The 'economics' of nuclear power in Australia

If you listen carefully to the new debate over nuclear power you can hear the sound of furnace doors being opened and bundles of the Treasury’s $100 notes being loaded on to shovels.

The Prime Minister says he wants to find out whether nuclear power is economically feasible in Australia. He must know that it is not a commercial proposition. There have already been enough reports prepared for his Government telling him so.

The most recent, prepared by a British scientist sympathetic to the nuclear industry for the Australian Nuclear Science and Technology Organisation (ANSTO) finds that any private operator who attempted to build a nuclear power plant in Australia would produce electricity ‘at a cost that is significantly higher than would a new coal-fired or gas-turbine power station.’

In many places overseas it is a different story. For countries that don’t have ready access to coal, are densely populated and are rapidly industrialising, then nuclear power might well be the ideal (perhaps, the only) commercial solution.

So what will the Australian Government do?

Well, I fear that it’ll do what it’s done before — notwithstanding its proclaimed commitment to the free market.

Back at the start of the 1980s, media moguls including the late Kerry Packer became fascinated with the idea of a national communications satellite. They wouldn’t build it or fund it themselves — as a business proposition, it made no sense. But persuading the Government (Malcolm Fraser Prime Minister, John Howard Treasurer) to part with its own money to ‘position Australia well for the future,’ the moguls played with the new technology for which they could never make a sound business case.

A decade later the government-owned aussat was $400 million in debt and derided as a piece of ‘space junk.’ The Hawke Government couldn’t give it away — literally. In order to persuade the firm that became Optus to take it off its hands, the Government threw in a domestic telephone licence.

AUSSAT was built and launched at a time when Australia was about to be covered by a web of cheaper-to-use optical fibre cable. In order to ensure that AUSSAT had paying customers the Government forced the ABC to use it exclusively to transmit its programs between Australian cities. But the economics of doing so were horrendous. Even after the ABC had paid for all of the transmission costs, the cost of an extra receiving dish was sometimes still more than the cost of using optic fibre cable.

I worked at the ABC during the 1980s and remember one instance when the ABC got around the spirit of the Government’s requirements by installing a cable between Sydney and Wollongong rather than buying yet another satellite receiver.

Smart people knew that AUSSAT made no financial sense. But it suited them for taxpayers to take the plunge and then take the bath.

Smart people are at it again.

The report prepared for ANSTO finds that a privately-owned nuclear power plant could only make money if the Government contributed 14.3 per cent of the cost of building it, and then paid 21.4 per cent of the electricity bills for the first 12 years. It’s a finding based on best-case assumptions. The interest rate used in the calculations is one of the lowest on record (that for 2002-2003), the plant is of a type not yet built, and it is assumed to be far cheaper than have been previous nuclear power plants.

It wouldn’t surprise me if the Government bites again.

Some of the arguments for it doing so are incredibly thin. The report for ANSTO says that a nuclear power plant would improve the security of electricity supplies ‘by adding diversity to Australia’s sources of electricity.’ This makes about as much sense for a nation built on top of a near-inexhaustible supply of coal as does the claim that Iran needs nuclear power in order to diversify away from oil.

It is correct that a nuclear plant might become more economic relative to coal-fired plants if the Government imposed a tax on carbon emissions and allowed carbon trading — something it has said it is not yet ready to do.

But if it did do so, all sorts of other actions might become more economic as well — among them the installation of technology to cut or offset the emissions from coal-fired power plants.

The market would decide. And my tax dollars would be safe.

Wouldn’t that be something?

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A Super Budget. Not.

High-income earners do well indeed out of the tax cuts in the Federal Budget. Andrew Leigh from the Australian National University says that whereas an average worker will get an extra $510 a year, Malcolm Turnbull will get $6200.

But that’s just the beginning. The real gift to the well-off is in the plan to abolish the tax on superannuation payouts.

Don’t believe for a moment that the benefits will trickle down.

Lump sum payouts below about $130,000 are already untaxed...

Removing the tax won’t help low-income earners. But it will help high-income earners, and the higher the income the greater the help. This is partly because the higher your income the more you put into superannuation automatically; and partly because the higher your income the more spare cash you have to pump into superannuation over and above what is required.

And if you can get your employer to pump it in for you, there’s no better place for it...

High-income earners are well advised ‘salary sacrifice.’ They get their employer to cut their take-home salary by, say, $30,000 and put the money into superannuation instead. They no longer lose perhaps as much as half of that money in tax. They lose only the 15 per cent superannuation contributions tax. And any earnings the fund makes are taxed at only 15 per cent as well, instead of something closer to 50 per cent.

It’s such a rort for the well-heeled — who scarcely need encouragement to save for their retirement — that in his first (and some would say, only) courageous Budget Peter Costello introduced a superannuation surcharge for high-income earners of an extra 15 per cent, taking the total tax to a still-concessional 30 per cent.

Here’s what he told me at the time in an interview on the ABC’s AM program:

"At the moment if you’re on a 48 per cent marginal tax rate, and an employer makes a contribution into superannuation on your behalf, you get a 33 cent tax concession — if you are a millionaire or a multi-millionaire.

If you happen to be under $20,000, and an employer makes a contribution on your behalf, you get a 5 per cent tax concession.

Now, our tax system is premised on the fact that rates should go up as incomes go up. But under this superannuation system, concession goes up as income goes up. That’s the basic unfairness.

How do you look the battler in the eye and say ‘when your money goes into super, you get a 5 per cent tax concession. When a millionaire’s money goes into super, he gets a 33 per cent tax concession?"

Peter Costello’s concern about the rort for the rich was short-lived. About a decade later when his Party gained control of the Senate it abolished its own surcharge.

The only thing left standing in the way of Australia’s biggest government-created tax lurk was the superannuation exit tax of 16.5 per cent applied to lump sum payouts of more than $130,000.

The Treasurer now plans to remove that as well as part of his plan to ‘simplify and streamline’ superannuation. As the plan revealed on Budget night puts it, from mid 2007:

All lump sum benefits paid from a taxed source to an individual aged 60 or over would be tax free when paid. There would be no reasonable benefits limit.

In removing the last hurdle facing one of Australia’s last legal tax dodges the Treasurer hasn’t even pretended that superannuation is overtaxed. He knows it is not.

Three budgets ago at the lock-up press conference a television journalist who had presumably been worded up by the superannuation industry asked the Treasurer why superannuation was so heavily taxed, and taxed ‘three times’ — on the way in, as money is earned, and from the well-off on the way out.

Peter Costello’s reply sent a chill through some who listened. He said that, even after those three levels of tax, the overall tax take from money paid into a super fund was lower than it would have been if the money had been paid out in the form of wages.

His implicit threat: if you really think superannuation is heavily taxed — how would you like to be taxed at normal rates?

The Treasury’s estimate is that the concessional tax treatment for superannuation costs it an astonishing $16 billion a year. It is by far the biggest of Australia’s so-called ‘ tax expenditures.’ The extra tax breaks proposed in this latest Budget will push that bill up by an extra $2.4 billion each year.

There was scarcely pretence by the Treasurer on Budget night that the proposed extra tax break will boost national savings. As he put it, in his interview with Kerry O’Brien:

If you are thinking of saving, put some money in superannuation. When this plan goes through it will be the best way of saving.

Too right. Some of the money that was going to be saved anyway will be saved now in the form of superannuation. The rich and well-advised will get a much bigger tax cut than the one advertised, and the rest of us will pay an extra $2.4 billion to give it to them.

The superannuation plan isn’t a done deal — yet. The Treasurer has called for comments. He wants them by 9 August.

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Advertising Obesity

Parents concerned that television advertising is encouraging their children to eat unhealthy food can apparently rest easy.

On Monday, on ABC radio's The World Today, the Australian Association of National Advertisers let parents in on a secret: ads for food directed at children don't succeed in persuading them to eat more.

As the association's executive director, Collin Segelov, put it: "If consumption was as easy as advertising, then, my golly, everything would be easy. It doesn't work that way."

That surely can't be what advertising agencies tell their clients.

I can't imagine them saying: "Listen, this advertising campaign isn't going to grow the market, but if you merely want to fight over market share, who am I to stop you?"

Segelov said:

Most of the food advertising that you see is where you've got companies competing with products against one another. So they're trying to get their brand into the equation. They're trying to get people to look at their brand as against someone else's brand.

It's a familiar argument. In the early 1970s, when there were moves to ban cigarette advertising in Australia, the manufacturers insisted ads didn't encourage smoking; they merely encouraged brand switching. As it happened, once the ads were taken off TV, smoking rates began to slide.

Cigarette companies also claimed that without their ads and sponsorship Australian television and Australian sport might go broke.

It's an argument Segelov has echoed this week in his campaign against moves to stop food companies advertising to children and sponsoring junior sport. He told the Herald: "If someone pulls the plug, then the sport could disappear"...

Perhaps fortunately for the advertising industry, the most comprehensive study of the evidence to date suggests that promoting food to children does encourage them to eat more of it. The University of Strathclyde in Glasgow concluded, after examining more than 100 studies at the behest of the British Food Standards Agency in 2003, that there was "sufficient evidence" to suggest food promotion encouraged consumption.

One of the studies examined obesity in Quebec, which banned television advertising directed at children in 1978. It enjoys the lowest obesity rate of any Canadian state.

Another used detailed diaries to record children's TV viewing habits. It found that the more food advertisements they saw, the more snacks and calories they consumed.

Late last year a study conducted for the US National Bureau of Economic Research concluded that a ban on advertising fast food restaurants to young people would cut the number of overweight children by 10 per cent and the number of overweight teenagers by 12 per cent. It found that even the more modest step of removing tax deductions for such advertising would most likely cut obesity among children by between 3 and 5 per cent.

They are gains worth having, and there is a precedent for them in Australia. We ban the alcohol ads until after 9pm. But advertising bans by themselves would make only a dent in childhood obesity.

The latest economic research on the growth in obesity in Western nations suggests that its causes are complex and not easily reversed. Writing in the Journal of Economic Perspectives, David Cutler and two colleagues from Harvard University put a lot of the blame on technological progress. Forty years ago most of our food was prepared laboriously at home. In 1965 it took a married woman who was not in paid employment two hours a day to cook, and then clean up after, a family meal. After decades of innovations, including vacuum packaging, deep-freezing and microwave cooking, it now takes half the time.

And the food is more processed.

As an example, Cutler says that Americans ate large quantities of potatoes before World War II, but the potatoes were usually baked, boiled or mashed. Chips were too hard to make, even for most restaurants. Now french fries can be peeled, cut, cooked and frozen in a few central locations using sophisticated technologies. Today the french fry is the dominant form of potato and America's favourite vegetable. Since 1977 potato consumption in the US has climbed 30 per cent, almost exclusively in the form of potato chips.

Cutler reasons that if it takes less effort to do something we like, we will do more of it. Only about a third of Americans reported eating two or more snacks a day in 1977. By 1996 it was almost a half.

And food is a lot cheaper, relative to earnings, than it used to be. Cutler uses the Economist magazine's so-called Big Mac index to show that the more affordable a country's Big Macs are (and, by implication, the cheaper its processed foods, generally), the more obese are its citizens.

Other economists lay blame at the feet of working women. Kristin Butcher and a team from the Federal Reserve Bank of Chicago conclude that the more hours a week a mother works, the more likely are her children to be obese. A mother who works an extra 10 hours a week appears to increase her likelihood of having an obese child by 3 to 4 per cent.

Curiously, this appears to be the case only for well-off families. The number of hours worked a week makes little difference to obesity rates among low-income families, which are, in any event, far more likely to raise obese children than are high-income families.

Depressingly, the economic research offers little usable advice on how to reverse the sudden growth in obesity. Redistributing income and unwinding technological change hardly seem practical.

But banning the advertising of junk food would be. It would be a start.

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Cheaper Nescafe?

All over Sydney we're getting our Nescafe out of different, cheaper, jars. Blend 43 costs somewhere between $6 and $7 for a 150-gram jar. But for the past few months it has been possible to buy instead a 200-gram jar of Nescafe Matinal or Classic Deluxe for only $4.69.

These Nescafes are in similarly coloured (although different-shaped) jars to Blend 43 and they taste much the same, if not better. They're available at Aldi and at small supermarkets in Chinatown.

The only disconcerting thing, as you unscrew the lid, are the words on the jar reading: "For sale in Indonesia only." At Aldi there is also an extra sign saying: "Whilst the blend is different to the locally sourced product we believe that the quality of the product is as good."

The company that makes Nescafe in Australia is upset. It has cut off supplies of products such as Milo to Aldi in retaliation. Which is odd because it is also the company that makes the product that it doesn't want Aldi putting on its shelves...

Nestle Australia and Nestle Indonesia (and also Nestle Brazil, from whom some of the coffee is sourced) are all subsidiaries of Nestle SA in Switzerland.

Nestle's official line is that it doesn't object to Aldi selling coffee from its Indonesian subsidiary, as such. (This sits oddly with the injunction it has printed on its jars of Indonesian coffee.)

It says what it does object to is the "confusion among consumers" that will result from an extra two varieties of Nescafe being on display on the supermarket shelves. This from a company that, when it can, displays about a dozen varieties of Nescafe on supermarket shelves.

In seeking approval from the Australian Competition and Consumer Commission to maintain its ban on supplying to Aldi, Nestle Australia says it has received a number of consumer complaints about the imported Nestle coffee.

It is reasonable to ask, what could possibly be wrong with imported Nestle coffee? Nestle Australia's answer - delivered, deadpan, in its letter to Aldi - is that the imported Nestle coffee "has not been blended specifically for Australian tastes".

It's the sort of explanation we are used to hearing from multinationals that want to stop the movement of their product between nations. Remember the fuss made by the record companies that managed for years to ban imports of records they had made for sale overseas? They said it was about piracy and copyright, nothing to do with price.

DVDs and computer games are region-coded, making it difficult to play those bought in the US in Australian machines. According to the film companies, it is done to ensure a money-saving staged release of films to cinemas. They say if the films are shown in the US first, the same copies can later be flown to projectors in other parts of the world.

But this doesn't explain why they also region-code classic and direct-to-DVD movies. Nor does it explain the ferocity with which software companies have used the courts in an attempt to stop Australians modifying their games machines so they can play games purchased overseas.

An economist would guess the surprising xenophobia of multinational corporations such as Nestle, Universal Music and Sony is really all about price - in particular, a practice known as "price discrimination".

In business it rarely makes sense to charge all of your customers the same price. If you set that price high and charge the most that an eager customer will bear, you will miss out on sales to a larger number of not-so-keen, or poor, customers.

If you set the price low in order to maximise your sales, you'll be giving away your product to the keen customers for much less than they would be prepared to pay for it.

Companies such as Nestle and Arnott's get around this by making two sets of products: one for people who are prepared to pay a lot, and the other for buyers who are canny or short of funds. They make the cheaper product less attractive in order to encourage buyers who can afford it to buy the higher-priced product and not the cheap one.

It is no accident that the packaging on International Roast coffee and Sunshine Biscuits is particularly ugly. International Roast is Nestle's second, cheaper brand (nothing on the packet tells you that - even the manufacturer's address is different). Arnott's makes Sunshine Biscuits, although it tries to keep that fact to itself.

The more you think about it, the more examples of price discrimination you find. Banks do it by offering discounted loans to new customers but not to the ones they've already got: new customers are looking for a good price; existing customers usually can't be bothered.

Cinemas do it by offering special prices to students - not because they have a love of education, but so they can move tickets they would not have been able to sell to these regular customers at a higher price.

Price discrimination works best when the people who are prepared to pay more don't get to find out about the cheaper price being offered to others.

In his book Retail Pricing Strategies and Market Power, Gordon Mills notes that in April 2000 a Sydney supermarket was selling special three-kilogram "budget bags" of apples for less than $3. The packaging made it hard to see what was inside. The apples were as good as those that were selling, loose, for up to $6 a kilogram. For the strategy to work, it was essential that the customers who were prepared to pay the high price could not find out.

That might be the real reason Nestle is so keen to discourage chains such as Aldi from displaying jars of its products at something approaching Indonesian prices: we might think we're being overcharged.

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Trading quarantine

The transcript of my ABC Background Briefing documentary, Trading quarantine is here.

It deals with the decisions, attitude and track record of Biosecurity Australia, a subject also covered in my Dateline SBS documentary, Foot in Mouth.

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The Topsy-Turvy Politics of Climate Change

There are two major political parties in Australia. Only one of them trusts markets. That’s the inescapable conclusion to be drawn from comparing the Government’s position on climate change with the Opposition’s, released last week.

The Government can’t countenance the idea of allowing traders to buy and sell licences to pollute.

Kim Beazley and his otherwise Left-leaning environment spokesman Anthony Albanese not only want to allow trading in pollution licences but also want to hand them out for free, with the most licences going to those firms that pollute the most.

It’s a policy that is not only pro-market, but also pro-polluter. So why on earth aren’t environmentalists screaming?...

Because there are some problems that markets are extraordinarily good at solving, and in the most painless way possible.

The idea of trading in pollution permits has an impressive parentage. When in the mid-1990s the United States had a problem with acid rain it handed out permits to emit sulphur. The firms that polluted the most got the most permits. And then it encouraged the Chicago Board of Trade to set up an exchange on which those permits could be bought and sold.

Polluters liked the idea because they could make money by installing filters on their chimneys and selling the excess permits they no longer needed. Firms that found it difficult to install filters didn’t need to. They could go to the exchange to buy the excess permits, providing a tidy profit to those firms that had installed filters.

Each year that followed the US handed out fewer new permits. Over a decade the price of a sulphur emission permit on the exchange climbed from $US100 to $US800 a ton. The polluters who could cut back found themselves rich. Those that couldn’t found business increasingly expensive — but not as expensive as it would have been if they had been made to install filters. The market rewarded the firms that could cut emissions cheaply and cushioned the blow for those that could not.

The European Union introduced the first scheme for trading in permits to emit carbon in January last year. It handed out permits to 12,000 carbon-intensive businesses such as oil refineries, electricity generators, and iron and steel foundries. Any firm found emitting carbon without such a permit faced a steep fine.

And then it sat back and waited. At first, the permits weren’t much traded. Their price actually fell. But then the EU knocked back a number of applications for extra permits and the price soared, leapfrogging from €6 per tonne of carbon to around €27 per tonne at the moment.

Along the way an entire new industry of professional carbon permit traders evolved. Once you get used to the idea it is not unusual. Financial markets that trade in bonds are just as bizarre. In his book Bombardiers author Po Bronson describes a bond trader who one day demands to see an actual bond, ‘… any kind of bond. He says he can’t sell bonds anymore if he’s never seen one.’

It is too early say whether the EU’s trading scheme will actually cut the amount of greenhouse gasses emitted by the EU. But there are reasons for confidence.

Over the ten years since the US sulphur trading scheme was introduced, sulphur emissions there have halved. In some parts of the US acid rain is down 25 per cent. The annual saving in healthcare costs is said to top $US20 billion.

The US and Australia would have seemed to have been likely starters for a European-style carbon trading scheme. Both have governments that are thought to approve of market-based solutions and

Yet both have said no to a legislated system of tradeable carbon pollution permits. This might be because they have both refused to sign up to the greenhouse gas reduction targets set out for them in the Kyoto Protocol. Yet the two questions — targets and means to achieving them — are really quite separate. It is possible to have a system of tradeable permits together with a very mild greenhouse gas reduction target. It is also possible to have no system of trading at all and a very severe and damaging greenhouse gas reduction target.

Permit trading is simply the most polluter-friendly means of achieving whatever target the government sets.

Support for the idea is spreading. In Britain, Tony Blair wants to extend the European scheme worldwide. Japan will begin a pilot program next month. Eight States in the US are banding together to introduce their own unified trading scheme without waiting for President Bush. And in Australia, New South Wales and Victoria are considering combining separate State-based schemes for carbon trading in the electricity industry into one semi-national market.

Even the Coalition may not be able to resist the lure of market-based solutions for much longer. Australia’s Environment Minister, Ian Campbell, says carbon trading might have a place in the future, but that he first wants to kick start some ‘breakthrough’ pollution-fighting technologies.

This preference for ‘picking winners’ over harnessing the power of prices may only be temporary. The Treasurer Peter Costello is said to privately support emission trading. His nemesis Malcolm Turnbull lives and breathes market-based solutions. Generational change might soon make Labor’s policy bipartisan.

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Annual Tax Pack ritual is just poor form

Spending money in advance to get money back later - maybe - doesn't make sense, says Peter Martin.

So the Treasurer wants to know what's wrong with the Australian tax system. Here's an idea the two business figures conducting his tax inquiry are unlikely to mention in their enthusiasm to make the case for a cut in Australia's "punitive" top rate of tax. That rate (47 per cent) will be paid only by the top 4 per cent of income earners after the changes announced in the last budget come into effect in a few months' time.

The imposition I am talking about is endured by nearly every one of us, year in and year out. It's the requirement to wade through the 120-question Tax Pack to send to the Tax Office information it most probably already has.

As Australian as the compulsory vote, it is a ritual not imposed on the citizens of Britain or New Zealand. In those countries, submitting a tax return is voluntary. Two out of every three citizens don't do it.

Going through the Tax Pack actually takes a lot more time than the compulsory vote. Two decades ago it typically took 4½ hours. (1) A decade later it took 8½ hours. (2) I don't know of any surveys since then but I do know that the Tax Pack has exploded in complexity in that time. Dr Andrew Leigh, an economist at the Australian National University, has costed the time lost nationwide as a result of attempting to fill in the form. He says it approaches $3 billion a year.

And it's not just time... Filling in unnecessary forms creates anxiety, often among those Australians with the simplest of tax affairs. And it can encourage dishonesty. An astonishing 75 per cent of us now use a tax agent - the highest proportion in the world. (3)

In New Zealand it is no longer possible to make claims for deductions. In Britain it has always been very difficult. The only things that matter for the tax affairs of a typical New Zealander are his or her salary (from which tax has already been deducted) and any income from interest or share market dividends (from which tax has already been deducted). The tax authority already has that information and it adjusts deductions throughout the year to make sure that, by the end, there is very little extra money owing. If it is, it sends a statement.

Entitled Simplifying Taxpayer Requirements, the change was introduced in 1999 partly to "reduce the extent to which the tax system intrudes on the lives of most individual taxpayers".

Reports from across the Tasman suggest it has been a success. I believe it would be here, too. Remember all the anguish leading up to the introduction of the GST? After the event, there seems no concern whatsoever among ordinary Australians. (Among businesses, there is concern, but that's the point: the more that the paperwork associated with a tax intrudes on someone's life, the worse they feel about it.)

So why won't authorities here make the income tax system as painless as New Zealand's or as the GST?

Peter Costello actually floated the idea in the lead-up the GST. He told a business lunch that if Australia "had a strong pay-as-you-earn tax system with a strong interest-withholding tax system, we could kick most Australians out of the necessity to file income tax returns". (4)

Then he moved the idea to the backburner. The Tax Office had tested it with focus groups and found people worried about losing their refunds: "For most taxpayers, refunds are what the personal tax system is all about." The obsession with the annual refund is indeed bizarre. Seventy-five to 80 per cent of us get a refund and we seem prepared to endure anything - even routinely having more tax than necessary taken out - to get it.

Professor Chris Evans, formerly of the British tax office, runs the Atax program at the University of NSW. He says: "Frankly, it is inexplicable, and unique to Australia. What rational person overpays in order to get something back at a later stage? It defies logical explanation - I would certainly not contemplate overpaying for my electricity in advance just so that I could have some 'forced savings' coming back to me at some point in the future." (3)

The lever most of us use to get a refund is to claim for so-called work-related expenses: things such as tools, conference fees and uniforms. But the rules governing what is in and what is out are so arbitrary as to make it look like a rort.

Professor Jonathan Baldry, of the University of New England, notes that a shearer can claim a deduction for the cost of jeans used as working clothes but plain-clothes police officers cannot claim for their clothes. (5)

The biggest claims are made by those with the biggest incomes. Baldry says the typical claim climbs by $49 for every $1000 increase in salary. Politicians and judges claim more than $10,000 each. We should abolish the right to claim deductions and let the chips fall where they may.

Then most of us wouldn't need to fill in the Tax Pack - although people such as landlords still would. Much of the information could be collected in another way. (For instance, the Tax Office could ask health funds directly about who is a member.)

An Australian twist might be to hand each of us a $300 deduction. That way we could still get our beloved refunds.

(1) Pope, J., and Fayle, R. "The Compliance Costs of Personal Income Taxation in Australia, 1986/87: Emperical Results"., Australian Tax Forum 8, (4) 485-538.

(2) Tran-Nam, B., Evans, C., Ritchie, K. and Walpole, M., 2000, “Tax Compliance Costs: Research Methodology and Empirical Evidence from Australia”, National Tax Journal 53(2): 229–252.

(3) Chris Evans, 2004, “Diminishing returns: The case for reduced annual filing for personal income taxpayers in Australia” Australian Tax Review 33: 168-181

(4) Committee for the Economic Development of Australia Conference, January 28, 1998

(5) Jonathan Baldry, "Income Tax Deductions for Work-Related Expenses: The Rationale Examined" Australian Economic Papers, 1998, vol. 37, issue 1, pages 45-57, Jonathan Baldry 1998, "Abolishing income tax deductibility for work-related expenses", Agenda, Vol. 5(1), 49-60.

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A Tax by Any Other Name

Spare a thought for business figures Dick Warburton and Peter Hendy. They’ve been given just five weeks to produce an ‘authoritative statement’ on how Australia’s tax take compares to that of other countries.

And every second member of the commentariat is telling them that the task is dead easy.

Andrew Leigh of the Australian National University says Warburton and Hendy are being asked to find out what anyone who uses Google can get from a public website. Malcolm Turnbull says a lot of the work has been done before. And economist John Edwards dismisses the exercise, saying there is ‘absolutely zero point in having an inquiry to ascertain facts that are well known.’

But if the facts are so well known, why is it that all the accounts we get of them seem different?

The truth is that it is impossible to authoritatively compare Australia’s tax take to that of other countries. The reasons why this is so tell us a lot about the meaninglessness of the question.

I’ll explain.

Rich nations other than Australia also impose so-called ‘social security contributions’...
They are extracted from both workers and their bosses. Germany, for example, hits workers for 21 per cent of their income, and their bosses for another 21 per cent. The UK charges workers 16 per cent and employers 10 per cent, and the US 8 per cent and 8 per cent. Even low tax Japan charges workers 12 per cent and employers another 12 per cent.

When compulsory social security contributions are counted as taxes (as they should be) it is the rest of the OECD , rather than Australia, which looks high taxing.

The Australian Treasury says by this measure Australia collects less tax as a proportion of national income than all but seven of the OECD’s 30 members.

But this comparison also leaves something out.

Australia — uniquely — enforces the collection of another impost, very similar to a tax. Our Tax Office compels employers to pay nine per cent of each of their employee’s earnings into a superannuation fund.

It is true that the money goes into private rather than government hands, but it does it at government insistence in order to fund retirement, just as it does in those OECD nations that impose compulsory social security contributions.

Compulsory superannuation contributions are a tax by any other name. That’s certainly the view of Dick Warburton who will be conducting the Treasurer’s inquiry. Last week he aroused the ire of the father of Australia’s superannuation system Paul Keating by saying plainly: ‘I definitely do call it a tax because it is money taken from the people to do the same sort of task that we pay taxes for.’

For what it is worth, when you count the Superannuation Guarantee as a tax (as I think you should) Australia’s total tax take looks pretty unexceptional compared to the rest of the OECD.

By now you might be forgiven for wondering whether such an exercise is worth very much.

Ask yourself this: What if Australia removed its system of compulsory superannuation contributions? We would then be called a ‘low tax country,’ but what would have changed? Without compulsion, the well-off among us would still put aside money for their old age (perhaps even just as much money as before, and perhaps to the same fund managers).

Very little might have changed when it came to financial flows — except that we would be called a ‘low tax country.’

Similarly, Australia could become a ‘low tax country’ if our governments stopped providing free schools. But the drain on parents’ resources would be little changed. They would still have to pay for schooling — perhaps just as much as before, perhaps more — but directly out of their own pockets with the money they no longer contributed in tax.

Working out whether Australia is a high-taxing or a low-taxing country, as the Treasurer has asked his Task Force to do, is meaningless without also looking at what the tax buys. You wouldn’t judge an internet plan or a holiday package by assessing whether it was high-price or low-price and leaving it at that. You would also want to look at what that high or low price bought.

To his credit the Treasurer recognises this. The terms of reference he has given Warburton and Hendy note that: ‘Some countries have a much larger/smaller government sector than Australia, and therefore require a higher/lower level of taxes.’

But he doesn’t seem to have followed through the implication. The team should be examining value for money, not the absolute amount of whatever it is they choose to define as ‘tax.’

That would be an inquiry worthy of a future Prime Minister, and certainly worthy of more than the five weeks and the handful of researchers that will be available to Warburton and Hendy.

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Is Brash City About to Crash?

The success of Australia’s brashest, crassest city has been something we’ve had to endure through gritted teeth for decades now, all the while holding onto memories of the days when it meant something to come from somewhere else, such as Adelaide or Melbourne.

Sydney is still the gateway to the rest of Australia. It sucks in almost half of Australia’s new arrivals. It serves as the regional headquarters for nearly every international corporation and is the Australian headquarters for most Australia-wide corporations. Its glittering harbourside real estate is said to be among the most desirable in the world.

But in the last year or so, it has begun to fall apart. Unthinkably, the unemployment rate in NSW is now almost the highest in the country (eclipsed only by Tasmania and the Northern Territory). The State is technically on the edge of recession and Sydneysiders are fleeing Sydney at the rate of thousands each month.

Even with the lion’s share of immigration, Sydney’s population is now scarcely growing. It climbed by just 0.7 per cent in the last year. By contrast Melbourne grew by 1.1 per cent; Brisbane by 1.9 per cent.

Who’s to blame?

As unlikely as it seems, I believe it is a Sydneysider....

John Howard is perhaps the ultimate Sydney Prime Minister. Aside from mainly enforced overnight stays in Canberra, he’s never lived anywhere else. Even though it is just down the road, Canberra was too far away for him and his family to live when he became Prime Minister ten years ago. He commandeered Kirribilli House — Sydney’s most impressive piece of real estate. Then, a year or two later, his Government set about feeding Sydney’s real estate obsession.

It wasn’t widely understood at the time what he was doing.

Added to the otherwise innocuous terms of reference for an inquiry into business taxation was one oddly specific measure dealing with personal, rather than business, taxation. The Ralph Committee, chaired by one of Howard’s friends, businessman John Ralph, was asked to examine the scope for ‘capping the rate of tax applying to capital gains for individuals at 30 per cent.’

At the time, income from capital gains was taxed at the individual’s marginal rate, often 48.5 per cent, minus the rate of inflation.

John Ralph did even more than he was asked. He recommended that only half of each capital gain be taxed — effectively cutting the top rate to 24 per cent.

Ralph’s report spoke of the boom in investment in Australian companies that would result, ‘particularly in innovative, high-growth companies.’

Others saw the likely result more clearly.

At the time Mark Latham was in self-imposed exile on Labor’s backbench. His then-leader Kim Beazley ensured that the Party supported the capital gains tax cut.

Latham described the cut in Parliament as ‘the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value-adding in the information technology sector.’

He was prescient.

As the Macquarie Bank’s Rory Robertson observed later: ‘Since September 1999 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.’

Borrowing to buy properties became amazingly tax effective. Much of the interest expense could be written off as a tax deduction — if the house or unit was new, the investor could claim a deduction for depreciation (whether or not the property had actually depreciated) and half of the capital gain was never taxed.

Property prices roughly doubled in the avalanche of buying and selling that followed, pushing up the already-high Sydney prices to levels previously unimaginable.

Those of us already well advanced on the property treadmill didn’t mind. In fact we felt richer. Howard’s then Parliamentary Secretary to the Treasurer, Ross Cameron observed succinctly: ‘[rising prices] makes for happy voters.’

But for many of those Australians not yet into housing — often too young to vote — Sydney was suddenly out of reach.

They are now leaving the city in droves. Six thousand more Australians now leave NSW each month than move to it. In South Australia and Victoria the net outflow is less than 1000. Queensland, Western Australia and Tasmania are actually drawing people to them.

It isn’t only those who can’t afford houses who are leaving. Many Sydneysiders who’ve done well out of the Ralph/Howard property boom are cashing in and buying more, cheaply, in more affordable cities. The ABC’s Richard Glover calls the phenomenon ‘Hobartering.’ Others are moving in order to find jobs.

Industry appears to be leaving Sydney as fast its people. The land prices in Sydney’s Inner West have made factories uneconomic. The owners can get far more by selling their land for housing than they can by continuing to run their factories . Some are relocating interstate or to the country, others are closing for good. Sydney’s Inner West is awash with so-called ‘brown field’ apartment developments, many with the factory exteriors intact.

In a less obvious way the Ralph/Howard property boom has also devastated Sydney’s State Government. It got it hooked on ever increasing stamp duty revenues, which eventually collapsed. Last week Premier Morris Iemma announced spending cuts worth $2.5 billion over four years. Five thousand public servants are to lose their jobs — at a time when the State’s unemployment rate is the highest it’s been in years.

Success is said to have many fathers; failure, very few. But it seems fair to acknowledge that John Howard is one the fathers of Australia’s manic real estate boom, the aftermath of which is set to send his beloved home city into recession.

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No tax but they're not happy, Pete

Imagine that you were able to (legally) pay no income tax. You'd feel pretty happy, right? Apparently not. This year an astonishing 38 per cent of Australian families will pay nothing to the Government in net terms, and there's plenty of evidence to suggest they're anything but happy.

Let me explain what I mean by no tax "in net terms". Those families will, of course, have tax collected from their pay packets through the PAYE system in the same way most of us do, but they will get all of that money back and more in the form of Commonwealth Government payments - in particular the family tax benefit and the new child-care tax rebate. The income levels at which this can happen are quite extraordinary.

Labor's Senator Chris Evans has had the Parliamentary Library do the calculations for a family on a single income with one child in school and another in child care for 20 hours a week. As reported in The Australian Financial Review, from the middle of this year when the new tax cuts come into effect, such a family could earn more than $53,000 and still pay no net income tax.

(The family will, of course, pay GST, which is formally a state tax, and a number of other government charges.)

Naturally it is an offer only available to Australians with children. A childless couple on the same money would pay $13,000 in tax. The position for such couples has actually worsened in recent years as cost-of-living pay rises have pushed more of their income into higher tax brackets.

But are these childless Australians on average incomes who actually pay tax about to be rewarded? It seems not. The Treasurer, Peter Costello, has promised that the upcoming budget will focus once again on families; in his words: "the people that need help in contributing the greatest gift to the future of our society - children".

Why should they need even more help? It could be because of the extraordinarily ham fisted way in which the help to date has been delivered...

Obtaining the family tax benefit, worth $10,000 a year to many parents, has become an exercise in humiliation. New parents whose financial circumstances are in the process of changing are asked to estimate their likely income one year in advance.

Millions get it wrong and are hounded like cheats. First there are polite letters comparing their actual income with their estimate and asking that some of the benefit be repaid. Then there are urgent letters demanding that the parents phone the "recovery staff" straight away. Then high-pressure sales techniques from the recovery staff along the lines of "don't tell anyone I told you this, but just for you I can start the repayments at the low rate of" and "this offer is only available today. If you ring back tomorrow you will be dealing with someone else and will have to go back to scratch."

And then there are letters from Dunn & Bradstreet collection services threatening unspecified action unless the debt is immediately settled.

There is no doubt that the Government knows that it has antagonised the people it is trying to help. It tried to paper over the problem with an extra $600 payment just before the last election.

But it didn't learn from its mistake. The new child-care tax rebate announced during the election campaign is in some ways even worse. In the words of the Coalition's Jackie Kelly, it appears to be "designed by people who don't use it".

If your child is in care during this financial year you are meant to hang on to your receipts. But the Tax Office says you won't be able to use them to claim the rebate until the end of the following tax year, half way through 2007.

This means that many parents won't get the money when they actually need it, while their child is in care.

Instead they will get it later, when their child has left child care to go to school. Research conducted for last year's Child Support Task Force found that the cost of caring for a child halves as a result of the transition to school.

Someone in the Government has designed a system that withholds money from parents at time when their expenses are high and gives it back when their expenses are lower.

On Sunday in Los Angeles an apparently oblivious Peter Costello defended the system saying he expected the fuss to die down. "I think once they do claim that 30 per cent rebate, that's going to make a lot of difference to the cost of child care."

Poor design appears not to worry the Government in another area of financial policy as well. An estimated 5 million superannuation accounts are "lost" - they have been dormant for years and the mail addressed to their owners is marked "return to sender".

Last week the Labor Party put forward a plan to trace the owners of the lost money using tax file numbers.

The Assistant Treasurer, Mal Brough, rejected the plan, saying: "This Government prefers to encourage Australians to take a strong interest in their retirement savings, rather than seeking to disengage Australians by making important decisions on their behalf."

It is as if our Government is trying to make life difficult for us, even in the midst of generosity.

More than 300 years ago a French minister for finance, Jean-Baptiste Colbert, defined taxation as the art of "so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing". Whether through incompetence or indifference, the Australian Government seems to have designed things so as to maximise the hissing. Even when it is giving money back.

It is little wonder that even those Australians who pay nothing whatsoever to the Federal Government are upset.

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Fix your rate: it is money for Nothing

In the famous joke about two economists out for a walk one asks: "Is that a $20 note I see lying on the footpath?" The other replies: "Couldn't be. If it was someone would have picked it up by now."

It's actually a useful mindset to have. The truth is that most of the times we are offered a chance to make (or save) money without effort there is a catch. Mark Knopfler's legendry hit Money for Nothing was ironic.

But those of us with that economist's mindset also miss out on the much rarer, absolutely genuine opportunities to get money for nothing that do exist, sometimes right under our noses.

One of them is available right now, under the noses of Australians with mortgages. It isn't $20 on the footpath; it is the opportunity to save literally tens of thousands of dollars, as good as risk-free.

Unusually, at the moment fully featured three-year fixed-rate mortgages are cheaper than fully featured variable-rate mortgages...

The Commonwealth Bank, for example, advertises its three-year fixed-rate mortgage at 6.79 per cent. Its standard variable rate is 7.32 per cent, often discounted towards 6.81 per cent.

It should only make sense for a bank to offer a cheaper fixed-rate mortgage than a variable one if it expects the variable rate to fall. But the Commonwealth Bank, among others, expects the variable rate to rise. Its forecast is for an increase in the Reserve Bank-controlled variable interest rate within the next few months. None of the bank economists surveyed by Australian Associated Press last month expected the variable rate to fall.

So unless rates turn down quite dramatically in the years beyond the banks' forecasting horizons, switching from a variable-rate to a fixed-rate mortgage seems an extraordinarily attractive deal. Usually fixed rates are a bad deal.

The economist Nicholas Gruen has examined what would have happened to people who took out a three-year fixed-rate rather than a variable-rate mortgage for each month during the 1990s. He finds that 86 per cent of the time that decision would have cost the mortgage-holders money. They would have ended up paying more.

Banks build an extra profit margin into their fixed-rate mortgages. They do it partly because they can (it is very hard for ordinary customers to work out whether they are being overcharged) and partly because their customers are prepared to pay more for the certainty of fixed monthly repayments.

In his role as the head of the discount mortgage broker Peach Home Loans, Gruen had been advising his customers to stay away from fixed-rate products. Economic theory told him that the rate would be set at about the best guess of the future variable rates plus a profit margin.

Then he noticed something that unnerved him - the fixed rates were falling lower than made forecasting sense. As he put it in his newsletter to clients: the fixed rate no longer reflects the best expectation of future rates.

Since sharing this epiphany with his clients his business has changed direction. A year ago he was steering only 10 per cent of his clients into fixed-rate loans. Now it's 35 per cent.

He is not alone. Australia's largest mortgage wholesaler, AFG, is now putting one in five of its clients into fixed-rate mortgages. A year ago it was one in seven.

Surely there has to be some sort of catch. It could be that we are about to head into an unforseen economic downturn - even a recession - which will force the Reserve Bank to cut variable interest rates a year or so down the track. There's a lot of talk about this in the United States, which also has fixed rates that are lower than variable ones - a so-called "inverted yield curve". Professor James Smith of the University of North Carolina has several times been recognised as that nation's most accurate economic forecaster. He says an inverted yield curve has preceded each of the past four US recessions. In his words: "When the curve inverts, run for the exits."

The other view, subscribed to by Gruen and also by the new head of the US Federal Reserve, Ben Bernanke, is that these are indeed unusual times. The world is awash with excess savings, much of it from Asia, looking for a home. Bernanke calls it a global saving glut. In earlier days the money would have been invested in projects within Asia, but after the economic crisis there, those opportunities dried up. It has come flooding instead into countries such as the US and Australia which appear to have good prospects, allowing us to borrow incredibly easily. (And allowing Australia to clock up the near-record $2.47 billion monthly trade deficit for November revealed yesterday.)

When you borrow from an Australian bank or mortgage provider these days there is a high chance the money ultimately comes from a lender in Japan, China or the Middle East. So much of this foreign money is washing in to Australia that it appears to have landed unevenly. It is available to Australian financial institutions more cheaply for three-year terms than it is for immediate repayment.

For once, a low three-year fixed mortgage rate might signal nothing whatsoever about the future course of the variable rate. It might signal a genuine bargain - the unlikely equivalent of a $20 note lying on the ground.

But it mightn't last. As they become more popular, the price of fixed three-year mortgages is climbing. The Cannex research service reports that the Adelaide Bank is still offering a fully featured fixed three-year loan for 6.55 per cent. But that offer is about to end.

The notes on the footpath are being picked up.

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Why stopping smoking is hard

Every January perhaps as many as half a million people resolve to give up smoking. By the start of each February most of them are back on the cigarettes again. If, like me, you never started, thank your lucky stars. The latest economic research suggests that it's far more difficult to give up than had previously been believed.

Even people who think they are giving up may be filling their bodies with just as much nicotine as before. And some of the measures designed to cut back smoking and protect the rest of us may be counterproductive.

Each year 11,000 Australians take part in a survey run by the Melbourne Institute of Applied Economic and Social Research and originally designed to measure changes in income and working arrangements. It also asks participants whether they smoke.

Last year two of the institute's researchers, Hielke Buddelmeyer and Roger Wilkins, looked for common threads linking those Australians who had succeeded in giving up smoking between one survey and the next. The biggest was pregnancy. The biggest thread linking those Australians who had taken up smoking was divorce.

Then they examined the effect of the extra bans on smoking in public places introduced in some states... They found that while these encouraged older Australians and the very young to quit, people aged 18 to 24 were actually less likely to quit in those states in which a ban had been introduced.

This "rebellion" effect appears to pop up all over the place when it comes to fighting smoking. It had been thought that increasing the price of cigarettes would cut the number sold and improve the health of smokers. It certainly cuts the number sold. In Australia, a price increase of 10 per cent cuts sales by about 4 per cent. But a price increase doesn't necessarily cut the amount of nicotine taken into smokers' bodies.

Late last year an economist, Francesca Cornaglia, decided to measure nicotine levels directly, or as directly as she could. Continine is a byproduct of nicotine, present in saliva. With a colleague from the Institute for Fiscal Studies at University College London, she linked records of continine concentrations state by state in the United States with information on the number of cigarettes sold per person and their price.

She found that while increases in cigarette taxes did cut the number of cigarettes sold, they appeared not to cut at all the level of continine in smokers' saliva. As she put it: smokers were smoking fewer cigarettes but were smoking each one "more intensively".

Smokers appear to adjust by having more puffs from each cigarette, inhaling for longer and (perhaps subconsciously) blocking the ventilation holes on the filter. (Interestingly she found that so-called heavy smokers may not be smoking that heavily at all. After about 10 cigarettes a day, they smoke each extra one far less intensively in order to merely top up their nicotine levels while avoiding an overdose. They appear to have an inbuilt nicotine regulation mechanism.)

Cornaglia found that smoking intensity increased throughout the 1990s as cigarettes became more highly taxed, and that this itself may be a health hazard. Smoking down to the filter leads smokers to inhale more dangerous chemicals. And she found that it's the poorer, mainly black Americans whom higher prices have forced to smoke the most intensively.

Cornaglia then turned her attention to the level of continine in the saliva of non-smokers. Her findings have made her particularly unpopular among those who would like to ban smoking everywhere they could. She presented them to economists at the Australian National University in November.

She found that increases in the tax on cigarettes improve the saliva of non-smokers quite dramatically, especially the saliva of children exposed to their parents' smoke. Throughout the 1990s the number of non-smoking Americans taking in dangerous levels of nicotine halved. Higher cigarette prices improve the health of the rest of us.

But when it comes to banning smoking, a more complex picture emerges. Banning smoking on public transport, in shopping centres and in schools appears to improve non-smokers' health. But banning it in places where smokers "go out", such as restaurants and bars, makes the health of non-smokers worse. It pushes smokers away from those establishments and back into their homes where they pump smoke into the air breathed by their children and loved ones.

Cornaglia suggested a better public health measure would be to allow the creation of special smoking establishments where smokers could breathe smoke over each other. It is a suggestion unlikely to cut ice with NSW's crusading Minister for Cancer, Frank Sartor.

From mid-next year all areas of all hotels, clubs and nightclubs open to the public will be completely smoke-free. Smoking in the indoor areas of cafes and restaurants was banned in 2000.

But Cornaglia said it is more important to protect the health of children at home than the health of the non-smoking adults who choose to go into smoking establishments. Children at home have no say in their exposure to smoke, they are particularly prone to tobacco-related diseases, and if they are exposed they may do worse at school and earn less in later life.

As uncomfortable as her arguments may be to anti-smoking zealots, they are unlikely to be welcomed by the cigarette manufacturers. They have been arguing for years that second-hand smoke at home does no damage.

The latest economic research on smoking provides little comfort to anyone, and certainly not to anyone trying to give up as part of a new year's resolution. Short of getting pregnant there's no particularly successful way to do it, and merely cutting back won't make all that much difference to your health.

The best advice from the economics profession is to go cold turkey. Little wonder it's called the dismal science.

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Googling books

You will find this hard to believe if you are spending this week in the sun dipping into and out of your favourite book, but the very idea of books is supposedly under attack. That's what the book industry says in two lawsuits filed in the Southern District Court of New York, one from the United States Authors Guild, and one from the Association of American Publishers.

Amid talk of "embezzlement" and "rape" they allege a "massive copyright infringement" of the type they say will do the authors of books "irreparable harm".

In the dock is the search engine company Google, and it is indeed orchestrating a revolution in the way we get access to the printed word - the biggest revolution since the introduction of the photocopier..

Right now in the Oxford University Library, the New York Public Library and the libraries of three US universities, staff are busy removing books from the shelves row by row and loading them onto trolleys for delivery to special centres where their entire contents are scanned and loaded into a computer.

When Google is finished in six or so years it expects to have on its files the words of some 32 million books - just about every book ever written in the English language.

Google describes the end result as a gigantic card index, but it will be much more than that.. No card index has ever allowed you to find books by searching the words within them. The clunky terminals in libraries now do little more than allow you to search the first words of the titles.

You can sample the early results by performing an ordinary search on Google and then clicking where it says "Try your search again on Google Book Search".

You will be presented with a list of books that contain the words you chose plus the sentences either side of the quote. If the publisher permits it, you will be able to read an entire page.

Google isn't alone in its plans. Amazon already allows searching within some books, and Microsoft is scanning books from the British Library. But there's a big difference: Microsoft and Amazon are only scanning books that are out of copyright or for which the copyright owner has given explicit permission.

By contrast, Google is planning to scan everything, whether or not it has been given permission. It will only exclude books if it has been explicitly instructed to.

It's this rudeness inherent in the Google plan that's sent authors and their representatives to court. As one wrote in a letter to USA Today: "I don't need to notify Google that they may not steal from me any more than I need to notify burglars that they do not have permission to rob my house or rapists that my body is off limits."

But Google's presumption that it can go ahead and scan every book ever written unless it is specifically told not to is necessary for the scheme to work. If it had had to ask for permission to scan web pages it never would have built its search engine.

On one estimate perhaps as many as 70 per cent of all the books ever written are "orphan works". They are still in copyright but the copyright owners and their descendents can't be traced. It isn't possible to get permission. As a result, by not seeking permission Google expects to scan tens of millions of books. Microsoft, which will seek permission, might scan perhaps only half a million.

It is not at all certain that Google will get away with it. US judges are famously protective of the rights of copyright owners. Every book that I've ever bought says inside the front cover that it can't be reproduced or stored in a retrieval system.

If Google loses, those of us who love looking up books will lose. But I would also suggest that books themselves will lose. If books can't be searched when other sources of information can, over time books will become less important. They'll stay unsearched on library shelves and in the back of lounge room bookcases.

Industries such as the book industry have been notoriously bad at predicting threats to their health. In 1982 Jack Valenti, the then president of the American Motion Picture Association, warned a congressional committee: "The VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone." These days film producers make more money than they ever did before the VCR, most of it from the sales of videos and DVDs.

Will the ability to search books really result in fewer books being sold?

Authors and publishers had a more believable-sounding case when they objected to the installation of photocopiers in libraries throughout the 1960s and 1970s.

A few years later an economist from the University of Chicago, Stan Liebowitz, examined the resultant change in the market for academic journals (the kind of publication most likely to be photocopied). He reported his findings in the Journal of Political Economy. He found an explosion in the number, page size and price of academic journals, and also in the number of subscriptions. Journals had become more sought after by libraries as a result of photocopying. The most sought after were those that were copied the most.

Will books become more sought after if people can find them? I have a feeling that they will, if they can be as easily found as pages on the web.

Book publishers may well face "irreparable harm" but they will do it to themselves if they win their fight against Google.

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An economic case for the death penalty?

Never have those of us who oppose the death penalty felt more convinced that we are right. And never has there been a series of more impressive-sounding arguments to suggest that we are wrong.

For most of the past century we have been secure in the belief that executing murderers does little to stop murder. That's what the psychologists and the criminologists have told us.

But now economists have entered the debate. And they have brought to the task a dazzling range of highly sophisticated techniques originally developed to answer more prosaic questions, such as whether tax breaks encourage saving.

More often than not the economists find that executions do save lives.

The most dramatic finding comes from Joanna Shepherd and a team at Emory University in Atlanta. They have taken advantage of the fact that some parts of the US don't execute murderers, and only a handful of states execute them consistently. (One of those states, Texas, accounts for more than one-third of the executions in the US since the Supreme Court lifted the ban on capital punishment in 1976.)

After taking account of other regional variations thought likely to influence murder rates - among them the mix of races and the resources devoted to policing - they found that executions explained most of what was left...

As they starkly report their central finding: each execution results in an average of 18 fewer murders. Or, to present the finding in an even more unsettling way: any state that refuses to impose the death penalty for murder is condemning 18 or so innocent people to death.

It is a dilemma that those of us who abhor the death penalty would prefer not to think about. Now two professors from the University of Chicago have decided to make it acute.

Cass Sunstein and Adrian Vermeule set out their arguments in a paper to be published in this month's Stanford Law Review. It is provocatively titled: Is Capital Punishment Morally Required?

They say that if the findings of the economists are correct, or anything like correct, a serious commitment to the sanctity of human life might well require, rather than rule out, the use of the death penalty.

I should point out that their argument applies only to the use of death penalty as a punishment for murder. They acknowledge that the issues are less clear when it is imposed as a punishment for carrying drugs, as it was in Singapore last week for Australia's Nguyen Tuong Van.

The first response of many of us would be to wonder whether the economists have got it wrong. But Sunstein and Vermeule have a comeback. They ask what our attitude would be if it could be shown that capital punishment did save lives. Would we oppose it anyway?

They point out that in hostage situations where police have the option of ending one life in order to save maybe six or seven, most of us would support the use of deadly force.

What, they ask, would be so different about murder if it could be shown that ending the life of one convicted criminal would save the lives of as many as 18 other people?

One answer is that we can't be certain about the number of lives that would be saved by an execution. But Sunstein and Vermeule point out that we don't usually demand certainty before allowing the government to take action.

Most of us have no idea of the number of lives that are saved by the law requiring the use of seatbelts, but we support that law nonetheless on the understanding that it will save at least some lives.

Another response is to say that there is a difference between intentionally killing someone and allowing even a larger number of people to die as a result of inaction. The first is morally wrong: forbidden by the injunction "Thou shall not kill." The second is a lesser sin.

The authors respond that this is not how we usually judge the decisions of the government. If it imposes only light penalties on the perpetrators of domestic violence, for example, we don't let it off the hook because it has merely refused to act. Sunstein and Vermeule say that refusing to use the full force of the state as a punishment for murder comes "perilously close to licensing private killings".

Fortunately the journal also includes responses to the paper, one of them co-written by an Australian economist now with the University of Pennsylvania, Justin Wolfers. He gets me off my ethical hook.

Wolfers re-examines the data used by the team from Emory University and finds that when it is treated correctly it no longer shows that each execution saves about 18 lives. Instead it shows that each execution brings about an extra 18 deaths!

It is a result that Wolfers himself does not take seriously, just as he does not take seriously the initial claim that the death penalty saves lives. His broader conclusion is that the data is so difficult to interpret as to make it impossible to say with any certainty what effect the death penalty has. He says it is not reasonable to build an entire moral case around an effect that cannot be shown to exist.

He might have added: particularly when the end result is an injunction to kill people.

I am relieved to be able to put the arguments of Sunstein and Vermeule to one side for the moment. They were beginning to get to me.

Peter Martin is the economics correspondent for SBS television.

Sources:

Does Capital Punishment Have a Deterrent Effect? New Evidence from Postmoratorium Panel Data
Hashem Dezhbakhsh, Paul H. Rubin and Joanna M. Shepherd
American Law and Economics Review, 2003, vol. 5, issue 2

Is Capital Punishment Morally Required? The Relevance of Life-Life Tradeoffs
Cass Sunstein and Adrian Vermeule, University of Chicago, Public Law Working Paper No. 85

No, Capital Punishment is Not Morally Required: Deterrence, Deontology, and the Death Penalty
Carol Steiker, Harvard Public Law Working Paper No. 125

USES AND ABUSES OF EMPIRICAL EVIDENCE IN THE DEATH PENALTY DEBATE
John Donohue and Justin Wolfers
Stanford Law Review December 2005

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A punter's guide to the bird flu pandemic

Like to bet on something more serious than the Melbourne Cup? At www.intrade.com you can bet on when bird flu will reach the United States. Disturbingly, the betting points to a 25 per cent chance that bird flu will hit the US some time this year and a 50 per cent chance it will hit early next year. Even more disturbing is that these markets have a history of being right.

In the US, betting markets accurately predict everything from election results to the weather. In recent elections they have predicted the winning margin of both Democrat and Republican candidates to within 1.5 per cent. In Australia's last election the punters at Centrebet put five times as much money on the Coalition as on Labor. They were right. The press and the opinion polls were saying the election would be close.

In his book The Wisdom of Crowds, James Surowiecki outlines one of the early successes of betting markets. In May 1968 the US submarine Scorpion disappeared at sea. It could have been anywhere in a region 32 kilometres wide.

Instead of asking one or two experts where they thought it was, the chief naval officer assembled a large group of specialists in all sorts of fields and asked each of them to guess the location. The prize was a bottle of Scotch.

Using mathematics to put the guesses together he came up with a spot just metres from where the ship was found. Intriguingly, it wasn't a location identified by any of the experts on their own...

What we really need right now is a market for betting on when, or if, bird flu moves between humans. We know that it sweeps through chickens and that it can jump to humans who handle them, although so far not easily - only about 120 people appear to have caught it, all of them in Asia. But the death rate among these people has been high, about 50 per cent.

Some of them may have already passed it on to other humans. Dick Thompson, from the World Health Organisation, has told the SBS Insight program that there have probably been a handful of limited transmissions in which the virus has moved from one person to another and then stopped. It hasn't yet continued to move on.

The Canadian economist Dr Sherry Cooper, of Harris Bank, has spoken to the world's leading bird flu experts and concluded that its spread among humans is just a matter of time. She quotes them saying that the virus "will learn to do it".

Her report is entitled Don't Fear Fear or Panic Panic. She says for perhaps the first time in history we are watching a global pandemic "unfold in slow motion".

There is a slim chance that we might be able to smother it before it develops. She says there is a 20- to 30-day window in which a huge application of antiviral drugs at the site of an outbreak might slow or stop it from spreading. But that will require international co-ordination on a scale rarely, if ever, seen.

If the disease does spread to humans and go global there will be an unknowable number of deaths. Martin Meltzer draws up the forecasts at the US Centres for Disease Control. He says the point isn't the exact number. "The point is: imagine a lot of people ill in a very short space of time. More than you've ever seen."

The task facing economists is to try to work out how such an upheaval would change things.

Cooper says it would fill all our hospitals and there would be nowhere to take the overflow. In a localised crisis victims can be ferried to hospitals in other towns and health-care workers can be brought in from interstate. But in a pandemic there are no healthy towns to draw beds or nurses from.

As well, the so-called H5N1 bird flu virus is thought most likely to kill or hospitalise those people with the strongest immune systems - typically those aged between 20 and 40. This unusual feature would see it disproportionately remove from the workforce our most productive workers.

The Treasurer is already worried about this sort of effect because of the ageing of the population. A pandemic would bring it forward, worldwide.

Unemployment, as measured, would fall further. Any worker who remained able-bodied would be in big demand and able to command a higher wage. It would be hard for employers to fill shortages with workers from overseas. Fewer 20- to 40-year-olds would mean fewer pregnancies and fewer new workers for decades to come. There would be less demand for houses. Property prices would fall.

Petrol prices would fall as well. With many of us too infectious to go to work and with schools quite probably closed there would be few reasons to drive a car. Coffee shops, restaurants, cinemas and airports would be particularly poorly patronised until the pandemic passed.

Other prices would soar. Among the items swept off the shelves would be face masks, rubber gloves and cans of baked beans as people rushed to stock up on news of the pandemic beginning.

News would become more important with so many of us stuck at home. But it would be news delivered by computers and radio and TV. Few of us are likely to pop down to the shop to buy a newspaper.

A radically different world awaits us if bird flu does begin to spread among humans, and it is entirely possible it will. It's little wonder the punters are interested.

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Water: Running Dry

The transcript of my prescient SBS Insight program on water: running dry is here. It, and the research on which the program was based contain a lot of useful information, such including the capacity of the rainwater tanks on Malcolm Turnbull's Sydney waterfront property.

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Who wants to be a millionaire?

Greed loses to caution when we have to take a chance at wealth, writes Peter Martin.

SO YOU think you want to be a millionaire? I'll let you in on an economists' dirty secret: deep down, you probably don't. Rob Fulton, of Sydney, made television history on Monday last week when he became the first person to win the top prize in the Australian version of the game show Who Wants to Be a Millionaire. But he was far from the first to be offered the opportunity.

Since 1999, nine Australians have been offered a chance to answer the million-dollar question. All nine have turned it down. Each has preferred to walk away with just $500,000 rather than risk it to aim for the big prize. As the relieved host, Eddie McGuire, exclaimed on the night: "This is the first person who's had the guts to have a go!"

It's enough to make you doubt whether Australians really are (as is commonly believed) instinctive gamblers. And enough to make you doubt whether we act as if we are (as the textbooks proclaim) profit-maximising machines...

It's a caution common throughout the world.

The British economist Ian Walker and two colleagues examined the behaviour of British contestants in a study entitled "Who Really Wants to be a Millionaire?" They presented their findings to the World Congress of the Econometric Society in August.

They found that most of the 500 or so contestants they studied didn't want to be millionaires at all. Two-thirds quit while they were ahead. And almost everyone who reached £125,000 (about $300,000) quit.

It is an important finding. Economists are not usually able to directly observe how we act when we are offered a really big gamble.

They know that we are notoriously and unreasonably cautious when we are offered small gambles. If I offer you a 50-50 bet: heads you win $200; tails you lose $150 - the odds are you will not accept, even though mathematically the offer is skewed in your favour. We are even cautious when the gambles are tiny.

Stanford University economist Baba Shiv and a team from Iowa University recently gave a roomful of Iowa residents $US20 each and offered them 20 chances to bet with it on the toss of a coin, risking $US1 each time. More was to be won each time if the coin came up heads than would be lost if it came up tails. It made financial sense to accept the bet on every occasion it was offered. And yet the Iowa residents typically accepted only about half of the time.

Then the researchers did something bizarre. They performed the same test on a group of Iowa residents who had either suffered a stroke or survived brain surgery. What they had in common was a damaged prefrontal cortex, the part of the brain that processes emotions.

These brain-damaged individuals turned out to be much better investors than the Iowa residents with brains intact. Given $US20 each and the same 20 chances to accept the attractive bet, they accepted more than 80 per cent of the time. They typically made $US3 more than did their counterparts with undamaged brains.

When the study was published in the journal Psychological Science in June the newspaper reports were sensational. One headline asked: "Are successful investors emotionally brain damaged?" Another declared: "Psychos best investors".

The importance of the team's finding is not that brain-damaged people make more sensible decisions. In many instances they do not. (Several of the volunteers with brain damage used in the study were bankrupt.) It is that the thing that holds many of us back from taking worthwhile financial risks is an emotion - most probably fear.

Much of the time fear is incredibly useful to us. It alerts us to danger and so keeps us alive. As a result, we appear to have evolved to become extremely sensitive to it.

The Iowa researchers now believe that fear might explain one of the biggest unsolved mysteries in economics. It is called the "equity premium puzzle".

Why is it that so many of us prefer to earn our money in interest rather than from shares, even though the payout from shares is usually much higher?

Conventional economics can't provide an answer. Indeed, some economists dismiss the puzzle as a statistical illusion.

But if the Iowa researchers are right, our behaviour begins to make sense. We may be so frightened of risking money, even if it is only a tiny amount - as little as $1 - that we are prepared to forgo the opportunity of earning much more. Fear may hold our finances hostage. The trick for those of us who would actually like to make money is to break free.

One way may be to hand over the management of our finances to someone else. Professional fund managers may well do a better job of managing our money than we would ourselves precisely because they don't act as if it is their own. They are prepared to take risks with our money that we couldn't stomach taking ourselves.

Another way might be to be genuinely free of responsibilities.

Millionaire winner Fulton says he took the plunge and went for the million in last Monday's show because he "didn't really have a lot".

In his words: "I lived in a one-bedroom unit. I wasn't really heading anywhere so I thought, 'I've got nothing to lose'."

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Foot in Mouth

Here is the George Negus introduction to the story broadcast on SBS TV. You can actually watch it here.

"Every now and then in this business, a story comes along that leaves you shaking your head and asking, 'How on earth could they have ever allowed this to happen?'

Well, what you're about to see falls squarely into that stunned and amazed category. Essentially, it's a story of how bureaucrats in Canberra gave the green light to beef imports from Brazil - a country with a history of the dreaded foot-and-mouth disease.

Peter Martin has been investigating a decision that risked a $13-billion catastrophe."

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TV's biggest crime - it's a thief of time

If you really want to be happy, throw away your television set. That's the bizarre finding of new economic research completely at odds with traditional assumptions. It has traditionally been assumed that people who choose to do a lot of something must enjoy it. And we certainly choose to watch a lot of TV.

I like to think of myself as a light viewer, but in truth I watch 30 to 90 minutes a night plus at least that much again of children's programs in the background each morning.

The typical Australian is said to watch two to three hours a day. Added up over a lifetime, that means someone who lives to 75 may have watched TV for nine years. The only things we do more of are work and sleeping.

So it's odd that economists haven't much studied TV viewing until now. When they have, they have found that we enjoy it. Most recently the Nobel Prize winner Daniel Kahneman asked 1000 women to record how they felt at each moment of the day. They felt their best when having sex, socialising, eating and watching TV...

They enjoyed TV more than they did talking to their spouse, shopping or caring for their children.

Now a team from the University of Zurich is suggesting that Kahneman and others have been looking at only half the picture. In a paper entitled Does Watching TV Make Us Happy? Bruno Frey and his colleagues argue that it is not enough merely to ask people how they feel at the exact moment when they are watching TV. It is also necessary to ask how people who watch a lot of TV generally feel.

They say that drug addicts feel great at the exact moment they are getting their fix, but they generally feel awful.

The team had access to data from a European survey in which 42,000 people were asked: "All things considered, how satisfied are you with your life as a whole nowadays?" They were also asked how much TV they watched. The team found that the people most satisfied with their lives were those who watched TV the least.

The effect was large. One of the most important predictors of happiness (for men) is whether they are married. The effect of not watching much television is about one third as big.

The team was left with a paradox. Watching TV made people feel good while they were doing it, but seemed to make them less satisfied overall.

Other activities affect us in the same sort of way. One is smoking. Cigarettes hurt smokers, but they do so slowly. Immediately, they offer relaxation - which becomes addictive.

Bruno Frey could see how television might act like that. It offers an immediate benefit - relaxation, with the costs not apparent until later. Those costs include tiredness, weak social relationships and insufficient attention to study and careers.

People who don't care about the future or who lack self-control will watch more TV than they should, and will be less happy as a result.

Opinion polls suggest that this is the case for many Americans. Forty per cent of US adults and 70 per cent of teenagers say they spend too much time watching TV.

But there is another possibility which Frey and his team have not been able to rule out completely. It's that rather than excessive TV use making people unhappy, people who are already unhappy may choose to watch a lot of TV.

Frey thinks this is not the case, and he designed a test to back up his opinion. He says if he is right about heavy TV viewing causing unhappiness, it won't do it to everyone.

The only people seriously harmed by heavy viewing will be those who have other things they can usefully do with their time. (Economists call them people with "high opportunity costs" of time.)

They include the self-employed, senior managers and people in professions where the work never ends. For them, lost time matters.

By contrast, pensioners and the unemployed (with low opportunity costs of time) shouldn't be that much harmed by the hours taken up watching TV - they might even welcome them.

Frey has gone back to the European data and found exactly that pattern. Watching TV for more than 1½ hours a day doesn't appear to hurt pensioners and the unemployed, but it makes a big dent in the happiness of the professionals who do it. Denied time in which they know they could be really achieving things, they feel perpetually unsatisfied.

TV appears to play with our minds in other ways as well.

The European survey asked people about their anxieties. One question asked: "How do you feel about your household's income these days?"

Another asked: "How important is it for you to be rich?"

Frey found that heavy TV viewers were both more anxious and more greedy than were light viewers on the same incomes. They were also more scared about the outside world.

Other questions asked whether people could generally be trusted, and whether it was safe to walk outside at night.

On both counts heavy viewers were more frightened.

Television viewing is by far our biggest leisure-time activity. And it's not all bad. (I happen to work in television.) But until now discussion of its impact has moved little beyond debates about whether or not it makes us violent. Its biggest crime may be to steal our time.

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