For the fridge door: Every Morrison minister

Some odd promotions, if you ask me:

 

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Government grants sloppy, and perhaps corrupt

Before the last election the Turnbull government had an unofficial budget: $20 million for each electorate in play. It could be handed out as picnic tables, fire trails, skate parks, netball courts, disabled toilets, or anything else that made it look as if the government cared about the electorate.

A senior source told me it was clever – Turnbull had managed to cap the financial cost. Labor said little. It couldn't. In office it had done it itself.

That these sort of grants weren't what the Commonwealth was for, as was tacitly acknowledged as Treasurer Scott Morrison tried to keep a straight face in a press conference days before the vote.

Journalist Phillip Coorey had asked him why the Commonwealth was funding dunny blocks.

"People need them Phil, people need them," the Treasurer replied. Addressing community cohesion was important.

But not important enough to have an independent panel access applications and award grants on the basis of need. If that had happened it is highly unlikely that 20 per cent of the funds would have gone to electorates representing just 2 per cent of the population.

Labor used to have such a panel, although it didn't always follow its recommendations. In 2014 the Audit Office recommended that the Department of Infrastructure and Regional Development do the job. The government "agreed" with the recommendation, although it merely "noted" another that said applications should have to meet published merit assessment criteria.

In an almost ideal world we would have an independent body deciding on grants, in the same way as the independent Reserve Bank decides on interest rates, and for the same reason – the government can't be trusted. In an absolutely ideal world the Commonwealth wouldn't hand them out at all.

At a minimum we should have a Commonwealth anti-corruption commission. And we ought to outlaw bigger grants that are just as sloppy, allocated without tender.

In the budget the government awarded Fox Sports $30 million to "increase coverage of sports that receive low or no broadcast exposure". The criteria are so broad it'll meet them easily. The documentation released this month says it's a direct offer, "available only to Fox Sports Australia Pty Ltd".

In The Age and Sydney Morning Herald

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It's time (to take Labor seriously)

The shape of the next Labor government is becoming clearer.

This week we learnt that it will end the practice of signing Australia up to trade agreements that haven't survived a benefit-cost analysis.

Seriously. Korea, Japan, China. None of the three big agreements boasted about by Tony Abbott and Malcolm Turnbull has been subjected to an independent assessment of its benefits and costs. And nor has the far bigger, 5600-page, Trans-Pacific Partnership agreement signed by trade minister Andrew Robb shortly before he resigned and took up a position with the Chinese investor that runs the Port of Darwin.

Nor have any of Australia's agreements ever had to face official scrutiny after the event. "Not that I am aware of," were the words used by a foreign affairs official at a parliamentary hearing.

The US-Australia free trade agreement at least faced an unofficial analysis about the time of its 10th birthday in 2015. An economic modeller from the Australian National University applied the framework developed by the Productivity Commission and found it had cut rather than boosted trade between Australia and the US and the rest of world. Trade between Australia and the US also slid, but for other reasons.

It's easy to see why it cut trade with the rest of the world. Like most exclusive agreements it gave special access to exports from its members. Here's how it would have worked with the 12-nation Trans-Pacific Partnership (had Donald Trump not pulled the pin): Vietnam would have been a member but Thailand would not have been. The US-based Peterson Institute for International Economics has found that Vietnam would have exported more to Australia (which would have boosted its economy) in place of Thailand, which would have exported less (which would have harmed its economy).

And Australia would have had to change the way it made things, cutting inputs from countries such as Thailand and Indonesia under complex "rules of origin" if it wanted special access to the US, even where that meant much higher costs. The Korea-Australia agreement included 5200 rules of origin.

It's little wonder that the business organisation closest to the action, the Australian Chamber of Commerce and Industry, finds its members less than keen to use the agreements trumpeted by the Coalition. Only 15 per cent use and understand the Australia-US Free Trade Agreement, 5 per cent use it without understanding it, 17 per cent understand but don't use it, and 22 per cent neither understand nor use it. Another 41 per cent say it's not relevant to them.

The chamber hosted Labor's policy launch on Monday because it has long argued that a body such as the Productivity Commission should run the ruler over future agreements and should review existing ones every 10 years, both of which Labor would do.

Labor would also tear up what has come to be seen as a cosy relationship between the government and Treasury forecasters, handing responsibility for official forecasts to the independent Parliamentary Budget Office. It would make "convenient" forecasts such as the pick-up in wage growth in this year's budget less suspicious. The Treasury would also lose responsibility for preparing the five-yearly Intergenerational Report, a document so debased by politics in its latest iteration that Treasury staff distance themselves from it when giving public presentations.

And it would make explicit the trade-off between cutting personal income tax and cutting company tax, in part by publishing 10-yearly projections for the cost of budget measures and in part by not proceeding with the unlegislated part of the company tax cut in order to deliver relief to ordinary taxpayers first.

It has consulted widely about its plans, receiving detailed input from 20 economists.

Negative gearing would be limited to new homes, and the capital gains tax discount that makes it attractive would be halved. Payouts from discretionary trusts would be taxed at the company tax rate. Deductions for the "cost of managing tax affairs" would be limited to $3000. "Junk" health insurance policies would no longer be eligible for the rebate, and the rebate along with the Medicare levy surcharge would be frozen for five years.

Labor is inclined to accept the Coalition's proposed national energy guarantee, ending the climate policy wars by keeping the framework (subject to seeing it) and adjusting the emissions target as needed.

Although critical of the Turnbull government's cut-price national broadband network, Labor won't fully return to its original very expensive plan to deliver fibre to 93 per cent of households and businesses. It would aim for a touch under 40 per cent, a step up from the Coalition's 20 per cent but nowhere near as expensive as would be rewiring most urban addresses in the nation.

It would keep offshore asylum seeker processing, but it would aim to process claims within 90 days instead of indefinitely and would set up an independent body to oversee Australian-funded detention centres.

The policies are not all to everyone's liking, but at least they are set down on paper. Unless things change, this time next year we will be faced with a choice between a government that makes things up as it goes along and a government in waiting that knows what it wants to do.

In The Age and Sydney Morning Herald

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Labor ought to stop pandering to millionaires on pensions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

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Turnbull promised economic leadership. We're waiting

Unveiling his surprise strike against Tony Abbott a year ago, Malcolm Turnbull identified just one reason for rolling a sitting prime minister: "economic leadership".

"It is not the fault of individual ministers," he told a packed press conference in a Parliament House courtyard. "Ultimately, the Prime Minister has not been capable of providing the economic leadership our nation needs.

"We need a style of leadership that explains complex issues, sets out the course of action we believe we should take, and makes a case for it. We need advocacy, not slogans. We need to respect the intelligence of the Australian people."

Twelve months on it's easy enough to assess the economy. It's improved. The unemployment rate has slid from 6.1 to 5.7 per cent. The economic growth rate has climbed from 2.5 per cent to 3.3 per cent. We've got jobs and growth.

But as for leadership ("advocacy, not slogans") the jury's still out.

There's no doubt that Turnbull consults. Within weeks of taking office he gathered together in the Cabinet room 25 leading economic advocates who had spoken earlier at a Financial Review summit and went around the table asking each what they thought should be the highest priority. In a complete break with the Abbott era, the group included union and social service representatives. A month later amid debate over the best shape for superannuation tax concessions, he phoned Deloitte Access director Chris Richardson at home and asked him to walk him through the arguments.

Yet his actions after consulting widely have been timid. His much-vaunted innovation statement included nothing extraordinary. A Turnbull insider who was proud of the statement sold this as its chief virtue. It did little harm.

On tax, after seriously considering the case for a 15 per cent GST, Turnbull said "no" on the basis that treasury modelling found it would do next to nothing for economic growth and would require very big compensation payments. His treasurer Scott Morrison was slower to reach the conclusion, talking up the idea even as Turnbull killed it.

Turnbull and Morrison inherited a budget deficit set to hit $33.7 billion in 2016-17 then blew it out to $37 billion by boosting spending and cutting tax in a pre-election budget full of talk, but little action, about controlling spending.

Even their omnibus savings bill, due to finally go before Parliament on Wednesday, will save just $1.6 billion per year, about 0.4 per cent of budget spending. That cautious approach is the right one, but it's hard to reconcile with talk about budget repair.

Where they have been bold is in their approach to company tax and superannuation. Independent modelling conducted for Treasury finds the promised company tax cuts will eventually cost $8 billion per year. The Parliamentary Budget Office puts the figure at $14 billion. Neither Turnbull nor Morrison have said how they'll pay for them. They've placed a lot of faith in modelling that shows the tax cuts will boost growth, but none has them boosting it enough to become self funding.

The superannuation changes will make back just a fraction of what the company tax cuts will lose: $770 million per year. They too are based on Treasury advice and ought to be saleable if much of an attempt was made to sell them.

For all his talk about explaining complex issues and building a case, Turnbull has done it rarely – usually after rather than before making a decision. More often he hasn't needed to, because he has decided (perhaps wisely) to leave things as they are.

To a large extent the economy has been improving of its own accord as commodity prices rebound and the impact of the lower dollar settles in. Two Reserve Bank rate cuts have helped as well. Really bold decisions of the kind the Reserve Bank has been urging such as borrowing big for infrastructure, haven't yet been made. It's easy to get the feeling that we are not being taken into Turnbull's confidence as he promised.

But he hasn't been in office long, and a big chunk of the year was taken up with a marathon election campaign. He'd like us to think there's time. We're waiting.

In The Age and Sydney Morning Herald

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So you think you voted wisely

So you think you voted wisely. Up until 1984 the candidates' names on the House of Representatives ballot paper were arranged alphabetically. So much did this advantage candidates whose names were near the beginning of the alphabet that half of those elected had names starting between the letters A and H.

Andrew Leigh, who with Amy King researched ballot paper order for his book The Luck of Politics, says the candidate at the top gets an extra 1 per cent of the vote. He says that since 1996 there have been nine such candidates who won by less than 1 per cent – one of whom was former Labor leader Kim Beazley.

Gender is also a matter of luck. Leigh says being a woman costs you one-third of a percentage point and makes it much less likely that you will be preselected at all. Of the 13 vacant yet safe seats up for election this time, 12 went to men.

Having a Muslim-sounding name sets you back as well. Leigh and King reckon it equates to 2.3 percentage points. An Asian name costs 1.5 percentage points and a continental European name 0.7 percentage points.

Their findings echo those of Queensland economists Redzo Mujcic and Paul Frijters who asked volunteers to get on buses, claim that their travel cards didn't work and ask to stay. They ran the experiment 1500 times. The success rate of the whiter-looking volunteers was 72 per cent, the success rate of those with darker skin was 36 per cent.

In the Northern Territory, where photos are allowed on the ballot paper, Leigh and Tirta Susilo analysed the results of the 2005 election and found that in predominantly white electorates those candidates with lighter skin did better. In the electorates with a high indigenous population, dark-skinned candidates did better.

And beauty itself is important. Leigh and King collected the photographs displayed on how-to-vote cards in the 2004 federal election and asked an independent panel to rate them. They found the best lookers (in the top 15 per cent) got an extra 1 to 2 percentage points. Oddly, beauty mattered more for male than female candidates.

Leigh is now himself a Labor politician, re-elected on Saturday. He is male, Anglo and symmetrically faced. But he is self-aware enough to acknowledge that his success is due as much to luck as competence. Most of us aren't.

In his new book Success and Luck: Good Fortune and the Myth of Meritocracy Cornell University's Robert Frank writes that we are incredibly keen to believe the good things that happen to us are the result of our own actions. He says it's not such a bad strategy (it helps to take responsibility) so long as we realise that it isn't true.

Songs become hits if the first one or two web reviews are good, regardless of the others; unknown actors become megastars when they are chosen because the big names aren't available; VHS beat the Beta because it was adopted first by the porn industry.

Frank describes an experiment in which volunteers were sent into rooms and given a problem to solve. One member of each group was arbitrarily made the leader. After half an hour a tray of biscuits was brought in, with four for the three volunteers. In every case the randomly-appointed 'leader' grabbed the fourth biscuit.

It would be nice if those we elected on Saturday showed humility. It'd be nice too if they remembered that the richest among us might not deserve their tax cuts. It would be best if all of us acknowledged that, but for a few rolls of the dice, we would be somewhere completely different.

In The Age and Sydney Morning Herald

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'Mediscare' worked because we were already scared

Scare campaigns only work when they reinforce or add to what is already known. 

Within weeks of its election in 2013 the Coalition entertained a proposal from a former advisor to Tony Abbott as health minister to end free visits to the doctor by requiring a mandatory co-payment of $6. Anyone who didn't like it would be invited to take out private health gap insurance.

Its Commission of Audit recommended a co-payment of $15 per visit and $5 per concession card holder, and then its first budget announced that "previously bulk-billed patients can expect to contribute $7 towards to cost of standard consultations." Medicare Rebates would be cut by $5 and bulk billing incentives would "only be paid to providers when they collect the $7 patient contribution". It encouraged public hospitals to charge public patients who walked in off the street in order to stem the leakage from doctors.

Seven months later Abbott dumped the $7 co-payment and replaced it with a $5 co-payment, all of which was to come from doctors, also abandoning that a few months later. Then he announced plans to slash the Medicare Rebate for short visits from $37.05 to $16.95, also abandoning that a few weeks later.

In his second budget he extended an existing one-year freeze on the Medicare Rebates by a further five years to 2020. By then doctors incomes would have fallen 15 per cent relative to other incomes unless they abandoned bulk billing.

And he booked a budget saving of $57 billion over 10 years by lifting grants to states for running hospitals by much less than the cost of running them, a good deal of which is still baked in to the Turnbull government's budget numbers.

Within a year of taking office he called for expressions of interest from the private sector in running the $29 billion Medicare and Pharmaceutical Benefits Scheme claims system. Among the Australian firms that are believed to have responded are Eftpos, Australia Post and Telstra offshoot Stellar. Among the foreign companies are British services giant Serco, which provides immigration detention centre services, Japanese-US technology giant Fuji-Xerox, German software house SAP and US professional services firm Accenture.

Malcolm Turnbull went into the election campaign continuing to defend the outsourcing option, only to abandon it on Q&A after it came to be conflated with privatisation.

The scare campaign worked because Medicare's supporters were already scared.

In The Age and Sydney Morning Herald

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Switching sides. Now Coalition voters get the glooms

It's as if they have switched sides

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

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

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

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

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

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

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

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

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

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

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

In The Age and Sydney Morning Herald

 

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Hockey's most dangerous idea: We're neither lifters nor leaners

Of all of the factoids bequeathed to us by departing treasurer Joe Hockey, the most dangerous is that the Australian population can be divided into two:"lifters" and "leaners".

Hockey was following in the footsteps of United States presidential challenger Mitt Romney when he used the words in his first budget speech. Romney had claimed the US could be divided into "the 47 per cent" who were dependent on the government, and everyone else who did the work.

Hockey's opposite number in Britain, George Osborne, made the same point about "strivers" and "skivers".

"Two groups need to be satisfied with our welfare system," Osborne said. "Those who need it – who are old, who are vulnerable, who are disabled, or have lost their job. And there's a second group – the people who pay for this system, who go out to work, who pay their taxes and expect it to be fair on them too."

Hockey and Abbott made it crystal clear which side they backed. Days before Abbott was rolled they unveiled a new slogan: "Backing Hard-working Australians".

Lifters versus leaners is a dangerous notion because it seems to contain an element of truth. Many of Hockey's other claims could be dismissed: that "higher income households pay half their income in tax," that Australia might "run out of money" to pay for health, welfare and education, that "the poorest people either don't have cars or actually don't drive very far in many cases". They were just Joe being Joe.

But the idea that a majority of taxpayers work hard to support a large minority of dependents strikes a chord with many of us who pay tax, all the more so because the treasurer sends us "tax receipts" at tax time showing how much of hard-earned is spent on "welfare", on other people...

Except that it isn't like that. Only in the short-term does money flow from "givers" to "takers", from lifters to leaners. Over a lifetime most of us are both. We fund pensions while we work and then receive them when we retire. At any moment we can lose our jobs or lose our health or become disabled. Later we can recover. We can move from being "lifters" to "leaners" and back again.

All it takes is luck. But we seem to be hard-wired to not recognise the role of luck in our lives and to attribute what happens to either our skill and hard work or to our general uselessness.

Andrew Leigh outlines fascinating instances in his new book, The Luck of Politics. Leigh was an economics professor before entering parliament and becoming Labor's shadow assistant treasurer.

He says that in a series of experiments students were asked to play games and randomly made either "lucky" or "unlucky". In Monopoly the "lucky" ones were given $200 for passing go and a double roll of the dice. The unlucky ones got $100 and could only a single roll. Pretty soon the lucky players began taunting their opponents, banging their pieces and eating more food from the snack bowl. They behaved as though they were superior even though they must have known they were not.

And almost everything that happens to us is a result of chance. Joe Hockey would almost certainly not be the member for North Sydney were it not the result of a principled decision by his predecessor to retire early before he was eligible for the parliamentary pension. Leigh would not have got preselection for the seat in Canberra's north had the Australian National University (and his house) been located in Canberra's south.

All it takes is a tiny difference in a chromosome for someone to be born a woman instead of a man and be less likely to get promotion, or to be born shorter and be less likely to become a politician.

British economist John Hills reckons that in Britain at least most people get back roughly what they put into the welfare system. The wealthier are leaners as well as lifters because they are more likely to live longer and take advantage of subsidised health care and tax breaks on investments. The poor get don't get to put in much, but don't get to take out much either.

His book is called Good Times, Bad Times: The Welfare Myth of Them and Us. It's a myth Hockey might like to consider as he ponders what it's like to be treasurer one day, on the political scrapheap the next.

In The Age and Sydney Morning Herald

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Not shabby. Abbott's pension for life to top $300,000

Tony Abbott is set to go off into the sunset with an annual pension of $307,542 per year.

Although well below his prime minister's salary of $539,338, it's not to be sneezed at.

If he wants, he can take half of it as a lump sum of $1.53 million and take the rest as an annual pension worth $153,771.

Abbott has been in Parliament for 21 years. The rules stipulate that base of his pension is 6.25 per cent of the base parliamentary salary of $195,130 multiplied by the number of years of service.

For Abbott, that's 21 years, which works out at $256,000. But he won't get that much. The base of the pension is limited to 75 per cent of the parliamentary base salary, which means he'll be limited to $146,350.

On top of the base he will get extra for the time he has been a minister, the opposition leader, and the prime minister.

The extra works out at 6.25 per cent of the extra salary for each job, multiplied by the number of years he has been getting it. He was a minister for nine years, the opposition leader for four years, and the prime minister for two years. The loadings are $141,469, $165,861, and $312,208...

That makes a total top-up $161,192. Added to Abbott's base pension, that's an annual pension of $307,542.

The rules allow him to take up to half of it as a lump sum, where it is paid at 10 times the amount sacrificed. That's a lump sum of up to $1.53 million, which could come in handy. His house is still mortgaged. After losing his minister's salary in 2007 he reportedly remortgaged it in order to meet expenses.

If previous prime ministers are any guide, he'll also receive other entitlements. Kevin Rudd, Julia Gillard and John Howard each receive an extra $300,000 a year with which to maintain a staffed office, plus travel costs. If Abbott does leave Parliament, deciding what extras he gets will be one of Prime Minister Turnbull's first decisions.

In The Age and Sydney Morning Herald

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Trust. Why Abbott has become a brake on the economy

Here's what's missing: trust. Not just between Abbott and his backbenchers, but also between Abbott and us. If anything,  the leadership contest has made things worse.

As Abbott brought forward the timing of the leadership vote on Sunday his supporter and finance minister Mathias Cormann told the ABC the economy was "heading in the right direction".

He wanted "to build on the achievements we made in 2014".

Take a moment to consider the achievements and the direction in which things are heading.

That year began with a quarterly rate of economic growth of 1 per cent. After the budget it slid to 0.5 per cent, and then to 0.3 per cent. It's falling, rather than rising. The direction is down.

(Ignore the through-the-year figures Cormann quoted. They make the budget look good by including the very strong economic growth that preceded it.)

The Reserve Bank made its view about economic growth clear on Tuesday. Here's what it said when it cut rates an hour or two before its governor briefed Cormann and others in cabinet:

"In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak."

It's weak and it's bleak. It isn't heading "in the right direction".

Looking ahead the Reserve Bank expects growth to remain "a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected."

Unemployment has climbed from a quarterly rate of 5.3 per cent at the end of 2012 to 5.8 per cent at the end of 2013 to 6.2 per cent at the end of 2014. We get the first figures for 2015 on Thursday.

The direction is undeniably clear, but it's not the right one. Unemployment is worse than it was at the peak of the global financial crisis. The Reserve Bank expects it to get worse still...

Hockey and Cormann will tell you that while unemployment is growing, employment is too. But it's not, really. The number of hours worked per month grew barely at all throughout 2014. More people may have been employed at the end of the year than the start but on average they've been working less, some shifting to part-time work and others to fewer hours of full-time work. Disturbingly, the Reserve Bank says the number of hours worked per month has scarcely changed since December 2011 despite three years of population growth.

None of these facts would surprise anyone in business or anyone looking for a job. What would surprise them would be to hear from the team at the top that things are "heading in the right direction". It would make them think they were being lied to.

When trust vanishes, it's awfully hard to restore. That's because it vanishes slowly.

Joe Hockey's first budget was far worse than it seemed on the night in part because he didn't tell us the truth about it on the night. The usual calculations showing the households that won or lost were missing.   The treasury had prepared them as usual, the treasurer withheld them.

And he made up stuff. He said treasury had told him that fuel excise was "a progressive tax". It hadn't. He said the poorest Australians "either don't have cars or actually don't drive very far in many cases," something many of them know to be untrue. Petrol takes up a much bigger share of a low-income budgets than high-income budgets.  

He said his own wealthy electorate of North Sydney had "one of the highest bulk-billing rates in Australia". It had one of the very lowest in all of Sydney. He said "higher income households pay half their income in tax". They pay nothing like half. Even those on $200,000 pay just 36 per cent. Back from his holidays this January he revived the claim and went further saying typical Australians pay nearly half their income in tax.

"When Australians spend the first six months of the year working for the government with tax rates nearly 50 cents in the dollar it is a disincentive. You're working July, August, September, October, November, December just for the government and then you start working for yourself and your own household income after that for another six months, he said.

But Australia's tax-to-GDP ratio is around 30 per cent, including account all taxes, state and federal. It simply can't be the case that typical Australians pay nearly half their income in tax. They don't.

And exaggerated claims have eaten away at trust. Hockey said Australia was on track to run out of money to pay for its health, welfare and education systems. The figures put forward by his then health minister suggested otherwise. In ten years the cost of Medicare had climbed 124 per cent, the cost of the Pharmaceutical Benefits Scheme 90 per cent and the cost of public hospitals 83 per cent. But Australia's gross domestic product - the money we would use to pay for these things - climbed 94 per cent.

The government tells us it's concerned about future generations, but won't release the treasury's intergenerational report. It tells us it wants a discussion about tax, but won't release the tax discussion paper finalised late last year.

Without trust we lack confidence. We are neither spending nor investing what we should. Business and consumer confidence has been sliding since September.

Specific businesses are at a standstill. Universities don't know what fees they will be allowed to charge, students enrolling don't know what fees they will eventually be asked to pay, doctors don't know what will happen to their incomes, electricity generators don't know what will happen to the renewable energy target, big businesses don't know whether they will be hit with the 1.5 per cent paid parental leave levy and what it will be used for.

If they applied themselves, Abbott and his ministers could methodically work through each of these issues. But they wouldn't be trusted.

The government itself has become an impediment to economic growth. It had the ability to make a fresh start. On Monday it didn't take it.

In The Age and Sydney Morning Herald


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The economic case for changing leaders

Government MPs wondering whether to ditch Prime Minister Tony Abbott now or give him a few more months to get his act together ought to have a close read of the Reserve Bank's latest economic statement.

It's upped its forecast for unemployment and cut its forecast for economic growth. So bleak were the original forecasts presented to the board on Tuesday that they had to be massaged in the document made public on Friday in order not to harm confidence.

The budget update presented by Abbott and Treasurer Joe Hockey in December forecast low economic growth of 2.5 per cent this financial year followed by 3 per cent in 2015-16, each figure well below Australia's potential growth rate, which is why unemployment was going to climb to 6.5 per cent.

The figure presented to the board would have been for growth of around 2.75 per cent in 2015-16, embarrassingly low for a country with Australia's potential and painfully low for a government about to face re-election.

This information isn't the result of a leak from the board. It's the result of a calculation that works backwards from the forecasts published on Friday. Those forecasts are for economic growth of 3 per cent in 2015-16. But they were made after taking into account the most recent interest rate cut (which hadn't happened when the board was presented with the forecasts on Tuesday) and at least one more subsequent cut...


The Bank's rule of thumb is that two interest rates cut cuts taken together boost economic growth by around 0.25 percent after a year to eighteen months. It means that the forecasts presented to the board on Tuesday were for unsettlingly low economic growth of 2.75 per cent right through to mid 2016. They would have made Abbott's promise of half a million new jobs in five years impossible to achieve and would have seen the unemployment rate steadily rise.

The message government MPs will get if they delve into the economic statement is that things are far weaker than had been thought, so weak that action is needed now rather than later.

If Abbott survives and he and Hockey cobble together another budget like the last one only to be brought down later, the opportunity for a timely reset will be lost.
The message is that now is the time to look at everything afresh, followed by a period of stability later.

As well-intentioned as Abbott and Hockey might be, they are gaffe-prone and shown themselves to be unable to build a budget that inspires confidence and unable to get things through the Senate.

Business and consumer confidence took a hit after the May budget and didn't recover.

The mere installation of a new team is itself likely to lift confidence.

If it is installed next week before too much work is done on the next May budget there's a chance it can be used to turn things around.

The Australian economy is worth $1.6 trillion. Delaying restoring economic growth for another year would cost Australia $40 billion.

Waiting is costly.

In The Age and Sydney Morning Herald


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It's the small bribes that suck us in

The shocking thing about the gifts and favours uncovered by the NSW Independent Commission Against Corruption is that they are small.

Australian Water Holdings gave the Liberal Party $75,000 - a tiny sum compared to the $1 billion contract it was seeking. It sent the premier a $3000 bottle of wine. Its behaviour is typical. At the height of the ferociously fought battle over the plain packaging of cigarettes in 2010-11 British American Tobacco gave the Liberal Party $184,565. It did it in small parcels - $2200 to the NSW branch, $10,000 to the Victorian branch, a further $5500 to the NSW branch and so on.

Most political donations are even smaller. Away from politics they are puny. Doctors routinely get pens and free samples from drug companies. They cost the companies nothing compared to what’s at stake.

Yet they work. Equally shocking is the finding from laboratory experiments that small gifts achieve more than big ones. Truly.

A few years back professors Ulrike Malmendier and Klaus Schmidt from US National Bureau of Economic Research discovered that while a small gift persuaded the recipient to award contracts to the donor’s company 68 per cent of the time (instead of 50), a gift worth three times as much cut the response back to 50 per cent, which was no better than if there been no gift at all.

The finding has disturbing implications for legislators' attempts to wind back the impact of donations by limiting their size. It suggests they will achieve little.

The study is called You Owe Me. It could have been titled: ''When less buys more''.

Malmendier and Schmidt investigated a special situation, one in which a decision maker receives a gift intended to persuade him or her to select the donor’s product over another one for a third party. In the case of the government, that third party is the taxpayer. In the case of a doctor it’s their patient; in the case of a financial adviser, their client.

What’s special about that situation is that the cost of bad decisions isn’t borne by the person who makes them. It is borne by their client.

Malmendier and Schmidt deliberately designed their experiment to make it unlikely the gifts would have any effect at all. Gifts and bribes are usually thought to be influential only if the recipient knows they will see the donor again, or if the donor will find out whether or not they’ve selected the donor’s product.

In 15 rounds of experiments with 350 students they made sure neither condition applied. After the gift the recipient never saw the donor again and the donor never found out whether it had any effect.

And they made sure the recipients knew the gift is intended to influence them.

Yet they found the effects of small gifts were huge.

Even where the products offered by the donor were clearly worse than those offered by the non-donor the decision makers chose the the worse over the better product almost 50 per cent of the time, compared to only 10 per cent when there were no donations.

As the size of the donations increased their effectiveness waned.

Their explanation for the effectiveness of small donations is that they create a special bond, what they refer to as the “dark side” of our desire to be social. Put starkly, we find it hard not to be nice to someone who has just been nice to us, even if we know it’s a trick.

And we do seem to know. Asked whether the donors were trying to influence them or just being nice, almost all of the decision makers said the gifts were an attempt to buy influence. Doctors would doubtless say the same thing about gifts from drug companies.

Big gifts may be less effective than small gifts in part because they are so visible as to be unsettling. Few people like to admit to themselves that they being bribed.

The findings suggest that rules that require the disclosure of donations above a certain size are the wrong way around. They would have more effect if they focused on donations below a certain size. And making donations public has little effect. Another part of the experiment found the decision makers behaved in exactly the same way whether or not the client knew they had been accepting small gifts.

The implications go beyond politics.

Labor outlawed commissions for financial advisers in 2013. The Coalition plans to bring them back in a limited way by allowing banks to pay their staff ''volume-based'' bonuses of up to 10 per cent of their total wages.

It is an extraordinarily bad idea.

The small rewards the Coalition would allow may enable the banks to skew the recommendations of their staff more effectively than the big ones they would not. Small rewards are pernicious. They sneak in under our radar.

In The Age and Sydney Morning Herald

Read more >>

Switching sides. Suddenly Coalition supporters feel good (fun graph)

Suddenly it’s Coalition voters who feel good.

After six years of trailing, they are now on track to overtake Labor voters as the most optimistic of Australians and to remain that way for the entire life of the new government.

A graph compiled by Fairfax Media from 17 years of monthly surveys shows Labor voters remained more optimistic about the economy than Coalition voters for the entire six years of the Rudd and Gillard governments. Before that Coalition voters felt better than Labor voters for the entire eleven years of the Howard government. And before that through the Hawke and Keating years it was the Labor voters who felt best.

The latest survey, conducted in the days either side of the vote shows confidence amongst Coalition voters surged from a reading of 92 on a scale where 100 means optimists balance pessimists to a clearly-positive 110. Confidence among labor voters dived from 127 to 114.

Asked how it could be that Coalition voters suddenly switched from being negative to positive while Labor voters went the other way Westpac’s Bill Evans not all of the switch might be real.

Westpac Melbourne Institute survey asks five questions. Two concern family finances, two concern the economy, and the other one asks whether it’s a good time to buy a major household item.

The questions about the economy were the ones in confidence surged...

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Optimism about the economy one year ahead jumped 9 per cent, optimism about the economy five years ahead jumped 7 per cent.

But when asked about family finances, views were little changed. The proportion of Australians believing family finances had improved fell 2 per cent, the proportion believing family finances would improve climbed 2 per cent.

“While consumers say they are confident the incoming government will manage the economy better, they are not so confident as to believe their own situation will much improve,” he said.

“It’s the same with business. The NAB survey shows business conditions unchanged, but business confidence building. The two can’t coexist for long. Confidence can only be sustained if consumers spend and that can only happen if they feel good about their own finances and not just some amorphic view about the economy.”

Mr Evans concedes Coalition voting businesses and voters are likely to feel better about the economy for a long time. He is less certain they will back that apparent view with investment, employment and spending.

In The Sydney Morning Herald and The Age






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Do facts matter?

New research suggests they matter more than we let on

Imagine an election without facts. What if that’s where we are heading?

Both the ABC and politifact.com.au have set up “fact checking units,” innovations that would have once been welcomed. After all, without facts, how can you work out how to vote? But the new institutions have been met with scorn. The Australian newspaper has run commentary asking whether the units will check facts from a “green-left” or “so-called progressive” point of view. A Coalition senator has pointed to tweets once made by the man who now heads the ABC’s unit and asked how he can check facts when he has attacked the Coalition.

It is as if facts don’t exist independently of views - as if there are green-left facts, pro-market facts, pro-business facts, but not simply facts, able to be dug up by anyone regardless of their political persuasion.

It is true that Labor voters give pollsters a very different account of economic facts to Coalition voters.

The Melbourne Institute has been surveying consumer sentiment for decades. Among the questions it asks is whether economic conditions are improving or getting worse. Every month without exception for six years now Labor voters have been reporting brighter conditions than have Coalition voters.

But if you look back to just a month before Rudd was elected you see something remarkable. For every month under John Howard as far back as the eye can see the Labor voters reported worse conditions than the Coalition voters. The two switched their perception of the economy as soon as their side took (or lost) office.

It can’t be because the economy suddenly changed. The switch is too dramatic. And if the facts had suddenly changed the perceptions of voters on both sides of politics would most probably have moved in the same direction.

We are increasingly self-selecting our ‘news’. Whereas once one single set of news was presented to the nation each night at 7.00pm and just a couple of sets each morning in the newspapers, these days we are tailoring our own news feeds, relying heavily on twitter, web searches and sometimes openly partisan newspapers and radio stations.

Does that give us even less of handle on reality? There are worrying signs that it does.

The US went down the tailored news road early with Fox News, an openly partisan cable news channel completely unlike Sky News in Australia.

The ‘facts’ that its viewers outline to pollsters are far more likely to be false than those who rely on old-style media...

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After the initial phase of the Iraq War in 2003 Americans were asked whether or not US forces had found the much talked about Iraqi weapons of mass destruction.

An astounding 33 per cent of those who relied on Fox News falsely said they had. Among those who relied on the traditional networks the proportion was only 20 per cent. Among those who relied on public broadcasting it was just 11 per cent.

Other findings in the survey suggest that the more an American watches Fox News the more likely she or he is to believe things that are false.

It would be deeply concerning, were it not for the findings of an ingenious new survey released in May.

Researchers from Yale University and the University of California San Diego wondered whether the Americans reporting false beliefs really held them or were just ‘barracking’, having a lend of the surveyors to make a political point.

Their genius was to pay for correct answers.

Without payments, Republicans and Democrats were sharply divided in their responses to factual questions such as whether American deaths in Iraq were increasing and whether or not the world was warming.

But with small payments ($1 for the correct answer and 33 cents for using the option “don’t know”) almost all of the gap disappeared.

The proportion admitting they didn’t know became huge, up to 50 per cent.

When tested with money Americans appear to have a surprisingly good idea about what they don’t know, and when they do take a stab at something they are likely to guess the truth, even when it conflicts with their political positions.

The researchers disparage polling of the kind conducted in Australia saying “just as people enjoy rooting for their favorite sports team and arguing that their team’s players are superior even when they are not, surveys give citizens an opportunity to cheer for their partisan team”.

There’s a chance that deep down we are hardwired to know what is a fact and what is not, even if we don’t let on. There’s a chance we will take seriously the work of the fact checking units even if some of the barrackers say they will not.

In today's Sun Herald 



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An early Clive Palmer election campaign

As a student he stood for the University of Queensland Senate in 1974.

Here's his pitch:

From Stan Correy who prepared this year's forensic ABC Background Briefing program on Clive's backstory.

Read more >>

Okay, so who would be in my unity ministry?

I posted this in 2010.

At the time commenter David said it was: a pretty savage demotion of Gillard.

Actually, I would only change one thing. I think I was too hard on Julie Bishop. She looks better now than she did then.

Here we go.

Tim Madden, ABC News Online

My dream team:

Human Services - Brett Mason

Tourism - Warren Truss

Resources - Martin Ferguson

Agriculture - Christine Milne

Attorney General - George Brandis

Arts - Joe Hockey

Water - Nick Xenophon

Climate Change & Environment - Greg Hunt

Innovation & Industry - Kim Carr

Broadband & Communications - Paul Fletcher

Infrastructure & Regional Development - Robert Oakeshott

Finance - Wayne Swan

Housing - Mathias Cormann

Families & Community Services - Craig Emerson

Indigenous Affairs - Peter Garrett

Ageing - Sharman Stone

Sport - John Alexander

Health and Disability - Bill Shorten

Trade - Julia Gillard

Foreign Affairs - Stephen Smith

Industrial Relations - Tony Abbott

Education & Social Inclusion - Andrew Leigh

Veterans Affairs - Julie Bishop

Defence Support - Ian Macfarlane

Defence - Greg Combet

Immigration and Population - Penny Wong

Consumer & Corporate Regulation - Barnaby Joyce

Financial Services - Bernie Ripoll

Treasurer - Kevin Rudd

Cabinet Secretary - Tony Windsor

Prime Minister - Malcolm Turnbull

About right?


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Gillard: "I worked damn hard as Kevin Rudd's deputy to try and keep the government running"

Memories

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Rudd. The day the seed was planted in June 2010, as seen by my mobile phone:

The children with Kevin Rudd and Therese Rein at the top are: Nicholas (born 1986), Marcus (born 1993) and Jessica.


I wrote:

We all looked at our shoes, not making a sound - not even a camera click - desperately willing him to go on.

It was like a prayer meeting.

We applauded at the end.

Commentator Taylor:

The poor kid at the back has a haunted look that I'm sure I will forever associate with Julia Gillard.


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"Terrible" - Gittins on the Gillard government's first first full year

Looking forward, looking back.

Here's his annual talk to the business economists forecasting conference.

Ross Gittins:

"Taken as a whole, the first full year of the Gillard government has been terrible.

Julia Gillard has hardly taken a trick all year and her present standing in the polls is worse - much worse, consistently worse - than it was at last year’s election, when she failed to attract enough votes to form government in her own right. Her present primary vote in the low 30s would give her zero hope of winning an election. Only if she could get it up to at least 40 per cent would she be in the hunt. This time last year - three years out from the next election, assuming the government runs full term - I fearlessly predicted Labor would lose it, because ‘this generation of Labor is terminally incompetent’.

Having made that call, I’m sticking to it. I’m doing so even though I know full well how easily the political outlook can change over a period as long as a year, let alone two years. After all, who would have predicted in October 2009 that the election would be months early and fought not between Kevin Rudd and Malcolm Turnbull, but between Gillard and Tony Abbott, that Abbott would come within a whisker of winning and that Labor would be forced into an alliance with the Greens and rag-tag independents?

But I have to add that, at the end of her first year, Gillard and her government are looking in better shape than they did half way through it. The first point to acknowledge is that she’s held her minority government and its alliances together for a year - longer than many people expected - and it’s never seriously looked in trouble. The second is that it’s been a year of great achievement. The opposition has frequently criticised Labor for being unable to actually do anything but, as was always Gillard’s intention, this has been a year of ticking off items on the to-do list - in particular, the various items inherited from Rudd. Of the three big problems he left her, the carbon tax has been put to bed, the mining tax is well on the way and only the asylum-seeker issue remains chronically unresolved. Along with Gillard’s opportunity to be seen looking like a leader on the international stage with other leaders, these runs on the board do much to explain her recent slow improvement in the polls, in the two-party preferred and, particularly, as preferred prime minister.

While the polls continue moving in the right direction - however slowly and with however far to go - Rudd is unlikely to mount a challenge. There’s no reason to doubt his desire to return, and should the poll recovery falter, we’re likely to hear from him. Would the caucus ever turn back to him? There is so much continuing dislike of him they’d have to be terribly desperate, but it’s not impossible. Would it help? No. His grass-is-greener popularity in the polls would soon evaporate as voters were repulsed by this ultimate proof of Labor’s disloyalty, ruthlessness and lack of principle...

Read On...

Next year should be a year of consolidation and less frenetic policy making, with the government needing to be sure the introduction of the carbon price arrangements goes smoothly. Should the world economy stay on track, the government will press on with its priority of returning the budget to surplus - as, in all the circumstances, it should. Should things go really bad in Europe, the primary response will be from the Reserve Bank, but the government will at least have to reverse its rhetoric and allow the budget’s automatic stabilisers to widen the budget deficit, and may need to consider a new round of fiscal stimulus. For Abbott and the opposition it will need to be a year where, finally, they make their contribution more constructive, outlining their own plans for improvement - even if, as ever, they leave the revelation of their detailed policies until much closer to the election. The longer Abbott continues with his relentless negativity, the more he risks trying the patience of voters.

Can we be sure the minority government arrangement will hold together for another year? No. But the grubby deal to install the former-Liberal Peter Slipper as speaker means it now would take two by-election losses to bring Labor undone. It also reduces Labor’s dependence on any particular independent. And by now it ought to be clear to all that the independents on whose votes Gillard relies have much to gain by continuing to prop her up and much to lose by deserting her. It should also be clear that achieving continued co-operation from the people whose votes she needs is one of the things Gillard is good at.

Why Labor is so bad at it

I have no problem putting the boot into politicians who are flying high, but I don’t enjoy kicking people when they’re down. If for no other reason than that I prefer to be ahead of the conventional wisdom. But I can’t take a look at the political scene and not address the obvious challenge for political analysts: why exactly is this version of Labor so bad at governing?

A host of explanations has been offered, many of which have only some degree of truth and some of which are more in the nature of excuses. One we can dispense with is that it’s all down to the personal failings of Rudd. He had many failings and he left Gillard with a terrible inheritance of a far too long agenda of half-finished policy projects, but we’ve seen enough to know things didn’t immediately look up after his departure.

A favourite excuse of Labor and its supporters is that it’s been turned on by the Murdoch press. It’s true The Australian has turned from being a newspaper to a product aimed at gratifying the prejudices of a particular segment of the audience, but it is - by commercial design - preaching to the already converted. Its influence is limited to those silly people in Canberra who continue to take it seriously, imagining it still to be a newspaper. As for the depredations of Sydney’s Daily Telegraph, it was ever thus. That organ has been a vehicle for foisting the bosses’ views on workers since it was owned by Frank Packer. It’s true the radio shock jocks often take their line from those two outlets, but were they not available the jocks would just have to work harder to find their sources of daily indignation. So, sorry, but I think the Murdoch excuse is greatly overdone. It falls into a class of argument politicians trot out to sustain the faith of the party faithful, not because they believe it or expect the uncommitted to believe it.

I think part of the problem attaches to Gillard herself. The brutal circumstances in which she came to power count against her in the mind of many voters. I don’t doubt there’s an element of misogyny in the electorate’s failure to warm to her and that many people find her voice grates. But her deeper problem is her inability to come over on television as a warm and likable person. Some pollies have that ability, others don’t. Other politicians manage to substitute an air of paternal authority - don’t worry, father is in charge - for likeability (eg Malcolm Fraser, Maggie Thatcher), but Gillard can’t manage that, either.

Lack of an air of authority - leaders who look like leaders and hence command respect and compliance; leaders who seem legitimate - has plagued the Rudd-Gillard government. I’ve come to the conclusion that - at the federal level, at least - the Liberals really are the natural party of government. That’s what the electorate thinks, what business thinks, what the media think, what the Libs themselves think and what, deep down, even Labor thinks. On the central polling question of which party is best to handle the economy, the Libs always win. The Hawke-Keating government managed to out-poll the Libs for a while, but Rudd and Gillard never have. This is not a question of track record, but of long-held and deeply held stereotypes. The party of the bosses will always be better at managing the economy than the party of the workers.

This is what allows Abbott to turn opposition to outright obstruction without attracting criticism. It’s what allows Abbott to take the support of business for granted, while Labor knows it must always be seeking business’s approval. It’s what has allowed business to conclude Labor is anti-business even while Labor modifies its policies - including Fair Work - to avoid offending business. It’s what, in the battle over the mining tax before Rudd’s overthrow, allowed the public to believe the foreign mining giants’ ads claiming the tax would destroy the economy over their own government’s ads assuring them the tax wouldn’t be a problem.

It’s what explains the Libs’ ability to wind up the electorate over Labor’s mountainous deficits and debt and why few economists intervened to dispel the nonsense. It explains why the opposition has had an excessive influence over the government’s fiscal policy and why Labor is obsessed by returning the budget to surplus in 2012-13. It also explains why only at this point have economists entered the debate to attack the government’s deficit mania.

Labor’s universally assumed inferiority - combined with journalism’s highly selective approach to quoting evidence - explains the success of The Australian in convincing almost everyone - punters, gallery journalists and even Labor politicians - that most of the money spent on Building the Education Revolution was wasted.

Associated with Labor’s lack of apparent authority is the phenomenon of the slippery slope. When you’re in power and on top you get a lot of co-operation, compliance and tacit support from interest groups and the public generally - all of which help you stay on top. These benefits of incumbency give you the strength to stand up to particular vested interests and tide you through the ups and downs of the polls. But when your weakness in the polls becomes sustained, you hit the slippery-slope part of the curve where it becomes a lot easier to fall further than to claw your way back up. Where things start to unravel as people who formerly accepted the reality of your continuing authority begin to wonder how long you’ll survive, whether they should give you a push on your way and whether they should start cosying up to your likely vanquisher.

Though she seems to have made a little progress back up the greasy pole in recent days, Gillard has spent most of her time as PM sliding down the slippery slope. It’s a situation that emboldens your critics and opponents while making your supporters more cautious. So things have been unravelling. The denizens of the House with the Flag on Top - pollies on both sides, staffers and journalists - revere success, fear the successful and despise failure. Lindsay Tanner says the press gallery is either at your feet or at your throat. It shifts when it sees you languishing in the polls, emboldened to be a lot more probing and critical and take a lot less on trust. The denizens take the polls so seriously that everyone starts expecting anything you do will fail, and their expectations tend to be self-fulfilling.

One interest group that’s particularly susceptible to this behaviour is business. Business will live with a housetrained Labor government with a steady grip on power. But it does so against its natural preferences. Big business people expect Labor to court them, while quietly accepting it when the Libs choose to ignore or pressure them. Business is very unhappy with Labor and I have no doubt its disenchantment and its increasing willingness to make its unhappiness known is magnified by its perception the Gillard government is not long for this world. It’s willingness to accept the carbon tax has been diminished by Abbott’s success in turning public opinion against the tax. Its complaints against Fair Work - which don’t seem to have great substance - are directed mainly at persuading the next government to shift the balance back in favour of employers. If this does collateral damage to Labor between now and the election, so much the better.

Both the Rudd and Gillard governments seem remarkably inexperienced. This shouldn’t be an excuse because it’s unusual for incoming federal cabinets to have many members with previous ministerial experience. Labor doesn’t seem to realise that maintaining good relations with business isn’t just a matter of senior ministers trying to fit in as many boardroom lunches as possible, or even keeping in touch with the business lobby groups. It means having big business chiefs feel they can ring the PM about a problem and their being on the receiving end of calls from the PM to inquire about their views on relevant matters. The main union leaders would have such a relationship with the PM, but I doubt the business chiefs do. They’d know this and would feel alienated from Labor, especially because Howard was such a great private phoner of power-holders.

Similarly, Labor’s failure to make sure the big miners knew what to expect well before the unveiling of the resource super profits tax is a sign of inexperience. The name of that tax - chosen by Labor’s spin doctors - did much to convince the rest of the business community Labor was anti-profit and anti-business, without doing much to arouse the punters’ resentment of foreign mining giants. Labor’s PR people have been far too young, lacking much journalistic experience, let alone political experience. It should have recruited some old hands. Rudd treated his staff so badly he burnt through a generation of good advisers.

But Labor’s chronic inability to sell its policies to the electorate can’t be explained simply in terms of the inexperience of its spin doctors. It isn’t primarily about spin doctors. I think the root of this generation of Labor politicians’ problem - the key reason they’re so bad at governing - is their background. Unlike earlier generations, almost all of them are apparatchiks; they come from Labor’s professional political class: people who start working for ministers or unions straight from university and climb the Labor career path, never making a success of a career in the outside world or even spending a lot of time as an on-the-ground union official dealing with ordinary workers and disparate employers.

The trouble with this system is that it seems to be breeding a generation of politicians who don’t have a good feel for human nature and, above all, don’t give up their profession and enter parliament with a burning desire to make the world a better place. Their burning desire is to make cabinet minister. Their entry to parliament is a promotion and a pay rise, not any sacrifice. These guys don’t have deeply held values and convictions they’re prepared to fight for and run risks for. Their lack of conviction robs them of the ability to explain policies that arise from their framework of belief. They can’t fashion a compelling narrative of what drives them and where the government wants to take us. They lack the missionary zeal of someone like Paul Keating; they have no desire to convert. They think ‘selling’ policies is a matter for spin doctors and advertising agencies, not of working tirelessly to help people understand the vision and see why it’s so important. When you’re not passionate about explaining your policies, when you’re just a political player, you do what Labor has done from the moment it took office: focus on attacking your opponents, thus conferring them and their criticisms a status they wouldn’t otherwise have. When you’re not a passionate explainer, you avoid answering questions and merely repeat prepared lines.

The problem with all this isn’t just that you fail win public support for your policies, it’s also that the public can sense your lack of commitment and conviction, your preference for self-preservation over leadership, your interests over theirs. You lose authority and respect in the eyes of voters. Courage comes from convictions; public confidence in governments comes from people’s perceptions of your courage and conviction. As John Howard demonstrated with the GST, voters are perfectly capable of giving you grudging respect for pursuing a policy they don’t like the sound of.

Minority government may be the making of Gillard

But having said all that, I now have to highlight a qualification. At the end of its fourth year, Labor has now amassed an impressive list of achievements. Leaving aside its remarkably effective response to the global financial crisis, we have: paid parental leave, equal pay for community workers, plain packaging for cigarettes, the foundations for a national disability insurance scheme, a price on carbon, the likely passage of the minerals resource rent tax, and the continuing pursuit of compulsory pre-commitment on poker machines. (Admittedly, the mining tax was butchered and Labor’s health and hospital changes fell far short of their billing.)

Some of the items on that list may not greatly appeal to you, but they would to the Labor heartland. And it’s noteworthy that some of the items wouldn’t have been there had it not been for the insistence of those whose votes Labor has depended on to stay in government. On the carbon price, in particularly, Gillard had no choice but to press on with its early introduction. See what’s happened? The circumstances of minority government and the ferocious opposition of Abbott have left Gillard with no option but to take principled positions and stick to them through thick and thin. If her improvement in the polls proves lasting, it will be because her failure to win a majority has forced her to exhibit all the impressive qualities she seemed not to possess. Her steadfastness and ultimate achievement may be we winning her the grudging respect of the electorate.

Provided she can hold the numbers in the House for another two years, Gillard should benefit from the effluxion of time. It will give people more time to get used to her idiosyncrasies and more time to tire of Abbott’s. And there’d be something very wrong if more than a year of living under the carbon tax didn’t cause people to lose their fear of it.

It’s interesting to observe the way conservatives have transferred the mantle of bogyman from the ALP to the Greens. Labor’s greatest crime is not being typically wrongheaded Labor, but falling under the spell of the demonic Greens. Exhibit A would have to be the carbon scheme. But, apart from its higher levels of compensation to industry, it was little different from Rudd’s carbon pollution reduction scheme, which the Greens rejected out of hand. It’s not politic to say so but, in the end, it was the Greens who changed their tune, much more than Labor did.

The prospect of Abbott

Abbott has been far more effective as opposition leader than I and other smarties expected. He quickly learnt to keep disciplined and avoid putting his foot in his mouth, and quickly displayed his greatest, most enviable strength as a politician: an ability to ‘cut through’ - to have the things he says noticed and broadcast by the media.

His policy of blanket opposition to all the government’s policies has served him well. Many expected the electorate to tire of his relentless negativity, but it hasn’t happened yet. Even so, some strains are beginning to show. His autocratic style has put noses out of joint within the party and, should his standing in the polls ever slip, we will hear from his detractors. There is much discontent within the party and in business over his refusal to criticise Fair Work and propose any changes that could reawaken the spectre of Work Choices.

Despite the opposition’s remarkably strong standing in the polls, Abbott is not personally popular. He has a 55 per cent disapproval rating for his job as opposition leader. And the authoritative Australian Election Study, in which ANU political scientists surveyed voters soon after the last election, found that Abbott’s unpopularity was the main reason he failed to win enough seats. Though Gillard’s popularity rating was low, Abbott’s was a lot lower - lower even than Keating’s in the 1996 election.

Abbott has little interest in economics and no commitment to economic rationalism. His policy positions reek of populism, protection and direct controls. His solemn promises to roll back the carbon and mining taxes, but not reverse the goodies they will be paying for, leave him with a funding gap of many tens of billions he has, as yet, made no attempt to fill. How such a man could bring himself to outline the sweeping spending cuts needed to make good his promise to return the budget to surplus without delay is hard to imagine. He has, however, taken the precaution of refusing to use the services of the new Parliamentary Budget Office to cost his promises. There is no precedent for parties promising to abolish major new taxes already in operation, nor for governments actually doing it. I find it very hard to believe it would happen.

Should Abbott be elected, we face either a monumental breaking of promises or a government totally consumed by the effort needed to turn back the clock. Why the part of the electorate that cares most about good macro management and micro reform has had so little to say about Abbott’s incredible performance I don’t know. Perhaps they’ll have more to say as the reality of an Abbott-led government draws closer.

Observations on monetary policy

I normally begin this section observing that the market and the business economists have had another bad year in their efforts the second-guess the Reserve Bank’s moves in the cash rate, but this year I have to declare the second-guessers to be ahead on points. The notion that the Reserve might cut rates entered the futures market’s head a lot earlier than it entered the Reserve’s head, so the market has to get credit for that. I’m not sure the market was particularly prescient on size and timing - suggesting it might have been right for the wrong reason. I suspect the market was dominated by foreign players who merely projected North Atlantic conditions onto the Antipodes, making insufficient allowance for local conditions. But, as all of us in the prediction business know full well, a win’s a win. I wouldn’t make those criticisms of the other great hero of this episode, Bill Evans. He stuck his neck out ahead of all of us, we marvelled at his folly, but he turned out to be right and he deserves all the accolades he got.

From where I sit it’s clear to me that to make a legendary call like Bill’s you have to get well ahead of the game, well ahead of the data - and you have to be right. When I saw Bill make his call I thought, that’s not in the Reserve’s plan, so he’ll only be right if he foresees developments the Reserve doesn’t foresee and those developments are big enough to change the plan. He did and they were.

The Reserve begins each year with a view of how the year’s going to pan out and a rough idea of the policy adjustments the outworking of that view will necessitate. It must have such a view because it has an on-the-record forecast, and that forecast is its view. The trick for you guys is to work out what its forecast tells you about the policy adjustments needed to bring the inflation forecast about, given the growth forecast.

This year the Reserve was expecting growth to accelerate as the effects of the resources boom spread through the economy, adding to inflation pressures at a time when we were already close to full employment. It was therefore expecting to have to tighten a few times as the year progressed. But here’s the point: it’s continuously testing its forecasts and its expectations against the data as they roll in. And it makes its judgments about whether policy needs to be adjusted one board meeting at a time. As events unfolded, the economy didn’t accelerate in the way it had been expecting, and so the Reserve never reached a point where saw the need to act on its ‘bias to tighten’. At first there was the temporary setback of the Queensland floods - which proved less temporary than first thought - and then there was the backwash from the growing sovereign debt problems in Europe, mainly on business and consumer confidence. By November it was clear the economy wasn’t taking off the way the Reserve had expected - mainly because of the confidence backwash from Europe - so the Reserve wasn’t going to have the trouble keeping inflation within the target range it had expected to have, thus allowing it to make what it expects to be a once-off reduction in the cash rate to get it back to neutral. It’s worth noting that part of the scope for this move came not from the effects of Europe but from the past and future revisions to the underlying inflation figures arising from the Bureau’s reweighting of the index.

I don’t think the Reserve has very firm ideas about where the stance of policy goes from here. The economy is pretty much in equilibrium, policy is set at neutral, so the rate will stay where it is until developments occur that knock the economy off its equilibrium path - and off the Reserve’s forecast - in one direction or the other and require a policy response. Clearly, the balance of risks is very much to the downside.

But Bill has made another call and, as I understand it, is predicting another three cuts -presumably 25-basis-point cuts - next year. Here again you see him getting well ahead of the game; well ahead of the Reserve’s thinking, as expressed in its forecast. He can see something coming down the pike the econocrats can’t, and he may again prove himself to be more prescient than them. What would fit Bill’s call of three further cuts over the course of 2012 would be for the economy to slow down rather than speed up as forecast - for it to run out of gas, presumably because of growing caution and uncertainty on the part of business and consumers in response to continued turmoil in Europe. This would be manifest in a continuing rise in unemployment and an inflation outlook that was even more benign, thus allowing the rate to be lowered another click. Of course, were Europe to turn into the full catastrophe, we all know from the events of late 2008 how the Reserve would react. In that case I wouldn’t be surprised to see three cuts next year, but they’d probably come thick and fast, and each be nearer 100 points than 25.

I remarked in my column in November that when the news is full of stories about some economic issue and the authorities pop with a policy change, all the instincts of the media and the punters are to assume that A caused B. In this case, we hear all this bad stuff from Europe, which makes us think the European economy is stuffed, therefore we must be stuffed and that must be what caused the Reserve to slash its forecast and cut the rate. I think all humans have a tendency to string together chains of cause and effect in this way and for our thinking to be unduly influenced by those events that have ‘salience’ (prominence in our consciousness) because they are so dramatic, so highly publicised or so recent.

My point is that this defective reasoning may be very human, but economists need to do better. Because the markets and business economists spend so much time studying developments overseas - usually the US, but these days, Europe - and they do that because national financial markets are so highly integrated - these developments have great salience in their minds, which can tempt business economists to over-weight them when forming views about likely developments in our economy - our real economy.

We need to remember that overseas events may be very exciting and very important, but they’re only relevant to us, our forecasts and our policy stance to the extent that, by some clearly identified channel, they have an effect on our real economy. They may be big in Europe, but are they still big by the time they reach us? Our real economy isn’t nearly as well integrated with the world as our financial markets are. Our domestic demand (GNE) accounts for almost all of our aggregate demand, sometimes more than all. As I keep reminding my readers, roughly 80 per cent of what Australians produce they sell to other Australians and roughly 80 per cent of what they purchase they buy from other Australians. Of course, the sharemarket is a more important channel than it used to be, and so - thanks to an ever-more globally integrated media - are confidence effects. I say all this simply because I keep hearing business economists making predictions about what the Reserve will do, and explaining why it’s done what it’s done, much more in terms of overseas development than I see in all the Reserve’s detailed exposition of why it did what it did. You’ve got to get your direction of causation right. The Reserve is managing our economy, it’s responsible for our inflation rate. Its highest consideration will be what’s happening in our economy and its interest in what’s happening in other people’s economies is limited to assessing the extent to which those events impinge on our economy. That’s obvious, but people who know a lot about what’s happening in other economies seem to keep forgetting it. Sometimes I think the traditional order in which the econocrats set out their analysis - start with the world, then move on to the domestic - may confuse people as to which is the more important.

Last year I advanced my theory that the timing of rate changes is influenced by ‘bureaucratic neatness’. At the time I said:

Over the past five years the Reserve has changed rates 20 times. Since there are 11 meetings a year, if decisions to change rates occurred at random, each month would have a 9 per cent chance of being chosen for a rate change. The four meetings a year that are preceded by the release of the CPI and followed immediately by the release of the statement on monetary policy, would account for just over 36 per cent of random chances. But, in fact, the SoMP months - February, May, August and November - accounted for 65 per cent of rate changes, with November alone accounting for 25 per cent. The point is that the Reserve has set up a pattern in which the SoMPs come soon after the meeting that comes soon after the CPI release, and two of the SoMPs come not long before the Reserve’s twice-yearly appearance before the parliamentary committee. Remember, too, that the release of the CPI is a key influence on the revision of the Reserve’s inflation forecasts, which are published in the SoMP and which heavily influence decisions about rate changes. The SoMP serves as the main vehicle the Reserve uses to explain and defend its rate decisions. Is it surprising that, having carefully set up the timing of its key publication and parliamentary appearances, the Reserve is more inclined to fit its decisions into that timetable? But why in the past five years has the November pre-SoMP meeting had more than twice the hits that the other three pre-SoMP meetings have had? Perhaps because of an unconscious desire to get the books straight before the end of the year and the knowledge that what you’ve done has to tide the economy over until February.

That was a year ago. What’s happened since then? We’ve had just one rate move and it happened on . . . Melbourne Cup Day, making it the sixth cup day move in a row. Still think it’s mere coincidence? Last year when I advanced my crazy, utterly economics-free theory, my mate Rory Robertson was the first to express his scepticism. So I asked some relevant econocrats what they thought of it. They thought it had some validity. Provided the Reserve hasn’t got behind the curve, and thus needs to catch up ASAP, it will be more inclined to move in those months that fit its carefully constructed reporting cycle.


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