Sunday dollars+sense: The angry email catcher

Have you ever sent an email that you wish you hadn't? And what on earth does that question have to do with global warming?

The connection is the idea of a “nudge”, which we discussed here last week.

Richard Thaler and Cass Sunstein from the University of Chicago are promoting the idea of a “nudge” to get us to get us to relatively painlessly cut our greenhouse gas emissions.

In their book Nudge, they describe what happened when Southern California Edison gave each of its customers an ambient orb, which was a ball that glowed red when they were using lots of power and green when they were not.

They cut their peak energy consumption 40 percent.

They call the idea “libertarian paternalism” - no one was forced to use less electricity, just paternalistically nudged.

Not everyone likes the idea...

A Harvard economics professor Edward Glaeser has complained that it is worse than outright paternalism. At least when an authority introduces a regulation it has to justify it. People can rebel. With nudges there is often no accountably and no opportunity to rebel. They are about manipulation - something we shouldn't want our authorities to get good at.

But Thaler and Sunstein are undeterred, and their ideas are getting more creative. Among them a voluntary savings account for smokers trying to give up. It would have the unusual feature that if the would-be non-smoker failed a urine test some months later the savings would disappear and be sent to charity.

And their favorite: the angry email catcher. It is always best to think twice before sending an angry email, and then probably not to send it. Their yet-to-be-designed system would help by detecting an angry email in draft and popping up a message saying, “WARNING: THIS APPEARS TO BE AN UNCIVIL EMAIL. DO YOU REALLY AND TRULY WANT TO SEND IT?”

A stronger version would say “WARNING: THIS APPEARS TO BE AN UNCIVIL EMAIL. THIS WILL NOT BE SENT UNLESS YOU ASK TO RESEND AFTER TWENTY-FOUR HOURS.” It would be possible to bypass the delay, but it would require work, perhaps putting in a password.

The customers of a few failed Australian financial institutions might be wishing their computers had been fitted with something similar. Perhaps a message saying: “WARNING. YOU ARE ABOUT TO BORROW LOTS OF MONEY TO BUY SHARES THAT CAN FALL AS WELL AS RISE IN VALUE. ARE YOU REALLY PREPARED FOR WHAT WOULD HAPPEN IF THEY FALL?”



Edward L Glaeser, Paternalism and Psychology, Regulation, Vol. 29, No. 2, pp. 32-38, Summer 2006

Richard H Thaler, Cass R. Sunstein, Libertarian Paternalism Is Not an Oxymoron, The University of Chicago Law Review, Volume 70 Fall 2003, Number 4

Richard H. Thaler and Cass R. Sunstein, Nudge - Improving Decisions About Health, Wealth, and Happiness, Yale University Press, available Mar 31, 2008 ISBN: 9780300122237

Thaler and Sunstein's website: http://www.nudges.org/


UPDATE: Blogger fmark alerted me to the fact that in the Endora email system, such a thing does exist.

"MoodWatch™ is a new language tool that acts as an emotion monitor for your email that flags aggressive language and calls it to your attention."

It even grades your email:

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The summit that will matter

The 2020 Youth Summit - with 100 of our best and brightest - is on right now, on Saturday and Sunday at Parliament House in Canberra.

I'll have the thrill of reporting it tomorrow for our paper. Ten of the participants will take part in the Summit itself next week.

Here's an extract from the excellent opening speech delivered this morning by the Deputy Prime Minister Julia Gillard:

"Recently, Australian archaeologists have been digging up large numbers of interesting objects at a desert site by the Hope Downs Iron Ore Mine, around 310 kilometres from Port Hedland in Western Australia.

They’re just small things: cutting tools that can fit in the palm of your hand; microscopic seed remains; charcoal from ancient fires.

Not much, you would think.

But using complex radiocarbon tests, scientists have dated them as at least 35,000 years old. And they’re confident that just below these finds there is another layer of human-created objects that push the timeline of these discoveries back to 40,000 years.

It’s being regarded by some as one of the most significant prehistoric records of humanity ever found – with the potential to tell us a great deal not only about the people who preceded us, but our ancient climate as well.

I want you to consider the implications of this.

It means that for 1,000 generations, Australians – in this case the Martidja Banyjima people – have been digging, cutting and transforming Australia’s landscape and climate, and creating a civilisation here, where we live.

But in the last 220 years since the arrival of the First Fleet – and most notably during the last century and a half when the industrial revolution was brought to Australia – our impact on the country has accelerated – to the point where, within the space of just a handful of generations, we may have inflicted irreversible and perhaps highly damaging change on our home.

The next couple of decades will confirm whether or not this is true.

Now, we don’t want to idealize Australia’s distant past. Progress has brought untold benefits. But it has also thrown up challenges.

Not just the challenge of dangerous climate change – but new forms of inequality, new health problems, transport congestion and a host of new moral issues for us to deal with. This is the history on which our future has the built – and the issues you must address.

Each of us stands at the end of that 40,000 years of Australian climatic, economic, social, technological and creative change.

My generation is responsible for its fair share of what has occurred – the good and the bad.

And next week some 900 other members, mostly of my generation, along with ten others from today’s audience, will follow you to Canberra.

There will be a lot of expertise and knowledge among them.

They will propose a lot of policy ideas.

But they won’t be the ones who have to carry the most long-term and perhaps most important of their ideas through to completion. They won’t have to live with the consequences.

As the 1,001st generation of inhabitants of Australia, that responsibility will eventually fall to you."

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THE BUDGET BLEG: What should be in it?

That's what I am writing about next Monday, for Tuesday's column.

I have quite a few ideas, but then I thought maybe someone reading this blog has one, or more, as well.

I am looking for ideas that would fit in with the Government's stated objectives (many of which have to do with saving money) and which would be politically realistic.

One is to end the special Fringe Benefits Tax treatment for motor vehicles and save up to $2 billion a year.

Another is to impose the same import duty on SUVs as cars.

What ideas do you have? I would love to add them to the mix.

Please put them in comments here.

Thanks.

P

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Full-employment no longer

The only region that had it, has lost it.

Full-employment has deserted the Australian Capital Territory.

Figures released by the Bureau of Statistics yesterday show that the number of unemployed Canberra residents climbed back up above the number of vacant jobs in March for the first time since last May.

An extra 598 Canberra residents joined the unemployment queue in March taking Canberra's unemployment total to 6,767 – the highest since the start of 2007.

By contrast the number of Canberra job vacancies has shrunk to 5,374 – the lowest since the start of 2007...

The chief executive of the ACT Chamber of Commerce Chris Peters said that Canberra businesses were putting off hiring workers.

“They are in a holding pattern, at least until after the May Budget,” he said.

“In the lead-up to every election business confidence and the ACT economy goes flat, no matter how certain or uncertain the result is going to be.

“Usually after the election everything bounces back very quickly. But that didn't happen after November's election.”

“My view is that because the Commonwealth has such a significant impact on the ACT businesses in Canberra are waiting to see what's in the Budget. They are putting on hold decisions about capital and people.”

“We saw investment in building starting to slow in the June quarter last year and short-term leasing of equipment started to slow in the September quarter, again in the lead-up to the election.

“For now, it's a holding pattern.”

The ACT's unemployment rate jumped to 3.5 per cent in March - its highest level since January 2007. In trend terms the rate edged up from 2.6 per cent to 2.7 per cent, and remains the lowest in Australia.

The nationwide unemployment rate jumped from below 4 per cent to 4.1 per cent in March as an extra 13,800 Australians joined the unemployment queue despite the creation of 14,800 new jobs.

The Employment Minister Julia Gillard said the employment numbers were “still very, very strong” but she said that the latest interest rate increase has obviously hurt Australians.

“We know that the environment for many working families is very, very tight indeed,” she said.

New South Wales was the surprise winner from the employment figures, gaining close to an extra 35,000 workers in March. Victoria lost around 20,000.

Westpac senior economist Anthony Thompson said that the national employment market was likely to remain strong even while the broader economy turned down.

“Firms are hoarding labour after finding it so difficult to attract and retain staff for so long amidst an historically tight market,” he said.

He expected the unemployment rate to remain close to 4 per cent right through until the end of the year.

ANZ economist Riki Polygenis agreed, saying that for the moment firms were reluctant to lay off quality staff for fear they may not be able to replace them when economic conditions improved.

In the meantime the number of advertised new vacancies was falling.

Enterprise bargaining data released by the Department of Employment and Workplace Relations yesterday showed wage growth broadly steady, with private sector wages up 3.8 per cent and public sector wages up 4.3 per cent in existing agreements and private sector wages up 3.8 per cent and public sector wages up 4.2 per cent in new agreements.

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Feel like shopping? You are getting lonely.

The International Monetary Fund says a recession in the United States is now inevitable and that there is a 25 per cent chance of a global recession.

The assessment, in the Fund’s latest World Economic Outlook released overnight in Washington comes as the latest Australian survey finds that consumer confidence has sunk to a new 15-year low.

Ahead of flying off to Washington later today for the half-yearly meetings of the IMF and the World Bank the Treasurer Wayne Swan said that a recession in the United States would affect Australia and that it could well have a fundamental impact on our two fastest-growing customers, China and India.

The Westpac-Melbourne Institute consumer sentiment survey suggests that confidence has collapsed since the start of the year.

Whereas in January 47 per cent of Australians agreed that now was “a good time to buy a major household item” by last week that figure had fallen to 27 per cent...

Significantly the proportion of Australians believing that now was a “bad time” to make such a purchase climbed above 50 per cent.

The slide of 1.3 per cent in the confidence index in April followed a slide of 9.1 per cent in March and the biggest three-monthly slide on record.

It came in a month in which the Reserve Bank did not lift interest rates.

The breakdown shows that the collapse in confidence has extending well beyond mortgage holders, drawing in outright homeowners and renters, whose sprits had previously been comparatively high.

The confidence of tenants slid nine per cent in the April.

On the 7.30 Report last night Report the Treasurer Wayne Swan confirmed that the Chairman of the retailer Myer, Bill Wavish had complained to him directly that the Reserve Bank was hitting consumer confidence “with a hammer”.

Mr Swan said that while that was a “tough assessment”, he believed in the independence of the Reserve Bank.

Asked whether he agreed with the approach the Bank had taken, Mr Swan said he was “completely in step” with it.

“The most important thing that we have to do is to deal with the primary cause of high interest rates which is high inflation,” he said.

The Opposition Treasury Spokesman Malcolm Turnbull accused Mr Swan of talking down the economy by focusing on inflation saying such talk was hurting “consumer sentiment, business confidence, and inflationary expectations”.

The IMF’s forecasts released overnight have Australia’s inflation rate remaining well above the Reserve Bank’s ceiling of 3 per cent both this year and the next.

They predict that Australia’s economic growth rate will slide from 3.9 per cent to 3.1 per cent in the coming two years and that Australia’s rate of unemployment will edge up to 4.3 per cent.

The IMF has cut its forecast for growth amongst the advanced economies in total to just 1.3 per cent in 2008 and 2009..

It predicts that the United States will tip into a mild recession this year before starting a modest recovery in 2009.

Its forecasts for global growth have been sliced to 3.7 per cent and 3.8 per cent, and it warns in the document that the risks to those forecasts are “tilted to the downside”.

“The IMF staff now see a 25 per cent chance that global growth will drop to 3 per cent or less during 2008 and 2009 - equivalent to a global recession,” the statement says.

“The greatest risk comes from the still-unfolding events in financial markets, particularly the potential for deep losses to seriously impair balance sheets and cause the current credit squeeze to mutate into a full-blown credit crunch.”

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Tonight: The deadline for submissions to the 2020 Summit

5:00pm eastern time, Wednesday 9 April 2008

Here.

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How much is being lost? As much as Australia earns in a year.

And mortage brokers are part of the problem, not the solution.

The potential losses from the US financial crisis may be approaching the entire GDP of Australia.

In its latest Global Financial Stability Report released this morning the International Monetary Fund said that the direct losses to financial institutions from bad mortgages in the United States may now amount to US$565 billion, and that when indirect real estate and other losses are taken into account the total may be US$945 billion (A$1,018) about the same as Australia's annual GDP.

It said there was a danger that the indirect losses facing non-bank institutions might “reverberate back” to the banks, widening their losses further...

New financial instruments had increased the potential for adverse “liquidity spirals” in which a funds shortage in one sector leads to a funds shortage in another and then back again.

Needing urgent revision were executive pay schemes that rewarded short-term performance rather than risk management.

Ratings agencies were also to blame for failing to understand that so-called structured credit products should be rated differently to standard loans. he IMF had recommended a different rating system for structured credit products as far back as 2006.

The report a tighter oversight of mortgage originators which it said should retain a stake in the mortgages they originate.

Its concerns echo those of Australia's Reserve Bank which on Friday described the the practice of banks lending through mortgage brokers as “dangerous”.

Giving evidence to the House of Representatives Economcis Committtee the Bank's Deputy Governor Ric Battellino said it was “quite dangerous that lenders have started using agents to market loans”.

“There is no doubt that the agent does not have the same incentives to maintain high standards as the bank itself,” he said.

“I think it is very important for banks to maintain a direct relationship with their clients and not to use agents.”

The Bank's Assistant Governor in charge of Financial Markets Guy Debelle said that the sooner the Commonwealth took over the regulation of mortgage brokers from the states the better. Brokers had given borrowers “poor advice”.

Australian banking stocks fell sharply yesterday on concerns about credit-related losses, with Commonwealth falling 2 per cent to $43.17, the ANZ down a further 1.5 per cent to $21.67 and Westpac down 2.4 per cent at $23.55.

The National Australia Bank business survey released yesterday showed confidence falling to a six year low.

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The Commonwealth public service is sexy

It is, actually. And it needs to be.

Bernard Keane, in today's Crikey:

"They stare out from job ads, attractive, elegantly-attired, like no public servant you’ve ever met, inviting you to come and join them in the exciting world of ... auditing. Taxation. Agriculture. Defence procurement. The national papers are full of job ads for public servants, all trying to make their agency sound exciting.

At a time when the Government is refusing to rule out compulsory redundancies in the Commonwealth Public service, most public servants will tell you that the problem isn’t too many of them, but not enough. And not just the empire builders and mandarins-in-training....

As everyone now knows, the Public service exploded under the previous Government. From a nadir in 1999 of just under 120,000 public servants, it has maxed out at about 154,000. The number of Canberra-based public servants has also been growing and is now more than 35% of the entire service.

But there’s a major problem with that. Unemployment in Canberra is currently 2.4%. It’s been below 3.5% for years. That means that public service agencies have to either steal each other's staff, rely on temporary staff, or attract people from interstate.

And attracting people to Canberra has never been harder. While Canberra is the proverbial great place to bring up kids, it has never been able to compete with Sydney and Melbourne. But now Queensland and Western Australia – traditionally a good source for bright young economists and lawyers – are vacuuming up talent in the resources boom. Nor can the Public service match private sector salaries. Indeed, it can’t even match many State public services, particularly at management level, which tend to dominate in Canberra. And that’s before you even get to the emerging effects of the retirement of baby boomers, who form the bulk of the APS’s senior ranks.

Some Departments are suffering more than others, which is why a department like Health and Ageing has been shedding temporary staff in preparation for the budget, but others continue to spend a lot of money on half-page newspaper ads for "multiple positions". The Department of Finance, which is driving the budget cuts, has been significantly understaffed for several years, with virtually permanent job ads in the national press.

Now, there’s been plenty of employers reading this and wondering what’s new. But there are short and longer-term consequences of this for public policy. The new Government, whose Prime Minister wants a lot done and done quickly, is pushing its bureaucrats hard. The reduction in ministerial staff has made matters worse, with inexperienced ministers and their advisers under the pump to implement election commitments and find savings while keeping the Prime Minister happy. In every agency the story is the same – Rudd, via Prime Minister and Cabinet, is demanding inordinate amounts of briefing, often in very short deadlines. The result is under-prepared material and lack of attention to detail.

The longer term consequence, which will need to be considered once the 2008-09 budget is out of the way, is more serious. Government and communities needs high-quality public servants, who take serving them seriously and who have corporate memory, people who remember the stuff-ups of the past and how to avoid repeating them. But last year the proportion of public servants with less than five years’ experience topped 50,000, or a third of the entire service. Those with 5-10 years also continued to climb, to 20%. This will begin to seriously affect the capacity of the public service to serve government effectively.

A recession would help. The quality of talent entering the public service tends to improve significantly when the job queues are long. Without that, or the relocation of the capital to Sydney or Melbourne, Governments will have to make do with a poorer-quality public service stretched thinner than ever.

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Tuesday Column: The real battle over Australians emissions trading scheme.

What if, while the attention of economists was focused on the Budget and the upcoming 2020 Summit, the really important economic decisions were being made elsewhere?

They are being made as we speak inside the new Department of Climate Change. Within weeks it will reveal the detail of the new emissions trading scheme that will be in force for decades.

From the outside it looks as if the battle has been won. All that's in play are the details. The independent inquiry being conducted by Professor Ross Garnaut supports such a scheme, the inquiry set up by the previous Howard government endorsed such a scheme, and the Rudd government won an election promising such a scheme.

But the details are the most important thing of all.

Think back to the introduction of the Goods and Services Tax. Would it have mattered much whether the low-income households who stood to suffer the most were compensated?...

Think back to the decision to effectively eliminate tariffs on the import of manufactured goods. Would it have mattered much whether motor vehicles were in or out?

Think back to the decision to introduce student loans. Would it have mattered much whether the loans had to be paid back at commercial rates or concessionally through the Tax Office?

Now think forward to mid last year and the emphatic endorsements from big polluters of John Howard's proposed emissions trading scheme. Why were so keen on it?

Chapter seven of the report of the Prime Minister's Emissions Trading Task force spelled it out.

The firms likely to suffer a “disproportionate loss of value” due to the introduction of pollution permits (in other words, the big polluters) would be given permits for free.

Their competitors – the smaller polluters and new energy producers attempting to start up – would have to pay.

As a way of buying the support of big polluters for the scheme, it was the best there was.

As a way of responsibly handing out public funds, it was a scandal.

As the doyen of Australian economic modelers Professor Peter Dixon of Monash University explained to me at the time: “It’s the same as putting a tax on carbon pollution and then instead of doing something useful with the proceeds, like cutting another tax, giving it to the shareholders of the polluting companies”.

Coincidentally the task force that recommended the scheme to Howard had on it representatives of those companies. Peter Coates was the chief executive of Xstrata Coal, Tony Concannon was the head of International Power, Chris Lynch helped run BHP Billiton, John Marlay
was chief executive of Alumina Limited.

The task force mounted an impressive defence of the handouts, quoting a US study as finding that “giving away allowances won’t shield firms or consumers from the price signal”.

As it happens, Professor Ross Garnaut agrees about that specific point. But he couldn't disagree more about the implication that it justifies corporate welfare.

A legend among Canberra economists, Garnaut is as dry as they come. While economic advisor Bob Hawke as Prime Minister in the 1980s he persuaded him to smash the system of import protection enjoyed by manufacturers since white settlement and to wind it down to near zero.

In an inspired move last year when he was still in opposition Kevin Rudd asked Ross Garnaut to conduct his own investigation of climate change.

Garnaut's approach was the antithesis of the Howard's task group's.

Whereas the Howard committee attempted to design a scheme that would pleased everyone – a camel - Garnaut, acting alone, was able to design a sleek machine without a hump.

“The complications in most schemes are about free allocation of permits,” he told me after his trading scheme report was released last month. “You need very elaborate processes to give things away.”

And he says there is no point in giving things away (except for trade-exposed firms such as aluminum producers, which would get support for the limited time that they ran the risk of being undercut by producers overseas).

He agrees that giving away permits to electricity generators and the like wouldn't shield anyone from price signals. He says they will bank the value of the permits and put up their prices anyway.

It is what happened in Europe.

As his report says, “most of the costs of the permits used in the domestic economy, including for electricity generation and automotive fuel, will be passed through to households. This will be the case whether permits are auctioned, or allocated for free”.

As he sees it, there is no point in handing permits worth billions to the worst of the existing polluters. There are better uses for the money.

His problem is that the former secretariat for John Howard's task group now forms the nucleus of Kevin Rudd's new Department of Climate Change. It is likely to be sympathetic to the camel of a scheme it came up with to appease existing polluters.

The government's decision is due in July.

Garnaut is worried that if the Howard scheme gets the go-ahead and the existing polluters are enriched, there won't be enough money left from the sale of the permits to compensate the people who will really need it.

Howard's task force as good as confirmed this.

It recommended that households “not be shielded”.

Garnaut sees things differently. He argues that as an environmental reform, the emissions trading scheme should not unintentionally “have large and arbitrary effects on the distribution of income”.

He says low income households in particular will have strong claims for compensation from the price increases imposed by the scheme. His report says firms seeking compensation should “have to establish the priority of their claims against those of households.”

Within weeks we will know whether either Garnaut or the existing polluters has won. The effects will be with us for decades to come.


The Garnaut Climate Change Review:

Emissions Trading Scheme Discussion Paper, March 20, 2008.

Interim Report, February 21, 2008

Prime Ministerial Task Group on Emissions Trading:

Final Report, June 1, 2007

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"Cracks" in the Australian economy

The ANZ Bank has dramatically widened its provision for bad debts as a major investment bank has warned of “cracks appearing” in the Australian economy.

The ANZ yesterday told analysts it would aside $975 million to cover bad debts in the first half of this year, more than four times the value of bad debts it had booked in the same period a year before.

The bank's chief executive Mike Smith said he wanted to ensure that it appropriately recognised “the ripple effects of the global turmoil”.

The ANZ Bank has dramatically widened its provision for bad debts as a major investment bank has warned of “cracks appearing” in the Australian economy.

The ANZ yesterday told analysts it would aside $975 million to cover bad debts in the first half of this year, more than four times the value of bad debts it had booked in the same period a year before.

The bank's chief executive Mike Smith said he wanted to ensure that it appropriately recognised “the ripple effects of the global turmoil”.

It was selling off the portfolio of shares tbehind the $650 million it had lent the failed stockbroker Opes Prime and was extending the bad debt provision for losses expected elsewhere.

The regular count of nationwide job vacancies produced by the ANZ yesterday showed that advertisements slid 0.7 per cent in March, the second consecutive monthly decline. Newspaper ads fell by 11 per cent.

The bank's trend measure of monthly job advertisement growth, regarded as a leading indicator of employment growth, has fallen for four months and is at its lowest level since mid 2003.

“It is beginning to look as if employers’ demand for new recruits is now waning after an extended period of very strong demand for labour. This is consistent with other indicators of economic activity that suggest domestic demand is now in the process of moderating under the weight of higher interest rates, lower share prices, and heightened concerns over decelerating global growth and global financial strains,” said the ANZ's Tony Pearson.

Building approval figures also released yesterday barely grew in February and in trend terms were down one per cent, the biggest monthly fall in 15 months.

By value, approvals fell more sharply, sliding 14.4 per cent in February – the biggest decline in more than four years – as the size of projects were wound back.

“The residential building industry is being knocked about by higher interest rates, and a lack of interest from investors,” said Savanth Sebastian of Commonwealth Securities.

At TD Securities, the senior strategist Joshua Williamson said that he could “hear the economy slowing”.

“Cracks are appearing in the economic data,” he told his clients in a briefing note. By the end of the year both inflation and employment will have fallen.

TD securities is expecting the Reserve Bank to cut official interest rates before the year is out.

The Opposition Leader Brendan Nelson said on radio that he thought the Reserve Bank had increased interest rates too far.

“I know this is a sensitive sort of area but they considered a 50 basis point rise, that’s half a percentage point rise, earlier in the year,” he said.

“On this listening tour small business people have said to me that they can pick, almost pick the day, three weeks ago when consumer confidence, demand dropped, on average about 20 per cent, is the way they see it.”

The employment figures due out on Thursday this week are not expected to show evidence of a turndown. Employment reacts to other economic variables with a lag.

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2020: The deadline

Those of us who aren't among the chosen 1,000 participants have until

this Wednesday

to get our submissions in.

500 words addressing one of the 10 subject areas:

* Productivity Agenda - education, skills, training, science and innovation

* Australian Economy - the future of the Australian economy

* Sustainability and Climate Change - population, sustainability, climate change and water

* Rural Australia - future directions for rural industries and rural communities

* Health - a long-term national health strategy – including the challenges of preventative health, workforce planning and the ageing population

* Communities and Families - strengthening communities, supporting families and social inclusion

* Indigenous Australia - options for the future of Indigenous Australia

* Creative Australia - towards a creative Australia: the future of the arts, film and design

* Australian Governance - the future of Australian governance: renewed democracy, a more open government (including the role of the media), the structure of the Federation and the rights and responsibilities of citizens

* Australia's Future in the World - Australia’s future security and prosperity in a rapidly changing region and world

As the 2020 Summit website says:

"Submissions must be received no later than 5:00pm Wednesday 9 April 2008."

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A 2020 Preview

And not a very inspiring one, I am afraid.

Andrew Leigh took part in Saturday's prequel, the ACT's own 2020 Summit.

He has printed out a list of the ideas that his group (education) came up with and then drew the following depressingly apparent conclusions:

"One of the things that you can tell from the above list is what happens if you put people with a single expenditure priority in a room and don’t give them a budget constraint. I have to hand it to those creative folks: they’re very creative in the ways they ask for government money.

I had previously been thinking that all one needed for the 2020 summit was a single big idea (I’ll post mine in the next week or so). But the lesson for me from today - and from the above list - is that any idea with less than 90% support on Day 1 is going to get killed. There simply isn’t time to persuade sceptics."

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Sunday dollars+sense: It's time for a 'nudge'

It has started to get painfully cold in Canberra early. Many times a day in our homes we need to make carbon-relevant decisions, such as whether to push our heaters up a notch, whether to delay turning them on, and whether to wear a jumper instead.

And whenever we make those decisions we are likely to err on the side of immediate comfort. We know we won’t be getting our energy bills for a while. We can use less tomorrow.

The electricity authority's promised smart meters might help. We will be able to find out how much power we are using. But they might not help by much.

What we need is a “Nudge”, which happens to also be the title of a new book about such ideas by two behavioural economists Cass Sunstein and Richard Thaler of the University of Chicago...

Thaler has told the New York Times that when he adjusts his thermostat he is “only vaguely aware” of how much it costs him.

But he says if the thermostat was programmed to tell him immediately in dollars and cents how much he was spending, the effect would be more powerful.

It would be more powerful still if he knew how his energy use compared to others.

In Australia we give people this information on their bills, and Thaler says it cuts the energy use of the hogs.

But according to a Californian study it also encourages the frugal among us to use more.

The study found a simple way of stopping that. It printed a smiley face on the accounts of the low energy users, and a frown on those of high users.

It was a “nudge”, or as Thaler and Sunstein also call it, a piece of “libertarian paternalism”.

Thaler’s proposed “save more tomorrow” scheme is another one. Americans who put off saving until tomorrow are offered the opportunity to sign a piece of paper agreeing to do just that, automatically out of their next pay rise. It’s a painless nudge.

But back to the cold.

Thaler says Southern California Edison has encouraged its consumers to save energy by giving them an Ambient Orb, a little ball that glows red when they are using lots of energy but green when they are not.

It has cut their peak energy consumption by 40 percent.

My children would love one. And I would love the nudge. The colder things get the more I’ll need it.


References:

Richard H. Thaler and Cass R. Sunstein, Nudge - Improving Decisions About Health, Wealth, and Happiness, Yale University Press, available Mar 31, 2008 ISBN: 9780300122237

Thaler and Sunstein's website: http://www.nudges.org/

Richard H. Thaler and Cass R. Sunstein, A gentle prod to go green. Turning wishes into actions a matter of showing people the way, Chicago Tribune, April 6, 2008

Richard H. Thaler, Shlomo Benartzi, Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving, Journal of Political Economy, Vol. 112, No. 1, pp. S164-S187, February 2004

Richard H. Thaler, Cass R. Sunstein, Libertarian Paternalism Is Not an Oxymoron, The University of Chicago Law Review Volume 70 Fall 2003, Number 4

Richard H. Thaler, Cass R. Sunstein, Libertarian Paternalism, American Economic Review, Vol 93, No. 2, May 2003

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From the mouth of Governor Stevens...

...confirmation to that his next move in interest rates will most likely be down.

And much much more. The whole transcript of Friday's parliamentary hearing is worth reading.

Some highlights:

ON RATES:

“The current level of rates, as we have made quite clear, is on the high side. When they’ve done the job, they can come down.”

ON UNEMPLOYMENT:

“In principle it could hardly rise at all. But if we are honest I think we have got to accept that through periods of history the unemployment rate goes up a bit for a while and then it starts to go down again.”

ON REPOSESSIONS:

“I wouldn’t use the term collateral damage, but people are affected by higher interest rates. I know that. I don’t have an instrument that only affects some people and not others.”

ON HOUSING STRESS:

“There has been a trend for the community as a whole to become more affluent. That has led to a choice by many people to put more of their income into housing. That isn’t stress, that’s a choice.”

ON THE BANKS:

“We don’t want a world where banks can not make an adequate return on their lending, and stop doing it. That I can assure you is a far worse world than the one we currently inhabit.”

ON EMISSIONS TRADING:

“It will mean a reduction in our living standards insofar as our purchasing power over energy-intensive things is concerned. We’ve got to accept that.”

ON TAX CUTS:

“In an economy like ours where we’ve got no debt, the budget is in surplus - it is continually in surplus it seems to me there is an obvious structural case that can be made for lower taxes.”

ON THE US ECONOMY:

“It is certainly feeling like a recession, even if it isn’t one. That’s what we’ve been assuming for a little while now.”

Stories below:


The Reserve Bank Governor has signaled that his program of rate rises is over at the same time as Australia’s largest bank, the Commonwealth has leapfrogged its competitors to push up its mortgage rate by a further 0.12 points to 9.44 per cent.

The new standard variable mortgage rate puts the Commonwealth ahead of the ANZ, Westpac and the National Australia Bank which charge 9.37 and 9.36 per cent.

Only St George among the big banks charges more at 9.47 per cent.

Appearing before the Parliament’s Economics Committee in Sydney yesterday the Reserve Bank Governor Glenn Stevens defended the actions of the saying that their costs had increased by more than the Reserve Bank’s cash rate.

“Like any business they are seeking to cover the cost of their funds,” he said.

“There are a lot of other banks around the world that are baring very large losses and are struggling to replenish their capital and so are not in a position to do much lending. If you are to ask me which of those scenarios I think is preferable, I would say it is the one we’ve got, for all the presentational issues that it gives us.”

The Governor said his board had taken into account the likelihood that the banks would impose their own rate rises in making its recent decisions and was hopeful it would not need to push up its own rates again.

“We couldn’t know precisely how much more than the cash rate rise their rates would go up by but it was obvious there would be some effect, and we’ve been calibrating for that all the way through in what we do.”

The Governor’s remarks were underscored by retail figures released while he was speaking showing that consumer spending fell for the second successive month in February, falling by 0.1 per cent after a 0.1 per cent fall in January.

The annualised trend growth rate is now just 2.3 per cent, well down from 9.8 per cent six months ago.

Discretionary spending was the hardest hit, with expenditure on household goods diving and restaurant and liquor spending recording the weakest results for 29 months and 6 years.

Westpac’s economist Matthew Hassan said consumers were “clearly reining in expenditure”.

“One month does not make a trend. Two is a different story,” he said.

The Australian dollar slid by more than one quarter of a cent to 91.23 US cents as traders become convinced that the Reserve Bank would not be increasing its rates again.

The Reserve Bank Governor said he couldn’t say at what point rates might come down.

“I can’t even promise, really, that they might not rise again. What I can say is that I think the current level of rates is on the high side - at some point in time they can be lower.”

Australia’s inflation rate, due for release in a fortnight’s time is thought to be 4 per cent. But the Governor said he would not need to wait for it to come back to within his 2 to 3 per cent target band before cutting rates.

“We don’t wait until to the point where inflation has actually gone all the way back down to the target. What we are trying to do is to get to the point where we are fairly comfortable that that is going to occur and then we can start the adjustments.

The Opposition Treasury spokesman Malcolm Turnbull seized on the Governor’s optimism about inflation to assert that he had made it “very, very clear that inflation is not out of control, it's under control.”

“It is reassuring because it offsets the language used by the Treasurer."


And more:

Australia’s number one banker has good news, but little sympathy for Australians struggling under the weight of the worst mortgage rates in 12 years.

Over three hours on Friday the Reserve Bank’s Governor Glenn Stevens made it clear to the Parliament’s Economics Committee that the interest rates he controlled would rise no further.

But he said that many of the Australians complaining about high mortgage rates had brought their troubles on themselves.

Why were are our mortgages so high? The Governor said it was because we had chosen to live in better houses.

“I think there has also been a trend for the community as a whole to become more affluent and with that has come, in large chunks of the middle classes, a decision to spend a higher proportion of income on housing, just as they now have to spend a lower proportion on some other things like manufactured goods whose prices have fallen or food.”

“As you get more affluent some of the necessities take up a smaller proportion of income and some of the things you really want take up a larger. That I think has led to a choice by many people to put more of their income into housing. That isn’t stress, that’s a choice,” Mr Stevens said.

The Governor said he gets upset when he reads about mortgage stress, because he thinks the term is too loosely defined.

“I have seen references to people being in stress if they spend more than 30 per cent of their income on housing. But the original definition was narrower than that. It was if you were in the bottom 40 per cent of the income distribution and you spent more than 30 per cent.”

“I mean someone on a very high income who has chosen to have a very large mortgage and still has a lot of money to live on after that, they could technically be defined as in stress if you used the 30 per cent rule, so I don’t think that’s very useful.”

He was in no doubt that some Australians were feeling pain. But there were only 15,000 people across the whole of the country who were running 90 days overdue on their loans. The figure was coming down.

“I am aware of those problems, and we certainly are conscious of the need not to inflict any more pain on those people than is absolutely necessary, but in the end we have to make and aggregate decision for the economy as a whole. I wouldn’t use the term collateral damage, but I do not have an instrument that would only affect some people and not others, and neither does anybody else.”

The whole point of what the 12 successive rate rises engineered by the bank over the last six years has been to slow our spending. In order to do that they will probably push up unemployment.

“What is clear is that 5 per cent plus demand growth can’t be sustained. It has to slow down. Employment growth will slow as well. The extent to which unemployment would rise depends on a range of other factors not least of which is how flexibly and quickly the labour market responds to the slower growth in output.”

“If we are honest I think we’ve got to accept that through periods of history where you have a mid-cycle pause in the growth trend, which is what we’re talking about here, the unemployment rate goes up a bit for a while and then it starts to go down again.”

“I don’t think there’s any sense in which one should say a much higher rate of unemployment would permanently be needed to contain inflation. But that isn’t to say that there can’t be some temporary rise for a while.”

Governor Stevens believes that he has probably pushed up rates enough to reign in inflation. “I can’t tell you at what point rates can start to come down. I can’t even promise, really, that they might not rise again,” he told the committee.

“What I can say is that I think the current level of rates, as we have made quite clear, is on the high side. “

“At some point in time they can be lower. When they’ve done the job, they can come down.”

He thinks they might be doing the job right now, even if our rate of inflation continues to stay high at 4 per cent, well above the Reserve Bank’s target of 2 to 3 per cent.

He stressed that he didn’t need to wait until inflation actually fell to 3 per cent before easing rates.

“What we are trying to do is to get to the point where we are fairly comfortable that’s going to occur and then we can start the adjustments occurring.”

Asked when that would be the Governor replied, “I can’t tell you that at the moment, mainly because I don’t know, although it probably would not be appropriate to foreshadow anyway, but I don’t know the answer at the moment.”

While the Governor was speaking about taking his foot off the interest rate pedal elsewhere in Sydney the Commonwealth Bank, on some measures Australia’s biggest, was pushing up its mortgage rate to 9.44 per cent, higher than that of its three biggest rivals.

Mr Stevens was empathetic.

“Banks are very profitable. That’s true. But at present what’s happening is that their cost of funds is increasing by more than our cash rate. That’s a fact, and like any business they are seeking to cover that cost of funds in the price of their product.”

“While I know that people feel perhaps aggrieved that banks are highly profitable, there are a lot of other banks around the world right now that are bearing very large losses, and are struggling to replenish their capital and because of that they are not in a position to do much lending. So if you are to ask me which of those scenarios I think is preferable, I think it is the one we’ve got, for all the presentational issues that it gives us.”

”The economy would be much worse off were it otherwise,” the Governor said.

He had also been allowing the banks to do some of his dirty work for him.

The Governor confirmed to the committee that were it not for the private banks widening their margins, he would have lifted the Reserve Bank’s rates by more.

“We were taking account of their actions in setting the rate that we set. We couldn’t know precisely how much more than the cash rate their rates would go up by, but it was obvious there would be some effect, and we have been calibrating for that all the way through in what we do.”

Should banks be more tightly regulated as to what they can charge?

“I am older to remember a much earlier time when bank interest rates were regulated quite heavily, and they couldn’t lift loan rates which meant they couldn’t raise the funds to profitably lend, which meant they didn’t lend.”

“When conditions tightened you didn’t just get a graduated response of lending slowing down, the tap got turned off,” Mr Stevens said.

For now the Governor is happy for the government to present a tight budget and reign in spending. He said in the fight against inflation, “every little bit helps”.

But not further down the track. In a surprise for Australians who might regard him as a killjoy the governor supported the case for big tax cuts, when Australia’s present inflationary problems were out of the way.

“In an economy like ours where we have no debt, the budget is in surplus – it is continually in surplus - it seems to me there is an obvious structural case that can be made for lower taxes,” he said.

“At the same time in the current environment there is an obvious cyclical case for tighter fiscal policy, just for the moment, in order to take the pressure off demand in the economy. That’s actually been the case for several years now. So you’ve got a structural case for lower taxes, and a cyclical case not to, or even for higher taxes if you are really serious.”

“That’s not an easy judgment to make. It’s hard strike the balance,” the Governor said.

After containing inflation he said his next big challenge would be the government’s emissions trading scheme. Like the introduction of the GST did, it would boost prices. But with deft handling, not inflation.

“The GST was a one-time price shift, it wasn’t an ongoing inflationary effect provided there were no second rounds.”

“We won’t rush in and bang the economy on the head the moment there is a rise in relative energy costs. We will take a medium term view.”

“The community will have to accept is that this is a reduction in living standards insofar as our purchasing power over energy intensive things is concerned and not collectively push up wages to get it back.”

Read more >>

2020 Questions

The summit "starter questions" are here, at the end of each of the ten pdfs or powerpoints.

Below, myself and Canberra Times colleagues Danielle Cronin, Andrew Fraser, Emma Macdonald, David McLennan and Ross Peake summarise the background papers prepared for each of the ten working groups at the summit:

Who will the next generation of Australian farmers be? What are the responsibilities of individuals and the state in managing behaviour-related illnesses? Can public education only be delivered through public schools?

Those are among the list of about 1,000 questions to be dealt with at next fortnight’s 2020 summit.

Released with the ten background papers that will guide the ten working groups, the papers draw on common themes, among them that Australia is aging - by 2030 one in four of us will be aged 65 and over - and that our climate is set to dramatically change.

The papers also deal with Australia’s future in the world, the place of Indigenous Australians in the year 2020, and the role of our parliament, government and the courts.

Unveiling the papers yesterday the head of the steering committee Professor Glyn Davis said they aimed to tell an evidence-based story about how Australia was faring.

“They are not intended to be definitive or comprehensive, but were put together to stimulate discussion. They do not represent government policy,” he said.

“We hope they will trigger a conversation”.

Some of the papers are notable for what they omit. The discussion paper on Australia’s economy includes no mention of taxation. And Japan, the world’s third biggest economy and Australia’s biggest customer, has been left off of the graph showing the evolution of the global economic landscape. The US, China and the UK are on it, just as they are on the Prime Minister’s present overseas tour...

The Economy

Australia’s productivity growth and public investment in infrastructure have been nose-diving while the demands placed on our infrastructure by export growth and economic growth have been accelerating.

The economy working group to be chaired by the former head of Westpac David Morgan will be told that our ports are stretched to maximum capacity, our road freight traffic is growing dramatically, the costs of road congestion are climbing and that we are in urgent need of new electricity generation capacity.

Two ideas to work our infrastructure harder are road congestion and related charges and water and energy priced to reflect their full economic costs.

Education

Australia spends the least on early childhood education of any OECD country. While our students perform well on international benchmarks, there is a large variation in their performance depending on their socio-economic status.

The education and productivity working group chaired by the former Coalition frontbencher Warwick Smith will be told that Australia’s teachers have low status and low incomes, and that as a result we are facing a looming teacher shortage.

Our TAFE enrolments are in long-term decline declining leaving many Australians without any sort of post-school qualification.

Australia’s private expenditure on research and development is amongst the lowest in the OECD.

While there is a “striking consensus” about the importance of skills and contributing to the workforce, Australia needs to translate that consensus into a real demand for education services that will respond to a changing world.

Sustainability

Australia is more vulnerable to climate change than most other OECD nations and receives less rainfall than most other developed nations, with our rainfall levels projected to fall further. We are one of the most urbanised countries in the world and our cities are growing quickly.

The population, sustainability and climate change working group chaired by Roger Beale of the Allen Consulting Group will be told that one future challenge will be to accommodate our preference for larger living spaces, while providing commutable, liveable cities with appropriate infrastructure.

Another will be to continue to provide water to our cities. Projections suggest that the demand for water in most urban areas - except Canberra – is on track to exceed the sustainable supply by 2025.

Australia is the 3rd highest per capita emitter of carbon dioxide in the OECD and our emissions are forecast to continue to rise even with the already announced measures other than emissions trading.

Our creativity, strong science base, agile economy and renewable resources, including sunshine, “hot rocks”, wind and bio-resources, provide enormous capacity for a shift towards a lower greenhouse footprint.

Clean coal technology could have a profound impact on our emissions and economy. Further development of carbon, capture and storage technology might enable us to reduce our carbon footprint and to maintain our significant coal exports in a carbon constrained world.

Much of the world is re-thinking the acceptability of nuclear power in the light of climate change. Australia has a large share of the world's uranium and a role to play within appropriate safeguards.

Strengthening Communities

While Australia is wealthy, some Australians live in extreme disadvantage. Many people with disabilities and long term health conditions struggle to find employment despite a booming economy.

The communities and families working group, to be chaired by the Australian head of World Vision Tim Costello will be told that there are specific locations in Australia in which poverty, illness, disability, crime and unemployment are concentrated.

These are the places with the worst educational results and the ones where the most children live in families with no working adults.

Many working households have low incomes, and there is an older group of Australians who lack sufficient savings to comfortably retire.

Problem gambling is an added pressure for some Australians and despite declines in the use of some drugs, substance abuse and binge drinking remain significant problems with a range of costs borne by the entire the community.

Australia has a relatively high crime rate, and people feel less safe than in many other countries.

Health

Australians enjoy one of the longest life expectancies in the world. However we live with a significant burden of ill-health and our ageing population will significantly increase the future demand for health care.

These days communicable diseases have given way to lifestyle-related chronic illness, many of them associated with growing rates of obesity.

The health working group, to be chaired by the director of the Queensland Institute of Medical Research Professor Michael Good will focus on whether governments have struck the right balance between spending on treating disease and preventing illnesses.

It will be told that current health funding remains overwhelmingly focused on treatment and that health outcomes are significantly worse for low socio-economic groups and rural and indigenous communities. Lifestyle risk factors are more prevalent in these disadvantaged sectors and the often lack good access to health services.

Australia spends an average amount on health compared to other OECD countries and has the opportunity to improve productivity through new systems and approaches to care.

Indigenous

The government has apologise to the stolen generations and promised to close the 17-year gap in life expectancy within a generation.

The indigenous working group chaired by Dr Jackie Huggins of the University of Queensland will be asked to consider the next steps needed and to overcome a housing shortfall identified as a `”major starting point”.

Australia’s indigenous population is largely urbanised, and is significantly younger than the rest of the population. Indicators of disadvantage are severe across all Indigenous populations and outcomes have not improved significantly in recent decades.
Future efforts must be effective and have real accountability. The paper finds that while mainstream attitudes towards indigenous disadvantage are generally constructive, the public is not well informed and needs a deeper understanding.

Urgency is required if we are to preserve Australia's indigenous languages and traditions. We could learn from effective initiatives overseas

Regional Australia

The agricultural sector accounts for 3 per cent of Australia's gross domestic product and 20 per cent of merchandise exports, but generational change makes it unclear how and whether the next generation will remain on the land.

The working group chaired by the former National party leader Tim Fischer will be told that the average farmer is already older than 50, with the largest proportion of them in the over-65 age group. There are also fewer of them, with their farms getting bigger.

The background paper says that declining rainfall may have consequences for the way we farm in some marginal areas and suggests re-examining the definition of drought.

However it says if managed well climate change could provide opportunities for regional Australia through things such as carbon credit schemes, water trading, wind farms, and possible increased reliance on biofuels.

Creative Australia

More than half of Australia thinks that the arts are “elitist and pretentious”. One third thinks they are irrelevant to their lives.

The ABC stands out as being appreciated - 85 per cent of Australians believe that it provides a valuable service – but it and the SBS are under-funded compared to counterparts overseas.

Cate Blanchett’s Creative Australia working group will be told that Australia trails Europe in the public funding of arts and culture, but exceeds the US where private philanthropy plays a greater role.

It will be asked whether private philanthropy could play a greater role in Australia and whether Australia’ art collections funding should remain fragmented between the states or managed from a national perspective.

Governance

Australia is a world leader in the turn out of registered voters at elections, but we may not be getting a good deal from our elected representatives.

The working group chaired by the head of News Limited John Hartigan will be asked whether ordinary people's views are heard in the Cabinet room, whether governments are too sensitive to opinion polls and whether they get their information from the right places.

The background paper raises the need for a bill of rights and also talks about the way in which interactive technology can change the nature of political engagement.

The role of lobbyists, think tanks and the media are open for discussion as well as the role and limits of freedom of information laws.

The paper asks whether the right structures are in place to ensure that decisions are made in the interest of the nation, rather than just the interests of political victory.

It asks whether we need an Australian head of state, whether the structure of federalism is the right one, and whether the parliament needs fixed terms.

It says that increasing public expectations of government will require an increasingly skilled and flexible public service.

International

Significant shifts in the balance of global power are taking place, with the economies of China and India developing strongly and exercising a greater gravitational pull.

The working group chaired by Professor Michael Wesley of Griffith University will be told that in order to remain effectively engaged internationally, Australia needs to build and maintain high levels of “international literacy”.

Throughout the world the proportion of people speaking English as a first language will decline. By 2050 around two-thirds of the world's population will not speak English as their first language.

Australia should be able to meet the challenge using its unique geographic location, its large educated and multicultural population, its half a million foreign students and the one million Australians who live abroad.

Australia has a long history as a significant development partner in our region, something that will become more important as some of our neighbors deal with the problems of chronic poverty, high birth-rates and stagnating economies.

Australia has benefited greatly from globalisation and it has a very strong interest in rules-based, multilateral international agreements.

Read more >>

Two charts that suggest Australia is in for interesting times

Both from Dr David Gruen of the Treasury who gave this excellent speech to Australian Business Economists in Sydney yesterday:

Read more >>

That $1 billion contract? Terminated.

It'll no longer be possible to claim that the new government is all talk.

Why Steven Conroy pulled the plug:

In opposition the Communications Minister Senator Conroy called the $1 billion Optus-Elders rural broadband network a “dog of a product”.

In government, he had to put it down.

Steven Conroy has his own much bigger broadband vision.

He wants 98 per cent of us to have access to very fast broadband (12 megabits per second or more) delivered by an optic fibre cable stopping just metres from our door.

He has been given access to $4.7 billion from the Future Fund to do it. As he said last week it was Labor's biggest spending commitment: “bigger than health, bigger than education”.

It would, he said, “rival the Snowy Mountains Scheme in its scale and significance to Australia”.

But there are two big problems...

One is that most of us in cities already have access to broadband. Perhaps not as fast as the Minister would like, and for various technical reasons not extending to parts of Gungahlin in Canberra, but access nonetheless.

The other is that most of the rest of Australia outside of the capital cities was stitched up by John Howard when he signed a deal with Optus and Elders just before he called the November election.

If the “OPEL” consortium had gone ahead and spent the $958 million John Howard had promised to fling its way the business case for tossing $4.7 billion into Senator Conroy's new national network would have begun to look shaky.

The Minister said yesterday that the technical people in his department had analysed the mapping and testing undertaken by OPEL and concluded that it would be unable to provide the coverage it had promised.

This meant that it had failed to meet the terms of its contract.

But there have long been such doubts.

It would be interesting to know what the technical people in the department concluded about OPEL's ability to do what it had been promised at the beginning.

Did they think that the technology OPEL was to use would be incapable of doing the job back then? Did such advice reach their Minister, Senator Coonan?

Or did the Department of Communications bide its time and wait for a new minister who would be receptive to its doubts?

The Minister's decision means that a monopoly will provide broadband in much of the bush, and a partly government-owned one at that.

Whether you think that's a good or a bad thing depends on your point of view.

It will mean that Australians in the bush will wait longer. Senator Conroy's “Snowy Mountains scheme” sized project is likely to take five years.

For the rest of us, it won't mean much. We are generally happy enough with the broadband we have got. We are not hanging out for the Conroy scheme and whether or not we use it when it comes will depend on price and the alternatives available at the time.


THE NEWS ITSELF:

In a dramatic exercise of ministerial power the Communications Minister Senator Conroy yesterday canceled the Coalition's $958 million “final failed broadband plan” delaying the delivery of improved internet services to 900,000 rural Australians.

Declaring that the OPEL consortium made up of Optus and Elders had failed to meet the terms of a contract it had made with the previous government, Senator Conroy canceled the deal, freeing up almost $1 billion to add to the budget surplus.

Elders and Optus were to lay around 15,000 kilometres of fibre-optic cables throughout the bush, taking high-speed broadband to places that are at present only served by satellite.

Gaps in coverage were to be filled in with largely-untested WiMAX wireless transmitters in order to reach 90 per cent of the under-served premises in rural Australia.

The Minister said yesterday that his department had analysed OPEL's maps and technical data and concluded that its network would reach only 72 per cent of the under-served premises.

“On the basis of the department's assessment, the government determined that OPEL’s implementation plan did not satisfy the condition precedent of the funding agreement,' Senator Conroy said.

Optus told the stock exchange it had already spent $16 million on the project, and Elders said it had already spent $15 million.

Neither indicated whether it would be suing the government, or seeking recompense for the money it had spent.

The Optus chief executive, Paul O’Sullivan said the department's analysis was flawed.

“There were serious errors in its database of underserved premises which led it to underestimate the number which would benefit,” he said.

“Optus has made an offer to the government which I repeat publicly today: we are quite happy to have a respected independent expert audit OPEL’s coverage database and the department’s coverage database.”

“The implications of this decision for confidence in future competitive selection processes conducted by this Government will need careful consideration.”

A spokesman for Elders, Les Wozniczka said the project had been a “live” one.

“It was there to be done and be operational within two years. The tried and tested way of introducing new technology into Australia is to bring in competition, and that's not going to happen,” he said.

The decision leaves leaves the way clear for the minister to proceed with his promised national fibre-to-the-node broadband network which would service both remote and city customers providing broadband faster than 12 megabits per second to 98 per cent of the population.

The scheme would be funded by $4.7 billion from the government's Future Fund and so would not affect the budget surplus.

A private partner would contribute a similar sum to the consortium.

Telstra yesterday denied that it expected to be that partner.

“It would be not be right for me to propose that we are in the box seat at all, because it's an open tender and we will work with the Government to meet their requirements,”said its spokesman Geoff Booth.

Senator Conroy has given his broadband advisory panel until September to recommend which company will win the $4.7 billion contract.

The network is expected to take five years to build.

Optus is heading the so-called G9 consortium of telecommunications providers which is competing against Telstra for the contract.

The Opposition Leader Brendan Nelson said the decision left regional broadband services in the lurch.

“The average hardworking Australian taxpayer would have have to ask why they have to spend billions of dollars more, when we already had a solution in place,” he said.

Read more >>

Forget about Reserve Bank rate rises. At least until November

Australia’s Reserve Bank believes it may have fired its final shot in the war against inflation and has declared it has no plans to increase interest rates further.

The declaration, released yesterday after a board meeting that decided not to lift rates was embraced by the Treasurer Wayne Swan as a “welcome reprieve for working families”.

The Bank’s statement indicates that while it expects Australia’s rate of inflation to remain high when the next figures are released in three weeks time, it expected it to decline after that.

A high inflation result in the March quarter figures to be released on April 23 would not trigger a rate rise in May...

The statement describes the tightening in financial conditions to date as “substantial” and says that tightening is “working to foster the moderation in demand growth that will take pressure off inflation”.

It is understood that even a high inflation result in the June quarter, to be revealed on July 23, will not trigger a rate hike in August.

The Bank believes that it has given the economy enough of the unpleasant medicine that it needs in order to contain inflation, and it now needs to move to the sidelines and watch how that medicine works its way through the system.

Recent indications are encouraging. Both consumer confidence and business confidence are down after four interest rate hikes in eight months, and personal debt has been wound back.

The Bank will be examining consumer spending, spending on housing, and import growth to get an early indication of how hard its rate hikes are biting.

Other data, such as employment growth and the inflation rate itself are regarded as lagging indicators unable to give a timely indication of the way the economy is heading.

The Reserve Bank’s four interest rate rises in the last eight months have been augmented by at least two more by the major banks, taking the total increase in mortgage rates since August to abound 1.4 percentage points.

The Bank believes that those increases will dent the economy, but it can’t be certain about by how much.

Further rate increases while the effects of the latest ones were yet to emerge would run the risk of going too far, especially while financial market sentiment remained “quite fragile”.

The Treasurer Wayne Swan signaled that for his part there would be no let up in the war against inflation, saying that under the previous government too much of that responsibility had fallen to the Reserve Bank.

“The government had not been playing its role. The consequences of a lack of discipline when it comes to fiscal policy in recent years are there for all to see. We’re dealing with that. We’re dealing with that in the budget process,” he said.

He implored Australia’s private banks not to take the fight against inflation into their own hands by lifting their borrowing rates again independently of the Reserve, saying that Australian families were under great financial pressure.

“The banks must take that into account,” he said.

The Opposition Leader Dr Nelson in Brisbane on his listening tour described the Bank’s decision was a “welcome relief”.

“Australians are suffering with cost of living pressures, petrol, groceries and interest rate rises. Since Mr Rudd and Mr Swan came to government, we have had two official rate rises and two unofficial rate rises. Small businesses have been telling me that in the last few weeks, and especially in the last couple of days, consumer confidence has plummeted.”

Read more >>

Why lenders are reluctant to part with their money

The best explanation.

From David Warsh at Economic Principals:

How did the subprime crisis become so serious?

The drop-dead shorthand explanation emerged today when Deborah Solomon of the Sunday New York Times Magazine asked former Treasury Secretary Paul O’Neill how some fast-and-loose mortgage lending at the margin could trigger “a financial crisis of global proportions.”

You remember O’Neill: he is the straight-arrow finance chief who was fired by George W. Bush and Dick Cheney on the eve of their war with Iraq.

O’Neill replied, “If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.”


That's why this idea makes sense.

Read more >>

What our banks are doing to their mortgage rates

The St George Bank has leapfrogged the other big banks to push up its mortgage rate to a new high of 9.47 per cent – a full 0.10 percentage points above its next highest rivals – with no end in sight for the increases following an apparent go-ahead from the Governor of the Reserve Bank.

On Friday Westpac increased its rate by 0.10 percentage points to match St George at 9.37 per cent following remarks to a conference by the Governor Glenn Stevens on Thursday who said that it would be be “unrealistic” not expect to banks to lift their rates.

“We have of course seen bank lending rates moving independently of the cash rate. I think that's just life in this environment,” he said.

The Reserve Bank board will meet today to consider its rate settings amid indications that the private banks will continue to leapfrog each other on rates and amongst evidence that the rincreases to date are starting to bite...

Lending figures out yesterday showed that personal borrowings were wound back in February for the second successive month, even before the Reserve Bank's March rate hike and the extra increases imposed by the banks.

It was the first back-to-back slide in consumer borrowings since the recession of the early 1990s.

Business borrowings were sharply lower than expected in February, increasing by just 0.5 per cent in the month, down from 1.5 per cent.

Housing borrowings remained strong, but only for owner-occupiers. The growth in investment loans weakened.

The Housing Industry Association's measure of new home sales fell 5.3 per cent in February, with the sales of home units down 7.5 per cent.

The Association's chief economist Harley Dale said there was no sign of any lift in sales and that this was “little wonder, given that over the space of only seven months we saw a 1.25 per cent hit to the average variable mortgage rate.”

Today's Reserve Bank board meeting will be presented with evidence from the Melbourne Institute showing that inflation is climbing and hit 4.0 per cent last month. The TD Securities – Melbourne Institute Inflation Gauge closely tracks the official figures which will be released in three week's time.

But the senior strategist at TD Securities Joshua Williamson said he did not expect the Bank to react to the news with alarm and push up rates again.

“It is important to recall that the economy and inflation have not yet had time to react to the two most recent official interest rate increases, not to mention the most recent round of unofficial hikes from the major banks and renewed stresses in the global credit market,” he said.

“These are significant economic issues and the Reserve Bank board is likely to see how the economy reacts before contemplating any policy changes.”

There is near-universal agreement that the Bank's board will vote to keep its rates steady when it meets today.

The chief equities economist at Commonwealth Securities Craig James said an extra hike seemed unnecessary.

“The Bank is forward looking, and if it is clear that higher rates are doing their work to slow the economy, then it can remain on the sidelines,” he said.

The Bank will also be also be concerned about financial turmoil caused by the collapse of the stockbroker Opes Prime which went into receivership on Thursday after lenders including the ANZ Bank demanded that it repay more than $1 billion it had borrowed to lend to investors to buy shares.

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