Thursday, December 29, 2016

Labor ought to stop pandering to millionaires on pensions

Once Labor and the unions stood up for battlers. Now they're robocalling seeking sympathy for millionaires who want to stay on the pension.

From the end of this week 91,000 extremely wealthy pensioners will be kicked off a payment that was meant to be directed to those in the most need. They'll lose an average of $5000 per year each. As a consolation, they'll get to keep the far more valuable Seniors Health Card, entitling them to discounted medicine under the Pharmaceutical Benefits Scheme, easier access to the Medicare Safety Net and rewards for doctors who bulk-bill them.

Some are complaining they might not continue to get a discount on council rates. Another 236,000 exceedingly well-off pensioners will get less of a pension, an average of $3400 per year less.

Astonishingly, at the moment it's possible for a couple to own a home (of whatever value) and investments of $1.18 million and still get a part pension. Couples who don't own their home can hold investments worth $1.33 million. The changes, from January 1, will cut those thresholds to $816,000 and $1.02 million.

What's being taken away is relatively new. In 2007 John Howard had a rush of blood to the head. Fearing he was about to lose office, facing a surplus that approached $20 billion, and believing the mining boom would last forever, he declared Christmas in July. On June 30 he posted nearly every senior citizen in the country a cheque for $500. On July 1 he made most super payouts tax free, and on September 20 he cut the pension assets test taper rate from $3 to $1.50 per fortnight.

This meant that instead of losing $3 of pension per fortnight for every $1000 in assets they owned over the full pension threshold, retirees lost $1.50. They could own twice as much over the threshold as before and still get a part pension. The change to the taper rate cost $1 billion per year and created a new generation of entitled wealthy pensioners.

Scott Morrison is the first treasurer to have taken them on, and he did it while social services minister. Announcing the return to the $3 taper rate ahead of time in 2015 he said Howard's $1.50 rate had been introduced when the budget was in surplus and was no longer affordable.

Anyone who felt disadvantaged by losing an average of $3400 or $5000 a year could draw down on their investments, which by definition would be substantial. The worst case would require the well-off retiree to draw down 1.84 per cent of their assets.

Drawing down is what savings in retirement are meant to be for. As Morrison put it, super "isn't there as an inheritance programme; it's not there as a wealth transfer programme; it's there so people can save for their retirement and have a great standard of living, a good standard of living in their retirement, that's what it's for".

Yet research by his department and the Productivity Commission finds that most retirees don't want to run down what they've got. Many continue to accumulate wealth while retired and while on the pension.

During their last five years on the pension 42.5 per cent of those surveyed lift their asset holdings and 24.7 per cent maintain them.

It's behaviour Labor is defending. It voted against Morrison's changes in the Parliament and accepted them only during the last election when it was searching around for billions to make its promises add up.

In doing so it also voted against the rest of Morrison's package, which boosted the ease with which not-so-well-off retirees could get the pension.

At the moment a couple with a home can only own shares and investments worth $296,500 before losing the full pension. From January 1 the threshold climbs to $375,000. For a couple without a home it climbs from $448,000 to $575,000.

An extra 50,000 modestly well-off part pensioners will get the full pension as a result of the changes Labor and the unions are decrying. A further 120,000 will get a bigger pension.

Morrison is Robin Hood. He is giving more to those who need it most and taking it away earlier from those who don't.

Unfathomably, Labor is styling itself as the Sheriff of Nottingham. And not for the first time. When Education Minister Simon Birmingham conceded last month that there was a limit to what the Commonwealth could spend on schools and said it might get more bang for its buck if it wound back its spending on over-funded private schools and directed it to those in need, Labor's Tanya Plibersek maintained that no school should be worse off.

It's the same party that at first opposed the Coalition's moves to even up the unfairness in superannuation tax concessions on the spurious ground that they were "retrospective".

Oppositions are meant to do more than simply oppose. They are meant to provide a moral compass by showing us what's right. This one could start by welcoming the overdue change taking place on January 1.

In The Age and Sydney Morning Herald

Tuesday, December 20, 2016

MYEFO. Call that an improvement? The ratings agencies won't

The ratings agencies won't fall for it, and neither should you.

Treasurer Scott Morrison has revised down tax revenue by $30.7 billion over the next four years in a belated admission he has a revenue problem.

But he says the budget deficits will only deteriorate by $10.4 billion.

We're meant to think the $20 billion difference is the result of cost-control. But it isn't. All up, government measures to make up the difference net out to just $2.5 billion. Over four years, that's a cut in projected spending of 0.13 per cent, barely a rounding error.

Instead it's pulled out the savings from the fiscal equivalent of the back of the couch.

It's discovered that childcare benefits aren't being taken up at the rate expected, so it's lopped $7.6 billion off the amount it expects to pay. It's discovered that pension payments are growing more slowly than expected, so it's lopped off another $2.7 billion. The support for carers program is also costing less than expected, so it's lopped off another $1.9 billion.

All up these "parameter variations," colloquially known as "hollow logs", amount to $12.2 billion. They're handy for making it look as if you're doing something to fight collapsing revenue when you're not doing much.

There's a lot the government could do if was minded to. It could abandon or postpone its largely-unfunded company tax cuts, saving $2.7 billion over the forward estimates, and eventually $8.2 billion per year, it could slash the capital gains tax discount, saving $5.4 billion, it could end negative gearing on newly-purchased assets, saving $2.6 billion, which would grow to something much bigger. They are the type of things the ratings agencies expect from governments just re-elected.

As it is, it is attributing a big chunk of the improvement in the deficit to bracket creep brought on by an arguably implausible lift in wage growth. Right now, wage growth is just 1.9 per cent, the lowest on record. We are asked to believe it will climb to 2.25 per cent and then to 2.5 per cent. We're not told why.

Even with apparently heroic forecasts and hollow logs, the surplus it is forecasting for 2020-21 is now close to nonexistent. It's $2 billion, around 0.1 per cent of GDP, which isn't enough to convince anyone of anything.

In The Age and Sydney Morning Herald

Bad news now in the hope of good news in May

Treasurer Scott Morrison loaded up the mid-year budget update with bad news in the hope that the budget itself, due in May, will appear to contain good news.

At his instruction, the Treasury has included the recent extraordinary jump in commodity prices in its budget estimates for the current financial year, but not for future financial years, even though it would have been perfectly entitled to.

"In recent years, Budget and mid-year update forecasts have used an assumption that commodity prices would remain around a recent average over the forecast period," the Treasury explains in a statement.

"In light of the current exceptional circumstances for bulk commodities, this assumption is not considered prudent at this time. An alternative assumption of a phased reduction in prices from recent levels has been adopted for metallurgical coal and iron ore.

"The metallurgical coal price is assumed to be US$200 per tonne free on board in line with the December 2016 quarterly contract price, before declining through the September and December quarters of 2017 to reach a level of US$120 per tonne in the March quarter 2018.

"This price is consistent with recent industry liaison."

As a result, the budget position has been revised up for this financial year, but revised down for those that follow. It means that, if commodity prices do indeed turn down, as the Treasury expects, the May budget won't contain a nasty surprise.

If they stay high, as is possible, the May budget will look better than expected.

It matters that the May budget will be produced when everyone is watching, while Parliament is sitting and TV networks and newspapers are producing special editions. The mid-year budget update is being released more quietly, days before Christmas in a news event that's likely to be forgotten before its properly remembered.

By bringing forward potential bad news, the Treasurer has ensured it will be barely noticed, compared to what he is hoping will be good news in May.

In The Age and Sydney Morning Herald

PC: Copyright rules make us break the law 80 times a day

If you are anything like the typical Australian, you probably break the copyright law 80 times a day, according to figures included in the Productivity Commission's final report to the government on intellectual property.

Most of the breaches are harmless, things such as including a copy of an email in the reply to an email. But the commission says that laws that are routinely flouted are bad laws, bringing themselves into disrepute.

In place of the labyrinthine system of complicated rules governing what can or can't be copied, the report released on Tuesday recommends the US system of fair use, under which the use of copyrighted material is legal so long as it is fair, taking into account the purpose of the use, the nature of the work, the amount copied and the effect on the potential market value of the work.

A study released with the report finds that Singapore had fewer copyright disputes after adopting fair use, suggesting the change made copyright easier to understand.

The commission says the change would put beyond doubt the ability of universities to use innovative technologies such as data mining and other technologies that haven't yet been invented, allowing Australia to innovate as quickly as competitors in Israel, South Korea and the United States.

It wants universities, schools, cloud computing services and other suppliers of internet services to be granted the same "safe harbour" status as internet service providers, meaning they cannot be held liable for the actions of their users.

In order to discourage piracy, it wants the government to legislate to guarantee the right of Australians to circumvent so-called geoblocks that prevent Australians accessing music, ebooks and software when it is available overseas at overseas prices. It says Australians subject to geoblocks are typically charged an 'Australia tax' of 13 per cent. Its survey of 1000 books found that parallel import restrictions, which can prevent retailers sourcing books from overseas, typically add 20 per cent to the US or British price. It wants the remaining restrictions removed by 2018, saving readers up to $25 million per year.

The commission has asked the government to urgently remove the anomaly, which grants perpetual copyright to the 13 million unpublished documents and letters held in cultural institutions, meaning they can't be digitised unless the heirs of the authors can be tracked down. It also wants to make it to be easier to make use of "orphan works" for whom the copyright owners cannot be found. It says the National Film and Sound Archive has told it that 20 per cent of its holdings are in a legal "no man's land", meaning it can't use them to celebrate Australia's heritage without tracking down owners who can't be found.

The report recommends a separate small claims list in the Federal Court that would allow self-represented litigants who felt their work had been used unfairly to get redress at low cost.

It is especially critical of the role of collection agencies, including the Copyright Agency chaired by former News Corporation chief Kim Williams, which it says are not open about what they do with the funds they collect on behalf of different classes of rights holders.

It wants them to hand to the government the funds they collect for the use of orphan works rather than distribute them to other rights holders, as happens at present. It wants the Competition and Consumer Commission to review their governance and rules.

The Copyright Agency struck back, saying in a statement the commission's recommendations seemed "to be straight out of the US Big Tech playbook" and would wreak havoc on Australia's creative community. Author Richard Flanagan said the commission was like "a deranged hairdresser insisting their client wears a mullet wig".

Universities Australia welcomed the report, saying the US had had fair use since 1976 and its creative industries were flourishing. The Digital Alliance representing libraries and other users of copyright material said the changes would ensure the everyday behaviour of millions of Australians was no longer illegal.

Minister Greg Hunt asked for comments on the report by February 14. The government will respond in the middle of the year.


What the Productivity Commission recommends

  • Legislation to enshrine the right of  consumers to circumvent geoblocks
  • Repealing remaining import restrictions on books from 2018
  • Allowing "fair use" of copyrighted material as in the US
  • Freeing up access to orphan works for whom no owner can be found
  • Extending "safe harbour" protection to all providers of online services
  • Subjecting copyright collecting agencies to a governance review by ACCC
  • Raising the inventive standard needed to gain a patent
  • Restructuring patent fees so that they climb over time
  • Providing open access to publicly funded research
  • Introducing a low-cost federal court list for hearing IP claims

Source: Report of the Productivity Commission inquiry into intellectual property arrangements

In The Age and Sydney Morning Herald

Sunday, December 18, 2016

Giving is like sex, it makes us human

Want to make someone incredibly happy? Give them $5, or $20. But you can't stop there.

A few years back researchers Elizabeth Dunn, Lara Aknin and Michael Norton approached students at the University of British Columbia Vancouver in the morning and administered a happiness questionnaire, after which they gave them either $5 or $20. They told half to spend it on themselves as soon as possible, and the other half to spend it on someone else.

The first thing they discovered when they readministered the happiness questionnaire at 5pm was that the amount of money made no difference. Five dollars did just as much as $20. And for those who had spent it on themselves (on magazines, at Starbucks and the like) that was nothing. They were no happier than they had been before.

But the half that spent the money on someone else (on toys for children, donations to the homeless and so on) were a good deal happier.

Without fully realising it, Dunn, Aknin and Norton had helped crack what's known as "happiness paradox" or "Easterlin paradox", named after the economist who came up with it. Based on inadequate measurements and broadly accepted until about a decade ago, it seemed to show that, when measured over time or between countries, more money didn't create more happiness.

It's now widely accepted that it does, at least for big changes in income. And it should. There's a lot you can do with more income, including giving it away. To the extent that more income does not create more happiness, that could be because people aren't doing the right things with it. As Dunn, Aknin and Norton put it, "how people spend their money may be as important for their happiness as how much money they earn".

So they surveyed workers at a large Boston firm one month before and two months after they received their annual bonuses, which averaged $US5000 ($6800). The more of their bonuses they had spent on buying things for someone else or donating to charity, the more their happiness had increased.

Even toddlers seem to delight in giving. Aknin videotaped children between the ages of 22 and 24 months who had been introduced to a puppet (a monkey) they had been told "liked treats". The researcher then gave them some treats (goldfish crackers) and asked them to share some with the monkey. Then the researcher "found" an extra one and asked them to pass it to the monkey.

Coding of the facial expressions by two assistants showed the children were happier passing the treats to the monkey than they were receiving them themselves. But they were the happiest of all when they gave up treats they already had to share with the monkey.

At the US National Institutes of Health neuroscientist Jordan Grafman conducted the same sort of experiment on adults, with their heads in a brain scanner. After money had been placed in their "accounts", they were presented with a list of charities and told they could pick some to donate to, or decide not to and take some of the money home.

Whenever they decided to donate, parts of their middle brain lit up, the same parts that control cravings for food and sex, and also the same parts that were activated when the money went into their accounts.

He concluded there was nothing particularly sophisticated about the decision to give. It was as basic as the need for sex, and food.

And sex comes into it. There was another bit of the brain that lit up: a small part of the frontal lobe that's full of receptors for oxytocin, the so-called "love hormone" that's released during sex, childbirth and breastfeeding.

Whereas adrenalin gives us "fight or flight", oxytocin gives us lust and trust. It makes us both more loving and more loyal, bonding us to each other. It's what most of us want.

Many of us are unhappy at Christmas. The Paul Kelly song How to Make Gravy is about someone who can't be with the ones he loves. He isn't feeling miserable because of what he won't get, he is feeling miserable because, this year, he won't be able to give; because this year he won't be flooded with oxytocin.

That makes it sound selfish, but it isn't. Giving is a human duty. It's what we do because we're part of the species. That's why it makes us feel better.

In The Age and Sydney Morning Herald

Thursday, December 15, 2016

Our copyright laws are holding us back, and there's a way out

Imagine a land in which everything was outlawed, except for the things that were specifically allowed. Things would more-or-less work, until you tried something new.

It would be illegal at first, perhaps for years, until the parliament got around to permitting it. This slow-moving land (which we'll call Australia) wouldn't stand a chance against competitors that could move quickly.

For the most part, we're not like that. We outlaw killing, rather than specific methods of killing. We permit the earning of income, rather than the earning of income from specific activities. Our laws are based on principles rather than prescriptions.

Except for copyright.

Google couldn't have grown up here because our copyright laws didn't explicitly permit the copying and indexing of the web. Video cassette recorders couldn't have developed here because our laws didn't explicitly allow home taping. Dr Rebecca Giblin of Monash University says if VCRs had been introduced here first instead of in the US, "rights holders may well have succeeded in suing them out of existence".

In the US, Google and Sony were able to rely on "fair use". The law there allows copying so long as it is fair, taking account of what's copied, the purpose for which it is used and whether or not it harms the market for the original work. It's based on principles rather than specifics, which means it copes with change.

In Australia, it's full of specifics. New activities are presumed to break the law until Parliament gets around to changing it, which can take years. Parliament didn't get around to legalising home taping until 2006, decades after the arrival of the video cassette recorder. You are now allowed to copy music from your CDs to play on another device, but only if you own that device. If your phone is leased on a contract, or your tablet is owned by your employer, your copies infringe copyright. You are allowed to take a photograph or scan of a newspaper, but only if afterwards you read only from the photograph or scan and not from the original paper. If you've complied fully with almost 600 words of dense text and succeed in making a legal copy but then lend it to a friend, that's no dice, even though you would be perfectly entitled to lend the paper to the friend.

The law obsesses about details, but never asks the most important question: is what's proposed fair?

Schools are also penalised for attempting to use new technologies. It's legal for them to use small amounts of copyrighted material in printed exam papers, but not in ones they email or put online. For universities attempting to compete with those in agile countries such as Israel, Singapore and the United States, it's a serious restriction. Universities Australia says its members typically spend between 1250 and 1740 staff hours seeking copyright permissions their competitors don't need to.

Like other Australians they're not even sure they can legally back up what they own. Backing up is essential in the age of computers but it involves the making of copies which can be charged for.

Five major inquiries have recommended that Australia future-proof its law by moving to the US system of fair use, as it probably should have as part of the US-Australia Free Trade Agreement.

Shortly, there'll be a sixth. The final report of the Productivity Commission inquiry into intellectual property will come with a detailed analysis from Ernst & Young that eviscerates work done by the main copyright collecting agency on the costs to the Australian economy of adopting fair use.

There would certainly be costs to it. Records tendered to the inquiry by Australian schools show the Copyright Agency is billing them millions of dollars for the display of materials that are freely available on public websites including tourism maps, health fact sheets and the homepages of institutions such as the Commonwealth Bank.

And they are are hit up for the use of so-called "orphan" works for which there is no longer an identifiable owner. The Copyright Agency, a government-mandated collection body, takes the money, holds some of it in case the owner ever comes forward, and distributes the rest to the owners of other works as a windfall, creaming off a generous amount for administration.

Australian schools say they pay 10 times more per student to use copyrighted materials than schools in New Zealand.

Students are entitled to copy small portions of copyrighted works for study – it's a right protected under a clunky alternative to fair use known as "fair dealing". But a quirk in the law means that if a teacher asks the students to make the copies, or presses the button on the photocopier, the school has to pay for them.

You're going to hear a lot in coming weeks about how "fair use isn't fair". That's impossible, by definition, because under fair use, if a use isn't fair it can't be permitted. What a switch towards it would do is move our law away from niggardly technology-specific details towards the one simple principle that's used in the countries that are getting ahead: whether, in all the circumstances, a use is fair. It'd be our entry ticket to the modern world.

In The Age and Sydney Morning Herald

Tuesday, December 13, 2016

Fortress Parliament. We are no longer above it

The designer of Parliament House faced an almost impossible problem.

Aldo Giurgola knew that the designers of Canberra, Walter and Marion Griffin, had specified that what we now call Capital Hill was to be set aside for public or ceremonial activities, "or for housing archives and commemorating Australian achievements," rather than for the Parliament.

It was to look down on the Parliament, which would be below it, making the important symbolic point that the people are above it.

But in 1974 the Parliament voted to nab the site for itself, and set up a competition to decide who would design it.

Giurgola won by satisfying both the Parliament and the plan. The building would be at Capital Hill as was required, but it would be within it rather than on top of it, and grass would be laid over its surface so that people could walk on top of it and gaze down. They could picnic on it.

After completing the building in 1988, the Italian-American settled down in Canberra and saw out the rest of his days in the suburb of Kingston, just down the road from his proudest creation.

He died this May, aged 95. The people who ran the building didn't think to drop the flags to half mast.

He had been upset with them for some time. They'd put fences four-fifths of the way up the lawn so that, while people could still walk up from the bottom or take the lift to the top, they couldn't roam over the entire structure. They had built an ugly fortified fence at the back and stuffed workers into windowless offices in the basement.

Had he been asked about a 2.6-metre fence around the lawn, or a moat, as he would have to have been because of his "moral rights", he would have said it ripped out the building's heart.

The fence was whisked through the House of Representatives without the debate. It was rushed through the Senate in 30 minutes. Our elected representatives won. We are no longer above them.

In The Age and Sydney Morning Herald

Friday, December 09, 2016

Labor attacks 'treasury' report discrediting stimulus

Labor has questioned the bona fides of a report apparently commissioned by the Treasury that plays down the role of big government spending in helping Australia survive the global financial crisis.

Written by Griffith University professor Tony Makin, a long-term critic of the so-called cash-splash during the crisis, it finds "no evidence fiscal stimulus benefited the economy over the medium term".

"In sum, the nature of Australia's fiscal stimulus was misconceived because it emphasised transfers,unproductive expenditure such as school halls and Pink Batts, rather than tax relief and/or supply side reform, as occurred for instance in New Zealand," the paper says.

"Largely implemented after the worst of the crisis had passed, fiscal stimulus countered the effectiveness of monetary policy by keeping market interest rates higher than otherwise and therefore contributed to a strong exchange rate. This worsened Australia's international competitiveness and damaged industries in the internationally exposed sector, particularly manufacturing."

Australia is one of the few countries in the developed world to have escaped recession during the crisis that began in 2008. Others, including New Zealand, did not.

Professor Makin has previously been taken to task by the Treasury for his criticism of economic stimulus during the crisis, which it said was "based on a theoretical model that does not apply in Australia's case in general and assumptions that did not hold during the global financial crisis".

The status of his new paper is unclear. It is dated August 2016 but did not appear on a Treasury website until late Friday morning after requests for it and after two newspapers were apparently given early access to it. Even then, it wasn't placed on the Treasury website itself but on as lesser-known site entitled "Treasury Research Institute" which the treasury says was established earlier this year to report on "topics of interest to Treasury to encourage work or collaboration with Treasury".

Only on Friday afternoon did the treasury create a link to the Treasury Research Institute from its homepage. It said the institute would "regularly publish papers to the site on topical economic and policy issues, written by both external contributors and staff".

Labor treasury spokesman Chris Bowen said he would write to the secretary to the Treasury, John Fraser, to ask why he commissioned work by a "well-known ideological opponent of the stimulus package".

He said its release seemed to have been designed to distract attention from government's backflips over energy policy and to preempt calls for further stimulus in the wake of national accounts figures showing the economy going backwards.

On Wednesday, Treasurer Scott Morrison attacked Labor's spending during the crisis, saying: "They gave money to dead people and thought that was going to grow the economy; that was a nonsense".

Mr Bowen said the Treasurer ought to be concentrating on the present rather than the past.

At the time, the Organisation for Economic Cooperation and Development and other international bodies had praised Australia's response to the crisis as "one of the best designed and implemented in the world".

In The Age and Sydney Morning Herald

Thursday, December 08, 2016

Recession? We're not even close

What if there was a recession, and no one noticed?

It's entirely possible. We don't normally think of the 2000 Sydney Olympics as a particularly bad time, yet in the June and September quarters of that year GDP slipped 0.4 per cent. As it happened, in the first of those quarters GDP barely grew, by a rounding error of $423 million, and in the second it slid $1.1 billion.

If GDP in the June quarter had been just $424 million worse, or if in future years it is revised down by $424 million, the year of our Olympic glory would become "officially" a recession and that quarter of a century without a recession wouldn't have happened.

In fact, that's already happened. GDP numbers are being revised all the time. A few years back the Bureau of Statistics was saying the economy shrank 0.02 per cent in the September quarter of 2000 and by 0.4 per cent in the December quarter, a "technical recession" under John Howard and Peter Costello, which was then revised away again.

In the US they're nowhere near as silly. Over there, there is no such thing as a technical recession until a group of elders say so. A committee of the National Bureau of Economic Research gets together, takes wide soundings and then issues a proclamation.

As it says on its website, "The Bureau does not define a recession in terms of two consecutive quarters of decline in real gross domestic product. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

In the past it's declared recessions ended before we would have said they ended, and declared them started after we would have been calling the recession technical.

And, just as in the Olympics year of 2000, what we've got now doesn't feel like the start of a recession and doesn't feel much like a downturn.

GDP fell by 0.5 per cent in the September quarter, leaving Scott Morrison and Malcolm Turnbull looking silly after an election campaign that promised jobs and growth. As slides go it was big, bigger than the slide of 0.2 per cent in the March quarter of 2011 when a cyclone in Queensland wrecked the banana crop. But that didn't seem that bad, unless you worked in one of the industries affected.

One of the reasons it doesn't feel that bad for many of us this time is that during the same quarter, employment (hours worked) climbed 0.5 per cent and the best measure of living standards (real net national disposable income per head) also climbed 0.5 per cent.

Living standards can climb while GDP falls because the two measure different things. GDP growth takes no account of changing export prices. Right now they are rising. Nor does it take account of interest and dividend income enjoyed by Australians earned overseas. Of late that's been rising. The truer measure, real net national disposable income, is climbing, even when it is shared among a growing population.

If the December quarter GDP growth is similar to the September quarter GDP growth, we'll be in what some call a technical recession, but we needn't be worse off.

Although some of us will be. Unacknowledged in the GDP figures is a shocking difference in conditions in the cities and the country. Calculations by Terry Rawnsley of SGS Economics and Planning for Fairfax Media suggest that during 2015-16, boom-time Sydney's enjoyed economic growth of 4.5 per cent and Melbourne 4.4 per cent. But the rest of NSW (including several major cities) grew by just 0.4 per cent over year while rest of Victoria shrank 1 per cent.

Even if GDP does shrink for a second consecutive quarter, the Treasury and the Reserve Bank are likely to "look through" the reported numbers to focus on what's happening beneath them. The bad news is this means there might not be further interest rate cuts to stave off recession even if the figures show we are in one. And they could.

Business investment slid enough in the September quarter to knock 0.4 per cent off GDP. There's no particular reason to think it won't slide again. The Reserve Bank believes 80 per cent of the slide in mining investment is behind us, but that still leaves a lot to come.

The downturn in construction, which knocked 0.3 per cent off GDP, might also continue, but the 0.1 per cent which was the result of sliding residential construction probably won't continue. The Bureau of Statistics reports on a very big 'pipeline' of residential construction commissioned but yet to be done. If the weather is better in the December quarter, a lot of it will be.

Early indications from retailers are that October and November were good, and government investment (in helicopters and submarines and the like) is so unpredictable that anything could happen.

And mere talk of a recession could make something happen, as could the inauguration of Donald Trump. But this doesn't mean that things are necessarily bad, yet.

If we hadn't heard the news, many of us mightn't have noticed.

In The Age and Sydney Morning Herald

Monday, December 05, 2016

Melbourne rides high while rest of state goes backwards

Victoria has become Australia's most divided state as the economic fortunes of Melbourne soar while those in the rest of the state crumble faster than anywhere else in the nation.

New calculations of capital city and rest-of-state economic growth derived from the national accounts show Melbourne's economy grew at a blistering 4.4 per cent in 2015-16, faster than anywhere else apart from Sydney, whose economy grew 4.5 per cent.

The economy of regional Victoria shrank for the fourth consecutive year, slipping another 1 per cent in response to a sharp decline in manufacturing. Victoria is the only state whose regional economy went backwards in 2015-16.

SGS Economics and Planning, which calculates the capital city and rest-of-state figures annually, says GDP per capita in regional Victoria has collapsed 8 per cent since it peaked in 2006-07. Manufacturing in regional Victoria has collapsed 26 per cent since 2009-10.

Manufacturing has also collapsed in Melbourne. Calculations by SGS Economics show it accounted for 16 per cent of Melbourne's economy in 1996 and only 7 per cent by 2016. But financial services and professional services have filled much of the gap, accounting for 13 per cent of the economy in 2016 (up from 10 per cent) and for 9 per cent (up from 6 per cent).

Healthcare and construction have also become more important to Melbourne, accounting for 7 per cent of its economy (up from 5 per cent) and 6 per cent (up from 4.5 per cent).

In regional Victoria, other industries have failed to take up the slack left by manufacturing, and further plant closures are imminent, among them Ford in Geelong, the Alcoa plant at Anglesea and the Hazelwood power station in the Latrobe Valley.

This is no surprise to Latrobe Valley resident Graeme Middlemiss, who lists a range of closures, or cutbacks, that have left local workers jobless.

He starts the list with a briquettes manufacturer in Morwell. "It steadily declined from about 600 employees down to about 100 and then closed - and most of those people haven't been able to find work," he said.

The Morwell briquettes factory closed in 2014, not long after the closure of the neighbouring Australian Char site, with the loss of about 50 jobs. Job losses have also occurred in mid-sized and smaller businesses such as in steel fabrication, he said.

The former power station worker, who is a Latrobe City councillor, said there were noticeable signs that the local economy was declining.

"The first thing that's apparent is there is not as much discretionary income in the community as there once was. Wages are lower, unemployment is higher - so what people have to spend is reduced," he said.

"My understanding is that our local economy, here in the Latrobe Valley, has been declining at about 2 per cent per annum for a number of years. Of course, that will be made much worse with the announced closure of the Hazelwood power station," he said.

The much poorer performance of the regional economy had accelerated the drift of country kids to the city in search of work, he said.

"Anecdotally, the young people in my region are finding it harder and harder to find meaningful work. So what it does is it puts pressure on these people to go to the city to find work," he said.

Victoria has become Australia's most centralised state, with 81 per cent of its economic activity taking place in Melbourne. In NSW, only 75 per cent takes place in Sydney. Even in highly centralised South Australia, 33 per cent takes place outside of Adelaide.

GDP per person in regional Victoria has slipped to $49,000, down from an inflation-adjusted $53,000 nine years ago. GDP per person in Melbourne has climbed to an all-time high of $65,000.

"I can't see the trend reversing, at least in the short-term," said SGS economist Terry Rawnsley, a specialist in national accounts who devised the city and rest-of-state accounts and used to produce the Australia-wide and state accounts while at the Bureau of Statistics.

"I can't see the Alcoa reopening, I can't see Ford reopening. The big centres, Geelong and Bendigo and Ballarat, need to work out what they are good at and get strong transport links to Melbourne.

"What they call the very fast train to Bendigo and Ballarat, which only goes at about 80 kilometres per hour, even that has helped Bendigo become a commuter town, which has helped the local economy because people spend money at home that they have earned in Melbourne.

Dr Rawnsley's calculations show regional Victoria deteriorating faster relative to Melbourne than it did when Jeff Kennett lost office in 1999 amid concern he was focusing too much on Melbourne.

Treasurer Tim Pallas said he recognised there were challenges in regional Victoria, "especially for those regions in transition, and after four years of inaction by the previous Liberal-National Government".

He said he was making record investments in regional rail, roads, hospitals and education, spending $2 billion in 2016-17, including $1.3 billion on regional rail. The $200 million Regional Health Infrastructure Fund would fund works and planning in Horsham, Port Fairy and Warragul. The budget set aside $169 million to reconfigure the Goulburn Valley Health service to meet the demands of a growing population.

Dr Rawnsley said so stark had the divide between city and the rest become that if the Reserve Bank made its decisions only for regional Victoria, it would need to cut its cash rate to 0.25 per cent. If it made them only for Melbourne, it would have to lift its cash rate from 1.5 to 2.25 per cent.

In The Age and Sydney Morning Herald

Sunday, December 04, 2016

Cheap wine is better, but hide the bottle

I get anxious going into bottle shops. That's partly because I was brought up Methodist, and partly because I never pick the right thing. If I spend too much, I'll be wasting my money; if I spend too little, my guests will think I'm serving rubbish. And to me, it's all the same.

The reassuring if depressing news from the American Association of Wine Economists is that I'm not alone. (Yes, there is such a group.) One of the most widely cited papers in its Journal of Wine Economics is "Nothing Good Ever Came from New Jersey: Expectations and the Sensory Perception of Wines".

In the first test they gave "experienced wine professionals" reds from New Jersey and California and asked them to tell the difference. They had been told nothing about where the reds came from and couldn't. But in the second they told the tasters that some (but not which) of the wines came from New Jersey. The professionals became dogmatic, saying that the wine they thought was from New Jersey was plainly inferior, even if it was really from California. They still couldn't pick which was which.

In Predictably Irrational, economist Dan Ariely describes how he gave students two small samples of beer and asked which they would like in a larger glass. One of the samples had vinegar added. The students rated each pretty well. Then he ran the experiment again, this time telling the students one of the samples contained vinegar. They picked the one they thought it was, and hated it.

Back to price. Ariely gave students electrical shocks, asked them how much they hurt, then handed out tablets to "relieve the pain" (which actually were vitamin C tablets). They worked, but what really worked was the price. If the students were told they were expensive, they worked extremely well. If they were told they were cheap, they were less effective.

Which is where wine comes in. Study after study finds that more expensive wines taste better, when people know they are more expensive. When they don't, the shocking finding from an analysis of 6000 tastings entitled "Do More Expensive Wines Taste Better?" is that, "on average, individuals who are unaware of the price do not derive more enjoyment from more expensive wine. In fact, they enjoy more expensive wines slightly less".

It bears repeating: on average, people unaware of the price enjoy expensive wines slightly less. If price is a guide, it's a guide for what not to buy.

Curiously, there was one small group which enjoyed what turned out to be the most expensive wines slightly more. They were wine experts; which is only half reassuring. They are experts at something, but it's not predicting what you and I will like.

My best advice (and I'm the worst person to give this sort of advice) is to race in, get something cheap, get out, and pour it into better looking bottles. Your guests will be doubly grateful.

In The Age and Sydney Morning Herald

Saturday, December 03, 2016

The first industrial revolution could have turned out badly

The first industrial revolution could have turned out badly.

That it didn't, that it created prosperity rather than destroyed jobs, has forever since given technophiles and free-market economists a licence to rubbish anyone who complains about jobs and incomes vanishing as a result of technology, even if they are right.

That's the concern of 64-year-old Kaushik Basu, an Indian economist and expert in game theory who was until a few weeks ago chief economist of the World Bank.

At Melbourne's Monash University this week to renew contacts before returning to Cornell University where he will specialise in macroeconomic research, he says the declining importance of paid work is one of the few things that worries him more than President-elect Donald Trump. In fact, he believes it's behind the rise of President-elect Trump.

Basu says throughout advanced economies the share of national income paid out as wages has dropped precipitously since the start of the information technology and automation revolutions that began in the mid-1970s, the first time this has happened in modern history.

The Australian Bureau of Statistics says the wages share of GDP has fallen from 58 per cent in 1975 to 49 per cent today ahead of the next update due on Wednesday.

In the USnited States it has slid from 61 to 57 per cent and in Britainthe United Kingdom from 69 to 56 per cent. Most of what isn't taken out as wages is taken out as profits. Automation, offshoring and glacial wage growth have kept a greater share for profits, meaning that in the in the US at least, there's been no real growth in the median wage for for decades.

History not repeating

That isn't what happened the first time around, in the great British industrial revolution from the mid 1700s to the mid 1800s, but in his cramped temporary office at Monash, Basu tells BusinessDay that it might have.

"During the industrial revolution it was common for workers to work 12 hours a day, 14 hours a day. Industrialists were patenting spinning machines that could be operated by children as young as five5. Reformers who argued in Parliament for reduced hours and protections were told that poor conditions built character."

The reformers won, on the floor of Parliament. But Basu's point is they need not have.

"People very often say: 'Why are you worried about today, we went through the industrial revolution and we came out fine, we are better off'. What they overlook is that it took dramatic changes in our thinking. That's why the industrial revolution did not cause catastrophe and realised its potential benefits.

"These days offshoring and automation are seen as a labour versus labour dispute – workers in Australia or the US versus workers in emerging economies. What's overlooked is that every time labour is outsourced profits in the country goes up and the wage share goes down.

"It's actually a labour versus capital issue. Workers don't realise this, and engage in hypernationalism or vote for people like Trump in a bid to return things to how they were."

Balance needed

What Basu thinks we should be doing is restoring the balance between labour and capital.

"It can't be done by boosting wages – that'll simply send more to the Philippines. What we need, and this is early thinking, but a number of people are writing beautifully about it, is a mechanism that will share profits."

He says if just $1 in every $10 of profit was retained for distribution to to workers, that would leave $9 in every $10 for the owners of capital, more than enough to maintain incentives.

It's similar to thinking behind Australia's aborted mining super-profits tax, except that those proceeds were to be retained by the government rather than distributed to workers.

Without it, without taking this radical idea as seriously as was taken the radical idea of spreading the benefits of the first industrial revolution, there's a chance ordinary citizens will end up worse off after this revolution than they were at the start of it.

"We are reaching a stage in the world where we have to think of these things seriously," he says.

"Without the same type of action as took place in that revolution, this one could leave workers worse off."

Basu thought the global economic outlook was "grim" even before the election of President-elect Trump. Now he thinks it is also unknowable.

If Trump sequences things right, it might be OKokay. If he quickly boosts infrastructure spending as promised he could lift US economic growth from 1.5 per cent to 3 per cent. Only several years on, after the budget had been replenished, would he be able to afford his promised tax cuts. And his threatened trade and currency wars are too awful to contemplate.

Basu finds much of what's ahead too awful to contemplate. But he says we should.

In The Age and Sydney Morning Herald

Thursday, December 01, 2016

How to help first home buyers, while keeping negative gearing

Malcolm Turnbull made the wrong call defending negative gearing in order to get re-elected. He needs to crawl back slowly. There's no shortage of people on his own side telling him to.

The latest is Jeff Kennett, who was Victorian premier just as negative gearing began to take off at the end of the 1990s. On Wednesday he tweeted: "It is inevitable that the rules affecting negative gearing will change – have a responsible bipartisan discussion in 2017." Victoria's present Treasurer, Tim Pallas, will echo Kennett at a round table of treasurers on Friday.

"It's all very well the feds telling us we need to boost supply, but whenever we do, their negative gearing and capital gains tax rules direct much of it away from first home buyers towards investors," he says he will tell the meeting.

The NSW Coalition Planning Minister and Premier agree with him, saying they can't see why someone buying a second house should get a tax deduction a first home buyer does not.

Graph the proportion of home loans going to investors since the early 1990s (which is as far back as the figures go) and you'll find out it began at 16 per cent, then climbed to almost 40 per cent, before soaring to nearly 50 per cent after the headline rate of capital gains tax was halved and negative gearing exploded. Would-be owner-occupiers (let's call them genuine home buyers) went from having not much competition to having half of all the money lent for housing amassed against them.

Then things improved for a while, especially during the global financial crisis when investors baled out, before lending to investors grew again and soared back way above 50 per cent to a record 55 per cent, at which point the Australian Prudential Regulation Authority (APRA) intervened to impose tougher rules on banks lending to investors, knocking the proportion back to 44 per cent. But it's growing again, and is again approaching 50 per cent.

John Alexander is the Coalition MP who chaired the inquiry in which the Reserve Bank's head of financial stability explained that it was "a truism that if an investor is buying a property an owner-occupier is not".

The inquiry was sidelined in the election campaign but has been reopened and will report by Christmas. Which is where it gets fascinating. Turnbull and Morrison are genuinely concerned about the inability of ordinary Australians to buy houses and are open to ideas.

So long as they can stick to their stated positions that they won't change the capital gains and negative gearing rules, they would be more than happy to introduce changes that would hold back investors and reskew the housing market toward genuine buyers at more reasonable prices, returning the Liberal Party to its historical position of championing a home ownership rate that was the envy of the world.

Within the Coalition's housing work group Alexander has been tossing around an extraordinary scheme derived from the hearings that has the potential to guarantee it the next election.

It's in three parts: The first would require APRA to continually adjust the rules governing how easily banks could lend to investors, each month; just as the Reserve Bank adjusts interest rates each month. But rather than targeting consumer price inflation as the Reserve Bank does, APRA would target house price inflation. Too much – perhaps more than doubling every 10 years – and it would make it harder to lend to investors, too little and it would be more generous. Home price growth would become predictable rather than scary.

The second part would be to advantage genuine buyers. Right now they are required to pump 9.5 per cent of their wages into superannuation. Instead they could allocate that 9.5 per cent to pay off the principal (but not the interest) on home loans, meaning they probably wouldn't need deposits and could start buying early. The usual criticism of any measure that advantages first or genuine homebuyers is that it would push up prices leaving them no better off. But this wouldn't, because of the role of APRA in restraining loans to investors to restrain price rises. It would just tilt the market back towards owner-occupiers.

The super funds would be upset, especially the union-dominated default funds, but they are not the Coalition's concern. The money put into owner-occupied housing instead of super would buy those who chose to do it more security than could super. Which brings us to part three.

Because part of the homes would be owned as "superannuation", that part would count toward the pension means test, keeping a lid on the cost of the pension. And because steadily increasing home prices would be as good as guaranteed, those increases could be borrowed against to fund fortnightly payments in retirement. For someone who bought a house at 25 and then retired at 65, the payments would be big.

It's a genuinely innovative idea, and it needs a lot more discussion. But if Turnbull could pull it off, or something like it, he would stand a chance of becoming the greatest Australian prime minister since Menzies. That's why he is listening.

In The Age and Sydney Morning Herald