Wednesday, February 24, 2021

One of these things is not like the others: why Facebook is beyond our control

What’s the difference between Google and Facebook?

One difference is that last week Google agreed to pay Australian news outlets for their content in the face of a threat of government action to force it to.

Facebook did not, temporarily removing Australian news sources from its feeds, a decision it only reversed after winning a range of concessions.

Another is the reason why.

It’s that Google faces competition, whereas Facebook really doesn’t.

In economists’ language, that’s because Facebook enjoys a rare “network effect”, Google scarcely at all.

If I want to switch from Google to another search engine (something I’ve done) it costs me next to nothing. I might find it hard to move my search history over (although there’s probably an app for that) but otherwise the new search engine will either be better, worse or about the same as the one I left. I’m free to find out.

Google faces competition

It means that Google is forced to defend itself from competition (or the threat of competition) by providing an extraordinarily good service.

Not so Facebook. Although a relatively new concept in economics, the idea of a network effect dates back to at least 1908 when the president of the American Telephone and Telegraph Company, Theodore Vail, spelled it out in a letter to stockholders.

“A telephone, without a connection at the other end of the line, is not even a toy or a scientific instrument,” he wrote. “It is one of the most useless things in the world. Its value depends on the connection with the other telephone — and increases with the number of connections.”

Facebook faces hardly any

The idea has since been expressed in a mathematical formula, but there’s no need to get into details. The world’s first telephone was indeed useless, the second allowed one household to reach only one other. But by the time there were millions, and almost every household had one, each telephone became incredibly valuable, allowing that household to reach almost every other household.

A startup that tried to compete with the phone system would be offering a very unappealing product. It wouldn’t be able to offer anything like the connections of the existing system until a huge proportion of the population signed up, meaning people would be reluctant to sign up, meaning it would stay unappealing.

Read more: We allowed Facebook to grow big by worrying about the wrong thing

Which is the point Vail was making. When it gets big enough, the telephone service is something close to a natural monopoly. There’s no point in anyone setting up a competing one (and in Australia we haven’t — the competing companies, Telstra, Optus and so on, share the one network).

The ASX stock exchange is another example, as is eBay. You could try to sell something on a different platform, but you wouldn’t reach nearly as many potential customers, so you mightn’t get as good a price.

The Australian Competition and Consumer Commission puts it this way in its report on Facebook: even if the government made it easier for a user to switch to another network, perhaps by mandating the transfer of data,

if none of the user’s friends or family are moving away from Facebook, that user would be unlikely to switch platforms

The “lock in” that happens when a network gets so big people feel they have to use it means it doesn’t have to treat them particularly well to get them to stay.

Seventeen million Australians use Facebook every four weeks — a huge proportion of the population, and an even bigger proportion of the population aged over 14 (80%).

Without Facebook, it would be hard to know what family and friends and long-lost classmates are up to — whether or not Facebook offers news. It doesn’t need to treat its users particularly well to get them to stay.

Facebook isn’t quite like the phone system. Young people find the fact that so many old people can use it to check up on them a turn-off and go elsewhere. But for the Australians already on it (that’s most Australians) it’s worth staying.

And there’s room for smaller specialised networks.

Linkedin has its own network for people concerned about the jobs market. If that’s the world you’re in, it’s wise to be on it because of the huge number of other such people who are on it. There’s not much point leaving it for something else.

Winner take all

It wasn’t always that way for Facebook. Fifteen years ago MySpace was how people connected, but not that many of them — it hadn’t grown to the point where network effects took over. When they did, there could be only one clear winner, and it happened to be Facebook.

Now not even its bad behaviour (Roy Morgan finds it is Australia’s least-trusted brand) can stop most people using it.

In the same way as people who want the lights on generally have to use the electricity company, people who want to catch trains generally have to use the railway and people who want to drive cars generally have to buy petrol, people who want to stay in touch generally have to use Facebook.

Which makes the government’s decision to remove its vaccination advertising campaign from Facebook silly. Facebook reaches 80% of its target audience.

Facebook has become a (trans-national) utility, unconcerned about its image. Attempts by one government, or even a coalition of governments, to force it to do anything are pretty much a lost cause.

No-one wanted it to be like this, and it’s not like this for Google. Facebook has moved beyond our control.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, February 17, 2021

The TV networks holding back Australia's future

If I offered you money for something, an offer you didn’t have to accept, would you call it a grab?

What if I actually owned the thing I offered you money for, and the offer was more of a gentle inquiry?

Welcome to the world of television, where the government (which actually owns the broadcast spectrum) can offer networks the opportunity to hand back a part of it, in return for generous compensation, and get accused of a “spectrum grab”.

If the minister, Paul Fletcher, hadn’t previously worked in the industry (he was a director at Optus) he wouldn’t have believed it.

Here’s what happened. The networks have been sitting on more broadcast spectrum (radio frequencies) than they need since 2001.

That’s when TV went digital in order to free up space for emerging uses such as mobile phones.

Pre-digital, each station needed a lot of spectrum — seven megahertz, plus another seven (and at times another seven) for fill-in transmitters in nearby areas.

It meant that in major cities it took far more spectrum to deliver the five TV channels than Telstra plans to use for its entire 5G phone and internet work.

Digital meant each channel would only need two megahertz to do what it did before, a huge saving Prime Minister John Howard was reluctant to pick up.

His own department told him 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

His Office of Asset Sales labelled the idea of giving them the full seven a

de facto further grant of a valuable public asset to existing commercial interests

Seven, Nine and Ten got the de facto grant, and after an uninspiring half decade of using it to broadcast little-watched high definition versions of their main channels, used it instead to broadcast little-watched extra channels with names like 10 Shake, 9Rush and 7TWO.

Micro-channels are better delivered by the internet

TV broadcasts are actually a good use of spectrum where masses of people need to watch the same thing at once. They use less of broadcast bandwidth than would the same number of streams delivered through the air by services such as Netflix.

But when they are little-watched (10 Shake got 0.4% of the viewing audience in prime time last week, an average of about 10,000 people Australia-wide) the bandwidth is much better used allowing people to watch what they want.

Read more: Broad reform of FTA television is needed to save the ABC

It’s why the government is kicking community television off the air. Like 10 Shake, its viewers can be counted in thousands and easily serviced by the net.

The government’s last big auction of freed-up television spectrum in 2013 raised A$1.9 billion, and that was for leases, that expire in 2029.

Among the buyers were Telstra, Optus and TPG.

The successful bidders for leases on vacated television spectrum in 2013. Australian Communications and Media Authority

The money now on offer, and the exploding need for spectrum, is why last November Fletcher decided to have another go.

Rather than kick the networks off what they’ve been hogging (as he is doing with community TV) he offered them what on the face of it is an astoundingly generous deal.

Any networks that want to can agree to combine their allocations, using new compression technology to broadcast about as many channels as before from a shared facility, freeing up what might be a total of 84 megahertz for high-value communications. Any that don’t, don’t need to.

All the networks need to do is share

The deal would only go ahead if at least two commercial licence holders in each licence area signed up. At that point the ABC and SBS would combine their allocations and the commercial networks would be freed of the $41 million they currently pay in annual licence fees, forever.

That’s right. From then on, they would be guaranteed enough spectrum to do about what they did before, except for free, plus a range of other benefits

The near-instant reaction, in a letter signed by the heads of each of the regional networks, was to say no, they didn’t want to share. The plan was “simply a grab for spectrum to bolster the federal government’s coffers”.

And sharing’s not that hard

It’s not as if the networks own the spectrum (they don’t) and it’s not as if they are normally reluctant to share — they share just about everything.

For two decades they’ve shared their transmission towers, and for 18 months Nine and Seven have been playing out their programs from the same centre.

That’s right. Nine and Seven use the same computers, same operators, same desks, to play programs.

One day it is entirely possible that a Seven promo or ad will accidentally go to air on Nine, just as a few years back some pages from the Sydney Morning Herald were accidentally printed in the Daily Telegraph, whose printing plants it makes use of.

All the minister is asking is for them to share something else, what Australia’s treasury describes as a “scarce resource of high value to Australian society”.

There’s a good case for going further, taking almost all broadcasting off the air and putting it online, or sending it out by direct-to-home satellite, removing the need for bandwidth-hogging fill-in transmitters.

Seven, Nine and Ten have yet to respond. Indications are they’re not much more positive than their regional cousins, although more polite. They’re standing in the way of progress.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, February 10, 2021

That extra you're about to get in super, most of it will come from you, but don't expect the ads to tell you that

There’s something odd about those television and internet advertisements telling us we are getting more super.

The money seems to come from nowhere.

“Pretty soon,” explains the woman getting onto an escalator, “the amount of super paid on top of our wages will go up”.

Fair enough, but the increases in compulsory super contributions will come out of the same bucket as wages – so-called on-costs which employers use to pay wage cheques, workers compensation, payroll tax, employees pay-as-you-go tax, and employees super contributions, which is also known as the “super guarantee”.

Read more: Retirement incomes review finds problems more super won't solve

The ad is a bit like those promising buyers of mobile phones the “free gift” of an accessory. It has to be paid for somehow, and it’s usually out of the purchase price.

Paul Keating, prime minister when compulsory super was introduced in 1992, put it this way in a reflection on the history of modern superannuation in 2007

the cost of superannuation was never borne by employers. It was absorbed into the overall wage cost

Last year’s retirement income review examined every study that had ever been conducted on the topic and concluded that the “weight of evidence suggests the majority of increases in the super guarantee come at the expense of growth in wages”.

A more informative advertisement would have referred to super “paid on top of our wages, at the expense of our wages”.

The ads are funded by Industry Super, which represents the big funds that want to manage the extra super. There’s no reason for them to tell the whole story.

They’re the start of a campaign to get the government to actually deliver the five legislated increases of 0.5% of salary starting in July that are scheduled to take compulsory super from 9.5% of salary to 12% over five years, and they are about to get more aggressive.

An extra half a percent of salary into super each year for five years culminating in an extra 2.5% would be a big ask at any time, but in the present circumstances it is worth considering how a COVID-affected employer might respond.

That employer has choices. It could shave each of the next five annual wage increases so that it won’t end up paying out more than it would have.

Or it could eat into profits (which is difficult if it is barely surviving), or attempt to put up prices (which is also difficult at the moment) or it could shave its wage bill by letting go of staff.

Read more: Australia's top economists oppose the next increases in compulsory super: new poll

In normal circumstances the first is the most likely, although in the circumstances we are in, and given the scale of the increases proposed, economists don’t rule out some of the last - letting go of staff.

The less employers expand employment or the less they increase wages, the less will be spent on their products, giving them even less money for wages. Household saving is already at unprecedented highs.

Most of us save enough, some too much

These downsides might be worth putting up with if we needed the extra super, but the November retirement income review found that – to the surprise of some – we don’t.

High earners have always saved enough for retirement, originally outside of super and now inside of it, making very large extra contributions on top of what’s compulsory in order to take advantage of the tax benefits.

Low earners earn so little while working that the cocktail of super, the pension and private savings gives them about as much or more per year in retirement as they got while working, albeit partly funded at the expense of wages while they are working.

Read more: Home ownership and super are far more entwined than you might think

The review found that if the increases in compulsory super proceed as planned, the bottom one third of retirees will get more than they got while working.

International benchmarks suggest most non-renters need only 65-75% of what they got while working, because they face far fewer of the costs they faced in their working lives including paying off a home, saving for retirement, raising and educating children, and commuting.

If the legislated increases in compulsory super go ahead, an astounding two-thirds of Australian retirees will get more than that benchmark. They will have been enriched in retirement at the expense of their living standard while working.

Retirement Income Review

So where does the target of 12% salary locked away in super come from? You might be forgiven for thinking it was adopted after an independent review, and you’d be partly right.

The 2009 retirement income system review conducted as part of the Henry Tax Review examined the right amount of super and concluded that “the superannuation guarantee rate should remain at 9 per cent”.

Yet as the review’s final report endorsing that conclusion was being released on May 2, 2010 Prime Minister Kevin Rudd and Treasurer Wayne Swan announced that “the superannuation guarantee will be gradually increased to 12 per cent, implying that decision derived from the review.

12% is not what was recommended

It didn’t derive from the review, but the hubbub over the mining tax announced at the same time meant that few people noticed.

The best thing to do would be to abandon the 12% target. It’s neither something we need nor something that would help us at the moment.

But if the super lobby makes that hard, I’ve another idea. It’s to allow the increase to proceed - an extra 0.5% of salary from each employer per year, amounting to 2.5% of salary after five years - but to give workers the option of having it directed instead to their wage account. For an employer, it’ll make no difference which account it goes to.

For Australians short of income at the time they need it, and an economy needing wages and spending, it might make a difference.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, February 03, 2021

Governor not for turning. No rate hike until unemployment near 4.5%

Reserve Bank governor Philip Lowe’s message to the nation today through the National Press Club is that he means it.

He isn’t intending to push up interest rates – he most probably isn’t intending to even think about pushing up interest rates – until 2024, at the earliest.

That’s a full three years from now, at a time when, maybe, inflation will be strong enough to be “sustainably within” the Reserve Bank’s target band.

That’s the new benchmark, adopted by the bank in November.

It replaced an earlier loophole-ridden benchmark of “progress towards” an inflation rate of 2% to 3%, something that could have meant almost anything.

The bank will now need to see actual, sustainable, inflation of 2% to 3%, something those of us wanting some inflation haven’t seen for a decade.

Ultra-low rates til unemployment hits 4.5%

After the press club event I asked him what sort of unemployment rate we would need to see for that to happen. Was it still the 4.5% the bank has nominated in the past, or had COVID pushed it up?

Might less ambitious progress on unemployment do the trick?

He told he thought not. While it is impossible to be sure, something seemed to have changed around the world over the past ten years meaning it has become much harder to create inflation. He doubted whether an unemployment rate above 4.5% could do the trick.

Read more: The Reserve Bank might yet go negative

Lowe told the press club that while unemployment had come down far more quickly than the bank expected when it produced its previous set of forecasts in November, its new forecasts had unemployment slipping only from 6.6% to 6% over the course of this year, and then taking another 18 months to reach 5.25%

An unemployment rate below 5% is beyond the bank’s forecasting horizon.

That’s why it has undertaken to buy as many government bonds as are needed to keep the three-year bond rate at the bank’s current cash rate target of 0.10%, to make it clear that the cash rate will “be where it is for the next three years”.

‘Creating money electronically’

And there’s another reason for buying government bonds – to restrain the Australian dollar. On Tuesday Lowe announced plans to use a separate program to buy an additional A$100 billion of bonds between April and September.

Combined, the two bond-buying programs will depress Australian long-term interest rates and make foreigners less likely to buy Australian dollars to take advantage of higher rates here than overseas.

Asked directly whether the bank was printing money in order to buy government bonds, Lowe said it was, with the caveat that the modern way of doing things means the bank “creates the money electronically”.

Read more: A little ray of sunshine as 2021 economic survey points to brighter times ahead

While Lowe accepts that the JobKeeper wage subsidy will end at the end of March (“the government made it clear this was a temporary program”) he is extremely keen for governments at all levels to keep spending on infrastructure, saying if weren’t for public projects, non-mining investment would be bad indeed.

While the economy is recovering, and the bank is forecasting slightly stronger economic growth than The Conversation forecasting panel of 3.5% this year and the next, the economy is unlikely to return to the trajectory it was on before the crisis, perhaps ever.

Reserve Bank GDP forecasts, February 2021 and February 2020

Index numbers, December 2019 = 100. RBA, ABS

The bank is envisaging an economy 4% smaller than it would have been. As Lowe put it: “it’s a big number, there’s a big gap there”.

The governor isn’t worried by a likely “blip” in unemployment when JobKeeper comes off in March, but he is worried about what will happen to employment beyond that. The unemployment rate is “higher today than it has been for almost two decades and many people can’t get the hours of work they want”.

Even when the unemployment rate was low (in NSW it got “as it was in 1973” before the crisis) wage growth was weak.

JobSeeker a"fairness issue"

It would help to permanently lift the rate of the JobSeeker unemployment benefit on which a million Australians rely and which is due to return to the poverty-line level of $40 per day in April, although Lowe sees that not so much as an economic question but as a “fairness issue”.

“Different people legitimately have different views on the level of support stopping - my own view is that some increase is justifiable,” he told the press.

Read more: Vital Signs: Any talk about raising interest rates is a huge mistake

The levers he can control, interest rates, will say low for as long as is necessary.

He isn’t “guaranteeing” to keep them low until 2024 or beyond, but he is guaranteeing to keep them low until inflation is sustainably near 3%, something he doesn’t think will happen until unemployment touches 4.5%, something he thinks is most unlikely to happen before 2024.

“I’m not pledging”, he told the national press, “but I am giving you my best guess”.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Monday, February 01, 2021

A ray of sunshine as 2021 economic survey points to brighter times

Suddenly, economic forecasters are optimistic.

Six months ago the forecasting team assembled by The Conversation was expecting Australia’s recession to continue into 2021, sending the economy backwards a further 4.6% throughout the year.

This morning, in the survey prepared ahead of the Reserve Bank board’s first meeting for the year and an address by the Reserve Bank governor to the National Press Club on Wednesday, the same forecasting team is upbeat.

It expects the recovery that began in the September quarter of last year to continue, propelling the economy forward by a larger than normal 3.2% throughout 2021, with growth slowing to more sedate 2.1% per year by the middle of the decade, still well above than dismal 1.7% per year expected six months ago.

Read more: So far so good: MYEFO budget update shows recovery gathering pace

The unemployment rate is now expected to remain near its present 6.6% throughout 2021, instead of soaring to almost 10% as expected six months ago.

But improvement in the unemployment rate is expected to be slow, and as house prices and share market prices climb, most of the panel expect the Reserve Bank to lose its patience and begin to lift interest rates from their emergency lows before the end of next year, ahead of its published schedule.

The 21-person forecasting panel includes university-based macroeconomists, economic modellers, former Treasury, IMF, OECD, Reserve Bank and financial market economists, and a former member of the Reserve Bank board.

Economic growth

Only two of the panel expect the economy to shrink further in 2021.

The rest expect the economy to grow, two of the panel by at least 5%, something that isn’t out of the question given that the economy shrank by 7% during the worst three months of the 2020 coronavirus restrictions and clawed back only 3.3% in the three months that followed.

Panellist Saul Eslake who forecast growth of 3.5% in 2021 six months ago is now forecasting growth of 5.25%, saying the transition away from JobKeeper and other supports has been going more smoothly and the property market and residential building market have holding up much better than he had expected.

Growth will be constrained by unusually slow population growth, a gradual tightening of government purse strings and anticipation of higher interest rates.

China’s 2021 growth, expected to be 4% six months ago, is now expected to be 6.3% as it reaps the fruits of having recovered early from its coronavirus crisis with its production systems intact. Panellist Warren Hogan cautions that longer term China is likely to place less importance on economic growth and more on military adventurism.

The continuing COVID crisis in the United States is expected to push its recovery out into the second half of the year as vaccination programs and President Biden’s stimulus measures take hold.


Although few on the panel expect unemployment to get much worse, most believe it will be many years before the unemployment rate shrinks to the 4.5% to 5% the Reserve Bank has adopted as a target.

Panellist Julie Toth says the end of JobKeeper in March will reduce the ability of struggling businesses to keep their employees. Closed boarders mean skill mismatches and shortages will grow alongside persistent unemployment and underemployment.

Other panellists warn of a “jobless recovery” as large organisations that held onto labour during the crisis start to shed staff as part of digitisation programs.

Living standards

Annual wage growth, at present a minuscule 1.4% – the lowest in the 23 year history of the index – is not expected to improve at all in the year ahead, ending 2021 at 1.4%.

At the same time annual inflation is expected to climb from last year’s unusually low 0.9% to 1.6%, putting it above wage growth for the first calendar year on record, sending the buying power of wages backwards.

A broader measure of living standards, real net national disposable income per capita, which takes account of the hours worked in each job and other sources of income, is expected to continue to climb in 2021, continuing the recovery begun in last year’s September quarter after the precipitous slide of 8% during the first half of last year.

Household spending is expected to climb a further 3.4% in real terms, continuing the recovery begun in the September quarter after a slide of 13.8% in the first half of last year.

Interest rates

The panel expects the Reserve Bank to lift its cash rate from the present all-time low of 0.10% well ahead of the “at least three years” timeframe set out by the bank.

The bank had promised not increase the cash rate until actual inflation was “sustainably within” its 2% to 3% target range.

And it had moved the three-year bond rate to 0.10% as a sign that it expected the cash rate to stay at 0.10% for at least three years.

Although few on the panel expect inflation to climb back to the Reserve Bank’s target range by the end of next year, most expect the bank to begin to lift its cash rate by then.

The Conversation, CC BY-ND

Panellist Mark Crosby says rising home and other asset prices will put the bank under pressure to backtrack on its commitment in the knowledge that the economy is in a position to withstand more normal rates.

Long-term interest rates are already higher than they were at the start of this year.

The panel expects the ten-year benchmark used to set the rates at which the government can borrow to gradually climb from last year’s all-time lows.

Asset prices

Sydney home prices are expected to climb 4.9% after climbing 2.7% in COVID-hit 2020. Melbourne prices are expected to climb a lesser 4.4% after slipping 1.3%.

Saul Eslake says Melbourne’s economy has been far more reliant on interstate and international migration than any other part of Australia and has damaged its image as a desirable destination by its handling of the pandemic.

Other panellists draw a distinction between apartment price growth, which should be weak because of lower demand for international student rentals, and freestanding home prices which should be supported by an implicit Reserve Bank guarantee of three years of ultra-low interest rates.

The panel expects housing investment to climb 3.8% after falling 5% during the first nine months of 2020.

The Australian share market collapsed 37% in just over a month in the early weeks of the coronavirus crisis and spent the rest of 2020 recovering.

Although opinion is split about 2021, the panel’s average forecast is for growth of 3.5%

Panellist Mala Raghavan says low interest rates are forcing long term investors to take positions in companies with strong fundamentals. Craig Emerson says he expects the equities bubble to burst at some point, but probably not while low interest rates continue.

At US$160 a tonne, the iron ore price has almost doubled since the start of 2020.

On balance the panel expects it to ease to US$133 throughout 2O21, noting that at some point Brazil is going to return to full production after a series of dam collapses and pandemic-related problems. China is thought to prefer to buy from Brazil.


The panel expects Australian businesses to find any lift in the share market and consumer spending uninspiring.

After collapsing 24% in the first nine months of 2020 the panel expects non-mining business investment to climb by only 2% in 2021 and 3.1% in 2022.

It cites low immigration and uncertainty over COVID and the shape of new business practices as more important in determining investment decisions than the government’s generous tax incentives.


The panel’s central budget deficit forecasts are not too far from the latest government forecasts released in December at A$192 billion in 2020-21 and $114 billion in 2021-22.

Panellists note that the government will have little opportunity to restrain spending in the lead up to the election and will be under pressure to boost the JobSeeker unemployment benefit which is due to sink back to its pre-COVID level on April 1.

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.