Bracket creep is code for cutting high-end taxes

I've never complained about being pushed into higher tax brackets. In fact I've been quite pleased.

I've seen it as a sign that I've made it, that I've moved up another notch.

And it has never meant that I've paid much more tax.

Work it out for yourself using the $80,000+ tax bracket. Put to one side the Medicare levy. If you had been earning $79,000 and then got paid $81,000, the tax rate on the last few dollars you earned would climb from 32.5 to 37 per cent.

But that doesn't mean you would pay 37 per cent of your wage in tax, or anything like it. It would mean your total tax bill would climb from $17,222 to $17,917. As a proportion of your (higher) salary it would climb from 21.8 per cent to 22 per cent.

It would be barely noticeable, but it would give you bragging rights.

And the strange thing is it would happen whether or not you moved into a higher bracket. Imagine you had been earning $75,000 and then got $77,000. You wouldn't change brackets but your tax bill would climb from $15,922 to $16,572. As a proportion of your salary it would climb from 21.2 to 21.5 per cent. Tax rates go up as income climbs whether or not people change brackets. The phenomenon shouldn't even be called bracket creep.

It happens because the more we earn, the more the proportion of our salary in the tax-free zone shrinks. "Crossing the threshold" matters symbolically but not practically.

But don't tell the Coalition, or talkback radio.

Here's Ray Hadley on Monday: "It is very hard to explain to people so-called bracket creep ... it simply means that people who were formerly taxed at the lower income rate through no fault of their own go on to the next income rate, taxable rate, and they are paying a lot more tax."

Here's Scott Morrison, agreeing with him: "Next year if you are on the average wage, you are going to go onto the second-highest tax bracket ... if we don't change the personal income tax rates you will end up paying more."

At this point you are probably feeling grumpy. The Treasurer has just told you the average wage is set to sail past $80,000. But your own wage probably isn't. Here's why. Most earners get nothing like the average wage. Right now the average full-time wage is $78,000, but the typical full-time wage is nearer $65,000. The average is pushed up by a comparative handful of high-earning megastars. In the real world three quarters of us earn less than that "average"...

Most are at no risk of crossing into the second-highest tax bracket. Morrison himself says over the next two years it'll be only 300,000 of Australia's 13 million taxpayers. And they'll hardly notice it. Again, don't take my word for it, listen to the Treasurer addressing economists last November:

"Income tax has become the silent tax for many Australians, particularly young Australians. When they go to the automatic teller machine to draw out their cash they do not see, as they do with the GST on their sales receipt, the 19 cents or 32.5 cents or 37 cents or 45 cents that has been deducted in income tax, let alone the extra 2 cents for the Medicare levy. They just take the cash."

Given enough time, bracket creep could hurt. But just at the moment wages are growing at their slowest sustained rate in memory.

Many of us would welcome bracket creep if it meant actually getting a pay rise.

It's as if the Treasurer picked up a script about the dangers of bracket creep and decided to use it just as if it mattered the least, a bit like Eric Abetz warning of a "wages explosion" as wage growth collapsed.

What's worrying is what he plans to do about it. Bracket creep hurts low-income taxpayers more than high income ones, yet Morrison says he is "deeply troubled" by the fate of those about to move into the $80,000 tax bracket. He "may be able to prevent that outcome going forward". It sounds as if he wants to adjust the $80,000 threshold to help them and leave the bottom three quarters of taxpayers alone.

The prime minister assures us that fairness will be at the heart of everything he does about tax. It would be good if Morrison ensured that it was.

In The Age and Sydney Morning Herald

Read more >>

There's more than one way to kill negative gearing

How easy would it be to move against negative gearing?

Soon after the introduction of the higher education student loan scheme, the Tax Office noticed something odd. Graduates were meant to start repaying their loans when their income climbed above a certain level. But instead, some borrowed to buy investment properties which they rented out at a loss to keep their taxable income below the threshold.

So government changed the rules. From then on graduates could lose as much as they liked on rental properties, but their income for purpose of determining their HECS repayments became their income before negative gearing rather than after.

Government toughened up more than HECS. Quietly, it outlawed negative gearing in the calculation of the Medicare surcharge, the Private Health Insurance Rebate, the Seniors and Pensioners Tax Offset and the Higher Income Superannuation Charge.

It would be dead easy to do it for the calculation of tax, and it would be consistent. Taxpayers would be able to lose as much as they liked renting out properties. They would even be able to use the losses to offset profits from other investments and carry them forward to offset any profits when they eventually sold. But, as in Britain, Canada, the US, France, Germany, Japan and most of the nations with which we compare ourselves, they wouldn't be able to use real estate losses to cut the taxable income from their salaries.

There's a reason surgeons, lawyers and mining engineers are far more likely to negatively gear than nurses, teachers or police. They have much bigger taxable incomes they are trying to get down. They often try to get them down below $80,000, where the second-highest tax rate cuts in.

At the heart of negative gearing is a lie, or perhaps a mistake. Most spending isn't tax deductible, but spending for the purpose of earning an income is. The lie is that the interest payments and the rates and other expenses involved in renting out a property are for the purpose of earning an income. Somehow there has been a mistake and the rent hasn't covered the costs, but because the intention was to earn an income the costs should be written off against other income.

Our tolerance of that lie institutionalises dishonesty, and it institutionalises losing.

Before John Howard halved the headline rate of capital gains tax at the turn of the century, negative gearing was relatively unattractive. Landlords as a group made money. In 1999-2000 they made a combined $219 million. Ever since then they've lost money. In 2012-13 they lost a net $5.4 billion...

Capital gains matter because they are the mechanism negative gearers use to make money. The profits they make from eventually selling their properties are meant to exceed their annual losses from rent. A cut-rate capital gains tax makes those profits more likely. Investors can write off their annual losses at the full tax rate and pay tax on their eventual profits at only half the rate.

But there are wider benefits, or so we have been told.

Howard's tax adviser John Ralph times disposable income.

At the last count one in every seven taxpayers were landlords.

But they've been increasing the stock of houses, right? Not much lately. Back the 1980s one in every five dollars lent for investor loans was used to build a home. Now it's one in every 35.

We're told that negative gearers are at least increasing the supply of rental housing, and many believe they are. But by pushing up prices and outbidding would-be owner-occupiers they are also helping create the supply of tenants to rent those properties to. They are often renting to people they have outbid.

And we are told they are holding down rents. That's >impossible to test without restricting negative gearing, as Labor actually did for 2½ years in the mid-1980s. The charts show Melbourne, Brisbane, Adelaide and Darwin rents fell, Canberra rents dived, Hobart and Sydney rents climbed and Perth rents soared. Nationally, there wasn't much in it.

With little obvious justification for continuing the tax dodge, both sides of politics are planning to wind it back, but gently.

Labor would allow everyone who is already negatively gearing to continue to gear their existing properties (a concession it didn't extend when it tightened HECS), and it would allow taxpayers to negatively gear new properties so long as they were newly built.

The Coalition is looking at capping either the number of properties each taxpayer can gear (one of its members, Queenslande rBarry O'Sullivan owns 42) or the total loss any one taxpayer can claim.

Neither measure would do much. But what would is the associated cut in the capital gains tax concession. Labor wants to cut the concession from 50 per cent to 25 per cent, meaning that for assets bought after mid-2017, three-quarters of the eventual capital gain would be taxed rather than half.

The Coalition is toying with matching Labor's proposal (if has been careful to attack Labor's proposed changes to the negative gearing rules rather than the capital gains concession) or cutting the capital gains discount from 50 to 40 per cent.

A 40 per cent discount was recommended by the Henry tax review on the proviso that it was extended to income from other forms of saving such as bank interest. It would be a popular measure.

"A more consistent treatment of household savings would encourage households to seek the best pre-tax return on their savings," the review said at the time. "It would also largely remove the current bias towards negatively geared investment in rental properties and shares and so reduce a major distortion in the rental property market."

In The Age and Sydney Morning Herald

Read more >>

Negative gearers aren't poor, Mr Morrison

It's the myth that keeps going round, in part because it contains an element of truth.

"Two-thirds of the people who use negative gearing currently have a taxable income of $80,000 or less," Treasurer Scott Morrison told Sydney radio station 2GB on Monday.

The figure makes it sound as if negative gearers aren't particularly well off, which is why the Property Council started circulating it.

It's genuine as far as it goes. It comes from the Tax Office. But it's not what it seems. Note the use of the words "taxable income". The figure of $80,000 is what two-thirds of the people who use negative gearing manage to reduce their taxable income to as a result of negative gearing. Before negative gearing, their incomes were higher, in some cases far higher.

The same figures show an astonishing number of negative gearers report taxable incomes of $10,000 or less. They would make no sense if that was what the negative gearers actually earned (what bank would lend to them?) but they make a lot of sense if they had used negative gearing in order to push their taxable incomes below $10,000.

The word "chutzpah" is often illustrated by the joke about the the boy on trial for murdering his parents who begs the judge for leniency because he is an orphan.

It's funny because the boy has done it to himself. Most negative gearers appear to be less well off than they are because they have used negative gearing to do it, sometimes to absurd lengths.

Labor has dug into the same figures and discovered that 64,000 negative gearers report taxable incomes of less than zero. No one, certainly not the Treasurer, would believe they actually earned less than zero.

There may well be good arguments for retaining negative gearing. The apparent poverty of negative gearers is not one of them.

In The Age and Sydney Morning Herald

Read more >>

Melbourne booms while the rest of Victoria sinks

Melbourne has pipped Sydney to become Australia's fastest-growing city, but risks a "lost decade" after years of underinvestment in public transport.

The latest spatial breakdown of economic growth produced by SGS Economics and Planning puts Melbourne at the top of the pack at 3.1 per cent, a growth rate exceeded only in regional Western Australia and the Northern Territory. Sydney's economy is growing at 3 per cent, Brisbane's 0.9 per cent and Perth's 0.3 per cent.

Adelaide is growing faster than the other second-tier capitals at 2.1 per cent, Canberra at 1.4 per cent, and Tasmania (no separate results are calculated for Hobart) at 1.6 per cent.

But regional Victoria is languishing. Away from Melbourne the calculations put Victorian growth at just 0.3 per cent, a rate that fails to cover population growth, meaning income per person is going backwards.

"It's been a bad year for both manufacturing and agriculture," said SGS partner Terry Rawnsley. "The closure of the Alcoa refinery in Geelong hit manufacturing, and we had drought in the Wimmera. Agriculture is seasonal so things might improve, but Melbourne is where the growth is."

Driving Melbourne's economy has been a rapid growth in the financial sector and a boom in apartment building, but Mr Rawnsley says both are at risk from years of underinvestment in public transport.

"Putting aside the regional rail link which has just opened, Melbourne's last big investment was the city loop in 1985. It expanded the capacity for people to get into the city, and the banks moved their operations to the Docklands. But by 2009 or 2011 that capacity was exhausted and the trains became extra crowded. While you can throw extra rolling stock at the problem, you really need an uplift in capacity."

Mr Rawnsley says the Melbourne Metro won't be completed until 2026 and the government's program of removing level crossings will achieve only incremental benefits...

"Like Sydney after the Olympics, we are facing a lost decade because of infrastructure which has failed to keep pace. Global and national firms are likely to bypass Melbourne because they won't be able to get their workers to work. They will go to Sydney or Brisbane or Auckland instead."

The 2014-15 accounts show Sydney was responsible for 23.3 per cent of Australia's gross domestic product and Melbourne 17.7 per cent. The next most important locations are Brisbane (9.6 per cent), Perth (9.5 per cent), regional Queensland (8.9 per cent), regional NSW (8 per cent), and regional Western Australia (7.5 per cent). Regional Victoria accounted for just 4.4 per cent.

In order to demonstrate the different economic fortunes in different parts of Australia, SGS Economics calculates what the Reserve Bank should do to interest rates in each location to allow it to grow at its long-term potential. In Sydney the bank should lift its cash rate from 2 per cent to 3.5 per cent, in Melbourne it should keep it steady at 2 per cent, and in much of regional Australia, including regional Victoria, it should cut it to 1 per cent.

The exceptions are regional Western Australia and Northern Territory where the Bank should increase rates to 2.75 per cent and 5 per cent.

In The Age and Sydney Morning Herald

 

Read more >>

The high earners who think they are battlers

High income earners are reluctant to part with their tax breaks in part because they think of themselves as battlers, new research suggests.

Two-thirds of the highest-earning households surveyed by Ipsos Australia for MLC Wealth define themselves as "middle class" or "lower middle class" or "working class".

Each brings home at least $200,000, putting it near the top 10 per cent of households.

Yet, according to the survey to be released on Monday, only 2 per cent of the high earners define themselves as upper class and only 31 per cent as upper middle class.

Almost half (44 per cent), say they are middle class. A further 10 per cent say they are lower middle class, and 13 per cent working class.

Many households in the top 10 per cent struggle to save. The survey finds one in five live "pay cheque to pay cheque", spending everything they earn.

Two out of three say the cost of maintaining their mortgage is "having a big impact on their lifestyle".

"It's a paradox," says Lara Bourguignon, MLC's general manager of corporate superannuation. "The people who are earning more are also spending more and feeling left behind.

"It might be because they are living in the major cities, living in the expensive areas of major cities, or working so hard that conveniences such as eating out seem essential."

Asked to nominate the average income of a household that was genuinely upper class household, high income households nominated $454,000...

Middle earning households were more realistic, nominating $280,000.

Curiously, very low income households defined upper class in much the same way as high income households, nominating $549,000.

But low earning households were realistic about their own status. Four out of 10 described themselves as working class. None described themselves as upper class.

Ms Bourguignon said perceptions about what constituted a comfortable lifestyle were changing.

"It used to mean having access to a home, food, healthcare and schooling," she said. "Now it extends to overseas holidays, private schools and the latest technology. We have come to define comfortable as being able to do whatever we want. We have changed our perception of what normal is."

In The Age and Sydney Morning Herald

Read more >>

Treasury considering cap on tax deductions

Treasury is considering a universal cap on income tax deductions that would apply to negative gearing as well as employment-related expenses such as self-education, transport, union fees and work-related clothing.

Arising out of the government's review into taxation, the proposal would abolish caps on specific expenses and replace them with an overall ceiling that would limit total deductions to a proportion of income or an indexed ceiling.

In Britain, which adopted the system in 2012, the ceiling is £50,000 pounds or 25 per cent of income, whichever is the higher.

"It means there's an upper limit. If you set the ceiling high enough, 90 per cent of the population could be unaffected while the big claims would be knocked back," said Neil Warren, professor of taxation at the University of NSW.

Australia is unusual in imposing no total ceiling to the amount of deductions that can be claimed, meaning some claims exceed 100 per cent of income.

Tax Office statistics for 2012-13 show 55 of Australia's highest earners paid no income tax at all during that year. All earned at least $1 million and managed to write their taxable incomes down to below the $18,200 tax-free threshold.

Although most Australians claim only small deductions, Australians with multiple negatively geared properties are able to claim large proportions of their income.

While pledging to continue to allow negative gearing, Treasurer Scott Morrison told Parliament last week that the government was prepared to look at "areas where the system is being abused or areas where they are excessive".

Professor Warren said harsher rules applied in many of the countries to which Australia compared itself. The United States imposes a minimum tax rate below which deductions could not reduce tax, Canada allows only specifically leglislated deductions and New Zealand allows negative gearing, but not work-related deductions.

In a submission to the Parliament's inquiry into tax deductibility the Treasury pointed out that Britain much more tightly limited the type of claims that could be made. Rental losses could only be offset against other rental income. Work-related deductions had to be incurred by every holder of that form of employment.

"It is not enough that one employee, or a subset of employees, happens to incur the expense," the submission said.

Work-related deductions amounted to $19.8 billion in 2012-13. Rental interest deductions amounted to $22.5 billion. The cost is believed to have climbed since with the spread of electronic lodgement.

In a paper being considered by the Treasury, Professor Warren suggests Australia adopt Britain's model of applying a global limit to all deductions including those related to work, health, negative gearing, the cost of managing tax affairs and gifts and donations.

Figures from 2010-11 showed a cap of $50,000 or 25 per cent of income, whichever was the greater, would affect only 0.9 per cent of landlords and only 1.3 per cent of those incurring a rental loss. A lower cap of $12,500 would affect 9 per cent of landlords and 14 per cent of those incurring a loss.

Professor Warren said the level of the cap would be a political decision. The important thing was to wind back excesses without affecting most taxpayers' ability to claim deductions.

In The Age and Sydney Morning Herald

Read more >>

Morrison's tax swap would have taken from the poor and given to the rich

The most shocking thing in the Treasury analysis delivered to Scott Morrison on January 25 isn't the finding that a cut in income tax funded by a lift in the goods and services tax wouldn't boost the economy at all.

It's what Morrison asked the Treasury to model.

He asked it to model a lift in GST from 10 to 15 per cent and then the handing back of every possible cent in income tax cuts. Because boosting the GST automatically results in extra spending on benefits such as Newstart, family allowances and pensions as prices climb it isn't possible to give all of it back.

But it is possible to hand back $30 billion of the $35 billion as tax cuts, and that's what Morrison asked the Treasury to model in the first instance, not legislated increases in benefits of the kind delivered by his predecessor Peter Costello when introducing the GST.

The impact is horrific.

High earning households do very well. In the top fifth, 81 per cent are better off. In the fifth below that, 80 per cent are better off.

In the bottom fifth, only 9 per cent are better off. Put another way, the change makes 91 per cent of the lowest-earning households worse off.

It makes 79 per cent of the next lowest earning households worse off, and 60 per cent of middle earning households better off.

Morrison had asked the Treasury to model a change that enriched middle and high earners at the expense of the least-well off.

And the results tell us something about the nature of the change. It appears to have been one that cut tax rates or adjusted thresholds at the top more than the bottom. All of the Prime Minister's talk about how any change must be fair appears to not have sunk in.

At his request Treasury and its consultants Econtech and KPMG also did sensitivity analysis. What would happen if, say, $6 billion of the tax cuts were diverted to low earners in extra benefits? They found that the more the tax cuts were diverted to benefits, the worse the economic payoff. Econtech found the payoff turned negative. KPMG found it was positive but got weaker the more low earners were compensated.

Morrison will make much of the finding in a later Treasury brief that doing nothing and allowing bracket creep to push people into ever higher tax brackets is is set to take 0.35 per cent from GDP over four years. But tax cuts funded by a hike in the GST wouldn't have halted bracket creep, they would have postponed it. And during the time they postponed it, the projected budget deficit would have swelled.

Morrison will be able to deliver income tax cuts, but they will be smaller, funded by a tightening up of superannuation and other tax concessions.

There's no realistic prospect of tax cuts being funded by slashing government spending. Treasury believes that at the moment the economy couldn't stand it. Cabinet ministers believe that spending cuts of the size needed to pay for big tax cuts just aren't possible.

In The Age and Sydney Morning Herald

 

Read more >>

Why state governments are about to hike taxes

Victoria, NSW, and every other Australian state have been mugged.

Here's how it happened. The Coalition came to office in 2013 promising to continue to properly fund state hospitals and schools. It left the impression the commitment had no expiry date. Then in its first budget it abandoned funding some state programs (encouraging the states to continue them "at their expense") and announced that from 2017-18 it would lift hospital and school funding only in line with population growth and inflation.

Think about that. Population growth is 1.7 per cent in Victoria and 1.4 per cent in NSW. Inflation is 1.7 per cent. Combined, they are about 3 per cent. But the costs of running hospitals are soaring. In the past decade they've jumped 7.2 per cent a year.

What are the states supposed to do? Not pay those costs? Limit spending growth to population plus inflation, even though the cost of wages and medical technology is growing much faster? Or are they supposed to find more money.

In the days immediately following the budget, then treasurer Joe Hockey seemed to have an answer, or at least a wink and a nod. Asked whether the states should raise more tax, he replied: "Well, that is a matter for them because they do run the schools and hospitals."

He had made his budget better by making theirs worse, and he expected them to do something to make up the difference. Asked specifically whether they should push for an increase in the GST, he replied that that was up to them. "They get all the money from the GST. If they want to change it, they've got to argue for it," he said.

Two of them did just that. Mike Baird in NSW and then Jay Weatherill in South Australia argued for an increase in the GST to continue to properly fund their schools and hospitals.

Then Hockey skipped the country...

His replacement changed the script. "If the proposition was that you should increase the GST to give the states a bucket of money to spend more, that has never been a proposition, I'm sure you know, that I or the government have countenanced," Scott Morrison said on Monday.

"We have been very clear about that. If that is what the purpose was, then that has never been something the government has really given any comfort to," he said.

Which leaves the states in an awful hole. The Feds have ripped $80 billion out of their budgets over the next 10 years: $50 billion out of grants for hospitals and $30 billion out of grants for schools. Each year the shortfall will grow, unless the cost of medical technology suddenly plateaus or schools become less ambitious.

The most obvious means of maintaining standards, the so-called states tax, has been pulled out from under them. Victoria's idea of a hike in the Medicare levy won't fly either. The Feds won't permit an increase in the total tax take. Which leaves the states desperate for taxes they can raise all by themselves.

At the moment, they are doing all right. The extraordinary boom in Sydney and Melbourne house prices has earned them a fortune. In the past year prices in both cities have climbed 11 per cent. But in the year ahead the BusinessDay forecasting panel expects only 2 per cent for Sydney and 2.8 per cent for Melbourne. Stamp duty will no longer fill the gap.

The ACT is weaning itself off, phasing out stamp duty over 20 years and phasing in an annual land tax charged as a top-up to municipal rates. When in, it will be able to lift it at will. Land taxes are next to impossible to escape. Home owners can always sell and move interstate (where they will be hit by stamp duty) but they will be replaced by others who will buy.

One of the unusual properties of land taxes is that they actually depress land prices. The higher they are the less likely home buyers will find properties out of reach.

Land taxes are >only one of five taxes graphed in the Treasury's tax discussion paper that do no economic damage whatsoever. At the other end of the scale, stamp duties do 80¢ worth of damage for each dollar collected.

The states get it. South Australia is experimenting with a land tax by progressively upping what it calls its "emergency services levy". But a full-blown land tax would have to be phased in. Otherwise someone who had just paid, say $50,000 in stamp duty would find themselves also paying the land tax that was meant to replace it.

The change mightn't phase in quickly enough to get the states the money they will need. Which leaves payroll tax. Removing all of the exemptions would raise the states a fortune. To stop businesses moving interstate to escape it, they would need to band together and act at once. Payroll tax isn't quite as good as the goods and services tax because it falls on only Australian products instead of Australian products plus imports, but it's a lever the states could actually pull.

And death duties. Until the mid-1970s all the states charged them. Applied to only the 0.3 per cent of families with assets of more than $10 million, they could raise billions. The US and Britain charge 40 per cent.

The states have to do something. Their citizens want properly functioning hospitals and schools.

In The Age and Sydney Morning Herald

 

Read more >>

What tax debate? What white paper?

Of all the questionable claims in the tax debate, the biggest is that it's been a debate.

Instead we've had Bill Shorten standing in supermarkets wrongly asserting that the government is planning to increase the GST, and for the most part the government saying nothing.

Even the Treasurer Scott Morrison hasn't made the case, apart from to say that pushing up the GST would be a bit like turning back boats, and that if the proceeds were used to cut income tax, fewer people would suffer bracket creep.

Bracket creep is the lowest it has been in decades, because wage growth is the lowest it has been in decades. And in any event, if bracket creep was high, tax cuts funded by a higher GST would be only a temporary solution. As it continued there would be a need to lift the GST again.

These points haven't been made much in the debate because there hasn't been a debate. We were meant to have one after the Treasury released its green paper setting out options and the arguments for and against. After the government picked its preferred option it was going to produce a white paper setting it out in concrete terms before putting it to an election.

The Prime Minister has confirmed there will be neither a green paper nor a white paper, and by implication neither a green paper nor a white paper in the related federation review which was meant to be conducted in tandem with the tax review.

Without a comprehensive review of the kind that preceded the introduction of the GST or Labor's changes to mining tax, it'll be hard to sell a big change.

But not impossible. The biggest changes are likely to involve superannuation. The government will need to finalise its position quickly and start explaining it very carefully.

In The Age and Sydney Morning Herald

 

Read more >>

Turnbull's wrong, the future isn't what it used to be

What would you rather do without: the internet, or airconditioning?

Here's another one. What would you rather give up: smartphones, or plumbing?

They're questions that go to the heart of the myth at the centre of Malcolm Turnbull's Australia Day speech – that we live in "the most exciting time in human history".

According to our technologically-savvy Prime Minister "there has never been such rapid change".

Really? Try telling that to your great-grandparents.

In the late 1800s families bathed in tubs in the kitchen, often the only heated room in the house, after carrying in buckets of cold water and heating it by an open fire. They washed once a week if they were lucky, and in some cases once a month. Yet within decades, by 1940, they had running water and heating in every room. So says US economist Robert J. Gordon in an impressive, and somewhat depressing, new tome entitled The Rise and Fall of American Growth.

Gordon says not a single urban home was wired for electricity in 1880, but by 1940 nearly 100 per cent had mains power. By 1940 94 per cent had clean piped water, 80 per cent had flush toilets, 73 percent had gas for cooking and 56 per cent had refrigerators.

Houses went from being isolated to being networked, "most having the five connections of electricity, gas, telephone, water, and sewer".

Compare that to the changes we are living through now, the ones spruiked by our Prime Minister.

Gordon says until 1970 progress was broad, encompassing electricity, the internal combustion engine, health and networking. Since then it's been mainly in entertainment and communications. And its been evolutionary rather than revolutionary.

By 1970 television was old. Even our family had one. Since then we have had a move to colour (something that happened earlier in the US) and a move to both larger and smaller screens. By 1970 telephones were ubiquitous. That's when my family signed up. Since then they've become more portable, but they function in the same way. Computers are improved typewriters, email functions as a fax machine, and the internet as an encyclopaedia.

And away from communications, progress has been glacial...

"By 1970 the kitchen was fully equipped with large and small electric appliances, and the microwave oven was the only post-1970 home appliance to have a significant impact," Gordon writes. "Motor vehicles accomplish the same basic role as they did in 1970, albeit with greater convenience and safety. Air travel today is even less comfortable than it was in 1970, with seating configurations becoming ever tighter and long security lines making the departure process more time-consuming and stressful."

His graphs are shocking. They are rainbow-shaped. They show that in the 50 years before 1920 output per person grew at an annual rate of 1.8 per cent. For one glorious half-century between 1920 and 1970 it grew at 2.4 per cent, then it fell back to 1.8 per cent where it has been for the past half-century. The graph on effort is U-shaped. Before 1920 working hours per person rose. Between 1920 and 1970 they fell rapidly, and now they are climbing again, more quickly than they did before the glorious half century began.

It's as if the promised future didn't happen. Peter Thiel, the founder of PayPal, put it this way: We wanted flying cars, instead we got 140 characters".

There's a counter argument, one I find intuitively attractive. It's that new developments feed on other new developments to create game-changing transformations such as the driverless car or 3D printing. But they are not showing up in the figures. The US economist Robert Solow famously quipped in the late 1980s that he could see the computer age everywhere but in the productivity statistics. He was briefly wrong – productivity growth did climb for a few years, but then it fell back down. Moore's Law – the rule of thumb that said processing power would double every two years – has been failing to keep pace for a decade. In recent times it has taken four to six years for processing power to double.

Gordon's point is that should neither surprise nor worry us. Humanity's big advances were awesome. Whereas as all of us could quite happily travel back in time 50 years from today and enjoy a recognisable lifestyle, that wouldn't have been possible if we travelled back 50 years from the 1940s.

But those advances have already happened. They can't happen again. They made us better off, forever. We're living in that forever.

In The Age and Sydney Morning Herald

 

Read more >>

GST hike is a solution in search of a problem

Of all the daft analogies. Scott Morrison says fixing tax is like turning back boats.

"I have had a bit of experience with this," he told a Canberra press conference this week. "I remember before the 2013 election, turnbacks actually had lower levels of support in the Australian community. It's important that when you believe that something's right for the country, that you remain focused on that."

Here's what's different about tax. When you turn back boats, you know what you are trying to achieve. When you attempt to change the tax system, you are without a clear goal unless you set one first. A 15 per cent GST might well be the answer. But it's impossible to know without knowing the question.

The question was muddled from the start. Here's how Tony Abbott put it during the 2013 election campaign: "Well within three years, a tax white paper will have canvassed how we can have lower, simpler, fairer taxes for higher economic growth and better and more sustained services."

That's five points, a bit like the arrow-covered pointless man in the Harry Nilsson film who concedes that "a point in every direction is the same as no point at all".

No matter. Over time the objectives were to be sharpened in a discussion paper, then a green paper setting out options, and finally a white paper detailing the preferred option. We were to be given something to measure the final proposal against.

Except that the Abbott government fell apart. The treasury had the discussion paper ready to go at the start of December 2014. Abbott sat on it for four full months as he dealt with a string of crises, among them the loss of the Victorian state election, the ill-advised knighthood for Prince Philip and a challenge to his leadership. By the time it was released at the end of March there was precious little time for submissions and the production of the green paper due that year.

And Abbott started ruling things out. Superannuation wouldn't be touched. It's the biggest tax break there is after the family home. But Labor had proposed touching it and Abbott wanted a point of difference. Negative gearing wouldn't be touched. Labor had talked about touching that.

By the time the green paper was ready (about the time Abbott lost his job) there was not much in it. Abbott's vetoes had piled up. So Turnbull and Morrison sat on it, and now they are thinking about not releasing it at all...

To their credit they have put everything back on the table and they are talking to lobby groups. Morrison says he has fostered "quite a real debate out there in the community, among policy makers, in private and public sector alike, the various groups".

"I mean, we have the current arrangement, which says there would be a green paper and a white paper. But what the debate over the last three or four months, I think, has shown is, in many ways, the public [has] moved beyond that," he says. "We've advanced the debate I think a lot more effectively over the last four or five months than a green paper ever would."

That's rubbish. Without a clear objective, a 15 per cent GST can seem like the answer. Morrison has become a fan. The treasury isn't. It has calculated that compensation would end up costing "at least half of the extra GST revenue". And that's if it could be delivered. The much higher tax-free threshold these days makes it difficult.

If the objective is fairness (something Turnbull is very keen on) a GST hike won't cut it. It would hurt low income households much more than high income ones, which is why it would require compensation.

If the objective is economic growth, treasury's own graph presented in the discussion paper shows the GST to be no less damaging than an idealised income tax. Deloitte Access Economics says in the real world a switch would bring some benefits, but they would be small, dwarfed by those of other proposals such as swapping stamp duty for land tax. And even those wouldn't be big. Overseas evidence suggests that even the best tax switches don't do much for economic growth.

If the objective is revenue, a 15 per cent GST most certainly would help. But Morrison insists that's not his objective. He says he doesn't want to lift the overall tax take, even though that's precisely why premiers Mike Baird and Jay Weatherill want an increase in the GST.

Examined dispassionately alongside other proposals such as a uniform payroll tax, a land tax, a tightening of superannuation tax breaks and a cut in the company tax rate, a GST for income tax swap wouldn't achieve much.

But Morrison isn't that interested in dispassionate evidence. On Monday he dissed the economic modelling that supported a cut in the company tax rate saying "the sad thing about economic models for those who run them is that they're not perfect and they can't predict the future".

Like a shark preparing to attack, he is closing his eyes.

Turnbull meanwhile has pointedly refrained from pushing the idea of a 15 per cent GST. He genuinely hasn't made a decision and he is quite prepared to leave his treasurer out on a limb. Expect the treasurer to be reined in and expect the Prime Minister to consider the evidence and work out what actually works.

In The Age and Sydney Morning Herald

 

 

Read more >>

With the GST out of the way we could fix what's broken

What's left to reform if Scott Morison's push for a GST hike goes south?

Lots. The really big money is in superannuation. A switch to taxing contributions at marginal rates rather than the present flat rate of 15 per cent would raise an extra $15.6 billion per year, about as much as would be left over from an increase in the GST after compensation. It's enough to buy substantial income tax cuts or properly fund hospitals and schools in line with the wishes of the premiers and leave money over for company tax cuts.

If the government didn't want to remove the concession altogether, it could tax contributions at marginal rates minus 15 per cent, raising $6 billion per year. It could rightly claim to be going after high earners harder than Labor, which had the best part of a decade to fix the unfair super tax system it introduced and came up with something more mild.

The biggest economic boost would come not from a switch from income tax to GST but from a switch from stamp duty to land tax. To get it the Commonwealth would have to knock together the heads of a few state premiers, but according to the the discussion paper that kicked off the tax reform process, it's where the big gains lie.

Capital gains are taxed at only half the rate of income earned from interest in bank accounts. The discussion paper asks whether that's appropriate and talks about taxing all income from saving at the same (discounted) rate.

Fringe benefits tax, employee deductions, business deductions, dividend imputation and the role of the family home all come under the microscope in the discussion paper. Getting the GST off the table would allow the government to focus on fixing what's really broken.

In The Age and Sydney Morning Herald

 

Read more >>

2016 Economic Survey: Share market flat all year, economic outlook bleak

 

 

The Reserve Bank board will confront a bleak economic outlook when it meets for the first time this year on Tuesday.

In 2016 the forecasting panel for BusinessDay's Scope economic survey is expecting below-trend economic growth, a further collapse in mining investment, next-to-no lift in other investment and a lacklustre year on the sharemarket.

It believes Australia's unemployment rate will stall rather than improve, wage growth will barely match inflation, US economic growth will remain weak, Chinese growth will weaken and the price of iron ore will stay low while Australia's terms of trade weaken.

In other words, it is forecasting a year pretty much like the one we've just had. Except that this time the Reserve Bank won't cut rates.

The panel concedes there's a small chance of an cut (its average forecast is for a December cash rate of 1.9 per cent) but not enough of a chance to force the Bank to cut by a standard increment, from 2 to 1.75 per cent.

It'll be a muddling-through kind of year, with little to drive growth. Housing investment, which did the job last year, jumping 10 per cent, will this year climb just 4.1 per cent. Home prices, which last year soared 11.5 per cent in Sydney and 11.2 per cent in Melbourne, will this year climb just 2 and 2.8 per cent.

The good news is that none of the panel expects home prices to collapse. The most pessimistic forecast comes from Stephen Koukoulas of Market Economics, who expects slides of 6 and 7 per cent; the most optimistic comes from Renee Fry-McKibbin at the Australian National University who expects gains of 10 and 9 per cent.

Made up of 26 leading economists from financial markets, academia, consultancy and industry, the BusinessDay panel's forecasts have over time proven to be more accurate than those of any of its members.

Of necessity they assume away unexpected events, as do the forecasts of the Treasury and the Reserve Bank. But as with the official forecasts, it would be fair to say the risks are weighted to the downside.

"For iron ore in particular, a sharper slowdown in global steel output (especially in China) could potentially drive iron ore prices closer to US$30 per tonne – roughly the breakeven prices for major Australian miners – compared with our current forecast of US$42 per tonne," writes the National Australia Bank's Alan Oster.

This year's survey is unusual in hosting something of a write-in protest. Five of the panel said they didn't believe China's official economic growth figure. They produced forecasts for what China would say the figure was, but thought the actual figure would be much less.

"Actual GDP is likely to be lower, but not reported," was how Nicki Hutley of Urbis Consulting put it.

The panel expects reported Chinese growth to remain near the 7 per cent target at 6.4 per cent, but it doesn't expect it to necessarily support Australian exports...

"China's economy is, at best, transitioning away from relying on commodity-intensive manufacturing and heavy industry to drive its growth, and at worst could experience a prolonged depression of these industries," writes the ANZ's Warren Hogan. "So the outlook for commodity markets remains weak, with stability in prices and continued growth in volumes looking increasingly like an optimistic view."

On balance the panel expects the iron ore price to end the year near where it started at US$40 a tonne, but the range of forecasts is wide, from US$33 to US$58 a tonne. Even if the price does hold up, the panel expects other export prices to fall, pushing Australia's terms of trade down another 4.7 per cent.

Mining investment will collapse a further 20 per cent as existing projects wind up, and the much anticipated boom in non-mining business investment will be postponed for another year. The panel expects non-mining investment to climb by 1.2 per cent, nowhere near enough to take up the slack.

And housing won't either. The authorities have been successful in their attempts to cool the boom in investor borrowing.

All up, the panel expects economic growth of just 2.5 per cent this year, much less than the 3 per cent expected by the Reserve Bank and also less than the 2.75 per cent the treasury believes is Australia's long-run potential.

As a result unemployment will stay roughly steady at 5.9 per cent, and wage growth will remain barely noticeable at 2.4 per cent, just a touch above the underlying inflation rate of 2.3 per cent.

Household spending will continue to grow at about the rate it has been, 2.6 per cent, perhaps funded by a further fall in the household saving. While a long way short of the 4 and 5 per cent growth rate in household spending achieved in the mining booms, its an improvement on the anemic growth of less than 2 per cent experienced during much of 2012.

Nominal GDP – the measure that matters for budget revenue – will also hold up in the view of the panel, growing by 3.4 per cent, up from this year's 2.2 per cent. But again the range of forecasts is wide, from just 1.5 per cent (Steve Keen) to 5.2 (Paul Bloxham of HSBC).

The panel broadly accepts the government's budget deficit forecasts, agreeing with it about 2015-16 and expecting a $3.6 billion bigger deficit in 2016-17. But forecasts for the second year range from a deficit of $17 billion to $60 billion indicating considerable uncertainty about how much the government will be able to tighten the budget in an election year.

Mardi Dungey of the University of Tasmania believes there might be an economic limit to how much tightening the economy can bear brought on by the tax white paper.

"There will be an effective tightening for consumers due to announcement effects and anticipation of an increase in tax collection via either a broadened or increased goods and services tax collection," she writes.

The panel expects the share market to grow hardly at all, the ASX 200 doing little more than recovering its January losses in the first half of the year and then closing up a mere one half of one per cent at 5325.

Weighing on the market will be a weak Australian economy and an equally weak American economy. The panel expects US growth of just 2.5 per cent throughout 2016. The most optimistic forecasts are 3 per cent (Nicki Hutley and Su-Lin Ong). The most pessimistic is 1 per cent (Steve Keen).

Higher US interest rates would mean a much-needed lower Australian dollar, but the weak US forecasts suggest it might not happen quickly. The forecasts for the Australian dollar centre around 69 US cents, roughly where it is now.

The government's 10-year bond rate should remain low at 3.14 per cent. Without a sustained lift in global interest rates, long-term rates will remain low.

The original version of this story wrongly attributed the lowest forecast for nominal GDP growth to Dr Guay Lim of the Melbourne Institute. The forecast was Steve Keen's. Dr Lim and her team at forecast nominal GDP growth of 3.8 per cent.

In The Age and Sydney Morning Herald

 

 

BusinessDay Economic Survey: Stephen Anthony shines in a year of gloom

Asked what would happen to the price of iron ore this time last year, our panel said "nothing much". It would remain roughly steady around US$72 a tonne.

Instead it collapsed, plummeting to US$41.

In fact, 2015 was the year our panel got spectacularly and unusually wrong.

Was the Reserve Bank going to cut interest rates? Not at all, said most of our 25-person panel. Instead, starting just days after the forecasts were published, the Reserve Bank cut its cash rate twice in a matter of months. By May it was 2 per cent. Only one of the panelists predicted it. He was Stephen Anthony, now with Industry Super.

Dr Anthony also came the closest to picking the fresh collapse in the price of iron ore. He wasn't very close, he predicted an iron ore price of US$55 rather than US$41. But he was closer than any of the rest. All the others went for an iron ore price of US$60 or even more. Some tipped a rise to US$80.

Until mid-last year the director of forecasting at his Canberra consultancy Macroeconomics, Anthony is a former treasury economic modeller who feeds scenarios to computer models that give him consistent economic and budget forecasts.

The scenario he chose was the one outlined in Ross Garnaut's book Dog Days: turmoil in China and much weaker demand for Australia's big exports.

"If you forecast the right story, if you back the right horse, you'll do well pretty much across the board," he says. "It's when you have the wrong sense of where we are at as a macroeconomy. That's when you a have problem."

His sense is that much weaker demand for Australia's exports will mean weaker incomes, weaker budget revenue and much weaker mining investment. He doesn't think it's over, and he doesn't rule out a recession.

"Mining investment was 5 per cent of GDP. It's going to fall to around 1 per cent. That means the economy is transitioning to something else, but we are not yet sure what it is," he says.

One of Anthony's forecasts was too gloomy. He expected an unemployment rate of 7 per cent. Instead it fell to 5.8 per cent. Anthony thinks employment is switching away from high wage jobs to lower wage jobs, something he didn't expect.

In The Age and Sydney Morning Herald

 

Read more >>

China gets it wrong

A write-in protest is unusual in an economic survey.

I am in the middle of compiling the annual BusinessDay survey, to be published at the end of the month.

This year, five of those surveyed complained about one of the questions.

They were asked to forecast China's economic growth.

Instead, they forecast what China would say the growth rate was, and said they wouldn't believe it. "I, as well as many others, suspect the official figures are significantly inflated," wrote one. "I have forecast 6.5 per cent, but the actual figure will be more like minus 1," wrote another.

That they are openly mocking the pronouncements of Australia's biggest customer says a lot about where China finds itself.

Its target growth rate is 7 per cent. Its official growth rate, released on Tuesday, is almost exactly the same, 6.9 per cent, suggesting either that China's leaders are incredibly good at meeting targets, or that their frightened underlings are good at leaning on the figures to make it look as if they are.

The first is unlikely, given the leadership's spectacular failure to get what it wants out of its own share market, the world's biggest. The Shanghai composite index plummeted 15 per cent at the start of the year, despite frantic efforts to prop it up.

What's happening to the share index isn't that important, except as an insight into a bigger game being played out on a larger canvas.

"Countries are like people," says Patrick Chovanec, chief strategist at Silvercrest Asset Management in New York. "People do what works until it stops working, and then they keep doing it, because it used to work."

China latched on to something that worked. Appallingly underdeveloped with embarrassingly low local purchasing power, it turned that weakness into a strength. Like Japan, South Korea and Singapore before it, used its low wages to tap into the rest of the world's purchasing power. As as it sold more and more cheap goods it invested the proceeds in more and more factories and housing. It was bringing hundreds of millions of workers in from the country to cities.

As the number of its factories and housing units grew, its need for the rest of the world to buy even more of what it made grew; which it did, enabling China build even more factories and more accommodation, mostly with Australian iron ore.

Until China grew to the point where it dwarfed the economies it sold things to...

On one measure it is now the world's biggest economy, on another the world's second-biggest. With the rest of the world unable to keep buying increasing amounts of what it produced it needed to try something different. It needed to let the growth rate slow and allow the spending of ordinary Chinese drive the economy.

It paid lip-service to the idea, but mostly it kept doing what it used to do.

If building more factories and accommodation had boosted growth before, surely it would do it again, its logic went. And it worked during the global financial crisis, sort-of. Its economy kept growing while the rest of the world's stumbled.

But the rest of the world never really recovered, and China kept building increasingly useless factories and increasingly empty housing.

"Intellectually, China's leaders know what they have to do," Chovanec says. They need to shift resources away from construction towards households. It's been Communist Party policy since 2013.

"The problem is the moment they succeed they will knock the stuffing out of the investment boom. That's why they flinch. They pull back and try to shore up the existing model."

Chovanec was until recently a professor of economics at Tsinghua University in Beijing. No longer living in China, he is free to describe what he saw.

"Whether it's in the property market, in shadow banking, in the stockmarket, in bad debts or in uneconomic state-owned enterprises, they want a correction without having a correction," he says.

"And the longer that goes on, the deeper the hole they dig, the more traumatic and the scary the correction becomes, and the more they flinch away from it."

China's industrial production slowed last year. Yet borrowing jumped a further 5 per cent as banks pumped more and more money into less and less economic factories, housing schemes and loss-making businesses.

"The message it sends is: hey, if you invest in real estate it doesn't matter whether anybody occupies the building, we will ensure you will make a profit because we need it for GDP," says Chovanec.

"It's storing up problems for later, but it is also sucking the oxygen out of the parts of the economy that need to grow."

As Chinese cotton on and attempt to get their money out of the country, China's president, Xi Jinping, is becoming increasingly authoritarian.

Outside of the country he is being openly mocked. Australian economist Saul Eslake described the share market collapse as a "Wizard of Oz" moment. "Far from the Wizard being as omniscient as Dorothy and all the munchkins believed, he is just an old man behind a green screen," he said.

In the short-run doing what used to work is helping Australia. It's allowing us to sell a few more years of iron ore. In the long run it is making what's coming worse.

In The Age and Sydney Morning Herald

 

Read more >>

Stephen Anthony. Australia 'has few tools left' to fight recession

A further downturn in China would leave Australia exposed, without sufficient tools to avoid a recession, one of Australia's leading forecasters says.

Stephen Anthony is a former BusinessDay forecaster of the year. In 2015 he took up a role as the chief economist for Industry Super Australia after having run his own economic consultancy and worked on forecasting in both the Treasury and Department of Finance. On Saturday, January 30, when the next set of BusinessDay forecasts are published, he will once again be awarded the title, this time for having most accurately predicted 2015.

"I think the risk of a recession is higher than most people would price it," he told Fairfax Media. "Most people are talking about a less than 30 per cent chance this year. I think it is higher."

Dr Anthony said the government had far less "wriggle room" to avoid a recession than it had before the onset of the global financial crisis in 2008.

In January 2008 the Reserve Bank's cash rate was 6.75 per cent, giving it plenty of room to cut interest rates. In January this year the cash rate is just 2 per cent.

In January 2008 gross government debt totalled just $55 billion. It's now $415 billion, or 25 per cent of GDP, giving the government less room to borrow more without alarming rating agencies.

Australia is going into 2016 with an expected budget deficit of $35.1 billion. In 2008 it had an expected surplus of $19.7 billion.

"The real question is how severe is China's downturn going to be," Dr Anthony said. "Are we going to see Chinese growth fall to 6 per cent, to 5 per cent, or to 4 per cent? A Chinese economy growing at 4 per cent is probably very bad news for Australia because it will cut the volume of our exports as well as the prices."

To date real estate investment had been propping up Australia's economy, but it had been deliberately slowed as the authorities had tightened conditions on investor loans...

Forecaster Nicki Hutley, of Urbis Consulting, said the probability of a China-linked crisis in the next 12 months was "pretty low, about a one in 10 chance".

"Some people might say that's not low," she added. "But the point is it's nowhere near the central case."

If Australia needed to respond to a downturn it would be unable to rely too much on the Reserve Bank.

"Not only does the Reserve Bank only have two percentage points left, but the experience of Europe and the United States suggests that those last few percentage points won't do much," she said.

"Investors don't respond in the same way to dropping rates from 2 per cent to zero as they do from 7 to 5 per cent."

The government had plenty of room to expand the budget.

"Australia has a very low debt-to-GDP ratio. Even the Prime Minister and Treasurer have significantly changed their language on this. Subject to the need for a path to recovery in the budget, they shouldn't feel uncomfortable about spending to stave off a recession."

"In fact a massive recession would itself damage the budget, so they would be better off making use of the budget to stop it."

Economist Saul Eslake said the government had far less budget firepower than it did in 2008 but that if necessary it should abandon its commitment to maintain a AAA credit rating.

"If needed, we should do what we did in 2008 - go early, go hard and go households," he said.

"The best option is too much rather than too little. If you do too much you can wind it back later. If you do too little it won't work, and you will have undermined the credibility of any attempts to do more."

The 8 per cent collapse in the Chinese share market in the first days of the year was important not because it meant China's economy was in trouble but because it showed China's leadership was no longer in control.

"It was almost a Wizard of Oz moment. Far from the Wizard being as omniscient as Dorothy and all the munchkins believed, he was just an old man behind a green screen."

Dr Anthony said the best thing Australia's government could do to was to focus on its core business of creating a stable environment. 

"It should remove the ephemera, the noise; crazy stuff like beating up on unions or creating disputes over television programs. It should remove impediments and instil confidence."

In The Age and Sydney Morning Herald

 

Read more >>

The bonds that fell to earth. Bowie's part in the financial crisis

Did David Bowie spark the global financial crisis?

It was a question seriously asked after Lehman Brothers collapsed in 2008.

A decade earlier in 1997 he pioneered what came to be called Bowie Bonds. The first was essentially a long-term loan to him in return for the future revenue from the 287 tracks he released before 1990.

He and his financial engineer collected $55 million. The bond holders collected the rights to the income from singles such as Space Oddity, Heroes, Changes and Ashes to Ashes. After 10 years Bowie had to return the $55 million (plus interest) and the bond holders had to return to rights to income from his tracks.

Securitisation, as it was called, had been around for a while, but Bowie showed it could be used for almost anything. By the late 2000s it was being used on an industrial scale to bundle the future income from bad US home loans with the future income from good ones and offload it to unsuspecting investors.

In the new movie The Big Short opening in Australia on Thursday Brad Pitt and Ryan Gosling outline what happened.

Bowie got the better end of his deal.

His bonds were given a AAA credit rating. Prudential Insurance bought the lot. Yet by 2004 they were downgraded to just above junk status. The growth of the internet and body blows to the traditional method of distribution meant his catalogue performed far worse than thought.

He knew it was going to happen.

An early internet service provider (he set up BowieNet at about the time Malcolm Turnbull helped set up Ozemail) he foresaw the arrival of digital downloads and streaming services years before they took off...

Here he is talking to the New York Times in 2002:

"I don't even know why I would want to be on a label in a few years, because I don't think it's going to work by labels and by distribution systems in the same way. The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it's not going to happen."

"Music itself is going to become like running water or electricity," he said. "You'd better be prepared for doing a lot of touring because that's really the only unique situation that's going to be left. It's terribly exciting. But on the other hand it doesn't matter if you think it's exciting or not; it's what's going to happen."

Bowie didn't spark the financial crisis. He was ahead of his time in applying to music the techniques that sparked the crisis.

As always, he spawned imitators. To this day a Los Angeles firm called Royalty Advance gives artists a quick cash advance on their royalties. But those artists are unlikely to ever do anything like as well out of securitising the future as Bowie.

A man of his time, and beyond his time, he was a one-off.

In The Age and Sydney Morning Herald

 

Read more >>

Trans-Pacific Partnership will barely benefit Australia, says World Bank report

 

Australia stands to gain almost nothing from the mega trade deal sealed with 11 other nations including United States, Japan, and Singapore, the first comprehensive economic analysis finds.

Prepared by staff from the World Bank, the study says the so-called Trans-Pacific Partnership would boost Australia's economy by just 0.7 per cent by the year 2030.

The annual boost to growth would be less than one half of one 10th of 1 per cent.

Other members of the TPP stand to benefit much more, according to the analysis. Vietnam's economy would be 10 per cent bigger by 2030, Malaysia's 8 per cent bigger, New Zealand's 3 per cent bigger, and Singapore's 3 per cent bigger...

Australia and the United States benefit the least from the Trans-Pacific Partnership. The study says it would boost the US economy by only 0.4 per cent by 2030.

Non-members would suffer as members directed trade to other members. The biggest loser would be Thailand, whose exports are set to fall 2 per cent while Vietnam's grow 30 per cent.

The study explains that highly developed nations such as Australia are either relatively reliant on things other than trade for economic growth or are already fairly free of trade restrictions.

Since sealing the deal in October the Australian government has been reluctant to commission an economic analysis of its effects, turning down an offer from the Productivity Commission.

Prime Minister Malcolm Turnbull described the deal as a "gigantic foundation stone", saying it would deliver "more jobs, absolutely".

It opens up trade between members but makes trade more difficult with non-members through a process known as "cumulative rules of origin" where members lose privileges if they source inputs from countries outside the TPP.

The Productivity Commission has been strongly critical of the provisions saying that they turn so-called free trade agreements into "preferential" agreements.

The Partnership also requires members to sign up to tough intellectual property provisions and to submit to investor-state dispute settlement procedures administered by outside tribunals.

World Trade Online says the negotiating parties are planning to sign the agreement in New Zealand on February 4. It says Chile has confirmed the date and some trade ministers have already made arrangements to travel to Auckland, but it says New Zealand has yet to issue formal invitations.

The deal will not come into place until it has been ratified by at least 6 of the 12 signatories representing 85 per cent of their combined gross domestic product. 

President Obama is expected to use Tuesday's State of the Union address to push for US ratification.

Australia has to table the agreement in Parliament for 20 joint sitting days and consider a report from the joint standing committee on treaties before it can ratify the agreement.

Labor has yet to announce its position. It has said previously that it opposes investor-state dispute settlement procedures but has agreed to them in the Korea and China free trade agreements.

A spokeswoman for Trade Minister Andrew Robb said the agreement would deliver enormous benefits by driving integration in the fast-growing Asia-Pacific, and establishing one set of trading rules across 12 countries.

"The World Bank report demonstrates that all 12 member countries – representing around 40 per cent of global GDP – will experience economic growth and increased exports," she said.

In The Age and Sydney Morning Herald

 

Read more >>

Relax, Spotify won't stop the music

Remember how the internet was going to kill music?

Seriously. And before that home taping, the arrival of the radio, and the invention of the record player.

Each was going to cut the return for making music. As a result, we would be surrounded by less of it. Seriously. At home I have a copy of a 1990s CD entitled "Don't stop the Music". The Australian record industry sent it around to warn that Australian music would vanish if the government allowed the unregulated import of CDs, which it did. The record player was going to cut sales of sheet music, putting composers out of business. Radio was going to cut sales of records, putting recording artists out of business. Home taping was going to cut multiple sales of records, meaning that artists would no longer find it worth their while to record. And the internet was going to cut payments to artists altogether.

Now there's streaming radio. It charges two prices: nothing (backed up by advertising), and very little. It pays the recording companies just 0.7 US cents per play. The artists and composers get a fraction of it.

Yet all these years on we are still surrounded by music. It follows us throughout a day from our bedside to our commutes to our earphones at work to our drive home to settling into bed.

And an astonishing amount of it is new. A decade after the arrival of file sharing, US economist Joel Waldfogel charted what had happened in a paper called Bye, Bye, Miss American Pie? The Supply of New Recorded Music since Napster.

There is no doubt that recording companies are making less money since file sharing, he says. But that doesn't necessarily mean they are making less music, or even less good music...

Assembling data on the quality of songs from the "all-time best" lists compiled each year by Rolling Stone and other magazines he finds that the albums regarded as good tend to be recent, and increasingly so as the internet age wears on.

The good new ones aren't even by old artists. He says around half of the good new albums are by artists who only started recording since file sharing. It has neither killed new music, nor frightened people away from beginning to make music.

But it is killing albums. The biggest revolution wrought by the internet wasn't illegal downloading (it's diminishing rather than growing), it was the ability to buy tracks one at a time.

Most albums are filled with fillers. After the standout tracks (the ones the producers put an effort into) the rest are close to junk, the kind of tracks that wouldn't be bought unless they were bundled onto albums.

While it has always been possible to buy individual tracks in the form of singles, they used to be inconvenient to play. Who wanted to change a CD every few minutes? Now that it's easy to play hours of single tracks without interruption, there's no longer much reason to buy albums.

A decade ago albums (physical and digital) outsold singles four to one. Now singles outsell albums four to one.

We are no longer buying what we don't want, and increasingly, we are no longer buying at all. Pandora, Spotify and similar services allow us to pay just to listen. So they've become the next big threat. At the annual general meeting of the American Economic Association last week Waldfogel previewed a new paper he has written examining whether they boost or harm sales.

It's quite clear they boost the sales of particular tracks. When Pandora tried playing some tracks in some regions and not others the sales of the tracks increased in the locations where they were played. It's what happens with radio and it's why artists are keen to get airplay. But that doesn't mean that Pandora itself boosts sales. Without Pandora and Spotify, would music sales in general be higher?

His answer is yes, but not by much, and it's not the end of the story. Every 137 streamed tracks appear to cut legitimate sales by one track (and to cut illegitimate downloads by much more).

That lost sale is a cost to the record company. It misses out on the 82 US cents it would have got from a retailer such as iTunes. In return it gets 0.7 US cents per play. Multiplied by 137 that gives it 95.9 cents in return for losing 82 US cents, putting it slightly ahead.

So please don't feel guilty listening to music at work. It isn't going to stop.

In The Age and Sydney Morning Herald

Read more >>

Blockbusters. The net is the force that is making us all alike

It's getting hard to see movies other than Star Wars.

 Playing on a record 941 Australian screens, The Force Awakens is squeezing other films out. Want to see a different film? You'd better be quick. Since December, other films have been on screens for mere days, replaced by others on for mere days, as The Force and The Force in 3D monopolise real estate and obliterate potential competition.

Fortunately, many filmgoers I know don't seem to want to watch other films. Some have seen The Force Awakens repeatedly. Others who aren't that interested feel they have to see it in order to find out what everyone else is talking about.

It isn't what we were told would happen.

Ten years ago, in an award-winning book titled The Long Tail: Why the Future of Business is Selling Less of More, the editor of Wired magazine Chris Anderson argued that blockbusters were on the way out. In their place would be "a market of multitudes". There would still be big sellers, of course, but beyond them would be an ever-growing tail of niche products that would do surprisingly well, "shattering the mainstream into a zillion different cultural shards".

Anderson used the example of a long-forgotten British book, Touching the Void, by mountain climber Joe Simpson. It sold poorly, until a decade later a fellow mountaineer, Jon Krakauer​, released another book, Into Thin Air, which became a sensation, causing Touching the Void to start selling with renewed vigour. It became a movie and a paperback and eventually outsold the Krakauer book two to one.

It happened because of the internet and online bookseller Amazon recommendations. Amazon's software told people who bought the Krakauer book that they might also like Simpson's story, and ecstatic reader feedback pushed the software to keep recommending it until it rose from the dead.

It could do it because bookstores no longer had physical limits...

"Scarcity requires hits," Anderson wrote. "If there are only a few slots on the shelves or the airwaves, it's only sensible to fill them with the titles that will sell best."

But with bookstores and record stores and movie stores suddenly limitless, and with search engines suddenly clever, the real money was to be made in the "long tail" of smaller sellers, which, when added together, would outsell the blockbusters.

Anderson's data seemed to show the tail growing. Record stores would have once sold only a few thousand units. Apple told him every one of the 1 million tracks in its iTunes store had sold at least once. Netflix told him that almost all of its massive collection of movies had been seen at least once. The tail seemed limitless.

Except it didn't work out that way. According to more recent data pulled together by Harvard Business School professor Anita Elberse, the long tail is weakening while blockbusters grow stronger.

She says of the 8 million digital music tracks sold in 2011, an astonishing 7.5 million were barely heard at all, selling fewer than 100 copies. An astounding 32 per cent sold only one copy.

"Yes, that's right: of all the tracks that sold at least one copy, about a third sold exactly one copy," Elberse writes.

It's the opposite of what Anderson predicted. Two years earlier, 27 per cent of tracks sold just one copy. Two years before that, 24 per cent sold one copy. The more digital sales have grown, the less important the tail has become.

Meanwhile, the head is swelling. When Anderson wrote his book, million-selling tracks accounted for 7 per cent of total sales. By 2011, they accounted for 15 per cent.

Google's Eric Schmidt, who endorsed Anderson's book at the time, now says things are moving in the other direction. "I would like to tell you that the internet has created such a level playing field that the long tail is absolutely the place to be, that there's so much differentiation," he told McKinsey Quarterly. "Unfortunately, that is not the case," he said.

"In fact, it is probable that the internet will lead to larger blockbusters and more concentration of brands. When you get everybody together, they still like to have one superstar."

Google ought to know. Few of us ever look past the first few search results. We want what others have found. In the 1950s, when the radio rule was that "no tune ought to be repeated within 24 hours", Todd Storz and Bill Stewart of radio station KOWH in Omaha, Nebraska, broke ranks by repeatedly playing the most popular tunes, to the exclusion of lesser-known songs.

The idea came from a restaurant across the road, where they noticed that when the staff were cleaning up they programmed the jukebox to play exactly the same songs their customers had been listening to all day. The top 40 has been with us ever since.

We want what others want. In 2006, three researchers from Columbia University set up a fake market in which 14,300 internet users were asked to rate 48 previously unknown songs. Those who were told how others rated the songs were far more likely to agree with their peers.

Australians flocked to December's Taylor Swift concerts partly because she is a good performer and also because others were going, too. It became an event, a communal experience, like the Olympics, a grand final, or the final episode of The Voice.Even Netflix, the ultimate long-tail company with a near unending catalogue, felt the need to create House of Cards.

The internet has made it easier for us to find things in the long tail, and diminished our need to do so. Why have separate pop stars for different countries when one or two will do for the entire world?

For a while, it looked as if the internet would free us to be different. Instead, for good or bad, it is binding us together.

In The Age and Sydney Morning Herald

Read more >>