It's a granny gravy train - grab a ticket

The future sounds frightening. Before the budget, the Treasurer, Peter Costello, warned that working-age Australians would soon have to support twice as many Australians aged over 65 as they do today. The changes are due to hit us in the next 40 years. And they can't be avoided. As the Treasurer likes to repeatedly remind us, "demography is destiny".

So why do I find myself not feeling worried? In fact, why do I find myself feeling actually grateful?

I've put myself in the position of my three-year-old daughter.

Grace will be in the middle of her working life in 40 years' time, when the changes talked about by Peter Costello hit with full force. I used to be worried that my children wouldn't be able to find meaningful or secure work. Nearly all of the one million or so extra jobs created since 1990 have been casual or part-time. Uncertainty has become the new permanence.

But it won't be in 2045. By then, instead of there being five people of working age to support each one over the retirement age, there will be fewer than 2½. Workers will be in demand. Employers won't be able to treat them casually.

The current shortage of skilled workers provides a taste of what's in store... According to The Australian Financial Review, there are now four accountancy jobs on offer for every one applicant. As a result, it says, accountants in their mid-20s are being offered salaries of $100,000-plus, as well as cars, five weeks of annual leave, sign-on bonuses and subsidised gym memberships. It's the kind of future I want for my children.

It won't just be available to university graduates. If workers really do become scarce in the decades ahead, employers will start valuing them for what they can do rather than the pieces of paper they hold. Qualifications of dubious relevance will no longer be demanded as part of the selection process. Students will switch from four-year degrees to three-year ones or move straight into employment, picking up what they really need to know on the job or in employer-sponsored part-time training. The education that my daughter does get will be real and not part of a mind-numbing charade designed to get her a job.

The jobs will be better as well. What can be automated will be automated in an effort to economise on labour. My daughter's work is unlikely to be mind-numbing either.

And if ever she decides to leave the workforce for a while and come back in her 50s, she stands a good chance of success. Right now it can be employment suicide to admit that you are older than 50. Employers even try to screen you out over the phone.

A few years back, Lynne Bennington, a management specialist in Melbourne, employed actors to pretend to apply for real jobs. One in every four of the recruiters they phoned said unprompted they would prefer a younger rather than an older candidate. One in every five asked about the actor's age. Then, as now, it was illegal for employers to discriminate on the basis of age.

My daughter will quite probably never have to suffer the humiliation and the collapse of self-esteem that comes from being unable to work at the age when many of us have the most to give.

Employers might even find my daughter increasingly attractive as she ages. By 2050 one in every three Australians will be older than 55. They are more likely to want to be trained by or buy things from someone they can relate to. They might even want to see the TV news read by a woman their own age.

And when Grace finally does retire she'll join an incredibly powerful club. One in every three Australian voters will be older than 65. They will be the most influential voting bloc since the entry into politics of organised labour. Most likely free of the traditional party loyalties that my generation grew up with, the aged of the future will be able to sell their votes to the highest bidder.

If the over-65s don't want to work, no politician is going to risk forcing them. If they want affordable, high-quality health care they'll get Medicare Gold and its successors extended and improved in election after election.

Growing up I felt ashamed and powerless about the state of the nursing homes in which several of my elderly aunts spent their final days. I have no such concerns about the nursing homes that will await my daughter. Caring for the aged will rightly come to be regarded as one of the most important things society can do.

Will we be able to afford it? The Treasurer has used the Productivity Commission's report on ageing to suggest that unless something changes in the next 40 years his tax take will have to increase by about 20 per cent. But the Productivity Commission itself has made it clear it's a bill we will be able to afford. It says that by then the real income of each Australian is likely to be roughly double what it is today. And it's a bill we mightn't have to pay at all.

Last year two Treasury economists published projections examining what would happen if over the next 20 years Australia was able to lift its workforce participation rate up to the level of the best-performing countries in the OECD, among them New Zealand. They found that most of the predicted extra tax bill would vanish.

It's research of which the Treasurer is well aware. That's why he's been keen to use what may be his final budget to do everything possible to get more Australians into work, be they single parents, people older than 55 or those who have retired early on the disability pension. He is one of the few politicians who realises just how important that is.

An aged Australia won't be bleak by any means. I am looking forward to it. Peter Costello is trying to make the transition as smooth as possible.

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The art of persuasion, going once ...

Spare a thought for any people you know still trying to sell their house. They're about to be hit by another rise in interest rates, pushing prices down further. If it doesn't happen at 9.30am today it'll most likely happen at 9.30 on the morning after one of the next Reserve Bank board meetings.

And they are about to be told they can't trust their real estate agent.

Steven Levitt has been lauded by the American Economic Association as the most promising US economist under the age of 40. Ten of the economists it has previously so awarded have gone on to win the Nobel Prize. But Levitt seems to lack the necessary seriousness. Among his research topics are the voting behaviour of contestants on the game show The Weakest Link, the inner workings of the Ku Klux Klan, and the things people lie about at online dating sites.

His unifying theme is that people with access to information tend to abuse it. His hobby is catching them. Which brings us to real estate agents.

Levitt says he first became involved with agents when he went looking to buy a house. He felt they were subtly encouraging him to bid low. Which should have made no sense. Real estate agents are paid by commission. But then he took a closer look at the structure of those commissions.

Agents usually get a fixed proportion of the price the property sells for. (In Australia it is often 2 per cent.) That means that while the reward for actually getting a property sold is big, the extra reward for extracting a higher price can be tiny. An Australian agent who held out for an extra $50,000 for example might find herself earning only an extra $1000. But the cost to the agent of holding out might well be large: opening the house, accompanying visitors and negotiating contracts for weeks upon weeks until a higher price is reached. Holding out could destroy an agent's business.

But to the homeowner it's quite different. The owner usually wants the extra $50,000 and is prepared to wait. It is in the agent's financial interest to persuade the owner to sell more quickly than the owner should. And this is where what Levitt calls "information asymmetry" comes into play. The agent is an expert in the market. The owner is not. And they both know it. If the agent insists that a quick and cheap offer is actually the best offer the owner will feel obliged to agree.

Levitt figured that if this was happening, agents would act quite differently when it came to selling their own homes... They would hold out for longer and get higher prices. He examined the records of 100,000 sales in Cook County, Illinois, over a 10-year period and discovered that the agents did indeed get higher prices when they sold their own homes - about 3.7 per cent higher than the similarly featured and located homes they sold on behalf of their clients.

Of course, that could have been because they presented their homes better and tried harder to ensnare buyers. But if that was the case, Levitt reckoned that the agents' homes would have sold more quickly than those of their clients. In fact they sold a lot more slowly, staying on the market for 10 days, or 10 per cent longer. Agents appear to encourage owners to sell more quickly than they would do themselves.

And they appear to use a different language to describe those owners' homes. Certain words turn out to be associated with high prices when used in real estate ads. They include "granite", "gourmet" and "state-of-the-art". Each conveys specific useful information. Other words are associated with a lower price. They include "fantastic", "well maintained" and "charming". Levitt found that the agents tended to use the first group of words to describe their own properties, the second to describe their clients' homes.

He believes the words in the second group function as a sort of code. The phrase "well maintained" might signal to a buyer that a house is old but not quite falling down. A low offer might be accepted. "But to the 65-year-old retiree who is selling his house, 'well maintained' might sound like a compliment, which is just what the agent intends."

Levitt says it's difficult to function well as a real estate agent. You need to convince owners that you are acting in their interests while at the same time persuading them to settle for less than the best price and letting potential buyers know that a house can be bought for less than the best price.

It isn't that Levitt especially has it in for real estate agents. He believes that they are about as honourable as doctors, lawyers, car mechanics and teachers, all of whom can misuse their specialist knowledge to act against the interests of their customers. Doctors recommend and perform a higher rate of caesareans in regions where the birth rate is dropping. And teachers forge exam papers in order to push up pass rates.

In 2002, Levitt examined the eight years' worth of primary school exam papers submitted as part of the Iowa Test of Basic Skills. He looked for unusual patterns of answers that would suggest that teachers had "improved" the answers of their students (and their apparent performance as teachers) after the papers had been handed in. He found evidence suggesting that teachers had cheated in 4 to 5 per cent of the classes he studied. The school system retested 100 classes and fired the teachers it found guilty.

Which doesn't mean that we shouldn't put ourselves in the hands of experts. Levitt makes the point that it's often worth using experts even if you know they are trying to do you in. An untrustworthy real estate agent might still be better at selling your house than you would be yourself. A corrupt schoolteacher might still be better at teaching students than would their own parents.

But it pays to check up on experts. And that's getting easier. Levitt says before the arrival of the internet in the late 1990s Illinois real estate agents were able to sell their houses for about 5 per cent more than those of their clients. Afterwards the difference fell to 3 per cent.

It might also be a good idea to let the experts know you are on to them. I'd suggest buying two copies of Levitt's new book, keeping one for yourself and giving the other to your real estate agent. It's due out in the US next week. Here, you'll have to order it. Its disturbing title is Freakonomics: a Rogue Economist Explores the Hidden Side to Everything.

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Low tax, low work?

If you repeat something often enough, especially in politics, it seems to become the truth. All the more so if it is plausible to begin with. Take the idea that if we are given tax cuts we will work harder. The so-called ginger group of Coalition MPs and its fellow travelers are pushing this idea to build their case for a cut in the top marginal rate of income tax, which is 47.5 per cent plus the Medicare levy.

The head of Parliament's economics committee, Bruce Baird, went on ABC radio shortly after the governor of the Reserve Bank complained about a shortage of skilled workers. Baird said the high top tax rate contributed to the shortage. "If we want real incentive - for people to stay in the workforce, for skilled tradespeople to work overtime - when they're hit by a 47.5 per cent tax rate, it is too high."

Australia's best-known backbencher followed up. Malcolm Turnbull said he wanted to cut the top rate so there was "nothing in the tax system which discourages people from seeking work".

Briefing the ginger group has been the Centre for Independent Studies. Its paper Tax Reform to Make Work Pay asserts that a cut in the top rate would make people "work harder to earn more".

It is a simple interpretation of human behaviour not shared by one of the founders of modern economics...

William Stanley Jevons asked rhetorically more than a century ago: "If a workman can earn ninepence an hour instead of sixpence, may he not be induced to extend his hours of labour by this increased result?"

His reply was that: "This would doubtless be the case were it not that the very fact of getting half as much more than he did before lowers the utility to him of any further addition. By the produce of the same number of hours he can satisfy his desires more completely."

What was he getting at? Any increase in pay, or a tax cut that increases pay, affects the desire to work in two diametrically opposed ways. On one hand it increases the financial reward for doing an extra hour of work, just as the centre has noted. Economists call this the "price" effect.

But on the other hand any increase in the rate of pay makes it easier for a worker to obtain his or her income target. After that it reduces the need to do an extra hour of work. Economists call this the "income" effect.

A pay increase or a tax cut makes extra work both more attractive and less necessary. It is impossible to tell on the basis of theory whether a tax cut would increase the number of hours people put in at work or cut them. Or do nothing much at all if the two effects more or less cancelled each other out.

It is also very difficult to find out in practice. Many of us are in jobs in which the hours are fixed and the pay rates don't vary much. So in 1994 four American economists decided to investigate the group of workers they thought most free to respond positively to a hike in their hourly rates of pay.

New York taxi drivers are free to vary the number of hours they work each day up to a maximum of 12 hours a shift. After paying a fixed fee for use of the cab, they keep every fare they earn. And their hourly rate of pay varies from day to day. On good days, when business is brisk, their hourly rate of pay is quite high. On bad days it can be appallingly low.

If an increase in the hourly rate did encourage workers to put in more hours, New York taxi drivers would be expected to put in the most hours on those days when their pay rate was high, knocking off earliest on those days when it was low.

A Caltech University economist, Colin Camerer, and his team examined more than 1000 taxi company documents providing data on the daily pay rates and hours of work of about 500 drivers. What they found appeared to defy common sense.

Typically on those days when business was good, New York taxi drivers knocked off the earliest. On those days when their hourly pay was at its lowest, they worked the longest. It's the opposite response to that assumed by the Centre for Independent Studies. Camerer concluded that taxi drivers were "target earners" who kept driving each day until they made a certain amount of money.

(Interestingly, he found that not all drivers behaved that way. The more experienced drivers did tend to work longer hours on those days when business was good, as assumed by the centre, but the effect was small and overwhelmed by the behaviour of the less experienced drivers.)

Singapore taxi drivers appear to behave that way as well. Yuan Chou of the University of Melbourne discovered that in 1997 when he set out to test whether Camerer had stumbled onto a purely Western phenomenon. In the latest issue of the Journal of Political Economy the economist Henry Farber revisits Camerer's study and finds no connection between the daily pay rates of New York taxi drivers and their knock-off times.

But even this is scarcely good news for those politicians and think-tankers asserting that tax cuts make people work harder. If that was true you would expect to find a very strong positive connection between pay rates and knock-off times.

After surveying studies on all types of work Farber concludes that the response of men to an increase in pay is usually "very small and not significantly different from zero".

Intriguingly, he finds that for women, particularly married women considering returning to work, the response to a pay hike or a tax cut is a good deal larger.

There are several reasons that should be the case. Married women have other demands on their time (an Australian survey finds that married women spend twice as much time on housework and child rearing as married men); they often don't need to work in order to live (having access to their husband's income); and the effective rates of tax they face on returning to work are horrific. Many make next to nothing after paying for child care.

The evidence suggests that these are the people the ginger group should be focusing on if it wants to use the tax system to get Australians to do more work. Cutting the top rate of tax might do nothing at all.

A few years ago my wife and I needed to phone our plumber. He told us he had retired early and moved up the coast.

I have a suspicion that if he had been facing a lower rate of tax he might have retired even sooner.

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Stay grounded. House prices haven't hit the floor

So you think the slump in real estate is over? You are in good company. On Tuesday the research chief at Australian Property Monitors declared house prices might have "finally reached their floor". A day later real estate agent Ivan Bresic said the market looked "set to come back strongly in 2005".

They must be talking to the agents I've been talking to.

For six months my wife and I have been searching for a house. We sold and then rented while we talked to agent after agent. They all seemed to be decent people. None of them lied about the state of the houses they were selling. But when we asked about the state of the market they began to babble.

Prices were just about to pick up. They could sense it. They were getting more inquiries. Some confided that they believed prices were already moving up. This was at a time when Sydney prices were relentlessly falling and when the agents themselves were coming back to us with progressively lower asking prices...

If the agents had their heads in the stratosphere when it came to prices, the economists I met at an annual forecasting conference in December could not have been more firmly grounded.

Each year the executive of Australian Business Economists (ABE) presents its forecasts for the 12 months ahead. On the committee are Australia's leading private-sector forecasters, among them the economic chiefs at Westpac, Qantas and Macquarie Bank.

Not a single member of that committee expects an increase in overall house prices during the next 12 months. The committee's forecast is for a fall in prices of between 5 and 10 per cent. And it says there's no sign of a pick-up beyond that. There won't be a "meaningful" increase in prices until the end of the decade.

So who are you going to believe? On one hand it must be said real estate agents are pretty personable, and that until recently they seemed to have had a good grasp on the way prices were moving. On the other, it must be said that economists, while less impressive socially, tend to get the difficult forecasts right.

The past year was extraordinarily difficult to forecast. When it began, prices were still soaring. And yet the ABE's forecasting team correctly picked that there would be a downturn and got its magnitude about right.

And I have another reason for throwing my lot in with the economists. It's the broad sweep of real estate history.

Professor Peter Abelson, from Macquarie University, has done anyone interested in house prices a huge favour by putting together reliable data for each Australian city going back to 1970. It wasn't easy. Much of what has previously passed for good data has been suspect, depending on the sales the agents themselves have chosen to report.

Abelson got around this by using state Land Titles Office data where he could and also the work of a clerk in the Tax Office who compiled figures for Hobart as a hobby.

When adjusted for inflation, Abelson's data points to four distinct house price booms in Australia, each separated by years of stagnant or falling prices. The first thing to note is that each of the first three booms was short. Beginning in 1971, 1979 and 1987, each lasted two to three years. The most recent boom is the exception. It lasted from 1996 to 2003.

The second thing to note is that after each boom collapsed it took five to seven years for Sydney prices to crawl back to their previous real level. And Abelson believes the true story on prices is even grimmer than those figures suggest. That's because houses are getting bigger. New homes have typically 40 per cent more floor space than they did 20 years ago. And existing homes are continually being extended at the owners' expense.

If a house that used to sell for $400,000 now sells for $700,000 but has an extra bedroom and a living room and a deck, it didn't really increase in price by $300,000.

Comparing like with like, Australia's house price booms have been shallower than is widely believed and the slumps between them have lasted even longer: some for the best part of a decade.

If you are an owner who still wants to feel optimistic about the decade ahead, or perhaps an agent, you are perfectly entitled to declare this doesn't matter. History won't repeat itself. Sydney will be spared. But you would need a good argument. The ones that I have heard don't stand up.

One is that Sydney prices move differently to those in the rest of Australia. Abelson's figures show prices in all Australian cities move surprisingly closely together, with the recent movements in Sydney particularly closely tied to those in Brisbane and Melbourne. Only in Perth and Canberra have prices at times shot up on their own: in Perth's case because of a mining boom, and in Canberra's case following the election of Labor governments.

Another argument is that Sydney is becoming an international city, accepting the bulk of new migrants. It is true that Sydney takes in more new arrivals than any other Australian city, and that once here they typically stay here. But that puts less pressure on the NSW population than you might imagine. Migration pulls in about 40,000 people each year. But at the same time about 30,000 locals move out, mostly to Queensland and Victoria. As a result Sydney's population is actually growing more slowly than either Brisbane's or Melbourne's.

None of this need disturb real estate-obsessed Sydneysiders. If you own a house you've enjoyed a spectacular capital gain. On Abelson's figures, since 1980 the real value of your home has more than doubled. Even allowing for the money you have spent on improvements it has increased 75 per cent.

But savour it while you can. That gain will shrink if, as the economists expect, real house prices head down.

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Lessons must be learnt if we are to keep teachers

I grew up in a family of teachers. Around the kitchen table the shop talk used to be about the unending teacher shortage. Many of my own teachers had been flown in from Canada, Britain and the US in a bid to plug the gaps. Others were retirees, barely able to cope, drafted back part-time. My dad had been a lathe operator, drafted without training into teaching metalwork.

And then suddenly, in the middle of the 1970s, the pendulum swung. Instead of a shortage the crisis became one of a massive and growing oversupply. Graduates in teaching were no longer getting jobs as teachers. Teachers who had left the service could no longer get back in. Official projections pointed to a surplus stretching out decades.

Now the pendulum is swinging again. The NSW Education Minister, Dr Andrew Refshauge, has launched a parliamentary inquiry into the recruitment of teachers, with submissions due next month. There's talk of a looming shortage. A big chunk of the teaching workforce is set to retire in the next five years.

What is it about the job market for teachers that makes it swing so quickly from famine to feast? The answer tells us something about politics and a lot about the very unusual nature of the job and the people who stick with it...

First, politics: it is true that the number of teachers needed at any one time depends on the number of students, but it also depends critically on political decisions about the desired ratio of teachers to students.

The decisions are political decisions because state governments make them. The states are by far the biggest employers of teachers.

Beginning in the 1960s, state governments aggressively raised their targets for the employment of teachers per student, even as the number of students was soaring. Class sizes, as measured by the pupil-teacher ratio plummeted. Australia-wide the ratio slid from 26 to 19.

And then in the mid-1970s the politics changed. In the midst of a worldwide economic downturn and a political crisis in Canberra each state government either temporarily halted further falls in class sizes or slowed the process. (By the early 1990s states such as Victoria and South Australia actually pushed up their class sizes in response to financial pressures.)

Looked at this way, our state governments have created much of the teacher "shortage" and the subsequent "oversupply". And they have also created the shortage they believe is about to come. The surge in hiring between the mid-1960s and the mid-1970s produced a workforce heavy in graduates of that time who are now approaching retirement.

But if it is our governments that create the swings in the job market for teachers, it is our teachers that turn them into crises. Here's how.

More so than in most professions, teachers don't particularly like teaching. Consider this: an astonishing 20 per cent of Australian teachers leave teaching within their first three to five years. In some parts of Australia, 50 per cent leave. The University of Sydney's Dr Jacqueline Manuel describes teaching as "the profession that eats its young".

Some of those who leave come back later. In fact, leaving, trying something else, and then returning is common in teaching. Some leave to start families, some leave to broaden their experience, and others treat teaching as a job of last resort.

Until the jobs dry up. When in the mid-1970s the state governments cut back their hiring rates, resignation rates plunged. The fear was it mightn't be possible to get back. Because resignations had typically created the bulk of teacher job vacancies, the hiring rates fell further, pushing resignations down further still, drying up the flow of teaching jobs almost completely.

(Naturally this frightened many would-be teachers and in time they moved away from teacher training courses, easing the surplus. But their decisions took years to have an effect. It takes three to four years to finish a teaching degree. Students who had already started continued to graduation.)

The same mechanism will work in reverse in the coming teacher shortage. The more job vacancies governments need to fill, the more relaxed teachers will feel about resigning, creating even more vacancies to fill, worsening the impending shortage.

If only there was a way to make teachers more serious about staying teachers. The Teachers Federation suggests higher salaries. Surprisingly, it's a proposition not strongly supported by evidence.

Melbourne University's Dr Michael Shields has examined the movement of teachers in Britain. He finds that most teachers who leave go to jobs that pay less than they got teaching, typically 22 per cent less expressed as an hourly wage. The new jobs have longer hours as well. Teachers are prepared to give up money and work longer hours in order to get out.

Shields has modelled the effect of a boost in teacher salaries of 10 per cent. He finds it would cut resignations by less than 1 per cent.

That isn't to say that higher salaries might not be important as part of a broader package of measures designed to get teachers to feel better about teaching. The 2001 Vinson report into public education described higher pay as a "gesture" and said that morale among teachers was so low that no other gesture could substitute for improved salaries.

But by itself higher pay would be wasted. There is something fundamental about the job or the way we ask people to do the job that makes teaching unsustainable for so many of our teachers.

For some it's a love-hate thing. Teachers report both greater levels of job satisfaction than other people and higher levels of stress.

My father told me that teaching was the only job he knew in which every day he faced people trying to stop him achieving what he was employed to achieve. They were called students.

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Dismal failure to count the true cost

The tsunami can only be seen in a positive light by ignoring human values, writes Peter Martin.

It didn't take long after perhaps the greatest natural disaster of modern times for an economist to say what would otherwise be unthinkable.

Fred Bergsten runs the Institute for International Economics in Washington. He is a former assistant secretary of the US Treasury. Three days after the tsunami hit, with at that time tens of thousands confirmed dead, he told US National Public Radio (NPR) that the tragedy might be a good thing for the economies concerned.

He said: "Like any disaster, you get negative effects through destroying existing properties and people's health, but you do get a burst of new economic activity to replace them, and, on balance, that generally turns out to be quite positive."

What on earth could he have meant? How could the loss of so many lives so suddenly, with so many more to come, be "on balance, positive"?...

It is one of the mysteries that first got me interested in economics and economists. I remember hearing at school that it would have been a good thing for Britain, economically, if it had lost World War II and had its buildings and factories destroyed.

Bergsten agrees. He told NPR that after Japan and Germany were flattened in 1945 they experienced economic booms that lasted for the next 20 to 30 years. He said that happened partly as the result of reconstruction spending but mainly because their old factories were replaced with state-of-the-art ones.

Applying that lesson to the devastation wrought on the Thai island of Phuket he says: "When they put up new resort hotels, they'll be more modern, they'll be more attractive. They'll probably bring in more people in the future."

Bergsten isn't alone in his distasteful optimism. Britain's Standard Chartered Bank has told its clients it expects the impact of the tragedy to be "V-shaped". It says that was the pattern with the SARS epidemic, the Bali bombing and Japan's Kobe earthquake: a large dip in economic activity followed by increased aid and government spending, then an economic recovery a year or so later.

It says it expects the same sort of pattern in most of the countries affected by the tsunami, although it acknowledges that the present disaster is far greater and more widespread than the earlier ones. (The bank says the exceptions to its optimistic outlook are Sri Lanka and the Maldives. Each faces severe difficulties, being in bad financial shape before the tsunami and relying on tourism for most of its foreign income. The Maldives collects more than 90 per cent of its tax revenue from tourism-related taxes and import duties.)

Such analyses only make sense if you don't pay attention to the lives that are being lost. They would sound ludicrous to someone whose family had been swept away.

The models of Bergsten, Standard Chartered and their ilk value the production that has been lost with those lives (tourism services, factory output and so on) and look forward to its return. But they don't value the lives themselves. Most of us value human lives above what they can produce.

When one of our parents or children is at risk of dying we find ourselves prepared to pay almost anything to stop that from happening, regardless of their productive capacity.

I say "almost anything" because a relatively new branch of economics believes it has found an upper limit to what we are prepared to pay to save a human life. The most widely quoted American limit is $US6.1 million ($7.83 million), known as "Viscusi's number" after the Harvard University economist Kip Viscusi.

In more than 60 studies Viscusi and his colleagues have tried to determine the monetary value we place on human life by examining our behaviour. If, for example, I demand an extra $610 a year to move from a job which I know is completely safe to a job in which I know there is a one in 10,000 annual risk of dying, they conclude that I value my life at $US6.1 million. They apply the same sort of calculations to decisions about my purchases, such as how much extra I am prepared to pay to buy a car with extra safety features.

The range of values resulting from the studies is wide, from as low as $US900,000 a life to more than $US27 million per life. But the average, $US6.1 million, has acquired an almost mystical status in the US. It has come to be regarded as the statistical value of human life. In 2000 the US Environmental Protection Agency used it to set the permissible level of arsenic in drinking water. Had the Viscusi number been higher than $US6.1 million, the agency would have imposed a less lenient standard.

There are many reasons for believing the number should be higher. One is that most of the workplace studies conducted by Viscusi and his associates exclude women. Recent studies suggest that women typically value safety about five times as highly as do men.

Another is that most of studies conducted in the US examine the value of life only to the person whose life is at risk. But other people value that life as well. In my own case they include my daughters, my son, my father, my wife. If I died tomorrow my own loss would only be the beginning.

The loss resulting from the tsunami is far more than the missing production and infrastructure. And it is far more than one Viscusi number for each of the 150,000 or so people believed to be dead. The entire planet appears to be grieving. We all seem to have lost something.

The economics profession is struggling to find the language to talk sensibly about what has happened.

That it can't yet do it says as much about that profession as it does about the scale of the tragedy.

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Price fixing at a cinema near you?

It's the season to go to the movies. And on the face of it, Australians are incredibly well served. We have more cinema screens per head than just about anywhere outside the United States.

And yet our prices, disturbingly, are higher than in the US. An adult ticket to see The Incredibles in New York costs between $11 and $13. In Sydney it costs $14.50 to $15.30 - quite an imposition, and one that competition appears not to have lightened.

If you want to get an idea of why this might be the case, try going through the Yellow Pages and a Sydney street directory. After a tip-off I did it myself the other day. I wrote the letter "H" on those parts of the Sydney map that hosted a Hoyts complex and the letter "G" on those parts that hosted a Greater Union or a Village complex.

(Greater Union and Village operate their suburban cinemas as 50-50 joint ventures.)

West of Parramatta there are only H's for Hoyts, except for the south-west, where there are only G's for Greater Union. North of the harbour there are only G's, except for the shopping meccas of Chatswood and Warringah Mall, where there are only H's.

It's as though someone has drawn lines on the map allocating territories... the sort of thing that would happen if Coles had the supermarkets west of Parramatta and Woolworths had the south-west.

(The division isn't precise. For example, the new Greater Union complex in Bondi Junction is in the middle of what would otherwise be Hoyts territory and the Hoyts complex at Bankstown mars an otherwise clean sweep in Greater Union-Village's patch.)

I say it's "as though" there is an understanding about territories, but that's exactly what has been alleged in the Federal Court.

The US-owned chain Reading Cinemas went to the full Federal Court in 2001 seeking evidence in a dispute with a member of the Village group over access to a Brisbane shopping centre.

Among the documents it sought from Village were any referring to "the territorial division of cinemas in Australia by the Hoyts Group of companies on the one hand and/or by [Village-Greater Union] on the other".

Reading's chief operating officer at the time, Neil Pentecost (a former Hoyts executive), said he knew how the separation worked. In an affidavit quoted in the judgement he said that in Perth everything south of the Swan River was Hoyts territory, while everything north of the river was Greater Union-Village territory. In Queensland, Hoyts was limited to the Brisbane city centre and Surfers Paradise, and the rest of Queensland was left to Greater Union-Village. The other states were divided in similar fashion.

Speaking about his time as a senior executive of Hoyts, he said: "I knew that I could make my own commercial decisions on the basis that GU-Village would not be a competitor against Hoyts in its acknowledged territories. To the best of my knowledge I do not recall an instance when GU-Village and Hoyts competed for a site."

Indeed, at times the two swapped sites. He said that in 1996 Hoyts and Greater Union-Village swapped their Blacktown and Parramatta sites to ensure Hoyts consolidated its control of Sydney's outer-western corridor, while Greater Union-Village consolidated at Parramatta.

It is easy to see how such an arrangement would work to keep ticket prices high. With geographical separation, most Hoyts cinema managers, for example, would know there was no risk of a Greater Union cinema down the road cutting its prices to steal customers. There would be no Greater Union cinema down the road. There would be no need for a price war in order to get customers back.

If the arrangement that was described in the Federal Court is deliberate, Australia's two big cinema chains would appear to make up a cartel. The Australian Competition and Consumer Commission describes cartels as "a cancer on our economy". Its chairman, Graeme Samuel, says he has 40 under investigation. His definition includes companies that engage in "market sharing".

The Federal Court believed that the territorial division of cinemas was worth investigating. In 2002 it granted Reading the right to obtain the documents it sought. Justice Bryan Beaumont noted the evidence about territorial division was unchallenged by Village and its associates during the procedural hearing, a fact he thought was significant.

But whatever documents there may have been never saw the light of day. Shortly after being given the right to obtain documents from Village, Greater Union and Hoyts, Reading discontinued its case. It settled out of court with Greater Union and Village.

The competition commission has the power to take the investigation further. For all I know, it may be doing so. It will not reveal the names of the 40 suspected cartels it is investigating. But its previous record on cinemas gives theatre goers little cause for hope.

In 2000 it approved an arrangement whereby Greater Union, Village and Hoyts centralised their separate Sydney city centre operations. The commission's then chairman, Allan Fels, said at the time that the three had assured him they would continue to compete while at the combined George Street site.

"Hoyts and Greater Union will each utilise six screens and Village will utilise five. Each will buy films independently from distributors, program their own screens and determine ticket prices."

I don't know about Fels, but the last time I went to George Street I couldn't tell which company owned which screen, and the price for each screen was the same: $15.30 - just about the highest in Sydney.

The commission is to be applauded for its work busting cartels in the cardboard box industry. It has obtained $11 million in fines from freight companies which divided up the Australian market. It obtained $4 million from cement-lined-pipe companies for offences including market sharing.

It might be time for it to ask whether there is market sharing of our screens.


Reading Entertainment Australia Pty Ltd v Birch Carroll & Coyle Ltd [2002] FCAFC 109

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Johns Hopkins University: strange goings on downunder

This is as odd a story as I have ever had to tell.

As George Negus said in the introduction to the half-hour report on SBS Dateline:


When Australian medical entrepreneur Peter Osborne became involved with a representative of Johns Hopkins University in the United States and promoted a new online health care system for Australia with him, he thought his future looked rosy. Now, several years later he is facing financial ruin, governments in Australia have been misled and there are serious allegations of impropriety leveled against the project. SBS business reporter Peter Martin investigates a corporate intrigue that stretches across three continents.


Read about Johns Hopkins University or watch the video for an amazing and disturbing ride.

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Do unfair dismissals laws boost employment?

Anyone serious about following Australian politics is about to have to become serious about understanding the economics of unfair dismissal. You wouldn't have guessed it during the election campaign. But now that the Government is back, we are told that one of its first moves will be to reintroduce into the Senate its oddly named Fair Dismissal Bill. It could happen this month.

But despite the claims made on both sides, its effects are more symbolic than real. The Fair Dismissal Bill exempts businesses from the need to act fairly when dismissing their workers; but only small businesses (employing fewer than 20 people) and only those covered by federal law. Most small businesses are covered by state laws. And many more are too small to have set themselves up as legal corporations and so are already exempt.

The Parliamentary Library estimates that only about 600,000 of Australia's 10 million-odd workers stand to be affected by the bill and, as it happens, those particular workers in their present jobs have nothing to fear. The provisions of the bill apply only to workers taken on after it becomes law.

So why do you need to bother brushing up on what economists have to say about unfair dismissal? Because with little concrete to debate, the bill's supporters and opponents are going to spend the next few weeks arguing about economic theory. And the theory most in contention will be the one that says that the easier employers find it to sack their workers, the more workers they will employ...

To the Government this is self-evident. The former employment minister, Tony Abbott, noted that if only one in 20 small businesses took on an extra worker as a result of the bill, it would create 50,000 new jobs - which is mathematically correct, but meaningless without knowing what the employers would actually do.

The Melbourne Institute attempted to help, with a government-commissioned report finding that 77,000 jobs would be created if unfair dismissal laws were removed, but it was based on an opinion poll rather than historical evidence.

The opponents of the bill, among them the Democrats senator Andrew Murray, argue flatly that there is no evidence whatsoever for the theory - which is also technically true, but then it is a very hard theory to prove.

Until a few years ago the economics profession didn't try. Instead it argued about unfair dismissal laws from first principles. Two competing principles were at stake. On the one hand the workers already in jobs ("insiders") should find their prospects for continued employment improved by unfair dismissal laws. Even during economic downturns. That would mean that, all other things being equal, unfair dismissal laws should make employment higher than it otherwise would be when the economy turned down.

On the other hand, potential workers not yet in jobs ("outsiders") should find their employment prospects diminished by the laws (because of the extra potential costs for employers involved in dismissing them should things not work out). This should be the case even when the economy is turning up. This means that, all other things being equal, unfair dismissal laws should make employment lower than it otherwise would have been when things were improving.

More jobs in the bad times and fewer in the good times mean a more stable pattern of employment, but that doesn't necessarily indicate anything about the average rate of employment over time. It could be either higher or lower with unfair dismissal laws than without.

In 1990 Edward Lazear from Chicago University decided to find out. In a ground-breaking study published in the Quarterly Journal of Economics he examined employment data and changes in dismissal laws for 20 countries over three decades. He found that introducing a requirement for severance pay typically cut a nation's employed workforce by 1 per cent. For the United States, this would mean a cut of more than a million jobs, if it decided to introduce unfair dismissal provisions. The finding stood for a decade, and was doubtless influential in the Coalition's decision to weaken Australia's national unfair dismissal laws shortly after taking office in 1996.

At about that time, the economist John Addison of the University of South Carolina began to voice doubts about Lazear's findings. He persuaded Lazear to hand him his original data and the programs he had used to arrive at his conclusions. After correcting the data for what he said were errors and using better methods to pool the data, he found that none of Lazear's findings survived as statistically significant.

The publication of Addison's study in 2000 unleashed a flood of other research which, taken together, provides a more sophisticated understanding of the effect of unfair dismissal provisions.

Most studies find that while smoothing fluctuations in employment, the provisions do cut average employment over time, but not always by very much, and not for all types of workers. Men of prime working age typically are not hurt at all. That's because they are usually the "insiders" who benefit from employment protection.

The losers are typically younger people trying to break into work and the long-term unemployed, who are seen as risky to take on. Unfair dismissal laws are typically found to increase the length of time that a long-term unemployed person stays out of work.

That's if they have any effect at all. Another strand of research suggests that "outsiders" looking for work simply bypass them. They work casually, or part-time, or for themselves, all situations where unfair dismissal provisions don't apply.

The economics profession is able to provide something for everyone in the debate that is about to engulf us. The former US president Harry Truman is once said to have asked for a one-armed economist after the two-armed variety had driven him to despair, advising him first on the one hand and then on the other.

The economists we have today are likely to say that yes, unfair dismissal provisions do tend to cost jobs, but no, they needn't cost very many of them.

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OutFoxed: Rupert Murdochs War on Journalism

He's my SBS Dateline report on OutFoxed: Rupert Murdoch's War on Journalism. Watch it here.

And gee it was fun to see the US during the Republican National Convention, and witness a protest march and chanting against a news organisation!

Here's George Negus's introduction:


In the US, the presidential election campaign is now entering the home straight. And there is one man who may well determine the result - Rupert Murdoch, who owns what has become one of the most influential news outlets in the country.

Fox News is now the highest rating cable news network in the States.

But it is winning enemies as well, with critics claiming it is taking journalism to new lows with its outrageous bias in favour of the Republican Party.

Peter Martin has more.

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At any rate, we're on borrowed time

There's a real economic debate taking place in Australia, and there's a fake one, concocted for the sake of the election.

The fake debate concerns interest rates. You can sample it on the National Party website. There you are asked to key in the size of your home loan and are rewarded with a box outlining your likely repayments under three scenarios.

They were: "Coalition 7 per cent", "Labor 10 per cent" and "Labor 12 per cent".

The Nationals are honest enough to admit that these scenarios "should not be used as a substitute for professional financial advice". Too right. But why have they been used at all? In part because, like all good fables, the myth that the Labor Party inevitably brings with it higher interest rates contains within it an element of historical truth.

In November 1989, in a last, desperate bid to rein in what he felt was runaway spending, the then treasurer, Labor's Paul Keating, personally oversaw a hike in the cash rate to 18 per cent. His principal adviser said later he could hear the economy snap. Australia slid into recession. Banks and financial institutions collapsed.

In making that sort of decision Keating wasn't alone. In 1960 the Liberal prime minister, Robert Menzies, and his treasurer, Harold Holt, imposed a disastrous credit squeeze; in 1973 Labor's Gough Whitlam and his treasurer, Frank Crean, did the same; and in 1982 Liberal Malcolm Fraser and his then treasurer, John Howard, pushed up money market rates to a peak of more than 20 per cent ahead of the recession of that year.

But Keating was the last political leader able to do so. In January 1990 the Reserve Bank grabbed control of the process and never handed it back. It took a decision to cut interest rates and issued a press release in its own name saying so. It has decided on and announced every adjustment since. The Treasurer, Peter Costello, granted it formal independence with an exchange of letters in 1996.

As it happens, the Reserve Bank's decisions have been kind to the Coalition... In the final years of the Keating government the Reserve's then governor, Bernie Fraser, increased interest rates and kept them high to squeeze out inflation. He began cutting rates within months of Howard taking office. As the Macquarie Bank's Rory Robertson puts it, Howard had low inflation and low interest rates handed to him on a platter. Robertson asks: "Wasn't it Woody Allen who said 80 per cent of success in life is just showing up?"

Put five economists together and the odds are that none of them will be able to think of a likely scenario under which the Reserve would be forced to push rates higher under a Labor government than under the Coalition. Labor's $3.5 billion family and tax centrepiece is hardly inflationary. It is funded by 18 separate savings measures. And while Labor's industrial relations policy will increase the bargaining power of some workers, wage explosions are a thing of the past in the Western world. There is too much competition from China and India.

In any event, mortgage rates in the teens are unlikely in the years ahead precisely because we have got used to single-digit rates. They have helped double the price we are prepared to pay for houses. Reserve Bank figures show the typical mortgagee now devotes more of his or her income to mortgage payments than was the case when rates were at their highest at the end of the 1980s. (Memo to John Howard: remember that the next time you are about to claim, as you did on Sunday night, that paying off a home is easier now than it would have been had the old rates remained.)

The increased difficulty of meeting mortgage payments means that Australians are now very sensitive to even a small lift in interest rates. If the Reserve Bank wanted to cause us real pain, it wouldn't need to push rates much higher to achieve it.

Which brings us to the real economic debate, unmentioned in the campaign. The big shift in house prices has been devastating for Australians not yet in their own homes. It has slashed the value of their lifetime earnings.

But it's made the larger number of us who own or who are buying our homes feel suddenly wealthy - consumer confidence is near an all-time high - and act wealthy - 60 per cent of us now say it's a good time to buy a household appliance.

And we don't need to wait until we have earned the money. Refinancing allows us to dig into the equity in our homes and spend more than we earn.

Australian households have been spending more than they have earned for the past two years. The household saving rate is minus 3.2 per cent. Compare that with the crazy days of the late 1980s when the Coalition was driving "debt trucks" and issuing dire warnings about us living beyond our means. Then the household savings rate was positive - 8 to 10 per cent. We can't and won't go on forever spending money we are not earning. When we fall to earth we are likely to get hurt.

The Treasury warned in its pre-election statement on Friday that our rising household debt made us more vulnerable to shocks.

It's the real economic debate that we're unlikely to hear much more of until the election is out of the way.

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Money can buy happiness. Here's how.

Driving to work this past week, I've had an insight into the key to happiness. We have moved house, and it now takes twice as long as it did to get to work each morning. No big deal, do I hear you cry?

Well, it seems like a big deal to me, and the more I ask, the more I discover that to researchers in the field of happiness, it is one of the very few things that is.

Their problem is that happiness is slippery. Money or changed circumstances can buy more of it, but the effect usually doesn't last long.

It needs to be said first that happiness itself is easy to measure. The researchers ask people whether they are (a) very happy; (b) fairly happy; or (c) not happy.

The results line up with other measures of happiness.

The people who say they are happy are those more likely to call up friends, less likely to commit suicide. And their brains light up in the same sort of pattern when they are put under a scanner...

The researchers find that people who win the lottery do indeed feel happier to start with, but after a while they feel a little better than they did before. Conversely, people mutilated in accidents feel devastated at first, but after a year or so often feel as happy as always.

As Ethan Hawke puts it in the new movie Before Sunset: "If they were basically optimistic and jovial, now they're optimistic and jovial in a wheelchair. If they were petty and miserable, now they're petty and miserable with a new Cadillac, a house and a boat."

Each of us seems to have our own built-in happiness equilibrium, resistant to attempts to upset it. The Holy Grail in economic research (as with much pharmacological research) is to work out how to use money to break free of it.

Robert Frank, a Cornell University economist, believes that as a matter of logic it must be possible. He says money can buy many truly useful things. Surely, some of them must be able to make a permanent impression on the way we feel.

In the journal of the American Academy of Arts and Science, Dædalus, he asks: "Would we really not be any happier if, say, the environment were a little cleaner, or if we could take a little more time off, or even just eliminate a few of the hassles of everyday life?"

He says the problem is that we choose to spend money on things that don't help. In the US house sizes are getting bigger and bigger. In Australia the typical new house has doubled in size over the past 50 years. It's now more than 250 square metres; about 100 square metres of indoor space per person. And many of the new houses being built in Sydney's south-west are bigger still.

Is all of the extra space making us happier? The evidence suggests that more space doesn't make us happier for long, in the same way as better views from our office windows don't work their magic for long. We get used to them.

But there are things that we could spend money on instead that might make a good deal of difference to the way we feel about life.

Robert Frank asks us to perform this thought experiment. Imagine, he says, two societies, equally wealthy, but with different patterns of spending. In society A the houses take up 4000 square feet and the journey to work takes one hour each day in heavy traffic. In society B the houses are 3000 square feet, and the journey to work takes only 15 minutes. He asks in which society we would prefer to live.

If we were choosing on the basis of likely happiness, the answer would have to be society B. All of the evidence suggests that the stress of driving through traffic is something we never completely adapt to. It wears us down day after day, and it shortens our lives. Escaping it stands a very good chance of making us happier.

Frank performs other thought experiments. Which society would you rather live in? One in which everyone lived in a house of 4000 square feet and had one week's holiday a year, or one in which the houses were 3000 square feet and people got four weeks off each year?

In each case he is offering a choice between "conspicuous consumption" and what he calls "inconspicuous consumption". Frank's notion of inconspicuous consumption usually involves time: arranging things so that you have more time to do the things you like, by spending less time doing the things that you don't.

It's a lesson that would come as no surprise to my teenage daughter. She's grown up playing The Sims, an incredibly complex computer game in which you manipulate the decisions of artificially intelligent beings in simulated societies. It's a sort of electronic economic laboratory.

One of the unexpected discoveries made by fans of The Sims is that the best way to make the characters happy is to have them free up their time, rather than buy them luxuries. In the words of the game's creator Will Wright, time is the resource, happiness is the score.

Perhaps that's just a result of the way that game is set up. The characters in the computer game don't seem particularly susceptible to envy. But if we were less susceptible to envy as well, we probably would not be as keen as we are on large houses. We would look for smaller houses closer in; saving ourselves stress, giving ourselves the gift of time, and quite possibly genuinely buying happiness.

The boom in inner-city living over the past few years suggests it's a realisation that more and more are waking up to. The next time our family moves, perhaps we should, too.

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Credit card interest rates: no competition

There's something about the way we use credit cards that doesn't make sense - even to some within the credit card industry. Rohan Gamble is the managing director of Virgin Money in Australia. He says he "can't fathom why" the big card providers haven't been subject to the same sort of consumer pressure to cut their rates as have the banks when it comes to home loans.

Figures prepared for Virgin by BIS Shrapnel show that while the Reserve Bank's official interest rate has plunged over the past eight years (taking mortgage rates down with it) the rates charged on the major credit cards have scarcely fallen. Some of the rates have actually climbed.

It is as if we don't shop around on the basis of the rates when it comes to choosing our cards.
Certainly, that's been my experience.

I was stopped at Sydney Airport by a woman offering me one of the new transparent blue American Express credit cards. I signed up, only to notice later that the annual interest rate was 19.9 per cent. I'm not alone. When a company in the United States renamed one of its cards the "Elvis card" it received three times the usual response.

This stupidity - if that's the word for it - both intrigues and frightens economists... It suggests that at least when it comes to credit cards, one of the fundamental tenets of economic theory doesn't apply and that there's no reward for cutting prices.

Professor Lawrence Ausubel of the University of Maryland in the US has come up with an explanation. It involves what he calls "a very specific form of irrationality".

Ausubel believes that there are two quite different types of credit card customers: those who believe that they will pay their bills off in time, and those who know that they won't.

The first group of customers are beloved by the banks: partly because they are good credit risks (they are able to pay off their credit cards on time) and partly because being human, they often fall behind in their payments anyway.

Roughly half of all US families using cards think they "nearly always pay in full", while at the same time about three-quarters of all active accounts are overdue.

And the banks love this deluded group of customers for another reason as well. When they sign up for their cards, they genuinely don't care what the interest rate will be. Why should they, when they don't intend to pay it?

(Some in this group might even welcome a card with a high interest rate. It would give them an incentive to make sure they paid on time.)

The way to compete for these valuable if often misled group of customers is through anything other than a low interest rate. They offer service, convenience, rewards and image. That's what I was promised at the airport.

The second group of customers are different. The rate of interest is about the only thing that matters to them. They are people who know that they are going to get into debt and stay in debt, month after month. In many cases, they will be unable to get out of debt. In the industry they are known as "revolvers". They are by definition worse credit risks.

So what would happen to a credit card provider that decided to strike out on its own and grab more business by cutting its rates? In Ausubel's view it would gain hardly any more of the deluded desirables. Instead it would be flooded with applications from high-risk revolvers. Slashing rates might mean commercial suicide.

Even short-term low-interest honeymoon rates have their risks. They can attract revolvers who "card surf", jumping from one short-term low rate to another.

Economists at Australia's Reserve Bank examined our credit card market some years ago and found circumstantial evidence for the sort of effect that Ausubel was describing. They concluded that in those circumstances there might be a case for government intervention to force rates lower.

Doubtless to the relief of Australia's major banks our Reserve Bank took the idea no further. And it now looks as if it won't need to.

Virgin Money is acting as if it has never heard of Ausubel, and Gamble confirmed to me this week that he hadn't. He says by competing primarily on the basis of a good interest rate (12.4 per cent) he's been able to grab 400,000 customers from Australia's major banks in just over a year - 100,000 of them from the Commonwealth Bank.

He says the thing that's astounded him is that the Commonwealth Bank hasn't fought back with a lower rate of its own. Instead it and the other banks have upped their advertising. "There are now seven credit card ads on television. All of them promote an image. None focus on the rate."

It is as if the established banks are sitting back waiting for the upstart to fail, buried under a mountain of less than desirable "revolvers".

Gamble insists this isn't happening. "Our customers have the same profile as those of the existing banks: an average age of 40, a broad spread of demographics and so on."

It might be that things are changing. Some of the desirable deluded customers may be wising up. Four years ago, 80 per cent of Australian credit card bills were outstanding at any one time. Today the figure is a more prudent 75 per cent.

Mortgage brokers and specialist websites have made it respectable to shop around for mortgage rates. Those same websites offer information about credit card rates.

Virgin says it is lobbying the authorities to require card companies to include an honesty box in their advertising outlining the actual cost of using their cards, in the same way as the mobile phone companies are required to do.

Time may be running out for the "happy idiots", blissfully unaware of how much they are enriching their credit card companies, too lazy to shop around and not believing that it matters. It's up to us.

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Anything but simple is a tax within itself

I think Mark Latham is on to something. The words simple, simply, and simplify appear 12 times in his 20-page tax manifesto. We are told the new Working Tax Bonus will be administered simply. We are told that the Better Family Payment will replace three existing payments and be fair and easy to understand.

Labor appears to believe that the promise of simplicity is important in its own right, over and above the dollars that its tax package would actually put into our hands. And there is a vast amount of new psychological and economic evidence to suggest that it is right.

It was John Howard who twigged to the concept first. Asked in 1996 by the ABC's Liz Jackson to describe his vision for Australia, he replied, "relaxed and comfortable", an answer that on its face sounded inadequate, but may well have tapped into a national yearning. It is an understanding his Government has moved away from ever since.

Under Howard's watch, the standard income tax form has swelled from six pages to eight. Most of the extra invasive questions would have once had no place on a tax form. They deal with family arrangements and health insurance.

The family payments system itself is so complex that it takes a good deal of foresight and calculation to work out whether it is worth making an application. If you make a mistake, you have to pay money back.

Decisions about whether or not to take out private health insurance involve a complex interaction of sticks and carrots involving age groups and income-tax rates.

I know of at least one PhD in economics who finds it too complicated to calculate. Families using the new Medicare safety net are supposed to collect receipts or work out ahead of time whether they will need it.

Small businesses were promised an easing of their paperwork burden in a prime ministerial statement in 1998, but two years later were hit with the new Business Activity Statements as part of the goods and services tax. And soon all Australian employees will be required to choose between several competing superannuation funds.

Until recently, Australia's economic mandarins acted as if this extra complexity didn't matter. The important thing was that we were being offered choice: choice of phone company, electricity supplier, super fund and so on.

The Treasury view is that choice is still good. But last month something changed. For the first time in an economic statement, the Commonwealth Treasury acknowledged that simplicity also mattered. It said that the level of complexity that people were subjected to in their daily lives could amount to a significant economic cost.

It is new thinking that derives partly from research involving jars of jam....

Until about four years ago, the conventional wisdom was that people enjoyed being offered choice, and the more choices the better. But then two psychologists from Columbia and Stanford universities asked what would happen if the number of choices on offer became very big.

Sheena Iyengar and Mark Lepper set up a jam-tasting booth in a Californian gourmet grocery store. On display were exotic flavours including kiwifruit, black cherry and lemon curd. They asked shoppers approaching the booth to try as many flavours as they wanted and then take the opportunity to buy one of the jars for a discount using a coupon at the checkout.

At times, the booth offered a choice of six flavours, at other times it offered 24.

Their finding was startling. At the times when they offered only six flavours, 30 per cent of the shoppers who tasted bought. At the times when they offered all of the flavours, only 3 per cent of the shoppers who tasted bought. Too much choice appeared to have overloaded the shoppers' brains, leaving them paralysed with indecision.

And odder still was the fact that the booth was at its most popular when it had all of its flavours on display. More people stopped to try jams when the biggest variety was on offer, but most didn't buy them.

Like moths to a flame, we appear to be attracted to the idea of a big choice but beyond a certain point, incapable of handling it.

Iyengar and Lepper tried the same sort of experiment on their students. They offered higher grades to students who would attempt an extra essay. They told some of the students they would have a choice of six essay topics; they told others they would have a choice of 30. The students who had to choose between only six topics were both more likely to take up the offer and more likely to write better essays.

Through this and other experiments, Iyengar and Lepper have come up with a guesstimate of just how much choice human beings can comfortably handle. They say when the number of choices on offer climbs too far above seven, we get uneasy.

An exception comes into play for superannuation plans, in which case the number appears to be two.

In the US, super contributions are voluntary. Iyengar examined the super status of 800,000 workers and found that the contribution rate was the highest among employees of firms that restricted the choice of funds to two. For every extra 10 funds added, the contribution rate dropped by 1 to 2 per cent.

George Lowenstein, from Carnegie Mellon University, thinks he knows why we resent being asked to make complicated choices. He says it's because they take up our time, we know we are liable to make the wrong decisions, and we know we will blame ourselves if we do.

He illustrates the point this way: car manufacturers offer us choices of colour, engine size, upholstery and the like, but they don't offer us the ability to choose between internal seatbelt mechanisms.

Lowenstein says that's because the manufacturers know that we lack the expertise to make such a choice; they know that it would take time to acquire that expertise, and they know that we might never forgive ourselves if an accident proved our decision to be wrong. By relieving us of the responsibility for carrying out a task for which we are not equipped, the car makers are providing us with real value.

It's a strategy open for government to adopt as well. Once upon a time, it constituted the rationale for government.

By promising simplicity, Mark Latham has taken a small step toward reclaiming that rationale.

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Latham should walk tall, like McEwan, Hawke and Keating.

Tim Colebatch in the Age.

In his desperation for a deal, the PM accepted an agreement that would mean free trade in one direction, but restricted trade the other way...

Could you imagine Sir John McEwen, Bob Hawke or Paul Keating accepting this cringing, second-rate outcome?

As one advocate of a Australia-US deal puts it privately, the problem is that negotiations ended at the half-way mark. In February the negotiators should have walked away, taken a long break for consultations and rethinking, and then resumed talks after both countries had got their elections out of the way.

That is still the way to do it. It is only possible if Labor has the guts to defy the Murdoch empire - half-owner of Australia's pay TV network, and hence a major beneficiary of the deal - vote this agreement down, and restart negotiations in 2005.

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"Among the most pro-American agreements... we've seen before this House"

This morning's AM has sound of US Congressman describing the US-Australia Free Trade Agreement as

among the most pro-American, pro-worker agreements that we've seen before this House.

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Do most Australians have any idea what our Government has just signed us up to?

The US House of Representatives has just approved the proposed FTA between Australia and the US.

Here Kim Weatherall gives us a taste of what's in store.

Removing Consumers’ Freedoms

The basic aim of the AUSFTA digital copyright provisions is to ensure copyright owners have the power to exercise complete control over how their material is used, played, accessed by individual consumers and new creators. The basic idea is: if they want to control some use or access; if they want to control some technology used to play their works: our laws will have to enforce that control. Let's follow that thought. What does it mean?

If copyright owners want you to pay a little bit every time you listen to the song? Australia will probably have to enforce that decision.

If copyright owners use technology to prevent home taping of TV broadcasts – Australia will probably have to enforce that.

If copyright owners want to stop Linux desktops playing DVDs or music files: Australia will probably have to enforce that.

Ever copied a CD onto a tape or a mp3 player because you didn’t want to carry your CD collection around? If copyright owners want to impose rules that say you can’t take a song you bought, and move it to your new digital music player, Australia will probably have to enforce that decision...

Has your child ever copied a picture from the Internet and put it in their school project? If copyright owners want to stop school students using copyright clips or pictures in their projects, or stop university students in media studies using clips to make documentaries or other movies: Australia will probably have to enforce that.

if the copyright owner wants to stop you fast forwarding through the ads on their content (or blocking or removing them) , Australia might also have to enforce that - depending on how the technology was put together
Once works are digital, and once TPM is imposed, all those "fair use" type rights you thought you have exist only so far as copyright owners think they should.

The government has said that we have our exceptions still. Reality check: not once the works are digital. If copyright owners use technology – the rules that physically prevent you making a home copy, or using a clip for your documentary – we can’t create effective new exceptions for those...

And you know what? Australia are the suckers here. This is not law that meets an international standard. This is law that has been rejected by other developed countries a bit like us – Canada, and NZ.

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The New York Times on the imminent US - Australia "Free Trade" Agreement

The Times says:

In negotiating the pact, the United States, for the first time, challenged how a foreign industrialized country operates its national health program to provide inexpensive drugs to its own citizens.

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A healthy appetite for higher tax

At last, a budget that gives the people what they want, eh? Well, if the Treasurer had really listened to what we want last night, he wouldn't have given us tax cuts at all. When asked, an astonishing 70 per cent of us now say we would rather have extra money spent on health and education than given back to us in tax cuts.

But we haven't always thought that way. As recently as the late 1980s it was the other way around: 70 per cent of us wanted a tax cut, fewer than 30 per cent wanted more government spending. What's changed?.

Andrew Norton, of the Centre for Independent Studies, notes that until recently our views about government spending responded to actual spending itself. So that when spending was low under Menzies and his successors we wanted more of it and then when it shot up under Whitlam and continued climbing until the mid-'80s we wanted less.

But that relationship shattered around 1993... From then on as government spending climbed, more and more of us have wanted more of it. This Government is the highest-taxing in our history (although low by international standards), yet our willingness to pay tax is the highest it has been for decades.

It could be that we don't realise just how highly taxed we are these days. Much of this Government's tax is invisible to many of us. We don't see the GST. It could be as well that we don't realise how much the Government is already spending on health and education - on some measures more per person than ever before. Yet at least on health this Government has been subtly implying that the public system is run down, offering us subsidies to take out private insurance.

Or it could be because of something more fundamental - a phenomenon known to just about every student who has ever enrolled in a first-year economics course.

Australia is enjoying its longest period of sustained economic growth in modern history. We are much richer than we used to be. And as people get richer their tastes change.

As Irish incomes increased in the 19th century the consumption of potatoes actually went down. Potatoes were what is known as an "inferior good". In Australia at the start of the 21st century health is what is known as a "superior good". The richer we become the more of it we want, much more so than goods such as food or entertainment.

And the basic health infrastructure we want can really only be provided by government, whatever the privately purchased add-ons. When Kerry Packer suffered a massive heart attack while playing polo at Warwick Farm in 1990 he was taken first to the State Government's Liverpool Hospital.

It is concern about health, more than anything else, which is driving our apparent new willingness to forgo tax cuts. An Australian National University survey suggests that 70 per cent of us would actually be prepared to pay more tax if we knew it would go to health, 63 per cent would pay more if it would go schools and only 34 per cent would pay more tax to see it spent on welfare.

And the Australians most prepared to pay more tax for health are those on the highest incomes. Only 23 per cent of Australians earning more than $78,000 say they would prefer a tax cut to spending on health and education, compared with 32 per cent of Australians earning $31,000 to $36,000.

So why do our national leaders act as if these polls aren't right and offer tax cuts regardless? In large measure it might be because of our peculiarly Australian division of state and federal responsibilities.

In Australia, the state governments run the hospitals and schools, while the Federal Government raises most of the tax. It is possible for voters to kid themselves that they can get the best of both worlds, voting for hospitals and schools at the state level while voting for tax cuts at national elections.

The Labor Party has won nearly every state election in Australia in the past decade. Right now it governs in every Australian state. It has traditionally been the party keenest to spend on schools and hospitals. State Liberal leaders such as Kerry Chikarovski, Jeff Kennett and John Olsen learnt this to their cost.

At the federal level the Coalition has done much better. Voters have occasionally been swayed by the promise (if not always the delivery) of lower taxes, believing hospitals to be a separate issue.

It is a fools' paradise that might be about to change. The state and federal health ministers have before them a proposal to remove hospitals from state control and place them instead in a national body funded directly by the Commonwealth.

Federal decisions about tax would suddenly have consequences. As the economist John Quiggin puts it: "Voters would be faced with a clear choice: they could vote for lower personal taxes and do without improved health care, or forgo tax cuts, and perhaps accept some tax increases, in return for high-quality, publicly funded health care."

And there's no reason to stop at health. The states could be given the full responsibility for funding and running schools. Each state election could then become a mini-referendum about the need for spending on schools and the level of state taxes, including the national GST, needed to raise the money.

It would improve the workings of Australian democracy and provide Australians who say they would prefer education or health spending to tax cuts with the opportunity to actually vote that way.

Quiggin would go further still. He would index the personal tax scales so that the Government's take no longer automatically increased. Then the overwhelming majority of voters who say they want more spending on health would find that the only way they could get it would be to vote for higher taxes and to accept them in federal budgets.

There's a good chance that they would.

See: Tuesday Column: An election without tax cuts January 30, 2007

See: After the tax revolt: Why Medicare matters more to middle Australia than lower taxes Trevor Breusch, Shaun Wilson; Australian Journal of Social Issues, Vol. 39, 2004

See: Money in your pocket, or money spent where it's needed? SBS Television 7.30pm Tuesday 4 May, 2004

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Money in your pocket, or money spent where it's needed?

That's one way of describing the question that will be posed on Insight tonight, SBS TV 7.30pm Tuesday 4 May.

Another way of putting the question is "the money or the box".

We recorded it last night at the SBS in Sydney.

Among the guests - former Treasury Secretary John Stone, "Krugman of the antipodes" John Quiggin, "responsible tax payer" Eva Cox, "develop the North" Bob Katter, "tax facts" Neil Warren, and Mike Keating, the head of Prime Minister and Cabinet under Paul Keating, who has authored a paper entitled The case for increased taxation.

It is a very good program (even if the producer has to say so himself).

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The Four Billion Dollar Man - update

SBS TV's Dateline reported on Commercial IBT on Wednesday 10 March 2004.

Ratings Agency of Malaysia has just made this announcement.

23 April 2004

RAM has suspended the AA1/P1 ratings of Commercial IBT Pty Ltd pending the outcome of an investigation on the Company by the Australian Securities and Investment Commission (“ASIC”).

ASIC itself has yet to make an announcement.

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The damage halving capital gains tax did

For a moment there I thought that Bob Carr had done the wrong thing. I read that his new transaction tax on sale of investment properties was a "shocker", a "major attack" that would erode retirement savings and consign the property market to "oblivion". And those were just the reactions in the Herald.

In The Australian Financial Review an industry analyst explained that for an investor who bought a property for $600,000 and then sold it for an extra $200,000, the tax take would be $22,000 on the way in, $18,000 on the way out and $39,000 in capital gains tax - a take he described as "outrageous".

And then the spell broke.

The taxes in the analyst's example add up to just 39 per cent. Australia's top marginal rate of tax is 48.5 per cent. The rate below that is 43.5 per cent. About half of us pay those rates on every additional dollar we earn at work, as well as on every single dollar we earn in interest on our savings.

Looked at that way, the real question isn't "how did the taxes on trading in property ever get to be so high?" but "how did they ever get to be so low?"...

Most of the blame (or credit) belongs to two people: the Treasurer, Peter Costello, and John Ralph, the doyen of Australian company directors, at present chairman of both Telstra and the Commonwealth Bank.

In 1998 Costello asked Ralph to inquire into business taxation. One of the terms of reference was odd, and extremely specific. It dealt with individual, rather than business taxation. Costello wanted Ralph to examine "the scope for capping the rate of tax applying to capital gains for individuals to 30 per cent". Until that point capital gains had been taxed at the individual's marginal tax rate, minus inflation.

Ralph went further than Costello had suggested. In September 1999 he recommended that only half of each capital gain be taxed, which as he pointed out would effectively cut the top rate to 24 per cent.

What followed was an avalanche of funds pouring into investment real estate, and a change in our financial psyche. One in every eight Australian taxpayers now owns an investment property, firming to one in every three where annual income exceeds $100,000.

Ralph didn't see it coming. His report contained not a word about real estate. He said instead he expected the cut to bring about a surge in sharemarket investment, "particularly in innovative, high-growth companies".

Mark Latham saw it more clearly than most. In an extraordinarily prescient speech he said the cut would add "to the great Australian disease of asset and property speculation, particularly in our big cities. It will take away resources from the knowledge economy and put them into the least productive, least honourable aspects of Australian economic activity."

It was already legal to negatively gear. That is, to borrow so much to buy a property that your interest payments ensured you made a loss each year, which you could use to cut your income for tax purposes. It was also legal to claim a depreciation deduction after buying a new house or unit, regardless of whether or not the investment actually declined in value.

But as attractive as these benefits were, they did little more than defer the payment of tax. It would be paid on the day the property was sold. Or that was the theory, until September 1999. From that date, as Melbourne University's Professor Cameron Rider puts it, only half of the deductions were recouped - the other half were converted from a deferral of tax to a permanent exemption from tax.

The changes gave property an advantage over competing forms of investment. Shares could match it when it came to negative gearing and capital gains tax, but couldn't match the associated depreciation deduction, as scores of mesmerised Australians were being told in investment seminars each weekend.

Borrowing to buy property became the "smart" thing to do, even for Australians who had never borrowed before except to buy their home. As Macquarie Bank's Rory Robertson told his clients: "It is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries."

Or to make money renting out the properties they bought. The Tax Office says six out of every 10 of Australia's landlords actually lose money on an operating basis.

This tax-driven diversion of money and effort away from work, away from small businesses, away from productive investments, is without recent precedent. It has helped push property prices into uncharted territory and may have brought on our last two interest rate increases.

All this from a change that Ralph recommended in order to "achieve a better allocation of the nation's capital resources".

When Latham tried to have Labor oppose it in September 1999 he was overruled by his leader, Kim Beazley. Shortly after becoming shadow treasurer last July he explored with Access Economics a plan to restore full tax to capital gains and use the billions of dollars liberated to cut the top tax rate for all forms of income. Access believed it could sell the plan as being fairer for both high and low income earners.

When news of the plan leaked last month, Latham ruled it out. He did so again this week.In election mode neither Latham, Howard nor Costello is likely to propose what an increasing body of expert opinion believes has to be done.

The Productivity Commission is said to have recommended some sort of action on property taxation to Costello. He is yet to release its report.

By rushing in and taxing where our federal leaders are scared to tread, Bob Carr and his Treasurer, Michael Egan, may have done the nation a favour.

And they get to keep the money as well.

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