Plea from the edge of the abyss. Why we need the Climate Change Authority

If we were sleepwalking towards catastrophe would we know?

The UN Intergovernmental Panel on Climate Change is about to release frightening projections for the impacts of the climate change that is already unstoppable. Among the projections for the next five years is the displacement of hundreds of millions of people, a slide in crop yields and increased deaths from heatwaves.

Few dispute that it is happening. Australia’s environment department has a whole division dealing with adaption - how to cope with what we can’t stop.

Bernie Fraser heads the Climate Change Authority. The man who ruthlessly bore down on inflation just as Australia was recovering from the early 1990s recession, he knows everything about acting in the country’s long-term interests.

But few others seem to.

“I am not out to scare the pants off anybody here and I don't want to insult your intelligence with suggestions that climate change is a load of crap,” he told the National Press Club this month.

“But if policymakers accept the science and its implications, you would expect them to follow through.”

The science says any increase in global average temperatures of more than two degrees compared with pre-industrial levels is “getting into the dangerous category”. We are already halfway there, and there’s only a limited amount of carbon and equivalent gasses we can release before we get there, our so-called our “carbon budget”.

We are using it up at too fast a rate to hold the increase to two degrees. All isn’t lost, if we can pull back. The sooner we pull back gently, the less sharply we will have to pull back later.

That was the message in the Climate Change Authority’s report on targets released on March 5. Its finding was that Australia should lift its target for cutting emissions from 5 per cent below 2000 levels by 2020 to 19 per cent. Making that steeper cut now will avoid a much steeper cut later.

Much of what it suggests is easy. Adopting tougher motor vehicle emissions standards of the kind already in place elsewhere would cut running costs as well as emissions. And there will soon no longer be a local vehicle building industry to object.

Another is to simply buy extra emissions reductions from other countries. They are going cheaply at the moment, and 2020 is looming too soon to bring about all of the cuts on the Australian continent. The globe doesn’t mind where they take place. So far the Coalition has been unaccountably hostile to the idea, presenting buying cuts from overseas as a sort of moral failing. But we trade with other nations all the time and for the moment it’s the only way to do what’s needed.

It’s the reactions to the suggestions in his report that shocked Fraser.   ...

He is not surprised by the reactions of business, except by their scale and brazenness. But he is surprised by those of the government. “It is the Government's job to protect community interests,” he says. “Every politician pledges to do just that in the lead-up to every election campaign that I have heard.”

The government plans to abolish the Climate Change Authority. While not disputing the science, it shows no interest in lifting Australia's emissions reduction target. It wants to remove the carbon tax and is prepared to underfund the Emissions Reduction Fund that will replace it. It wants to axe the Clean Energy Finance Corporation and to wind back the renewable energy target.

If it believes the science - and it says it does - its thinking is unaccountably short-term, unless you consider the three-yearly electoral cycle.  If an entire nation was sleepwalking towards catastrophe it’d be politically risky to wake it up.

Could an entire nation, perhaps the entire globe, sleepwalk towards catastrophe?

Al Bartlett thought so. He was Professor Emeritus in Nuclear Physics at University of Colorado at Boulder. Before he died last year he spoke to the BBC’s More or Less radio program. <i>More or Less</i> deals with statistics, as did the interview.

Bartlett was an expert on what happens when constant growth comes up against a hard limit. A YouTube video of one of his lectures is entitled: The Most Important Video You'll Ever See.

“Steady growth means doubling over a certain period of time,” he explained to More or Less.

“Suppose you have bacteria that doubles in number every minute. Now suppose you put one of these bacterium in an empty bottle at 11.00 am and then observed that the bottle was full at midday.”

“At what time was the bottle half full?”

The surprising answer is 11.59 am - just one minute before midday, because the bacteria are doubling every minute.

“Now if you were an average bacterium in the at bottle, at what time would you first realise that you were running out of space?” he asked.

The answer mightn’t even be one minute before it was too late.

“After all, at one minute before twelve the bottle was half full, at two minutes before twelve it was only a quarter full and at five minutes before it was only 3 per cent full with 97 per cent of open space just yearning for development.

“At five minutes before twelve how many of you would realise that there was a problem?”

How many of us would realise we were sleepwalking towards catastrophe?

In The Age and Sydney Morning Herald

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Public-private sector partnerships a mirage. The PC says so

Of all the strange things to have flowed from the corruption inquiry engulfing the former assistant treasurer, few are stranger than his use of the word ''passionate''. Arthur Sinodinos says Australian Water Holdings is a ''company whose mission I believed in and was passionate about''.

Passionate? Australian Water Holdings built pipes, tanks and pumps for Sydney Water that it could have built itself.

It's easy to imagine getting passionate about such a mission if it was the only means of getting pipes, tanks and pumps to Sydney's north-west. Or if AWH could do it more cheaply than Sydney Water itself.

Both are claimed by spruikers of public-private partnerships. In fact they are often asserted as universal truths.

Joe Hockey did so shortly after the election when he asked the Productivity Commission to inquire into ways to use the private sector more. ''The capacity of government to meet expectations for improved infrastructure services is always limited,'' he said. ''Options involving the private sector can reduce the call on government.''

The father of NSW public-private partnerships, the late 1980s and early 1990s premier Nick Greiner, made it a mantra.

Opening the privately built (and then privately run) M4 motorway, he said: ''The choice is very simple. Either have the road as a privately owned tollway or not have the road at all.''

It's complete nonsense, and a draft Productivity Commission report delivered to Hockey spells out the fallacy in excruciating detail. The private sector can't do anything the public sector can't, unless it charges. And the government itself could do that if it wanted to.

Sometimes the private sector will do things better than the public sector. The commission cites three studies that find private projects are more likely to be completed on time and near budget than government ones.

Often it'll do things worse. Borrowing is more expensive for firms such as AWH (chaired by Sinodinos) and the firm that built the M4 (whose board Greiner later joined). And the salaries are more expensive. Sinodinos was paid $200,000 for a part-time job as AWH chairman. Eddie Obeid jnr was paid $350,000. If AWH had scored the contract it was angling for, Sinodinos was set to get a bonus that would take his shareholding to about $20 million.

The fallacy is the view companies such as AWH can get access to money the government can't - what the commission calls the ''magic pudding'' fallacy.

Private sector money has to come from somewhere. Most often the private firm will siphon it out of the government, as AWH did when it billed Sydney Water for expenses including limousine rides, pornographic movies and Sinodinos' salary. Or it might borrow the money and later siphon it out of the government, meaning the government will face the same sort of costs as if it had borrowed itself.

Or it might charge tolls, which the government itself could do if it had the guts.

Either way there's nothing stopping the government borrowing more than it has for worthwhile projects. The commission thinks it can. On that point it thinks Hockey and Greiner are wrong. And probably also NSW Treasurer Mike Baird.

His plan is more subtle. It's called ''recycling''. He has sold the leases on Port Botany and Port Kembla to use the proceeds to build the first stage of WestConnex. When that's built, he will sell it and then use the proceeds to build the second stage, and so on.

As a piece of financial engineering, it's admirable. But the commission thinks it confuses two very different questions: whether something is worth building and whether it's better off privately run.

It's not happy with Baird's view of the world, but it reads as if it is much happier than it would have been with Greiner's, during whose term as premier the company that is now AWH gained the Sydney Water contract.

In The Age and Sydney Morning Herald

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How to pay for roads

Why is it that whenever anyone asks about the funding of roads they end up getting a report that reads like 1960s' science fiction?

Kevin Rudd didn't expect it when he asked the Henry tax review to examine roads. It found that fuel tax was on the way out. New developments in technology mean increasing numbers of cars don't use fuel. Henry suggested ''telematics'', where each vehicle reported its trips to a central computer that charged its owners per kilometre driven.

Four years on Tony Abbott has been ambushed by the same suggestion. He asked the Productivity Commission to inquire into the financing of public infrastructure. He wants more of the funds to come from the private sector. Instead the commission's draft report released on Thursday found that private financing was ''not a magic pudding'' and recommended a trial of telematics. Abbott backed away quickly. Telematics was ''not something this government is considering''.

But it keeps being suggested because it's the right answer. When Abbott's ''Son-of-Henry'' tax review gets under way shortly it will probably suggest it as well. And it's far from the only confronting common sense suggestion in the draft report.

Its starting point is that we probably don't need as many new freeways and toll roads (and rail lines and desalination plants) as we think we do. It says we should first work out what we want to achieve (such as moving cars quickly) and then work out the cheapest means of achieving it. It might be congestion taxes or priority lanes for cars with three or more passengers.

It points to the national broadband network as a classic example of what not to do. Rudd developed a solution without first identifying the nature of the problem and considering whether there were cheaper ways of solving it. When none of the companies bidding to build the NBN handed in acceptable tenders Rudd decided to build a grander one with government funds at 10 times the cost. At every turn Rudd blocked attempts to compare costs and benefits.

If governments decide they should build something, ultimately the private sector won't be much help. It's not where the money comes from. In the end it can come from only four sources, according to the commission: user charges; user-specific taxes; general taxes; and (rarely) philanthropy.

Private sector funds have to come from somewhere, and to the extent that they are borrowed at high interest rates they will be more expensive than public funds.

Governments love public-private partnerships (PPPs). Victoria has 23 of them. But they are a sleight of hand.

''There is a perception that they offer a way to increase the provision of public infrastructure without drawing on a government's purse, thereby circumventing budgetary and borrowing constraints,'' the commission says.

In reality the money has to come from somewhere, either from charges or tax, but shifted in time in an effort to enable governments to keep their AAA credit ratings.

''There are benefits to maintaining a AAA credit rating,'' the commission says. ''However, there may be situations where public financing of infrastructure would be more efficient and welfare enhancing than either obtaining private financing or not providing the infrastructure.

''In these circumstances, it is in the community's interest for governments to weigh up all considerations and not just focus on credit rating concerns.''

The commission believes governments have plenty of scope to borrow more for worthwhile projects even if their credit ratings slip, and believes they probably wouldn't slip any more than if they had signed up for a PPP. Ratings agencies see through them.

And the commission has little time for the related fad of ''recycling''. Joe Hockey talks about it as a magic ingredient of this year's federal budget. Victoria's Michael O'Brien wants to do it with the Port of Melbourne. NSW is the pioneer, funding roads then selling them and funding more roads with the proceeds.

''It involves two decisions that should be considered independently,'' the commission says. ''First, whether a government-owned asset should be sold; and second, whether the government should procure new infrastructure.''

The commission has no doubt that ports and electricity generators should be sold. But it believes the arguments stand on their own. They are to do with who would best manage the assets rather than whether the proceeds should be plundered.

Asked to endorse the fashionable view that high labour costs and restrictive practices are pushing up the cost of big projects, the commission largely refuses.

''There is no single culprit,'' it says. ''Labour costs have risen steeply, particularly for (largely non-unionised) engineering design and consulting services, but so too have material input prices. For the construction industry as a whole the labour share of total costs has not changed appreciably over the past two decades.''

It's an uncommonly calm and uncommonly forward-looking assessment of the way Abbott and the states can go about building the things we need. All the more so because it's not what he expected.


In The Age and Sydney Morning Herald

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'Repeal day'. It's easier than fixing problems

I'm going to enjoy ''repeal day''. That's on Wednesday week when the Prime Minister's parliamentary secretary introduces a blizzard of legislation and regulations aimed at sweeping away thousands of pieces of useless legislation and regulations.

Nifty, eh? It'll doubtless sweep away the laws that prevent newsagents competing with newsagents, that prevent pharmacies (and supermarkets) competing with pharmacies, and prevent taxi drivers collecting who they want.
It won't? But Josh Frydenberg, the Prime Minister's parliamentary secretary, says he wants to attack the red tape that is "cutting jobs, impeding innovation and deterring investment". Last Friday the head of the Productivity Commission nominated the red tape tying up newsagents, pharmacies and taxis as among the last shards unattacked by the wave of competition reforms set off by the Hawke government in the early 1990s.

His back-of-the-envelope calculations put the benefits of the so-called Hilmer reforms at $20 billion. He said the remaining reforms would probably be worth $5 billion.

Frydenberg will be attacking easier targets. He is set to take on weights and measures acts that he says set the standards for calibrating imperial measuring equipment during the 1960s transition to the metric system, and a war service homes regulation that set rates of interest charged in the '60s.

Repeal day is a stunt copied from the US. It would be fair to say that repealing these types of laws - and they are the only types Frydenberg mentions - will achieve nothing whatsoever when it comes to repealing red tape that matters.

"It might remove irritants, but it's actually fictitious; it's ghosts, red-tape ghosts," was the assessment of the father of the competition reforms, Professor Fred Hilmer, at the same seminar last Friday.

"I'll give you a silly example," he said referring to his own experience as vice-chancellor of the University of NSW. "Under the Audit Act, a university has to file accounts to the Parliament for every one of its subsidiaries. That would be a book centimetres thick. We don't. No one does it. And they'll repeal it. "

Removing laws that cause actual damage is harder.

Newsagents are forbidden by restrictive agreements from poaching each other's customers. The former prime minister John Howard went out on a limb to persuade the Australian Competition and Consumer Commission to back off on its plan to allow competition, declaring the restrictions "part of our way of life".

The Community Pharmacy Agreement between the government and Pharmacy Guild prevents a new pharmacy from opening up within 1.5 kilometres of an old one (unless it's in a shopping centre). When a qualified pharmacist tried to open up in the ACT suburb of Hackett in 2012, she was told she couldn't because there was already a pharmacy in Watson, 1.345 kilometres away.

Had her shop been 155 metres to the south she could have served the suburb and provided competition.

If the red tape mollycoddling existing pharmacies was removed altogether supermarkets would be able to dispense medicines at all hours of the day using qualified pharmacists. They could force down prices.

It would be in the spirit of the Hilmer reforms, but whenever a politician suggests pharmacists should face the same sort of competition as other businesses, friendly chemists hit their customers with petitions to sign while they are waiting for prescriptions.

And there's taxis. At the seminar to commemorate the 21st anniversary of the Hilmer reforms, Productivity Commission chief Peter Harris noted similarities.

Existing businesses in all three areas have been protected by red tape for so long that they are under attack in any case.

For newsagents he said the decline in circulation and the rise of social media had done "what regulatory reform could not".

Taxis face a $3.5 billion threat from Uber. That's how much Google has just paid for an app that connects passengers directly to drivers at the touch of a button.

"Three point five billion looks remarkable for a taxi booking app," Harris said.

"This suggests that there is much more scope for reform gains than just a convenient online booking service. I am not going to speculate what they might be.

"Without taking sides I merely note that Google is not the sort of entity that will go away quietly."

Even chemists are feeling "the hot breath of technology-driven competition".

"I will not comment on the position in Australia, but both Canada and the United States are experiencing the impact of online competition jumping over regulatory boundaries," he said.

"According to media reports, Canada's much cheaper regulated pricing of pharmacy products - a 200 per cent cost difference in the 10 most prescribed drugs in New York state - attracts scripts from the US to the extent that parcels are now being scrutinised by border agencies."

Tony Abbott has just commissioned the first full-scale review of competition policy since Hilmer 21 years ago. What he does in response to it will say far more about what he really thinks of red tape than will ''repeal day''. It'll show whether he hates red tape enough to take on his friends.
In The Age and Sydney Morning Herald

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When you've nothing to say, say you're 'open for business'

What do you say when you've nothing to say? You declare you're ''open for business''. That's what South Australia did when it lost Mitsubishi in 2008. Left with 61 hectares of factory space, it advertised an''opportunity''.

Six years on, the site remains mostly empty. The government will move in departments of a university and some TAFE colleges, it has attracted some small businesses and a data centre and its website continues to proclaim: ''Right place, right time.''

Two-thirds of the workers who lost their jobs after an earlier Mitsubishi closure were employed on lower wages. One-third job-hopped from casual job to causal job. South Australia's share of the national economy slumped one-third of one per cent.

It's a picture of the future facing Victoria as Alcoa, Toyota, Ford, Holden and much of Qantas leave. This state is just as dependent on manufacturing as is South Australia. In both states it provides one job in every 10. ''How to avoid South Australia's mistakes'' might just as well have been the title of the report handed to Prime Minister Tony Abbott on Friday.

Prepared by a committee including former Victorian industry minister Mark Birrell, it is addressed to the right level of government. Most international studies show it's the economy rather than anything the locals can do that determines how factory closures pan out. John Spoehr of the Australian Workplace Innovation and Social Research Centre sums up the evidence in a paper just published by the City of Playford, which takes in the Holden plant in Adelaide. He says it is far easier for displaced workers to slot into new jobs when the economy is booming. Workers in the arc that takes in Avalon, Geelong and Point Henry might have been OK had their factories closed a decade or so back when the economy was revving up. They are less likely to be OK today.

Few new firms arise when the national economy is fairly flat. The best way to support the arc is to boost the national economy or at least not flatten it further.

If Abbott and treasurer Joe Hockey came from Victoria instead of Sydney, they might grasp the point. As much as they would like to start winding back the budget deficit, it is not the right time for the economy of Geelong and it is not the right time for the broader economies of Victoria and South Australia.

Slogans don't attract businesses. In the three months since Abbott declared Australia ''open for business'' ABS figures show planned mining investment collapsed 25 per cent and planned manufacturing investment 20 per cent. Economic conditions attract businesses, and cutbacks can make them worse.

Hockey's way out in the May budget might be to announce that many of the cuts recommended by his Commission of Audit will take place but not for some time, so as not to worsen conditions now.

Another would be to announce a number of big government-funded infrastructure programs, several of them near Geelong. It'd be a Band-Aid. Eventually those jobs would go. But it might be enough to last the arc until things pick up.

In The Age and Sydney Morning Herald

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Spending on health is sustainable precisely for the reason that we want to sustain it

Unsustainable? A generation ago the veteran Labor MP Barry Jones led an inquiry into expectations of life in the 21st century. He said the question was being framed as whether Australia could "afford" an ageing population. "At first sight this seems an ordinary sort of accountant's question," he reported. "Like: can we afford a new car?''

"But decisive differences emerge when we consider the answers. If we can't afford a new car, we don't buy one, and nobody suffers. But what if we decide that we can't afford the coming increase in the aged population?"

Jones said it was a deeply sinister question. Or a silly one.

Peter Dutton is Australia’s health minister. Joe Hockey is Australia’s treasurer.

(Dutton shouldn't be confused with the assistant health minister Fiona Nash who is more famous for pulling down health websites and defunding preventative health organisations).

Within weeks of taking on the health job last year, Dutton declared the system was on track to becoming "unmanageable".

Last week, in an address to the Committee for Economic Development of Australia, he said spending on Medicare was "spiralling", future costs were "staggering", and we were on an "unsustainable path with no prospect of meeting the needs of the health of our nation in the 21st century".

Then Hockey piled in: "If our health, welfare, and education systems stay exactly the same, Australia is going to run out of money to pay for them," he said as the G20 summit got under way.

Hockey is one of the few people who has read the Commission of Audit report. His concerns would reflect its concerns. But when it comes to health they are misplaced.

Health is about the last thing we will run out of money for. It matters more to us than does almost anything else. Jones was right. Spending on health is sustainable precisely for the reason that we want to sustain it.

We are spending more on health because more of us are getting older (the phenomenon Jones was inquiring into) and also because we are buying new and better health services. We would be mad not to. It is not normally thought of as waste to spend more to buy something that is better.

A year ago, Hockey had a relatively new form of surgery known as a gastric sleeve. As much as 80 per cent of his stomach was removed to make it more like a sleeve. It's expected to save lives. A few years ago it wasn't possible. It costs Medicare millions.

Offered a choice between an old dial-up internet connection and a new broadband service most of us would opt for the broadband. It isn't wasted money. Nor is it unsustainable, given rising incomes. Broadband matters to us. Health matters even more.

But the difference is that health is predominantly provided by governments. We tend to see it as a problem when governments buy more, even if we want them to, whereas we don't worry when we do.

There's little doubt that we want to pay more tax for health. The latest increase in the Medicare levy (due in July) was approved with scarcely a murmur. It'll help fund the National Disability Insurance Scheme.

Some 19 per cent of the Australians surveyed in the latest Australian National University election survey rated health as their No.1 priority. Only 11 per cent nominated tax. It used to be the other way around.

As recently as the 1990s, Australians were more concerned about tax than health. But we are richer now, and older. We are able to, and keener to, spend more of our GDP on health.

It's always wise to get value for money, but it would really be stupid to buy less of what we really want.
In The Age and Sydney Morning Herald

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Protecting predators. What is it with assistant ministers?

What is it with assistant ministers? First the assistant health minister pulls down a healthy food labeling website, then the assistant treasurer insists he’ll plow on with plans to neuter Australia’s new financial advice rules.

One took two years to build, the other took five years. The food website had just gone live. The Future of Financial Advice legislation has been in place seven months.

What assistant ministers Fiona Nash and Arthur Sinodinos have in common is a willingness to buckle to the least consumer-friendly parts of the industries they regulate.

Nash was helped by a Chief of Staff who had an undisclosed conflict of interest. Sinodinos was until recently a senior executive at the National Australia Bank.

The legislation Sinodinos plans to stifle was born out of the collapse of Storm Financial.

Thousands of elderly and poor investors lost everything they had and more, persuaded by their advisors to borrow against their homes to buy shares and then to borrow more using the shares themselves as collateral. When the share price collapsed in the global financial crisis they lost the lot and owed even more.

The owners of Storm financial pocketed 7.5 per cent of everything that was sent their way, upfront. That’s 7.5 per cent of everything the clients invested as well as everything the clients borrowed. They directed huge chunks of it as rewards to the advisers the clients trusted.

After a landmark parliamentary inquiry and three years of subsequent negotiations Labor introduced a new law designed to make sure it could never happen again.

Financial planners would be required to act in the “best interests” of their clients. It was that simple. Sure, there were also specific requirements, but behind them was a straightforward requirement to act in their client’s “best interests”.

One of the specific requirements was a ban on commissions and other forms of conflicted remuneration...

It’s hard to work for a client when you are being rewarded for steering your clients in a particular direction. Doctors are unable to receive payments for scripts from drug companies. It’s fairly straightforward.

And advisors who continued to receive annual so-called “trailing commissions” from the makers of products they had previously sold would be required to let their clients know, by letter, once a year.

Every two years the clients would be asked by letter whether they wanted to continue to have the trailing commission deducted from their funds. If they failed to “opt in” the deductions would stop.

It would be fair to say much of the industry has already adapted to the changes (just as much of the food industry has already adapted to the food labelling changes that annoyed the assistant health minister).

Financial planners whose business model was built around commissions have left the industry. Many of those that remain are keen to serve their clients.

During the election the Coalition said little about the Future of Financial Advice Act (just as it said little about food labelling). Sinodinos didn’t know he would have the portfolio.

Just before Christmas he declared that the law had gone “too far”. They had created “unnecessary complexity”.

Oddly the part of the law he was keenest to remove was the simplest - the requirement for an advisor to act in their client’s “best interests”.

Taking it away would leave the process-related steps, the boxes that should be ticked, making it legal for an advisor to tick each box and yet not act in their client’s best interests.

Conflicted payments would be allowed once again, where the advice was general in nature and not personal. Put simply, if an advisor promises not examine a client’s circumstances, they are able to receive a kickback.

Advisors continuing to receive trailing commissions won’t need to let their clients know. Annual letters will be required only to clients signed up after July 2013. Sinodinos says “applying this requirement to existing clients is overly onerous” - an odd statement given that trailing commissions are said to be a continuing fee for an ongoing service.

And “opt in” will become “opt out”. Clients will be able to stop financial planners getting what might be an ongoing 0.5 per cent of their funds each year, but only if they find out about it and only if they make the effort of “opting out”.

It’s the delivery of a wish list which is making some in the industry blush. Although not the banks. They hated it the new law. They want to be able to continue to incentivise their employees for steering their customers into their own products. Being freed from the need to act in a customer’s “best interests” is worth a lot.

If Sinodinos was going to change the law he would have to act quickly. It has been in place since July 2013. Waiting until the Senate changed in July 2014 would waiting too long.

So he is going to try and do it by regulation. Regulations can be disallowed by the parliament, but that needn’t be an impediment if Sinodinos introduces them just after the parliament rises on March 27. It won’t sit again for six clear weeks giving his regulations the force of law - if they are legal, which the top law firm of Arnold Bloch Leibler believes they are not.

Regulations are intended to implement the provisions of an laws rather than nullify them it says in advice to Industry Super. Sinodinos will be hoping that by the time anyone challenges the regulations a more compliant Senate will have amended the law, giving him cover.

But it’s a big risk for an infinitesimal political gain.

Sinodinos is looking like Nash.
In The Age and Sydney Morning Herald

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Loads of money: it's the route to happiness

Never believe a rich person who tells you money doesn't matter. I used to be one of them. Not rich in financial assets, but on a high-enough income.

I used to appear on the ABC and in newspapers spouting the then conventional economic wisdom that (beyond a certain point) more money didn't make people more happy.

Of course it seems to, I would say. An individual who gets a pay rise will feel better off than his or her less fortunate neighbours but that's just because of a change in status. If an entire nation (or an entire state) gets a pay rise no one in it will feel any better off.

It's what the data seemed to show. In the United States average happiness had merely bounced around for decades as income per person climbed. Internationally high-income countries seemed to be scarcely any happier than low-income ones, except for cases of extreme poverty.

The buzzwords of the time were ''habituation'', ''homeostasis'' and the ''hedonic treadmill''. We were meant to have a sort of thermostat inside us. People who had lost their legs were said to feel little worse than when they had them. People who had won the lottery were said to feel little better than if they had lost. As Ethan Hawke put it in the movie Before Sunset: ''If they were basically optimistic and jovial, now they're optimistic and jovial in a wheelchair. If they were petty and miserable, now they're petty and miserable with a new Cadillac, a house and a boat.''

By all means get more money, the argument went, but if you really want to be happy, stop comparing yourself to your neighbours.

It reached its high point in 2006 with an article in the prestigious Financial Times headed: ''The hippies were right all along''.

Victoria's Treasurer had better hope they were indeed right. In the past six months 27,000 Victorians have lost their jobs. Melbourne incomes are growing at only half their usual rate and on one measure are falling.

But the hippies are wrong. And I was wrong, and probably Ethan Hawke. A re-examination of the data shows money is about as closely related to happiness as could be.

After comparing the results of 160 Gallup polls in 160 nations with gross domestic product per capita in those nations, Australian economist Justin Wolfers described it as ''one of the tightest cross-country relationships I have ever seen''.

Previous surveys had only compared handfuls of nations.

In 2008 he and University of Michigan colleague Betsey Stevenson found that GDP per person wasn't merely correlated to happiness, but correlated at a level of 0.8. And that was assuming the data was accurate. Wolfers believes the underlying correlation is even stronger.

Both GDP per capita and happiness are hard to measure. (Happiness turns out to be easier. It's a simple question, asked on a scale of 0 to 10 in all countries all around the world. GDP is harder. It is calculated by adding up everything produced, spent and earned in each nation. In some places it isn't done well.)

''It is amazing that the estimated correlation is as high as 0.8, given that it's a correlation between two noisy measures,'' Wolfers says. The actual correlation might be nearer 100 per cent.

And just as with income there seems to be no limit. The more money a person or a society gets, the happier they get - without end. Wolfers and Stevenson find that a doubling of a high income lifts happiness by about as much as a doubling of a low income. ''If there is a satiation point, we are yet to reach it,'' Stevenson says.

The downside is that as income per person slides, happiness or ''life satisfaction'' slides. We feel uneasy.

Which brings us to Victoria. SGS Economics and Planning says Melbourne's economy has typically grown by 3 per cent per year. In the past financial year it grew only 1.7 per cent.

When adjusted for population, GDP per person went backwards. On average, each resident of Melbourne made and earned less than the year before.

Treasurer Michael O'Brien doesn't like the conclusion. He points out that Victorians are having babies at a record rate. He says it's the births that have turned GDP per person negative. Adult Victorians probably may not have lost real income.

But Melbourne's GDP per capita has slipped in three of the past five years. It's looking like a trend.

The finance industry has grown. SGS says it accounts for 12 per cent of what Melbourne does, up from 7 per cent. Much of it is setting up in Southbank and the Docklands, straining the ability of public transport to get people to work.

Away from the centre, work in the middle and outer suburbs is hollowing out.

It's probably adding to frustration and anxiety. And if the established relationship between GDP per capita and happiness holds, it's making us grumpy.

It's an awful environment in which to be standing for re-election.

In The Age and Sydney Morning Herald

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Romance. Why is a ''basic woman'' is so attractive to a basic man?

Sixteen Valentines Days ago economist Herbert Stein stumbled across perhaps the ultimate question.

Why is it, he asked, that a “basic woman” is so attractive to a basic man?

He was quick to point out that he could have asked the question the other way around.

Stein had worked presidents Nixon and Ford. He was a senior fellow at the American Enterprise Institute. He was 81.

The question is harder to answer than you might think.

Stein liked to ponder it as he sat at an outdoor table watching couples walk arm-in-arm up the hill leading to New York’s Kennedy Centre.

“I look particularly at the women in those couples. They are not glamorous,” he wrote in Slate Magazine.

“Some of them are pretty, but many would be considered plain. Since they are on their way to the Kennedy Center, presumably to attend a play, an opera or a concert, one may assume that they are somewhat above average in cultural literacy. But in other respects one must assume that they are, like most people, average.”

“But to the man whose hand or arm she is holding, she is not average,” he wrote. “She is the whole world to him. They may argue occasionally, or even frequently. He may have an eye for the cute intern in his office. But that is superficial. Fundamentally, she is the most valuable thing in his life.”

And then his question: “Why is this basic woman so valuable to the man whose hand or arm she is holding?”

In their new book, An Economic Theory of Greed, Love, Groups, and Networks Australian economists Paul Frijters and Gigi Foster actually attempt an answer, but at a personal cost...

Forster writes that while the prospect of understanding love is intellectually compelling, “actually witnessing the demystification of the love mechanism is also shocking on a personal level.”

“One must find a way to carry on after this experience as a normal individual, despite having deconstructed love (and hence one’s own loves) into constituent parts.”

They see love as a strategy, in the same way as trade and stealing are strategies. Each is about getting something we want, but love is a strategy that changes us.

Economists have long known about the other two. We are acquisitive. If we see something we want we take it. If we can’t take it we trade something for it. But what if neither taking nor trading works? What if we are powerless to get what we want?

Newborn babies are as powerless as could be. Taking things isn’t an option, they can scarcely move. Nor is trade, they have nothing physical to trade.

So they do the only thing they can. They completely subjugate themselves to a higher power.

As Frijters puts it: “Someone who starts to love begins by desiring something from some outside entity. This entity can be a potential sexual partner, a parent, society, a god, or any other person or abstract notion.”

“From a position of relative weakness, the loving person tries to gain control over this entity by incorporating the entity into his own sense of self.”

The needy person makes themselves a mere part of something larger, be it society, a religion or (hopefully) a couple.

And then they are hooked. They are no longer just themselves. It’s hard to fall out of love with something you’ve become part of. The other person, the society or the church or cult has becomes your everything.

Why is this basic woman so valuable to this basic man?

Stein says it isn’t necessarily sex, although it may once have been. He says it’s something even more primitive: human contact.

And conversation.

“The primary purpose of this conversation is not to convey any specific information,” he writes. “Its primary purpose is to say, I am here and I know that you are here."

And it’s being needed.

“If no one needs you, what good are you, and what are you here for?” he asks. “Other people - employers, students, readers - may say that they need you. But it isn't true. In all such relationships you are replaceable at some price. But to this woman you are not replaceable at any price.”

“So this ordinary woman - one like about 50 million others in America - has this great value to this man she is going to the theatre with. He surely does not make a calculation. He probably never says how much he values her, to himself or to her. But he acts as if he knows it.”

How did Stein, a mere economist, know it? He wrote: “My wife and I walked up that hill to the Kennedy Centre many times”.

In The Age and Sydney Morning Herald


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We've drawn a line in sand on industry support. Sure.

Within minutes of treasurer Joe Hockey declaring an end to “the age of entitlement” on Monday the assistant infrastructure minister Jamie Briggs stood on a highway on the outskirts of Hobart and announced a grant of $3.5 million to a Tasmanian seafoods manufacturer, Huon Aquaculture.

It would help “provide the equipment to process fresh fish, as well as smokehouses and other machinery for boning, skinning, portioning and mincing,” he said.

The Tasmanian government was kicking in $1.5 million, the Commonwealth $3.5 million and Huon Aquaculture itself $7 million.

As it happens the proportions are roughly similar to those asked for by SPC Ardmona to save its fruit canning plants in Victoria. SPC had suggested $25 million from the state government, $25 million from the Commonwealth and $90 million from itself. In fact as a proportion of the total SPC had asked the Commonwealth for less than Huon - two dollars in every ten rather than three.

Why did the Commonwealth reject one, creating “an important marker” and not the other? On Tuesday finance minister Mathias Cormann tied himself in knots explaining that one was a “grant” while the other was a “co-investment”, although at it wasn’t always clear which.

“Let’s just be very clear,” the finance minister said.

“We were not being asked to make a co-investment, we were being asked to make a grant from the taxpayer to an individual business so that they would be able to invest in a $12 million dollar restructure of their business. We were not being asked to make an investment, if you make an investment you actually get a share in the business and you end up getting a return from your investment.”

Governments of all persuasions support businesses, sometimes by direct grants, sometimes by tax breaks, sometimes by tariffs and sometimes by the provision of services such as Austrade, subsidised water and electricity, technical colleges and the CSIRO.

Often the support has a broader justification. We are told the grant to Huon Aquaculture will “support Tasmania's contribution to this vital industry”.

The $16 million to Cadbury in Tasmania is “essentially an investment in tourism infrastructure” according to the prime minister.

What will eventually be $750 million per year in “direct action” grants to carbon emitters is as much about the environment as it is the businesses that benefit.

It’s the same with the $5.5 billion per year private health insurance rebate. It’s about the patients as well as the funds...

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Government support for business is as hard to escape as it is to quantify.

The Australia Institute says the mining industry receives $4.5 billion per year in subsidies and tax concessions, half of it from fuel subsidies. The Productivity Commission comes up with a lower total - $700 million per year.

The motor vehicles industry costs $621 million, and another $785 billion in tariffs. Food manufacture costs relatively little in terms of grants and concessions ($45 million and $62 million) but a whopping $1.7 billion in tariffs.

All up the Productivity Commission says Australian governments deliver $10 billion per year in industry support.

An end to support - “a line in the sand” as a backbencher put it - would be something to see. But we’re nowhere near it and we probably never will be.

In The Sydney Morning Herald and The Age






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2014 Economic Survey. Steady as she goes: rates on hold all year

Here is is, the 2014 BusinessDay economics survey:

As the Reserve Bank prepares for its first board meeting of the year the BusinessDay forecasting panel is predicting a rarity - an entire year without a move in official interest rates.

It hasn’t happened since 2004.

A unique blend of 25 of Australia’s leading forecasters in the diverse fields of market economics, academia, consultancy and industry associations, the BusinessDay panel includes several former Treasury forecasters. Over time its average forecasts have proved to be more reliable than those of any of its individual members.

A year ago the average forecast was for a cut in the Reserve Bank’s cash rate from 3 per cent to 2.7 per cent. The Bank cut to 2.5 per cent. In 2012 the average forecast was for a cut from 4.5 per cent to 3.6 per cent. The Bank cut to 3 per cent. This time the average forecast is for no cuts. The average comes in slightly below the current rate at slightly below the current rate at 2.46 per cent by June and slightly above at 2.55 per cent by December.

If rates do say on hold at around 2.5 per cent for the entire year it will be because the settings are already in place to deliver just enough (anemic) economic growth to keep further unemployment (almost) at bay.

The average forecast reflects a panel evenly split. Nine of the 25 members expect rates to fall further, nine expect rates to climb, and seven expect them to stay put. Two of the panel expect cash rates to fall to an ultra-low 2 per cent. One of them, Macquarie Group’s Richard Gibbs expects it to happen in the first half of the year. The most bullish forecast is from Stephen Koukoulas of Market Economics who expects 3.5 per cent by the end of the year and 3 per cent by June. As it happens Koukoulas was spot on last year, predicting a near-record low of 2.5 per cent by year’s end.

The central forecast is for improving global growth partly offset by a further easing in China. The panel expects the world economy to grow 3.3 per cent in 2014. In the United States it expects through-the-year growth to climb to 2.7 per cent. China’s growth should slip further to 7.4 per cent, but there is a wide range around the forecast. Melbourne University’s Neville Norman expects China to grow by 8.2 per cent. Stephen Anthony of the Canberra consultancy Macroeconomics expects 6.5 per cent.

Weaker Chinese growth would mean a further slide in Australia’s terms of trade. The price of Australia’s exports relative to imports has already slid 18 per cent from the peak in late 2011. The panel expects a further slide of 3.9 per cent. Only Richard Robinson of BIS Shrapnel and Gareth Aird of the Commonwealth Bank expect an improvement. Their forecast upturns are modest: 1.4 and 0.7 per cent.

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Business investment is expected to stagnate further as resource prices sink. Non-mining businesses are unlikely to fill the gap. The average forecast is for a further decline in investment of 3.2 per cent. Tim Toohey of Goldman Sachs forecasts the steepest decline: 11.6 per cent. Neville Norman is alone among the panel in expecting an increase, of 5.1 per cent.

The panel expects Housing investment to surge as the full impact of last year’s rate reductions comes through. The most impressive forecast is from Tim Toohey who offsets his pessimism about business investment by predicting a 10.5 per cent lift in home building. The average forecast is for a 5.3 per cent increase. One of the lowest forecasts is from the Housing Industry Association itself, which is expecting 1.8 per cent.

The pace of Household spending is also expected to pick up, climbing 2.5 per cent in 2014 after advancing 1.8 per cent over the past twelve months.

The panel believes the boosts in both housing investment and household spending will be enough to lift the pace of GDP growth from 2.3 per cent to 2.7 per cent. The highest forecast, from Stephen Koukoulas is 3.9 per cent. The lowest, from Jakob Madsen of Monash University is 1.2 per cent.

Although welcome, economic growth of 2.7 per cent would be well below the long-term growth rate of 3.4 per cent, and insufficient to stop the unemployment rate rising. The central forecast is for an unemployment rate of 6 per cent by year’s end, up two notches from the present 5.8 per cent.

Population growth means individual living standards will advance by less than GDP. The panel expects GDP per capita to grow by 1 per cent during 2014, which is an improvement on 2013. Jakob Madsen expects it to fall, slipping 0.5 per cent.

Inflation has been edging up with the falling dollar, most recently reaching 2.7 per cent in the year to December. The panel expect it to stay at recent highs, finishing the year at 2.5 per cent backed by an underlying rate of 2.4 per cent. The ANZ’s Justin Fabo picks the highest headline rate: 3.4 per cent. Nigel Stapledon of the Australian School of Business picks the lowest, 2 per cent.

The panel expects the Australian dollar to drift lower, finishing the year at 86 US cents - close to but not quite at the “magic spot” of 80 and 85 US cents identified by Reserve Bank board member Heather Ridout in an interview with Fairfax Media in January. Only two of the panel expect the dollar to end the year back up above 90 US cents: Su-Lin Ong of RBC Capital Markets who expects US 95 and Stephen Koukoulas who expects parity. The lowest forecast, from Stephen Anthony is for US 78.

And the budget deficit will come in pretty much as forecast, both this year and the next in the view of the panel. The result is more surprising than it seems. The forecasts in the government’s pre-Christmas budget update were presented as if they reflected badly on the outgoing Labor government. The update predicted a deficit of $47 billion in 2013-14 and $33.9 billion in 2014-15, unless something changed. The government has set up a Commission of Audit to recommend changes in time to shrink the deficit in 2014-15, but the panel expects little progress. It’s opting for $47.6 billion in 2013-14 and $32.8 billion in 2014-15.

Given the panel’s relatively weak forecast for Australian economic growth it might be of the view that the economy couldn’t take too much progress on the cutting the deficit. If the government reaches a different view and cuts hard, the panel’s central forecast of unchanged interest rates may turn out to be on the high side.

In Business Saturday


The most accurate of the Business Day forecasters this past year was only half human.

“Barry” is a dynamic stochastic general equilibrium model of the Australian economy. Its creator is Stephen Anthony, a former Treasury modeller who set up a private consultancy Macroeconomics in 2007.

Dr Anthony uses his own judgement about fiscal policy and monetary policy and then uses Barry to spit out results for everything else. Barry is built from more than fifty equations.

Last year Barry said the Australian economy would grow by 2.5 per cent (so far it’s been growing at 2.3 per cent), China would growth 7.3 per cent (so far 7.7 per cent), the US would grow through the year growth by 2.1 per cent (2.0 per cent), household spending would grow 1.8 per cent (1.8 per cent) housing investment 2.1 per cent (1.7 per cent). Barry said the Australian dollar would end the year at 90.5 US cents (it ended at 89.2) and a current account deficit would reach $55 billion (it reached $52 billion).

Not everything came out the way Barry and Stephen predicted. Inflation was higher at 2.5 per cent rather than 2.1 per cent, unemployment was lower at 5.8 per cent rather than 6.3 per cent and the cash rate was nowhere near as low. It ended the year at 2.5 per cent, well above the machine-human hybrid’s prediction of 2 per cent.

Only five out of the Business Day panel got the cash rate completely right, and they were completely human: Shane Oliver of the AMP, Nigel Stapledon of the University of NSW, Frank Gelber of BIS Shrapnel, Stephen Koukoulas of Market Economics, and Brad Crofts of the Australian Workers Union. Most of the panel thought it would end the year much higher, some above 3 per cent.

The inflation rate of 2.7 per cent was an easy pick for most of the market economists, but for no-one else apart from Neville Norman of Melbourne University.

Where the academics came into their own was the 2012-13 budget deficit. None of the other forecasters predicted anything like the eventual outcome of $18.8 billion. Professors Bill Mitchell and Jakob Madsen came about as close as possible, picking $20 billion.

All of the other forecasters who went for a lower deficit can be excused. The Treasurer had been predicting a surplus.

In Business Saturday


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Where's the Gonski report? It's back, on a government website

...after a bit of a push

The Gonski Report is now back on a government website. But only after an extraordinary intervention by Fairfax Media.

All traces of the 286-page school funding report and its associated submissions vanished from departmental websites shortly after the Abbott government took office in late 2013.

A search for the phrase 'Gonski Report' on the education department's website returned the query: “Did you mean ‘lenskyi support’?”

The new education minister Christopher Pyne said he wanted to go “back to the drawing board” on school funding and charged his department with developing “a new model that is national, that is fair to everyone and that is needs-based”.

The Gonski Review, the most comprehensive in 30 years, vanished from the official record.

Other publicly-funded reviews including the Henry Tax Review and the Garnaut Climate Change Review remained on their dedicated websites.

Asked through the freedom of information process why it had deleted the Gonski website the department referred to “the outcome of the federal election and the relevant machinery of government changes”.

In January Fairfax Media used a little-known provision of the Freedom of Information Act in attempt to return the report to the department's site.

The Act not only requires a range of documents to be supplied on request, but also stipulates those documents that are supplied be published or made available on a so-called disclosure log, which each department has to place on its website.

Fairfax Media didn't need a copy of the report. It had already published one on its own website and had access to the National Library's copy available on its Pandora web archiving site.

Last week the department granted Fairfax request and returned the report to its website, education.gov.au.

Australia's Freedom of Information Commissioner James Popple said the intent of the provision was to encourage departments to publish public documents “unless there is a technical reason why they can't”...

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“Direct publication facilitates public access,” he said. “Technically if a document has been provided under the Act it is already available. Disclosure logs put that into practice.”

But the department has returned to the web much less than was there before. It has published only the 286-page final report requested by Fairfax. The issues paper. The previously-published commissioned studies and submissions remain hidden.

And the department has taken steps to distance itself from the report. It has included a disclaimer noting the report was commissioned by the “previous government”.

In The Sydney Morning Herald

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The makeup trap. Why women keep piling it on

And some would like to take it off

Tracey Spicer wears three inches of make up. She doesn’t literally wear that much, but she says that’s the way it feels.

“Let me take you through my schedule,” the television journalist told the Brisbane TEDxWomen conference in December.

“Get up, look in mirror, see old lady looking back, put on running gear designed to suck in wobbly bits, run to maintain professionally acceptable size 10, go to bathroom, scour skin with defoliant to get rid of those dreadful dead cells, hop in shower, lather hair with sodium laurilsulfate, rinse out, dollop on conditioner containing placenta extract, wait until it sinks in, rinse off, soap up, wash off, get out of shower, dry body, lather body in petroleum byproduct, otherwise known as body moisturiser, and wait until that sinks in, cleanse face, add toner containing alcohol, dab on eye cream, cover the rest of the body in bronzing cream, and wait until that soaks in, put straightening jell in hair, section of and apply searing heat until styled into shape, almost do back in lifting up makeup kit, foundation powder, concealer, blusher, eyeshadow, eyeliner, eyelash curler, mascara, eyebrow liner, eyebrow colour, lip liner, lipstick, lipgloss, put on shapewear to suck in mummy gut after two children, pop on dress perfectly pressed by a dry cleaner using known carcinogens, add liquid to nails containing chemicals linked to cancer after yesterday visiting the house of pain, the one with the hot wax which drips above my lip and below my eyebrows before large hairs are torn out of my face.”

"Why, why do we do this to ourselves?” she asked, before adding: “...because its bullshit.”

And then, in the video on the internet, Spicer began to he begins to “deconstruct” the problem, literally.

To whooping and laughter she removes her layers of makeup, sprays her hair to return the frizz, takes off her dress, removes her high heels, and remains on stage wearing nothing much at all.

“Imagine what we could achieve if we weren't beholden to society's unreasonable expectations about how we should look?” she asks.

“Over our lives on average women will take 3276 hours grooming...

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For men it's 1092.”

“Do you know what we could do over those 3276 hours? We could complete a Master of Business Administration, become proficient at a musical instrument, learn another language...”

“I've got a seven year old daughter. Every time I get ready for my TV appearances she stands next to me in the bathroom, and she always asks the same question: Mummy, why do women wear makeup and men don't?”

“I can't say: ‘Because honey it makes me look better’, because that implies that women don't like the way they look naturally. I can't say: ‘It makes me feel better’, because that points to pathologically low self esteem.”

“What I do say to her is: Darling, I don't like it, it's not right, but it is what society expects of women.”

Is it wasted effort as Spicer suggests? If the aim of makeup, grooming, and what would would have once been unthinkable exfoliation is to help women get ahead (and good looks do help, even babies are attracted to beautiful faces) the the effort ultimately will be wasted, even though if though it works to start with.

Four decades ago the British economist Fred Hirsch summed up the folly of what he called positional goods like this: “If everyone stands on tiptoe no one sees better”.

A positional good is something that improves the position of someone who uses it, like buying a $500 suit to attend a job interview. It’ll work, and it’s far from stupid to try it. But as soon as everyone gets a suit, the expense is wasted. The job outcomes will be the same, yet everyone will have spent an extra $500. But by then there will be no way of escaping it. It will have become essential.

Charles Darwin was on to it earlier. He noted that large antlers gave male elk an advantage in fighting for females. But as they mated the entire species developed very large antlers and became vulnerable to attack. In his book The Darwin Economy economist Robert Frank sums up it up this way: What was good for the individual was bad for the species.

Think about dental work, or university degrees. We are drowning in them compared to earlier decades, and they help the people who get them. But does all the extra work advance the species?

Frank says in many areas of life we impose limits. Nations have arms reduction talks, ice hockey players wear helmets. We get together to help individuals in a way they can’t themselves.

No-one should accuse Spicer of hypocrisy for continuing to wear makeup when she presents the news. She is prepared to point to the problem and she is pleading for a way out.

In The Canberra Times, The Sun Herald





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Clipping peaks. Why we'll allow power companies to turn off our air conditioners

It'll save us a fortune

Productivity Commission

Only an idiot would turn off their air conditioner during near-record heat. But the economics of electricity mean that’s what we’ll have to do if we want our power bills to stop rising.

Last week’s extraordinary heat was unusual. One estimate says Melbourne hasn’t had a run of days like it for 100 years. But the generators and the cables had to be build to handle it (they nearly failed).

In NSW the rare spikes of extreme electricity use last for just 40 hours a year when added up. That’s a mere half of one per cent of each year. But the Productivity Commission says the cables, substations and generators built to handle them account for around 25 per cent of each electricity bill.

It’s a financial cost that dwarfs the carbon tax. And the physical cost of generators we otherwise wouldn’t need and rarely-needed maximum strength cabling is enormous.

Sometimes the peaks last just minutes.

Twelve years ago extreme peaks were only an emerging problem. Australia had half as many air conditioners as it does today. In NSW 65 per cent of homes are now air conditioned, in Victoria and Queensland it is around 75 per cent, in Western Australia 86 per cent and in South Australia more than 90 per cent.

Queensland estimates suggest that each 2 kilowatt air conditioner imposes a cost of up to $7000 on the entire system. This isn’t the cost of running it. It’s the cost of building otherwise unneeded capacity to be able to run it on those rare occasions when nearly everyone else is running their’s.

The Productivity Commission says the $7000 figure is an overestimate...

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Many new air conditioners simply replace older ones. And they are getting more efficient (although although more powerful).

Its calculation, allowing for the fact that even in peak periods some air conditioners are not fully used, is a one-off cost of $2500. It says that’s amounts to an extra cost of $350 per year per air conditioner, paid by all electricity users, whether or not they cool their homes.

Productivity Commission

It’s even more unfair than it seems. It isn’t just the few Australians without air conditioners who are paying money they needn’t to build up the system for those with them, it is also Australians with only small air conditioners who are paying far more than they should to support houses with massive three-phase ducted systems.

Rarely has there been a problem in economics to which so many inappropriate solutions have been offered.

A decade back South Australia imposed a higher electricity charge in summer than it did in winter. It was meant to impose greater costs on users of air conditioners. But all it did was impose greater costs on everyone in summer, even those who couldn’t afford to or didn’t need to cool themselves.

The Electricity Supply Association suggests imposing a larger fixed supply fee on those households with double the usual electricity consumption (typically those houses with lots of air conditioning). But the main effect would be to lumber them with a fairly inescapable cost. Already being liable for the fee, they would have every incentive to run their systems at full bore in extreme heat.

In December the Commonwealth government issued an issues paper proposing greater time-of-use pricing. The idea is that high prices at times of high use would encourage people to move their use to other times, as happens with variable road tolls.

It’s an idea that seems to have promise because Australians are indeed price sensitive when it comes to electricity. Energy analyst Hugh Saddler of pitt&sherry says that as electricity prices took off from 2008 household electricity use steadied. As prices soared still higher from 2010 household electricity use fell for the first time in a century. Houses use less electricity now than they did five years ago.

But that doesn’t mean they will use less in a heatwave.

"No one is going to avail themselves of time-of-use pricing on a 45 degree day,” he tells me. “No one is going to turn off their air conditioner when it gets extremely hot just because of time-of-use pricing. The only time you would need them to respond to time-of-use pricing is the time they won’t.”

Economists, conditioned to believing that prices always change behaviour, find this hard to accept - unless they themselves have been locked inside a building during five straight days above 40C.

The economic problem of finding a way to avoid massive infrastructure costs brought on by mere days or hours of extreme peaks is probably best solved by turning away from economics.

Queensland is showing the way. The government-owned Energex offers customers cheaper electricity if they install “PeakSmart” air conditioners. PeakSmart means remotely controlled. As peaks approach, the electricity supplier sends a “ripple” down the line which can switch the cooler off or into a less cold method of operation (the fan stays on so it still feels cool). At test sites in Perth and Adelaide most of the users couldn’t tell the difference. The switch-off might last just minutes, not much longer from what happens automatically when the system is operated by a thermostat. But because different suburbs are powered down at different times, PeakSmart can eliminate extreme system-wide peaks.

Eight manufacturers are already providing machines that are PeakSmart ready. You might have bought one yourself without even knowing. Australian ministers will meet soon to decide whether to make PeakSmart readiness compulsory. After that it’ll be up to us and whether we are prepared to have our machines turned off remotely.

It’s less scary than it sounds, extraordinarily simple, and urgently needed.

In The Age and The Sydney Morning Herald


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Australia Post. Why it no longer needs to deliver daily

When I was young the postman came twice a day. You could post a letter in the morning and if you were lucky have it delivered across town by the afternoon.

It was the only way to send messages (apart from telegrams, which were expensive).

Then came the phone (and the increasing usefulness of phones - they weren’t very useful at first when only a few houses were connected). Deliveries were cut back to once a day, and the Saturday service was axed.

The nature of the post changed. Short messages arranging meetings were no longer needed. Longer 'essays' were still the preserve of the post as was the delivery of documents, parcels and bills.

Then came mobile phones and text messages (and with them the gradual disappearance of Doctor Who style telephone boxes). You could send messages from almost anywhere. Even away from home there was no need to send a letter.

At first the arrival of email made little difference to the post. As with the phone it was of limited use when few of us had email addresses. And we couldn't send big documents.

Then email addresses became ubiquitous, as did social media. The much forecast 'digital divide' never happened. Every strata of Australia is now connected, from the elderly to farmers to school children. And the capacity of the system has grown. Almost all of us can send big documents and long letters with ease. We don't need to post them.

Australia Post says back in the 1980s almost all written communication was carried by the post. Today it’s less than 1 per cent...

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And most of it is bills or notices from various levels of government.

Late to the party, businesses are abandoning the post big time. They are using email to send us bills and even ‘junk mail’. Links to websites mean they can get an instant response, or instant payment.

The Coalition has pledged to put virtually all government services and interactions online by 2017. By then there will be scarcely anything left to post.

Mail deliveries are plummeting at the rate of 4 to 5 per cent a year. Twelve years ago Australia Post delivered an average of 2.2 local letters or bills per day to each street address per day. It is now 1.7 and on track to fall to 1.3 by 2016, sliding further beyond that.

When the national broadband network is complete there will be no excuse whatsoever for daily mail deliveries. Australia's really remote locations are already limited to two deliveries per week. That should become the standard for the rest of us, as a precursor to eliminating local deliveries. If the spread of the telephone was responsible for halving the frequency of mail deliveries, the spread of the internet should be responsible for eliminating them.

It would be absurd to have spent $40 billion building a world-class system to instantly deliver messages while hanging on a system poorly replicating it that hardly anyone used.

Delivering mail used to make Australia Post money. It now costs it $150 million per year. The loss is on track to blow out to $1 billion, and then perhaps $2 billion, far exceeding the profits from delivering parcels and making the entire organisation an albatross around the taxpayers necks.

Delivery twice a week is more than adequate for most parcels. If someone wants one sooner, they can try a competitor to Australia Post or pay a premium.

Australia will soon stop paying Holden and Ford to make cars Australians aren't keen to buy.

If we are serious about getting value for our taxpayer dollars we will also stop paying postal workers to make deliveries Australians no longer need.

Australia Post employs 33,000 workers and provides work for another 10,000 contractors. Twice-weekly deliveries would slash the wage bill (and the rubber burnt and the petrol poured into tanks) and give us a chance of making good on our investment in the NBN.

It’s not only a question of money. Right now there are roughly 2 Australians of traditional working age for each Australian who is older or younger. The Intergenerational Report says by 2050 there will be just 1.5.

Australia will need to make good use of every worker it has. Employing someone to do something we no longer need merely because we always have will be a waste of a scarce resource. In most fields the market will handle the transition. Banks are moving us away from tellers, supermarkets invite us to check out our own groceries, and the baker and the milkman no longer call.

But Australia Post is stuck with a government-imposed requirement to deliver mail five days a week to 98 per cent of Australian addresses. Changing it will require a government decision. It’ll mean taking on unions and the National Party.

The Business Council tackles the question obliquely in its submission to the Commission of Audit by saying there’s a case for selling Australia Post. But that's beside the point. The point is that we are asking Australia Post to do things we no longer need. Passing the parcel to a private owner who can take on the unions and lobby for weaker service standards is passing the bucks.

In The Sydney Morning Herald and The Age


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Secret fees. Why the war on red tape is a war on us

Imagine being whacked with an annual fee for a service you didn’t get. You would want to know about it, right? Apparently we’ve voted not to.

The annual fees we pay to financial planners are so big they rival electricity bills. Many of us might not even be able to remember the last time we saw a financial planner. But if we once did, and if that planner put us into a superannuation fund or investment product, it is likely the planner is continuing to get an ongoing “kick back” or “trailing commission” - year in, year out for as long as we stay with the product.

Worth typically 0.5 per cent of the funds under management, it gets bigger over time as our contact with the planner recedes into the past. It adds up to $500 on a fund with $100,000 under management, $1000 per year when the fund grows to $200,000 under management, and $2000 per year when it grows to $400,000.

It shouldn’t be confused with the separate and larger annual fee for actually managing the money - that goes to the financial institution itself. The trailing commission is a hangover from the days when financial planners were called insurance salesmen. It was their commission for selling and keeping you in a product. (A separate, larger commission was paid to them upfront - taken directly from your funds before they were placed under management).

If you didn’t know you were paying the annual fee, it could be because you didn’t read the fine print, or it could be because you were put into the fund way back in the days when the fine print was exceedingly fine and hard to find.

It is still hard to find, which is why after a Senate inquiry into the collapse of several high-fee institutions the previous government wrote into the law a requirement for financial planners to tell you.

Every year each financial planner would be required to write to each client telling them the fee the planner had taken out of their fund in the previous year, the services that had been provided in return for the fee, the fee that would be taken out the following year and the services that would be provided in return for it.

Every second year they would be required to also send a renewal notice...

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If the client said no, or didn’t send it back, that would be the end of the fee.

Planners could escape the strict letter of the law only by joining a professional association which imposed requirements no less severe.

The law required a few other things as well. Financial planners would required to act in the “best interests” of their clients and to “place the interests of their clients ahead of their own”. Astoundingly, this hadn’t previously been the case. That’s because financial planners were once salesmen. Just as a refrigerator salesman isn’t required to put your interests ahead of his own in recommending the most suitable model, insurance salesmen weren’t either.

And from July 2013 it would be illegal for any new deal between a planner and a client to be funded by “conflicted remuneration” or kickbacks. Customers would have to pay planners directly.

Rather than accept the law, or campaign publicly against it, those planners wedded to trailing commissions went to the Coalition complaining about “red tape”.

After the election, under the cover of Christmas on Friday December 20, those planners received their reward.

The assistant treasurer Arthur Sinodinos announced that “consistent with the Coalition's election commitment to reduce compliance costs for small business, financial advisors and consumers,” the legislation would be “improved”.

Gone will be the requirement to send all clients an annual statement. It will apply only to new clients, signed up from July 2013. Older clients (most of us) won’t be told how much we are continuing to pay to someone who was once our advisor. They will be able to keep the income stream and sell it when they sell their businesses.

One statement once a year would have been “overly onerous”, even though its probably the least that could have been expected from a planner who actually was providing on ongoing service.

Gone too will be the requirement for anyone paying an ongoing fee to “opt in” every two years. We will still be able to opt out if we want, but unless the planner hears from us it’ll be assumed we want to keep paying the annual fee (even if we don’t know what it is because we are not getting annual statements).

Its a deal other industries would love, made all the more invisible because superannuation contributions are deducted automatically from our wages.

Sinodinos thinks we voted for it.

In The Canberra Times and Sun Herald


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