Rupert moves minds? Sure, if you already agree with him

ABC 891 Adelaide September 18 2013 Right click to download




Ray Hadley holds two apparently contradictory views.

On one hand the 2GB jock thinks it’s important to tell people what he thinks. During the campaign he said Labor’s David Bradbury a dill, a sycophant and a lapdog.

On the other he thinks what he says makes no difference. He told Four Corners: “I can enunciate how I feel about David Bradbury, but at the end of the day the voters of Lindsay, I mean they're not going to take any notice of a shock jock and what he thinks of David Bradbury, they'll form their own assumptions”.

It’s the kind of get-out-of-jail-free card used by Fox News in the US. One of its slogans is “We report, you decide”. But if Fox News is right and it doesn’t sway opinions, it’s worth asking why it tries so hard - unless it’s for entertainment. It’s also worth asking the same question about Sydney’s Daily Telegraph. Was it merely trying to entertain us with its front page depicting Kevin Rudd as a Nazi prison camp commandant, or was it trying to shift votes.

Rudd thought so. He said News Corp was in a coalition with the Coalition to bring him down.

Economists are inclined to side with Hadley. They don’t think slanted coverage matters. They think we are rational. Here’s how a paper from the National Bureau of Economic Research puts it:

“A media source injects bias into its coverage of a political candidate. A rational viewer, knowing the exact extent of the bias, realises that often times bad news is not reported and good news is exaggerated. If the viewer has a good sense of the degree of the media source’s bias, she will take into account the media source’s bias and discount the news.”

Nifty, eh? Actually, it’s pretty much how we think it works when it comes to ourselves. We are not swayed by biased coverage, only others are.

It’s a hard proposition to test...

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In the case of Rupert Murdoch it is widely believed he backs whichever leader is are likely to win anyway, pocketing an undeserved reputation for swinging the vote.

But an usual occurrence at the turn of the century allowed two researchers to try. Stefano Della Vigna and Ethan Kaplan noticed that Murdoch’s Fox News channel was being rolled out to some towns ahead of others. In otherwise identical towns next to each other, one had Fox News, the other did not.

Comparing those towns they calculated that in the 2000 George Bush - John Kerry contest Fox News managed to persuade 3 to 8 pc of its viewers to change their votes, a shift that may “have been decisive”.

A more recent reexamination of the data reached a less alarming conclusion. Fox News was indeed persuasive in getting Republican-leaning voters to actually vote Republican, but had no effect (if anything an anti-Bush effect) on voters likely to vote Democratic.

It’s hard to change opinions, easy to reinforce them. And this is where it gets personal. Newspapers such as this one (our slogan is Independent, Always) ought to work against polarisation. We report the views of people all sides. Except they don’t. The latest research suggests that reporting a range of views actually hardens pre existing positions.

Harvard University economists Edward Glaeser and Cass Sunstein outline it in a paper entitled Why does balanced news produce unbalanced views?

One of the studies involved capital punishment. People were asked to read arguments both in favor of and against. Both supporters and opponents hardened their opinions.

Another involved reports that attempted to settle questions (fact checking). People were shown arguments about the proposition that cutting taxes is so effective at boosting economic growth it actually lifts government revenue. Then they were shown evidence that it did not. Those who believed the claim to start with “ended up believing this claim more fervently” after seeing the refuting evidence.

People shown both good news and bad news about themselves or people like them (intelligence, attractiveness, the likelihood of getting cancer) took the good news on board, but downplayed or forgot the bad.

Ray Hadley might be more correct than you might think (and probably as correct as he thinks). He can’t much influence the people of western Sydney, unless its in the direction they were likely to move anyway. And I can’t much influence you (even when I am checking facts) unless its in the direction you were heading anyway.

I don’t like it, but then I’m not inclined to like it. I’m hard to convince.

In The Canberra Times and The Sydney Morning Herald


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Budget 2013-14. Will we hit the debt ceiling?

Probably. The next Treasurer will have to lift it.

Me on RN Drive, May 15, 2013

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Budget 2013-14. Me on the radio, the morning after

Me on Life Matters, Wednesday May 15

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Austerity. Why it is suddenly no longer fashionable

It’s been an appalling fortnight for peddlers of austerity. Bit by bit the weight of Australian and international opinion has shifted away from surplus towards deficit, away from repayment towards debt and away from containing inflation to rekindling it.

Australia contribution was startling. As recently as December opposition leader Tony Abbott was promising surpluses “in each year of the first term of a Coalition government,” although he qualified the promise by saying it was “based on the published figures”.

Last week he declared “all bets are off”.

"We were confident that we could deliver a surplus based on what the government was telling us until just before Christmas," he said. "But all bets are off given that the Government won't tell us what the deficit will be."

His treasury spokesman Joe Hockey fleshed things out. Enforced austerity at a time when the economy was fragile could send things pear-shaped.

“It is important to be prudent,” he told an investment conference. “We are not going to go down the path of austerity simply to bring the budget back to surplus, because it would end up being a temporary surplus depending on how deep the deficit is that we inherit.”

“The challenge will be how to get the settings right to bring the budget back to surplus, to start to pay down some of the government debt - whilst at the same time not constraining what I think will be a sense of optimism and hope if there is a change of government,” he said in further remarks not previously reported.

“I think companies will unleash their balance sheets, and I think consumers will as well if there is a change of government, and I am very mindful that we don’t want to be the ones that close down that optimism.”

The Coalition’s new caution about a swift return to surplus, coming months after the government’s embrace of caution, means there is now no mainstream political party promising to quickly end the deficits, or to quickly pay down the government debt they will pile up.

In January Hockey was committed to a surplus “to the core of my bones”. Events since have chilled those bones.

The Reserve Bank is worried there simply isn’t enough happening in the economy to take the place of mining investment as it turns down. The December quarter national accounts released in March showed machinery and equipment investment down 2.5 per cent. Hours worked slipped 0.1 per cent. Household spending climbed just 0.2 per cent.

The consumer price figures released Wednesday put March quarter seasonally-adjusted inflation at just 0.1 per cent. Businesses are having to discount to get Australians to spend. (Woolworths cut average prices 2.5 per cent in the quarter). The discounting is squeezing their profits and providing little reason to invest, at exactly the time the economy needs non-mining investment.

To further cut government spending at such a time could risk recession. Overseas the idea that government debt itself causes recession got hammered at about the same time as the Coalition’s rethink in Australia...

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Internationally renowned economists Carmen Reinhart and Kenneth Rogoff became disciples of the austerity movement in 2010 when they published a provocative paper entitled “Growth in the Time of Debt”. They claimed to have discovered a tipping point. Government debt didn’t seem to do much harm until it reached 90 per cent of gross domestic product. But from that point economic growth crumbled.

“Even advanced economies hit a ceiling,” they wrote. “Current debt trajectories are a risk to long-term growth.”

Mitt Romney’s vice presidential running mate deployed their finding in campaigns. In Britain an advisor to David Cameron used it to back spending cuts which as it happened pushed the UK into recession. In mainland Europe it prodded already weak economies to cut spending further.

At the University of Massachusetts a graduate student had been having trouble with his homework. Thomas Herndon had been trying to replicate Reinhart and Rogoff’s findings. Eventually they gave him their spreadsheet and showed him how to use it. When he did he found glaring - almost inconceivable - errors.

In attempting to average 20 cells on their Excel spreadsheet they had only highlighted 15, leaving out the first five in the alphabet - Australia, Austria, Belgium, Canada and Denmark. And there was more. When he and his teachers recalculated the spreadsheet the tipping point disappeared. All that remained was a mild negative correlation between government debt and growth, one more likely to be the result of weak growth pushing up the debt ratio than other way around.

A laughing stock on US television all week and mocked more seriously by US economist Paul Krugman as the “coding error that destroyed the economies of the Western world,” the findings had carried weight in Australia. Just this week the Grattan Institute cited them in support of the proposition that high debt could slow economic growth “for a long time”.

Austerity for austerity’s sake is suddenly unfashionable. The Grattan Institute’s talk of a decade of deficits has become more of a forecast rather than a warning.

The Reserve Bank meets in ten days time, a week before the budget. It is increasingly concerned about the economy and it’s in no mood for austerity.

In today's Sydney Morning Herald



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Holden's tragedy. Elvis has left the room

What’s killing Holden is what killed the Top 40.

As a child growing up in the 1970s I scarcely missed an edition of American Top 40. It mattered to me because it was the Top 40. Record buyers and radio stations shared common music tastes.

But towards the end of the 1970s it began to splinter.

Some US stations didn’t play disco. They edited out the disco records before putting the program to air. Others played only country music, others only ‘black’, and others only white, including the new video hits channel MTV which famously didn’t play a black video until Michael Jackson broke through with one so good it could not be ignored.

Three decades on it is happening to news. Readers are increasingly choosing their own sorts of news, via a twitter stream or (in some cases) a newspaper that tells them the sort of things they want to hear.

Michael Jackson was a throwback. The era of universally shared musical taste probably ended earlier with Elvis. Bruce Springsteen thinks so. In a speech at a 2012 music festival he quoted a 1977 Elvis obituary:

“I can guarantee you one thing,” said music critic Lester Bangs. “We will never again agree on anything as we agreed on Elvis.”.

“So I won't bother saying goodbye to his corpse. I will say good-bye to you.”

There’s no longer a generally-agreed Top 40. There’s the adult contemporary chart, the soul chart, and so on. There’s more music, but different types of it are created for different types of people.

Which brings us to Holden.

When Elvis died Holden had close to 40 per cent of Australia’s market. We really did love “Football, Meat Pies, Kangaroos and Holden cars”. Four out of every five cars sold in Australia were made in Australia. And they looked pretty much identical.
Partly it is because we had little choice. The tariff (tax) added to the price of each imported car was 57.5 per cent.

And partly it’s because most of us probably did want the same thing - a big car. Holden gave birth to the Commodore as Elvis died. It is still with us, and it is still big. It’s competitor the Ford Falcon is big.

But our tastes have fractured. More of us have wanted small cars, more green cars, and more and more four wheel drives (now known as SUVs). But with only rare exceptions the Australian manufacturers have acted as if we didn’t. Like the makers of American Top 40 continuing to pretend there were still universal musical tastes through the 1980s each of Australia’s big four kept acting as if the key to survival was making a better version of the same big thing.

Economic theory shows us that’s what protected firms do.

Ever wondered why Qantas and Virgin flights leave at roughly the same times? It’d be more useful if they left at different times, but without outside competition they won’t.

A century ago a United States economist named Harold Hotelling explained why using Hotelling’s Law.

Imagine a kilometre long beach served by just two ice cream carts. Each sunbather wants a cart nearby. The best solution would be to put the carts where no sunbaker has to walk more than 250 meters, by placing one cart one quarter the way along and the other three quarters along.

But if that happened each cart would be tempted to move closer to the middle to grab some of the other’s business. Eventually the two would be next to each other.

Our big car makers kept specialising in big cars because they believed they could focus inwards, each trying to grab the other’s market share.

They might have gotten away with it (amid grumbles from consumers) except that the wall protecting them crumbled. On January 1 2010 last bricks were kicked away. The 10 per cent tariff was cut to 5 per cent. Offsets mean the effective rate is 3.5 per cent.

At the same time the dollar did what it had never done in the era of floating exchange rates. It climbed above $US1 and stayed there. In the quarter of a century to January 2010 the Aussie had averaged 72 US cents. It’s now 105 US cents. That makes foreign cars 45 per cent cheaper to import, and there’s no tariff wall to keep them out.

Free to buy what we want to we are shelling out for different cars like never before. Every third new car sold is an SUV. Every fifth car sold is small. Only every tenth new car sold in made in Australia. Every 25th new car sold is an Australian-made Holden.

Holden let go of 500 workers this week. It’s one size fits all business model has gone and it is not coming back.

In today's Sun Herald


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We need more tax, we need an extra $10 billion - Doug Cameron

Listen to Cameron at the Adelaide ACOSS Conference, March 25 2013

9 minutes, play or CLICK THEN CLICK AGAIN to download mp3



Leading Labor senator Doug Cameron wants Australians to pay more tax after the May budget - an extra $10 billion more. He wants Labor to stop seeing it as a “badge of honour” to have a lower tax ratio than did the Coalition.

Addressing the Council of Social Service conference in Adelaide Senator Cameron said there was “almost universal acceptance” Australia should lift the Newstart unemployment allowance, introduce a national disability insurance scheme and provide world-class public education.

“But manifestly it seems there is almost universal timidity when it comes to the question of how we pay for them,” he told the conference.

“I have said before and I will say it again. I can not understand why it is a badge of honour for a Labor government to have a lower tax to gross domestic product ratio than the Howard government.”

“Tax receipts to GDP in this country are the fifth lowest in the Organisation for Economic Co-operation and Development. A mere 0.7 per cent increase in the ratio would be for us to realise our aspirations to be a good society.”

An increase of 0.7 percentage points would lift the tax to GDP ratio from 22.1 to 22.8 per cent, bringing in an extra $10 billion per year.

“With GDP approaching $1.5 trillion it is beyond me that we cannot see fit to devote less than one per cent to fulfilling a promise of a good society,” he said.

“Even if we did we would still be the fifth lowest taxing country in the OECD.”

Although a long-standing supporter of the superannuation system, Senator Cameron said the time had come for a reappraisal of the associated tax concessions that arguably acted as a device to allow high-wealth Australians to minimise tax...

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“Many of these concessions are deeply entrenched. They cost around $32 billion a year and they are not sustainable,” he said.

“Treasury estimates they will cost $42 billion in 2015-16, more than the annual cost of the aged pension.”

“At that rate we may as well double the aged pension and do away with superannuation incentives.”

Acknowledging his remarks would get him “in trouble again,” he said his party should “change its position on increasing and indexing Newstart”.

The conference will consider a resolution Tuesday calling on the government to lift Newstart and other low paying allowances by $50 per week.

In today's Canberra Times


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Turnbull and Abbott in lockstep?

Tony Wright on ABC Adelaide 891 this morning

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Who says RBA forecasts are hopeless?

The Reserve Bank says so.

Me on ABC NightLife, Wednesday November 14

9 minutes, play or CLICK THEN CLICK AGAIN to download mp3



Me on ABC Adelaide 891, Wednesday November 14

6 minutes, play or CLICK THEN CLICK AGAIN to download mp3

Who says most Reserve Bank forecasts are hopeless?

The Reserve Bank itself says so in a research paper released Monday.

To be strictly accurate, the paper is by two of its economists Peter Tulip and Stephanie Wallace. Released by the Bank, it is prefaced by the usual warning that its findings “do not necessarily reflect” those of the Bank. Nevertheless Tulip and Wallace find Reserve Bank forecasts explain only 15 per cent of the variation in unemployment in the short term and beyond that are “less accurate than a random walk”.

The Bank’s forecasts for GDP growth aren’t likely to be accurate at any time. Even in the very short-term the historic mean provides a better guide. For the year to December 2013 the Bank is forecasting economic growth of somewhere between 2.25 and 3.25 per cent. Tulip and Wallace say a more likely range is somewhere between 0.9 and 5.7 per cent.

The Bank’s forecasts for inflation are pretty good (better than those of the market) but only for one year ahead. After that they also are also no better than random. Tulip and Wallace say the best longer term predictor of inflation is 2.5 per cent, which is the centre of the Reserve Bank’s target band. The finding makes sense. The Bank is good at hitting its target

And what about market forecasts of the RBA’s own decisions? Tulip and Wallace say the judgements backed with money and baked into the yield curve predict short-term interest rates “only slightly better than a random walk”. Sorry.

In today's CBD

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Price Shock: The carbon tax is doing even less than expected

Me on ABC NightLife,Wednesday October 24 2012

8 minutes, play or RIGHT CLICK to download mp3










The carbon tax has boosted the cost of living scarcely at all. Despite dire talk of an “almost unimaginable” increase (Tony Abbott) and $100 for a Sunday roast (Barnaby Joyce) the first official consumer price figures show a far lower impact than predicted by the Treasury.

Last July Treasury said the tax would push up the consumer price index 0.70 percentage points, adding $9.90 per week to average household costs. In return households were given compensation averaging $10.10 per week.

But 0.70 percentage points looks like being an overestimate. Inflation figures for the September quarter (the one that encompasses almost all of the electricity and gas price rises) show them adding 0.44 points to the CPI. It’s a big figure - but not that much bigger than the usual September quarter slug.

Sydney households were whacked with with a horrific 17.9 per cent increase in the price of electricity in the latest September quarter. As bad as it is, it’s not that much worse than the 15.1 per cent served up the previous September quarter, and its much less than the 21.7 per cent served up the September quarter before that.

Melbourne households have endured a 13.6 per cent increase electricity prices - unwelcome, but well short of previous September quarter jumps of 19 and 21 per cent. Canberra families have had to cop 19 per cent this year - bad, but not too different from a previous 18.1 per cent.

Nationwide, electricity and gas price rises added 0.25 and 0.33 points to the consumer price index in the previous two September quarters. The latest increase of 0.44 points isn’t that much bigger. It is 0.11 points bigger than last year’s increase and 0.19 points bigger than the one before that. Those differences are a long way short of the 0.70 impact forecast in the lead up to the introduction of the tax...

We won’t know the full impact for some time. Treasury expected the gas and electricity price hikes to account for only half of the 0.70 boost, the rest being accounted for by businesses that passed them on.

But Commonwealth Bank senior economist Michael Blythe makes the point that if the electricity and gas impact is around half what was expected it is likely the total impact will be too.

“It is looking as if the Treasury’s figure will be an overestimate rather than an underestimate,” he told the Herald.

The total consumer price index increased 2 per cent in the year to September, a figure right at the bottom of the Reserve Bank’s two to three per cent target band, giving its board room to cut interest rates again at its next meeting on Melbourne Cup Tuesday.

The quarterly price increase of 1.4 per cent is high, on a par with earlier outsized increases sparked by unusual movements in fruit and vegetable prices. The latest increase also reflects an outsized jump in food prices which contributed 0.32 points to the total, not too far behind the 0.33 points contributed by electricity and the 0.11 points contributed by gas.

The so-called underlying rates of inflation calculated by the Bureau of Statistics come in at 2.4 and 2.6 per cent, almost exactly in the middle of the Reserve Bank’s target band.

Futures markets were last night pricing in a 60 per cent chance of a rate cut at the Melbourne Cup day meeting, down from 85 per cent on Tuesday.

In today's Canberra Times, Sydney Morning Herald and Age


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6401.0

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MYEFO. What the wash-up tells us (it ain't pretty)

Me on ABC 891 this morning

12 minutes, play or RIGHT CLICK to download mp3

Me on ABC The Drum, Monday October 22

Tim Palmer. presenter
Jacqueline Maley, Sydney Morning Herald
Judith Sloan, The Australian
Peter Lewis, Essential Media

14 minutes, play or RIGHT CLICK to download mp3





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Why did the RBA cut? The resources boom is about to peak

Access was pilloried for saying it could happen by 2014. Now the Reserve thinks it'll be 2013

Me on ABC Adelaide 891 this morning

16 minutes, play or CLICK THEN CLICK AGAIN to download mp3

How much you’ll save

If the banks pass it on

MORTGAGE SAVING PER MONTH

$20,000 $3
$40,000 $6
$60,000 $9
$80,000 $13
$100,000 $16
$150,000 $24
$200,000 $31
$250,000 $39
$300,000 $47
$350,000 $55
$400,000 $63
$450,000 $71
$500,000 $79
$600,000 $95
$700,000 $110
$800,000 $126
$900,000 $142
$1,000,000 $158

Assumes 25 year 6.85% variable mortgage

The Reserve Bank has cut interest rates to the lowest point since the 2009 financial crisis amid concern the mining investment boom will peak sooner and lower than expected. It is on standby to cut rates again at its November board meeting on Melbourne Cup Tuesday.

Iron ore and coal mining companies have told the Bank they are putting their investment plans on ice sooner than expected because they can no longer be certain prices will stay high. They have told the Bank the rebound in prices over the past month gives them little comfort because they can’t be confident they won’t slide again.

The September commodity price reading released by the Bank late yesterday  shows the Australian dollar prices of Australian exports have slid 18 per cent over the past twelve months.

The Bank has brought forward its estimate of the peak in mining investment from 2013-14 to 2013. It believes the economy will need stimulus as mining investment falls away and the right time to start providing it is now, given the long lead times involved in boosting activity.

The 0.25 point cut will take the Bank’s cash rate to 3.25 per cent, the lowest since October 2009. A further cut at the November board meeting would take it to 3.00 per cent, the floor at which it stayed for six months during the financial crisis...

They will be guided by investment intentions, global economic developments and the strength of Australian dollar in deciding whether to cut again on Melbourne Cup Tuesday.

Although it is not cutting rates in order to cut the dollar it believes the stubbornly high dollar is depriving Australia of export income it would have expected to earn as the dollar fell in line with plunging commodity prices.

The Australian dollar slid 0.60 US cents to a low of $1.0295 on the news. The share market gained 1 per cent.

If fully passed on the cut will slice a further $47 of the monthly cost of servicing a $300,000 loan. The Reserve Bank’s four most recent cuts in November, December, May and June have cut a total of $190 from monthly repayments.

Treasurer Wayne Swan said the cut meant a family on a $300,000 mortgage would pay around $4500 less per year than when the Coalition left office.

“It’s a welcome dividend from responsible budget management. It is good news for families and small businesses right across Australia,” he said.

Shadow treasurer Joe Hockey said rates was now just one step away from what Mr Swan had previously described as the “emergency levels” needed during the global financial crisis.

“The Reserve Bank is no longer as confident about the outlook for growth,” he said. “I have been warning for some time Australia can no longer rely on record high commodity prices to boost economic growth and the budget bottom line.”

Mr Swan appealed to banks not to “crib” or “crimp” something from the cut. The Bank of Queensland was the first to respond passing on only 0.20 points of the 2.25 point cut, bringing its mortgage rate to 6.71 per cent. The big four have yet to announce their decisions.

In today's Canberra Times, Sydney Morning Herald and Age


What you’ll pay

Standard rates this morning

Bendigo Bank 6.90% (unchanged)
Westpac: 6.89% (unchanged)
Commonwealth: 6.80% (unchanged)
ANZ 6.80% (unchanged)
NAB 6.78% (unchanged)
Bank of Queensland 6.71% (down 20 points)


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Why the GST is failing, and why it's hard to fix

Me on ABC Adelaide 891 September 19, 2012

11 minutes, play or CLICK THEN CLICK AGAIN to download mp3

The GST takes in $50 billion per year

WAYS TO GET MORE

Lift the rate to 12.5%: An extra $12.5 billion

Lift the rate to 15%: An extra $25 billion

Tax fresh food: An extra $6 billion

Tax financial services: An extra $4 billion

Tax health spending: An extra $3 billion

Tax education: An extra $3 billion

Tax child care: An extra $600 million

Tax on-line imports: An extra $600 million

Commonwealth Treasury: 2012 Budget, 2011 Tax Expenditures Statement.

(Rounded figures)

Lifting the goods and services tax to 15 per cent would boost Australian state budgets by an extraordinary $25 billion per year - $8 billion of which would be kept by the O’Farrell government in NSW, but experts warn it would soon evaporate.

Fifteen per cent was the rate originally slated for the GST to be introduced by a John Hewson-led Coalition government should it have taken office in 1993. It is also the rate to which New Zealand has now lifted its GST after two decades at 12.5 per cent. It is dwarfed by GST rates of 20 per cent or more in most of Europe.

At 10 per cent, Australia’s GST earns the states $50 billion per year, double the $24 billion it earned when introduced in July 2000. But as a proportion of gross domestic product it has been slipping for years, something Treasury budget papers blame on increased household saving, and also a “steady decline in expenditure on items attracting GST as a share of total consumption”.

“We knew this was going to happen,” says Greg Smith, a former head of Treasury’s revenue group and a member of the Henry Tax Review. “It was clear people were moving their spending from goods to services - it was one of the arguments for a GST - but it was also clear they were moving spending to services outside the scope of the GST such as health and education."

Treasury calculations show the prices of health, education and rent - all excluded from the GST - have been increasing far faster than the prices of items covered by the GST, meaning a growing proportion of spending is GST exempt.
It is why NSW Premier Barry O'Farrell and Treasurer Mike Baird have called for a debate about lifting the GST, receiving backing from South Australia’s Treasurer Jack Snelling.

But experts warn lifting the rate to 12.5 or 15 per cent would only buy time, perhaps even accelerating the shift in spending away from items covered by the GST...

“The greater the GST rate the greater the incentive for fraud and for moving spending elsewhere,” says Neil Warren, professor of taxation at the University of UNSW. “To stop it you would need to tighten up on GST-free imports and consider extending the GST to food, education and health.”

Treasury calculations show extending the GST to presently exempt fresh food would raise an extra $6 billion per year (some of which would need to be spent compensating low income earners), extending it to education would raise a further $3 billion, and health another $3 billion.

But Professor Smith says the health and education savings are illusory.

“The states themselves are the biggest providers of health and education. Taxing their services in order to help fund their services would mean money in one door and out the other. It isn’t a net revenue gain.”

And much of the extra income would be earmarked as soon as it came in.

“The Commonwealth would want the states to cut insurance taxes and stamp duties. Those two alone would eat up the extra income. The Commonwealth would want to pin the states down to timetables for cutting the taxes, it wouldn’t just let them have the extra GST,” said Professor Warren.

In today's Sydney Morning Herald and Age


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What next, after the boom ends?

With Matt Wade, audio below

Australia's mining boom was never going to last forever.

Tucked away in the budget papers two years ago were estimates from Treasury and Geoscience Australia about how long each of the nation's minerals would last. Iron ore was set to run out in 70 years at the current rate of extraction, gold in just 30 years. Black coal would last longer - 90 years, meaning many very young Australians will still be alive when the last known lumps of black coal are dug from Australian soil and thrust into furnaces.

Treasury was careful to say its estimates weren't definitive. Higher prices could "encourage greater investment in exploration activities and new discoveries". But its message was clear: mining would be unable to power Australia's economy forever. Sooner or later - within one lifetime or maybe two - we would have to face up to the question of what comes next.

It's the sort of question Australia has faced in the past. Those who grew up in the 1950s were forever being told the nation rode on the sheep's back. Back then the farm sector accounted for one-quarter of Australia's production. Today it accounts for a little over 2 per cent.

For the most part that transition away from agriculture has been managed smoothly (although for a while woolgrowers tried to stare change in the face by legislating a floor price for wool, with disastrous consequences). The subsequent decline of manufacturing has been more painful, mainly because of the number of people employed. In the 1960s manufacturing provided jobs to one in every four Australian workers. Today it employs just one in 12.

On Thursday, the Resources Minister, Martin Ferguson, appeared to ring in the next change. Speaking to the ABC's AM program after BHP shelved plans to build what would have been the world's biggest uranium mine at Olympic Dam in South Australia's arid north he declared the boom over.

"It's about time Tony Abbott stopped talking down Australia both at home and internationally and recognised how well placed we are," he said.

"But you've got to understand, the resources boom is over. We've done well - $270 billion in investment, the envy of the world. It has got tougher in the last six to 12 months. Look at Europe, the state of the European and global economy. Think about the difficulties in China, with still strong growth. The next round was always going to be difficult and I must say Olympic Dam was always a very, very challenging project - its sheer size."

The Prime Minister rushed to reassure the public that Ferguson hadn't meant to say what it sounded as if he had...

"He has indicated that prices have come off a bit - or, if you like, that the commodity price boom has passed its peak," she told Parliament. "But there is a huge investment phase with still some way to run and the export boom in resources still has a very long way to run."

The simultaneous industrialisation of the world's two most populated nations - China and India - has decades to run. Another 1.1 billion Asians are expected to move to cities over the next 30 years and they will require housing and supporting infrastructure. The Reserve Bank has estimated a typical Chinese apartment requires about six tonnes of steel, while 10 kilometres of metropolitan subway requires about 75,000 tonnes. Each tonne of steel produced requires about 1.7 tonnes of iron ore and more than half a tonne of coking coal.

But the plummeting mining profits and shelved resource projects have underscored the need for Australia to prepare for a time when it must rely on a different mix of exports, mostly knowledge-based services.

Resources exports have forged deep economic ties between Australia and Asia. But the mining boom may just be the prelude to the main game of Asia's economic emergence. By the middle of this century, more than half of the world's economic activity will occur in Asia.

This landmark shift creates economic possibilities unimagined even a decade ago. As the region's middle class becomes richer, demand for a long and different menu of Australian exports including foodstuffs, tourism, education, financial services, business services, professional services and niche manufactures will steeple.

But the shift from selling Asian customers bulk commodities such as coal, iron ore and gas to the far more nuanced task of exporting a wide range of goods and services into diverse Asian markets won't be easy.

"It is one thing to sell a homogenous minerals commodity to a minerals-hungry industrialist in China, and another thing entirely to design and market a sophisticated personal service to someone living in that culture," the former Treasury secretary Ken Henry said in a speech to business this week.

Australians have become much more aware of Asia, especially through holiday travel. But experts warn our knowledge is superficial. Even though so many more of us are travelling to Indonesia and other south-east Asian destinations there are fewer students studying Indonesian now than in the 1970s.

A recent business survey found less than half of Australian businesses with dealings in Asia have any senior executives or board members with Asia experience or language ability.

Asia's middle-classes are emerging as the world's biggest consumer group but many of them won't speak English. They will also have business cultures and political systems very different from Australia's.

Henry, who is writing the government's white paper on preparing Australia for the Asian century, says the nation needs to build its "Asia-relevant capabilities".

It will be crucial that Australian students gain a much deeper understanding of the culture and languages of Asia.

Businesses will also need to think differently. Many firms that are defined as Australian will have to start looking at themselves as regional and be willing to move components of their business to Asia in order to survive.

The Prime Minister and the Resources Minister are both right. The resources boom has ended, but only in a limited sense, for now.

It was kicked off last decade by an explosion of urbanisation in China. The first impact was to ramp up prices. With Australia and suppliers in Brazil and India ill-prepared, the only way China could get the iron ore it needed to cater for its rapidly expanding cities was to bid up the price from a long-term average of about $US13 a tonne in 2002 to an extraordinary $US180 a tonne by 2011.

For Australian miners the undreamt of price was pure profit - they hadn't needed to spend an extra cent to get it, which is why Kevin Rudd and Wayne Swan wanted to tax some of it away as super profits.

The price boom begat the investment boom as resources companies scrambled to mine more of the stuff. The investment boom is boosting the economy in its own right, drawing in billions in overseas capital and employing more workers constructing mines than will eventually be employed operating them.

But as miners across the world have ramped up production, prices have eased.

A year ago iron ore was fetching about $US180 a tonne but yesterday the price slipped below $US100 for the first time since the global financial crisis.

Investment will turn down soon. The Reserve Bank governor, Glenn Stevens, told Parliament's economics committee yesterday he expects investment spending to peak "within the next year or two" although it will remain at an unusually high level for a long time.

Big investments in gas production means exports are set to quintuple by the end of this decade.

But Peter Coleman, the chief executive of Woodside Petroleum, Australia's biggest gas producer, says that as commodity prices fall miners are becoming more cautious about investments.

"We're just seeing a natural part of the cycle to be honest, it's kind of like that long wave that comes into the beach, it's starting to break, that's what commodity cycles do, and then we'll pick up another one here soon, it just depends on picking the right one."

But even if the resource price boom is over and the resource investment boom coming to an end, our resource income boom still has some way to run.

This payoff from the investment boom - the extra resources Australia is able to ship out of the country - will stay with us for decades.

After China will come India. China has just passed a historic milestone: one half of its population now live in cities. India's rate of urbanisation is just a third so it has a long way to go. In the past 15 years India has shot up from being the world's 10th-biggest steel producer to the fourth.

While India is blessed with vast reserves of its own high quality iron ore, it is desperately short of the coking coal traditionally used to turn it into steel. Australia, with its abundant stocks of coking coal, looks to be in the box seat once more. It already exports more coal to India than China.

Even so, a director at Deloitte Access, Chris Richardson, says there could be a "tricky phase" for the Australian economy as commodity prices fall and we wait for recent investment in mining capacity to come on line.

"In late 2014 going into 2015 we are going to have to change gears from construction as an economic driver to export earnings," he said. "There could be a pothole. We don't know how big it will be."

Some parts of the economy will benefit as the effects of the mining boom fade a little. The Australian dollar will probably fall providing a boost to important sectors that have been badly affected by the high exchange rate like tourism, education and parts of manufacturing and retail. The firms in those sectors that have weathered the effects of the soaring exchange rate are likely to thrive if the dollar pulls back.

Meanwhile, Henry says there is no room for complacency. Australia should waste no time adapting and reforming its policy settings to make the most of opportunities beyond the mining boom.

"It would be a mistake to think that geography and/or geology alone will get us where we want to go and allow Australia somehow to ride the wave of the Asian century around us," he said.

Published in today's Canberra Times, Sydney Morning Herald and Age


Me on ABC 702 mornings, Wednesday August 22

9 minutes, play or CLICK THEN CLICK AGAIN to download mp3









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Olympic Dam. Why will BHP be charged so little?

Let's start with the ANU's Paul Cleary, author of the just-released Mine-Field - The Dark Side of Australia's Resources Rush

Here he is in The Australian:

"This deal is a monumental example of state government incompetence when it comes to acting as custodian of the nation's mineral wealth.

South Australia has agreed to a regime based solely on percentages and even cents per tonne of the mine's production. Mike Rann, who stands down today as Premier, has done South Australians a disservice that will cost them dearly for almost half a century.

The then premier Mike Rann and his administration should know full well that these royalties fail to capture a fair share of mining profits. This has been in the economic literature since the 1970s and was made more prominent by the Henry review. Yet the deal does not contain a single element of profits-based taxation.

The case for such measures is all the more compelling given that the mineral resources rent tax will not tax the millions of tonnes of copper, uranium, silver and gold the mine will be produce under the 45-year agreement, because the MRRT only applies to coal and iron ore.

Given that this is an agreement negotiated in the 21st century, it beggars belief the state could have agreed to a regime based exclusively on production-based royalties that hark back to medieval times.

But none of these ideas penetrated the thinking of the South Australian government when it negotiated its 45-year agreement for BHP's $30 billion expansion.

The three-tier regime involves 3.5 per cent for refined mineral products, meaning copper and gold, and 5 per cent for uranium oxide and uranium-bearing copper concentrates.

There's also 35c per tonne on extractive minerals sold to a third party, but this is not even indexed for inflation, so its value will diminish over the life of the agreement."


They were points he was making on ABC Adelaide 891 Tuesday when the man who negotiated the deal, former state Treasurer Kevin Foley rang in:

Play or CLICK THEN CLICK AGAIN to download mp3

Foley: “You don’t even understand the state-based royalty system. A royalty is a tax on the quantity of the mineral taken from a mine. It’s not a tax in a, as a profit-based tax. That can only be levied by the Commonwealth government.

Cleary: The previous government...

Foley: No that’s just not true, you don’t know what you are talking about. A royalty is what a state government can apply, a tax based on profit can only be applied by the Commonwealth government.

Cleary: That is not the case.

Foley: It is true. We don’t have access to the company profitability, it is only held by the Australian Tax Office and the national government. They are the only body by which a profits-based tax can be applied, so you don’t even know what you are talking about."

One of them had to be wrong, either Cleary or Foley.

It was Foley, the man who negotiated the Olympic Dam deal, as I outlined on Wednesday.

South Australia is perfectly capable of imposing a profits-based royalty but decided not to.

But listen in, to a conversation between Foley and me that actually gets somewhere...


18 minutes, play or CLICK THEN CLICK AGAIN to download mp3




To recap:

Our system of distributing money between the states is so warped that states that impose high royalties get almost all of their excess earnings taken away from them, and states that impose profits-based royalties (which by definition earn little money in the early years allowing projects to go ahead that otherwise would not) get penalised.

Is there a better way?

You bet.

Ross Garnaut is on the case:

Ross Garnaut, Submission to GST Review, July 2012



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How important are household power bills really?

Me on ABC Adelaide 891 August 8, 2012

15 minutes, play or CLICK THEN CLICK AGAIN to download mp3



Reference material:

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6530.0

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Olympic-style events boost the economy, right? Take the Sydney quiz

Me on ABC Adelaide 891 August 1, 2012

15 minutes, play or CLICK THEN CLICK AGAIN to download mp3




Here's a graph of tourist arrivals in Australia.

At what point in this graph did the Sydney 2000 Olympics take place? Can you spot it?

Now here's a graph of NSW gross state product compared to Australia's gross domestic product.

At what point in this graph did the Sydney 2000 Olympics take place?

Can you spot it? Did NSW surge ahead?

Well?

Click on the graphs to see the answers. When did the Sydney 2000 Olympics take place?

I enjoyed actually being in the ABC Adelaide 891 studio on Wednesday.

I took a photo of an in-house monitor:

Here's John Madden on whether hosting the Olympic Games confers economic benefits.

He knows more than most.



Memories.

In Canberra at about the same time as the Sydney 2000 Olympics a series of V8 car races was meant to bring the city $11 million to $13 million each year by creating a “vibrant city”. The ACT government kicked in $4.5 million in capital works and a $2.5 million per year subsidy, which climbed to $4.7 million.

On this occasion the Auditor General did get to look at the books. Mark Harrison, the consultant who prepared the report, was stunned.

Here’s what he told me at the time:

“The Cabinet submission couldn't even add up the numbers properly in its columns. It didn't discount future cash flows, which had the effect of exaggerating the net benefits of the project by more than a third. It involved double counting, and the benefits it did list were vastly exaggerated.”

He concluded that the event had actually cost the territory money. In his language, it brought “significant negative economic results”.

Most of the people who go to these events are locals (nearly all of the visitors to Floriade are). If they spend money or time there, it is likely they are not spending money somewhere else. Most of the non-locals come from other states. Even if their spending boosts the ACT’s economy, it doesn’t boost Australia’s.

And if ever thousands (or millions) of visitors did come from overseas for a big event and spend like crazy, the main effect would be to push up Australia’s exchange rate and hotel room rates. And perhaps even interest rates.


ACT Auditor-General’s Office, Performance Audit Report. V8 Car Races in Canberra, Costs and Benefits July 2002.

Peter Martin, The Economics of Big Events, Insight, SBS TV, October 09, 2003 (transcript below):

The economics of big events:

The Rugby World Cup kicks off tomorrow across the country. There will be 48 games from 20 national teams spread over seven weeks.

We've been promised it'll create jobs in every Australian city and give our nation an $800 million economic boost. But do the figures stack up? Economics correspondent Peter Martin.

PETER MARTIN: This man is obsessed with rugby.

TIM HARCOURT: It's the game they play in heaven.

The game is as important to him as economics. Tim Harcourt is the economic chief at Austrade, where he speaks about Australia in terms of rugby.

TIM HARCOURT, AUSTRADE: If you think about the Australian economy, it was very much closed and sort of very amateur, a bit like rugby used to be.

The Rugby World Cup, bringing 20 nations to Australia for 48 games in 10 cities, from tomorrow, will be a defining moment for the game in Australia and perhaps for Australia itself in the view of economists like Tim Harcourt.

TIM HARCOURT: In terms of direct benefits, the Australian Rugby Union estimates around 800 million.

REPORTER: Extra boost to the Australian economy?

TIM HARCOURT: In terms of expenditure.

REPORTER: Almost $1 billion?

TIM HARCOURT: There's been ranges, up to 800, some have been 400, some have been 800, some have been up to a billion. We've also seen estimates of international visitors, people coming here. The estimates have ranged between 40,000 and 55,000 visitors, internationally.

BOB CARR, NSW PREMIER: Distinguished guests, ladies and gentlemen, Sydney is greatly honoured to be hosting the Rugby World Cup.

They are forecasts enthusiastically endorsed by Bob Carr the Premier of the main host State. He speaks about a benefit to NSW alone of $300 million an extra 2,500 jobs, an extra $2 million in payroll tax. They're impressive-sounding numbers of the kind we've heard before, but can we take them seriously? In the case of the Rugby World Cup probably not. In an earlier life, John O'Neill was head of the State Bank of NSW, he's now head of the Rugby Union, and in charge of the Cup. John O'Neill came up with the figure of an $800 million World Cup by extrapolating from a Victorian estimate of the benefit of hosting the Bledisloe Cup in 1997.

JOHN O’NEILL, AUSTRALIAN RUGBY UNION: So if it was $60 million for one match over three days, and you think about 48 matches over 7 weeks and it's a World Cup, 40,000 visitors from overseas, 100,000 Australians travelling interstate to watch games, I don't think it's very hard to substantiate, albeit a guesstimate, of 800 to $1 billion of economic impact.

But the Victorian Government estimate was based, in part, on spending in Victoria by visitors from interstate. It's irrelevant in a national context because it doesn't take into account the money the interstate visitors would have spent had they stayed at home.

ADVERTISMENT: For every fan who's travelled from afar to support his or her country, Australia is ready. You beauty!

And there are other more fundamental problems with the estimates of benefits from the World Cup, as there are with the estimated benefits of just about every other big event ever held in Australia.

As good a place as any to begin to understand the mysterious art of estimating the economic benefits of big events is Floriade, Canberra's annual spring flower festival. Each year it attracts 300,000 visits. But that's not the economic benefit - which is what Angela Smith and her team from Canberra University have been commissioned to determine. They start by eliminating those visits that don't add to the ACT economy.

ANGELA SMITH, CANBERRA UNIVERSITY: Well, firstly, we screen out local residents - they were gonna be spending that money anyway, so, for example, going to the local mall to buy a coffee or going to the local nursery to buy some flowers.

ANGELA: So how many times a year do you come to Canberra?

And then we move on and talk to those who are from out of town.

ANGELA: OK, would you have travelled to Canberra on this occasion if it were not for Floriade? OK. Thank you very much. Enjoy your stay. Thank you, bye-bye.

We want to screen out those people who came basically to Canberra for other reasons. They have bought money into the local economy but Floriade is not what bought their money into the local economy.

Their conclusion - the benefit to Canberra isn't the 300,000 people who pass through the Floriade turnstiles, it's the mere 38,000 visitors attracted to Canberra especially for the event, and the money they spend. But even that is most probably an overestimate of the benefit to Canberra. It takes no account of those visitors who would have come to Canberra but stayed away because they knew Floriade was on.

What the promotional videos don't say is that every big event brings with it negative effects as well as positive. The Sydney 2000 Olympics illustrated that perfectly. The Games were good for restaurateur Stan Sarris and this business in the heart of Sydney's party zone, but very bad for others.

STAN SARRIS, WINEBANC: And it was reported. I mean, it's quite common knowledge, it was reported some businesses were down 20% or 30%.

They're negatives not usually counted when economic impact statements are compiled.

MARK HARRISON, ECONOMIC CONSULTANT: They tend to exaggerate the benefits and ignore the costs and, in fact, the net benefits that result from these things are often only 5% or 10% of the kinds of numbers that these studies come up with.

Canberra resident Mark Harrison was employed by the ACT Auditor-General to examine a Government decision to back a series of V8 car races. He was shocked at what he found.

MARK HARRISON: The Cabinet submission couldn't even add up the numbers properly in its columns. It didn't discount future cash flows, which had the effect of exaggerating the net benefits of the project by more than a third. It didn't deal adequately with the risks that were being imposed on ACT taxpayers by the agreement to underwrite the race. It involved double counting, and the benefits it did list were vastly exaggerated, I estimated by over 50%.

The shoddy state of the assessments used to justify big events is an open secret among Australian economists.<>
Peter Forsyth is Australia's pre-eminent micro-economist. With John Madden, he's part of a small team attempting to introduce what he calls best practice into the assessment of big events. That means evaluating their surprising costs as well as their more obvious benefits.

PETER FORSYTH: If, for example, people come from overseas to go to the Rugby World Cup, these people will come and spend money in Australia, so what we've got is a - let's say a mini export boom. Now, what we know from export booms is that they tend to push up exchange rates. That tends to squeeze out other export industries. So these industries could be the primary exporters, the mining industry and indeed, the elaborately transformed manufacturing industry.

Using techniques that are standard in other areas of economics, Peter Forsyth is able to trace all of the connections to estimate the net effect of an event on Australia's gross domestic product, which he then slashes to work out the net national benefit.

PETER FORSYTH: When you get an increase in GDP, this invariably means that extra resources, extra inputs have to be used. More labour, more capital, more land, you name it - they're not free, and we have to factor in that cost.

REPORTER: And when you do that, how much lower is the economic benefit?

PETER FORSYTH: When you take into account other costs, for example, the cost of building up infrastructure, any environmental costs that some of the special events might have, then the net benefit from these events could well be negative.
Even if we accept that big events are beneficial, even the biggest of them has had only a tiny effect on the Australian economy. The $6.5 billion Olympic boost sounds big, but it was an estimated benefit over 12 years, and amounts to only 0.1% of Australia's GDP each year.

JOHN MADDEN: And it might not have been as high as 0.1% if in fact the effect on real wages or the number of tourists weren't exactly what we assume they were before the event.

And they almost certainly weren't. The Government assumed an extra 1.5 million tourists would visit Australia in the years following the Olympics, 10 times as many as came here during the Games itself. In fact, tourist numbers fell a year later as a result of other global events and showed little sign of recovering. However, there's one very big beneficiary of the hype associated with the World Cup - and that's the Australian Rugby Union. It's convinced each of Australia's State Governments to pay it money in return for the right to host some matches in the weeks ahead.

JOHN O’NEILL: Governments make these decisions with their eyes wide open. It really is the business that governments are in these days. Sports, business and politics do mix.

Politicians love big events. They get to rub shoulders with sports stars...

PREMIER BOB CARR: It doesn't come better than this.

..and seduce the media into taking an unusually non-critical approach.

REPORTER: This must be a proud moment for you tonight. It's times like this where we can build on this, isn't it - tourism, other industries? And, as you say, there's a long-term benefit, not just a short-term benefit?

BOB CARR: It brings money into the country. All those people who have been doing it tough - tourism industry, the restaurants with low bookings, the hotels with low occupancy rates, this is a boost to them.

They can play up economic expectations and then move on before the outcomes are properly assessed.

STAN SARRIS: People will get, you know, quite tired of the World Cup being in their face all the time.

Bar owner Stan Sarris isn't taking chances in the weeks ahead.

STAN SARRIS: We're going to make it more of a comfort zone. It's a getaway, it's a chill-out zone, if you like, from the World Cup.

TIM HARCOURT: We've got nearly, as of this morning, nearly 6,000 members of the rugby business club.

While at Austrade, Tim Harcourt is talking up the Cup's potential to create what he calls accidental benefits for exporters.

TIM HARCOURT: 50% of new exporters meet, you know, meet their partners by accident. It's like a Jewish matchmaking service. We basically find the companies from overseas that are going to come here to watch rugby and we're gonna match them up with exporters here.

It's an approach that may miss the point of what the World Cup is really all about.

PETER FORSYTH: I think we have lost sight of the ball in the case of valuing special events. The main purpose of the Rugby World Cup is to have some great games of rugby and the main benefits are likely to be in the benefits that the consumers of rugby, namely the rugby fans, are getting. And those benefits are probably very substantial.

JOHN MADDEN: Don't see this as a big economic boost, right. It's not a big economic boost. It's a really big sporting event.

Worth enjoying on its own terms, without pretending it will do much at all for our economic health.

Read more >>