting the benefit for the government to about $12 billion a year – which happens to be about what's needed.

Former Treasury economist Steven Anthony of the Canberra consultancy Macroeconomics has come up with the $12 billion figure, from taxing wages paid as super in the same way as wages paid as wages. He says it's extremely conservative and it would climb each year.

The thing about compulsory contributions is that they are compulsory. They can't be cut. The government would lock in an extra $12 billion per year (and climbing) at the stroke of a pen. It shouldn't dent household spending in the same way as would an increase in income tax, but it might make households more wary of spending, believing they've less tucked away for when they retire.

Which is where Hockey's just-completed financial system review comes in. It's come up with a plan to boost retirement incomes by between 25 per cent and 40 per cent, largely by the simple expedient of cutting the other "superannuation tax" – the fees imposed by fund managers for performance that's usually no better than ordinary.

The plan is wonderfully simple. The market would cut the fees all by itself. All the government would do is conduct an auction every three or so years for the right to manage all new default accounts. With a huge business up for grabs, the fund managers would fight among themselves to bid the fee down. Right now fees range from 0.48 per cent 1.84 per cent. When Chile adopted the scheme it got the fees for new accounts down to 0.4 per cent and customers in other schemes switched over. The Grattan Institute reckons it would save around $10 billion per year, which coincidentally is close the $12 billion extra the government would take from them by properly taxing their super contributions.

As it happens the Coalition is in a good position to blame Labor when it grabs the $12 billion. It is Labor that set up compulsory super in 1992. It is Labor that taxed all contributions at 15 per cent regardless of the taxpayer's rate. It is Labor that was prepared to leave the woefully deficient scheme in place until right near the end when budget pressures forced it to take limited action against high earners – action that it didn't have time to put through parliament.

If anything it is the Coalition that has a better track record. Peter Costello introduced a 15 per cent super tax surcharge for high earners (they paid 15 per cent plus 15 per cent) which he later removed after it led to "enormous complexity and compliance costs".

This wouldn't. There is nothing simpler than taxing all income as if it is income. And the pay-as-you-earn tax system is set up to collect it.

It's over to Joe, and the tax inquiry he is about to commission. He could solve his problems in one hit.

In The Age and Sydney Morning Herald

Related Posts

. How unfair are super tax concessions? Two views

. The Grattan fix. How to stop fees eating up our super

. Treasury: Super costs us three times what it should


Wednesday, December 10, 2014

Why you'll pay much more for the doctor. The three-card trick that purports to save $3.5 billion

How can a $5 GP co-payment that excludes the young and those on benefits save just as much as a $7 co-payment that applies to everyone?

That's what we'll be asked to believe when the budget update is published next week. We'll be told Prime Minister Tony Abbott's new health package will save $3.5 billion whereas his old package would have saved $3.6 billion.

Part of the trick is that it isn't the co-payment that saves the government money, it's the cut to the Medicare rebate. That cut was always going to be $5 per consultation. If doctors had had the ability to charge a $7 co-payment they would have got an extra $2 in their pockets. Now they won't.

Another part of the trick is that the government will now cut some rebates by much more. Standard so-called Level B consultations of up to 10 minutes currently attract a $37.05 rebate. Under the changes they will classified as Level A and attract $16.95 for the young and concession holders and $11.95 for everyone else.

And the two-year freeze on increasing the amount of Medicare rebates that was going to extend to June 2016 will now become a four-year freeze, extending to June 2018.

Doctors will lose just as much as before, but in different ways and for longer.

At least that's what the budget update will say.

All of the changes but one will be introduced through the back door by regulation rather than by legislation, which requires the approval of Parliament. But regulations can be disallowed by the Parliament after they are introduced. Just last month the Senate disallowed the regulations that purported to water down consumer protection under financial advice law.

There's every reason to think it's prepared to do so again if it doesn't like co-payments, meaning that, while the $3.5 billion saving will be in the budget update, most of it will never be banked.

In The Age and Sydney Morning Herald

Related Posts

. Abbott: the most radical prime minister since Whitlam

. "A crime", "absurd". Stiglitz on the budget changes to health and education

. Medicare. What would charging for a previously free visit to the doctor achieve?


Abbott's GP co-payments aren't dead: it's a tweak not a termination

Tony Abbott has cut the size of the co-payment and he has excluded children and Australians on benefits, but he is insisting on a co-payment, or as he puts it a "price signal".

Like a price signal for pollution (the carbon tax) or a price signal for traffic congestion (road tolls) the theory is that if we are charged for something we'll use less of it.

But visits to the doctor aren't quite like those other things. One of the things we are buying when we go to the doctor is information - information about whether we really needed to go in the first place. We can't know until we go. Doctors and patients have what health economists call an "information asymmetry". And so that makes it entirely possible that co-payments could deter necessary, as well as frivolous, visits.

It's what the giant Rand health experiment in the United States found. It sent some people to the doctor for free, charged others small fees and others big fees. In the words of the Rand report: "Cost sharing did not seem to have a selective effect." Serious as well as trivial visits were equally discouraged and those visits that were discouraged were almost entirely first visits, those that let the patients know whether it's serious or trivial...

His move might help the budget, but it might not help public health, and there's reason to think it mightn't even help the budget as much as he thinks.

If general practitioners do find their work their work slowing down as patients are turned away by co-payments, what are they expected to do? What they are likely to do is to see other patients more intensively - to recommend follow-ups and to make their consultations last longer. They'll get less from the government per consultation (Abbott is cutting the Medicare rebate by $5 for all but young patients and concession card holders) but they are unlikely to put in fewer hours.

And these changes are unlikely to pass the Senate. Most of them are being introduced by regulations rather than legislation bypassing the need for Senate approval, but the Senate still has the ability to disallow regulations, and just last month it showed it was prepared to use it when it was presented with watered-down financial advice regulations. It isn't over yet.

In The Age and Sydney Morning Herald

Related Posts

. Medicare. What would charging for a previously free visit to the doctor achieve?

. Why you'll pay much more for the doctor. The three-card trick that purports to save $3.5 billion


Tuesday, December 09, 2014

Want lower interest rates? Attack negative gearing

There's only one thing standing in the way of lower interest rates, and the Abbott government has just been handed a way to deal with it.

When the Reserve Bank board gets back from its summer break on February 3 it will be told that the economy is weak and (on the latest figures) getting weaker.

It will be told that the government is unable to do what's needed to boost it. Hemmed in by the deficit and its talk about the deficit it won't boost spending and, aside from promised tax cuts due next July, it won't cut taxes further. (Credit where credit is due. At least Joe Hockey says he won't cut spending further in next week's budget update. That would be "in the current circumstances quite irresponsible," he says.)

So it's up to the Reserve Bank.

Another cut in its cash rate from 2.5 per cent to 2.25 per cent would boost the economy by giving mortgage holders access to more cash (an extra $51 dollars each month for someone on a $350,000 mortgage) and make it cheaper for businesses to borrow.

And it would make Australia a less attractive place for foreigners to park money, knocking out a support for the high dollar and making it easier for Australian businesses to compete with imports and sell overseas.

Normally it's fear of inflation that holds the Reserve Bank back from cutting interest rates, but not this time. Both price growth and wage growth are disturbingly low.

But not house price growth. Since house prices bottomed in 2011 the typical price has climbed a frightening $100,000. For much of this year prices have been climbing at an annual rate of 11 per cent in Melbourne, 16 per cent in Sydney. Just recently the pace has slowed, with prices actually slipping in Melbourne. The latest annual figures are 8.3 per cent in Melbourne, 13.2 per cent in Sydney...

The Reserve Bank is worried about reigniting what it regards as an unsustainable boom in house prices and pushing them to the point where they collapse and cause financial damage.

It's the only thing standing in the way of it cutting rates.

The Bank's governor Glenn Stevens has been thinking out loud about ways to restrain house prices in order to make get room to cutrate cuts possible. Importantly he has discovered that ordinary homebuyers aren't the problem. In the past year the amount borrowed by personal investors to buy property has climbed at almost twice the rate of the amount borrowed by owner occupiers. Investors now account for $1 in every $3 1 in every 3 dollarsborrowed to buy property. Stevens is thinking about imposing tougher lending standards and capital requirements for lenders to investors but leaving owner occupier loans alone.

And now the Murray financial system inquiry suggests something else...

On Sunday it pointed its finger at the tax system. In its words: "The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing".

EverSince the Howard government halved the headline rate of capital gains tax in late 1999, investors have enjoyed a low rate of tax on the profits they make when they sell properties while being able to deduct from their taxable earnings the full interest costs of the borrowing they use to make those profits.

The Murray review calls the tax treatment "asymmetric".

For well-heeled households it has made investing in second, third and even fourth properties a no-brainer.

As Macquarie Bank economist Rory Robertson told his clients at the time, "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".

By becoming landlords they have provided renters a useful service, but by elbowing would-be owner-occupiers out of the way in order to buy properties on which to run up interest bills they have also been creating those renters.

Since Howard changed the rules, the proportion of households forced to rent has climbed from 27.2 per cent to to 30.3 per cent.

House prices have run way ahead of household incomes ever since.

Doubling the rate of capital gains tax to make it the same as the tax paid on other income would take the wind out of the investor housing market. If the government wanted to merely do it to new housing investors (leaving existing investors untouched) it would take out the wind slowly. Or perhaps it could do it only to investors who buy existing properties rather than ones built from scratch. The Murray inquiry isn't prescriptive. It wants capital gains tax and negative gearing investigated by the tax inquiry Abbott is expected to announce this week.

Abbott could give the Reserve Bank cover by announcing at the same time as the tax inquiry that he is inclined to act against negative gearing. He could say that when the new rules are decided on they will apply from December 2014, deflating the housing market straight away and making it easy for the Bank to push down rates.

It would help the Bank help him, and quite possibly allow much lower interest rates. And it would rake in more tax as well.

In The Age and Sydney Morning Herald

Related Posts

. Is negative gearing responsible for soaring house prices?

. What were they thinking? The tax heists that made us a nation of losers

. Why the Reserve Bank board is poised to cut


Duty calls John Fraser back to head Australia's treasury

John Fraser says he felt he had little choice when approached a few months ago in London about running Australia’s treasury.

A former treasury official who rose to the rank of deputy secretary, he had spent most of the last two decades working in investment banking, much of it overseas with the financial conglomerate UBS.

“This country has been very good to me, and life's been very good to me and I felt I might be able to make a contribution,” he said after the governor general approved his appointment as Australia’s 17th treasury secretary.

“I don't want to sound as if I'm a saint - I am not. But I think all of us, particularly those who have been a bit lucky, have a moral obligation to do something for our country.”

Mr Fraser was jetlagged as the Governor-General approved his appointment. He had arrived from London at 2am and been unable to sleep.

Asked how he’ll run the department differently from his predecessor Martin Parkinson who was forced to resign by the prime minister Mr Fraser said he had no set views and was still learning about how the department had changed.

“Martin has been very helpful in briefing me, and indeed I'll be spending a day with the treasury team before Christmas to go through everything. But no I don't have any thoughts. It’s a broader organisation than when I was there.”

Treasurer Joe Hockey paid tribute to Dr Parkinson who leaves on Friday describing him as a “loyal servant of the Australian people”.

Dr Parkinson was effectively sacked by Mr Abbott shortly after the Coalition took office. Mr Abbott asked him to stay on only until after the May budget. The recently published biography of Mr Hockey indicates the decision was taken without the treasurer’s knowledge. Mr Hockey later managed to negotiate an extension for Dr Parkinson.

“He has utilised his enormous intellect to pursue and affect significant policy change. He is a man of great personal integrity. I wish him all the very best for his future,” Mr Hockey said in a statement.

Mr Fraser said he believed the treasury’s job was to work with rather than for Australia’s political leaders.

In The Age and Sydney Morning Herald

Related Posts

. Treasury has a problem with women?

. Leigh on the Coalition's hatred of Treasury

. 2011: If he wants me to go, I'm out of here' - Parkinson on being Treasury Secretary under Abbott


Thursday, December 04, 2014

GDP Weak. Rate cut looms

An unprecedented further cut in interest rates to levels never seen before in Australia is now virtually certain as the national economy sputters with dwindling growth and disposable incomes slipping backwards.

Slower than expected growth of just 2.7 per cent for the year, outlined in the September quarter national accounts, immediately prompted Treasurer Joe Hockey to reassure Australians he would not order harsh new cuts in the forthcoming Mid-Year Economic and Fiscal Outlook nor in his second budget in May, admitting it would harm the economy and risk further falls in jobs growth and incomes.

"If we have revenue falls due to external factors we should not chase them down," he said. "New cuts to the budget would slow the Australian economy."

Outgoing Treasury Secretary Martin Parkinson said the figures were "a serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians."

The bleak outlook is both economically and politically complex for the Abbott government.

While it had been pursuing an austerity agenda, the risk of harming anaemic growth could now force a fiscal re-think delaying the 2017-18 time-table back to surplus, and a winding in or abandoning of cuts it has been unable to achieve anyway through a hostile Senate.

Mr Hockey told reporters his preference was for a good Christmas with high levels of spending...

With the government now desperate to underpin at-risk business and consumer confidence, Mr Hockey also promised 2015 would be better than 2014 and that 2016 would be better again.

"We want Christmas to be good for Australia, we want Australians to go out there and spend - not just for Santa Claus but for Australia, because increasing household consumption is good for the economy and that in turn will help create jobs for other Australians."

Yet with people's disposable incomes now stuck in negative territory for two successive quarters, there are concerns that to some, the situation will already feel like a recession, sending spending further down.

Australia's economy grew just 0.3 per cent in the first three months of the financial year, a low hit only once before in the past three years. The weak growth rates of 0.5 and 0.3 per cent in the June and September quarters follow much stronger growth rates of 0.8 and 1 per cent in previous two quarters. They suggest economic growth is weakening quickly, a prospect that alarms the Bank.

The central bank's board next meets on February 3. A cut in its cash rate from its present long-term low of 2.50 per cent to 2.25 per cent would take the typical discounted home loan rate below 5 per cent to 4.85 per cent, the lowest since 1970. It would slice a further $51 dollars off the monthly cost of servicing a $350,000 home loan.

The accounts show national income fell for the second successive quarter, slipping 0.4 per cent in September after slipping 0.3 per cent in June, enabling Labor's treasury spokesman Chris Bowen to claim Australia was in an "income recession", the first since the global financial crisis in 2009.

Income per capita shrank 0.8 per cent in September after shrinking 0.8 per cent in June. Household spending was flat after adjusting for inflation as consumers saved more in order to make up for lower real incomes.

On the release of the national accounts the Australian dollar dropped about half a cent to 83.92 US cents, the first time it has been below 84 US cents in four years. Betting on the futures market raised the implied probability of a rate cut in February from 13 per cent to 22 per cent.

Budget revenues are driven by nominal gross domestic product, unadjusted for inflation. It slipped 0.1 per cent in the quarter, indicating that budget revenues will be revised down further when the mid-year budget update is released in two weeks.

The government claims that Labor has blocked $28 billion of savings by blocking budget measures in the Senate.

Mr Hockey said although there would be few if any spending cuts in the budget update he would stick with his strategy of getting spending under control, removing red tape, and granting billions of dollars to the states to build roads.

"We expect the states to help us roll out this new productive infrastructure as quickly as possible," he said. "This will support growth and jobs in the short and medium term and lift our nation's productivity."

The accounts show the construction industry going backwards, subtracting 0.2 points from economic growth in the quarter. Financial and insurance services was the best performing industry, adding 0.2 points to economic growth.

NSW is the best performing state economy in terms of spending, boasting an increase of 1.3 per cent in the past three months. Spending in Victoria slumped 1.6 per cent.

In The Age and Sydney Morning Herald

Why the Reserve Bank board is poised to cut

After a year of finely judged inactivity, the Reserve Bank is stirring.

The bank's board met for the last time this year on Tuesday and concluded as usual that "the most prudent course is likely to be a period of stability in interest rates".

But after the national accounts it's no longer so sure.

It isn't just that economic growth is weak; it's that it's been weak for two quarters in a row.

In the past six months Australia has stepped down from an annualised economic growth rate of 3.6 per cent to an annualised rate of 1.6 per cent.

Put politically, during the Coalition's first six months in office, economic growth was high; during the past six months it's been low.  There are few signs it will pick up without help.

The Treasurer will do what he can, or as much as he feels he is able to. He says he won't cut spending any further ahead of Christmas.
But it won't be enough.

That's why the Reserve Bank board is considering cutting its cash rate when it next meets on February 3 after a two-month break.

A cut isn't completely locked in and a lot can change in two months. But most of the arguments line up in favour of a cut.

One is that a cut would boost the economy without stoking damaging inflation. Wage and price rises are too low and unemployment too high for inflation to be a concern.

Another is that a cut would help bring down the dollar, which itself would boost the economy. It would help stem the inflow of hot money that's keeping the dollar high.

The only cause for concern is that it might restoke an unsustainable real estate boom. The bank has other measures in mind to deal with that including tougher lending standards for banks that lend to real estate investors.

There's little reason not to cut.

In The Age and Sydney Morning Herald

Related Posts

. July 2013: Inflation is too low. Stand by for a pre-election rate cut

. October 2013: Why there won't be any more rate cuts this year

. February 2014: Steady as she goes. Rates on hold all year


Tuesday, December 02, 2014

Memo to Abbott. Mess with Victoria and you mess with the nation

Here's a tip: Tony Abbott won't make good his threat to rip $3 billion out of Victoria's economy.

Before the election he said the money promised for the East West Link would vanish if an incoming government used it for any other purpose.

"I want to make it absolutely clear to the people of Victoria that the $3 billion the Commonwealth government has committed to this project is for one purpose and one purpose only - and that is to build East West Link," he wrote to both Dan Andrews and Denis Napthine. "If a future government is not prepared to spend the money on East West Link, then that money will not be forthcoming."

Such a decision would shrink what Abbott repeatedly calls the biggest infrastructure investment program in Australia's history. And it would shrink it in the state where he needs to spend the most.

Victoria accounts for more than one-fifth of Australia's economy. No other state, apart from NSW, produces more. Yet in the past six years its output per person has stalled. Victoria produces scarcely any more per person than it did in 2008.

Victoria's construction industry stood still in 2014. Over the year to September it grew just 0.7 of one per cent. No other state performed as badly. The NSW construction industry grew 19 per cent.

To withdraw a promised $3 billion from Victoria's construction industry (half for East West Link stage 1, half for stage 2) would be to deny a boost to the state that needs it the most, and to deny a boost to the national economy in the process. Abbott himself said building the East West Link would create almost 7000 temporary jobs.

There's every reason to believe that Melbourne Metro would create as many jobs. It is the purpose for which the $3 billion was originally intended before Abbott diverted it into roads...

On Sunday his language softened. He said merely he was determined to do what he could to ensure the East West Link proceeded.

Melbourne Metro would do far more for Melbourne than would East West Link. That must be what the cost-benefit statements show, otherwise Napthine would have made them public. When Andrews makes them public in a matter of days Abbott will have to explain why he was determined to lock Victoria in to the least beneficial of the two projects.

He is granting money to every Australian state for a major infrastructure project. In NSW it is WestConnex, in Brisbane it is Gateway Motorway North, in Adelaide it is the South Road upgrade and so on. In every case it is money collected from the citizens of those states via taxes.

It is inconceivable that he would damage the national economy by leaving out the one state that needs it, especially when it was he who dubbed the election "a referendum on the East West Link".

And here's another tip: Abbott and Joe Hockey as good as wrote off Victoria during the campaign in order to salvage their budget. And not in the way you might think.

It would have made political sense to ditch the Medicare fee increases and the bulk of the changes to university funding before or during the election campaign. They weren't likely to get through the Senate.

Instead they, kept them as government policy to tide them through to an event they believed was more important than the Victorian election - the release of the Mid-Year Economic and Fiscal Outlook on December 16.

If those programs are still regarded as government policy Abbott and Hockey can include them in the statement as zombies - neither alive nor dead. They can book the best part of $5 billion they would have raised from them even if it won't come near the budget.

As shadow treasurer, Hockey, every budget night, was keen to distribute a very useful document detailing the accounting tricks Wayne Swan had used to forecast yet another unlikely surplus.

This year he'll be the one using accounting tricks if he persists in booking the income from zombies. He might as well. The Coalition denied Napthine a lifeline so that he could.

It will fool no-one of course. Budget analysts will simply add the best part of $5 billion to whatever deficits he forecasts for the next four years and mark him down for trickery, like they marked down Swan. Even without the zombies the budget update is looking horrific.  

The ABC reports the Treasury will use an iron-ore price of about $60 a tonne. The budget itself was struck when the price was $103. Deloitte Access says even with the zombies this year's income will be $2.3 billion worse than the budget forecast and next year's income $7 billion worse.

Most of it will be due to the impact of a lower iron-ore price on company profits and tax receipts. But not all.

Disturbingly, Deloitte notes that "whereas once the red ink was mostly confined to the profit taxes, the combination of wobbly job growth and an extended period of weak wage gains now looks like being just as big a budget buster". Income taxes are set to fall short of budget estimates by $2.9 billion this financial year and $4.2 billion next financial year.

Victoria's jobs growth is close to the weakest in the nation. In the past year Victorian employment has climbed by less than 0.5 per cent, about half the weak national growth rate of 0.9 per cent.

In The Age and Sydney Morning Herald

Friday, November 28, 2014

You'd think the networks owned the airwaves

You'd think our commercial networks owned the airwaves.

When Communications Minister Malcolm Turnbull cut back the ABC and SBS last week he also gave notice of a minor rule change that sent them into convulsions.

Henceforth, the SBS would be able to broadcast up to 10 minutes of advertising each peak hour instead of the usual five.

The networks acted as if he had attacked their right to exist.

"This government was elected as being pro-business," thundered Seven Network chief executive Tim Worner. "It shouldn't be making decisions that harm Australian businesses."

"I am surprised the government is prepared to compete against and inflict damage on Australian commercial broadcasters," wailed Nine's David Gyngell.

What was proposed was "directly at odds with the government's claim that Australia is open for business," said Free TV Australia chair Harold Mitchell.

What was proposed was competition.

Australian television networks don't believe they are like other businesses. Banks have to put up with competitors muscling in on their turf, supermarket chains have had to cede ground to Aldi, carmakers have had to compete or go under, but the spoiled children of Australian industry want to be forever protected from competition on the airwaves as everything changes around them.

The biggest change is that broadcast spectrum has become incredibly valuable for mobile communications. Yet the networks sit on it.

Another is that much less spectrum is needed to broadcast a TV program than before.

Yet the networks sit on it. During the switch to digital in the 1990s, rather than broadcasting what they had before using much less spectrum (the whole point of the exercise) they said they needed more spectrum in order to broadcast in full high definition. That way it couldn't be used by anyone that might want to start a competing network. They produced dodgy-looking research saying Australians didn't want extra channels - they wanted the same channels in high definition.

Prime Minister John Howard bought their line against the recommendations of his advisers.

The Office of Asset Sales labelled it "a de facto further grant of a valuable public asset to existing commercial interests".

His department said there were "better ways of introducing digital television than by granting seven megahertz of spectrum to each of the five free-to-air broadcasters at no cost when a standard definition service of a higher quality than the current service could be provided with around two megahertz".

They were given it on the condition that they could only use it for broadcasting their existing channels in high definition.

When after some years it became apparent that Australians weren't going to switch to digital if all they got was the same channels (invalidating the networks' dodgy looking research) the networks said they could better use the excess spectrum for extra channels themselves.

Each still maintains a token commitment to high definition on one of its channels (it's actually degraded high definition to make way for the extra channels) but no one much notices. Much of the time those channels don't carry high definition content. The spectrum is wasted, but no one else has it. That's how the networks think.

And the minister is on to them.

He has already picked on the easiest target. The poorly watched community channels in Melbourne, Geelong, Sydney, Brisbane Adelaide and Perth will be kicked off their spectrum at the end of 2015. They'll have to use the internet. After the freed-up spectrum is used to test new technologies it'll be made available to the highest bidders, almost certainly mobile phone and data companies.

The next step will be grabbing back spectrum from the ABC and SBS. That's fairly easy - cut their budgets, let them use a new compression technology called MPEG-4 that halves the amount of spectrum they need and tell them they can save on transmission costs and give the other half back.

The commercial networks require more subtle handling. The minister has launched an inquiry - the spectrum review -  to work out how to "maximise the economic and social return from spectrum". Its preferred approach is auctions, with the winning bidders limited to 15 years at a time and the department given the right to take the spectrum off them (with compensation) if it's not fully used.

The treasury describes spectrum as a scarce resource in its submission. It says it should be allocated to the highest value uses.

"To be clear, this includes both commercial and non-commercial applications," it says - making a pointed reference to two of the biggest hogs of spectrum, our armed forces and our police and emergency services.

Defence will, at the very least, have to justify what it needs and hand some back. Police and emergency services might be able to hand back a lot with the proviso that in a real emergency they get it to use it again, with the mobile communications company that has bought it agreeing to degrade its service to give emergency services priority.

And the networks. Turnbull will probably get it off them by being nice. Using new compression technology, they will need only half as much and be able to sell the excess to someone who wants it more. It's far more than they deserve, but at least their spectrum will be better used.

It'd make a nice little earner for whoever buys Channel Ten and a really good earner if the new owner sold the lot and closed the station down.

Mobile communication is increasingly important to us. Network television is not.

In The Age and Sydney Morning Herald

Tuesday, November 25, 2014

The secret report Napthine won't let you see

Within months of becoming treasurer, Kim Wells commissioned a report. He asked the Victorian Competition and Efficiency Commission to deliver "a state-based reform agenda" – a user manual for boosting Victoria's economic growth.

It had been abysmal for two years. High population growth was masking "dwindling growth in productivity and in per capita GDP – the main determinants of growth in living standards". And the Australian dollar was set to remain high, "threatening the competitiveness of Victorian exports".

Wells knew the problems. He wanted Victoria's strengths benchmarked against those of other states and he wanted a list of options that would "yield the greatest potential benefit in light of Victoria's relative competitive strengths and weaknesses".

He wanted it within in nine months.

The commission issued a discussion paper, received 81 submissions, convened conferences, commissioned outside studies and published a draft report two months ahead of the deadline in November 2011.

Then it convened another conference, received another 37 submissions, and presented its final report to the government by the deadline in January 2012. Then nothing. Absolutely nothing.

Not only did Victoria's government not respond to the >commission's report, it did not publish it. Not at all. It was as if it had never happened.

Like the Productivity Commission at the national level, the Victorian Competition and Efficiency Commission is unable to publish its final reports off its own bat.Its reports are considered to be reports to the government. But the government is expected to publish them after considering what is in them. To keep them secret would deny the public a return for the money it spent preparing them.

The Order of the Governor in Council establishing the commission even sets out a timeframe: "The treasurer should publicly release the final report within six months of receiving it from the commission," it says.

As well, "the government should publicly release a response to the final report within six months of the treasurer receiving that final report from the commission, regardless of the date of release of the final report". Neither of these things happened.

Apparently, the loophole is the word "should". Other parts of the order use the word "must". Although clearly against the intention of the commission's founders, it would be legal to make sure one of its reports never saw the light of day, which is what the government is trying to do.

By keeping it secret for 32 months, right through to the end of its time in office, it has probably buried it for good. If, as is likely, a new government is elected on Saturday, it might be unable to release it. That is because of a convention that unpublished reports delivered to one government are unavailable to its successor. The convention exists to stop an incoming government trawling through its predecessor's files.

A look at the website listing the 19 reports the commission has completed since it was established by Steve Bracks in 2004 reveals only one has never been published. It is as if the Baillieu and then Napthine governments were embarrassed by what the commission told them.

It is possible to make some guesses. An ACIL Tasman report prepared for the review found against large road projects, saying some had a benefit-cost ratio of as little as 1, "with little public information about what alternatives were considered".

In contrast, small road projects typically had a benefit cost ratios of 3. It suggested "less focus on large projects" and "more on modest projects that have a higher rate of return".

The rate of return for the East West Link is said to be 0.8. Even bulked up to include nebulous "wider benefits", it is to just 1.4.

ACIL Tasman suggested congestion charges as alternative. "The introduction of time-varying one-way tolls in the Sydney Harbour Bridge and tunnel have increased off-peak traffic and reduced rush-hour traffic," it said. "The economic case for congestion charging is strong, and the political challenge becomes easier if some or all of the revenue is channelled into road and public transport improvements."

The commission agreed. Responding to congestion by building new roads did "not tackle the underlying causes". It generally only succeeded in improving travel conditions "by small amounts or for a limited period".

"Future transport policy and planning should identify ways to work existing assets harder and provide services more efficiently as opposed to resorting to new investment as the first recourse," it wrote in its draft report.

Denis Napthine plumped for the East West Link only after Tony Abbott made it clear he was prepared to grant Commonwealth funds for big road projects, but would withhold them from (more important) big rail projects such as the Melbourne Metro. Napthine scaled back the Metro and pushed the timeline out into the next decade.

Perhaps embarrassed by the avalanche of expert voices saying it was a poor use of money, he might have felt he did not need yet one more voice, a report commissioned by the Coalition itself when his predecessor was premier.

It is an appalling way to run a government and an appalling way to treat voters who you are trying to persuade you have the best plan.

If Napthine loses on Saturday, it will be in part because he did not stand up to Abbott and in part because he did not level with the public about what his own experts were telling him about his platform.

In The Age and Sydney Morning Herald

Tuesday, November 18, 2014

China is ahead of us on climate change. Let's not belittle its commitment

China must hate the things that were being said about it as it closed its free trade deal with Australia.

Interviewed at the G20 as Chinese and Australian officials were fine-tuning the details of the announcement, Treasurer Joe Hockey belittled its commitment to turn back its tide of rising carbon emissions.

"I mean, you just look at China," he told the ABC's Barrie Cassidy. "China is going to continue to increase emissions Barrie, until 2030, it is going to continue increasing emissions."

Earlier he had told Sky News that: "To put it in perspective we are in the business of trying to reduce our emissions off a base load and China actually is increasing emissions and said in 2030 it will start to reduce them".

The perspective missing from Mr Hockey's account is that Chinese living standards are a fraction of Australia's. China is lifting its emissions because it is rapidly industrialising as its citizens move from the country into cities, something ours did a long time ago.

To slow and stop emissions growth while industrialising would be an achievement of unimaginable proportions.

It has never happened before.

To do it the White House believes China will install an extra 800 to 1000 gigawatts of emission-free technology by 2030 -  "more than all the coal-fired power plants that exist in China today and close to total current electricity generation capacity in the United States"...

China's use of coal for electricity climbed 13 per cent a year as its economy roared into life between 2000 and 2011. Since then it has climbed just 3.25 per cent per year and looks likely to have stabilised in 2014. China expert Ross Garnaut expects its use of coal for electricity to slip 0.7 per cent per year from now on before sliding sharply after 2020.

Mr Hockey said he "didn't hear the United States or the Chinese saying they were going to introduce a carbon tax", but China's vice finance minister Zhu Guangyao mentioned emissions trading in a briefing to journalists on the sidelines of the G20 summit Mr Hockey attended. China has seven pilot schemes in operation and is preparing for a China-wide scheme by 2020. China's vice finance minister seemed serious.

Yet on Thursday Prime Minister Tony Abbott mocked China's plans as "hypothetical" and "down the track".

"It is all very well to talk about what might happen in the far distant future but we are going to meet our five per cent reduction target within six years," he said. "We are talking about the practical; we are talking about the real. We are not

talking about what might hypothetically happen 15, 20, 25, 30 years down the track. We are talking about what we will do and are doing right now."

Aside from any offence caused to Australia's newest free trade partner, the problem with Mr Abbott's statement is that the commitments announced by China and the US on Thursday will force Australia to do much more than five per cent within six years.

And Mr Abbott's preferred mechanism, his "direct action" Emissions Reduction Fund is incapable of doing much more.

That isn't just because the $2.55 billion he has set aside over four years for grants to polluters to cut pollution wouldn't be enough to meet the bigger target (it's almost certainly not enough to meet the present target).

It's also because of something else, something of a dirty secret among proponents of direct action grants:  they are not directly scalable.

The bureaucracy that would be needed to hand out enough grants to get a 5 per cent reduction on Australia's 2000 emissions by 2020 wouldn't be able to handle a 30 per cent reduction by 2025 - and that's what the Climate Institute believes will be required if Australia is to match the US commitment.

The red tape that's tolerable when you are using a system of bookkeeping and grants to achieve something small becomes intolerable when you are attempting to achieve something big.

That's what the Treasury advised the Coalition in the change of government document it prepared in 2010. In its words then, "a market mechanism can achieve the necessary abatement at a cost per tonne of emissions that is far lower than alternative direct-action policies".

It's what Prime Minister John Howard's emissions trading taskforce told him in 2007. It said "by placing a price on emissions, trading allows market forces to find least-cost ways of reducing emissions by providing incentives for firms to reduce emissions where this would be cheapest, while allowing continuation of emissions where they are most costly to reduce".

Once emissions permits are sold or given away it is up to the firms that own them to decide whether to use them or whether to cut their pollution and sell them to firms that need them more. This automatically ensures that the firms that can most cheaply cut emissions cut them first (pocketing income along the way) and that the firms that can't afford to do it cheaply do it last (paying to buy permits).

Emissions trading is "set and forget", and infinitely scalable.

The Coalition's "direct action" system of grants attempts to achieve the same goal but will do it less perfectly because the grants its bureaucrats will administer can't be traded among polluters to ensure that the lowest cost methods of cutting pollution are tried first. And its cost scales up with the size of the task.

The Coalition has said often that Australia will lift its emissions reduction target beyond 2020 if other major nations lift theirs. China is doing so, making an unprecedented promise to cut its emissions growth to zero while industrialising. The US has made a commitment that when applied to Australia would require us to cut our emissions by 30 per cent on 2000 levels by 2025. Last month, European leaders agreed to cut their emissions by 40 per cent on 1990 levels by 2030.

Australia will need to stump up with something in time for the Paris climate change summit due late next year. As Mr Abbott and Mr Hockey well know having just organised Australia's G20 summit, the reality is that Australia will need to show its hand well before the Paris summit.

A bigger commitment is no longer hypothetical, and it's not down the track.

In The Age and Sydney Morning Herald

Sunday, November 16, 2014

Breastmilk is worth more than you think. Gina Rinehart doesn't know the half of it

Gina Rinehart is on to something. The woman who picked the mining boom by betting on iron ore at a time when few realised what was about to happen in China, she is now betting on powdered milk.

So fast is China's market for infant formula growing that it doubled in five years and is expected to double again in three years. It's why foreign companies are falling over themselves to take over Australian milk producers.

And it's why the richest Australian is spending half a billion to build Hope Dairies from scratch. Bloomberg reports it'll take up 5000 hectares of Queensland farmland pumping out an extraordinary 30,000 tonnes of infant formula per year, all of it bound for China, gazumping Australia's present milk powder exports to China of 18,000 tonnes per year.

It would be great if it actually helped Chinese infants. But it won't. Infant formula is one of those rare products the use of which usually hurts rather than helps the user. And unlike others such as alcohol and unhealthy foods the user has no choice but to use it.

Formula milk displaces breast milk, a wonder-food specifically designed for emerging human beings. Formula-fed babies are less resistant to infection, more likely to suffer from diarrhoea and pneumonia and more likely to die of sudden infant death syndrome. Later in life they are more likely to contract diabetes, multiple sclerosis, heart disease and cancer. And they are likely to have lower IQs.

And that's where formula milk is prepared properly. Where it isn't – where water is tainted or where hygiene is bad – the results can be lethal. In 2008 around 54,000 Chinese babies were hospitalised after ingesting a chemical added to formula to give it a higher apparent protein content.

Yet the way we treat formula milk and breast milk in our national accounts is bizarre.

When more formula milk is produced or consumed we say that Australia's (or China's) gross domestic product has gone up. GDP is regarded as a measure of standard of living.

But our standard of living will have got worse. Breast milk is an incomparably superior product that formula necessarily displaces, and it isn't counted in GDP.

But it should be. Breast milk can be stored, exchanged and traded, like other foods. In Norway hospitals sell it for around US$100 per litre. 

An Australian study back in 1992 put the value of breast milk at $67 per litre. (By way of comparison wine often costs $20 per litre, petrol costs $1.60.) Multiplied by the number of litres produced it implied that more than $2 billion was missing from Australia's national accounts, around 0.5 per cent of GDP. At the time the sales of formula were worth $135 million.

The author, Julie Smith, says estimating the production and consumption of human milk is straightforward. It's the only food for which production equals consumption. There are no "post-harvest losses" and no "plate waste". It's simply a matter of estimating the daily volumes of breast milk produced per mother, the number of mothers breastfeeding and the market price. Australia has milk banks in Perth, Brisbane, the Gold Coast and Sydney's Royal Prince Alfred Hospital and Melbourne's Mercy Hospital for Women in Heidelberg .

The Bureau of Statistics already counts around $1 billion of backyard production in the GDP; things such as the on-farm consumption of eggs, fruit and milk.

This year it says it was thinking about going further, including the value the electricity produced by household solar panels and the water collected in backyard water tanks.

Its guidelines say it should include things in the GDP where there is "a reasonably satisfactory basis for valuing the transaction" and where "exclusion could result in distortions to the national accounting figures."

Yet it doesn't yet count breast milk. Dr Smith says this means that when farmers' children are fed milk from a cow, it counts in GDP. But when their children are fed by their mothers it does not.

The invisibility of one type of milk but not the other means less care is taken to support it. That could be through providing quality maternity care and mother and child health programs, through providing access to unpaid and paid maternity leave or through providing breastfeeding-friendly workplaces.

It also means that funds are likely to be directed to supporting the alternative, should its fortunes turn down, even though it usually harms rather than helps its users. In the United States governments assist the dairy industry by distributing free or low-cost formula to households with children.

And it also means that we can't work out what's missing – how much better off Australia (and China) would be if more mothers breastfed and fewer used formula.

What is counted and can be traded matters. Gina Rinehart knows that. It's why she dived into iron ore, eclipsing the exposure of her father. She can see an opportunity in formula milk as well.

If breast milk was counted and could be traded we would see an opportunity in that too. We should. It's worth more.

In The Age and Sydney Morning Herald

Tuesday, November 11, 2014

Truth in promises. A policy worth voting for in the Victorian election

Now noone knows where the money is coming from.

Usually governments are restrained in what they offer in election campaigns. Their promises are already in the budget, already accounted for. It's the opposition that appears reckless, making promises that by definition aren't in the budget and aren't funded with savings.

Unless the government is in imminent danger of losing. Then it'll throw out money like an opposition on steroids, announcing unfunded promise after unfunded promise like a squid under attack squirting out ink.

Denis Napthine announced new promises worth $4.2 billion in his 33-minute campaign launch speech on Sunday. Something of a record, it works out at $127 million per minute which is more per voter per minute than John Howard promised in his final desperate pitch to get re-elected in 2007.

Most of it was for trains and trams, which is odd because just two days before, the Prime Minister Tony Abbott defined the election as a "referendum on the East West Link".

When you're facing political death it's wise to cover bases. Which means scrambling to find money.

We don't yet know where he would get the $3.9 billion for public transport, the $100 million to spend on regional cities, the $23 million to give to parents of kindergarten children and so on and nor do we really know how he would find the $8.5-$11 billion he promised in the budget to pay for the Melbourne Rail Link. Most of it is beyond the budget's four-year forecasting horizon...

And we are not likely to know until just before the election. "At a later stage" are the words used by the treasurer's office. If history is any guide we'll be told on the Wednesday or Thursday before the vote; or even on the Friday, election eve. It'll be too late for the Victorians who've voted early (more than half a million are expected to) and effectively too late for debate and discussion about what Napthine has in mind.

It'll be the same for Labor, although at least it has come up with a date. It'll outline the costs of its promises and how they will be funded >on the Thursday before the poll - that's 40 hours before we vote. Labor will outline these promises in a press conference attended by a representative of Moore Stephens, the private accounting firm that has been going over its numbers.

It's an appalling way to treat the people who are meant to be deciding how to vote, not to mention the press which is meant to be giving those people the information they need to decide.

"The big reveal" two or three days before the election can and does result in voters being misled, with no time to check the truth of what they are being told.

In the 2010 federal election the Coalition's treasury spokesman Joe Hockey released 12 pages of costings (with no explanation of how they were derived) late on the pre-poll Wednesday. They were covered by a one-page note from a Perth-based accountancy firm that said it was "satisfied that based on the assumptions provided, costed commitments and savings have been accurately prepared in all material respects".

But the costings weren't accurate, as the Treasury discovered after they were released after the election. Among other basic mistakes the Coalition had booked as a gain the interest it would save by banking the proceeds of selling Medibank Private without booking as a loss the dividends it would no longer receive after selling Medibank Private.

Four years later in 2013 the Coalition delivered an eight-page document that was no more informative. It did it on the Thursday, 40 hours before voting began. This time a post-election review by the Parliamentary Budget Office found it was mistake-free, but voters weren't able to know that at the time, and they weren't able to see the assumptions that lay behind it until after they had voted.

Victoria doesn't have a parliamentary budget office.

The Commonwealth has one, NSW has one, and the Victorian Coalition promised one when it was in opposition. Ideally a PBO works with political leaders to fine-tune and cost their policies and then makes public the final document when the policies are announced. The Commonwealth's has a major flaw. It is not allowed to make the documents public until the leader says so. In 2013 Abbott didn't say so. That meant the Coalition was able to claim the endorsement of the PBO without letting the public see how that endorsement was arrived at.

Victoria's wasn't going to have that flaw and the Baillieu government was going to write it into law on taking office. It didn't, for three years. Then under Napthine it introduced legislation for a cut-down "temporary recurring" PBO. Rather than working all year round it would accept costing requests only for the three months before each election and then shut down. (The NSW office is also temporary recurring but it accepts requests for many more months than three). Opposition Leader Daniel Andrews said he wouldn't cop it and Napthine dropped it.

Now Labor's putting forward a proper model that would work all year round. It would cost $3.3 million per annum. It's the least we deserve.

In The Age and Sydney Morning Herald

Tuesday, November 04, 2014

Power down: What the Melbourne Cup tells us about electricity

Something remarkable happens as the horses leave the barrier at 3pm each Melbourne Cup day. Our use of electricity drops.

Last year NSW usage slid from 7.831 gigawatts just before 3pm to 7.791 gigawatts at 3.15pm. By 3.30pm it had climbed back up to 7.865 gigawatts.

In Victoria the dip is less severe. Tuesday is a public holiday and so electricity use is down all day. But in the rest of the nation factories slow or stop work at 3pm as workers gather around TV sets to watch the race. By 3.30pm they've finished and are back to work.

Electricity suppliers have to react in real time. If electricity supply doesn't almost exactly match demand awful things happen to the equipment.

A YouTube video titled Tea-time Britain illustrates the balancing act wonderfully.

On the wall of Britain's national grid control centre in London is what looks like a large digital clock. Its readout usually varies from 49.9 to 50.1. More power than is needed pushes the frequency of alternating currents to more than 50.1 times a second - a danger zone. Less power than is needed drops it below 49.9 - another danger zone.

To cope with the surge in demand as more than a million kettles are turned on at the end of EastEnders the controller fires up hydroelectric power stations as far away as Scotland and pulls in power from France. He has one eye on the TV schedule and another on a TV screen so he is able to time the surge in supply to meet the surge in demand as the credits roll.

Some of the adjustment is automatic. In both Australia and Britain certain power stations are designated "Frequency Control Ancillary Services" generators. Their output adjusts instantaneously in response to demand in an attempt to get things back in sync within six seconds. They achieve this by either opening or closing turbine steam valves or (in the case of hydro) quickly unleashing or stopping a torrent of water.

But big events overwhelm automatic adjustments and demand on-the-spot decisions.

During the first 2013 Queensland-NSW State of Origin match the controllers watch the action on TV screens and attempt to time a surge in supply to match the surge in demand when viewers turn on kettles and open fridge doors during the halftime break. They even pay attention when the match gets boring. The energy analyst Global Roam has published a fascinating blow-by-blow graph of a 2013 State of Origin match linking surges and troughs in demand to "First try to Hayne for the Blues - a 30 megawatt rise in 1 minute", "Second try to Blues, more tea anyone", and "Maroons try denied, kettles are boiling".

The process by which we - through our individual decisions - control what's happening in power stations from Townsville to Hobart can best be thought of as an industrial form of democracy. Although no single Australian decides whether more or less power will be produced across the eastern Australian grid, combined we make the entire decision.

It's analogous to what economics pioneer Adam Smith called "the invisible hand".  And it's true that we rarely think about it.

Remember the oil crisis of the mid 1970s? It ended largely because Americans switched from six-cylinder to four-cylinder cars and insulated their homes. For the most part no one told them to switch, but millions did and slashed an entire nation's demand for oil.

They were responding to price.

Australians did the same thing in just as spectacular a fashion from 2010 as climbing energy prices and talk about a carbon tax started to bite.

For Australia's entire history right up until 2010, every year through two world wars and the Great Depression, Australians used more electricity each year than the year before. Each year from 2010 on Australian households have been using less.

It's probably not because anyone told them to - there have been exhortations about saving electricity for decades. It's because big price rises and the talk about the looming carbon tax persuaded enough individual Australians to insulate their houses and to install solar generators and hot water systems.

For the most part it was painless. Most households were compensated for the carbon tax with tax cuts. But the price signal worked as expected. When something is more expensive we buy less of it - not all of us, and not because we are forced to, but because enough of us decide to.

It's a different approach to the one the Coalition is adopting with Direct Action grants to polluters. Although clunky (think of the administrative expenses) the Coalition's idea is fair enough as far as it goes. Any business that has a good idea about how to cut its pollution can bid for a grant to reward it for implementing it. The lowest-priced bids win.

What's missing is the price signal encouraging individuals to change their behaviour. We know that it works. And we know that individual decisions add up, just as they do each Melbourne Cup day and each State of Origin night.

This week's Intergovernmental Panel on Climate Change report warns of "severe, widespread and irreversible impacts" unless carbon emissions are cut sharply and rapidly. "Substantial" cuts are needed in coming decades and "near zero" emissions by the end of the century.

If we accept the findings, we need to accept that it's silly to argue about whether we need Direct Action or a renewable energy target or an emissions trading scheme. We need all of them, and more, at once. Both Labor and the Coalition are guilty of acting as if their preferred solution works to the exclusion of all others.

Whether it is cost-effective or not, Direct Action will be with us for a long time. Its contracts will lock in the government for years to come. A carbon price, likely to be recommended by the inquiry set up by the Coalition as part of its deal with the Palmer United Party, could work alongside Direct Action, even helping fund it.

The invisible hand is too valuable a tool to throw away.

In The Age and Sydney Morning Herald

Sunday, November 02, 2014

Sunday Explainer. Why we will pay more for petrol, even though Parliament said no

The excise on petrol is set to go up in line with inflation despite the government not having taken the policy to the election or having the support of  Parliament. Peter Martin examines the case for and against.

First, the history. Why do we tax fuel at all?

To pay for roads and the costs of maintaining them. We've been doing it since 1929.

Has the money raised actually been spent on roads?

That was the law from 1929 to 1959, but it has been the practice all along. In July the Productivity Commission reported that in 2011-12 total road expenditure by all levels of government amounted to $19.5 billion. The revenue collected from fuel excise, registration charges, driver's licence fees and stamp duty amounted to $16.5 billion.

It's called an excise, not a tax. What's the difference?

A tax is levied on the price of something. The goods and services tax is levied at a rate of 10 per cent. Income tax is levied at rates of 19 per cent, 32.5 per cent, 37 per cent and 45 per cent. An excise is levied on the amount of something. In case of the alcohol in full-strength beer it is $46.30 per litre. In the case of tobacco it is 50.8 cents per gram. In the case of petrol it is 38.1 cents per litre.

As prices go up wouldn't the impact of the excise shrink?

That's why every so often the government used to announce one-off hikes in excise. The typical budget headline read: "Beer, smokes, petrol up". Then, in 1983, prime minister Bob Hawke made the process automatic. From then on, every February and August the excises on tobacco, alcohol and petrol climbed in line with inflation.

Did you say petrol? Did the rate of petrol excise climb with inflation?

It did until 2001 when prime minister John Howard froze it where it was at 38.1 cents per litre. He was trying to head off criticism of his recently introduced GST.

So as a proportion of price the fuel excise has been shrinking?

Too right. When John Howard froze the excise in 2001 the petrol price was $1 a litre making the tax rate 38.1 cents in the dollar. Petrol is now near 150 cents, making the tax rate only 25 cents in the dollar. Unless indexation is reintroduced the tax rate will fall even further.

So the government is undoing a decision of John Howard's and reinstating a decision of Bob Hawke's?

Exactly, and it is happy to sing Hawke's praises. "We have simply done what Bob Hawke did," prime minister Tony Abbott told the parliament on Wednesday. "Bob Hawke was a real Labor leader, Bob Hawke was someone who was prepared to put the national interest ahead of short-term politicking," he told the leader of the opposition.

What about the politicking? How have Labor and the Greens justified opposing the reintroduction of indexation?

They say that it is a new tax, and that Abbott promised no new taxes. And they say that it hits low income Australians the hardest, which is does despite the treasurer's assertion that "the poorest people either don't have cars or actually don't drive very far in many cases". As a proportion of income, low-income Australians spend much more on petrol than high-income Australians.

And the Greens are concerned that the legislation 'sets aside' the extra revenue for spending on roads. But the provision is fairly meaningless. The government spends much more on< roads than the extra revenue already. When the government offered to withdraw the provision the Greens wouldn't budge, so the government left it there and used regulations to get around Labor and the Greens.

What will the regulations do?

The regulations will lift the excise on petrol in line with inflation just as the legislation would have. The regulations will lapse unless they are validated by the parliament within 12 months.

Can the government do that - impose tax increases without the approval of parliament?

Yes. Whenever beer, cigarettes and petrol were slugged in budget nights past, the excise went up at midnight on the night of the budget. A delay would have encouraged a run on supplies. This time the provision isn't being used to stop a run on petrol stations - it is simply being used to get around the parliament.

The increase will take effect on Monday, November 10, so it could be worth filling up the evening before. But it won't be worth much. The first increase will take the excise from 38.1 to 38.6 cents per litre. The November hike will lift the price of a tank of petrol by around 25 cents.

What if the parliament withholds its consent?

After 12 months the money would be returned to the petrol manufacturers and importers.

Is the parliament likely to withhold its consent?

Not likely. It would be hard to justify handing to oil companies money that was effectively collected from their customers.

Does that mean the Senate will cave in and pass the government's legislation?

Not at all. It could simply validate the government's regulation so as not to hand money back to oil companies but still refuse to pass the legislation that would reintroduce indexation. The government would have to regulate one year at a time, with embarrassing consequences. Each year it would be hit with headlines saying "fuel tax up", the sort Bob Hawke's system of automatic adjustments was designed to avoid.

Abbott said after a year it'll cost the average family just 40 cents extra a week. Is he right?

No. He misspoke. It will cost the average household an extra 40 cents per week. But the average family is bigger than the average household. Many households contain just one person. It'll probably cost the average family an extra 55 cents per week.

In The Age and Sydney Morning Herald

Tuesday, October 28, 2014

Crowned. Neither Napthine nor Andrews wants to govern

Daniel Andrews and Denis Napthine are competing for glory without power. Neither really wants to govern.

Napthine signed away his right to make laws that tackled gambling and smoking in an extraordinary deal waved through Parliament days before the election campaign. The law not only restricts the actions of the Napthine government should it get back, but the actions of every future Victorian government for the next 36 years.

Should a future government decide to impose a $1 betting limit on poker machines (as recommended by the Productivity Commission); should it decide to enforce the use of precommitment technology on poker machines; or should it require automatic teller machines to be further away from poker machines, it'll be up for a $200 million payment to Crown. The size of the penalty will climb with inflation. By the time the provision expires in 2050 the penalty will be $480 million.

In the (entirely likely) event that community attitudes to smoking harden in the decades ahead, the government will be unable to remove the exemption permitting smoking inside Crown's VIP rooms no matter how necessary it thinks it is. The legislation says the only way through would be to pay Crown millions for "loss and damage", the exact amount to be determined by a panel of "experts" appointed from independent, internationally recognised chartered accounting firms or investment banks.

It's a right not normally available to firms hurt by government decisions. The government was able to ban smoking inside pubs and restaurants without compensating those firms for "loss and damage". It was able to ban drink driving without compensating alcohol retailers, it was able to ban ATMs within 50 metres of poker machines without compensating either the owners of the machines or the banks. Governments are normally allowed to govern. If most of us suffer "loss and damage" when they put up taxes or hurt our businesses we just have to bear it, or vote them out at the next election...

The restrictions on what future Victorian governments can do are set down in excruciating detail in schedule 11 of the legislation. The only exceptions apply in cases where all of Australia's state and territory governments act together, a get-out clause that further underlines the impotence of the Victorian government we are about to elect.

In return for binding future governments this one gets an upfront payment of $250 million. (The government is spinning it as a payment of $910 million, but it's nothing like that much.  It gets the first $250 million immediately. It gets another cheque for $250 million in July 2033, but assuming a discount rate of 4 per cent, that is only worth a payment which is worth $115 million in today's terms. It also gets plus the right to contingent payments if Crown's gambling revenue exceeds certain targets.)

Put starkly Crown gets the right to impose fines of $200 million per government any time a new government comes in and changes the law to Crown's disadvantage, for the next 36 years.  in return for the government gets an immediate payment of $250 million plus a few lesser payments later.

It's an extraordinary deal for Crown. In addition to "regulatory certainty" denied other businesses it gets an extension of its licence from 2033 to 2050, the right to install another 40 gaming tables, the right to buy another 128 poker machines and the right to continue using the site for the peppercorn rent of $1 per year.

And Labor under Andrews? It voted for it. Andrews was silent during the debate. His treasury spokesman Tim Pallas spoke of the importance of "certainty" for Crown, apparently forgetting its status as a specialist in gambling. Crown employs 8800 people.

Aware that he was voting for a "regulatory time bomb" he said Victoria's hotels and clubs would demand similar assurances in the future. He failed to acknowledge that all sorts of Victorian businesses will demand similar assurances and that Victoria has set a precedent for businesses in other states to demand those assurances similar deals.

The Commonwealth government refuses to allow its hands to be tied. Told that its plain packaging legislation would infringe on the rights of Philip Morris under the terms of an obscure Australia Hong Kong investment treaty it took on Philip Morris in an international arbitration tribunal.

Where it can, it refuses to include so-called investor-state dispute settlement procedures in international agreements.

Overseas they are used to winding back the ability of sovereign governments to legislate in ways that hurt pharmaceutical companies, pesticide manufacturers and mining companies.

Labor rejected them outright. John Howard's government was the only one in the world to successfully resist having them  in its free trade agreement with the United States. This The Abbott government assesses them on a case-by-case basis, including them in its agreement with them with Korea but excluding them from its agreement with Japan.  

Over the weekend ministers from 12 pacific nations have been meeting in Sydney to thrash out the details of the proposed Trans-Pacific Partnership. The US is holding out for investor-state dispute settlement clauses. If the other 11 succumb and sign up Australia's biggest investors and customers will be granted the right to sue our governments in international tribunals for attempting to do what they are elected to do.

Perhaps unwittingly, Napthine (and Andrews) have made it clear that they really don't mind. Elections matter because we are able to elect decision makers to take decisions on our behalf. If we can't, there's no point.

In The Age and Sydney Morning Herald