Restoring the ABCC a poor foundation to build an election on

Of all the unlikely reasons to call an election. Industrial relations has never been anything like the most important issue facing Australia in Malcolm Turnbull's mind. Most of his speeches, including his first in Parliament, barely mentioned it.

Instead that speech talked about the green hills and golden beaches of his Sydney electorate, "strung like jewels between the harbour and the sea". It talked about the republic, how Australia's head of state should be one of us. It talked about climate change and the need to better manage water, it talked about the importance of marriage, families and having children.

And it talked about the importance of boosting productivity. But it said nothing about unions or workplace relations, except perhaps this: a reference to Turnbull's first job, loading bananas in the Sydney markets.

He told me about it a few years later: "I think I had been sacked or I was having some problems with my employer so I went down to the Trades Hall to ask for help. [Labour council secretary] Barry Unsworth listened with a modest amount of interest and said, you should see another Trades Hall official, Bob Carr."

"Bob didn't seem particularly interested in my employment issues in the market, but then uttered the line I've never forgotten, which was: 'Do you know, I've just read a fascinating book on the politics of Eastern Europe, would you like to borrow it?'"

Carr went on to become foreign minister, Turnbull prime minister. Neither spent much of their careers complaining about unions. Until now.

"Unlawful conduct on building sites around Australia is holding back our economy," Turnbull told Monday's press conference. The extra costs were "a serious handbrake on economic growth".

What changedwent wrong? Labor abolished a Howard-era "cop on the beat" named the Australian Building and Construction Commission (ABCC) and replaced it with a cop called the Fair Work Building and Construction (FWBC). Whereas the ABCC could compel witnesses to appear and answer questions (contrary to common law principles in the view of the Law Council) after a three-year transition period the FWBC could not. Whereas the ABCC could reopen disputes after they had been settled, the FWBC could not.

These modest changes, along with changes to penalties and the right of union officials to enter workplaces, amounted to something of a silver bullet, in the view of the Prime Minister. "When the Australian Building and Construction Commission was in force, productivity in the sector grew by 20 per cent," he said on Monday. "Since it was abolished, productivity has flatlined."

It's an extraordinary statistic. Rarely does anything have such a clear-cut effect. Turnbull gave a hint as to where it came from when he told  the ABC's 7.30 that there was "plenty of work been done on this by Independent Economics✓ that shows there was an increase in productivity following the introduction of the ABCC".

Independent Economics, formerly known as Econtech, did the work for the ABCC itself. After academics from Griffith University✓ uncovered errors in the analysis, the ABCC removed it from its website. Then the Master Builders Association✓ commissioned Independent Economics to update it. The Productivity Commission examined the findings in 2014 and disassociated itself from them in unusually strong terms.

"When scrutinised meticulously, the quantitative results provided by Independent Economics or others do not provide credible evidence that the Building Industry Taskforce – Australian Building and Construction Commission regime created a resurgence in aggregate construction productivity or that the removal of the ABCC has had material aggregate effects," the Productivity Commission said. "Indeed, the available data suggests that the regime did not have a large aggregate impact."

The absence of a big effect was "neither surprising nor inimical to the need for further reform". It thought productivity in some parts of the industry probably had improved during the ABCC era, and it recommended boosting penalties and adequately resourcing the body that replaced it. But it stopped short of recommending the re-establishment of an organisation with the power to compel witnesses to answer questions. It's a power denied to courts and denied to the Australian Security Intelligence Organisation.

It thought productivity in some parts of the industry probably had improved during the ABCC era, and it recommended boosting penalties and adequately resourcing the body that replaced it.

But it stopped short of recommending the re-establishment of an organisation with the power to compel witnesses to answer questions. It's a power denied to courts, denied to the Australian Securities and Investments Commission and denied to the Australian Security Intelligence Organisation.

Turnbull's office says his claim about a 20 per cent jump in productivity came from the Australian Bureau of Statistics. It's there all right, if you use 2012-13 as the end date for the ABCC even though it finished at the end of 2011-12. But over the same period productivity in the entire market sector jumped 14 per cent. Something other than the ABCC was at play. In the post-ABCC era productivity in the construction sector climbed 3 per cent. Productivity in the entire market sector climbed 7 per cent.

Industrial disputes are indeed high in construction. In the 14 quarters since the ABCC they've totalled 180 working days lost per 1000 workers. But in the previous 14 quarters during the ABCC era, they totalled 164 working days lost.

This week's Essential Poll finds more Australians support reinstating ABCC than oppose it, even among Labor and Greens voters. Civil liberties aside, the ABCC ought not to be particularly controversial, certainly not enough to build an election around.

In The Age and Sydney Morning Herald

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Confused by the modelling about negative gearing? That's the whole idea

Politics is about trust.

Prime Minister Malcolm Turnbull has been claiming for weeks that Labor's plans for negative gearing would smash house prices.

"The 70 per cent of Australians who own houses will see the value of their single most important asset smashed to fulfil an ideological crusade," he told parliament.

His Attorney-General George Brandis​ has made it sound even worse. "There is one thing we know about the negative-gearing debate," he told us. "If the Labor Party were to implement its policy, the value of most Australians' homes would collapse".

His assistant treasurer Kelly O'Dwyer​ briefly said the opposite. Labor's policy would "increase the cost of housing for all Australians; for those people who currently own a home and for those people who would like to get into the housing market".

And then his treasurer Scott Morrison latched on to a "credible report" that said Labor's policy would have "a significant impact on property values".

He latched on too quickly. The report, by BIS Shrapnel, said no such thing. Prices would continue to rise in all but two of the next 10 years under the scenario it modelled, just as they would if negative gearing was maintained. After a decade, they would have climbed 15 per cent. That's less than with full negative gearing, but its still an increase.

The report explained that house prices are typically "sticky in a downwards direction," unable to fall lower than the cost of construction plus a markup. When new attempts at negative gearing were temporarily suspended between 1985 and 1987 real estate prices continued to climb.

While new investors would be less keen to buy if Labor's policy stopped them negatively gearing, existing investors would be also less keen to sell, because they could only continue to negative gear if they hung on to the properties they had. Prices wouldn't be smashed.

It's all there in the report Morrison lauded as credible (because it said rents would rise), but appeared not to properly read....

Certainly his eyes appeared to glaze over the howling error on page one. The report said Australia's national income would average $190 billion over the next ten years when it meant $1.9 trillion.

And they appeared not to be troubled by its suggestion that a measure that raised around $2 billion per year would shrink the economy by $19 billion per year. That's $9 of economic damage for every $1 collected, a sum so big as to be way out of the ballpark of anything his department has ever modelled.

When Treasury modelled a range of taxes for its tax discussion paper, it found the worst of them, stamp duty, did 70 cents of economic damage for each dollar collected. Yet first thing Thursday morning on AM Morrison described as "credible" a report that found removing negative gearing would create multiples of the biggest damage his department could find.

The Grattan Institute's John Daley says the finding doesn't even pass the giggle test. Try it for yourself. Attempt to say: "a tax that raises $2 billion will shrink the economy by $19 billion" without laughing.

What's really odd about the report is its false precision. Limiting negative gearing would create 175,000 fewer jobs over ten years. The unemployment rate would settle at 5.9 instead of 5.8 per cent.

And its woolliness. It assumes away the role of the Reserve Bank in stimulating the demand as economic growth slips, and also the role of state governments in controlling the release of land to regulate the housing market.

The oddest thing is its origin. Who commissioned it? BIS Shrapnel won't say. Why did it release it instead of the client? And was the whole idea to get a gullible politician to swallow and regurgitate it so that the public became even more confused and decided any change was too risky?

It's happened before, in the mining tax debate, in the carbon tax debate and whenever anyone suggests anything that might hurt the superannuation industry.

Economic modelling is the cheapest and dirtiest way to muddy a debate. It lends an appearance of authority to what amounts to guesswork, with key mechanisms often deliberately or accidentally left out. The Australia Institute wants a code of conduct for economic modellers. There's one for auditors and accountants. They'd have to spell out their assumptions and who was paying them.

Right now, with the enthusiastic assistance of people who should know better, we're being had. And we don't even know by who.

In The Age and Sydney Morning Herald

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

Now Malcolm's sucked in.

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

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

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

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

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

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

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

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

So why do it?

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

 

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Eleventy. The arithmetic mistake that made them think ChAFTA would boost jobs

Suddenly, it's all about jobs. Hundreds of thousands of jobs, according to the Trade Minister Andrew Robb. "Literally".

And exports. So unimportant have imports apparently become in the China-Australia free trade agreement that it's now been christened the "export agreement" by enthusiastic (or anxious) government MPs.

Robb and his colleagues used the new phrase an impressive 14 times in question time last Thursday. They referred to "jobs" an astounding 59 times - almost once every minute.

In politics you need to keep repeating something until you vomit, one of its practitioners once told me. Only then does it begin to sink in. So Robb and his colleagues would want to be sure of the facts they were repeating ad nauseam, wouldn't they? They would want to be sure the agreement really will create "hundreds of thousands of jobs".

It won't. It will create only a few thousand, according to government's own modelling, conducted by the Canberra-based Centre for International Economics. But you wouldn't know it from the way the modelling has been mangled and butchered by the government.

It began ahead of its release. The Trade Minister sent journalists "highlights" of modelling, but not the modelling itself. Added to an otherwise faithful reproduction of its executive summary were these words: "The modelling shows that between 2016 and 2035 there will be 178,000 additional jobs as a result of the free trade agreements; an average of almost 9000 extra jobs per year."

Which is odd, because nowhere in the report itself is there a mention of 178,000 additional jobs. The report says that by 2035 the agreements will have produced a total of 5434 additional jobs, a long way short of 178,000 ...

And that figure is a grand total, applying to all three North Asia free trade agreements; those covering Japan and Korea as well as China. Rather than "hundreds of thousands", the total is expected to not quite reach 6000.

By way of comparison, each month the employment total moves up or down by around 10,000 or 20,000 or 30,000; 6000 after 20 years will be something less than a rounding error.

By 2035 Australia's workforce will exceed 15 million. An extra 6000 will be less than one-half of one-tenth of 1 per cent.

But the agreement is all about jobs.

How could the government get its own report so ridiculously wrong? It added up each of the gains reported to employment for each of the years between now and 2035. In 2016 the number is 7925; in 2017 it's 11,119; and so on. By 2020 it peaks at 14,566, and then falls, so that by 2035 it's only 5434 extra.

But these aren't extra jobs per year, they are totals achieved by that year, as the appendix to the report makes clear.

Each of those numbers is already a total. By totalling the totals, Robb and his ministers have been double, triple, quadruple counting, right up to the power of 20.

And there's no doubt that's what they've done. Here's employment minister Eric Abetz in Parliament last Tuesday: "These trade deals will create almost 9000 jobs per year and create 178,000 jobs by the time all the agreements come into full force in 2035. This is visionary, this is wealth and job creating. This is providing a real, positive future for job seekers."

It's nothing of the sort according to the government's own modelling, and the reason it's not is that jobs can't be really be created by trade deals, not in general equilibrium modelling anyway.

The models assume that employment always moves back to its long-run non-inflationary equilibrium, regardless of the new projects and new agreements that are flung at it. Too much of a boost to jobs from a new agreement, and the Reserve Bank will push up interest rates to wind back inflation. Too little a boost and the bank will cut rates to boost jobs.

Trade agreements have little to do with jobs, whatever our ministers (and their soon-to-be-launched advertising campaign) say. And this one has relatively little to do with exports, despite their poll-driven rechristening of it as the "China-Australia export agreement".

Treasurer Joe Hockey told Parliament last week that China spends twice as much on Australian exports as Australia spent on Chinese imports. "It works in our favour by two to one," he said. "The trade agreement that we have with China today is going to make that even better."

No it won't. The modelling says the three agreements taken together will boost total Australian exports by 0.5 per cent. They'll boost imports 2.5 per cent. They are more like "import agreements" than export agreements. They will make Australia better off by encouraging more imports, but on the government's own figures they will send the trade balance backwards.

The modelling finds some industries will do well from the deal - dairy, meat and sugar among them. Others, mainly manufactures, will go backwards. It's worth doing if labour market protections can be built into proposals to import Chinese workers. But there's far less to it than we are being told. Twenty years on, we'll be glad it's in place, but we'll scarcely notice.

In The Age and Sydney Morning Herald

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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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Really Rio? The judge who put its claims about jobs to the test

Thank heavens. Monday Column

If only judges thought about economics.

Rio Tinto lashed out at the NSW Land and Environment court last Monday after it overturned a government decision to approve a massive expansion of its Warkworth open cut coal mine in the Hunter Valley.

The decision was “significantly obstructing investment and job creation in New South Wales,” the mining giant thundered.

It was “a blow to our plans for the Mount Thorley Warkworth mine and the jobs of the 1300 people who work there”.

If only the judge had thought about the impact on jobs.

As it happened the judge spent a good deal of time considering the impact on jobs, especially Rio’s far-fetched claim that its plan would have created an extra 44,600 jobs.

What he found will send shockwaves through the ranks of economic consultants. It will never again be safe to come up with a big number for jobs created (“direct and indirect”) expecting the decision maker to give it a tick because it is the outcome of an economic model.

The Treasury has been on to the scam for a long time.

In an economy near full employment you can’t create extra highly skilled jobs.

Here’s its former secretary Ken Henry addressing troops in 2007:

“Consider, for example, recent commentary in the press which argues that the government should support a nuclear power sector because jobs would be created. Where will the nuclear scientists and technicians come from? Is it seriously being suggested that they will come from the dole queue or from Indigenous Community Development Employment Projects?”

“The next time any of you get an opportunity to write a coordination comment on a Cabinet submission that proposes a taxpayer-funded handout for some stunning new investment proposition – and I predict that some of you won’t have to wait very long for such an opportunity – I suggest you draw attention to the submission’s failure to identify the businesses that will lose labour, and be forced to reduce output, if the proposal is agreed to.”

Rio Tinto used what is known as an input-output model to argue that if it spent more at its mine in the Hunter more jobs would be created elsewhere in the Hunter. That’s the sort of thing an input-output model is likely to conclude. Mining’s links to some industries (such transport) are strong, its links to others (such as communications)are weak. The model assigns each link a ‘multiplier’ and - voila! - out comes a disturbingly precise estimate of the total number of jobs created. Rio said expanding its mine would create an extra 44,675 jobs, where each is defined as full-time and lasting for one year.

It’s a common (if flawed) technique. Pizza Hut used it to claim the introduction of the Big Foot pizza would create thousands of jobs. But the organisers of really big events such as the Sydney 2000 Olympics have shied away from it, perhaps fearing close scrutiny...

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The study conducted for Rio by Andrew Searles of The Hunter Valley Research Foundation was a good example of a well-constructed input-output study (although the data he used was more than a decade old). The main problem with it is that is was an input-output study. As with all such studies it assumed there were unemployed resources on tap, ready to meet the firm’s needs.

“I am sure Dr Searles will agree with me,” the Australia’s Institute’s Richard Dennis told the court. “Quite explicitly the input-output data that is before you assumes the existence of what I refer to as a ghost workforce.”

“The idea that there are unemployed skilled mining and manufacturing workers in the Hunter Valley at the moment sitting and waiting for these projects to go ahead, I just don’t think is plausible, accurate or useful.”

Indeed the mining industry itself had been warning of chronic shortages and bidding up wages to grab workers from other industries.

Counting as jobs created the jobs workers went to without counting as jobs destroyed the jobs they went from was double counting.

“What would happen if every industry were to commission a consultant to write the same report for them,” Dr Denniss asked rhetorically.

“If every industry were to go and try and estimate the indirect jobs that flowed because of their industry’s existence, what you find is that Australia would employ around 200 per cent of its current workforce,” he replied using calculations from Bureau of Statistics input-output tables.

Dr Searles said he thought there was enough skilled unemployed labour in the region to meet the needs of the expanded mine and that the unemployment rate might climb in the future.

The court was told the rate for Singleton Council was 1.1 per cent.

Dr Dennis extolled the virtues of computable general equilibrium model which takes skill shortages into account. Dr Searles said he had never used one.

It wasn't Rio’s finest day in court, but it would be wrong for it to claim the judge didn’t seriously consider its claims about jobs.

In today's Sydney Morning Herald and Age


12/10224 - BULGA MILBRODALE PROGRESS ASSOCIATION INC v MINISTER FOR PLANNING AND INFRASTRUCTURE & ANOR





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How big is Australia's LNG boom?

Big enough to inflame economic growth, big enough to inflame interest rates:

Australia’s natural gas boom threatens to set off a new round of interest rate hikes, pushing economic growth above the level with which the Reserve Bank is comfortable.

An analysis commissioned by the industry itself finds that by 2016 LNG investment will add 2.2 per cent to GDP growth.

Written by Deloitte Access for the Australian Petroleum Production & Exploration Association the study says over the next few years substantial additions to capacity will propel Australia towards becoming the world’s second largest exporter of liquefied natural gas. Of the 14 gas liquefaction plants under construction or firmly committed around the world, eight are in Australia. If all the planned oil and gas investments come to pass, they will comprise over 64 per cent of all Australian investment.

At present amounting to 2 per cent of Australia’s gross domestic product, by 2020 when production and prices peak, oil and gas should be worth 3.5 per cent of the economy.

Capital expenditure is expected to average $23 billion in capital outlays per year until 2017. Output of oil and gas is expected to peak at $46 billion in 2020...

The report says as a result Australia’s GDP should increase “significantly above the reference case”.

By 2016 GDP is expected to be 2.2 per cent higher than it otherwise would have been.

The finding implies pressure to push growth up from its long-term average of around 3.25 per cent to near 5.45 per cent, well above the level with which the Reserve Bank is traditionally comfortable.

The report says the boom will depress the economies of two states, NSW and Tasmania, while dramatically boosting those of Western Australia and Queensland.

“This suggests resources and activity are being reallocated from those states to the resource intensive states,” it says. “This occurs as part of the broader and national welfare-enhancing structural adjustments needed to capitalise on the resources boom.”

The report warns against direct measures to assist industries suffering as a result of the adjustment saying “any new policy rigidities or constraints such as explicit industry protection measures, mandated local content requirements, onerous project approvals frameworks and additional fiscal imposts will ultimately sacrifice economic welfare and intensify adjustment pressure on other sectors”.

Mandating that some of the gas be used in Australia would reduce financial returns, essentially acting “as a subsidy to other industries and a tax on developing gas reserves”.

“Many of the current calls for continuation and extension of the reservation scheme appear to have a legacy element. A form of domestic gas commitment was a feature of the State Agreement which covered the North West Shelf Project,” the report says.

“If subsidy arrangements are longstanding, they can become deeply entrenched. This stands as a key risk associated with any broader application of a domestic gas reservation scheme on the east coast. Like other forms of industry assistance, once such a policy is in place, it can be very difficult to unwind, whatever its merits or demerits.”

In today's Sydney Morning Herald and Age


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Holiday Reading. Economics, "the most male of the social sciences"

"The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need. For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial. It is probably no accident that economics is by far the most male of the social sciences."

I agree with John Kay's description. I am less sure he has identified a fatal flaw. Yes, models are unrealistic - that's the point. A model that included everything wouldn't be a model, it would be reality. Simple models are good ones. But he is right, some people who use them have confused them with reality.

Kay begins:

The Map is Not the Territory: An Essay on the State of Economics

by JOHN KAY

The reputation of economics and economists, never high, has been a victim of the crash of 2008. The Queen was hardly alone in asking why no one had predicted it. An even more serious criticism is that the economic policy debate that followed seems only to replay the similar debate after 1929. The issue is budgetary austerity versus fiscal stimulus, and the positions of the protagonists are entirely predictable from their previous political allegiances.

The doyen of modern macroeconomics, Robert Lucas, responded to the Queen’s question in a guest article in The Economist in August 2009.[1] The crisis was not predicted, he explained, because economic theory predicts that such events cannot be predicted. Faced with such a response, a wise sovereign will seek counsel elsewhere.

But not from the principal associates of Lucas, who are even less apologetic. Edward Prescott, like Lucas, a Nobel Prize winner, began a recent address to a gathering of Laureates by announcing ‘this is a great time in aggregate economics’. Thomas Sargent, whose role in developing Lucas’s ideas has been decisive, is more robust still.[2] Sargent observes that criticisms such as Her Majesty’s ‘reflect either woeful ignorance or intentional disregard of what modern macroeconomics is about’. ‘Off with his head’, perhaps. But before dismissing such responses as ridiculous, consider why these economists thought them appropriate.

In his lecture on the award of the Nobel Prize for Economics in 1995,[3] Lucas described his seminal model. That model developed into the dominant approach to macroeconomics today, now called dynamic stochastic general equilibrium. In that paper, Lucas makes (among others) the following assumptions: everyone lives for two periods, of equal length, and works for one and spends in another; there is only one good, and no possibility of storage of that good, or of investment; there is only one homogenous kind of labour; there is no mechanism of family support between older and younger generations. And so on.

All science uses unrealistic simplifying assumptions. Physicists describe motion on frictionless plains, gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. To put such models to practical use, you must be willing to bring back the excluded factors. You will probably find that this modification will be important for some problems, and not others – air resistance makes a big difference to a falling feather but not to a falling cannonball.

But Lucas and those who follow him were plainly engaged in a very different exercise, as the philosopher Nancy Cartwright has explained.[4] The distinguishing characteristic of their approach is that the list of unrealistic simplifying assumptions is extremely long. Lucas was explicit about his objective[5] – ‘the construction of a mechanical artificial world populated by interacting robots that economics typically studies’. An economic theory, he explains, is something that ‘can be put on a computer and run’. Lucas has called structures like these ‘analogue economies’, because they are, in a sense, complete economic systems. They loosely resemble the world, but a world so pared down that everything about them is either known, or can be made up. Such models are akin to Tolkien’s Middle Earth, or a computer game like Grand Theft Auto.

The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need. For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial. It is probably no accident that economics is by far the most male of the social sciences.

One might learn skills or acquire useful ideas through playing these games, and some users do. If the compilers are good at their job, as of course they are, the sound effects, events, and outcomes of a computer game resemble those we hear and see – they can, in a phrase that Lucas and his colleagues have popularised, be calibrated against the real world. But that correspondence does not, in any other sense, validate the model. The nature of such self-contained systems is that successful strategies are the product of the assumptions made by the authors. It obviously cannot be inferred that policies that work in Grand Theft Auto are appropriate policies for governments and businesses.

Yet this correspondence does seem to be what the proponents of this approach hope to achieve – and even claim they have achieved...

Read the full thing

While we are at it, here's an "anthropologist's view":

Life among the Econ

by Axel Leijonhufvud:

"The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours. such as the Polscis and the Sociogs. Despite a common genetical heritage, relations with these tribes are strained-the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter-and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider. This probably accounts for the fact that the Econ have so far-not been systematically studied. Information about their social structure and ways of life is fragmentary and not well validated. More research on this interesting tribe is badly needed..."

Here's the pdf of the original 1973 journal article.







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Wednesday column: Earth to supporters of an ETS - we have a problem

Listen up

Julia Gillard is right. Althoucagh ridiculed, never put to Cabinet, apparently abandoned by the new-look Gillard herself and awarded first prize in The Chaser's Cash for Policy Clunkers contest, her promise of a 150-person citizens assembly to consider climate change has a compelling logic.

As she put it a fortnight back when she thought the idea was a winner: "You can’t create a circumstance where our economy transforms because you have put a cap on carbon pollution and then three years later we have a new government come in and sweep it all away and then three years later you have a new government come in and put a cap back on. We can’t do that. We need a deep and lasting consensus."

She put her finger on the deepest and least-spoken fear of all the experts and enthusiasts who promote an emissions trading schemes.

It's that, instead of spending money gearing up to cut emissions in the knowledge that the price of carbon will climb, polluters spend their money lobbying to bring down the scheme or to bring down the government that proposed it.

Why not? It's worked before. They could advertise. They could set up a website along the lines of "Keep Mining Strong." They could help push a prime minister under a metaphorical bus. It'd be value for money.

We now know there's no guarantee a government or an emissions trading scheme could withstand such an assault.

Reserve Bank board member and internationally recognised economic modeller Warwick McKibbin has been pointing to the weakness at the heart of such schemes for a decade.

As he presciently described the problem back in the days when John Howard was thinking of such a scheme, "in a democracy, a policy doesn’t become credible simply by being written into law. Every subsequent government will have the ability to repeal the law or to relax enforcement until it is irrelevant. Why would an energy company want to make a long-term investment knowing that? It’d easier to lobby to neuter the law.”

His solution? "Bluntly, you’ve got to create a powerful lobby group that will vigorously resist backsliding"...

Carbon emissions would be illegal without a permit. But the permits would be freely available - literally free, for 90 per cent of the present pollution. That would ensure an immediate 10 per cent cut. (Unless polluters paid over the odds for extra permits to be sold by a Central Bank of Carbon - more on that later.)

The genesis in the scheme is the design of the permits and the way they would be handed out. Each would last for 100 years and would allow a specific amount of pollution in each of those years. Think of coupons attached to certificates, one for each year. The coupon for the first year would allow 90 per cent of current pollution, the coupon for the next year somewhat less, the coupon for 2020 - 20 per cent less, the coupon for 2050 - 50 per cent less, the coupon for 2100 something close to zero.

Half the permits would go straight to polluters. But the other half - and this is the clever bit - would be given away to every Australian household. Businesses would try and buy them. Wise householders would hang on to them, selling just the coupons each year, or leasing their certificates for a decade or so knowing they had an asset that would appreciate in value.

Real environmentalists could burn them knowing they had permanently destroyed the ability to emit carbon for free. But the important point is that the householders and businesses who held on to the certificates would own something of value and would want that value to appreciate.

Just as Tesltra shareholders want the value of their shares to increase and are minded to punish any political party that tries to attack it, Australia would have a built-in electoral constituency for appreciating carbon certificate prices. Our retirement incomes and our children's inheritance would depend on it.

It ticks quite a few boxes. The Greens would like it because it would drive an immediate cut in pollution and create the certainty needed to plan to cut pollution in the future. The Coalition ought to like it because it revives John Howard's dream of a nation of mini-capitalists.

And Labor should like it because it would get business off its back - once and for all. Because businesses could make a lot of money by selling their free 100-year permits rather than polluting (essentially borrowing from the future) they would wind down pollution without complaining and without the threat of a Great Big New Tax.

The government's bottom line would scarcely be affected. It would neither take in nor pay out the billions essential to the scheme that ultimately cost Turnbull and Rudd their jobs.

To make things even simpler a separate Central Bank of Carbon would adjust the price for extra permits, probably once every five years in line with changing climate science. It's what our Reserve Bank does now for interest rates. It's regarded as above politics and it suits both sides to keep it that way. Financial markets could bet on what will happen to the price, just as they bet on what will happen to rates. It would allow businesses to better plan and to hedge against unwelcome developments.

When McKibbin first modeled the idea last decade the critics thought it too elegant. It wouldn't be needed because once an ETS had been legislated business and politicians would play by the rules. They mightn't think so now.

Published in today's Age and SMH.
Photo: Andrew Meares


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My hobby: Extrapolating

HT: EconGirl, Economists do it with Models, Original from XKCD Creative Commons


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Warwick McKibbin on pig flu

In BusinessSpectator

. He believes the current swine flu outbreak is approaching the 'mild impact' scenario for a pandemic

. Economic modelling shows the impact of a mild scenario would cost the global economy $360 billion

. The impact on Australia of the mild scenario would be a GDP reduction of about eight tenths of a per cent

. The US now has the largest number of reported cases and that can be devastating in the short term for an economy

. McKibbin applied for an Australian government grant to do real-time monitoring of the economic impact of a flu pandemic, but was rejected

. A pandemic will not extend the financial crisis, but the downturn will go deeper than expected this year and have a sharper than expected recovery

Meanwhile Andrew Leigh reports that Intrade has opened betting markets on Swine Flu

Read more >>

Two more excellent quotes from Tim Colebatch

"Treasury's latest forecast, released on November 5, implied that the worst financial meltdown since the Great Depression will do no more damage to Australia than the introduction of the GST. Sure, guys, whatever you say."

"It's the job of central banks to keep economies growing and on track. It's the job of commentators to tell the truth, to give readers information that is accurate, timely and relevant."

It's here.

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COLEBATCH: Don't believe anyone who won't tell you we're falling into recession

"The reality is that these forecasts are political. They are designed to buy time, offer reassurance, not to give useful information"

"THE OECD forecast that Australia's economy would experience modest but continued growth. Treasury agreed: there will be no recession, it said. And private forecasters agreed: the economy would slow but it wouldn't stop. The time was 1990.

In fact, Australia was already in recession. Yet the authorities told us we would escape it.

It is a bit of history we should keep in mind right now. Treasury, the Reserve Bank, the IMF, the OECD and most private forecasters are unanimous: Australia is in for rough times in the next year or two, but not a recession.

But then, they were almost unanimous in saying the same in 1990 — as Australia slid into a recession that left us with 11 per cent unemployment.

Why? In part, because even when forecasters know in their bones that a recession is coming, they don't want to be the one who delivers the bad news."...

Read Tim Colebatch's full article in the Saturday Age here.

Today,  as if to demonstrate that Tim is right, each of the forecasters is predicting positive growth in the September quarter figures to be released Wednesday.

A bit odd don't you think, that none say they are predicting a negative number even though three come close to it and one almost hits it.  I mean, how much closer to negative can you get than 0.0%?

The forecasts are below the fold:

Economists' GDP growth forecasts for the September quarter:

4Cast: 0.1

AAP: 0.2

ANZ: 0.2

Citigroup: 0.1

Commonwealth Bank: 0.3

HSBC: 0.2

ICAP: 0.2

JPMorgan: 0.4

Macquarie Group: 0.4

Moody's: 0.3

NAB: 0.2

RBC Capital: 0.2

TD Securities: 0.0

UBS: 0.3

Westpac: 0.1

Median Forecast: 0.2

Source: AAP

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The 'R' word. It's baaaaack!!!

THE Australian economy is already going into reverse and could be officially in recession within months, according to alarming new assessments from leading forecasters.

In a dramatic shift of outlook, investment bank JP Morgan yesterday became the first major forecaster to say the economy will contract in this quarter and the next — satisfying one of the most common definitions of recession.

The firm sent its gloomy forecast to clients early yesterday. Within hours, another forecaster, Deutsche Bank, revealed it was also expecting the economy to contract in the current quarter despite the Government's $10.4 billion economic stimulus package, much of which will hit consumers' pockets in December.

JP Morgan Australia chief economist Stephen Walters told The Age he did not expect the fiscal stimulus package to have much impact...

“I will cushion the down side, but I don’t think the fiscal stimulus package will be that significant,” he said.

“I think it’s important for confidence that the government is seen to be doing the right thing, but the way consumers are feeling right now with recession levels of confidence, with equity markets having fallen 40%, with funds frozen all over the country, with concerns about the stability of the banks, with global recession having kicked in, with consumers now worried about their job prospects, why would you rush out and spent $1,000 that the government sends out in a nice little cheque to you?”

“As much as 40% of Australia’s spending is done by the top 20% of income earners. It’s their behaviour that matters the most, and they won’t be getting cheques.”

Mr Walters expects Australia’s GDP to slide by 0.3% during the current quarter and by 0.4% in the following quarter.

“As recessions go, that’s fairly mild. In the quarter after that we have growth of 0.6% and its positive thereafter, so this is not like the early 1990s recession which was stretched over 5 quarters with more than a year of negative GDP growth.

While not explicitly forecasting a recession, other forecasters spoken to by The Age foresaw similar developments.

“That forecast is not too far from consensus,” said Professor Philip Adams, an economic modeller who runs the Centre for Policy Studies at Monash University. “Whether growth is positive or negative, it’ll be pretty low.”

Westpac’s chief economist Bill Evans said he regarded negative economic growth during the current December quarter as “very, very unlikely”.

“You would have to assume that people aren’t going to spend much at all of the fiscal stimulus package, and we think 40% of it will be spent. We are expecting economy to grow in the December quarter, but after that we are expecting zero growth in the March quarter and then only very small growth as the effect of the stimulus dies away.”

Asked whether that could mean a technical recession in the first half of next year, Dr Evans replied that it might, but only by using a very technical definition.

“Growth will be low, no doubt about that,” said the National Australia Bank’s chief economist Alan Oster. “We don’t think it will be a recession, but it might feel like one.”

The government will release its forecasts in the Treasury’s Mid year Economic and Financial Review next month.

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What if inflation hits 5 per cent?

It has. So what?

The Treasurer has declared victory in the war against inflation as the official rate hits 5.0% - double the Reserve Bank’s target.

Prices are now climbing faster than at any time since 1995, apart from the spike when the GST was introduced in 2001.

The Reserve Bank’s preferred measure of inflation, the so-called underlying rate, hit 4.7% in September - its highest point since the recession of 1991.

The acceleration means that prices are now climbing faster than wages, sending buying power backwards.

The Treasurer Mr Swan greeted the news by declaring that while inflation was historically high, he believed it had peaked...

“That is the view of the Reserve Bank and if you look at what's happening in terms of global commodity prices and global growth I think that is an accurate prediction,” he said.

Private sector economists agreed, the Commonwealth Bank’s Michael Blythe saying that financial meltdown and the risk of a global recession would “fix” Australia’s inflation problem.

“Inflation typically peaks and then turns down during slowdowns or recessions,” he said. “Rising unemployment takes the heat out of markets.”

Australia’s 5.0% inflation rate in the year to September would have been an even-higher 5.13% had it not been for a one-off drop in the recorded price of childcare as a result of the government’s decision to boost the 30% Childcare Tax Rebate to 50%. The move pushed down the recorded price of childcare 23% from July.

The fastest-growing prices during the quarter were those over which consumers had little influence. Petrol was up 2.0%, electricity up 4.9%, property rates and charges up 6.1%, and rents up 2.1%.

By contrast the slower-growing or falling prices were those that weaker consumer demand was able to influence. The price of men’s clothing fell 1.9%, the price of children’s clothing 2.1%, and the price of audiovisual equipment 3.9%.

The rate of inflation on imported goods fell during the September quarter despite the lower dollar, suggesting that retailers are paring back margins in order to keep customers.

“We expect this process to intensify as firms have less pricing power and feel less able to pass on cost increases in full,” said ANZ economist Warren Hogan. “Weaker employment will also help push down inflation.”

Mr Swan refused to speculate about the future of employment, saying the government would update its forecasts in its Mid-Year Economic and Fiscal Outlook, due “within the next month”.

Appearing before a Senate estimates hearing Treasury official David Gruen revealed that his department had conducted no formal economic modelling during the lead-up to government’s $10.4 billion economic stimulus package.

“We are dealing with a situation of substantial disruption in credit markets. With the best will in the world it is extremely difficult for formal models to come to terms with such events, he said. “It is a situation which calls for judgement.”

The futures market is still pricing in an 80% likelihood of an interest rate cut of 0.50 points at the Reserve Bank’s Melbourne Cup day board meeting despite the elevated inflation rete..

“Concerns about inflation have been overtaken by fears about slumping growth,” said Citibank economist Paul Brennan.

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How bad are things? Please tell us

The Opposition and a growing body of economists are calling on the government to release the economic forecasts behind this week's $10.4 billion stimulus package as speculation swirls around what they might contain.

"This pacakge is bigger than we have ever seen before," said Professor Bob Gregory of the Australian National University. "That must mean that their forecasts are worse than anything we've ever seen before."

"And this has all happened very quickly, which must mean that any forecast that is on the record is out of date."...

The latest official forecast made at Budget time in May is for economic growth of 2.75 % during the current financial year. It is not due to be updated until the release of the Treasury's mid-year review next month.

In September before the latest financial turmoil the International Monetary Fund predicted 2.5% economci growth this year falling to 2.2% in 2009.

Private banks have cut their forecasts dramatically, although most believe Australia will escape a recession. The ANZ is forecasting 1.7% this financial year, with growth in the September quarter falling to just 0.1% and in the December quarter to 0.55.

But the bank's chief economist Saul Eslake says he is to some extent operating in the dark.

"I am surprised that the government hasn't seen fit to share with us at least the gist of their advice about GDP and employment," he said."

In Parliament In Parliament the Opposition's treasury spokesman Julie Bishop asked the Treasurer whether "in the interests of levelling with the Australian people", he would immediately release the revised economic forecasts behind the $10.4 billion package.

Mr Swan replied that he would not be releasing any forecasts until the mid-year review.

"That's the reasonable thing to do, that's the sensible thing to do. We will put it out there in plenty of time for there to be plenty of scrutiny because we do believe in transparency," he said.

In information that did become available yesterday Commonwealth Securities concluded that Australia had recorded its biggest slide in wealth in 18 years.

The firm used an updated modellers database released by the Treasury to conclude that wealth per Australian had dropped 3.6% over the year to June, sliding $12,100 in just nine months.

"It would have plunged even further since June, highlighting the urgency of moves to boost spending," said CommSec chief economist Craig James.

Asked at the National Press Club for updated forecasts Mr Rudd said he expected "slower growth and more unemployment than had been projected" but did not go into further detail.

"That underpins precisely the nature of the package that we have put forward. this economic security strategy is for the future, and it is simply the first instalment," the Prime Minister said.

The ANU's Professor Gregory suggested that in the absense of information the package might make things worse.

"The message a lot of people may be getting is not that these extraordinary measures are going to save us all, but 'good god - things must be really bad', he said.

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Just when you thought NSW couldn't get more stupid...

it has handed over $30 million to the organisers of a V8 Supercar race

Really.

The new Premier Nathan Rees says the event will "contribute $A110 million to the state's economy between 2008 and 2013, at a cost to taxpayers of just $A30 million.

Does he read widely? (Unlike his Education Minister.)

If so, he'll know about the alleged economic "benefits" of V8 Supercar races.

To quote from myself:

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

The ACT Auditor General looked 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”.

As I went on to outline (all this is really very well known):

Most of the people who go to these events are locals. 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.

It's not as if the NSW Premier can spare the money.


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.

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"Tell the truth about tariffs"

Peter Dixon and Nicholas Gruen's challenge to Productivity Commission.

The Commission's reply will appear here.

Australia’s motor vehicle industry is asking the government to reconsider the tariff cuts recommended in the Bracks Report saying the evidence put forward to support them is built on a mistake.

The Bracks Review recommended cutting the tariff on imported motor vehicles from 10% to 5% in one hit on January 1, 2010.

It quoted the Productivity Commission as finding the cut would boost Australia’s economic welfare by $500 million.

But the creator of the economic model used by the Commission in its analysis claimed yesterday that it had misinterpreted its results.

Professor Peter Dixon of Monash University built the Monash Multi-Regional Forecasting Model used by the Productivity Commission for its economic analysis.

In a ten-page analysis of its results commissioned by the Federation of Automotive Products Manufacturers he claims that while they were right to conclude that cheaper imported motor vehicles would boost the amount of capital goods used in business, they were wrong to describe that as a boost to economic welfare.

“Capital goods have to be paid for,” he said...

“Either by Australians or more likely by foreign investors who capture the economic benefit. The only real boost to Australian economic welfare comes from the tax collected – and that’s much less.”

“This isn’t a debate about interpretation. It’s an error by the Productivity Commission. It created four hundred million dollars out of thin air.”

The Commission was tight-lipped yesterday about the analysis. It said it was reviewing it and might put a response on its website in due course.

The $400 million hole claimed by Professor Dixon is in addition to earlier quibbles with the Commission’s work which he presented to the Bracks Review as it was compiling its report.

Taken together Professor Dixon’s adjustments to the Commission’s modelling suggest that the net economic gain from cutting tariffs to five percent would be close to zero rather than the $500 million claimed by the Commission.

“I actually get negative benefits – a cost to the economy ranging from $14 million per year to $92 million, but these are tiny numbers in the context of the economy so its best to conclude that the net welfare effect is roughly zero.”

Professor Dixon was keen to point out that he wasn’t accusing the Commission of misusing his economic model, merely of misinterpreting its conclusions.

“This has happened before. In 1997 the Commission as desperately keen to show that cuts in car tariffs would boost economic welfare, and it also misinterpreted the model’s results.”

“I don’t mind people making mistakes. But if they don’t want acknowledge that, or if they say it doesn’t matter, they are abandoning an evidence-base.”

A spokesman for the Industry Minister Kim Carr said he had made no decision on cutting tariffs and would consider Professor Dixon’s report in deciding how to respond to the Bracks Review’s recommendations.

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FuelWatch: "The claim relied on by the Prime Minister is false"

The claim relied on by the Prime Minister that Western Australia’s FuelWatch scheme has cut the retail margin for petrol by an average of 1.9 cents per litre is false.

An examination by the Canberra Times of the methodology used by Australian Competition and Consumer Commission to arrive at that estimate finds that it hinges on an unusual definition of the word “average”.

In using the ACCC’s estimate Mr Rudd has often been careful to insert the words “up to” before “1.9 cents per litre” even though the ACCC’s documents themselves do not include the qualification.

Mr Rudd told Melbourne radio yesterday that the ACCC had examined seven years of Western Australia data and concluded that overall FuelWatch “represented something like a price difference between Perth and the eastern states of up to 1.9 cents a litre”.

The ACCC petrol price report released in December found that “the average of the price margin reduced by a statistically significant amount for Perth relative to the eastern capitals in the time since the introduction of FuelWatch”.

“The relevant weekly average price margin was around 1.9 cents per litre less on average,” it said.

The figure has been used to bolster the Government’s case against the Opposition and four of its own departments who have attacked plans to take the scheme national...

On Thursday the ACCC released updated modeling that further bolstered the government’s case concluding that that the introduction of FuelWatch to Western Australia in 2001 had cut prices by "an average of 3.5cpl for the highest price day of the week”, “an average of 0.7 cpl for the lowest price day of the week” and “an average of 1.8 cpl for the remaining middle five days of the week”.

The Prime Minister described that conclusion as “quite stark”.

But it hinges on an odd definition of the word “average”. The Canberra Times has confirmed that in preparing both sets of econometric analyses the ACCC calculated the “average” differential in price margins between Perth and the eastern capitals by adding up each price observed and dividing the total by the number of observations.

The method took no account of how often those prices were actually paid.

If, for instance, very little petrol was bought at the highest prices charged in Sydney and much more was bought at the lowest prices, the ACCC’s calculation of the “average” Sydney price would overstate the price actually paid in
Sydney and make Perth purchases look cheaper relative to eastern capitals than they actually were.

Indicative data on petrol purchases obtained by the Coalition’s Consumer spokesman Luke Hartsuyker suggests that Sydney petrol is in fact far more likely to be bought at times and places when it is cheap compared to Perth petrol.

During the month of August 2007 almost two thirds of the petrol sold in Sydney was sold for prices in the lowest 30 per cent observed.

In Perth only a little over one third was sold for prices in the lowest 30 per cent.

Expensive petrol prices were rarely paid in Sydney. There, only 3 per cent of petrol was bought at prices in the top ten per cent. In Perth almost 12 per cent was.

The ACCC did not have access to purchasing data for the full period of its surveys and so could not take purchasing into account in its calculation of “averages”, but the indicative data for August 2007 suggests that FuelWatch had a smaller effect on the average margins charged in Western Australia compared to the east than the 1.9 cents per litre quoted.

The Commission’s other finding – that the lowest margin charged in any given week fell by 0.9 cents per litre as a result of FuelWatch – remains valid.

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