Saturday Forum: The Sydney Declaration. Australia won't acknowledge the authority of the UN on climate change, but you should.

John Howard has spent his entire Prime Ministership resisting pressure to sign up to a climate change protocol negotiated through the United Nations.

His defining achievement at this weekend’s APEC summit might be a commitment to get his fellow world leaders to do just that.

It isn’t how the “Sydney Declaration” on climate change to be negotiated today was intended to turn out.

Howard intended it to vindicate his and the US President’s decision not to sign up to Kyoto.

The problem with the Kyoto protocol was variously said to be that it required nothing of big polluters such as China and that it lacked flexibility...

Without China and India (both exempted from the short-term need to meet pollution targets in the name of flexibility) Kyoto apparently wasn’t worth signing up to.

What was needed was a breakthrough - one that used APEC to end the standoff that John Howard and George Bush among others had helped create.

The Prime Minister outlined his planned Sydney Declaration in an address to the Lowy Institute and in radio interviews last week.

APEC would have the three largest emitters in the world “all present, that’s the United States, China and the Russian Federation, and the very fact that they comprise three out of 21 countries is itself a very good thing because 21 is a manageable number.”

By contrast the United Nations framework convention on climate change had proved to be unwieldy. “The UN meetings are so big that you can’t run a meeting of 146 people, you can’t have 146 people sitting around a table, whereas if you’ve got 21, I think we can make a bit of progress”.

And the UN framework convention had produced the Kyoto Protocol, which was ineffective because nations such as Australia would not submit themselves to it. “We are still essentially dealing with a world in which the basic functioning unit is the nation state and not some kind of super national body,” the Prime Minister said.

Today’s APEC leaders meeting would nut out the basis of a post-Kyoto Sydney Declaration that would be universally acceptable, in part because it would avoid hard and fast targets. The Prime Minister told the Lowy Institute that they would be replaced by “an agreed long-term aspirational goal for reducing greenhouse gas emissions”.

For developed industrial countries such as Australia a shared “long-term aspirational goal” would be less demanding than a specific hard and fast target. On the other hand for developing economies including India and China it would be more demanding than Kyoto. It would at least commit them to something.

As the Prime Minister put it: “Kyoto divided the world into two groups, and required concerted action from only one of them”.

The US President was enthusiastic, telling the APEC business leaders meeting on Friday that “in order for there to be effective climate change policy, India and China need to be a part of the process. In order to get them in the process they have to be included in setting international goals.” He said that process would begin at APEC.

But even as he read those words George Bush probably recognised that the game was over. The world’s second-most important President, China’s President Hu Jintao killed it dead on Thursday.

Asked about the prospect of a Sydney declaration he said he supported the idea but added: “We very much hope that this Sydney declaration will give full expression to the position that the UN framework convention on climate change should remain the main channel for the international efforts to tackle climate change. It should also give full expression to the principles set in the convention, namely common, but differentiated responsibilities.”

In order for a Sydney Declaration to come out of today’s meeting it will have to extol the virtues of the UN process the Prime Minister has previously derided. It will have to commit the APEC leaders to sign up to the sort of agreement their host would not.

The signs are that they are keen to do so. In the months ahead George Bush himself will host a meeting in Washington to discuss the basis of a post-Kyoto UN framework convention agreement, the UN Secretary General will host another in New York and Indonesia will host one in Bali.

The Kyoto agreement expires in 2012. If Australia does want to be part of the next one (and it may commit itself to that along with other APEC nations in today’s Sydney Declaration) it will start at a disadvantage.

Australia did well in the negotiations that set up the Kyoto Protocol back in December 2006. It was one of the few countries that secured a target that allowed it to modestly increase its emissions through to 2008-2012 rather than cut them. Australia also secured a particularly generous interpretation of what constituted emissions, allowing it to define a slowing in its rate of deforestation as a cut in its emissions.

Then, prodded by the US President and by some sectors of Australian industry, it refused to ratify the protocol. It is unlikely to be so well treated in the negotiations to come.

The draft of the Sydney Declaration on Climate Change was being finalised last night. Stripped of what was to be its core, it is not certain what it will contain. China is understood to have succeeded in getting it to recognise the UN rather than meetings such as APEC as the main forum to debate climate change.

The Philippine Foreign Secretary Alberto Romulo, who was briefed on the negotiations said that “the general consensus was that it should be under the framework of the UN. That is also the position of China.”

Some of the remaining content is thought to deal with “energy intensity” - the amount of energy needed to produce economic growth – rather than carbon emissions as such.

Officials were rushing to complete an acceptable statement late yesterday knowing that it was needed for consideration today, before George Bush leaves the summit one day early at the end of Saturday’s talks. Should the officials not reach agreement, the content of the declaration will be left to the leaders themselves.

Australia’s Foreign Minister Alexander Downer confirmed yesterday that the climate change announcement would be called the “Sydney Declaration” and said it would be single most important thing to emerge from the leaders meeting.

As the two-day APEC leaders meeting gets underway at the Sydney Opera House today all the indications point to no big breakthroughs and no history-making announcements, despite the intentions inherent in the idea of a Sydney Declaration.

John Howard can take comfort from the knowledge that APEC meetings usually don’t result in breakthroughs. Reaching their conclusions via consensus, they are unlikely to come up with anything totally new. The one notable exception was the well-timed 1999 New Zealand summit which gathered support for the UN intervention in East Timor.

The achievements from this weekend’s leaders meeting are likely to be more subtle and perhaps more important.

The leaders will get reacquainted with each other and will be forced to consider each other’s positions. Some of them may have to yield a little on topics such as climate change. One of them may be this year’s host - John Howard.

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Tuesday column: The Access Card is a complete mess, buried but still belching up toxic smoke.

The Prime Minister says Labor's industrial relations plan is "cobbled together". Compared to his own government's plan for an Australian Access Card, it is a model of due process.

Both plans will, if implemented, limit our rights and create obligations way into the future. And as it happens both involve the one of the Prime Minister's favourite right-hand men Joe Hockey.

Before his current job as the Minister and attack dog for industrial relations (he says Labor's policy is an ugly nightmare) Joe Hockey was in put charge of developing a $1 billion plus information technology project, that also involved social engineering.

He cut corners...

On taking over the human services portfolio in 2004 he inherited a cautious limited trial of a Medicare smart-card underway in Tasmania which he disparaged, declaring that pilots were “for planes, not for technology in my view”.

He called for tenders for two Access Card projects each worth hundreds of millions of dollars ahead of submitting the legislation to parliament (a process that caught the attention of the Audit Office) and spent $3 million advertising the proposed new card through agencies including George Patterson and Young & Rubicam.

His department hired a public relations consultant to promote the card on a contract worth $580,000 and a "branding consultant" on $100,000. A Senate estimates hearing heard that 18 departmental staff were working full-time on communications strategy for the card.

All this was before any of the legislation approving the card had been passed by the Senate, and before all of the legislation had even been written.

It is an approach that created moments of farce.

During the Senate inquiry this March the ACT’s Kate Lundy asked Christopher Cook, an executive with one of the firms tendering to build the card Computer Sciences Corporation about the performance indicators in the tender documents. Cook replied that he was bound by confidentiality. While Lundy could ask, he could not answer.

Hockey commissioned the accounting firm KPMG to prepare a business case for the card, which he promised to release, and then released only edited highlights. When the Australian Democrats tried to obtain the full document under Freedom of Information laws Hockey’s department said it would cost them $867.23.

To reassure the public that its interests were being taken into account Hockey set up a task force chaired by Allan Fels AO. It recommended that the Minister reconsider putting a photo on the face of the card and that he not put on it a signature or a unique identify number.

Hockey decided that the card needed all three.

When the government’s own Privacy Commissioner raised similar concerns citing an increased risk of identity fraud Hockey remained unmoved.

By the time a Senate Committee dominated by his own side of politics called for the whole thing to be sent back to the drawing board (a very rare occurrence) Hockey had been parachuted out of the portfolio.

His successor Ian Campbell lasted only weeks, resigning over an unrelated matter. His successor Chris Ellison was in the job only months before the departmental secretary who had driven the project was moved on.

It is easy to get the feeling that plans for an Access Card have been on a sort-of autopilot since then, in large measure because several private sector firms have already spent millions preparing tenders for a scheme that has yet to get parliamentary approval.

The latest Minister Chris Ellison has continued to reject calls from the government’s Privacy Commissioner, its Access Card taskforce and the senate committee to leave important personal information off the face of the card, and has said that if the Coalition gets back he wants the legislation passed.

His latest draft of that legislation attempts to placate them with reassurances that seem nonsensical. It states explicitly that “access cards are not to be used as, and are not to become, national identity cards” but no-where does it define what it means by the term national identity card. It says that “an individual owns his or her access card” but neglects to say what it means by the term ownership, other than to make it clear that people can’t sell their cards or get access to all of the information written inside them.

If Alan Fels is worried, if the government’s Privacy Commissioner is worried, and if a Coalition-dominated Senate Committee is worried, should we be?

After all most of us have absolutely nothing to hide.

Why not take Hockey and his successors at their word and get a card that we can use to absolutely prove our identity for Medicare and Centrelink purposes?

For two reasons:

One is that as soon as our photos, signatures and unique identifying numbers (along with our dates of birth if we wish) are printed on the face of the card it effectively becomes a universal identity card.

If you don’t believe me, think about our driver’s licences. In a number of states including NSW it is illegal for anyone not connected with the roads and traffic administration to demand to see your licence or be told your licence number.

But almost every organisation that wants to find out who you are asks for one. Try dealing with ActewAGL without one.

It will be illegal under the Access Card regime as well for unauthorized people to demand to see the card (with enforcement via on-the-spot fines) but it will happen.

In any event it WILL be legal for bars, telephone companies, banks and the like to request the “voluntary” production of the card.

When the Access Card becomes near-universally accepted, as such a high-quality identity document is likely to be, it’ll become valuable to identity thieves.

And guess what? The signature they need to forge and the face they need to match will be printed on the face of the card.

A really secure card would only have the photograph and perhaps the signature recorded on the secure computer chip inside the card, making the card itself useless to most identity thieves and useful only for the purposes that the government says it is needed for.

That’s what the government’s friends and appointed experts have been telling it. They want a card that will work, not one that was cobbled together early by an enthusiast who put the project out for tender without approval leaving his successors uncomfortable about backing out.

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Sunday dollars+sense: So you don't believe the rate of inflation

Do you get the feeling that you are being lied to once every three months? In October, slap bang in the middle of the election campaign the Bureau of Statistics will do it again.

It’ll tell us that Australia’s inflation rate is two-point-something.

Last time it told us it was 2.1 per cent.

I have yet to meet anyone who thinks that prices are actually increasing that slowly, certainly not anyone who drives a car or attempts to catch a bus or rents a house or pays a mortgage.

Part of the reason why we all think that prices are climbing more strongly that the statistics say is that we tend to notice the prices that go up.

I am grateful that (thanks to China) computer power and budget clothes are cheaper than they have ever been and that (thanks to overproduction) wine is cheaper than it has ever been, but I tend not to dwell on it.

And part of the reason is that many of us are correct to be suspicious – our own personal inflation rates are well above the Bureau’s average...

Its so-called analytical living cost indexes released during the week make that clear.

Your rate of inflation depends on what you choose to spend your money on.

If you were keen on bananas (and remained keen on them even after the price climbed) your own personal rate of inflation would have been stratospheric last year. This year it would have been low, even negative as banana prices returned to earth.

The Bureau assembled the typical spending patterns of four types of Australians: wage slaves, old-age pensioners, people on other government benefits and self-funded retirees.

Their patterns are strikingly different. For instance old-age pensioners spend only half as much each week on food as wage slaves, but because of their much lower income they spend a much greater proportion of it on food.

The Bureau says most of us – the wage slaves – had an inflation rate well above the national average in the last year (3.1 per cent compared to 2.1 per cent).

People on government benefits had a high rate as well (2.8 per cent) with age pensioners at about the average and self-funded retirees at 1.9 per cent.

For people with time on their hands, the retirees and the pensioners, things are probably even better because they have time to shop around.

Now you know. But I don’t for a minute expect you to believe it.

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Saturday Forum: Australia had to create APEC because Japan could not

The former Prime Minister Paul Keating says APEC is “the most important table we sit at”. His successor John Howard says the leaders who will be attending in Sydney on Saturday and Sunday account for more than half of world GDP and nearly half of world trade.

The Asia Pacific Economic Cooperation Forum is the kind of leaders club from which Australia might normally expect to be excluded, but in the case of APEC our place at the table is no accident. In fact, without Australia, APEC would probably not have come about.

In a speech in Sydney last week Paul Keating attempted to portray himself as the father of APEC, but the title really belongs to his predecessor Bob Hawke.

A specialist in international organisations at Tokyo’s Waseda University, Dr Takashi Terada says Hawke took the lead in pushing for APEC because Japan could not...

In the late 1980’s many of the certainties that had been good to Japan were breaking down. Its Asian neighbours were becoming commercial competitors rather than clients, communism was imploding in Europe and under strain in China, and perhaps most worryingly of all, the US was entering into a Free Trade Agreement with Canada.

Japan’s Ministry of International Trade and Industry wanted to talk to the countries in the region, perhaps to form a trade block with them, but it couldn’t do make the approach.

Terada recounts a meeting between Shigeo Muraoka of MITI and Australia’s Minister for Trade Negotiations Michael Duffy in December 1988.

He says Duffy asked Muraoka why Japan needed Australia’s help to set up an organisation that would allow it to talk to its neighbors.

Terada says Muraoka replied “explaining Japan’s difficult position due to its wartime attempt to create the Greater East Asian Co-Prosperity Sphere”.

The world’s second-biggest economy had no real history of liaising with its neighbors except through force.

Paul Keating revealed last week that he had been stunned to learn as Prime Minister than none of Japan’s Prime Ministers had never met any of China’s leaders.

He said Kiichi Miyazawa, perhaps Japan’s best-known international leader on the international stage, asked him over dinner to describe the personality of China’s leader Li Peng who Miyazawa had never met and then asked Keating whether he thought “the Chinese would attack us”.

Keating said both questions sent a political shiver through his spine. He had to bring the two leaders together.

APEC had been in existence for three years at the time, but as a meeting of ministers rather than world leaders.

Japan could not have set it up, but Australia which had reached out to Japan at a time when it was otherwise friendless after the second world war was in the perfect position to act as a go-between.

Terada quotes an Australian Foreign Affairs official as telling him that in 1988 the two nations formed the view that a “small non-threatening country like Australia” had to launch the initiative because Japan itself could not.

Bob Hawke was especially well placed to do so. While Australia was indeed regarded as small and non-threatening by many of its neighbors, it had also been regarded as protectionist, and therefore not on their side. Its high tariffs kept out their goods.

But Hawke was in the process of dismantling Australia’s tariff barriers. He was also an internationalist. In his earlier job as President of the ACTU Hawke had taken an active part in meetings of the International Labour Organisation. As Prime Minister he had attended every Commonwealth Heads of Government meeting and all but one Pacific Forum meeting.

The man who talked about achieving “consensus” during summits at home felt just as confident in his ability to do so abroad. A few years earlier he had helped set up the Cairns Group of leading agricultural exporting nations.

Hawke announced his plan on a visit to South Korea in January 1989 saying “the time has come for us substantially to increase our efforts towards building regional cooperation and seriously to investigate what areas it might focus on and what forms it might take”. He said later he was surprised to discover just how enthusiastic South Korea was. Like China, its leaders had had little peacetime contact with their neighbour Japan.

The first APEC meeting was held in Canberra at the Hyatt that November. It wasn’t the high-security affair that APEC meetings later became because the leaders were not there. But the foreign ministers and trade ministers were. Getting together ministers from 12 countries some of whom had never met was an immense achievement.

Under Paul Keating from 1993 the APEC meetings were attended each of the nation’s leaders. There are now 21. Keating says he wanted the meetings to focus on big geopolitical issues, but that the US President Bill Clinton would only take part if they focused on trade.

Ever since there has been an uncomfortable if useful ambiguity about what the meetings are for. At times they happen to have coincided with major world events. The first, in Canberra, took place months after the Tienneman Square massacre in China and a few days before the collapse of the Berlin Wall. Later APEC leaders meetings took place as Australia and other UN nations were preparing to intervene in East Timor and after the World Trade Centre bombings in 2001. Last year’s meeting in Vietnam took place amid a crisis involving North Korea.

On Monday in a talk to the Lowy Institute John Howard set out his goals for this meeting.

He said a lot would be achieved by the mere act of getting together.

Just as it was important for China and Japan to get their two leaders into the same room at the same time it will be important for Australia to have a Russian leader on Australian soil for the first time. John Howard says he hopes Vladimir Putin will sign a safeguards agreement which will make it easier for Australia to sell Russia uranium.

Howard has invited Canada’s Prime Minister Stephen Harper to address Australia’s parliament in the week after APEC. He will be the first Canadian leader to do so.

George Bush will take part in a three-way meeting with Howard and Japan’s Prime Minister Shinzo Abe and over breakfast on Saturday and then update all of the leaders on the latest US thinking about Iran and Iraq.

The theory is that by meeting face to face the leaders will can achieve the sort of breakthroughs their officials can not.

Often they are breakthroughs in attitude.

By encouraging each other to support to cause of free trade over the 1990s the APEC leaders helped encourage China to make the changes needed to join the World Trade Organisation.

Trade, international security and strategies to deal with natural disasters will again be important topics for discussion in 2007, but they are likely to be overshadowed by the Prime Minister’s big-ticket item – climate change.

Several of his ministers call themselves climate change sceptics, John Howard calls himself a climate change realist, and for a decade he has resisted signing the Kyoto protocol.

But in Sydney next week John Howard will attempt to take his fellow leaders where Kyoto would not.

He makes the point that the APEC nations with no obligations to limit pollution under Kyoto account for half of APEC by GDP and 40 per cent of global emissions.

He has put climate change on the addenda in an attempt to get them excited about taking action in the same way as earlier APEC meetings got them excited about free trade.

Howard says there will be no hard and fast targets – that’s not what APEC is about. But he will ask the leaders to agree for the first time that the post-Kyoto agreement should include “a long-term aspirational goal” for cutting emissions – a commitment that sounds as if it is straight out of the Howard phrasebook, but one that would represent a real achievement and could even become a lasting legacy.

Howard says an APEC-style approach would be to recognise that different nations need to react to climate change in different ways (“what works for Australia may not necessarily work for Thailand”) and that it is important for worldwide economic growth that the late developing economies of China and Indonesia continue to be able to grow.

He hopes to commend to them the carbon trading scheme devised by Warwick McKibbin at the ANU as well as Australian-developed low emission and so-called “clean coal” sequestration technologies.

But it would be wrong to describe the APEC leaders’ meeting as a trade fair.

It is a rare opportunity for the leaders of the world’s most dynamic economies to mix and speak freely without the legalistic constraints of forums such as the United Nations or the World Trade Organisation.

APEC happens to include nearly all of the world’s fastest growing economies, with the obvious exception of India which has been excluded because it is in the Indian Ocean rather than the Pacific.

It many respects its leaders are leading the globe into the future.

It is extremely important they get together to talk, and it might never have happened at all were it not for this year’s host – Australia.

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Tuesday column: The secret to saving lives is repetition, not keeping open small hospitals.

"There probably isn’t a single worker in an Australian or Japanese car production line who knows how to make an entire car, but each becomes particularly good at his or own specialised repetitive task."

So Kevin Rudd wants to take control of Australia’s 750 public hospitals.

It’s only a start.

Each year some 18,000 of us die in hospitals most of whom should not.

By comparison fewer than 2,000 of us die on the roads...

The 18,000 deaths, six out of ten of which were avoidable, were identified along with 50,000 cases of permanent disability in a landmark 1995 study that has not since been updated.

Ten years later in 2005 an editorial in the Medical Journal of Australia asked whether a decade on we could “confidently state that healthcare is safer for patients.”

It concluded: “Unfortunately, the answer is no. It is regrettable that we have not measured the frequency of adverse events in Australia in a way that allows us to assess how we have fared since 1995; how we compare with other countries; and whether any initiatives have been effective in reducing patient harm.”

The Foundation Director of the Monash Centre for Health Economics Professor Jeff Richardson describes the reported rate of preventable deaths in Australian hospitals as “equivalent to a Bali bombing every three days”.

Indeed he says we are probably justified in thinking about those deaths in the same way as we would casualties in a war. Some 50 Australians die in hospitals every day. Another 140 are permanently injured.

But in a war we would be galvanized into action. We would immediately identify the likely clauses and the likely solutions, not sit around and wait for the “confirmed, demonstrated cause” and a “solution based on professional consensus”.

More of Professor Richardson later.

In the United States a young surgeon named Atul Gawande has made a specialty of examining the sort of things that go wrong in hospitals. His books Complications (2002), and Better (2007) also examine what’s needed to put things right.

He says, contrary to what we in Australia might imagine from the “Dr Death” scandal in Queensland and the ACT’s own problems at the Canberra Hospital detailed in this morning’s paper, most of the unnecessary deaths in hospitals have nothing to do with “bad doctors”.

Only a tiny proportion of doctors have very high death rates, and only a tiny proportion have very low rates. The vast mass are about average. A statistician would say that the distribution of deaths is bell-shaped. Gawande says that the question isn’t “how to keep bad physicians from harming patients; it is how to keep good physicians from harming patients.”

He says to find out you need to examine what is different about the very small number of doctors and hospitals that have extraordinarily low death rates.

The answers would not surprise any one who has done an industrial economics course and would have come as no surprise to the father of the automobile production line –Henry Ford.

I’d sum them up this way: routinisation, repetition and extreme specialization.

Gawande says: “Consider a relatively simple surgical procedure, a hernia repair. A hernia is a weakening of the abdominal wall, usually in the groin, that allows the abdomen’s contents to bulge through. In most hospitals fixing it – pushing the bulge back in and repairing the wall – takes about 90 minutes and might cost upwards of $US4,000. In anywhere from 10 to 15 per cent of the cases the operation eventually fails and the hernia returns.”

“There is however a small medical centre outside Toronto, known as the Shouldice Hospital, where none of these statistics apply. At Shouldice, hernia operations take from 30 to 45 minutes. Their recurrence rate is an astonishing 1 per cent, and the cost of the operation is about half of what it is elsewhere. There is probably no better place in the world to get a hernia repaired.”

“What’s the secret of that clinic’s success? The short answer is that the dozen surgeons at Shouldice do hernia operations and nothing else. Each surgeon repairs between 600 and 800 a year – more than most general surgeons do in a lifetime.”

Gawande says the repetition changes the way they think. “The doctors at Shouldice deliver hernia repairs the way that Intel makes chips: they like to call themselves a focused-factory. Even the hospital building is specially designed for hernia patients. Their rooms have no phones or televisions, and their meals are served in a downstairs dining hall; as a result the patients have no choice but to get up and walk around, preventing problems associated with inactivity such as pneumonia or leg clots.”

As strange as it seems this kind or ultra-specialisation raises the question of whether better education - the Kevin Rudd catch-all for improving productivity in Australia - is even needed to preventing hospital deaths. Gawande says “none of the three surgeons I watched operate at the Shouldice hospital would even have been in a position to conduct their own procedures in a typical American hospital, for none had completed general surgery training. Yet after apprenticing for a year or so they were the best hernia operators in the world.”

He asks: “If you do nothing but fix hernia’s or perform colonoscopies, do you really need the complete specialists’ training in order to excel?”

The key to saving thousands of Australian (and US) lives each year may well be the same as the key to making defect-free cars. There probably isn’t a single worker in an Australian or Japanese car production line who knows how to make an entire car, but each becomes particularly good at his or own specialised repetitive task.

Applied to Australia Gawande’s insights would require us to travel longer distances to specialised hospitals, often interstate, not only us in the ACT but also for residents of the Northern Territory and Tasmania.

It most certainly would not mean championing the survival of small general community hospitals such as Tasmania's Mersey, which the Prime Minister has promised to keep open.

A few years back Jeff Richardson took time out from his duties at Monash to work for the Tasmanian government conducting the review that recommended that the Mersey be closed and its patients be directed to more specialised units.

His thinking would have been informed by what he knew about hospital deaths.

When John Howard announced the Mersey takeover at the beginning of this month Richardson described the move as vandalism.

He said, “I suspect that unless there is something we are not being told, Tasmanians will pay for that decision with their lives.”

The work of Atul Gwande provides a pointer as to why.

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Sunday dollars+sense: Perhaps it was the bagpipes.

Remember Bon Scott? Hard-drinking, hard-living, the former Adelaide postie and bartender went on to front AC/DC, record It's a Long Way to the Top (if you want to rock and roll) and die of acute alcohol poisoning in 1980.

The National Trust has classified his gravesite, rock magazines honour him as the greatest frontman of all time, but the man who replaced him in as lead vocalist, Brian Johnson actually recorded the better selling albums.

So among fans the debate has raged: who was the better vocalist?

This week a paper came to light by a Canadian economist Robert Oxoby of the University of Calgary, attempting to inject rigor into the discussion.

He called it On the efficiency of AC/DC: Bon Scott versus Brian Johnson...

What makes his investigation different is that rather than focusing on what he called “the aural or sonic quality of the vocalists’ performances” he used the techniques of experimental economics. He got groups of university students to take part in a bargaining game while playing different AC/DC music in the background.

To represent Bon Scott he played It’s a Long Way to the Top. To represent Brian Johnson he played Shoot to Thrill.

He found that the bargainers were significantly less greedy, significantly more likely to give what was needed to the other side, and so more likely to arrive at a satisfactory outcome when they listened to the vocals of Brian Johnson.

His conclusion: “In terms of affecting efficient decision making among listeners, Brian Johnson was a better singer”.

He added, fairly obviously tongue in cheek that his finding had “direct implications for policy and organizational design: when policymakers or employers are setting up environments in which other parties will negotiate and are interested in playing the music of AC/DC, they should choose from the band’s Brian Johnson era discography”.

His paper was a joke, although the data was real. But newspapers around the world reported it straight, among them Australia’s Sydney Morning Herald. Oxoby got hate mail accusing him of wasting funds.

In fact he had been stuck at the Vancouver airport and dug out data from a pilot study by one of his students. She had accidentally played two different AC/DC songs rather than the same one while conducting a negotiating experiment.

He wrote the paper in the bar using the same sort of technical language he puts into all of his papers. It has become his most widely-read ever.

He now says he wishes he hadn’t. And he prefers Bon Scott.


Robert Oxoby, On the Efficiency of AC/DC: Bon Scott versus Brian Johnson, University of Calgary, May 2007

HT: Joshua Gans

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Saturday Forum: How not to save a surplus.

People who dole out their savings into jam jars are not usually thought of as good economic managers.

But this week proclaiming a near-record budget surplus of $17.3 billion for the financial year just ended the Treasurer Peter Costello ascribed it little else.

He mentioned “economic management”, (or “good economic management” or “strong economic management”) three times, but mentioned Australia’s resources boom, China, the extraordinary growth in our terms of trade and luck not at all.

But these outside influences must have had a bit to do with the surprise $17.3 billion surplus announced this week.

Otherwise our economic managers would have seen it coming.

Last May Peter Costello and the Treasury budgeted for a 10.8 billion surplus for the financial year just ended. In December they upped it to $11.8 billion. In May this year, with only six weeks of the financial year to go they upped it to 13.8 billion, and were still massively out despite going on a last-minute spending spree in May and June that burnt off $4.2 billion.

Something is going on that Australia’s economic managers seem unable to forecast let alone control...

Part of it is an explosion in the amount of income coming into Australia and ending up in the government’s hands as company or personal tax.

But there’s something else. Dr Stephen Bartos was until recently the director of the National Institute for Governance at the University of Canberra. Before that he was in charge of the Budget group in the Department of Finance. Now with the Allen Consulting Group he says that the government seems to have underestimated its spending as well.

“Most spending should be predictable,” he says. “Especially social security spending which is closely monitored in real time”.

What he thinks has happened and will be confirmed when the detailed final figures come out is that the government has underestimated its spending on programs. And the reason why it has done that is that it has simply been unable to spend the money the kind of money it set aside.

It takes planning and resources to spend money on new programs. Staff have to be hired, and as has become apparent in the private sector as well, staff are hard to get.

The only way to be sure you can spend a lot of extra money quickly is to hand it out in tax cuts or in the modern equivalent of bank cheques. The government did both in the May budget to about or somewhat beyond the limit of what the Reserve Bank would tolerate.

It had very little choice but to book a big surplus for 2006-2007. But it did have a choice about how it presented that surplus.

What it has done has the experts cringe.

It has doled out $7 billion into one metaphorical jam jar (the Future Fund); $6 billion into another metaphorical jam jar (the Higher Education Endowment Fund) and $2.5 billion into a new jar it has labeled the Health and Medical Investment Fund.

Do people who know about these things regard this jam jar accounting as a bit of a joke, I asked Chris Richardson, the budget specialist at Access Economics.

“Oh yea. Mmmm,” he replied and paused before laughing. “I’m sure you’ve run across people just walking around town like I have who’ve pretty much made that point.”

“It’s not all bad, but I just wish they had taken the punters into their confidence and explained why right now big surpluses, bigger than we’ve got, are actually good for them.”

“Nobody has sat down and said – look it is great that we have got all this money but if we turf it at you it is going to go up in a puff of interest rate smoke, and we need to hang on to it because we might need to turf it at you later.”

“Having failed the honesty test they needed to come up with a Plan B, which is to pretend that they are spending the surplus while they are not actually spending it to any great extent.”

“From a political point of view and from an economic point of view the idea is to talk about putting $2.5 billion into this fund, $7 billion into that fund, $6 billion into that fund, and get people looking at the big numbers and thinking - oh good, they are using the surplus - whereas in fact they are only spending the earnings on it.”

And Chris Richardson sees another problem with the growing use of funds of “jars” in which to put portions of the surplus.

“Right now we happen to agree that infrastructure spending - on medical equipment, on higher education - is a good thing. But these funds are being set up in perpetuity.”

“Spending on those things might not always be our highest priority. Decisions about whether to spend on medical equipment or buildings for higher education should be made on a cost-benefit basis taking into account other perhaps more worthy uses of the money.”

Stephen Bartos at Allen Consulting agrees.

“We are told that the money will be locked away and only its earnings touched for spending only on those purposes. But by the time we pass through a couple of years they could turn out to be entirely the wrong purposes. I mean higher education and medical equipment sound great now but how do we know that that will be the right spending priority for us five years, ten years from now.”

“What if something else, maybe climate change, turns out to be our overwhelming priority? Locking away bits of the surplus for its earnings to be spent on this, its earnings on that, reduces the government’s flexibility. The existence of the funds will prevent us from taking rational decisions about the use of our resources.”

But surely the government could always cuts its general spending on university buildings or on medical equipment to compensate, I ask.

“If that’s the case then setting up the funds is just a con,” Bartos replies.

“It they are going to a adjust spending out of the normal budget allocations for things like health and education because they’ve got these funds in existence then the notion that they have set aside anything additional is just misleading.”

“It is either a con or it restricts the government’s flexibility in ways that may turn out not to be wise later. You can’t have it both ways.”

The creation of specially named pots of money is an idea with a long Coalition linage.

Early in their terms as Prime Minister and Treasurer John Howard and Peter Costello named one of its taxes the Guns Buyback Levy. Then they announced (although never introduced) the Timor levy, the sugar levy and so on.

They weren’t pioneers. State speeding camera revenues had long been notionally allocated to spending on roads, cigarette taxes partially to anti-smoking campaigns, gambling tax revenues for health-related purposes and so on.

Economists call the idea “hypothecation” – because the money raised is hypothetically allocated to a particular purpose. The reality is often different. Australia’s Medicare Levy, the best-known example of a hypothecated tax, collects far less than is needed to fund Commonwealth spending on health.

Efficient administration demands that all the dollars collected by a governments be pooled together, in the same way as all the deposits taken collected by a banks are pooled together.

(If banks didn’t pool all their funds together they would be unable to lend out our money while purporting to have it on call for us as they do. They would have to hold each of our funds in its own specially marked safe just in case we came in wanting to withdraw them.)

Governments get away with the fiction of hypothecation for the same reason the banks do - because each dollar looks the same. In the language of economists, dollars are “fungible”. No-one knows or cares where each particular dollar comes from. It doesn’t matter if the dollars raised for buying back guns are actually spent on something else so long as other dollars raised for other purposes are used to buy back the guns.

This government’s innovation has been to extend the concept of hypothecation from taxes to investments. Its Future Fund will now be notionally investing some money for some purpose, some for another.

Aside from savings bank Christmas Clubs of the 1960’s it is an idea that most of us have outgrown when it comes to our personal finances. We trust ourselves to invest our money where we think it will get the best return and then spend the proceeds (and often the capital) as we think is needed.

The government’s announcements this week suggest that it does not trust itself, or its successors, to the same extent.

It is an approach unlikely to give us confidence in ourselves as electors or confidence in the economic management ability of the governments we elect.

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Jam-jar economics.

Imagine for a moment that the Government still owned Telstra. Imagine that it announced that a certain proportion of each year’s dividend would go to public service pension payouts, a certain proportion would go to funding much needed capital expenditure on universities, and a certain proportion would go to go to buying medical equipment.

You would probably think that the government was crazy: “Why is it bothering to tell us this stuff? – this is what we expect it to do.

And your would probably think that it was a good idea for the government to keep owning Telstra.

Stop imagining, and think about what’s actually happening.

The government’s Future Fund (and associated Higher Education and Health Infrastructure funds) still does own $17.6 billion of Telstra shares and heaven knows what of other shares...

The Treasurer has announced that a certain proportion of each year’s dividends will go to public service pension payouts, a certain proportion will go to funding capital expenditure on universities, and a certain proportion will to buying medical equipment.

As he put it yesterday: "we are now beginning to see the results of long, hard work to strengthen the Australian economy.'"

But it could have been done years ago. It could have been done in any year that Telstra shares and the like paid dividends.

Steven Bartos, a former deputy secretary of the department of Finance describes it as “jam jar economics”.

You put away a little bit of your expected earnings for this, a little bit for that and so on – for the kind of thing you would have any way.

Peter Costello is asking to be given credit for the kind of things we employ him to do any way.

He wants us to re-elect him for it.

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Newsflash: They are rolling in it.

From the Treasurer and Finance Minister:

Preliminary estimates indicate that the Australian Government general government sector recorded an underlying cash surplus of $17.3 billion for 2006-07, which is $3.7 billion higher than expected at the time of the 2007-08 Budget.

The Government will use the realised surplus from 2006-07 to transfer $7 billion to the Future Fund immediately. This should allow the Fund to meet its objectives without any additional Government contributions provided all earnings are re-invested.

The Government announced in the 2007-08 Budget that it would transfer $5 billion into the Higher Education Endowment Fund (HEEF). In view of the better than expected outcome, the Government will now invest an additional $1 billion capital in the HEEF...

...there is $2.5 billion remaining for investment. This will be invested in the Health and Medical Investment Fund (HAMIF) by the end of the financial year after legislation is passed establishing the Fund.

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Tuesday column: Just because the US is cutting interest rates...

Throughout the world central banks have been “injecting liquidity into the system” and the US Federal Reserve has cut one of its key interest rates. This means that Australia is now most unlikely to push up rates, right?

Wrong. If anything it means our Reserve Bank is more likely than before to push up Australian rates.

Sorry Mr Costello. And if you have any say over it, pencil in the election for the Saturday before the Reserve Bank’s crucial meeting on Melbourne cup Tuesday.

I’ll get back to what it means to “inject liquidity” and what it means to push rates up and down in a moment. Many of us don’t really know, and I suspect the wizards who control our central banks quite like it that way. It gives them mystique...

But first - if you want to get an idea of what Australia’s Reserve Bank is likely to do on Melbourne Cup Tuesday, you only need to ask it.

That’s what ten government and opposition members of the parliament’s economics committee did on Friday when the Governor of the Bank, Glenn Stevens appeared before them.

He told them his chief concern was Australia’s climbing rate of inflation. As he put it: “We are clearly very fully employed, and we are getting a stimulus from the rest of the world which is quite powerful… we are at a point where we are certainly more worried about inflation being too high than we would be about inflation being too low.”

Inflation is climbing towards the very top of the Reserve Bank’s 2 to 3 per cent target band and (we can’t be certain of this yet because the official figures are historical) may have already climbed beyond it.

The next official figures are out in nine weeks’ time on October 24, almost certainly right in the middle of the election campaign.

Should Australia’s underlying rate of inflation be continuing to head toward 3 per cent – notwithstanding the last rate hike – or have moved beyond it the Bank will consider pushing up rates at its Melbourne Cup day board meeting, and make the announcement at 9.30am the next day, Wednesday November 7.

It’s a fair bet that by itself the August interest rate hike won’t have done enough to stop the inflation rate climbing. There’s a saying in financial markets: interest rate hikes are like cockroaches – there’s never just one of them.

Might the Governor and the board hold their fire because an election campaign was underway?

Extremely unlikely. As Governor Stevens himself put it to the committee: “I don’t think there is any case for the Reserve Bank board to cease doing its work for a month in the month that an election is going to be. I doubt very much that members of the public would regard that as appropriate.”

“Should the inflation data or other data make that case I feel we would have no choice, nor should we have any choice.”

But what about the perilously weak state of financial institutions in the United States – a weakness now spreading to institutions as far flung as France’s BNP Paribas and Australia’s Macquarie Bank.

That doesn’t much concern Australia’s Glenn Stevens, unless it means there is some sort of worldwide economic slowdown which brings down Australia’s rate of inflation anyway.

He told the committee that it was “true that the United States is weak, but other areas of the world have been accelerating over recent times, particularly China which is very important to Australia.”

Earlier this month he pushed up rates even though he could see the US crisis coming. “We could see that there were tensions in global markets to some extent. We did not think at that time that those things were likely to make a difference to the macroeconomic outlook sufficiently to outweigh what we thought was a pretty clear case for a modest adjustment to interest rates. I still think that.”

But would he push up rates again, at a time when the US Fed was actually cutting rates? He answered this question firmly (if indirectly) by pointing to what financial markets expected.

As he put it: “The markets are pricing in cuts by the US Federal Reserve, which doesn’t mean the Fed will do it, but they are pricing that in and they are still I think pricing in an increase by us within the next year. That doesn’t mean we have to do that either, but current expectations are quite different between the two countries - not without reason, I would say.”

Stripped of any vestige of ambiguity, the Governor’s words mean that he believes financial markets are right to expect him to push up rates even if US is cutting them. If needed, he won’t hesitate to do it.

Indeed, to the extent that a cut in US interest rates makes a worldwide slowdown less likely it’ll make him more likely to push up Australian rates, not less.

Powerful, isn’t he?

It’s time to let in on a fairly well kept secret. The Reserve Bank can’t really push up interest rates (or push them down, for that matter). It can only try.

When the Reserve Bank announced two weeks ago that it had “decided to increase the cash rate by 25 basis points to 6.5 per cent” it wasn’t telling the complete truth.

Until Glenn Stevens took over as Governor late last year the wording was more modest. It said the Bank “will be operating in the money market this morning to increase the cash rate by 25 basis points”.

The hidden truth is that Glenn Stevens and the Reserve have little more power than anyone else attempting to influence the price of anything.

If you wanted to push up the price of oranges at the Kingston markets you could do it buy buying a lot of them. So could the authority that runs the markets. In this case, the authority, the Reserve Bank, succeeds because it’s more determined, and other traders know it. It will keep buying cash (issuing pieces of paper called bonds in return) until it has pushed up the price of cash – called the interest rate - as far as it wants.

If it wants to cut the price of money, it lends it freely (the equivalent of flooding the fruit market with oranges) until it has pushed down the price, known as the interest rate.

That’s what it and other central banks do when they want to “inject liquidity into the system”. They lend until there’s enough money around to make sure no-one goes under.

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Sunday dollars+sense: Women seem more easily satisfied.

The next Westpac head, Gail Kelly, at present in charge of the St George Bank, is to get a reported salary approaching $24 million in the first two years.

My guess is that she'll be pretty satisfied.

I don't say that because of the salary (although she'll be the first woman in Australia to earn anything like that much).

I say that because she's a woman. Women are more easily satisfied than men when it comes to work, much more so. I know this because of HILDA...

The government-funded Household Income and Labour Dynamics Australia survey is just about the most useful source of information in the country - in many ways far more so than the census. Each year since 2001 around 19,000 Australians have been quizzed in detail about their incomes, jobs, family circumstances and feelings in a far more detailed way than the census could ever achieve.

Using the same approach as the makers of the Seven Up series of documentaries, the questioners keep coming back to the same group of people to check on how they are going. HILDA can track the break-up of relationships in real time, the way in which pay rises change behaviour and so on.

HILDA asks participants about six aspects of job satisfaction - overall satisfaction, satisfaction with pay, job security, the type of work, the hours and the flexibility.

The reality is that women are short-changed compared to men on just about every one of the measures. But you wouldn't know it from what they told HILDA.

On every measure other than flexibility, each year the women said they were more satisfied than did the men. When it came to flexibility, something likely to be of crucial importance to women given the greater role they play in caring for children, they were still equally satisfied.

The researchers, Temesgen Kifle and Parvinder Kler from the University of Queensland, found that the satisfaction gap narrowed somewhat over time, but critically they found that nearly all of the change was as result of the men becoming more satisfied, rather than the women becoming less so.

Their guess as to why women are so much more satisfied than men with jobs that are objectively less satisfactory? Expectations. Women expect less than men.

They've grown used to getting less. Apart from Gail Kelly.


Temesgen Kifle and Parvinder Kler, Job Satisfaction and Gender: Evidence from Australia, School of Economics, University of Queensland, HILDA Survey Research Conference 2007

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Saturday Forum: The Governator turns mythbuster.

Australia's most powerful bureaucrat cut the credibility of his political masters to tatters on Friday, demolishing three of the main arguments they have used to argue against a change of government.

Doubtless Glenn Stevens, the Governor of the Reserve Bank for a little under a year, wasn’t trying to be political.

He said so a number of times under questioning from both sides of politics at his semiannual appearance before the House of Representatives Economics Committee, this time meeting on the Gold Coast.

But he is a direct man who says what he thinks.

He thinks it is nonsense to claim that interest rates will always be lower under one party than the other, as the Coalition insists. And he thinks it borders on laughable to suggest that interest rates could ever return to their highs of the 1980s, another Coalition claim.

As to the suggestion that state government borrowing for infrastructure will force up interest rates, a theme of Coalition advertising, he says “it’s quite apparent that infrastructure needs to be expanded”.

And when asked about the wisdom of returning to centralised wage fixing system, another Coalition theme, he counters with a question: “is anyone actually proposing that system?” ...

But he is his at his most direct outlining what is essentially a new doctrine that would allow his board to push up rates during an election campaign, so it feel the need.

He predecessor Ian Macfarlane declared just last year that while there was nothing to stop the Bank pushing up rates during an election year "we would not be all that keen to be changing them in the election campaign".

In his first appearance before the parliamentary committee this May Stevens appeared to endorse that view.

Not now. Having broken one taboo a week ago and forced up rates during the year of an election he asserted his right to break another and force them up while campaigning was taking place. (The most likely date is Wednesday November 7, following the board meeting that will consider the next inflation figures).

Making it clear he had anticipated the question he read out and then amplified a prepared reply.

“If it is clear that something needs to be done, I don’t know what explanation we could offer the Australian public for not doing it - regardless of when an election might be due,” he said.

“I don’t think there is any case for the Reserve Bank board to cease doing its work for a month in the month that an election is going to be. I doubt very much that members of the public would regard that as appropriate and so, should the inflation data or other data make that case, I feel we have no choice - nor should we have any choice.”

Disturbingly for politicians or others hoping that the worldwide financial turmoil might put on ice plans to hike rates, the Governor came close to dismissing concern about the US meltdown. He said he and others had long expected it. When interrupted by the sound of music from a mobile phone at the hearing he said, “in some ways that’s appropriate because the music was certainly playing for some years there.”

He said in Australia a lot of people were “behaving in a way which I think in the past few days we’ve seen bordering on irrational”.

Asked whether he would have still have pushed up interest rates last week if he had known the meltdown was about to happen he replied: “We could see that there were tensions in global markets to come extent. We did not think at that time that those things were likely to make a difference to the macroeconomic outlook sufficiently to outweigh what we thought was a pretty clear case for a modest adjustment to interest rates. I still think that.”

Indeed he said not to have pushed up rates for fear of adding to the turmoil might have even caused more trouble.

“No credible case could be made for that idea. In fact, it would probably have been more destabilising to expectations not to have carried out a policy adjustment that most people could see was needed.”

He acknowledged that higher interest rates would hurt saying: “That’s the idea, that’s how it works. We are not pretending that there’s no pain involved. The idea is constrain spending relative to supply and dampen the pressure on prices.”

Would he do it again, within months? He noted that the markets expected the US Federal Reserve to cut rates and Australia’s Reserve Bank to push them up and added ominously: “that doesn’t mean we have to do that, but current expectations are quite different between the two countries, not without reason I would say”.

Unlike the US, the Australian economy had “a lot of momentum, it is very fully employed, it is enjoying - if that’s the word - substantial external stimulus, and inflation has gone up a bit over the past couple of years. Our job is to be alert to that and to try to make sure we’ve got a setting in place that resists those pressures.”

Political parties have very little to do with the general level of interest rates, according to the Governor. In fact: nothing, over the long term.

This public airing of what’s regarded privately as a truism within the Reserve Bank appears to designed to head off another advertising campaign along the lines of those used during the last election asserting that under one party interest rates would always be lower than other the other.

It is a line repeated by the Prime Minister as recently as last week.

But as the Governor sees it, “if you are talking about long sweeps of time, the principal thing that drives nominal interest rates is the ongoing inflation rate”.

“Our job is to anchor inflation at 2 to 3 per cent, I think both sides of politics agree with that. We are independent to do that and if we’re successful in doing that the nominal interest rate would be driven by that. Frankly if you want much lower interest rates in the long-run, choose a lower inflation target.”

The idea that interest rates could return to their earlier highs experienced under the 1980s governments of both Malcolm Fraser and Bob Hawke struck the Governor as absurd. The Reserve Bank fought hard to get inflation down from 8 to 2.5 per cent. It wasn’t going to give up that gain, and the average level of interest rates was calibrated “to what the inflation rate is”.

But what about a return to centralised wage fixing, wouldn’t that be a risk, a Coalition MP asked hopefully.

It certainly would be, Stephens replied - but not a risk to interest rates. The Reserve Bank would keep them broadly where they were at the moment. The risk would be to employment.

Stevens was pleased that the Australian labour market was “very, very different to the late 1970s and 1980s”.

“I think it is obvious that two successive governments of differing political persuasions have moved things in the direction of less centralization, more flexibility, more focus on productivity and so on.”

“A highly centralised system would not handle the current circumstances at all well he said, adding “the question is: is anyone actually proposing that system?”

“I think what is being debated at the moment in the political sphere is the extent to which very recent changes get reversed.”

If Mr Stevens political masters continue to campaign on the basis that a vote for Labor will be a vote for an industrial relations policy that will put upward pressure on interest rates, they won’t be able to imply that he supports them.

In fact about the only argument against Labor’s industrial relations policy that they would be able to mount with the Governor’s implicit support would be that it would make very little difference, that it is a paler echo of their own.

This month the Coalition launched an internet ad attempting to blame “Kevin Rudd’s Labor premiers” for putting upward pressure on interest rates by planning to borrow $70 billion over five years, “plunging Australians into debt again”.

The problem for the Coalition should it continue to run the ad is that the man in charge of interest rates made it clear at the hearing that he has no problem with the premiers borrowing plans.

He has even discussed those plans with “a couple of the state treasurers”. They have assured him that if the projects push up prices they will just “delay them until things calm down”

“I think that’s very sensible. I think they’ll be able to make that call themselves if they’ve got a good sense of how the costs of the projects are moving”.

Stevens is in no doubt that extra infrastructure spending is needed, both by governments and by private companies.

“Ideally it would have been done five years ago when the miners didn’t want to do it, but it wasn’t. I think it is reasonably clear we need more infrastructure over time for the economy to grow, otherwise we will be permanently capacity constrained”.

But wouldn’t the spending by the states be inflationary, the Governor was asked.

“Compared with what?” he replied. “More spending by someone somewhere, all other things equal, puts more pressure on demand and therefore on the economy’s available capacity. You could equally say that spending by the mining sector on what they are doing is inflationary”.

“I am not sure how different it is for a government-owned water utility or electricity authority to invest. It adds to demand and in the medium term adds to supply. So what’s the difference between those things, other than one’s public, one’s private?”

In the longer term the investment would help the economy.

“We will see that I think in the next couple of years in the minerals sector where there are big capacity expansions currently being done starting to come on stream, and our ability to supply exports is going to improve. GDP will go up but so will potential GDP to the same extent.”

On Friday the Governor declared that he was his own man. He may have been appointed by the Treasurer, but he won’t answer to him and won’t lend him support or keep quiet for his sake on anything that’s politically sensitive.

It is hard to imagine Governor Glenn Stevens, appointed for seven years and now just a few months short of his 50th birthday, appearing in government-scripted TV ads designed to enhance its political position.

In part that’s a measure of who he is.

But it is likely to also reflect fury within the Bank about the way it was treated during the 2004 election campaign. The Coalition invoked its name to make claims it did not think were true. The Bank complained privately to the Liberal Party and wrote to the Australian Electoral Commission.

Its then Governor said later that he had been “sort of disappointed but there was no way I could speak out”.

By delivering a few shots across the government’s bows this week the new Governor may have ensured that he won’t need to.


ACCOMPANING NEWS STORY

Australia’s Reserve Bank Governor Glenn Stevens yesterday demolished three of the key claims made by the Prime Minister, the Treasurer and the Workplace Relations Minister about Labor and interest rates.

Under questioning by members of the parliament’s economics committee at a special hearing at Broadbeach on the Gold Coast the Governor declared that general interest rates would be little changed whoever took office.

The Prime Minister has consistently maintained that “interest rates will always be lower” under the Coalition than under Labor.

Governor Stevens told the parliamentary committee that “as a long-run proposition the rate of interest goes with the rate of inflation” which he said was under his control.

“Our job is to anchor inflation at 2 to 3 per cent. I think both sides of politics agree with that, and if we’re successful the nominal interest rate would be driven by that,” he said.

“I suspect that the various comments that are made about what interest rates would do under this or that policy are about transitional periods. Well I’ve no comment on that, but as a long-run proposition the rate of interest goes with the rate of inflation.”

The Governor rejected the Coalition’s claim that labor’s industrial relations policy would put pressure on rates, saying firstly that any recentralisation of wage setting would affect the unemployment rate, not the interest rate, and secondly that he did not believe that was what Labor was proposing.

“I think it is obvious that two successive governments of differing political persuasions have moved things in the direction of less centralisation. I don’t think an objective observer would conclude differently to that. I think what is being debated at the moment in the political sphere is the extent to which very recent changes get reversed,” he said. said.

The Governor treated the line being pushed in Coalition advertisements that Labor state governments would put pressure on inflation and interest rates with something close to derision.

He replied: “Compared with what? You could equally say that spending by the mining sector, that what they’re doing, is inflationary.”

“I do not think it is necessarily the way to go to single out particular chunks and say - this is inflationary, but all these other things are not”.

Mr Stevens revealed that he had had discussions with state premiers about their plans to borrow for infrastructure spending and was reassured by what they had told him.

“I think it is reasonably clear we need more infrastructure over time for the economy to grow, otherwise we will be permanently capacity constrained,” he said.
Labor’s Treasury spokesman Wayne Swan said the Governor had debunked the Prime Minister’s mythmaking.

“He has underscored the comments of the former governor Ian Macfarlane who said after the 2004 election that the desperate claims made by Howard and Costello were – quote – incorrect.”

The Treasurer Peter Costello said that the Governor’s opening statement had supported the government’s view “that our real economy is strong, that inflation is contained, that we have to be vigilant in relation to this and interest rates will go up if industrial relations is rolled back.”

The Governor said that the global financial crisis had had little impact on Australia so far and had not eased his concern about inflation.

He if the bank had to push up rates in November after the next inflation figures, it would do so.

“I don’t know what explanation we could offer the Australian public for not doing it, regardless of when an election might be due,” he said.

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Who were the financial geniuses behind RAMS?

The next time you hear either the Coalition or the Labor Party talk about what financial geniuses they are, remember RAMS Home Loans.

Its business model was flawed from the start. It committed the textbook sin of “borrowing short” and “lending long”. It borrowed money short-term from international financiers and then lent it to Australian homebuyers for periods of 25 to 30 years.

It made sense only as long as international money was cheap.

On Wednesday night RAMS faced one of its regular refinancing deadlines and couldn’t find anyone to lend it the money.

Its existing lender has given a 180-day extension, but at a punishingly higher rate, although I suspect the rate it eventually pays will be even higher. If the US experience is any guide it could be one, two or three complete percentage points higher, for money that its customers expect to paying off at the same rate as they did before.

RAMS is a public company now, worth only a third of what it was when it floated last month. But it began life privately with some very high profile board members.

One was Tony Staley, a former Coalition minister and the national president of the Liberal Party. If he saw problems with the RAMS business model he didn’t prevail in its boardroom...

Another was George Campbell, who until next July remains a Labor Party Senator. The RAMS board was bipartisan, if not prescient.

The other lenders – Aussie, the Commonwealth and all - are not RAMS. Their business models make sense. That’s why the signals they are sending via radio interviews about the need to raise rates seem to me like collusion.

If they met in a room and decided to put up rates it would be illegal.


THE ACCOMPANYING THURSDAY NEWS STORY

Australian shares and the Australian dollar went into freefall yesterday with the share market at one stage losing 5 per cent and the Australian dollar falling below US 80 cents for the first time in five months.

The fall in the share market was magnified by a decision of the Australian Securities Exchange to halt futures trading for more than an hour, leaving some traders flying blind.

The All Ordinaries Index closed down 1.54 per cent at 5,712, barely above where it began the year.

Prices plunged from Tokyo and Seoul to Beijing and Shangahi to Jakarta, Bangkok and Manila, with some of the losses exceeding 5 per cent after Wall Street slid a further 1.3 per cent Thursday morning Australian time.

The New York Dow Jones index was down 8 per cent from its peak in July; the Australian All Ordinaries index down 11 per cent.

The Australian home lender RAMS led the market down sliding a further 37 per cent to close at 86.5 cents, barely a third of its price when it debuted on the exchange just one months ago.

RAMS told the market that it had been due to refinance more than $6 billion in loans overnight on Wednesday but had been unable to do so. Its lenders had granted it a 180 day extension, but at a rate more than 0.25 percentage points higher. It said its troubles were the result of the tightening in global credit markets and that its business “continues to operate profitably”.

Also hard hit were the financiers Macquarie Bank, down 4 per cent, Allco, down 7 per cent, and Babcock & Brown, down 5 per cent.

The Treasurer Peter Costello said it was inevitable that companies that borrowed overseas would find themselves facing much higher costs.

“People who were raising money in the United States will not be able to raise it for the same type of prices. In order to raise it they will have to pay a bigger margin, and what’s going on at the moment is the world is re-pricing risk and they are going to charge a bigger a bigger premium for risk,” he said.

The Treasurer said he thought mainstream banks were not at risk and were not under pressure to raise their interest margins.

“There is no reason whatsoever why there should be any change in relation to the banking system. I make that very clear, because the banks are well capitalised and profitable. There is no reason whatsoever why they should be affected.”
The US economist David Hale said the events demonstrated just how far the financial globalisation has gone.

“The European Central Bank injected more than 155 billion euros of liquidity into markets because unemployed workers in Detroit are defaulting on home loans they obtained during 2006 that did not require any down payment, principal repayment or documentation of income,” he said.

“In the 1980s those defaults would have merely led to a run on the local bank.”
After the end of local trading yesterday the Australian dollar slid below US 80 cents to US 79.84 – a fall of 10 per cent from its peak of US 88.70 reached only three weeks ago.

The Reserve Bank Governor Glenn Stevens will be closely questioned about developments when he appears before a Parliamentary Committee this morning.

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People of the same trade seldom meet, but they do communicate via the radio

Australia’s biggest home lenders have begun softening people up for bigger increases in mortgage rates than those brought on by the Reserve Bank.

Both the Commonwealth Bank and Aussie Home loans yesterday warned of rate increases over and above last week’s 0.25 per cent official rate increase on a day when the measure of consumer confidence dived and the Australian share market plunged.

The head of Aussie Home Loans John Symond told the ABC that concern over home loan defaults in the US had already increased his cost of funds and that “eventually if that digs in, it will need to be passed onto consumers”.

“There's a thunderstorm brewing here, it could turn out to be quite aggressive and if it really hits, there is a chance that interest rates could trickle up a little bit, and that's beyond what the Reserve Bank does,” he said.

The head of the Commonwealth Bank, Ralph Norris, said that his bank, with 1.1 million customers would be among those that would have to charge more...

“The fact of the matter is that the price of credit in markets internationally has moved, so there will at some stage be some increase in rates. I think non-bank lenders are going to be in a situation where they will have to pass on significantly greater increases than a bank like us,” he said.

In recent years cheap funds from overseas and competition from non-bank lenders such as Aussie and Rams have forced banks such as the Commonwealth to cut their margins.

While they quoted standard variable mortgage rates of around 8.05 per cent before last week’s hike, they actually offered near-universal discounts which resulted in an average rate for new borrowers of 7.45 per cent according to Reserve Bank calculations.

Non-bank lenders source a greater proportion of their funds from overseas and will face greater cost pressures. Traditional lenders will be under less pressure to discount their rates to match them.

The highest rate increases are likely to be faced by low-documentation borrowers, who at the moment are charged an interest rate premium of only 0.15 percentage points according to the Reserve Bank.

That premium is likely to climb sharply, with standard loans themselves being discounted by less.

The Australian share market lost $48 billion in value yesterday as the index slipped a further 3 per cent to a new five-month low following big losses in Europe and on Wall Street.

Australia’s banking sector was particularly hard-hit with the Commonwealth losing $1.00 to $53.00 despite announcing another record profit of $4.47 billion, up 14 per cent.

The retailers Woolworths, Coles and David Jones also lost value after news that consumer confidence was hit hard by last week’s rate hike.

The Westpac-Melbourne Institute index of consumer sentiment slid 8 per cent after last week’s rate hike, with some sub-indexes sliding more steeply. Asked whether now was a good time to buy a house, 20 per cent fewer Australians said yes than in the month before. 15 per cent fewer Australians thought now was a good time to buy a major household appliance.

The slide in confidence was widespread with even those Australians who owned their homes outright appearing spooked by the higher rates.

Westpac’s Chief Economist Bill Evans said he had expected such a plunge but noted that there have been sharp rebounds in confidence following the last four hike-related plunges.

The Reserve Bank Governor Glenn Stevens will explain his views about the future of rates at a parliamentary hearing on the Gold Coast on Friday.

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"...the bravery, the courage, to call it as it is, no matter the political sensitivity of the advice."

The head of the Treasury - a member of the Reserve Bank board that last week decided to put up interest rates - has defended the right of policy makers to take brave decisions and counselled against acceding to the wishes to people who are hurt along the way.

At the ANU last night Dr Ken Henry delivered the fifth Sir Roland Wilson Foundation lecture in honour of the man who ran the Treasury head from 1951 to 1966.

Noting that Sir Roland was the first economist to be employed in the Commonwealth public service he defended his bravery in bringing on a short recession in 1952 in order to “wring out of the economy” inflation.

He also commended the credit squeeze of the early 1960’s which he said “reflected brave Treasury advice specifically designed to bring inflation back under control”.

Dr Henry said these days those sorts of decisions were made by the Reserve Bank. They entailed “the true essence of Sir Roland’s legacy: the bravery, the courage, to call it as it is, no matter the political sensitivity of the advice”...

He called on policy makers to reject pleas for help from people hurt as a result of economic change.

In an echo of his instruction to Treasury officers in a leaked internal speech in March to resist pressure to approve policy proposals that were “frankly, bad” Dr Henry warned that “protectionism comes in many guises”. It was imperative that pleas to compensate people affected adversely by structural adjustments be resisted.
“We are currently passing through one of the most prosperous periods in Australia’s history,” the Treasury Secretary told his audience.

“Most Australians are benefiting from this prosperity. But there are some notable exceptions. There will always be a temptation, especially in times of rapid structural adjustment, to focus on the acute cases of loss. But there is a stronger case to be focussing, in these times of plenty, on the chronic cases of disadvantage that have tarnished the record of Australian development not for months, or even years, but for centuries. I am, of course, referring, among other things, to chronic indigenous disadvantage.”

“If we are able to muster the courage – if we prove brave enough – to resist the pressure to impede structural change, and instead use this historic opportunity to tackle problems as challenging as indigenous disadvantage, then we will truly have honoured Sir Roland’s legacy” Dr Henry said.

The Treasury Secretary said that in many ways the Australians of today were better off than when Sir Roland ran the Treasury in the 1950s and 1960s. Although on paper our unemployment rate is still above the very rates that prevailed then, taking into account the increased numbers of people now making themselves available for work, Australia’s employment to population ratio was actually better than any time since the early 1960’s.

Then, as with now, Australia had to deal with a terms of trade boom. But the price pressure from the Korean wool boom was spread throughout the economy by centralised wage fixing system. Australia’s present system contained those pressures.

Perhaps significantly, Dr Henry said the move to decentralised wage fixing took place in 1993, under the Keating government with the introduction of enterprise bargaining, rather than in 2006 under the Howard government with WorkChoices.

Before delivering the lecture Dr Henry chaired the first Sir Roland Wilson Debate between students from the Crawford School of Government at the ANU and students from the School of Economics.

The question was whether the big macroeconomic policy questions had been resolved – whether full employment and low inflation were here to stay.

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Danger! Danger! Rate rises ahead!

The Reserve Bank has begun preparing the ground for yet another hike in interest rates – one that would take Australia’s standard variable mortgage rate to 8.55 per cent.

Less than a week after its last hike, which will take the rate to 8.3 per cent, the Bank used its Quarterly Statement released yesterday to lift its inflation forecast to the very top of its target band.

The Bank said that even after last week’s interest rate hike it expected Australia’s underlying inflation rate to climb to 3 per cent by December, the limit of what it can tolerate.

It expected the rate to stay that high through much of 2008 and warned of pressures that could push it higher still.

It said Australia’s labour market is “as tight as it has been for a generation”, borrowing by business was climbing at an annualised rate of 22 per cent, and property prices were growing firmly in every city other than Perth...

In a signal that the Bank fears its 3 per cent inflation forecast is conservative it said these factors “could result in more upward pressure on wages and inflation than has been incorporated into the forecasts”.

It said the main downside risk to its inflation forecast was a further slowdown in the United States economy leading to a downturn in worldwide inflation, something it did not think was likely.

The Bank’s comments set the scene for its Governor’s second appearance before the House of Representatives Economics Committee on Friday.

Under questioning his first appearance in February Glenn Stevens declared that he was not afraid to increase rates in an election year, replying that “if in August it needs to be done it will be done”.

Last week’s August rate hike is likely to be followed by another as soon as November, after the release of the next inflation figures due on October 24.

TD Securities told its worldwide clients last night that it would not be surprised if the Bank decided to put up rates sooner, possibly at its next board meeting in three week’s time before the election campaign got under way.

The ANZ bank, previously a sceptic about the possibility of an interest rate hike this year, told its clients that there was now “a delicious possibility that another rate increase could be in prospect in November”.

It said in “in any year other than an election year the chance would be high. Even as it is, that possibility cannot be ruled out”.

Westpac said the Bank’s Sstatement was not that “of a central bank that expects that the current tightening cycle has come to an end”. It said the Bank had indicated it would have “little patience with any evidence that inflation pressures remain strong”.

The Treasurer Peter Costello reacted to the statement by attempting to redefine the publicly understood role of the Reserve Bank.

He said the Bank had not been charged with always keeping Australia’s underlying inflation rate between 2 and 3 per cent as commonly understood, but with keeping it there “on average over the economic cycle”.

“The cycle is at its high point now. You would expect at times of weakness it will be below, at times of strength it will be above, and that the target is average,” the Treasurer said.

The Reserve Bank gave short shrift to that argument in its statement adjusting rates last week, saying that even with the underlying rate below 3 per cent it needed to increase rates to ensure inflation did not climb above the 2 to 3 per cent band.


COMMENT

The Prime Minister has blamed his advertising agency for his party’s stupid but electorally useful promise last election to keep interest rates low.

He says the advertisement was pulled after one week and that he never made that much-ridiculed promise.

But he did make this one. Last week in his radio address he singled out state government plans to run up $70 billion in debt as being “bad news for interest rates”.

He wasn’t putting pressure on rates. He was running a surplus.

Yesterday in a few short sentences in its quarterly review the Reserve Bank demolished that argument.

The Commonwealth was indeed running a surplus, but it was “expected to be a little lower in 2007/08 reflecting policy announcements”.

Things were looser for the states too. They were “projected to show a slightly larger deficit in 2007/08, due to increased infrastructure spending and slower growth in revenues.”

It was the direction of change that mattered, and both were arguably moving in the wrong direction, if only “a little” and “slightly”.

And the amount of money involved? Half of one per cent of GDP.

It’s not much. Earlier this year the Finance Minister Senator Nick Minchin pleaded to a Senate estimates hearing for understanding. A government program hadn’t been put to Cabinet, but it was just “less than half a per cent of Commonwealth government expenditure, let’s keep it in perspective”.

During the last election the Coalition verballed the Reserve Bank on interest rates, using its name to falsely imply that it supported the Coalition’s claims.

The then Governor Ian Macfarlane said later “we were sort of disappointed, but there was no way I could speak out”.

His successor looks like being less timid.

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