Tuesday, October 27, 2015

Mortgage rates: the big four think they'll get away with it

Notice how quiet the big four banks have been since they jacked up interest rates?

Westpac added 0.20 percentage points to each of its variable mortgage rates a fortnight ago, hitting up its customers for an extra $34 a month. It'll haul in an extra $300 million a year.

On Thursday, the Commonwealth Bank raised its rates by 0.15 points. On Friday, the National Australia Bank added 0.17 points and the ANZ 0.18 points. Then St George and the Bank of Melbourne (both owned by Westpac) added 0.15 points.

Between them they'll rake in an extra $1 billion a year. In the coming week they'll unveil profits that will make ordinary businesses blush: Westpac's will be $7.8 billion, the ANZ's is expected to be $7.29 billion and NAB's $6.26 billion.

Not too long ago the banks would have defended their rate rises on the radio and television to egg each other on. Here's Westpac's then retail chief, Peter Hanlon, in 2009. He had just whacked up mortgage rates by an extra 0.20 points on top of the Reserve Bank's rise of 0.25. "All the banks in Australia face exactly the same issue, and it is a peculiarly Australian issue because we do depend too much on overseas wholesale funding," he told radio 3AW 's Neil Mitchell. "All the banks are in the same boat, but they'll obviously make their own decisions."

It was known as the mating call of the banks. Discussing prices over the phone would have been illegal, so the banks communicated by radio.

And then the government outlawed that too. Anti-price-signalling legislation means they've got to stay silent and just hope each of the others takes the hint.

This time they have...

It's true that the smaller banks won't push up rates, because they're not affected by the new tougher capital requirements, but that doesn't much worry the big four. They figured out long ago that most of us don't change banks, even when we should.

The big four say they're pushing up rates because they've been forced to hold more capital. Until now the big banks have been required to hold embarrassingly little to back up their mortgages. The Murray Financial System Inquiry found that in the event of another financial crisis, their low reserves "would be sufficient to render Australia's major banks insolvent in the absence of further capital raising".

The Prudential Regulation Authority has started asking them for more capital and will ask for more again. It says by international standards their backing is only mid-range. It wants it in the top quarter.

Tying up more capital on each loan will necessarily mean a lower return, which ought to be OK. Each loan becomes safer. Overseas that's what happens – shareholders take a hit – but not here. Our big banks believe they can widen their margins, restore their profits and maintain their payouts to shareholders.

Former treasurer Wayne Swan used to rail against the banks for this sort of behaviour: "If you're not happy with your bank, walk down the road and get a better deal."

Swan set up a bank-switching hotline, required banks to hand over lists of direct debits to departing customers, and eventually abolished mortgage exit fees, but none of it seemed to help.

Even though the smaller banks offer lower mortgage rates and accept lower returns, we're reluctant to move to them. It's true that under the cover of the global financial crisis many of them became big banks in disguise. The Commonwealth now owns BankWest and most of Mortgage Choice. Westpac owns Rams Home Loans, St George and the Bank of Melbourne.

One of the reasons we are so reluctant to switch to the small guys is our distaste for filling in forms. Going to a new bank means proving your identity all over again. It means demonstrating spending and savings habits. It means revaluing your house, and not being too old to look like a good prospect. Those who do manage it are likely to be hunted down by their old banks' retention teams and bribed to stay with the sort of low rates that ought to have been available to all of the bank's customers.

The best way to make switching easy would be complete account number portability of the kind we have for mobile phone numbers. There's no need to re-establish your identity and no need to speak to your old provider. The new one switches everything across. A review of the idea in 2011 found the technology wasn't yet available, but it must be coming closer.

And there's another, sadder, reason we are reluctant to move. Some of us are comforted by high profits. An extraordinary survey by the Australia Institute finds that one in five of the big banks' customers think high profits made them safer. They are begging to be fleeced.

We're our own worst enemies, and the big banks know it.

In The Age and Sydney Morning Herald



Thursday, October 22, 2015

Westpac and the Commonwealth protect mortgage profits no matter what

If the Commonwealth Bank and Westpac had been located anywhere else, they wouldn't have pushed up rates.

The Australian Prudential Regulation Authority has imposed tough new capital requirements that will require each of the big banks to back up their housing loans with more cash.

In the United States and elsewhere where this has happened the banks' shareholders simply accepted lower returns. More capital made the banks safer, less deserving of an outsized return to compensate for risk.

Not here. Westpac and the Commonwealth seem to believe their shareholders are entitled to outsized returns no matter what.

Westpac's return on shareholder funds is an astonishing 15.8 per cent. The Commonwealth's is even higher - 18.2 per cent.

In the United States, Morgan Stanley, run by Australian James Gorman, accepts high single-digit returns. In Australia recently he said investors around the world were becoming more comfortable with idea of banks holding more capital in exchange for lower earnings.

As recently as two months ago the head of the Commonwealth Bank, Ian Narev, said the same thing. "As you carry a bit more capital and wear a bit more costs, you are going to get a moderate decline in profitability," he told shareholders...

And perhaps to increase them. The best guess within official circles is that if the banks insisted on merely maintaining their profits they would have had to add the equivalent of 0.10 percentage points to the price of each loan. Because (so far) they are raising rates only on mortgages and not on business loans they would probably have to recoup a bit more from each mortgage, although not as much as 0.15 percentage points.

Westpac is lifting its variable mortgage rates by 0.20 points, the Commonwealth by 0.15 points. They are doing it in a year in which their other costs of borrowing have fallen.

The only thing that will make them think twice is losing business. The smaller banks aren't threatened with the same higher costs. They already heavily back their loans. They are in an excellent position to steal Commonwealth and Westpac customers.

The Commonwealth and Westpac think we're too lazy to make the switch.

In The Age and Sydney Morning Herald



Wednesday, October 21, 2015

Now Hockey says he wanted to tax the rich all along

Now he tells us.

Hockey wanted to wind back super tax concessions all along.

"We should be wiser and more consistent on tax concessions," the former treasurer told Parliament in his farewell speech. "In particular, tax concessions on superannuation should be carefully pared back."

It wasn't what he said while he had the job.

When Labor put forward rather mild measures that would have reduced super tax concessions Hockey said only Labor wanted "to introduce new taxes and have new changes on superannuation".

"The last thing you would want to do to people relying on investment income is to hit them with a new tax," he said.

All Labor wanted was to ensure that retirees getting more than $75,000 a year in super actually paid tax, at a rate of 15 per cent. And it wanted to more highly tax super contributions, but only for Australians earning more than $250,000.

Until Labor came forward with these most inoffensive of suggestions, Hockey had indeed spoken quietly about doing something about super tax concessions. But as soon as Labor offered support, he and the rest of the Coalition backtracked as fast as they could.

He now says he wanted to re-skew negative gearing toward new housing so there was an "incentive to add to the housing stock rather than an incentive to speculate on existing property".

Again, it's not what he said at the time. In July he attacked Labor's never-announced proposal to do something just like that, saying it would create "an exception to a standing rule in taxation law, and that is that you can deduct the cost of, or the losses, against, another form of income".

In his valedictory speech he said he had endeavoured "and failed" to keep all tax options on the table. It was an admission that he had wanted to do the right thing but lacked the strength to follow through.

Who knows? Eventually he might have found it. But how long would we have had to wait?

In The Age and Sydney Morning Herald



Tuesday, October 20, 2015

Asking what super is for opens a can of worms

The Treasurer jumped the gun.

Promising in his formal response to the financial system inquiry to determine and enshrine in legislation the objectives of Australia's $2 trillion superannuation system Scott Morrison cut to the chase. It's primary purpose was to "ensure that when Australians reach retirement age they will not be reliant on welfare".

Which is fair enough. But other people think super is for other things, which is why the Murray Review demanded that someone clarify its purpose.

Some think it's for income smoothing, in which case it make sense to allow withdrawals for home deposits. Some think it's for wealth accumulation, in which case it makes sense to keep giving high earners the biggest super tax breaks. Some think it's to build national saving, in which case tax breaks for high earners also make sense.

If the government adopts Morrison's definition of the purpose, tax breaks skewed to high earners make no sense at all. They ought to be skewed in the other direction, towards those actually at risk of falling back on the pension.

Right now, as the Murray review told him, the top 10 per cent of earners get more than 35 per cent of the concessions. The bottom 10 per cent get none, the next 10 per cent get just 1 per cent.

It would be easy to switch things around. Labor's Henry tax review suggested taxing all super contributions at the taxpayer's marginal rate offset by capped rebates...

But maybe that's not what Morrison means. He and Assistant Treasurer Kelly O'Dwyer are keener to talk about putting people in the "driver's seat" when it comes to managing their money. That means allowing all Australians the right to choose their own fund, whatever their enterprise agreement says. David Murray saw it as human right. Morrison and O'Dwyer might also see it as containing the influence of unions.

Murray suggested going further and introducing a competitive tender to pick new default funds, taking the power away from employers. The Coalition is less gung-ho on that, punting the idea off the Productivity Commission to develop models ahead of an inquiry later this decade.

There are good reasons why no-one has adopted a formal definition of the purpose of super until now. Clarifying the purpose would involve clarifying the role of tax concessions and compulsion. It would involve asking hard questions.

In The Age and Sydney Morning Herald



The bubble is shrinking. But why were house prices ever so high in the first place?

The madness is receding.

Each month for a year now more than half of all the dollars lent for buying and building homes went to investors. The insanity is apparent when you consider that until the mid-1990s only 10 to 20 per cent went to investors. People bought houses to live in.

In May this year as prices in Sydney and Melbourne soared to once-unimaginable heights the proportion lent to investors hit an all-time high of 53.5 per cent. And then it slipped, in August sliding below 50 per cent for the first time in a year.

At 48.5 per cent, it's still ridiculously high, but something has changed. The canaries can smell the gas.

The Reserve Bank has been desperate to contain investors because it believes they are accelerating the boom and might amplify the risk of crash.

As it put it in its Financial Stability Review released on Friday: "Investors are more likely to contribute to the run-up in prices than owner-occupiers because the rationales for their purchases differ: capital gains are likely a greater motivating factor for investors, and rising prices can induce even more investor demand by increasing expectations for future price rises. Investors also tend to face fewer barriers to exit."

Investors were also denying owner-occupiers houses they once would have bought. Before the cut in capital gains tax that sparked the boom in borrowing for investment, fewer than half the households headed by Australians aged 25 to 34 rented. Now it's 60 per cent.

The Bank and the Prudential Regulation Authority have been heavying the retail banks to make things more difficult for investors. Last week they hailed "tentative" signs of success. And then Westpac put up all variable mortgage rates 0.20 per cent.

At Saturday's auctions in Sydney only 65.1 per cent of properties sold. A week before it had been 70 per cent. Back in May it was 90 per cent. Melbourne's clearance rates held up at 73 per cent.

Macquarie Group is predicting a 7.5 per cent decline in house prices over the next two years. If it's gentle, it'll be good. But why did they ever get so punishingly high in the first place?

Tax is an awfully big part of it. When the Howard government halved the headline rate of capital gains tax at the end of the 1990s the price of a typical house jumped from two to three times household disposable income to four times disposable income. At no other time in Australian history have prices jumped so far so quickly. Negative gearing (making losses on rent to offset against other income in order to enjoy a barely-taxed capital gain) became mainstream...

"It is a truism that if an investor is buying a property, an owner-occupier is not," the head of the Bank's financial stability department Lucci Ellis told the parliament's home ownership inquiry in July. "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties."


Investors like to believe that they are creating new properties, adding to supply and driving down prices. But few of them are. Before the explosion in negative gearing, one in every six new investors built a home. It's now one in 16.

Tilt has also ramped up house prices by making them more affordable to start with, at the cost of being less affordable over time. That's the "tilt". It used to be the other way around. When interest rates and inflation were high, the upfront cost of buying was high (because the of the mortgage rate) but the payments became easier over time as wage rises inflated the burden away. These days low interest rates make it much easier to buy a house (so long as you can get a deposit) but low inflation makes it much harder to pay off.

The changed tilt has pushed up prices because borrowers who didn't realise what happened rushed in and bid in order to take advantage of cheap rates without realising that the burden would stay with them for much longer.

Increasing wealth has been the other big driver of house prices. The richer we get after meeting our basic needs the more we are prepared to pay for the place in which we live. (The fact that owner-occupied housing is entirely tax free helps as well.)

The typical home now has 3.1 bedrooms, up from 2.9 two decades ago, as well as other rooms such as studies and extra living rooms that used to be uncommon. Eight out of 10 homes now have at least one bedroom free.

But that's not where the real money is going. For those who that can afford it, place is more important than space. And there's a limited number of well-located places. The bigger our cities become the more important it becomes to have a place close well in to the centre, or vaguely near the sea.

It's the prices in these suburbs that move first, and short of a wealth tax or a land tax or a capital gains tax on the family home, there's nothing that that can be done to stop them rising.

"More supply", the simple fix, isn't going to help.

It's wise to resign ourselves to the reality that some house prices are always going to be beyond most of us. But if the other prices of other houses ease off and fall for a bit, we will be able to count ourselves lucky.

In The Age and Sydney Morning Herald




Sunday, October 18, 2015

Deadline stressed? You've brought it on yourself

You probably shouldn't be reading this.

You've got too much to do. But that's one of the odd things we do when we've too much to do: we thumb through newspapers, we check our email, we read articles like this about how to get through our list rather than actually getting through our list.

We act as if we've taken leave of our senses.

Just about everyone knows the way to get through a list. It's to take on fewer projects, start big projects earlier and finish them sooner. But almost no one does it. It's as if, when we are busy, we lose the mental strength to escape from our busyness.

That might sound familiar. It should. It's the way dieters approach dieting. Everyone knows that the way to do it is to eat less and to eat less often. Yet most can't manage it. We start to diet, then we get hungry, and lose the mental strength needed to keep going.

This isn't just an analogy. Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafir​ reckon it's the same thing. They set out their argument in their new book titled Scarcity: The New Science of Having Less and How It Defines Our Lives.

They believe that scarcity (whether of time or food or money) makes us temporarily dumber.

They're even prepared to say how much dumber. They say it's worth 13 to 14 IQ points.

Thirteen points is enough to move you from "average" to "superior" intelligence, they say. "If you move in the other direction, losing 13 points can take you from average to a category labelled borderline deficient."

Not for one second are they saying that busy people are dumb or that dieters are dumb or that poor people are dumb...

They are saying that when we get into those situations we become dumber and that that makes those situations worse. As they put it: "scarcity creates its own trap".

Here's how it worked with a group of shoppers they surveyed at a New Jersey mall. Just before administering the IQ test they asked about auto insurance:

Imagine that your car has some trouble, which requires a $300 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision?

Rich and poor shoppers answered the question in much the same way, and were roughly matched in the intelligence test that followed. Then they administered the test to a new group of shoppers, but changed one detail of the question. Instead of it being a $300 service, it became "an expensive $3000 service".

A rich shopper is easily able to handle $3000, but for a poor shopper it is almost impossible. The rich subjects did just as well as before in the intelligence test. The poor subjects did far, far worse.

They'd been made worse because they had been made to think about financial problems, which soaked up their "mental bandwidth".

As Mullainathan and Shafir put it: "The mind orients automatically, powerfully, toward unfulfilled needs. For the hungry, that need is food. For the busy it might be a project that needs to be finished. For the cash-strapped it might be this month's rent payment; for the lonely, a lack of companionship. Scarcity is more than just the displeasure of having very little. It changes how we think."

Someone desperate for enough money to make it through the week will be attracted by a payday loan, whatever the interest rate and the likelihood of paying it back. Their critical facilities will be weakened and they'll become poorer still.

A dieter unable to think about anything but food will relent (just once) telling themselves they will make it up the next day, without realising they'll probably relent the next day as well.

Someone mired in deadlines and an overwhelming workload will say yes to just one more project (so long as it is in the future) without realising that they've just made things worse.

The solution they propose is to consciously build slack into our systems: to only accept work that won't overload us, to go on a less demanding diet, or to further lower the living standard we accept. They are solutions that might make sense if so much of our brains weren't tied up worrying about the next crisis.

And that's the problem.

In The Age and Sydney Morning Herald



Friday, October 16, 2015

No longer a nation of homeowners, we're renting

Once a nation of homeowners, we are becoming a nation of renters.

It's been two years since the latest update on housing occupancy and the one released on Friday show the proportion of households renting has edged up to 31.4 per cent. The proportion owning outright is only a point or two in front, at 32.5 per cent. Around 35 per cent of homes are mortgaged.

Back before the tax change that ignited negative gearing at the end of the 1990s around 40 per cent of households owned outright, and only 28 per cent rented.

It's the flipside of the boom in second properties that has made Australia a nation of landlords. The Bureau of Statistics says an extraordinary 1.5 million households now own properties they don't live in. Among high earners 39 per cent own a second, third or fourth property.

The extra properties need tenants, and the higher prices the landlords have been prepared to pay to get the properties have created a new class of tenants - those who once would have been able to afford to buy in their own right.

In September 1999 the Howard government halved the headline rate of capital gains tax, making the life of a negatively geared landlord suddenly up to twice as attractive as it had been.

So popular has the lifestyle become that the Bureau of Statistics reports that about 300,000 landlords don't live in their own homes. They rent out, while renting elsewhere themselves.

Among households headed by Australians aged under 35 an extraordinary 63.4 per cent rent.

Labor has held out the prospect of some sort of action to wind back negative gearing in order to make owner-occupation more affordable.

Tony Abbott ruled it out, but there's a glimmer of hope. Malcolm Turnbull is prepared to think again.

In The Age and Sydney Morning Herald

No revenue problem Treasurer? Tax revenue falls $1.7 billion short:

Weeks after Treasurer Scott Morrison declared his budget had "a spending problem, not a revenue problem", new finance department figures show revenue falling short.

The figures for the first two months of the financial year show revenue of only $61.113 billion in July and August, well short of the $63.336 billion expected when the budget was delivered in July.

Tax revenue is down $1.7 billion down on the budget forecast due to both slower than expected wage growth and weaker than expected dividend payments.

Superannuation tax receipts are about 20 per cent short of expectations and the resource tax has brought in less than half of what was expected due in part to the lower oil price.

On the upside, company tax takings are $1 billion ahead of expectations and the lower Australian dollar has helped bring in an extra $1 billion in customs duty.

Spending is roughly as expected at $73.495 billion for the first two months of the financial year.

Former treasurer Joe Hockey forecast a deficit this financial year of $35.1 billion. Two months in to the year the deficit is $13.5 billion, more than one third of the forecast total.

But the department says that care needs to be taken when comparing cumulative revenue to full-year forecasts as takings can vary from month to month.

In The Age and Sydney Morning Herald

Thursday, October 15, 2015

Why you're working an extra 16 minutes a week

Feel like you're working longer days? That's because if you're a typical Australian worker, you are.

The latest employment figures show that, on average, we are each putting in a quarter of an hour more per week than this time last year.

The working week has grown over a year in which the unemployment rate has stayed put, suggesting that had employers put on extra workers rather than work their existing workforce harder, unemployment would be a good deal lower.

Australia's unemployment rate stayed steady at 6.2 per cent in September, the same rate that prevailed in September 2014.

But in September 2014 the average full-time worker put in 39 hours and 13 minutes per week. The total is now 39 hours and 29 minutes, a jump of 16 minutes.

The average part-time worker put in 16 hours and 42 minutes per week. The total is now 16 hours and 56 minutes, a jump of 14 minutes.

The extra hours are a sign of improving business conditions that aren't yet matched by improved business confidence.

The National Australia Bank's measure of business conditions has climbed from near-neutral to positive over a year in which its measure of business confidence has failed to grow.

Without confidence that better conditions will continue, it makes sense to put on more hours rather than hire more workers who might be difficult to keep.

Rough estimates suggest that if employers had put on more workers instead of increasing the number of hours their existing employees worked, about 291,000 Australians would have gained jobs over the past year instead of 230,100...

Employment Minister Michaelia Cash described the trend as "very healthy", saying that in the past nine months 160,300 jobs had been created, the highest number in a nine-month period for five years.

NSW has been responsible for the vast bulk of the jobs growth, boosting employment by 100,500. Queensland lifted employment by 28,000, Victoria by 15,600 and Western Australia and the Northern Territory by 5200 and 4500 respectively.

Employment grew by just 1100 in the Northern Territory, by 800 in Tasmania and by 600 in the Australian Capital Territory.

In The Age and Sydney Morning Herald



Switching sides. Now Coalition voters get the glooms

It's as if they have switched sides

Since the ascension of Malcolm Turnbull, it's Coalition voters who have been feeling downbeat - the most downbeat since the election - and Labor voters who've been feeling better.

It's usual for consumer confidence to change as soon as there's change at the top. Usually what happens is that supporters of the party that lost become pessimistic and supporters of the party that won become optimistic and stay that way that way as long as their side is in power. Throughout the entire life of the Rudd and Gillard governments Labor voters were more optimistic than Coalition voters and stayed that way right through until the 2013 election when positions swapped.

Coalition voters have been clearly more optimistic than Labor voters in the Westpac Melbourne Institute survey ever since the election of Tony Abbott. Until now.

The October survey is the first since Malcolm Turnbull became Prime Minister. Confidence among Coalition voters dived from a clearly positive 105.9 points (on a scale where 100 means optimists and pessimists are evenly balanced) to 102.1, the lowest reading in the two-year history of the Coalition government.

It's Labor voters who have had a surge of enthusiasm. Their confidence has surged from a deeply gloomy 86.7 to 93.3. It's the second-highest reading in the life of the Coalition government...

If all of Australia had reacted as did Labor voters, consumer confidence would have surged 7.6 per cent. Because Coalition voters turned bearish, confidence surged only 4.4 per cent.

"The result is a little short of the increase we would had expected given the strong boost the government received in the polls," Westpac chief economist Bill Evans said.

Labor voters appear to have found a prime minister that makes them feel better while Coalition voters feel worse but still plan to vote for the Coalition.

The consumer sentiment index is made up of five questions, dealing with perceptions of changes in family finances, perceptions of future changes in family finances, economic conditions over the next year and economic conditions over the next five years as well as whether now is the right time to buy a major household item.

On all but one of those measures consumers are more confident since the ascension of Malcolm Turnbull. The exception is their assessment of the Australian economy over the next five years.

A separate part of the survey revealed that expectations of house price increases fell by 3.9 per cent between September and October. They are down by around 15 per cent over the past three months and 25 per cent from their peak in December 2013.

In The Age and Sydney Morning Herald



Wednesday, October 14, 2015

Just 'cos Westpac raises rates... A Reserve Bank rate cut is no sure thing

Steady on. It's far too early to predict a rate cut in November. And that isn't just because the Reserve Bank genuinely hasn't considered the question and won't until shortly before its November meeting.

Macquarie Group's interest rate analyst James McIntyre thinks the RBA will cut rates because Westpac has pushed them up. It's "all but a done deal", he says.

It's true that if all of the lenders lifted their retail rates by 0.25 points, the Reserve Bank would be likely to cut its cash rate by 0.25 points.

Governor Glenn Stevens has said often in the past that the bank targets retail rates and uses its cash rate as merely a means to get at that end. If the retail banks push up or push down rates on their own, the Reserve Bank will push down or push up its cash rate to compensate.

But Westpac is only one of the big four banks, and the big four between them control only around 80 per cent of the mortgage market.

Its decision to lift its variable mortgage rates by 0.20 points might only affect one quarter of the market, perhaps less.

And it's only lifted them on products with the Westpac brand. For the moment products branded St George and Bank of Melbourne are unaffected.

Treasurer Scott Morrison has forcefully made the point that Westpac's hike is more than would be needed to compensate it for new rules that will push up its cost of capital.

If he succeeds in dissuading others from following it, the Reserve Bank is unlikely to move in November. Westpac's move will feed into the mix of factors to be considered, but in a small way.

In The Age and Sydney Morning Herald

Tuesday, October 13, 2015

Trans-Pacific Partnership: we're selling sovereignty for little return

Now Malcolm's sucked in.

Hot on the heels of his predecessor, who labelled the China-Australia Free Trade agreement an "export agreement" (when his own modelling showed it would boost imports more than exports), and claimed it would create hundreds of thousands of jobs (when his modelling said it wouldn't even create tens of thousands), Turnbull says the 12-nation Trans-Pacific Partnership will be a "gigantic foundation stone" for Australia's future.

Pressed by an eager Neil Mitchell on Radio 3AW last week for details about the jobs it would create, he said: "More jobs, absolutely. Australian jobs depend upon open markets and free trade".

Which is a pity, because the only economic modelling we have shows it won't create jobs. It'll boost the Australian economy (slightly) by shifting workers away from some jobs towards others, but it will replace rather than add jobs, in the same way as things that are modelled usually do.

Our own Productivity Commission is itching to model the effects of the Trans-Pacific Partnership. It's the sort of task it was set up to do. But for some reason governments don't ask it to, so in this case we have to rely on the work of the prestigious Peterson Institute for International Economics in the United States. It is a supporter of the TPP. One of its blog posts is called "The Case for TPP". Another is titled: "A Convincing Case for Passing the TPP". Yet it finds the economic benefits are slight.

It says 10 years on, the United States economy will be 0.4 per cent bigger as a result of the TPP. That's it. It isn't a boost in economic growth of 0.4 per cent a year (which would be substantial), it's a total boost of 0.4 per cent after a decade, brought about by a barely perceptible lift in economic growth.

The effect on employment is zilch. "Expecting normal US employment then, we do not calculate any increase in the number of people at work," the authors say.

But about one-half of 1 per cent of the US workforce will move from import-competing jobs (typically in manufacturing) to exporting jobs (typically in services) where they will better paid. It's that, and cheaper imports, that drives the small increase in living standards.

Some countries do much better. Japan boosts its income by 2 per cent, according to the model; Malaysia by 5.6 per cent; and Vietnam by 10.5 per cent. But Australia fares much the same as the US. Our economic boost after 10 years is 0.5 per cent. Our manufacturing and mining industries shrink as a result of the deal and our agricultural and service industries grow. The net effect isn't big...

So why do it?

Free trade agreements give us special access to markets that others don't have. Whereas other countries would face tariffs or quotas if they attempted to sell to TPP members, as a member country we would face lower or zero tariffs. We would be inside the castle rather than out, a bit like members of the European Union.

And by cutting our own tariffs (albeit for imports from inside the castle rather than out), we would get cheaper goods. Of course we could (and should) cut all our tariffs, but that wouldn't be playing the trade agreement game. We wouldn't then be able to offer privileged access.

And that's where the problems start. Treating outsiders as worse than importers stuffs up trade. Here's an example. Under the TPP, Japan gets special access to the US car market, but only if its cars are "Japanese". More than a certain proportion of Chinese parts, and there's no special access. So Japan is discouraged from sourcing parts from the most efficient supplier. It means that, like most so-called "free trade" agreements, the TPP is anti-trade. A study of the US-Australia agreement 10 years on found it had rather than boosted trade with the rest of the world.

Much of the TPP deals with services. It'll be easier for Australian-registered architects, lawyers and engineers to get work in other TPP countries, just as it'll be easier for professionals from those other countries to bid for work here. It's the part of the agreement Trade Minister Andrew Robb describes as "truly transformational".

But it comes at a cost. The cost is standardisation. In almost every case the TPP nations will be locked into the US way of doing things and denied the freedom to move to anything else. Copyright is an example. Right now the Productivity Commission is examining whether Australia's copyright term really needs to last until 70 years after the death of the author. Regardless of what it finds, we will be locked into 70 years by the TPP (as well as by the US-Australia Free Trade Agreement). When Robb says the agreements require no changes to our intellectual property laws, he is telling only half the story. They also prevent changes to our intellectual property laws. They lock us into American standards.

We managed to escape a US demand that we give drug manufacturers longer monopoly rights that would have cost our Pharmaceutical Benefits Scheme $100 million a year, but the agreement has locked us into the monopoly rights we do grant. Our rules will be overseen by a TPP Commission to prevent backsliding.

And we are locked into a US-style investor-state dispute settlement scheme that will allow foreign companies (other than tobacco companies) to sue our governments in extraterritorial tribunals.

US-style rules will also be imposed in a range of ways we would probably support. Labor laws in the TPP states will have to outlaw child slavery, environmental laws will have to fight wildlife trafficking, and so on. To prove we are open for e-commerce, we will be unable to pass laws requiring Australian data to be kept within Australia.

Is it all a fair price to pay? On balance I'd say not. But then I am particularly keen on economic sovereignty. The agreement we are about to sign sells it, for not that much in return.

In The Age and Sydney Morning Herald