It may be Europe will proceed with two speed integration.  The 17 members of the Eurozone may chose political integration without the participation of the UK, Denmark, Sweden, the Czech Rep, and others.  Or, a deeper  core of Germany, Netherlands, Luxembourg, Belgium and France, might push ahead alone toward political union.  But, the GFC has highlighted the problems of subsets of the EU integrating at different speeds.  The most significant changes in Europe have to be agreed to at the level of the EU treaty, which gives non-participants veto powers.

Of course we don’t know what will happen to the political structure of Europe, or anywhere else, in the long term.  My guess is that a push for a wholesale remaking of the EU treaty into a European Constitution will arise soon after the economic crisis in Europe has passed.  That push will be unstoppable, and countries that won’t ratify a new European Constitution will be effectively opting out of political integration in Europe.

I think the UK should leave the EU as soon as is practicable.  It is a bad marriage which will cause a lot of anguish to both sides and there are no children to consider.  The sooner they end it the better for both sides.  The UK is a Liberal Democratic society that will always feel suffocated by, and alienated by, a socially democratic Europe.

Opponents of a UK exit from Europe, such as the Economist magazine, argue that it would be an economic catastrophe for the UK.  I can’t see that at all.  Why will the UK not be able to do just as well as Switzerland or Norway?  These are much smaller countries than the UK, but so what?

The US position on the possible departure of the UK from Europe is interesting.  The State Department and President Obama himself have stated quite clearly that they oppose a UK exit.  They have told the UK explicitly that it will be ‘isolated’ if it leaves Europe (they don’t mean ‘splendid isolation’).  That term ‘isolated’ seems to be a clear statement that the UK should not consider any kind of union with the US if it leaves Europe, and certainly should not try to negotiate entry into the North American Free Trade Agreement (NAFTA) before leaving Europe.

I think there is something important and subliminal in the US position on UK membership of the EU.  If the UK leaves Europe then it will be hard for the US political class to ignore that.  The UK as a floating, ‘isolated’ element in the global community will inevitably start a conversation about what the US should do about that.  Should the US push for UK entry to NAFTA?  Should the US consider some form of union with the UK?  This later question is one the US doesn’t want to think about but it would be hard  to ignore.  The US has such as sense of its own ‘specialness’ and destiny that it doesn’t want to ever think about political union with anyone.  This attitude is expressed in the US attitude to international treaties and forums of all types.  But, the bond between the US political class and the UK is very, very strong.  They really care about the UK.  Thinking about an isolated UK will lead to thoughts about whether the political structure of the United States is immutable — and such thoughts are a form a heresy in the US.

A possible UK exit from the EU also impacts the question of whether Scotland should exit the UK.  For many Scots the idea of a Scotland that travels into the future on a parallel but separate course to the UK is an appealing one.  They want to be separate but still much more closely engaged with the UK than any other country.  The possibility of a UK exit from Europe after a Scottish exit from the UK introduces a lot of uncertainty for Scots.  As the likelihood of a UK exit from Europe grows the likelihood of Scottish succession from the UK will likely shrink.

One can see the main learning challenges in Australian schools as related to the quality of what is taught, the quality of who is teaching, and the quality of the school as a whole. Three main issues then come to mind:

1. The curriculum is often too influenced by political concerns and of low quality.
2. Teachers are relatively low paid, and have seen their relative wages drop over many decades, leading to the newer cohorts of teachers to be less good as the old ones.
3. Failing schools are kept going rather than replaced, effectively leading to whole neighbourhoods being bereft of good educational opportunities.

On top of this, the sector has governance issues, like a large education bureaucracy both inside schools and outside of them, but since we are here ultimately interested in the transmission of knowledge, let us focus on the problems at the coal-face and talk about the governance issues when they arise.

Now, on point 1, I am optimistic about the role of the National Curriculum that was recently introduced. It will make it visible what the educational problems are in parts of the country, most likely will lead to a set curriculum and thus a set textbook and teaching aids for all subjects, and should hence significantly raise the bottom of the education distribution (though I don’t think it will matter for the top). Whilst one cannot really see this dynamic yet on the ground, in which schools and states are just getting used to the idea of a national curriculum, one can argue that other countries that have a national curriculum have indeed gone the way of raising the floor (NZ in particular). Given the competitive mindset of the Australians and the fact that you now get frequent international comparisons, I do expect the political pressures to accumulate to use the national curriculum to improve what is taught and how it is taught. In short, I think the signs are good in terms of addressing problem number 1.

Point 2 is a very tricky one because of the fact that we have a large stock of teachers who accept the current wages and hence would not change their behaviour if you increased their wages. This means education authorities, school principals, and ministers have a strong incentive not to raise teacher wages except for the new entrants. However, if you would cheat the stock of existing teachers and only increase wages for the new teachers, you quite understandably run into opposition from the union on equity grounds. Similarly, having schools compete for teachers by letting the good schools offer better teachers higher salaries needs active competition and would probably only happen if the private schools expand and become more academically focused (rather than focused on local networks or particular religions). In short, the pressures from within the sector don’t look like leading to higher teacher pay at all, even though it is well-recognised that better teachers are the main thing that leads to improved education.

Whilst the federal government could explicitly raise teacher wages, the current reforms do exactly the opposite: to partially fund the Gonski reforms, the government is discontinuing the current policies of paying some teachers extra, and the policies under which principals can reward good teachers (and many commentators seem not to realise that the main benefit of paying teachers more is that you attract better people into the profession). In exchange for this effective lowering of teacher pay, it seems likely that it is the already overly large education bureaucracies that will get discretion over how to spend more money, and only non-economists could believe that they are going to spend most of the money on improving education by attracting better teachers into the profession by means of higher wages, rather than to predominantly use the money to hire more and better paid bureaucrats. Indeed, even if the local education bureaucracies were far-sighted and truly interested in teaching outcomes, it makes no sense for them to individually increase teacher pay because aspiring teachers do not know where they will work and hence base their entry decision on the average pay in the whole sector, implying that it needs a central push to increase teacher pay across the board. Given that Gonski seems to imply local authorities get discretion, we are talking about a clear missed opportunity in terms of teacher pay.

The third problem is the trickiest of all and has bedeviled most education reforms and flummoxed many economists too.

The essential problem with failing schools is twofold: their initial failure leads to lock-in effects such that they become hopeless in nearly all dimensions (teaching, parents, pupils), whilst there are enormous political transaction costs in actually closing down a school. Let me expand on both.

Schools can fail for many reasons, just as a marriage can go sour for many reasons. Schools might have a particularly bad principal, have particular drug-prone and aggressive students, might suffer from parents who see the dominant culture as something to be actively resisted, have open warfare between clubs of teachers, etc.

Like a failing marriage, once a school starts to fail, the problems tend to get worse and worse. Good teachers will leave a failing school and try their luck elsewhere. Good pupils will leave to go to other schools. Active parents will similarly take their children elsewhere. So over time, a failing school gets stuck with the most demoralised and least skilled teachers, the most disruptive and dumb pupils, the least interested and least active parents, and a run-down building to boot.

Now, economists know exactly what should happen in such a case: you basically want the whole school to be disbanded. You don’t merely want new management, because new management would still inherit the disruptive culture amongst students and parents. Similarly, a small influx of better pupils or parents wouldnt help much either. No, what you want is for all the teachers, parents and pupils to have to find a better school elsewhere, cap in hand. That’s what happens in a market: what is efficient and productive survives, what is not disbands such that the individual elements can become part of successful entities elsewhere.

Why do you want to destroy the old school rather than reform it? Basically because you want to force the disruptive parents and the dispirited teachers to enter a different culture in which they are the small minority: you want the disruptive kid to go to a school where the disruptive behaviour is not merely frowned upon by teachers, but actively discouraged by the peers in the class. You want the dispirited teacher to go to a school where the other teachers are optimistic and things are run well, so that that teacher rediscovers the good parts about teaching. Etc. Effectively, you want teachers, parents, and pupils to get away from cultural lock-in effects (called peer spill-overs in the jargon of this literature).

Now, here is the rub: destroying an existing school comes with huge initial transaction costs. You force individuals to go to schools further away (a big no-no in policy land, particularly when pertaining to Aboriginal kids); you are stuck with a large expensive property unsuited for anything else; and you would have to pay out redundancy packages for the teachers and actively find places for the pupils.

It should be clear that this disruption is politically very unappealing and a nightmare administratively. So the local politicians and education bureaucrats would usually prefer to have the next generation of local children get no decent education than go through the pain of this disruption. This selfishness on the part of politicians and bureaucrats, by the way, is normal since it is the usual tradeoff between visible short-run pain versus uncertain long-term benefit. It is exactly the same when it comes to bankruptcy of large corporations: politicians don’t want to be seen to be responsible for those forms of short-run pain either.

Now, it is in this realm that the Gonski reforms will succeed or fail. The headline promise is that funding will follow students (a voucher system), which in principle means that good schools can outbid bad schools, that new schools can come in, and that bad schools can thus go bankrupt, to be replaced (potentially in the same location some time later) by good schools.

Will this really happen though, and in particular, will local education authorities allow bad schools to disappear and be displaced by (Christian) private schools or more successful public schools, as many commentators seem to hope? I have my doubts: I find it hard to imagine that local politicians and bureaucrats will not actively sabotage or try to undo any existential threat to bad schools. They simply have too much to lose politically not to engage in ‘emergency loans’, ‘visitation committees’, ‘additional resources’, etc.

I find the following quote by the teacher union ominous as to what will really happen with the Gonski reforms: ‘‘What Gonski proposed to do is not pay teachers but instead direct resources into schools to allow students who are disadvantaged, by a whole range of circumstances, to get better outcomes for education’’. My my, that sounds pretty bad, doesn’t it? The unions clearly don’t think the additional resources will go either to improve teacher pay nor to the disbanding of failing schools. They seem to hope it goes into the bottomless sink of administrators ‘helping’ failing schools.

In this respect, the post-Gonski environment will probably offer a lot of scope for fudge and for rewarding failing schools rather than killing them off. For instance, local education authorities can then easily discover a whole set of mental learning difficulties amongst the pupils of a failing school, thus allowing them to send in an army of monitors who will set ‘performance criteria’. Similarly, they can engage in the ‘let us try new management’ trick, thus ensuring not much changes in the medium run. In short, I fear that the potentially positive aspects of the Gonski reforms are easily sabotaged and that we will end up with more education administrators.

My hope is that the National Curriculum will break the political dead-lock over failing schools: that open league tables will start to make it so clear which schools are really bad, that education authorities will bite the bullet and truly let some schools go under, replaced by better ones. But I am not holding my breath on this.

In the short run however, the resources for Gonski seem partially to come from reducing teacher pay (via the axing of bonuses), which is a clear turn for the worse in terms of attracting good new teachers. Australian education just got a little dumber again.

Timothy’s first and main empirical finding is that “Overall, the average compensation of a top 100 US public university president is A$480,409; that of a UK vice chancellor A$456,867; and that of an Australian vice chancellor A$721,607. ”

Now, that sounds like Australian Vice-Chancellors are ‘only’ paid some 155% of the compensation of equivalent US and UK Vice-Chancellors, doesn’t it? Not 300% by a long way. But this is where one should dig deeper into the data (explained in his Footnote 3).

Timothy’s data on the US is on total compensation, so includes bonuses and pensions and side-benefits. His data on the UK includes salaries and pensions. Yet his data on Australia is just salary.

In Australia, the salaries that you find in the annual reports do not capture all the elements in the total compensation package of the Vice Chancellors. It misses bonuses, superannuation and side-benefits. And these are large chunks of the total compensation package.

To start with bonuses, my recent post on the goings-on at QUT already mentioned that the average bonus for the Vice Chancellor plus Deputy Vice-Chancellors there was A$270,000 in 2011. That reflects an average bonus of around 40-50% for that layer of administrators.

Employer contributions to superannuation are not normally reported in Australian salary scales, but usually lie in the range of 14-17%.

If we add these probable bonuses and superannuation contributions to the stated salaries of all Australian VC’s (40% and 17% compounded), we get an average monetary compensation of A$1,118,000 per Vice Chancellor in Australia. And that does not yet include the chauffeur-driven car, the business-class travel, or other forms of additional compensation, but let’s be generous and pretend those don’t exist.

So if you just look at monetary compensations for the average Vice Chancellors, then the Australian ones get paid around 250% of that of the top 100 American universities and UK counterparts.

But of course we are then comparing the average Australian VC with the average VC of the better universities in America and the UK. This is not the proper comparison because Australian universities are not in the same league as the top 10 American ones where the salaries are of course higher. If you compare with the more appropriate level of American and UK universities (the bottom of the top 100), you find that you are looking at average total compensations of around A$400,000 in the US and the UK. Using that as a comparison gets you the stunning number that an Australian VC gets paid around 300% of equivalent VCs in the UK and the US.

If one then reflects on Timothy’s finding that the VCs at the GO8 and SJT/ATN universities in Australia get paid at least 20% more than the VCs of other universities in Australia, one should realise that one is looking at an approximate total compensation package of around 1.3 million for VCs at the GO8/ATN/SJT universities in Australia, bringing their compensation well above 300% of VCs at equivalent universities in the UK and the US.

Nice jobs if you can get them! And, as Timothy argues, we are clearly not looking at pay-for-performance, but rather at the compensation levels agreed between different layers of the same entity, i.e. between chancelleries and chancellery-appointed Senates!

As I argued in an earlier piece, one possible solution to the massive governance problem at Australian universities is to have a compensation ceiling wherein no-one in the universities administration can earn more than the Prime-Minister of the day. That would restrict Vice Chancellors to compensations considered normal in top universities in the US.

But when will it be over?

“Outlining a plan to deliver a tiny surplus of less than $1 billion in the third year of the budget cycle, after a larger than expected deficit nearing $20 billion for 2012/13, the Treasurer has revealed the $5000 baby bonus will be scrapped from March 1, 2014, to be replaced by a lower $2000 supplement payable only to recipients of Family Tax Benefit (A).”

In other words, if your kid is born on the 28th February 2014, you get $5000 and, if it is born one day later, you either get $2000 or nothing depending on your income. What this means is that, to the extent that scheduling birth timing is possible, parents will have a huge incentive to move their deliveries forward. You don’t want to play around with health outcomes just to implement a policy but there you go.

Is birth timing manipulable? Yes, you can plan an inducement or a caesarian although some have denied it. When there are economic incentives do parents react by changing birth timing? Yes. How do we know? Well, when the baby bonus was introduced on the 1st July 2004, the same carrot was dangled in front of parents: that time to delay births. That lead to that date having the largest number of births in recorded Australian history (which probably means, Australian history). And then again on the 1st July 2006, we saw a similar surge. This was all carefully studied, and written up in accessible form. It is literally the textbook case now of bad policy implementation. At the time, I criticised the Coalition government who continually did this of poor economic management, a term which here means doing something that you know in the face of overwhelming evidence that will create bad incentives. Sadly, in countries around the world governments have continued to implement policies that change birth timing and economists have studied their continual bad impact.

So now we have the same thing coming. It isn’t hard to imagine why. The Government knows it will impact on people’s birth timing decisions. So why is this not scrapped today? Well, there is an election coming up is the cynical response. But the real cynical timing date would be the 7th June 2014 which would mean everyone pregnant by 14th September would still be eligible for the baby bonus. As it is, you can still get the baby bonus if you conceive by the 8th June or so this year. In other words, Wayne Swan would need to be some sort of aphrodisiac because you may need to get started right away.

That aside, this is poor economic management. As I wrote 7 years ago:

Burying your head in the sand on the reality of this is not going to make good fiscal management or health economics.

I have no issues of getting rid of the baby bonus although I will note that it was claimed to be Australia’s current parental leave policy. But how you implement these things tells you about what sort of economic managers you are dealing with.

[Update: when births were delayed, birth weights went up so it was unclear that the health outcomes were necessarily poor. This time around the reverse could happen and low birth weight is not generally considered good in the short- or long-term for babies. To be sure, doctors will caution parents on this but they shouldn't be put into the position of having to tell parents why they might miss out on a significant amount of cash.]

What was memorable about the Canberra and Melbourne launches were that the hosts had read the book and prepared lengthy speeches on it, which of course was very flattering. Andrew Leigh, who hosted the Canberra launch, already put his verdict on his own website and Adrian Pagan, co-hosting in Melbourne, kindly gave me permission to let you see what he made of it in the pdf attached (Adrian Pagan on frijters book).

Of course, neither of these two eminent economists are uncritical praisers of the book I wrote with Gigi Foster, and both speeches draw attention to elements that raised their interest and doubts. Andrew Leigh, a politician now, notes how often we make the kind of strong statements that he can no longer make! Adrian Pagan likes the importance in our work of economic linkages in the explanation of recessions, but he is not quite yet ready to accept our theory of love without a bit more humming-and-ahing. Yet, both are very supportive and complementing, whilst giving their own unique view on the endeavour. Thank you both. We hope to get similar responses in our tour of the US and Europe later this year!

Abbott’s leave scheme is a step backwards for women

Tony Abbott’s paid parental leave scheme is widely regarded as a boon for women. But will it do anything to address the larger problem of gender discrimination in the workplace? Joshua Gans says it likely will make matters worse.

Parental leave policy is back in the news. The Coalition is intending to spend billions of dollars a year on a so-called ‘generous’ parental leave scheme.

There have been debates over whether it is too much, but ultimately the issues are deeper than that. What no politician – of either side – seems to be willing to touch on is that the whole scheme likely is a massive step backwards with regard to the position of women in the workplace.

To understand this, we should remind ourselves of what the public policy issues really are here. One of the stated reasons for parental leave is to make it easier for parents to choose to take career pauses to care for children. That is, in fact, why many companies, especially larger ones, actually offer parental leave.

The rationale for government intervention in the labour market is to extend that worker’s right universally. Why? Because there is a desire to make workplaces today more family accepting and friendly. Without intervention, we get stuck in a competitive situation in which being family-friendly is costly for employers, and in a competitive market place, they can’t afford it. However, make it a regulation, and the competitive pressure goes away.

The Coalition’s plan, on the surface, is dressed up to look like it will tackle this. It will give a mother’s replacement wage to families for six months at up to $75,000 or, if the mother isn’t employed, the minimum wage. It seems hard to argue that that is bad for families who will receive that benefit. But it isn’t hard to see a problem if you look at the bigger picture of gender discrimination in the labour market.

Despite massive strides, women still fare worse than men. While starting from the same educational attainment (if not better), women’s pay is lower and they do not progress up the corporate and government hierarchies at the rate of man. It isn’t hard to think of why: women are still far, far more likely to take leave from work – paid or otherwise – when children come along. That shouldn’t harm their career prospects, but it does precisely because employer’s face costs when workers take six month or longer pauses. Those costs are real and what it means is that, at the margin, employers are more likely to hire and promote men than women. So differences persist.

Now, consider what happens when into this mix you plop the Coalition’s big incentive for women to take maternity leave. And I say it is an incentive for women because it is women who can get their replacement wage for six months. Just look at the Coalition’s policy document. This isn’t parental leave, it is maternity leave.

To be sure, somewhat grudgingly, the Coalition will allow a man to be a primary carer but he is only going to get his spouse’s replacement wage. Why? Because the Coalition throws in the breastfeeding card – something I’ll return to in a moment.

Under the Coalition’s scheme, women are more likely to take maternity leave than before; after all, that is the stated intention of the scheme. But it blasts the household bargain as to who stays home with the baby back to the 1950s. All of the incentive is for women to take six months off to get the advantage of the scheme. Employers will know this and so when they are evaluating equally qualified men and women for good jobs, it isn’t hard to see that they will have more reason to choose the man. To be sure, it isn’t as bad as some proposals that mandated employers paying for that leave, but the incentives are still there.

What we really need is parental leave. In Sweden, both parents are eligible and both can opt to take leave at the same time. And they do. There are still costs to employers, but the balance over whether it is a man or a woman going to impose those costs is dramatically shifted, reducing pressures for gender discrimination. What is more, as any parent knows, it matters to have more than one adult around with the baby. This makes it easier for everyone to cope. To be sure, both parties now advocate a couple of weeks off for daddy, but let’s face it, daddy was likely sleep deprived anyway so this is just a straight out gift to employers. The point is that you need to be stringent in ensuring that parental leave encourages just that without entrenching discriminatory roles.

And what of the breastfeeding card? Only women can do that, right? Breastfeeding can be good for children; there is evidence for that. So we want parents to have the choice. But it is at best a second-order issue and there is no evidence whatsoever that when women stay home they are more likely to breastfeed. Indeed, in my experience, breastfeeding is made much easier when both parents are around. Mummy is going to find it much easier to sit down a feed the baby when Daddy is around to take care of the dishes and laundry.

So let’s not presume that throwing money a family’s way is decisive in that equation. And, by the way, let’s calculate what that money is. If you get $75,000 from the government and feed your baby on average six times a day, that is $68 a feed. Now that is some special milk.

There are ways to overcome all of this and change the workplace culture of Australia. A few years ago I proposed that governments give businesses who have workers who take parental leave and successfully bring them back to the workplace a tax rebate on that worker’s wage. This will give businesses an incentive to change workplace practices to accommodate parents and lower labour costs rather than precisely the opposite. You can read more about that here or watch my (slightly wonkish) video exposition. It is amazing to me that the so-called employer-friendly Coalition would rather choose an expensive labour market regulation than a market-oriented policy to tackle this policy.

The essential problem is political. Politicians, especially male ones, are falling over themselves to sympathise and be seen as sensitive to issues facing mothers, but are not at all willing to lead change. Ultimately, that is what is required here.

You cannot just throw money at an issue and think you have it covered and you are being a ‘good guy.’ Instead, you have to change the attitudes entrenched in our workplace culture that makes it difficult to have families and difficult to deal with families at work. That means you have to provide leadership and as near as I can tell there is virtually none of it on this issue in Australian politics.

Joshua Gans holds the Skoll Chair in Innovation and Entrepreneurship at the University of Toronto and is a Research Fellow at the Center for Digital Business at MIT. View his full profile here.

So here are the activities that are compared:

• uploading wedding photos to Facebook
• Downloading Game of Thrones
• Uploading a new puppy video to YouTube
• Syncing engineering designs with Dropbox

The biggest public expenditure in Australia’s recent history is going to this. Please explain how any of these are remotely a public good. And yes I am including the engineering designs here. Go with the Coalition and your business is set back 8 minutes!

For the Game of Thrones one it isn’t even a private good. With ALP you can download the whole thing in 16 seconds (actually, I’m pretty sure you can’t) but with the Coalition, it takes 10 minutes. But here is the point, if you download from iTunes you can start watching right away. In other words you get NO BENEFIT from the ALP NBN. Is it no wonder we can’t find people to privately pay for this.

And on the uploading ones that can be cured tomorrow by not limiting upload limits over DSL; that is, removing the A. The whole limited upload deal demonstrates why the current proposals remain in the dark ages.

But the whole exercise is enough to convince ourselves that neither plan is worth it. Now, I don’t quite think that but I do think that the focus on speed is ludicrous.

For those who haven’t been following it, this plan which harks back to 2010 is to give mother’s six months leave at their replacement wage up to a total of $75,000. That sounds good on the surface until you think for just two seconds as to what such leave is supposed to bring: it is supposed to make the lives of women easier. To be sure, more money when you have a baby does that but what is the cost?

The cost is to blast the household bargain back decades. In the time-old decision of who gets to stay home with the baby, this plan strengthens the incentive for that to be the mother. And if it is the mother, employers know that when they employ women they are just that more likely to take time off. Yes, I know, employers ought to be a good about things but it is also true that 6 month leave intervals are disruptive to workplaces as they currently are. So unless there is some massive shift in workplace culture, this plan will entrench gender discrimination and that is not a good outcome. Read the Coalition’s policy document and you get the feeling that is precisely what they are after.

There are other options. One is to have parental leave where either parent has the right to leave. Another is to move to a situation as they have in Sweden that requires both parents to take leave. That will start to change norms but I suspect the country isn’t ready for that.

Instead, if the Coalition were really the economically responsible party, it would engage in something thoughtful, market-based and business friendly such as my plan for years ago for tax rebates for returning workers. I won’t go into details here but if you want to read more, here is my plan. And here are some video treatments.

And this doesn’t get on to the cost of the thing. It is a regressive subsidy — favouring higher income households — and it also asks those who aren’t having children or who have already had them to essentially foot the bill.

Seeing those Evangelical schools and all that Christian devotional energy made me think about the Gonski report.  I don’t think people realise what a boost the Gonski funding reforms will give to Evangelical schooling in Australia.  The Gonski reforms have two main aims.  First, to ensure a minimum level of funding for all schools in Australia.  Second, to direct extra funds to areas of special need; in particular schools with: students from low socio-economic backgrounds; students with disabilities; students with poor English; and indigenous students.

To meet the first aim there is a minimum school resource standard (SRS) of $9,300 for primary school students and $12,200 for high school students.  Every school will be raised to this level.  That does not mean that government funding will be at this level for every school because the school ‘resource’ includes the resources of the parents of the children of the school (both financial and ‘educational background’ resources of parents).  Most schools that don’t currently meet the minimum SRS are either public schools from states which have under-spent on education or are private schools that have very low fees and parents with low incomes.

About 35% of Australian school children attend private schools.  About 20% are in Catholic Christian schools and nearly 10% are in low fee paying, Protestant Christian schools.  Many Catholic schools have low fees.  But many of the very lowest fee paying schools are Evangelical schools.  These schools often have terribly ordinary facilities — at least to start with.  An Evangelical primary school  was started by a church group in our area a few years ago with only a bunch of demountable buildings, such as you might see on a mine site.  Then in the ensuring years the energy and commitment of the parent group transformed the facilities of the school into something quite impressive.  These very low fee Evangelical schools with parents with low incomes will receive more funding under Gonski.  Their resources will be brought up to the SRS level.

To meet the second aim of the Gonski reforms — to provide extra funding for students with special need — loadings will be applied to student funding.  For schools with students from low income suburbs, these loadings will be very large.  Here is a quote from the ‘Better Schools’ site

A percentage of the per student amount, starting with 15 per cent ($1,391 per primary student and $1,829 per secondary student) for the first student in the lowest SES  quartile (Q1) increasing up to 50 per cent for Q1 enrolments over 75 per cent in a single school ($4,635 per primary student and $6,096 per secondary student).

For students in the second lowest quartile (Q2), the loading will start at 7.5 per cent for the first Q2 student ($695 per primary student and $914 per secondary student), increasing up to 37.5 per cent for Q2 enrolments over 75 per cent in a single school ($3,477 per primary student and $4,572 per secondary student).

My understanding is that this means the following.  If a church group decided to start a school in a very low income area and charge fees of almost nothing, then they will receive most of the SRS ($9,300 for primary school students and $12,200 for high school students) in government funding plus a big loading for low socio-economic status (SES).  That level of funding will be like ‘manna from heaven’ for Evangelical church groups that currently run schools on the smell of an oily rag.  They will be able to use church resources, and low interest government loans, to build schools with very modest facilities.  Then attract students because they offer the discipline and academic standards that public schools in many low income areas lack.  Then, run and build out the school with a level of resources that will be much greater than they currently need.

Once the Gonski funding is in place we will have the perfect conditions for a massive expansion of Evangelical schools in Australia.

1.  Evangelical church groups will bring the energy.  Evangelical groups are literally on a mission from God.  Religion for Evangelicals is not something done on Sundays and forgotten for the rest of week for them — it is the very core of their existence.  Education is the single most effective way to spread the word in suburbs of Australia.  Of course non-religious groups will have the same opportunity to bring the energy to building new schools — but where do you see that energy now among secular educational groups?  There are low fee secular private schools, but they are thin on the ground.

2.  Aspirational parents will bring the students.    Many parents in low income areas are aspirational and sick of the indiscipline and low standards of the schools their kids attend (even though the indifference to discipline and educational standards of other parents is most of the problem in those schools).  They don’t necessarily want a religious education for their kids, but many will jump at the chance to exit the public school system.

3.  The Gonski reforms will bring the funding — lots of new funding.

Eventually state education departments will resist the building of new Evangelical schools, but they won’t be able to stop it.  Concentrated political pressure can always move the bureaucracy to approve a new school.

This Gonski funding model is so favourable to low fee private education, for families that do not currently have that option, that it might push the share of private education in Australia over 50% in the next two decades.  If that comes about it will be by far that main legacy of the Gillard Government, for good or for ill.

Personally I think that will be a good thing.  It will put pressure on the public school system to improve and it will give parents with low incomes more options for their kids.  But I don’t think it is really what many people in Labour Party are intending.  I don’t think they understand what a boost to religious education in Australia this will be.  Especially Evangelical education in low income areas.

One of the hallmarks of a real university is that you don’t get called a professor for being a high level administrator: you have to have been a serious scholar with some degree of national and international recognition before you get the highest academic title a university has to offer. Whilst it is thus quite normal in many universities that high-level administrators are not academics because the job requires different skills, serious universities will only hand out academic titles based on academic merit, not administrative merit. After all, professors are supposed to embody and profess the quality of the academics in their university! So the reputation and quality of these publicly funded universities stands or falls with how easy or difficult it is to get an academic title. I will let you judge the case of QUT.

Let us start at the top of the university, made up of the Vice Chancellor and 6 Deputy Vice Chancellors. All 7 of them are professors. The 2 people just below the VC on the QUT management website, the ‘Senior’ Deputy Vice Chancellors are Professor Carol Dickenson and Professor Peter Little. Let us look at their achievements and those of the others using two standards every other academic has been judged by in recent years in Australia: whether they have published in good journals and conferences, and whether their peers have cited their work. For publications we can turn to the rankings used by the journal lists of the Excellence in Research for Australia (ERA) exercise, wherein publication outlets have been ranked from high (A* and A) to low (B and C). For citations, there are various possible sources, but let us take the very generous and easily accessible Google Scholars information, a resource frequently used and recommend in Australian grant applications.

A complication is that one cannot find the CV of any of these DVCs online, which is unusual because normally academics are not afraid to let you know their achievements. Yet, QUT helpfully has a reprint facility and Google Scholar finds almost every paper from the last 50 years. Also, the QUT website does tell you whether they have a PhD and where it is from, so there is enough information to trace people’s academic careers from these sources. To be sure the results are not biased, the DVCs were individually approached to see if publications and citations were overlooked in this search (none responded with information on additional papers or citations).

Professor Peter Little has a PhD (from Bond university). He has one publication in 2001 registered at QUT (co-authored with two others) in a journal that is not on the ERA 2010 journal list. He has another paper from 1998, also in an un-ranked journal, with a total of 31 Google Scholar Search cites (including self-cites) up to 31.

Professor Carol Dickenson has 17 cites generated by two papers, one of which is a report from a ministry and the other in a B-journal on the ERA journals lists.

What about the next four DVCs in line then: Professors Scott Sheppard, Suzi Vaughan, Arun Sharma, and Tom Cochrane?

Professor Scott Sheppard doesn’t have a PhD, has no publications to be found anywhere and has been a diplomat most of his life.

Professor Suzi Vaughan comes from an art background. In terms of publications,  she has two book chapters,  an un-ranked journal paper, two conferences (see here), and 14 citations on Google Scholar. On top of this is a 2003 ‘art work’.

Professor Arun Sharma  is still producing as an academic, with an A*, 6 A’s and 2 B’s to his name in the 00’s alone, as well as some serious conferences. He has 40 citations from his QUT-registered publications.

Finally, Professor Tom Cochrane. He does not have a PhD. He has one B and one C publication on the QUT repository . His main publication is called ‘making a difference: implementing the eprints mandate at QUT’ and has been cited 21 times, bringing his estimated total number of Google Scholar cites to 44.

Let us for comparison look at the publications and citations of senior professor-administrators in other regional universities in Queensland: the University of the Sunshine Coast and the Southern Cross University.

The Vice-Chancellor of the University of the Sunshine Coast has hundreds of citations and dozens of articles, praised on his own promotional website.  The Deputy Vice-Chancellor, the Pro Vice-Chancellor International, and the Pro Vice-Chancellor Research, all seem to be solid academics with hundreds of publications combined. Indeed, they are still publishing and are encouraging some of the lower managers, who primarily have worked in government, to write papers too. The one person on the management team who is clearly not an academic is also not called a professor.

At the Southern Cross University, meanwhile, the VC, the Deputy VC, and the Pro-VC look very solid academics too. Together they have about 500 publications (papers, book chapters, etc.) and thousands of Google cites.

Let us now take a different comparison and look at what is normal within QUT, the school of management in the faculty of Business. Let’s look at the lecturers first for they are at the bottom of the academic hierarchy. One of the lecturers there had 5 publications, including an A on the ERA 2010 list. And at the senior lecturer level, the standards are higher: this senior lecturer for instance has an A and an A* and a whole list of further publications. Another senior lecturer has several C’s, B’s and an A* too, on top of 165 Google citations, which is more cites than all 6 DVCs combined.

What is normal at GO8 universities? Well, senior professors at GO8s typically have thousands of citations and dozens, if not hundreds, of articles that are in the ERA rankings. In economics at GO8 universities, it would be hard to even get tenure as a lecturer without at least a couple of A/A* publications. Professors with less than 500 Google citations are rare. I don’t know any professor at a Go8 without a PhD.

What are the criteria at QUT for being a professor? Well, the official QUT criteria for professors is that they demonstrate “leadership and authority in research and scholarship”. Judging by some of the DVCs this apparently does not include the need for either a PhD, journal publications, or citations. Who judges, you might ask? In the end, at QUT it is all up to the Vice Chancellor whose word on this is final according to its criteria.

Do these DVC professors then accept a lower wage as compensation for getting an academic title with their levels of academic output? Not quite: they get huge salaries of around 500,000 dollars each (see pages 44 and 45 for their salaries) and average ‘bonuses’ of 271,000 in 2011!.

I have not looked at all the Deans and other ‘lesser managers’ at QUT, but from a quick glance at ‘Creative Industries’, the situation seems the same as higher up. You might want to browse their list of emeritus professors who are supposed to be top scientists.

I think it is up to the reader to judge whether QUT takes academic titles seriously or not. Personally, I am amazed at the ease with which administrators there get professor titles. I want to see QUT adopt far higher standards and find myself wondering, whenever I meet a QUT professor, whether they are a real one or not.

Disclaimer: the views expressed above are solely those of the author and do not necessarily reflect those of his employer (UQ). Previous writings on related topics are here, here, here, here, and here.

Professor Withers told the HES the main advantage would be that the government “gets the money now”. Rather than waiting for graduates to pay off some $26 billion in HECS debt — with the proceeds conservatively estimated at about $15bn, once forgone interest and non-payments had been taken into account — the government could immediately recoup $15bn in bonds.

The Oz asked both Stephen and myself independently what we thought and, as it turns out, much the same thing.

However, Monash University economist Stephen King said the proposal was just another form of government borrowing.

“All you’re doing is playing around with government cashflows,” he said. “It doesn’t matter where the money comes from when it’s time to pay it off.”

Professor King said the government could just as reasonably issue bonds against expected tax receipts. “You can run the argument for more funding of higher education, but accounting tricks are just accounting tricks,” he said.

The Chinese emperors hit upon this truth when they started to surround themselves with eunuchs, despised by the rest of Chinese society and thus fiercely loyal to their protector, the Emperor. The roman emperors, similarly, made a habit of surrounding themselves with freed slaved who were despised by other Romans, as well as by a dedicated palace guard (the Praetorians) who were the only militia allowed in the vicinity of Rome.

The European colonialists too used this basic ‘dirty dozen’ technique when it came to keeping a large population in check with minimal own presence, particularly in Africa, by elevating some small despised group (ethnic or religious minorities) as the preferred club from whom the senior administrators came. This small favoured group would get personal benefits (riches and influence) but in return they would do whatever the colonizers wanted.

To see the relevance of this for university cuts in the Land of Beyond, you first need to step back a level and imagine yourself to be the Vice Chancellor of a second-rate university that brings in, say, a billion ‘Beyond’ dollars a year out of which some 300 million is money you dont really need to generate that 1 billion. It is ‘potential profit’ if you like.

Now, your first thought will of course be to give as much of this money to yourself as you can. That is not so easy though: in Beyond, universities are non-profit organisations nominally run by senates and full of academics who like to monitor and criticise you. You would never get away with giving yourself multi-million dollar salaries and huge offices if academics are really watching your every step.

So in order to get more of the profit, you need to subdue two groups, the academics and the senate. You subdue the academics by keeping them busy with ‘compliance’ and having a lot of systems in place to punish them if they become pesky. You thus include in your rules that anything that harms the reputation of the university is a sacking offence. You put yourself at the top of the committees that decide on professorial promotions and academic bonuses so that you are their direct boss. You appoint hundreds of administrators to monitor the media, teaching, and student-related activities of the academics with the purpose of keeping them quiet and punishing them when they get out of line.
You subdue the senate by overloading them with information (for which you need again more administrators) and by keeping them happy with luxuries and gifts. Over time, you attempt to get control of the mechanism via which new members get to be in these senates.

Now, the essential problem you face in this as a VC is how to ensure that the people helping you with your take-over plans are somewhat loyal to you rather than to something as silly as the goals of the university or academia or even to the needs of Beyond. It is loyalty to yourself that you need in order to eventually be able to get away with giving yourself huge amounts of money.

You remember your history lessons and realise that what you need is a set of eunuchs: people despised by the academics in your organisation who will thus have the same incentive as you have to subdue the academics and grab as much of the university resources as possible.

What are the equivalent of eunuchs in universities? Why, non-academics of course! Better still, non-academics whom you give academic titles for they will be even more despised! Hence you pick the most efficient bullies you can find, call them all professor and put them in charge of the divisions that subdue the academics and that send mountains of information to the university senate to ensure they will just go along with whatever you happen to ask of them at the end of some sumptuous occasion.

Due to your brilliance and foresight, the trick works like a charm and you find yourself earning well over a million, with several huge offices, and in a position to bargain for even more kick-backs from outsiders who want to use parts of the university for their own end (property developers and the like).

Now imagine yourself in the layer yet higher: you are now an ambitious paymaster in the Capital of Beyond, someone who nurtures a reputation for being able to get things done even if they might not really be in Beyond’s best interests. You too have a control problem for you want all kinds of things from universities. You would like the universities to keep the population happy by churning out cheap degrees to domestics. You also want universities to sell visas to smart oversees students by means of high fees for almost no education (cross-subsidising those domestics). Basically, you want universities to abide by whatever fancy drifts into the head of your current minister.

The control problem you have as a ‘wheeling and dealing’ senior civil servant in Beyond is again those pesky academics: they are self-righteous, not all that interested in your opinion or even your money, and wouldn’t easily go along with these plans. They might well flatly refuse to sell visas to foreigners because they would baulk at short-changing the education given to those foreigners. Indeed, they would probably laugh in your face if you suggested that universities should fall in line with, say, your wish to have a campus in the middle of nowhere just because it is a marginal constituency.

Just imagine what confident academics would do if you told them to cut their budget by 900 million! Why, they might do something as bold and brash as to honestly tell their students that there are no funds to properly educate them. Imagine the political fallout of such honesty by a bunch of self-righteous academics who won’t simply do your bidding! No no, it is quite clear to you that the last people you want leading universities are academics. You want leaders who know what you really mean when you talk about ‘university accountability’, ‘stakeholder management’, ‘strategic visions’ and ‘preparing for the future’.

So the senior Beyond bureaucrat too finds herself in the situation of needing eunuchs in charge of universities. You don’t mind if they get some private benefits out of the arrangement as long as they do your bidding and not rock the boat politically.

Now think a step higher again and consider why Beyond might have fixers at the top of the ministries …..

So, who did this study that concluded that Australia would need 50 years and 114 billion dollars to build a high-speed rail line that would make travel slightly longer and more expensive than just going by air?

The report was compiled by a gravy-train made up by AECOM and its sub-consultants (Grimshaw, KPMG, SKM, ACIL Tasman, Booz & Co and Hyder), all highly-paid private consultancies. There was no noticeable involvement of the public sector at all.

What is wrong with that? Everything. Private consultancies get paid for their answers, not their honesty. Just take AECOM’s strategic vision: “Our purpose is to create, enhance and sustain the world’s built, natural and social environments”. Lovely. Its a bit cheeky of course to have entirely contradictory elements (build and natural) in your mission statement as if they are not contradictory at all, but what do you expect from consultants? Honesty?

KPMG Australia then, what about their reputation for honesty? Its stated values are of course beautiful, full of words like ‘respect’, ‘honest’, ‘community’, ‘integrity’.  But what about its history in this kind of area? Well, its 2010 report into the mining tax was a great example of being paid-for-an-answer. It was selective, made false comparisons, and uninformative. My conclusion at the time was that “The report, and in particular the summary, is indeed not an objective appraisal but a piece of propaganda that was bought for a reason.”

So, it is a bunch of paid consultants that now tell us that it would take 50 years to build a high-speed rail line (whilst the Chinese took 4 years to build a longer one between Beijing and Shanghai). And how serious are its pronouncements? Well, if you use their own disclaimer, not very much for they say in their own disclaimer “The Study Team has not verified information provided by the Information Providers (unless specifically noted otherwise) and it assumes no responsibility nor makes any representations with respect to the adequacy, accuracy or completeness of such information. ”

So, it was given a set of assumptions and information by others and takes no responsibility for checking those, meaning that its conclusions could have been pre-cooked by those ‘information providers’, including the controlling ministry. How handy! How convenient to have such non-inquisitive consultants! So much for integrity!

It is basically ridiculous to have national debates on the basis of the words of hired guns. The Australian civil service should have something like its own independent budget office with the ability to calculate the effects of major infrastructural projects, as well as major tax plans.

We now in fact have a parliamentary budget office and I hope it grows into a substantial independent body that can get us out of these consultancy-lead shadow debates.

I am here to talk about Paul’s contributions to applied theory. While Susan and Yeon-Koo have talked about theoretical contributions that so many in this room associate with Paul, to the wider profession, his main contribution is somewhat different.

Take a look here at his most highly cited work. With just a couple of exceptions, it is all applied theory. And moreover, when you look at where those citations are coming from it is not economics. It is management, strategy and finance. In other words, Paul is the most significant theorist in business and management, today, and possibly ever.

How did this happen? To give some context, there is really a schism in economics and social science in general. It surrounds the issue of complexity. There are many social scientists who think the world is too complex to make simplified theory useful. When you use specific assumptions — like rationality or expected utility or equilibrium — or more commonly in applied work, functional forms — they argue that you miss so much that what remains is useless.

Paul’s view of the world, it seems to me, is that complexity must be respected but our tools of economic theory can guide us as to their own appropriateness. In that respect, simplicity is a virtue and is manageable so long as the tools and methodology applied is understood.

Take the famous result in agency theory of Bengt and Paul’s that simple wage functions can be optimal. Everyone knew those functions were employed in practice but the ‘informal’ reaction was that it was a response to difficult of doing more, or a saving of cognitive costs or a lack of skill. Paul said no, it can’t be that. There will always be a smart agent who would improve it and then we would see heterogeneity. Instead, the complexity of the world itself would give rise to a simple response.

That is one way to read all of Paul’s work. Simplicity must be a response to the complex environment. And simple theoretical treatments can be immediately generalised if those treatments capture key trade-offs. Paul taught us where to look.

What I learned from this is that in applied theory there is a symbiotic relationship between the real world phenomenon, the formal model and its intuition. And there are feedbacks between all three in the exploration that is economic theory. I had the pleasure of observing Paul, and John, during the hey-day of their foray into organisational economics. Time and time again, they would take an individual transaction (Paul contracting with a builder, say; Paul thinking about spectrum packets; observations of a Toyota factory in Japan) and realise why existing theory just couldn’t apply. In that process, they would identify and relax the key assumption and draw new implications (the job design should change; you have to us computer technology to deal with substitutes and complements in packages; that change will be hard) and discover it in the real world. They would leave behind a framework for empirical researchers to follow and that is where all those citations come from. They seep through MBA curriculum. It is a tremendous legacy.

Not only that, Paul appears to yearn for ‘beauty’ in his theories. If it is a mess, you must be missing something. You haven’t identified the key trade-offs. These papers are beautiful. I have taken this to my own applied work. Avoid contrivance. Understand intuition. And above all, become a useful theorist. That will make theory useful.

Now for we mortals this is a challenge. Paul lights the path because it comes easily to him. I remember him lamenting to me that it took him a whole day — a whole day — to get the model right for a paper. But that doesn’t mean that we should not aspire for the same.

Applied theory is an area that continues to have issues finding its place in economic research. But Paul has, in many respects, allowed good applied theory to flourish and rise to a new standard.

In conjunction with the conference, everyone involved contributed to his Wikipedia page as a birthday gift. Suffice it to say, this was greeted with enthusiasm and it produced one of the most comprehensive entries of any economist (and perhaps the longest, in the terms of bytes, of them all). Several Nobel prize winners contributed so I think it is safe to say that quality is high. Here is Al Roth’s account.

“The average person who does regular internet activities is probably not going to notice much difference today,” Professor Tucker said. ”Where I think it will make a difference is in small businesses.”

Independent telecommunications analyst Paul Budde said right now only about 5 per cent of people, mainly small businesses, would be able to make use of the increased speed.

This from top supporters of the current NBN.

So why not just do FTTH for small businesses? Why does it have to be rolled out at public cost to everyone?

In the year Margaret Thatcher became PM, government revenue was around 34% of GDP. When the conservatives finally left office at the end of the 1990s it was a bit higher at 36% and today it is… again, about 36%. Government spending at the peak of the recession of the early 80s was 47% of GDP and  …. so it was again in 2009 at the peak of the current recession.

Real GDP growth per person from the first quarter in 1970 to the first in 1980 was around 25%. From the first quarter in 1980 to 1990 it was around 32% (and the next decade 26%). Not so different from Germany.

In terms of major events that politicians can truly influence that came up in her time, the first one that comes to mind is the housing bubble that the UK government allowed to build up and that burst at the end of the 1980s, leaving households in negative equity and devastating the country as much as any Winter ever did. The second one that comes to mind is the Single European Act of 1986, proposed by Lord Cockfield (British) and helped through parliament by Thatcher’s massive conservative majority, giving European laws reached by qualified majority precedence over those of the UK. This greatly expanded the powers of the EU and diminished those of Britain. It was one of the biggest reductions in UK’s parliamentary powers in its history. No wonder Thatcher tried to disown it later when ex-post rationalizing her reign to fit her image, essentially by pretending to have been too stupid to see what she was pushing through parliament. A weird defense from an ‘Iron Lady’!

And if you believe her favourite minister’s autobiography (John Major, who went on himself to be PM for 7 years), then Thatcher was pushed by her cabinet to declare war on the Argentineans, changed her mind frequently on important issues, and had gone control-freak to the point of paranoia by the time of her demise.

So the overall legacy of Margaret Thatcher has been to make no basic difference to the spending or revenue of the state, to have bankrupted many small house owners by having too low interest rates for too long, and to have signed over a lot of powers to Europe. So she neither destroyed the public sector, nor was she truly frugal, nor was she immovable, nor did she protect British powers.

Summing up her time, she resided over an average economic period, made serious mistakes, and essentially went with the flow of her party and the times. A normal reign. What was truly unusual about her was her style: people were and are passionately for her or against her.

So the reality simply does not measure up to either the picture that her enemies paint nor that of her supporters. The consumers of Thatcherism are the consumers of exaggerations.

But what about her facing down of the unions, I hear you ask? The halving of union membership, the demise of Arthur Scargill and the return to mass private share ownership? Was that not a real change in the destiny of the UK?

I am glad you ask about that one. Yes, the unions lost a lot of influence during Thatcher’s time. But what filled the void of these public sector and manufacturing-based unions? The small entrepreneurs she so admired and that were part of her own family history? Fat chance! In effect, what replaced the manufacturing unions were the financial unions: with the demise of the role and power of industry came the rise of London as a financial capital, fueled by foreign money and foreign workers, making manufacturing uncompetitive and greatly increasing the power and influence of the financial executives.

So yes, sandwiches at number 10 by hairy smelly men with strong regional accents were no more after Thatcher. They have been replaced by well-coifed corporate men smelling of roses, with impeccable French and German English accents, coming for caviar on toast. To paraphrase the Italians: everything had to change so that nothing would change!

Conviction is not sufficient for greatness but it did ensure that Thatcher was never diverted from her purpose to remake the UK economy, and society with it, on the basis of Liberal principals.  What made Thatcher great was her instrumental role in ending the crisis of confidence suffered by Liberalism in the UK, and throughout the West, from 1914 to the mid-1980s.

The decades before WW1 were the golden era of Liberalism in Europe.  The following key tenets of Liberalism reached a peak at that time.

1.  The belief that individuals are the units of civilisation, and that individuals give up freedoms to create society; rather than society being the unit of civilization and society granting liberties to individuals.  Hence the Liberal belief in the freedom of individuals to live and organise their lives as they choose and outside of traditional hierarchies and social orders if they wish.

2.   The belief in Laissez-faire organisation of the economy and a minimal role for the State in the economy.  The belief that the ownership and accumulation of private property is the right of individuals and generally has positive externalities.  A belief in the equality of opportunity, the sweeping away of vested interest and the rule of law.

3.   An optimistic view of progress by humanity and faith in the ability of reason and continual questioning of existing beliefs and understandings to elevate humanity.

WWI was an assault on each one of these tenants and caused a deep loss of confidence in them.  The imperatives of total war led to suppression of the liberty of individuals through the censoring of the press, seizure of property, and most profoundly, the conscription of millions of young men into the armed forces to fight.  The economy came under the close control of the State and was organised for war production and little else.  The faith in human progress that was so characteristic of the pre-WW1 Western Europe was bleed out at Verdun, the Somme, Ypres and Passendale.  Wilfred Owen’s Anthem for a Doomed Youth ends with:   Their flowers the tenderness of patient minds, And each slow dusk a drawing down of blinds.  That drawing down of blinds was Europe’s loss of faith in human progress.

The West’s crisis of confidence in Liberalism was broadened and deepened by the events of the Great Depression and the Second World War.  By the end of WWII there is a seemingly permanent shift of Europe’s mindset from Liberal Democracy to Social Democracy.  After 1945 the individual is no longer paramount.  A powerful and wide reaching State is needed for our collective protection and co-insurance.  Pursuit of individual goals are deprecated and subordinated to the collective.

I shouldn’t go too far, but just in terms of the economy the UK sees widespread nationalisation of industries (railways, electricity, steel) and the creation of a welfare state in the decade immediately following WWII.  During WWII Thatcher was at Oxford University, where by her own account she read Friedrich Hayek’s great critique of State control of the economy, The Road to Serfdom, in 1944, its year of publication.

Thirty five years after the end of WWII Margaret Thatcher was in 10 Downing Street preparing a Liberal campaign to remake the UK economy.  Thatcher sought to restore confidence in key Liberal values – that is what makes her a great Liberal Prime Minister.

The idea Thatcher was a Conservative is absurd.  She was a radical who sought to remake UK society and especially the economy, guided by her belief in: the primacy of the pursuit of individual goals and freedom of individuals to act without interference from the State;  skepticism over the efficacy of the State and collectivist projects in general; belief in the benefits of the ownership and accumulation of private property; and opposition to vested interest.  Thatcher was also a strident opponent of totalitarianism which is the polar opposite of liberalism.

Thatcher was a great Liberal because she was a key agent, perhaps the key agent, in the restoration of the West’s confidence in Liberal values.

1. I am a Labor voter and will be so in the current election.
2. I can do that because I am an Australian citizen. I just happen to live in Canada.
3. Living in Canada is not a bad thing, it gives me a different perspective on some issues.
4. One example of that is that broadband delivered over cable or 4G wireless is fast; much faster than what most have currently in Australia.
5. I did not endorse the Coalition broadband plan. There aren’t enough details and I made a mistake endorsing a broadband plan before when the details weren’t secure.
6. But it does move the debate forward which they didn’t do in the last election when they didn’t have a broadband policy other than to have no real government involvement.
7. The key element of moving that debate forward was re-opening up infrastructure based competition from cable and wireless which the government is shutting down.
8. They also put on the table that it is economical not to try and give everyone precisely the same service, and in the shadows, different prices.
9. Neither party are doing what I would like to see and offer a free broadband service at 5-10Mbps. That would be an actual public good because it would allow government services to go on line.
10. Both policies are horribly regressive. Massive expenditure on what is primarily a private good as evidence from Korea has demonstrated. It is, frankly, shameful.
11. If it were done properly we would have money to spend on other things, for instance, improving the horrible way in which our schools are preparing our children for the future.

With the Coalition’s alternative national broadband plan, Australia is finally focusing on a real issue – that there cannot be a ‘one size fits all’ approach and that competition has a role, writes Joshua Gans.

This week I will be speaking at a conference in Kansas City. Interestingly, the session I am participating in will be chaired by the mayor, Sly James. This is not usual for an economics conference, but when you see that also speaking at that session is Google’s chief economist, Hal Varian, it makes sense. This is because Kansas City was the first winner of Google’s contest to pick a city to install a fibre-to-the-home broadband network. And Mayor James is very pleased to be associated with Google.

A couple of years ago, localities all across the US were falling over themselves to get first in line for Google’s investment. Topeka, Kansas even renamed itself “Google”. One thing was for sure: thanks to competition, Google would face no local regulations in the way of rolling out Google Fibre.

The story of Google Fibre has important lessons for the economics of broadband. The most important element is that Google recognised that broadband is a local public good. When you install a more advanced broadband infrastructure, you cannot get the full benefits of it unless that installation takes place in local areas.

But it is that “last mile” which is both very costly and also has the greatest variation in costs from locality to locality. But, as Kansas City realised, each time you wire a locality, it is the local residents and businesses that benefit the most. In other words, as public benefits go, it has more in common with garbage collection and parks than it does with national defence.

The Australian Government, however, has gone the national route in broadband. That means that it wants very close to a ‘one size fits all’ model. Everyone gets fibre to their home. Everyone pays the same price. And no one gets more choices than another. Now, the economics have not allowed that goal – even the NBN rules this out for outlying regions – but nevertheless that is the aim.

For years, the Coalition resisted that. They avoided having a national approach and it cost them the last election. (Technically, everything cost them the last election). This week, that changed. The Coalition will now build a national network. It will be for everyone. And the prices will be the same. But they have abandoned the notion that everyone will get the same service. In other words, the economics will rear its head, and in most areas, the government will only build out fibre to the node.

That is actually a familiar policy; indeed, it was the policy that got Labor elected in 2007. But as Labor proposed it, it was insane. A government consortium would build the network to the node and then, effectively, Telstra would get the last bit into people’s homes. A monopoly is bad but two in sequence is worse. It was cheap in terms of capital, but expensive in that the capital would be effectively useless.

I wrote as much in 2008 when I argued for Plan B: for the government to build itself a national fibre-to-the-home network. Six months later, that is precisely what they proposed to do.

They did not, however, do what I had called for. I wanted the government network to be a competitor – to drive Telstra and others to enhance their network, boost up the cable network, and push fixed-line telephony costs to zero. The government could then subsidise heavily the areas where broadband was costly while relying on an open access model with private investment to cater to the last line.

I was basing this idea on a model proposed by Google’s Derek Slater and a collaborator, Tim Wu. Basically, the government would not so much build a network as cut through all the regulations and market power that were stopping a network from being built. Do it right, and it would be economical and move Australia forward. You would design a broadband market.

We know what happened. We got a Telstra break-up (which is a plus) but we ended up with an expensive old-style government monopoly in its place (a definite minus). And the prices people will pay will reflect that; not to mention the slow pace of the broadband roll-out.

Contrast this with Google Fibre. For $120 per month, you get everything. Internet, television, a digital video recorder and telephony. They even throw in a tablet. And you get it without download limits and 1 gigabit per second (10 times the NBN’s proposed rate) for both uploads and downloads.

The top of the line option from Google blows the NBN’s $90 per month out of the water. If you just want the internet you have two options: a $70 per month option without TV or a $0 per month option. The last one is interesting. It is slower (5Mbps) and involves a once-off fee of $300. If the Government was acting like a public good provider and actually like a Labor government, it would have a free option too. Then it could compel people to use it for government services and actually start saving money.

The Coalition, in their new embrace of national broadband, have not given us lots of details. Then again, neither did the Government. They hope to bring the retail broadband price below $70 per month, but you are going to get slower speeds. That doesn’t sound like a shiny future, so you can almost wonder why they are bothering.

As you read a little more carefully, there are glimmers of hope. With the Government having done the job of quashing Telstra’s long-term market power, the Coalition is looking to bring back competition. Rather than prohibiting cable providers from offering broadband, they are bring that back.

From my personal experience in Canada, you’ll get speeds in excess of 100Mbps with that alone. And moreover, you’ll get it sooner. Importantly, they will free up mobile competition because while the engineers don’t like wireless, real people seem to and we don’t want to cut that option off to preserve government monopoly profits.

The broadband debate in Australia has moved on. Finally, it seems that it will focus on a real issue – that there cannot be a ‘one size fits all’ approach and that competition has a role. None of this is at the level that would truly please an economist like myself. But for the moment, we should all appreciate a positive direction.

Joshua Gans holds the Skoll Chair in Innovation and Entrepreneurship at the University of Toronto and is a Research Fellow at the Center for Digital Business at MIT. He blogs on these issues at digitopoly.org. View his full profile here.

http://www.youtube.com/watch?v=Jk7eac53oG4

Comment by Professor Timothy Devinney:

It is interesting how over my 20 years as an academic I have heard this sort of logic again and again and again. Invariably it is from adjunct faculty with a more ‘professional’ background complaining that they do not understand what it is that academics do and why the do not ‘teach’ more or that their promotions should be based more on teaching. Unfortunately such arguments, while valid to the individuals who make them, are based mainly on faulty logic and a basic misunderstanding of what is going on. For example, whenever I go and work with a company I am amazed at how much time managers waste actually doing nothing but monitoring and interacting with other managers? Why are they not working with customers more? Why are they not out in the field rounding up more business? Isn’t it inefficient to have them in meetings so often invariably doing little more than playing power games against other managers? Of course, this is a naive viewpoint and it is based on my failure to understand what these managers do. Ditto Mr. Zicklin’s view of academics in business schools. Here are some points that matter.

His view of teaching is dominantly one of information dissemination. Having been at the top and bottom of the academic food chain (being both at U. Chicago and now in Australia at what is dominantly a teaching factory) I have seen the differences. The students at Chicago get knowledge at the coal face by people who understand what is both leading edge and sophisticated. Students here get commoditized information delivered by individuals who only know what they read because they are not leading edge scholars. Indeed, where the MOOC Tsunami will hit is on this commoditized end of the business.

Second, his viewpoint is based on the ‘leach on society’ view of academics. I argue that good scholars are some of the most entrepreneurial people in the world. Imagine Mr. Zicklin working in a business in which the failure rate is > 90% (which is the rejection rate of most leading journals). Also, it does not matter where you reside or which university you are at since the rejection is based on blind review. Imagine your typical corporate manager working in an environment in which their work was evaluated blindly and in 9 cases out of 10 rejected as being inadequate. Imagine also those individuals attempting to run projects on little more than scraps of funding (for an average academic on what is known as a 40:40:20 contract the actual cost of the research per year amounts to only about $50,000 per year). Most companies spend more on business class airfare for managers than this. Most universities spend 20 times this on the basketball coach.

Third, most good academics could easily make more money outside academics than inside academics. When I received my PhD I had an offer from one of the major consultancies. It was three times my academic salary. But I remained an academic because I believed in what I wanted to do. I argue that the difference between managers and academics is that managers give up what they love for money while academics give up money for what they love. If you take away the scholarship aspect of this then the equation skews toward money. So if I am going to sing for my supper then I want to be paid for singing. Unfortunately as soon as that occurs I end up choosing not to be an academic. In reality, we have serious problems getting good brains to commit to getting phds and hence the pool of potential future faculty is actually drying up. If anything the premium needs to be bigger not smaller.

Fourth, Mr. Zicklin’s argument that promotion is all about research and not teaching is just wrong. You cannot get promoted anywhere as a basket case in the classroom. Indeed, nearly every academic I know is quite good to very exceptional in the classroom. It is also the cases that I know where we looked at exactly this we found that our best scholars were our best teachers. So this idea that there are ‘teachers’ and there are ‘researchers’ is just nonsense. The best scholars are on average exceptional at communicating. Mr. Zicklin’s problem is that he is basing his viewpoint on myth and exceptions and not evidence. However, in the end, if your best scholars are you best teachers the institution must make a decision as to the allocation of their time. Unfortunately, good scholars are rare and institutions cannot replace them as easily as they could to one trick teaching ponies.

Finally, the fact that academic journals are not read by managers is absolutely meaningless. These journals are not meant for managers. That is why you have HBR, Sloan Mgt Review, McKinsey Quarterly and other outlets. Any good journalist or writer will tell you that you write to the audience. If you want to communicate with managers you do it differently than when you speak to other scientists. As soon as you attempt to write to everyone you actually communicate with no one. I personally am the sort of academic that communicates to broad audiences (like my colleague Pankaj) but I do not expect managers to read my academic articles. Also, in a response to Freek Vermeulen on this same topic (also in the FT), I argued that we as academics influence practice one student at a time by how we do what we do and what we pick to have in our classes and how we communicate in public forums. Many of the examples above are good examples of others. And there are many many more.

So while Mr. Zicklin’s arguments appear to be logical and reasonable I would argue that you need to be careful about what you wish for. There is more than one tsunami approaching and my view is that the more dangerous one is that there are fewer and fewer potential scholars choosing to be academics because the personal benefits of such a career are being eroded while the financial compensation is not sufficient to offset this. If I had to make the decision today that I made 20+ years ago I would not go into academics. I would chase the money, cash out and then become and adjunct faculty member writing opinion pieces for the FT while living the life of the casual academic.

So far, the central bankers have pumped money through the existing systems to friends in high places, bankers and politicians. They have so far been loathe to create new systems to print money for the people who actually have debilitating debts: individuals and their private companies.

Let’s unpack this and talk about how additional money is currently channelled towards ‘friends’ and what needs to happen to get money in the hands of those who would do useful things with it.

The US Fed first started printing money in 2008 by directly rewarding banks for having reserves, ie it just gave a quarter of one percent on all reserves. Then it dropped the cost of loans to banks: the ‘discount rate’ it charges to commercial banks is now a paltry 0.75%. So a bank can lend at 0.75%, also implying that bank-related major institutions can borrow indirectly at such low costs. What does a bank do with this cheap money, apart from giving its bosses a huge bonus of course? A particularly safe thing is to buy up government bonds, which the Fed counts as ‘safe’ and as a ‘reserve’. And what are the returns on the Federal bonds? Well, at the moment they are 1.88% for 10-year bonds, but they were roughly 4% in 2008 when the Fed started this game. So a direct and fairly safe profit is to be made by borrowing from the Fed at 0.75% and then lending it out again to the Fed (via the government) for 2-4%. Of course, investing abroad is even more lucrative. So, the roughly 2 trillion more money that the Fed has put into the US economy has partially ended up as 1.6 trillion in additional, idle, reserves in US banks (see here) who in turn have a fair whack of Treasury bonds directly or indirectly, and have of course also tried to park their money in lucrative foreign investments.

The Fed has also announced it will just directly buy up mortgage backed securities for more than its real worth, again sending money to banks, and more to banks that previously made worse investment decisions. Similarly, the Fed now and then buys entire vintages  of new government bonds.

In short, the Fed has printed money for bankers and governments, subsidizing government consumption, bankers’ bonuses, and crowding out commercial investment since the smart money will have been invested abroad to flee the dropping US dollar and get the higher foreign returns.

The ECB has similarly been printing money for bankers and governments, albeit somewhat indirect. It for instance doesnt like to directly buy bonds so instead gives loans to commercial banks at very low rates (such as 0.5%), who in turn give them those bonds as collateral. By borrowing from those self-same banks the same money at higher interest rates (say 3%), the ECB gives these banks a guaranteed income-stream that ensures the viability of the incredible bonuses the bankers award themselves. Somewhat deviously, the ECB does not disclose the prices on these buddy-buddy deals so the full extent to which money is given to befriended bankers is not clear! How convenient for them. And when the ECB is not ‘lending’ from commercial banks, they can always buy up government bonds at much higher returns than banks pay to borrow off the ECB.

Also, the ECB now directly buys up bonds, some 200 billion euros worth at the moment according to one source. The large combined holding of bonds mean it has now become a cheap financier of government consumption. And of course banks are just as loathe to lend to private investors as before, prefering instead to get into safe government bonds. When push comes to shove, as happened with Greece a while back, the ECB allows countries to simply not pay back the loans, or, equivalently, extend the loans till the far far future whilst giving back any interest rate up to that moment (zero-interest loans hypothetically paid back in the far future).

So the situation in Europe too is that the ECB is subsidizing government consumption and bankers bonuses.

It is crucial to realise that this method of money printing is not the economic ideal nor really necessary: it is just convenient and helps the direct friends of the central bankers. I know this sounds somewhat conspiratorial, but dont forget that central bankers come from and often return to the world of bankers and governments, so favours they do to that in-crowd come with personal returns to central bankers! ‘Mates helping mates’, we would say in Australia.

What is the alternative? To do money printing properly, ie to have what is known as ‘helicopter drops’ wherein every member of the population is given the same amount of new money to spend as they see fit. In stead of printing money for bankers and governments, one would give new money to the population. It then wouldn’t end up in bonuses but in things households care about: the education of their kids, holidays, cars, medicines, their own private business, paying back their stifling mortgage debts and their commercial loans, etc. Now, which method of money printing sounds more likely to help the economy and get rid of the shackles of bad debts: the hoarding of idle reserves in banks and inflated government consumption, or private investment and private consumption? The latter, of course, particularly since the most crippling debts are private.

Why hasn’t this happened yet? I suspect the main reason is that central bankers are members of the financial elite with an unhealthy disdain for the population, thus allowing themselves to think that giving money to their friends and future employers is ‘better for the economy’ than giving it to the ‘plebs’.

But there is also a convenient excuse, which is that we don’t have the institutions to do it. There is no mechanism to send, say, 10,000 Euro to every member of the Eurozone. Why not? Because no-one has a list of all the individuals living in the Eurozone. Neither do all those individuals have bank accounts. They aren’t even all registered by their own governments.

How come? The deep historical reason is that Napoleon did not conquer the whole of Europe and that there are hence outposts (like the UK!) that do not have a population register to start from. Many people don’t have passports, nor are their deaths properly recorded. More immediately, even in those countries with population registers, not everyone has a bank account because they are too young, too disabled, too old, etc.

So the easy excuse of the central bankers is that they simply have no mechanism to print ‘money for the people’ and hence are forced by circumstance to give it to their mates. But of course this really is just a form of laziness that masks elitism, for there is really no reason why the central banks could not set up a universal bank for everyone. It should create that public institution, just as it is the role in general for government to set up beneficial public goods!

So one practical way to go is to announce that everyone over 16 with a passport of a Eurozone country can register themselves for a bank account with the ECB, at which point their fingerprints and perhaps a photo of the eye is taken too to ensure minimal cheating. Upon receiving their ECB account they get 10,000 Euros in that account. The ECB can of course just out-source this job if it wants to. Ditto for the US Fed. What then would happen is that everyone first goes through their national system to get a valid passport and only then applies to the local ECB-registering office.

It would clearly be a massive operation to register the entire population with several pit-falls (just imagine the incentives to pretend a family member hasn’t yet died!), but that registry itself has all kinds of further useful purposes as it can become the main conduit for European and American taxation and subsidies. It is the kind of system we should want to have anyway, if only to get more efficient internet banking! And yes, public goods of this type are still being built in the modern world, but lately more by private companies than public ones. Just think of Google StreetView.

The simple message: if central banks think printing money is the way out of the debt crisis, they should print money for their people rather than just their befriended bankers and politicians!

Your adviser points out the many advantages: you can halt pay increases for teachers immediately which, as Andrew Leigh so nicely showed, gradually dumbs down the stock of teachers, particularly at the bottom end of the market. The incoming migrants have to buy a lot of stuff when arriving so you get immediate boosts to the economy, quite apart from the free human capital walking in.  You let those with a chip on their shoulder regarding the philosophy of current education do their thing. It’s the road of least resistance on all sides.

After some reflection you realise it’s a brilliant plan. All your kids are winners, none of them failing a class and each of them frequently getting rewards for breathing quietly, whilst they will end up in admin jobs where they mainly write reports for other admin people. The bright kids can invest in networks and fight it out with the other networkers to become the managers. Meanwhile the ‘tech’ foreigners do the hard yakka in the mines and behind the scenes. What is not to like about this joint proposal on education and visas?

The only thing not to like about the proposal is that it was never proposed. It was never consciously decided upon. But we ‘sort of’ did it this way anyway!

As far as I know hence, this choice was never consciously debated in Australia in the era of the 1980s, the Dawkins reforms. There wasn’t a clear first move towards it, with both Australia’s education and visa policy subject to numerous independent reviews, white papers, and complicated deliberations; all involving many heated debates about lofty goals and utopian visions, but none of which to my knowledge led to a conscious choice for the joint proposal above.

Yet the proposal above does describe how our education and visa policies actually co-evolved in the last 30 years: it is as if we consciously decided upon this path 30 years ago. Worse, it is as if we consciously decided upon it, and then purposely muddied the waters with thousands of pages of text pretending that we were choosing something else.

Whilst dumbing down schools and universities has become an art-form in itself(see, in particular the recent PISA results strongly suggesting that our school system is lagging internationally and this book on university decline), the reason that it has managed to go on without serious national backlash is because of the visa system: Australia’s industry can get the skills elsewhere, whilst most home-grown kids get good jobs anyway(with notable booms in the number of HR positions). In line with the large US-based debate on skill-biased change, one emerging view of the Australian labour market is that it too has a very skilled top end but with lots of workers not using all that many skills at all, stuck in dead-end jobs. Also, the resource boom has reduced the importance of human capital in the Australian economy via a Dutch disease effect.

It is not hard to see in hindsight what the lock-in mechanisms were to cement the choice: with human capital walking in for free, the pressure to improve elite education at university never materialised; with no pressure to improve schooling, the temptation to reduce teacher pay and give in to the hundreds of reform plans that effectively meant more administrators and less teachers was too hard to resist. And once the reliance on overseas skills became ingrained, there was a constituency of employers who became used to attracting foreign workers and thus no longer wanted to revert to domestic ones.

Similarly, the visa policies followed a road of least resistance: industries wanted skills Australian schools and universities were no longer providing, so politicians opened the gates and overseas countries provided the skilled foreigners who came for the great culture and wealth Australia has to offer.

And if you think about it objectively, the choice is not a bad one to make. It has basically allowed a generation of Australian kids to grow up in the happy belief that they are skilled without having to really push themselves, while at the same time allowing foreigners to improve their lot in life by relocating here. Where is the loss, one might ask? Australian culture is still doing fine and our country is still quite empty so the choice can be extended into the future without much trouble. It is certainly much easier politically than tackling the educational institutions, so why bother? As long as the boom lasts, the road-of-least resistance is to maintain the current course.

The first thing to note is that a supporter of the USE idea should not necessarily fear an EU break-up. This is because there are strong geo-political and economic advantages for European countries to band together into a single union: a block has more clout on the world political stage than a loose alliance, and with the emergence of China as a dominant single entity I do think it is a case of ‘divided we lose’ in terms of influence in the resource-rich areas of the world. Divided, the Europeans are easy pickings for coercive and disadvantageous financial blackmail by the remaining blocks, for instance via patents and disadvantageous access to resources. So a common market and common trade-related institutions (such as a competition regulator) look likely to survive any break-up simply because it is so clearly in everyone’s interest.

One should also give the EU its due: the EU has performed its historical role as pacifier admirably over the last 50 years, with perhaps its proudest moments in the 1990s when its mere existence and the honey pots of its subsidy schemes had a great pacifying effect on the emerging Eastern European countries. The conditions for entry that Van den Broek so admirably explained to the former Soviet states wanting to get into the EU did wonders to convince the elites in those Eastern countries to go easy on their minorities and to embrace modern democratic and inclusive institutions, so just on that count alone the EU has been a success.

But at the moment, the EU is part of the problem, with little hope in sight to be a part of the solution.

At the moment the EU performs a couple of reasonably useful roles (such as international trade negotiations or in coordinating education reform) but it has otherwise degenerated into an a-la-carte behemoth handing out subsidies to the same people it gave them to 25 years ago (farmers and regions). This reflects the fact that the real power is in the hands of the national politicians who fight each other tooth and nail over every change in the EU, leading to ‘no change’ in terms of money flows. The privileges historically acquired are defended to the bitter end whilst any decision making is a very slow and costly process. The classic example of this is that the EU has two parliaments between which the EU politicians have to travel (Strassbourg and Brussels) with zillions of interpreters to cater for all the official languages, for which the only logic at the time was that it met the demands of the French that money was wasted on them. A related one is that, at the moment, all EU legal documents must be available in its 23 official languages!!! The EU is full of these costly idiocies that employ legions of bureaucrats. And these idiocies are defended to the bitter end by the inside elite.

Apart from such instances of hidden unemployment though, where are the structural problems most severe that no small crisis will solve? The most severe is financial regulation, including tax regulation: the a-la-carte financial arrangements in the EU have allowed for financial piracy on a huge scale. Effectively, countries like Liechtenstein, Luxemburg, Ireland, Switzerland, Cyprus, the UK, and various UK-related islands have been free-riding off the EU. Their association with the EU allows them access to the EU financial systems and the internal market, but their independence in terms of tax legislation allows these small countries to undercut everyone else in terms of taxation of capital and labour.

What are some examples of this? Ireland is a haven for headquarters of major companies in the EU; the UK is undermining a Tobin tax on financial transactions, effectively shielding the city of London where lots of the EU financial transactions take place, and thus preventing such a tax from being instigated elsewhere in Europe. Similar low capital taxations occur in Switzerland, Liechtenstein and other countries. Companies and individuals base themselves in these countries for tax purposes whilst their productive activities use the public goods in the other countries paid for by local taxes mainly on locals.

Now, if the EU were a USE then it could do what the Americans are now doing: finding ways to bring these small countries to heel via foreign policy and new domestic financial regulation on the duties of any entity dealing with these pirate countries. The recent Cyprus deal very effectively killed off their financial system, but the same trick will only work for countries forced to come beg for loans, something the Swiss and the UK small islands for instance are not going to be doing any time soon.

This really is the major issue that is fundamental to the ability of the EU to become a USE. In the current arrangements the financial free-riding cannot be challenged because individual countries resist the EU obtaining taxing powers or the ability to regulate taxation across countries. These powers are of course the main vestige of national sovereignty but it is the main thing now killing the economic viability of the EU project. Without the threat of taxation, the defenders of waste can’t be bought out.

What do we then get during the latest crisis? As foretold in 2011, we get weak new economic institutions which lack enforceable agreements on budgets, coupled with very large loans given to countries that cant pay back and that now and then simply get given money in the form of more and more favourable loan deals (the latest Greek deal was a classic, whereby interest paid on previous loans was given back and interest rates on loans became miniscule. A default in all but name). You thus get dependency of dysfunctional elites on the money printers in the ECB. Not a sustainable situation and one that easily turns into anger amongst the dependents when the gravy train stops, as well as anger amongst the financers of these loans about the dependents.

Defense is another area where no real process has been made over the decades. Because countries have different international ties and interests they don’t want to truly bundle their military potential under joint leadership. De Gaulle’s plan of a common army was defeated back in the time of the Dinosaurs and similar non-cooperation is hitting current joint ventures. Partially the diverging interests reflects the colonial period that gave France ties to Francophone Africa, England ties to the Commonwealth, Spain ties to Latin America and Italy ties to North Africa. With different friends come different interests. The result of a lack of coordination has been duplication in military institutions and slow reactions to crises such as the Yugoslav wars, the Libyan conflict and now the Syrian conflict.

So the EU has some design problems that have now become impenetrable. It might die, in which case the hope is that it gives birth to a USE in its final death-throws.

Undoubtedly, the EU bureaucracy will invest in any propaganda that says that its break-up is bad for Europe and would spell infinite doom and disaster. No doubt, many fervent believers in the European ideal who do not trust in the ability of populations to see what is in their self-interest once the EU is gone, will also hang onto to the current EU project. I am not so sure this is right.

What are the forces that might get us to an implosion? The big one is nationalist forces wherein populations are starting to realise that the EU-project does not deliver them what they hoped. The example of countries outside the EU doing well and the inability to bring them to heel for their free-riding erodes support for the EU. The large inefficiencies and inequities in the EU, such as the two parliaments, furthermore erode support. Differences in economic institutions furthermore mean that the high public-sector-wage-inflation countries are suffering in terms of competitiveness vis-à-vis the other countries, which erodes support in those high public-sector-wage-inflation countries.

There are counter-forces keeping the EU together though, such as the large EU bureaucracy, the European political class for which the EU is a source of political jobs and international political prestige, but also the financial players and those most successful at the subsidy-race. There is also a slow moving increasing integration, some of which is happening right now as many Greeks and others have moved to Germany, whilst Southern European countries are adjusting their institutions in a very slow process of ‘germanification’. These are powerful forces and it is by no means clear that they are too weak to stop the nationalist tides.

It is also not the case that pressures on the monetary system in Europe would necessarily mean to a straight break-up. There have always been various scenarios for the EU project to lead to a United States of Europe for just a few countries. The Schengen countries could for instance join together and form a mini-USE that has a unified budget. It is but one of the possibilities for internal reform within the EU-structures that may yet prove to be the road ahead.

As a Euro-enthusiast I do not quite hope the EU dies but I don’t really fear the event either. The European ideal will not die with an implosion of the EU, as it did not die after the violent attempts of Hitler and Napoleon to unify Europe by force. I trust in self-interest to preserve the European project.

It is the wrangling about the bigger bank, the Bank of Cyprus, that is the really interesting one. As I commented on just last week, the politics of Cyprus were such that its parliament could not openly approve a haircut on major deposit holders, partially because it would mean they would openly and personally be taking action against the interest of people more wealthy and dangerous than themselves (ie Russian tax evaders).

Yet, as soon as there were any rumours of a bank levy, a major capital flight out of Cyprus was a certainty the moment that banks would resume normal proceedings. Hence, despite the fact that the Cypriot parliament could not, for political reasons, go against the interest of the wealthy and the dangerous, by the same toke allowing business-as-usual was no longer an option either: a bank-run would have been immediate the minute the banks opened its doors.

So how did they solve this catch-22? Quite ingeniously, really. The Cypriot parliament basically allowed itself to no longer decide on bank deposits by voting in a new law on bank restructuring last Friday! Hence, instead of openly and democratically deciding on a tax, parliament voluntarily gave up that power so that a ‘bank restructuring’ could occur that would allow exactly the same thing to happen but without their open approval and without their further involvement. Truly ingenious. And forgive me for suspecting it was exactly due to the reason I talked about last Friday, which was fear of the wrath of particular deposit holders.

What will thus happen? Well, one bank will go bankrupt and the other bank is going to inherit the small deposits (under 100,000 euro) from it, together with the loans Laiki had to the EU. Within that remaining bank, the large deposit holders will easily be taxed some 30% of their total deposits in order to ensure that the bank meets ECB standards. Importantly, the bank restructuring is entirely left to Cypriot officials. One can imagine that even the ECB did not really want to have to decide on which deposit holder was going to lose out how much!

The long-run ramifications of this saga look like being enormous. Within Cyprus, the ability to do political deals and quickly make a lot of money has just been transferred from parliament to whomever is going to actually decide on the financial restructuring of their remaining bank. You should expect frantic lobbying on that point as there will be all kinds of details yet to be decided upon that will create huge losses and gains, meaning that there will be lots of money available to ‘ensure particular wins’. For instance, if the tax would be only on deposits above 100,000 then of course there is a huge discontinuity around 100,000 in terms of taxes paid. Small innocuous looking decisions can then make all the difference, such as whether or not a ‘large deposit’ is calculated on the basis of several types of bank accounts that fall under the same name, or whether interest due of the last year should be added before a decision is made on whether someone is large, or whether to count minor withdrawals that banks are going to have to allow in the near future to ensure the continuity of the economy.

Similarly, if it is decided that levies will apply only till the ‘resulting deposit’ hits a 100,000 euro (and hence the discontinuity does not apply), then of course the unit of accounting will be crucial: will it be on the basis of individual accounts or will several accounts of the same company be combined? Will deposits with multiple holders (such as a married couple) be considered as a single deposit or a combined one? Is the levy going to be higher for even bigger accounts? Etc. Etc. On small decisions made in back offices, large sums of money will depend, opening the doors to lots of shady dealings. Now is the time to be a financial expert in Cyprus with good connections!

The ramifications for the banking system in Europe will also be large. Cyprus is essentially a kind of ‘minor Greece’ in terms of banking so bank-runs throughout southern Europe are now looking a whole lot likelier. This is of course great for Northern Europe, where I am from, because it means capital flight to them will continue. Yet, it is not good for Southern Europe, meaning that euro-exit is looking a whole lot likelier. Indeed, make-or-break decisions will probably be sped up in the rest of Southern Europe as they will have to choose more clearly between muddling on as usual or quickly enacting large financial restructuring packages.

Another ramification is that the principle of raiding the deposits of overseas tax-evaders has now been established. If ever there was a group of very mobile and forward-looking people, it is tax evaders, so their behaviour will change incredibly quickly. I can imagine Russian tax-evaders as well as the tax evaders from other countries pulling money out of any banks in Europe where they deem a similar risk to exist. Indeed, they have probably already done so the last week. Any remaining such money in banks in Greece and Spain will probably be in the firing line. Golden days hence for tax advisers.

It is clear that the whole saga was going to be disastrous for Cyprus the moment that the possibility of a raid on Russian bank deposits became a serious possibility. I am heartened to see that the ECB and the EU have finally caught on to the principle that they should leave the actual restructuring to countries in trouble and that bailing out banks is a bad idea. Still, a lot of detail on the deal is yet to emerge and the only way in which the Cypriots would have agreed to the final deal is if there is, yet again, another European loan for them on offer. It will make the politicians in Cyprus even more inclined to blame overseas agencies for any of their domestic troubles and increases long-run dependency. In that sense, the basic mistake of the ECB and the EU to get involved in huge loans in the absence of a fiscal union continues.

Let us leave aside for a moment the arguments about whether or not it can make sense to directly tax deposits by stealth. Just think about the politics of this deal: the opposition parliamentarians get, in one swoop, to decide on whether or not for their country to ‘steal’ some 2 to 3 billion euros from Russian tax-evaders (assuming here that they have the bigger accounts). From a national point of view, its a no-brainer in the short-run (you tax what you can, preferably foreign assets). But from the point of a party and individual parliamentarians, their votes suddenly became worth 2 to 3 billion to wealthy and possibly maffiosi Russians.

What would a savvy corrupt parliamentarian do? Stall and try to make a deal with the wealthy, of course. A golden opportunity to earn well over a lifetime’s worth of income in one fell swoop. And what would a Russian maffiosi do if he knew he was about to be fleeced for 2 billion by people with a name, a house, and a family? He’d probably threaten and bribe his way out of trouble. What did we thus see last weekend and until Tuesday? Stalling and, wonder of wonders, no deal.

Quite independent of the issue of whether it might make economic sense, it was basically asking nearly the impossible of Cypriot politicians to tell them vote in a few days time on whether or not to grab money from people richer, more powerful, and much more dangerous than themselves.

How should one normally hence do this? Normally, one prints a lot of money overnight. That way you get a quick burst of inflation. Same net result, which is to have basically taxed all deposits proportionately. But the politics are far easier, though there too you will find the incentive to ‘tip off’ the right people. Now, why did the Cypriots not do this? Because its the ECB that prints the money, not them.

A very clean example of how one can tax financial assets by stealth by increasing the money supply, but not by taxing them directly if one needs political negotiation.

Both Clarke and Duckett point to what others pay to convince their audience. Phillip Clarke, in a recent letter to the editor of the Medical Journal of Australia points out that several other countries, such as New Zealand, pays much lower prices for the same medicines and that just on statins alone, a 260 million savings could be made by going to the low price. Duckett points out that even within Australia, several entities pay much less for the same medicines than the commonwealth does to pay for medicines-at-home. Hospitals for instance pay much less for the same medicines which they buy in bulk. Applying the lowest-cost price all round would in his estimation save around 1.3 billion. In short, we pay too much.

The deeper question is how to reform the pharmaceutical benefit scheme so that we get the incentives right to avoid paying too much. The problem hitherto has been that the decisions have become political, leading to a huge amount of lobbying by the pharamaceutical industry of both the ministers via media manipulations, and via repeated (and successful!) attempts at influencing the composition and work methods of the current scheme, forever expanding its budget.

Duckett has now started calling for a more independent monopsony scheme that would be allocated a fixed budget to buy in medicines for patients in Australia and that would hence regularly have to add and remove medicines in order to stay within the budget yet allow new and useful drugs into the system. Politicians would still determine the budget beforehand and appoint a director, after which the independent institute decides what to fund and what not. By fixing the budget beforehand one thereby removes a lot of the incentives for pharmaceutical companies to coordinate on political pressure as it puts the various companies in more direct competition with each other for the available dollars.

Buckett helpfully supplies a whole timeline for how the thing can be set up. Interestingly, what he proposes is almost a carbon copy of the first ‘piece of advise’ I gave to this government in March 2012 (see here where I call for an “independent Medicine Procurement Authority”), although his plan clearly pre-dates mine and is far more worked out.

I applaud Clarke and Duckett’s attempts at helping the nation get lower prices for our medicines and I wish them favourable political winds!

The increase is almost 4% if we compare the 1980 peak with the 2007 peak, but there is an argument to be made that this is because the 2007 peak represents a larger boom than the 1980 peak and that we should really compare it with the peak in the 1960s.

Unfortunately, the data on hours only started in 1978 for Australia so it is actually not so easy to know whether 1980 was really comparable in terms of an economic boom with the very long boom we have had in the 00′s. To look at this a bit more, we can look at data for a country with a very similar labour market structure as Australia that has longer series on hours, i.e. the Netherlands. The graph on this (see below, which is now hours per person of any age so not completely comparable) shows that, indeed, the peak in terms of hours worked per person was in the 1960s and that there was a rebound early 1980s after the oil shocks of the early 70s, but that even the peak in the early 2000′s was not as high as the highs of the 1960s. And in case you are wondering, labour force participation in both countries rose during this period, particularly amongst women, and are currently nearly identical for both countries (63.3% in the Netherlands, 65% in Australia), with the two countries leading the world in rates of part-time work.

Source: centrum voor beleidsstatistiek 04003, Pieter Al and Robert Selten

The moral of the story? After 45 years of dramatic changes in labour laws, welfare provisions, industrial structure and attitudes to female employment, we work just as many hours in formal employment as before.

As I note here, the scheme is likely to be a net job creator. One of Australia’s leading demographers, Peter McDonald has noted the lack of rigour in the numbers the Prime Minister is using. The IT industry has noted that if it wasn’t for overseas skilled workers there would be no IT industry in Australia – despite these same workers being a focus of the PM’s attacks. The claims that we should train young Aussies to fill the roles is silly (hmmm – five years training – just hold the job guys) and hypocritical (hmmm – now which federal government funds the universities who train IT graduates, engineering graduates, etc).

So why is the PM vigorously pursuing a policy change that will destroy wealth for Australia? Presumably because it is an election year and the government believes that this sort of campaign will win votes. Presumably it is aimed at the ‘blue collar’ voters who labour is ‘bringing back’ to the fold.

And, well, they are the experts in politics, not me. But I hope this type of beggar-thy-country politics does not work. I hope the electorate will see through it. Because if they do not, with seven months of election campaign left, God help us! What other wealth-destroying policies will be pursued before September?