A misguided desire to save the bush

There has been much written about Australia's national character emerging from a bush ethos -- the idea that a specifically Australian outlook emerged first amongst workers in the Australian outback.  But few now have anything much to do with the bush.  They mostly live in cities, or close to the beach, and spend holiday time on the coast.

However, the concept there is an outback still looms large and successive federal governments have claimed they can save it.

The previous Howard government was going to save the Murray from salinity and largely achieved this through the construction of salt interception schemes.

The new Rudd Government plans to save the Murray from climate change.  This is perhaps a more ambitious undertaking.

The Rudd government was elected with the help of internet campaigners, GetUp, and this group recently joined-in with a major online campaign claiming to provide an opportunity for ordinary Australians to "keep the rivers flowing" and "save Australia's food bowl" through a few mouse clicks at the home computer.

In particular it seems many city-based Australians believe that there is no water because of over-allocation exacerbated by climate change and so if the Government buys back some water there will be more for the remaining farmers and this will "save the food bowl".

Certainly, much of outback Australia is under pressure from a series of dry years and reduced runoff, including pressure from changed land management practices.  But as some farmers explained on ABC television's Four Corners, you can't buy back rivers, not even with billions of dollars.  The reason -- water allocations are just air space until it rains.

Furthermore, only a few thousand hectares of the Government's recent purchase, Tooralee Station, involved irrigated agriculture and now the 91,000-hecatre lot will be converted to national park.

While the latest city-based internet campaign claims to be about "saving the food bowl" there is much precedence to suggest that government interference will only result in less agriculture generally and the redistribution of some water downstream when it does eventually flood.

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Only our government failed to predict the crisis

It has been said that those who lack the imagination of disaster are doomed to be surprised by the world.  Kevin Rudd and Wayne Swan obviously don't enjoy watching a good horror movie.  In recent weeks they have been so surprised by the global financial crisis that they have declared a radically new economic agenda to combat what the Prime Minister calls a "rolling national security crisis".  What was once said of 9/11 is now said of the GFC:  everything's changed.

But as traumatic as the market mayhem has been, it was not only predictable but long predicted and warned against.  Nor were the reasons for such warnings hard to discern.  During the past year, Liberals from Peter Costello to Malcolm Turnbull have suggested that the US sub-prime mortgage collapse in September 2007 could lead to a financial tsunami all over the globe, and that Australia was not necessarily immune.  In this environment, Labor's tight fiscal policy, taken together with the Reserve Bank's (RBA's) tight monetary policy, to slay some inflation dragon would lead to lower growth, higher unemployment and make life tougher for millions of Australians.  Now, the chickens are coming home to roost.

The media has portrayed the Rudd government's response to the global contagion as an economic and political coup.  With his "decisive" move to shore up the banks and stimulate the economy with a $10.4 billion spending package, the PM has, we're told, restored confidence to the financial system and sold a coherent narrative to the Australian people:  Labor, the party of economic conservatism, is best able to save the nation from global recession.

The truth is very different.  For when it comes to running the economy, both Rudd and Swan are drawing confusing roadmaps and not surprisingly are swerving all over the street.  Already the duco is scratched and there are a few dings in the bumper bar.

Rudd and Swan insist they've been prepared for this global crisis since the beginning of the year.  Laurie Oakes recently retold a January conversation between the Australian treasurer and US treasury secretary about the dire state of Wall Street.  "An economic stimulus plan was already on the blocks," according to Oakes.  "As they became increasingly alarmed at what was happening overseas, Rudd and Swan had been working on it, just in case."

If indeed this was the case, why were Rudd and Swan so surprised by the collapse of Lehman Brothers and Bear Stearns in September which led to their sudden decision to spend half the budget surplus and guarantee bank deposits?  If they were so concerned about boosting growth, why were they hewing to the tightest fiscal policy since the early 1970s?  And if they were so concerned about stimulating the economy, why were they, as Turnbull consistently complained, "egging on" the RBA to raise interest rates?

Now, a strong case can be made for a bold, tight fiscal and monetary policy to put downward pressure on interest rates and inflation that has increased by 2 per cent since last November.  A case of a different kind can also be made for giving very high priority to boosting growth and safeguarding the Australian economy from the global storm.  But no case can be made for combining the two -- or dramatically shifting direction from one priority to another -- when the global outlook has remained gloomy for more than a year.  Yet this is what Rudd and Swan have been trying to do.

To reiterate:  it's not as if no one was warning that things could get worse.  In October and November last year, Costello suggested that the US sub-prime mortgage crisis would "create other problems around the world".  Although our economy was in relatively good shape, it was imperative that our leaders held their nerve and didn't panic.  "At a difficult time like this," he said on 25 October 2007, "it is important that we keep our economic management strong, in experienced hands, and that we keep Australia's economy growing strongly." No wonder the Liberal party's election campaign slogan was "Go For Growth".

Fast-forward a year to 20 October when Costello delivered a well received, but little noted address to a Quadrant dinner.  "Labor now wants people to believe that it has been preparing a fiscal stimulus since the beginning of the year.  No, it didn't underestimate the fallout from the sub-prime crisis," the ever so sarcastic Costello remarked.  "It just fooled us all by telling us the government needed to cut spending when in fact it was preparing to increase it."

The point here is that Rudd and Swan have been asleep at the wheel.  Against the backdrop of the US financial meltdown, Labor was more focused on trashing the economic record of the Howard-Costello years and talking up inflationary expectations than safeguarding the Australian economy.  If indeed Australia does go into recession, it will be partly seen as an own goal by an inexperienced Prime Minister, a nervous treasurer and a gung-ho RBA governor.  After all, they rushed into tight measures that were exacerbating the downward trend pressure on economic activity from abroad.

Amid economic uncertainty, the public understandably looks to their elected leaders and the senior public servants for reassurance.  But with its immense power and capacity to harm, government can itself become a source of panic.  In recent weeks, Rudd and Swan have taken extraordinary action to spend half the budget surplus and guarantee all bank deposits in a careless and hasty manner without a single minister discussing the matter directly with the RBA governor.

But how these decisions are implemented is important if they're going to reassure the public and markets.  The government's bungling of its emergency decision to guarantee without any caps all deposits of Australian banks, and the subsequent capital flight and stock market carnage, are evidence of the danger when our leaders take fright.

Having only recently awakened to the scope of the global crisis, Rudd and Swan are indeed frightened.  The need now is not for more dramatic knee-jerk policy changes that could incite severe runs on investment funds and across the financial system, but confidence that the government knows what to do.  Alas, the signs are far from encouraging.

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Train driven through rights

Treasurer Wayne Swan has added his own voice in support of a High Court decision requiring BHP Billiton to provide rival iron ore miner Fortescue Metals Group with access to its Pilbara rail lines.  This is contrary to the position the Australian Labor Party took to the last election and constitutes a staging post in a 15-year march through private property rights.

These rights are the key to ensuring efficiency in private enterprise economies.  They embody owners' abilities to do what they please with their property, and to exclude others from access to it.

This exclusivity provides the incentive to save and invest in an asset.  It allows an owner flexibility to use his assets without having to negotiate and seek permission.  Private property rights also prevent free riding, where users avoid paying the full costs, which is endemic in socialised systems.

If these decisions on the Pilbara railways were to apply to assets in general, then many would be cheering them as sounding the death knell of the capitalist system.  Owners' sole rights to use their property would be substituted by the state requiring that it be shared and setting the fee for such sharing.

The basis for the decision goes back to the 1993 Hilmer report on national competition policy.  Though paving the way for reform in opening up government monopolies, or "essential facilities", to competition, Hilmer also brought non-government within the net.  Recognising this could deter private investment, Hilmer excluded "production processes" from within the scope of monopoly assets that must be made available to all parties.  This recognised that new production facilities could always be built to challenge a monopoly.  The subsequent legislation was Part IIIA of the Trade Practices Act.

The Pilbara case has some way to go before BHP is forced to allow Fortescue and others to use its rail lines.  Further challenges to the High Court and the Trade Practices Tribunal will follow but, if finally allowed to stand, the government's approach sets a precedent with enormous implications.

Applying the case to a car assembly line, which is itself a transport facility, we have the equivalent of a rival car manufacturer seeking access to the Toyota plant.  Such an application would be ruled out only because that facility is defined as a manufacturing plant.  But this is an arbitrary distinction and, indeed, the National

Competition Council has argued that the exemption for manufacturing facilities should be revisited.

Even with that exemption, there are many areas of business that appear to be caught up in the socialisation net that the High Court decision reveals.  These include other rail lines such as BHP's own Hay Point coal line in Queensland.  This is integrated with BHP's mining and port facilities and as such has demonstrated advantages over the open access regimes in other rail-port systems.  Also in the net are gas pipelines and facilities such as private hospitals, theatres or sports stadiums.

Above all the decision has implications for telecom facilities.  In this respect, it confirms the wisdom of Telstra in refusing to build its fibre optic network without assurances that it would not be subject to Australian Competition and Consumer Commission regulatory seizure.

The fact is that Australia's definition of an essential facility under the Trade Practices Act is too wide.  The US, for example, does not allow access to be required just because it is "uneconomical" to develop another facility.  The present legal framework is the outcome of faulty analyses on the part of policymakers anxious to ensure access to facilities is not restricted by excessive business rivalry.

But this has created a new form of investment risk.  Firms will now be uncertain whether their facilities are to be opened to rival businesses on terms determined by a regulatory agency.  And they will have an incentive to hold off making investment decisions, hoping that a rival will move first and incur the risk of failure.

The adverse situation was created by government legislation.  It will require legislation to restore the encouragement to investment brought by private property rights.

Now, more than ever, we need to avoid measures that create additional investment risks that will hamper private provision of infrastructure.

The Treasurer and his advisers are yet to recognise the magnitude of the deterrence to investment they have created.

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Billions lost as SA finances melt away

In the modern economy, everything is interconnected.  Poor financial regulation in the U.S. leads to a meltdown in their housing market;  banks around the world start building up bad debts as international credit flows tighten.  A financial sneeze halfway around the world leads to the cold of an economic downturn in Australia.  Nobody is immune from the market adjustment.

South Australia's production is growing more slowly than the rest of the country.  House prices in Adelaide have fallen by 2 per cent over the September quarter, while manufacturing jobs have been lost over the past year.

The State Government Budget has also been affected by global financial market frictions.

Treasurer Kevin Foley made a statement to the Parliament in mid-October which makes for sobering reading for SA taxpayers.

The Government's superannuation investment arm, Funds SA, recorded a loss on its investments from July to September of $627 million.  This was on top of losses of close to $1.5 billion for 2007-08.

Unfunded superannuation liabilities are expected to increase by an additional $150 million.

Overall taxation revenue is expected to fall by about $100 million in 2008-09, mainly due to declining housing finance commitments impacting on the expected duty revenue take.

Declining consumer confidence is likely to reduce the flow of GST revenue by a further $30 million.

The extent to which the state's finances have melted away has been sudden as well as substantial, and looks likely to wipe out the $160 million Budget surplus estimated for 2008-09.

The Treasurer has not ruled out spending cuts or the deferral of capital projects.

However, the reforms needed to scale back the public sector are going to be much more painful than should otherwise be the case.

This is because the Rann Government coasted along during the good times, spending as much money as it could get.

From 2002-03 to 2006-07, the general government sector raised $2.4 billion in revenue and spent $2.6 billion.  This led to deterioration in the Budget surplus over those years.  In other words, less money was set aside for the "rainy day" of the current global financial crisis.  In its latest annual report, the Auditor-General also revealed a range of cost blowouts and poor management practices within government.  As government inefficiencies have grown, key ministers seem to have turned the other cheek.

The years of "maximum spending" and waste have come to haunt the Government as it undertakes the necessary task of putting the State Budget on a more sustainable footing.  The time for action is now.  Yet, Mr Foley has indicated that an economic statement informing people of the fiscal implications of the financial crisis will be deferred.

By contrast, other states such as Tasmania are bringing forward their midyear statements to bring business and the broader community into a discussion of the reforms that need to take place.

Now is not the time for the Treasurer to act like a rabbit in the headlights.

The State Government has no option but to cut the excess spending built up over the good times, and to do it quickly.

BLOATED GOVERNMENT

• Additional spending from 2002-03 to 2006-07 helped subsidise the employment of an extra 13,800 bureaucrats across the SA public sector.
• In 2006-07, about 14 per cent of people working in SA were employed by the Government, the second highest state proportion after Tasmania.
• The wages bill to support the extra state public servants has also increased over the life of the Rann Government.  Bureaucrat salaries now account for about 48 per cent of the general government Budget.
• With teacher unions taking industrial action seeking more pay, the challenge is on for the Government to quell further increases in public sector wages in the interest of taxpayers.

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Clamp on conflict of interest may hobble sound judgement

Do we want our councillors to be even less interested in local government policy than they already are?

As potential councillors submit their nominations for Victoria's council elections next month, this is the message the State Government is broadcasting.  A legislative change to local government administrative law now filtering through Parliament will exclude councillors from being able to vote on an issue in which they have an indirect interest.

Across the nation, councils have been embroiled in scandal after scandal over alleged corruption concerning development approvals.  It would be nice to clean up council politics.  But this new indirect interest rule is remarkably broadly defined.  Apart from the obvious possible conflicts of interest -- family members owning property that might be enriched by council decisions, and so on -- it also considers an improper interest to exist if the council member had, at any time in the past, made a submission on the issue at hand.

But what if the councillor was elected specifically because of his or her position on that issue?  Those activists who have in the past taken legal action against, say, the St Kilda Triangle or the 2am lockout would be unable to vote against them in council when the time came.

The only councillors who would be able to vote would be those who have no particular concern for the issue.  Imagine this rule extended to state or federal government -- democratic representatives could only vote if they didn't care about what they are voting for.

It would be wrong to have a politician determining fiscal policy if they have a mortgage, or health policy if they have a relative in hospital.

The Government claims this new rule will apply in a small number of cases, but the legislation is worded so ambiguously that many councillors will have to excuse themselves to avoid an inevitable legal backlash.

Other ways the Government believes that councillors might have an indirect interest are just as dubious.  One test is whether the councillor ever received a gift worth more than $200 from one of the parties appearing before the council.  A sum of $200 is ridiculously small considering most contentious council development applications involve projects worth many millions of dollars.

Does Spring Street really think that bribing local councillors is that easy?  If so, we have a much more serious problem than the State Government is making out.

When such trivial donations come to be considered a conflict of interest by the new law, councillors will find it hard to identify prominent members of the community who they don't have an indirect interest in.  Remember, councillors are politicians who have, over many years, needed to fund-raise from within their community.

While we all enjoy feigning moral outrage over the influence of money in politics, as long as councillors are able to make decisions that can make or break property developments worth millions of dollars, money is going to flow into councillors' campaign chests, whether overtly or covertly.

The problem the State Government is trying to tackle is actually quite real.  Councillors are asked to do two separate jobs that can easily come into conflict with each other.  Half the time, they are supposed to be politicians, pressing palms, kissing babies and pronouncing judgement on the issues of the day.

The rest of the time, their role in Victoria's planning framework requires them to be dispassionate judges, prostrating their personal opinions upon the cold concrete slab of administrative law.

This tension between councillors' democratic and quasi-judicial functions is one they are not well-equipped to manage.

Local government seems to attract the dregs of our political class.  There are young factional hacks from political parties who view local government as well-paid work experience.  There are activists who don't know much about government but know they hate ugly new houses spoiling their suburbs' "traditional character".  And there are earnest greenies who campaign to declare their council "nuclear-free".

Yes, local councillors are a bizarre collection of the uninformed, the uninterested and the weirdly over-interested.

But they were democratically elected.  The State Government should allow them to vote on the issues that got them there.

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Henry policies must be in public gaze

At the Senate estimates hearing on October 22, Treasury secretary Ken Henry expressed his preference that the government's bank deposit guarantee scheme ought to have been developed away from the prying eyes of public scrutiny.

In his own words:  "I really think that it would be much better if these things could be dealt with in a sober way, out of the public gaze for the time being.  Allow the officials the opportunity to reflect soberly and deeply upon the implications of various options and provide appropriate advice to government."

This is an extraordinary statement to make, and has all the hallmarks of a "we know best" attitude.

Fortunately, our liberal democratic system obliges governments to propose and implement policies to be critically scrutinised by the public.  Our system is one of "government by discussion", with the discussion applying to every aspect of policy.

Important checks and balances are also in place to monitor government revenue raising and expenditure, and the conduct of bureaucrats in implementing policy.

The estimates committee hearing was a fine example of this in action.

For example, it revealed that Treasury did not undertake formal modelling of the impact of the guarantee.  The hearing also revealed that the $10.4 billion spending target was essentially plucked out of thin air.

To have government policies out of the public gaze runs the risk that taxpayers' money will be wasted to an even greater extent than is evidenced today.

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Depression logic pushes fast cash into the economy

Anna Schwartz co-wrote with Milton Friedman the signature piece of work on money and economic stability.  Now 92 and still working, she recalls that in 2002, now US Fed chairman Ben Bernanke said in a speech in honour of Friedman's 90th birthday:  "I would like to say to Milton and Anna:  Regarding the Great Depression.  You're right, we did it.  We're very sorry.  But thanks to you, we won't do it again."

In fact, the hubris of those in charge of policy intervention is never having to say sorry -- at least for their own actions.  Bernanke, and before him Alan Greenspan as well as Australia's Reserve Bank chiefs Glenn Stevens and Ian MacFarlane, knew the history of the Great Depression inside out.  With that knowledge they are certain they could have stopped the present unwinding of global markets.

And yet, and yet!

The prologue to the current crisis was the same effervescent money supply expansion we saw in the 1920s.  Easy and cheap money caused the same asset price inflation.  Uncertainty over how long this could last and belated attempts by the authorities to rein it in led to the Great Depression.  Central bankers then and now oversaw a shovelling out of money into the economy.  In doing so they were sowing the seeds of disaster.

The recent period of debt accumulation fuelling asset inflation is instructive.  For Australian households, debt to disposable income increased from under 40% in the mid-1980s to over 150% by the mid-2000s.  Although asset values also rose, this still left a huge rise in debt net of assets.  And the value of assets (especially houses and shares) that underpinned most of that debt is now heading south.

Interest rates were held too low for too long and a level of housing stock that zoning regulations have kept in tight supply was the obvious outlet for the Reserve Bank's monetary excesses.  Households' interest payments on homes, historically at less than 4% of disposable income, ballooned out to double this by 2004 and, with the interest rate increases since then, in June of this year approached 12%.

As with the Great Depression, governments are now "reinflating".  In doing so, they are taking the advice of the very reserve banks and treasury departments that furnished the advice and pulled the levers that caused the problem.  Governments and reserve banks are lowering interest rates, handing out cash and supporting financial businesses with suspect assets.

Treasury secretary Ken Henry's Senate testimony appears to affirm that he and the RBA were of one mind in supporting blanket guarantees to bank deposits, a measure that fails to recognise the knock-on effects on other saving vehicles the positions of which are worsened as a result.  We need a scalpel, not a sledgehammer.

Simply reducing interest rates does not solve the problem, which is that assets are overvalued -- and some financial businesses that have highly leveraged loans are holding some assets that are worthless.

Nor are cash handouts or other such measures in the Government's $10.4 billion program a solution.  As ever, the problem is not a shortage of demand.  It is that people have become overextended and, with assets overvalued, they have to repair their real levels of savings.

Disposing of the budget surplus in a spending spree means releasing funds that previously were locked up in forced savings by taxpayers.

If pushing $10.4 billion into the economy to promote consumer spending was going to do the trick why not increase the largesse tenfold?  There is no documented case of handouts averting a recession.  Unless the productive potential is there, more money will not bring increased output.  And Australia's productive potential has been diminished in recent years by wasteful investments and by regulatory impediments.

While we should release funds that have been taken from the community in over-taxation, we must simultaneously remove many other inflexibilities that have diverted savings from productive venues.  Above all, we must recognise that assets are not worth as much as we thought they were.  Having done so, we have to allow asset prices to fall to their underlying market value.

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New IR law contains unnecessary risks

So far the Rudd government's Forward with Fairness policy has been debated in the context of what it is not.  That is, it's not Work Choices.  Also it has largely been a policy explained in broad terms.  But now that detail is emerging it needs consideration on its own merits.

Most importantly, given the collapsing global economic environment, does Forward with Fairness (FF) create economic risk?

Broadly, FF is good.  It has legislative minimum employment rights and simplified awards that underpin collective agreements and individual flexibility possibilities.  In overview it has balance.  But details indicate significant economic risk with a likely contribution to rising unemployment.  There are several examples.

The first relates to the reintroduction of unfair dismissal laws for businesses employing between 16 and 100 employees.  In toughening economic times, if these businesses are to survive they have a narrow window to mid-2009 in which to adjust workforce numbers and dismiss employees without facing unfair dismissal litigation.  After that they will face higher risks when employing because of their limited capacity to manage complex unfair dismissal laws.

The simpler "fair dismissal" laws apply only to businesses with 15 or fewer employees.  But mid-sized businesses face new exposure with significant disincentive to employ.

Another risk is the introduction of the puzzling concept of "good faith bargaining".  Under FF, if a majority of employees want an enterprise agreement, employers can have orders imposed upon them forcing them to negotiate in good faith.  The means being forced to attend and "participate" in meetings, disclosing business information, responding to and giving "genuine" consideration to proposals and not acting capriciously or unfairly.

Each of these subconcepts of good faith will require significant litigation to understand them.  Good faith will become a complex legal concept removed from everyday meaning.  In particular, where class warfare mentalities prevail in workforces, managers will have to appear to comply with process.  This will complicate business focus on performance.

A third risk relates to the removal of prohibited content clauses.  Enterprise agreements now cannot have content that, for example, requires a business to use a specific supplier.  Typically, when these clauses were allowed in the past, such clauses restricted businesses to using suppliers who had union approved agreements.  In effect this allowed industrial agreements to subvert competition provisions of the Trade Practices Act.  It was a form of market manipulation.

FF will now allow the insertion of such clauses in industrial agreements.  But oddly such clauses will be "void and unenforceable".  This makes the government look confused.  Why allow things in agreements that have no force?  Unnecessary litigation will occur over determining what is or is not enforceable.  This will increase business costs and blur the line between employment and competition law.

These details are igniting speculation over other matters.  For example "drop dead" clauses are said to be in discussion that would require all existing enterprise agreements to cease in 2012 or at their nominated expiry date.  Normally agreements continue past their expiry dates while negotiations for new agreements continue.  A change of this nature would create a pressure cooker of uncertainty around negotiations after 2010.

Further speculation exists over increasing union rights to enter worksites.  Under NSW industrial relations laws unions have entry and document seizure rights that exceed that of the police and the Australian Taxation Office.  The thought of such arrangements going national is spooking business.

What's emerging in the detail is that FF will introduce areas of complexity of process.  This always retards economic efficiency, growth and employment.  Concerns about anti-business agendas being introduced by stealth are surfacing.

Risk factors heighten when considering changes to the construction industry reforms.  The government maintains it will keep a "strong cop on the beat".  But the detail of how this will operate is hazy.  A review is being conducted for the government by a judge, Murray Wilcox.

The only indication of possible policy direction is in a discussion paper inviting submissions.  Perhaps it's intended to be provocative.  It accepts union allegations that the operation of the construction reforms breaches discrimination laws and International Labour Conventions.

The paper asserts that claimed economic benefits flowing from the reforms are a myth.  The construction industry would disagree, having produced significant documentation demonstrating major productivity and employment gains.  But the discussion paper dismisses the industry reports as lacking "hard evidence".

If the government undoes the construction reforms, they arguably put at risk the new-found efficiency claimed by the sector.  This would threaten infrastructure development, which the government hopes will assist Australia to ride out the global economic crisis.

Politically the risk is also high for the government.  Originally FF was not to be implemented until 2010.  Workplace relations changes take time to affect the economy.  Any negative economic or employment impacts would arguably not hit until after the next federal election due by late 2010.

But the government has moved much of the implementation agenda forward to mid-2009.  This creates opportunity for the government to be blamed for higher unemployment at the next election.

There's also an issue of electorate credibility.  The promise of FF was one of balance between necessary work flexibility and employee rights.  If implementation detail deconstructs that promise, a risk to electorate credibility exists.

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As world finances unravel, PM loses the plot

The Federal Government's economic narrative has been mugged by reality and is completely shredded.

In less than a year, the argument has gone from highlighting John Howard's "irresponsible spending" and the inflation genie being out of the bottle, to desperately pumping more than $10 billion into the economy to stave off recession.

Prime Minister Kevin Rudd has blamed the crisis on "free-market ideologues" and greed.  His commentary throughout is troubling and ill-informed.  His experience, interests and expertise are in foreign affairs and diplomacy.  He is the first Australian prime minister in a generation with little economic or business experience.

Perhaps that explains why the Government has moved from Howard-light to Howard-heavy on spending.  Money has been thrown at families with children, and retirees -- all to arrive in a lump sum just before Christmas.  First-home buyers of new homes will enjoy an even greater grant from government.

Of course, there is nothing wrong with government giving something back to the community -- yet tax cuts would be a far more effective way to do so, and also to stimulate the economy.

Rudd has the same bad economic habit as his predecessor -- willing to spend;  reluctant to cut taxes.  Unfortunately, it gets worse.  The Government intends to bring forward several, as yet unspecified, "nation-building" infrastructure projects.

Of course, the Government was always going to build some white elephants -- only the justification has changed.

Rudd is using the crisis as an excuse to take bank bashing to new heights.  He has leapt on to so-called excessive executive compensation.  US politicians are on to this, too, so the "me too" era continues in office.

Yet there is no evidence that excessive salaries are the cause of the crisis.  In fact there is evidence that meddlesome bureaucrats are to blame.

Many commentators are pointing to so-called fair lending laws in the US and the actions of the Boston Federal Reserve in encouraging banks to make loans to low-income borrowers.  Unusually low US interest rates after 2003 have also been identified as contributing to the crisis.  The actions of the US Government and its agencies are at the root of the crisis.

If any bankers are to have their salary scrutinised it should be those at the Reserve Bank.  Not only has the RBA been caught raising rates in a slowing economy and having to reverse its recent monetary policies with indecent haste, but those actions have probably just cost taxpayers $10 billion out of the surplus.

Bankers in the private sector would never get away with a loss of that size.  Rudd needs a coherent and consistent economic message.

When justifying why banks did not pass on the full rate cuts, he argued that the banks were well run and well regulated.

This hasn't changed in the past month.  So there is no reason to argue that executive compensation at Australian banks is endangering our economy or Australian deposits.

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Rudd's generosity will exacerbate crisis

Banking failures in New York and even pressures on some Australian banks all seem remote from our own day-to-day lives.

Yet these massive economic convulsions ricochet all the way through the financial system right down to small-business credit availability.

The difficulties that Australia's well-resourced banks have experienced in accessing overseas funds had been causing a crunch in their own lending and credit lines.

Hence the Australian Government's action in explicitly guaranteeing all bank accounts.  Without this, there was a danger of a lending lockdown by banks.

While the guarantee of bank deposits was necessary, the other parts of the Rudd Government's package are likely to backfire and worsen the crisis.

It sounds grand for the Government to inject $10.5 billion into the economy.  But the Government does not actually own that money.  All it has is an ability to take it from some people and give it to others.

Such robbing of Peter to pay Paul brings about adverse effects.  One of these is that it shifts incentives from working to gain income towards lobbying government to supply income by taking funds from others.

Moreover, the $10.5 billion funding measures are targeted at those who are likely to spend the money on consumption -- on houses for young people and on everyday goods for pensioners and carers.

Gifting $10.5 billion to these recipients, no matter how worthy they are, means we are switching resources from savings to consumption.

And, together with the Reserve Bank's reckless credit expansion, the underlying cause of Australia's present problems is inadequate domestic saving.

This required excessive overseas borrowing, which has now dried up.  And yet the Government is now also spending domestic savings.

Meanwhile, the financial meltdown is becoming an economic recession, which increased government spending could easily exacerbate.

Within a few months, Canberra will realise that its $10.5 billion package has failed to reignite the economy.  Hopefully it won't introduce an even bigger package since this will further undermine the nation's savings and investment.

It's an accumulation of things that make for a recession.  People stop spending.  This is not because they suddenly don't need goods and services.  Nor is it that they cannot afford them, though increased unemployment will necessitate some belt-tightening.

The fact is that people have recognised that their savings are less valuable than they thought they were.  Their super fund is down or the value of their investment property is looking softer.

For some, their annual bonus is looking less certain, while others may be fearful of losing their jobs.

Those in businesses selling or using imported goods have seen the Aussie dollar's crash increase their costs by 20 per cent and such increases are difficult to pass on.

This lower level of wealth -- actual and prospective -- means most of us will be looking to do more saving and less spending.  The upshot is fewer customers in cafes, furniture stores, car dealers and other areas where we can delay purchases.

Anything the Government tries to do to offset lower consumer spending at this late stage will only worsen things.  The focus must instead be on cutting its own waste.

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Rudd fails leadership test

It's the end of another week of -- alternately -- financial fear, hope, and then despair.  Everyone is asking:  "How bad will it get?" and "When will it end?"  These are questions about the stockmarket, but they also apply to government policy.

When Bob Brown and Barnaby Joyce start leading the debate about how to handle the economic crisis, we have a problem.  And for this problem we can thank the Prime Minister.  Kevin Rudd's easy rhetoric about the need to rein in "executive greed" has given legitimacy to the demands of everyone who has ever wanted the government to legislate to control food prices, fuel costs and bosses' salaries.  Of course government can easily regulate all of these things, but the results would be disastrous.

Yes, executive salaries in the tens of millions of dollars appear excessive.  In some cases "obscene" is not a bad description for executive pay packets, but that's the price we pay for economic and political freedom.  This is not simply a debate about ideology.  The system that has allowed executives to be paid these "obscene" amounts is also the system that has delivered unprecedented prosperity for Australians.

Sure, if executive salaries were regulated, everyone not earning a million dollars a year might get some fleeting satisfaction from knowing that really rich people will now only be very rich -- but there's a trade-off.  We'd come close to doing away with one of our basic human rights, which is the right to gain as much profit as possible from our personal labour.  The ALP is happy to defend this principle for union members but not, it appears, for managers and executives.

The Greens are demanding that executive pay packets should be limited to $5 million a year.  The Prime Minister now has to say whether he agrees with this.  Does he think the limit should be higher or lower?  Does he think executives should be entitled to earn $4 million a year or $6 million a year?  How much does he think they should be able to earn?

One of Rudd's justifications for controlling the salaries of bank executives is that the government's guarantee on bank deposits now places some sort of responsibility on the government to ensure that the banks behave responsibly.  Leaving aside the question of whether there should be such a guarantee in the first place (there shouldn't), there's the issue of where such logic leads.

The Australian car industry survives only because of the federal government.  Should the federal government now control the salaries of car company executives?  The renewable energy industry is likewise a creature of government regulation.  Should there be a minister in charge of the salaries of wind farm bosses?  The list could go on to encompass every aspect of the national economy.  Why stop at the banks?

In the search for an easy headline Rudd risks creating a firestorm that he can't control.  Twenty years of economic reform is at risk of coming undone.  The measure of the success of that reform is not only the material benefits it has delivered.  Of even greater significance has been the gradual acceptance by the Australian community that free markets provide better outcomes than government control.  If Rudd keeps on with his rhetoric about how free markets spawn greed and fat cats, this success is at risk of coming undone.

To say we live in difficult, interesting, or tumultuous times is an understatement.  In the United States we've seen how John McCain's economic solutions are, if anything, more left-wing than those of Barack Obama.  And the Bush administration, which has been castigated for its handling of the Iraq War, is now looked to as the one being able to fix the greatest financial crisis since the Great Depression.  Apparently the US government can be relied upon to turn around a $US14 trillion ($20.2 trillion) economy, but not to win a war.

In the United Kingdom, the banking system has effectively been nationalised.  The UK government will end up owning 60 per cent of Royal Bank of Scotland and more than 40 per cent of Lloyds TSB.

At the moment there aren't too many defenders of the free market.  No one expects Rudd to come out and argue the advantages of laissez faire capitalism.  Nor does he need to.  But what the Prime Minister should not do is fan the flames of cheap populism.  The test of leadership is being able to stand above the popular clamour.  This week Kevin Rudd has failed that test.

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Bartlett's big spend may miss its mark

Following the Federal Government's $10.4 billion package to pump-prime the national economy, Premier David Bartlett has announced his own extra spending measures for Tasmania.

The main plank of the State Government's package is a $100-million scheme to give loans to small and medium-sized businesses.  This new Tasmanian Industry Support Scheme (TISS) is expected to commence by November.

A politically clever move, it complements Prime Minister Kevin Rudd's spending on households with more funding for business.  But will it work?

The lack of detail surrounding the scheme is concerning, given that the Government proposes to spend taxpayers' money.  The Premier's announcement states that business applicants must have sound governance structures and sound balance sheets, without any further details.

Another funding condition is that businesses that access the fund must not retrench workers.  This doesn't sound too realistic.

Would business receiving TISS funding suddenly lose the grant if it needs to retrench, say, an unproductive worker but replaces him or her with a more productive one?

The TISS scheme is an addition to the plethora of existing government schemes designed to assist business.  There's the Enterprise Development program, Tasmanian Innovations program, Research Partnerships program, a Springboard Accelerator program, New Market Access program, Market Ready Commercialisation Program, a micro-credit program for women entrepreneurs, an export assistance scheme and an interest rate for young farmers.

If the State Government is keen to give businesses extra funding, it is not unreasonable to ask why funding was not boosted for existing programs.  Are they too inflexible to meet business needs in changing economic circumstances?

It seems that another grant program on top of the existing pile only gives the economic development department bureaucrats another reason to exist.

The ability of governments to pick out industry winners has a demonstrably poor record over a long period.  For example, the economic pain experienced by Victoria during the Cain-Kirner period was exacerbated by its Economic Development Corporation extending loans to business projects of poor commercial viability.

The Australian car industry has been on its knees for at least a decade, with plants closing in Victoria and South Australia, in spite of the continued intravenous drip of funding from governments.  Other industries receiving government support, such as textiles, clothing and footwear, have met with a similar fate.

A Tasmanian Auditor General study in 2000, when questioning the transparency of business grants, even suggesting that the department produce basic administrative guidelines.  The prospects for the Tasmanian government picking viable businesses through the TISS are highly questionable.

When announcing the package, Mr Bartlett said that governments are elected to lead and we are taking the steps to reassure Tasmanians in a time of economic uncertainty.

It must always be remembered that the Government is spending taxpayers' money and so any spending measure must be made with the greatest of care.  If there are any doubts whatsoever, the State Government should instead deliver comprehensive tax cuts to allow individuals and businesses to pick themselves up in uncertain economic times.

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Confidence tricks fail to secure our economic future

The Rudd government's $10.4 billion fiscal stimulus package is nothing more than a set of confidence tricks played out on the Australian people.

The centre piece of the package is an immediate $4 billion payment to pensioners.  This equates to an additional $1,400 for singles and $2,100 for couples just before Christmas.  Self-funded retirees with a Commonwealth health card can also look forward to extra money.

There is little doubt that pensioners will be grateful for the addition support about to go their way.  From the government's perspective, it also solves the dual political problems of placating pensioners, on the one hand, whilst defusing the Federal Opposition's attack on the other.

However, the pension announcement highlights the extent to which so many older Australians remain captive to the budgetary whims of government.  Where today Rudd decides on giving pensioners a break, tomorrow he can refuse on budget grounds to give them another increase down the line.  Moreover, it creates a "moral hazard" in discouraging people to save for their own old age.

The fiscal stimulus package also provides $3.9 billion in extended benefits for 2 million families.  Families eligible for Family Tax Benefit (A), Youth Allowance, Abstudy or a benefit from the Veterans' Children's Education Scheme payment will each receive $1,000.

Again, this funding sounds nice on the surface.  Yet, most economists warn of the extensive waste of "churning" -- where families pay tax to get it straight back as a government benefit -- and this proposal only worsens the situation.

Kevin Rudd and Wayne Swan also announced an increase in the First Home Owner Grant, at a cost to the budget of about $1.5 billion.

This proposal does not tackle the root problem of excessive house prices, a problem caused by regulatory restrictions on the part of state governments in releasing land.  New houses on the periphery of Australia's metropolitan centres should be $50,000 to $150,000 cheaper than their current price, and a relaxation of zoning laws would be a more effective way of helping people and industry than a hike in the subsidy proposed.

The announcement of the Rudd government to fast-track the implementation of its education, health and infrastructure funds is another key element of the fiscal stimulus package.

There is little question that the state governments will be eagerly wanting to dip their paws into these honeypots.

However, the lack of additional detail that came with the announcement is disconcerting.  For example, it ignores important questions as to how scarce labour and materials will be sourced to build the dedicated infrastructure, without putting further pressure on inflation and interest rates into the future.

Issues about the delivery of efficient infrastructure through these funds is left absent by the government's rush to be seen to be doing something.

The government seems to have forgotten the lessons of decades past.  Keynesian-style fiscal pump priming had a poor record in terms of practically stimulating economic activity in a sustained manner.  This is because any government spending has to be financed by taxation sooner or later.  The increasing value of Smith's government benefit is offset by the rising taxes paid by Jones.

Other economic costs had become apparent as a consequence of fiscal stimuli, including an upward pressure on interest rates leading to a "crowding out" of private sector capital accumulation.

Instead of a fiscal stimulus package inspired by the worst of the bygone "Keynesian consensus", a better course of action for government would have been to instigate significant tax cuts all round, financed by reductions in wasteful government spending.

The tax cut would have increased rewards to work, investment and saving to get Australia moving again, whilst the reduction of spending restricts the likelihood of inefficient "roads to nowhere" and other special interest projects.

With the grandiose title of "Economic Security Strategy", the knee-jerk fiscal expansionism of Kevin Rudd and Wayne Swan does nothing to bring about the economic reforms that Australia desperately needs in this time of economic uncertainty.

At a political level, it is ironic that Rudd castigated the former Howard government in Opposition for its irresponsible, wasteful spending, only to now copycat the former government.

The economic implications of the Rudd government's stance are much more serious.  Where it thinks that showering Australians with their own money will steer the country through tough times, the reality is that it has missed yet another opportunity to properly secure Australia's economic future.

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Roos for Ruminants but What about Rice

The Federal Government's climate change advisor, Professor Ross Garnaut, has suggested that reducing sheep and cattle numbers and replacing them with 175 million farmed kangaroos would help to dramatically reduce Australia's greenhouse gas emissions.  This is because ruminant animals, like sheep and cattle, produce methane which is a potent greenhouse gas.

But of course there are other forms of agriculture that produce methane, in particular rice agriculture.  Furthermore, we all know that there are a lot of Chinese and they eat a lot of rice.  In the scheme of things, if Australians are to give up their lamb chops then perhaps there should also be some pressure brought to bear on the Chinese to stop eating rice.

Indeed while ruminant animals are thought to produce 93 million tonnes of methane per year globally, rice cultivation is not far behind at 60 million tonnes of methane annually.

Interestingly the world's wetlands dwarf both these sources of agricultural emissions, producing an estimated 145 million tonnes of methane each year.  Another natural source of methane is termites producing an estimate 20 million tonnes of methane each year.  But clearly in this age of environmental concern it will be sheep and rice that go before termites or wetlands.

It has been suggested that because methane production in flooded rice fields is a result of microbial activity in the anoxic environment of the flooded soils, that drier forms of rice cultivation could solve the problem.

Of course, all sorts of potential solutions are possible to all sorts of proposed problems.  Mr Garnaut could have even suggested that the Chinese start eating kangaroo.  Indeed Australia is a large country and we have a lot of greenhouse-neutral kangaroos.

A problem for the Australian kangaroo industry has not been a shortage of kangaroos, but rather the lack of a reliable market in large part because of animal rights campaigning against the killing of this perceived cute and cuddly creature.

Environmental personality, the late Steve Irwin, was even against the idea of farming Australian native animals and supported a campaign that forced David Beckham to stop wearing kangaroo skin soccer boots.

I am not averse to a good lamb chop, beef burger or kangaroo stew and there are better reasons than "climate change" for eating kangaroo -- nature's natural bounty.  But Australians and Chinese will first need to overcome some of our cultural aversions and the opposition of animal rights organisations such as People for the Ethical Treatment of Animals (PETA).

Indeed the PETA cheer squad would probably prefer we all ate rice.

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How we found ourselves ambushed by reality

Australia's love of emissions trading to combat global warming is ending in the face of economic uncertainty.

Kevin Rudd likes to proclaim that "climate change is the great economic, environmental and moral challenge of our time".  Malcolm Turnbull seems to agree.  Yet their love affair with emissions trading schemes to combat global warming has been pushed to the margins of public life in the face of global financial turmoil.  The politics of climate change is shifting dramatically.

Whereas once both leaders were calling on Australians to pay higher energy prices to save the planet, they now warn of tougher economic times as the financial crisis enters a new and dangerous phase.  Whereas once Australians wanted to do their bit to cut the gases our leaders claim cause global warming, we now panic about more visceral things like protecting their jobs, mortgages and superannuation.  Whereas once Australians were cheering on the Prime Minister to lead the world on the environment, we now fear we'll succumb to the financial contagion wreaking havoc all over the world.  And whereas once the political debate was over co-ordinated global action to tackle global warming, it's now over co-ordinated global action to stabilise the international financial system.

You know the climate is changing when even ABC gabfests ignore one of the Left's sacred cows.  I recently appeared on Q&A, and I naturally expected questions about Ross Garnaut's final and most important report on climate change which had been released that very week.  Of the dozen or so questions asked, more than half were about Wall Street's market upheaval;  not one question was raised about climate change.  Not one.  And this disinterest, remember, came from an audience not usually known for reflecting the thoughts and attitudes of Middle Australia.

So you'd expect the federal opposition to be howling about the Rudd government's call for a huge bureaucratic expansion and undefined costs to industry at a time of economic unrest.  Instead the Coalition is sending mixed signals.  F. Scott Fitzgerald once remarked:  "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function."  Perhaps no one better exemplifies this truth than Turnbull himself.

Amid economic uncertainty, the new Liberal leader insists that "whatever Australia does will be ineffective unless it is part of a global solution";  and yet he also remains committed to a 2011 or 2012 start date for the implementation of an ETS regardless of the outcome of the Copenhagen global conference in December 2009.

Which raises the obvious point:  why even make plans to implement an ETS now?  If the world's major emitters such as China, India and the US -- which together will account for more than 50 per cent of global emissions by 2030 -- won't participate in any serious carbon reduction plans, why should Australia -- which will account for only 1 per cent of global emissions -- slash emissions to 60 per cent of 2000 levels in the next 40 years?

Former federal Liberal leader Brendan Nelson and his chief of staff Peter Hendy believed the coalition should sharpen the difference with Labor over its proposed Carbon Pollution Reduction Scheme, by arguing that it was mad to slash Australia's carbon levels at a high cost in jobs and cash when no nation that matters would follow our lead.

The response was overwhelmingly hostile.  The media, more interested in subjecting the opposition's policy to more scrutiny than the government's Green Paper, viewed Nelson's intentions through the prism of the never-ending leadership speculation.

The Rudd government used the episode to accuse the Liberals of being climate change deniers in the pocket of Big Oil and Big Coal companies.  Several shadow ministers, meanwhile, were aghast that their leader had the temerity to question the previous government's recommendations for an ETS -- even though these same critics had no qualms about jettisoning other Howard policies on an apology, Work Choices and Kyoto ratification.

The strange thing was that the article that induced this violent reaction was a very modest one.  Writing in the Australian on 11 July, Nelson merely pointed out the obvious:  that there are serious risks for Australia if we implement an ETS before any global agreement.

The article was undogmatic in its presentation, studded to the point of tedium with pro-green lines such as "It is prudent to reduce our carbon footprint" and "Practical steps to reduce carbon emissions are imperative".  Nelson did not question the science underlining global warming, nor did he propose any serious alternative to the cap-and-trade model.

Nothing in the article suggested opposition to an ETS itself.  It only took issue with the idea of Australia, with its natural abundance of fossil fuels, going out on a limb ahead of the world on cutting greenhouse gases.  Unless the nations responsible for the biggest emissions commit to effective plans to reduce them, Nelson argued, Australian unilateral action would inflict collateral damage on the wider economy in lower growth and higher prices up and down the energy chain.  And it would lead to the export of our energy-intensive jobs to those nations that do not take action to reduce carbon emissions, thus worsening the emissions problem.

Now, in the face of the global financial crisis, all this sounds reasonable enough.  Yet the stridency of the response to our proposal at the time left Nelson, Hendy and me wondering whether, unwittingly, the article might have touched an exposed nerve of a new political correctness in Australia.  Not only was it impermissible to question climate change science;  we were now being told to not even question unilateral action to combat global warming, even if it would come at huge cost to the economy.  It was a sad state of affairs that ideas bearing on Australia's national interest could not be discussed and speculated on freely without fear of being dismissed by those who claim moral superiority in this debate.

That was back then -- only a few months ago, when polls showed 77 per cent of Australians were content to pay higher bills for electricity, gas, and other consumer goods, and Professor Garnaut was presenting his reports that made him famous among the elites.  The world that confronts us today is not the one announced in the program and shown in the preview.  As a recent Lowy Institute poll shows, Australians are now much more worried about jobs and economic security than emissions trading and global warming.

All of a sudden, the idea that a single-income family should pay more to run their evaporative air conditioning system, washing machine and dryer, fridge and stove, computer and large flat-screen television does not sound so morally self-satisfying after all.  To say again:  it was not meant to be like this, but the fact that it is suggests many advocates of unilateral action were naive to think that climate change could possibly trump cost-of-living issues that are the bread and butter of election campaigns.  As Sarah Palin might say, Joe Six-Pack may not understand emissions trading schemes, but he sure as heck understands hits to the hip pocket.

In the midst of a global financial crisis, moreover, it is surely Pollyanna-ish to think the world will somehow reach a consensus on climate change.  The Chinese government is not only refusing to cut its emissions;  it is building a new coal-fired plant nearly every week.  The Indian government is not only rejecting Rudd-style cuts;  it is unashamedly saying poverty poses a greater threat to its people than climate change.  In the US, although both presidential candidates support an ETS, the Democratic-controlled Congress recently failed to pass a watered-down version of their plans.  Most of Europe, meanwhile, has failed to meet its mandatory carbon targets under the Kyoto protocol, despite already having implemented an ETS.

During the week that shadow cabinet "rolled" Nelson's common-sense ideas, the other major global talks -- the Doha round of multilateral trade -- collapsed.  The culprits?  India's Congress, which sought to placate small farmers in the run-up to the next elections;  and Chinese leaders who doggedly defended cotton and rice producers.  What's to stop a few other well-placed parochial interests bringing another vast global process tumbling down?  Indeed, if the world can't reach a consensus on something as relatively simple as free trade, how on earth will it be able to reach a consensus on something as complicated as climate change?

Now, it's true Rudd is so scared of inevitable voter anger over the ETS that he has softened Garnaut's original recommendations.  Petrol taxes, for example, will be reduced for the first three years of the scheme.  Nonetheless, forcing companies to buy pollution permits will raise the cost of energy production and hit every corner of the economy.  According to the government's Green Paper, electricity and gas prices will rise by 16 and 9 per cent respectively.  Why then should the Liberal party, ostensibly the party of small government, be complicit in a scheme that has all the hallmarks of a giant revenue grab and creeping socialism?

No doubt some critics will warn that Liberals can't afford to be seen as "browner than John Howard".  No doubt too they will use any Coalition opposition to an ETS as evidence that conservatives remain climate change deniers.  But as Oscar Wilde said:  "The truth is rarely pure, and never simple."  What's so wrong with embracing an agnostic position on climate change which says:  yes, it can't be good to pollute the atmosphere, but the moral absolutists who presume to know exactly what to do are kidding themselves?  Meanwhile, with one of the world's biggest supplies of uranium, Australia could develop an alternative form of energy use which produces not an ounce of carbon dioxide:  nuclear.

In any case, conservatives won't be able to attack effectively the government's global warming scheme if they remain carbon copies of Labor.  When all is said and done, Turnbull and his shadow environment minister Greg Hunt agree with virtually everything that Rudd and his climate change minister Penny Wong say about taxing industry and redistributing the proceeds at potentially huge cost to the economy.

The only point of difference is the start date:  the government supports a deadline of 2010;  the opposition says no later than 2012 -- no matter what the rest of the world does.  But by putting forward a simple, sharp critique of this costly and risky scheme at a time of global economic turmoil and when no global consensus exists, the Coalition would be better able to feel the pain of battlers who will suffer most from higher energy prices as companies pass on costs.

This is what Brendan Nelson was essentially saying behind the scenes.  For his pains, he was disowned by many of his colleagues and was denounced as a denier by the foolish.  But this is what Malcolm Turnbull should be saying on the record in the most forceful and coherent language he can find -- and sooner, rather than later, he will have to.

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Big bucks roll in poll quest

Despite both Labor and the Liberals promising to outdo each other on the fiscal conservative criteria, The Canberra Times election "spendometer" in late September had the Labor Party's total spend at $486 million with the Liberals running a close second at $396 million.

Since then, both parties have made a rash of new promises.

Using the parties' own costings, and excluding promises both double-counted and already budgeted for, I estimate that Labor has committed to spend a whopping $1.06 billion compared with the Liberals $619 million.  For every $1 that the Libs promise to spend, Labor commits $1.70, such is the power of incumbency.

The adjusted spending total was calculated as of last weekend, and does not take into account any extra promises made during this last week of campaigning.  In part, the party spending differences reflect Jon Stanhope's preparedness to go into spending overdrive, while Zed Seselja may be hoping that a flurry of late promises will get him over the finish line.

The spending tally removes the tricky double-counting of spending promises that appears in the parties' policy statements, and does its level best to account for sloppy policy work by the parties.  For example, Labor's water policy states that a re-elected ACT Labor government will provide $600,000 million to support water audits and water management plans by businesses.  So, is that $600 billion in spending or just $600,000?

Even so, the breadth of government spending across the ACT economy is extraordinary.  Like confetti floating randomly in the breeze, Labor has splashed money everywhere over the forward estimates, from public hospitals and health care ($1 billion, but with $300 million already spent), ACTION buses ($10 million) and maternity leave ($7 million), right through to a $60,000 grant to the Council for the Ageing.  If re-elected, Labor will ensure that no Canberran is left untouched by the churn of the state.

The Liberals, on the other hand, are hoping to nab the votes of sporty types, with new promises for sport venues capital funding ($24 million), recurrent grants for sporting activities ($6 million) and improvements to the bicycle network ($7 million).  The Canberra Liberals may be thinking that the sporty types could be youthful types, too, with their $122 million stamp-duty exemption for first-home buyers.

It must be worrying for Stanhope that his spending promises are failing to resonate with voters.  With the latest polling showing Stanhope's approval ratings falling by 20 percentage points since the 2004 poll, and with predictions of a return to minority government, Labor must be wondering how much more tax churn it would take to get the electorate to think more favourably of it.

Perhaps the key issue is that Canberrans realise that Stanhope is merely trying to bribe their vote with their own money.  For example, health issues are prominent in the minds of electors.  However, public hospital elective surgery waiting times have been going up, and 41 per cent of emergency department patients aged 75 and overare waiting more than eight hours for admission after treatment.

Perhaps Labor's soft polling reflects the fact that Canberrans know about the underwhelming performance on government service delivery, and don't like getting such a poor return from their own money.

Debates in previous ACT elections were conditioned by a national economic powerhouse that flooded the ACT Treasury coffers with money.  This time round it's a slightly different story.  As the pre-election budget update shows, an economic slowdown is almost certain to hit the budget bottom line through reduced tax revenues and earnings on the Government's superannuation investments.

With the economy projected to grow at below its long-run average, Canberrans would do well to consider the sustainability of the "max-spending" election promises being made before registering their vote.

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Reprising the 1930s degringolade

"You don't know what you're doing" is the soccer crowd's refrain to a failing team manager's player selections.  Such an accusation applies to almost all the world's central bankers, whose carefully cultivated pretensions of deific prescience are now deflated.

Aside from attempting to address the economic mess they have created, central bankers are setting out their apologias.  The authorised version is given by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia.

Plosser tells us that monetary policy can't do everything.  He says it cannot protect against buffeting caused by non-monetary disturbances, such as a sharp rise in the price of oil or a sharp drop in the housing market.

In fact, soaring oil price increases over the past couple of years were absorbed without causing economic dislocation.  As for house price increases, these were caused partly by governments forcing up the price of housing land (and in the US requiring relaxed lending standards) and partly by the reckless expansion in the money supply fomented by the Fed and, indeed, by our Reserve Bank.

Plosser adds.  "Encouraging the belief that any system of financial regulation and supervision can prevent all types of financial instability would be a mistake.  Instead, our goal should be to lower the probability of a financial crisis and the costs imposed from any troubled financial institution."  Having specified such limited goals, neither Plosser nor other central bankers and Treasury chiefs have acknowledged their abject failure to meet them.

For the central bankers, their bail-out proposals are policy-on-the-run with no sense of fitting the colossal rescue sums they want into what is needed.  The US $700 billion is inadequate to liquidate the "toxic debt" variously estimated at $3-6 trillion.  It will be used to reward the very people who have acted recklessly in their borrowing and lending and it is being accompanied by a re-run of the very low interest rates that were the original cause of the debacle.

The central banks have been set up with dictatorial powers over the money supply and interest rates precisely so that these levers of a stable economy can be kept away from the political process.  Wisely, the machinery of monetary management has been removed from the control of politicians who therefore have to be open in borrowing and stealing to buy votes.

But, in taking such powers from politicians, we have surrendered considerable discretion in monetary management to detached experts.  These reserve bankers have basked in that power.  They have encouraged an army of sycophants examining every word they utter looking for hidden meaning or some hint as to where the great minds' thoughts are developing.

In fact the Masters of the Policy Levers had no clue what the money supply was doing.  The recession we now face is due solely to their monetary mismanagement.  When a central bank presides over year after year of money supply increasing at double digit rates, something in their training and qualifications should be asking "where is all that money going"?  The increased money supply can only be reflected in inflation, transfers overseas and real economic growth.

We are pretty certain that economic growth was at levels of only 3-5 per cent, so the rest must have been boosting inflation or was being accumulated by overseas borrowers.  The overseas accumulation of Australian funds is certainly one direction where the monetary expansion went.  The collapse of the $A is a vivid illustration that the lenders want their money back and, in claiming it, are causing just the sort of policy surprises and wild fluctuations that the monetary policy managers were supposed to prevent.

As for the rest of the surplus money created by the Reserve Bank, if it was not being measured in the CPI it must have gone into other forms of inflation.  Housing is the obvious area.  House prices were inflated by mismanagement in other arms of government, which boosted prices by creating land shortages and excessive taxation of new developments.  This created a casino with prices escalating and home owners complacently took out second mortgages to finance rental properties and overseas trips.

In the current debacle, there have been calls for punishment of the merchant bank Masters of the Universe.  But all they were doing was responding to the policy environment set by the central bankers, and it is they who should be called to account.

Far from acknowledging their culpability, central bankers and Treasury chiefs are calling for even greater powers.  It would be foolish to agree to this.

Many voices are calling for greater regulation.  Regulatory controls should be constantly reviewed, though in the current world crisis it is not always the lesser regulated countries that have fared worst.  In Australia, Lindsay Tanner has recognised that there remain areas where red tape is excessive and costly.  Knee-jerk regulatory intensifications and government interventions have not worked in the US and UK and can store up real future problems.

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Why greed's just too small a word to hang a crisis on

Pundits, letter writers, talk-back radio callers, John McCain and the Prime Minister all agree;  It Woz Greed Wot Done It.  In a speech in Sydney last week, Kevin Rudd recalled the movie Wall Street and its main character, Gordon Gekko, before declaring that the era of "greed is good" is over.  And McCain's campaign -- or at least what is left of it -- has been busy blaming money-hungry fund managers for the financial crisis.

It seems that everyone knows who the villains behind the crisis are -- those greedy, greedy share traders who grubbily fondle their portfolios with their fat, stumpy fingers, and all those greedy consumers hoarding investment properties.

But if there's one thing constant in human history, it is greed.  Even 2000 years ago, Roman moralists sounded old-fashioned when they complained about the avarice of the common people -- the satirist Gaius Lucilius wrote that "a man can be cured of his lust, but never a fool of his greed".  So greed wasn't invented with Facebook.

The causes of the financial turmoil have to lie elsewhere.

An extraordinarily elaborate patchwork of national and international regulation gave banks and traders a false comfort that regulators were protecting their investments.  And after September 11, the US Federal Reserve lowered interest rates, making it seem that only a sucker wouldn't borrow vast sums for their home.  Restrictions on land use in many areas raised house prices so high that it became almost impossible to buy a home without borrowing 20 times your annual salary.  Compounding all this were government policies that encouraged banks to loan to individuals with non-existent credit histories.

On the other side of the market, traders relied on complex models of the riskiness of certain assets that, it is now clear, were systematically hiding dodgy mortgages.  The existence and practices of quasi-government mortgage lenders -- Fannie Mae and Freddie Mac -- further obscured the riskiness of subprime lending and, indeed, the risks of subprime borrowing.  There was a lot of hubris -- Western democracies have seen decades of rising house prices and traders have increasingly filled their investment portfolios with assets that appear far removed from the individual debtors at their source.

So, where is all the "greed"?  Share traders working hard to increase wealth isn't greed -- it's their job.  And if we are to be completely honest, most Australians would prefer that their super fund managers were eager to beat the market.

It was complacency, not greed, that made everyone underestimate how risky their investments actually were.  Greed might be a deadly sin, but so is sloth.

Even if greed did cause the crisis, then it was greed unfulfilled.  All those sharks who have spent their careers scurrying around the big banks and mortgage houses looking for investment opportunities have had their dreams of mega-wealth spectacularly dashed.  After all, it wasn't the CEOs packaging up those dodgy assets; it was the ambitious middle-rung traders who are now filing out of their offices.  It's easy to be greedy.  It's a lot harder to be successfully greedy.

It is sort of understandable that people are trying to portray the financial crisis in moral terms -- there are a lot of people watching their small investments hit bottom, for reasons that are complex and technical.

But the financial crisis is not a crisis of consumerism, or of morality.  The international banking system isn't a telemovie of the week, where the good guys are obvious because they love their mothers and the bad guys have silly moustaches and curse a lot.  Gordon Gekko is a character in a movie written and directed by Oliver Stone -- a guy who thinks that the US government is competent enough to execute its own president and keep it a secret.  Wall Street is not a documentary;  it is a well-executed caricature.

And it is remarkably patronising to tell people who are living in rented property that owning their own home would be greedy.  Greed is easy to identify in others, but hard to identify in yourself.

There are serious discussions going on about what regulations caused or failed to prevent the crisis.  But trying to compress the world's economic problems to a cheap morality play helps no one.

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Commodities could topple our domino

The world economy looks like a set of falling dominoes at the moment.

What started out as solvency problems in the subprime mortgage market has spread throughout the United States.  Asset write-downs and credit losses for banks, combined with tighter credit for small and large businesses alike, has lead to fears of recession in the world's largest economy.

Some of Europe's dominoes have also fallen, as a lack of liquidity translates into slower economic activity.

The International Monetary Fund predicts a sharp fall in economic growth for the Euro area in 2008 and 2009 compared to last year.  As in the US, governments in Germany, Greece, Iceland, Ireland and Spain and the UK are bailing out financial institutions using taxpayers' money.

So far, the Australian economic domino has remained largely unscathed from the fallen heap around it.  While national growth is predicted to moderate,and business and consumer sentiment has weakened this year, our financial system remains strong in the midst of some perilous international
conditions.

Strong global demand for Australia's commodity bounty over the past few years has fuelled exports as well as our incomes.  With almost half of Australia's coal exports alone mined in the Hunter Valley Region, and shipped out from an increasingly busy Port of Newcastle, the local region has been at the forefront of our national prosperity.

The local economic good times have been driven by Asian economies, especially China, needing our resources to help them grow.  It should also be remembered that Australia was growing at a healthy rate before the current commodities boom.

Yet, as is the case of the current domino dynamic of world economies, there are some hints that Chinese growth is slowing.  There are reports that slowing demand and tighter lending by banks are forcing Chinese purchasers of commodities to delay their shipment orders.  It is predicted that
coal and iron ore prices could fall by as much as 20 per cent next year.

Other factors point to a Chinese economic slowdown.  Subdued growth in America will surely affect China's export incomes, as will concerns about quality standards of Chinese merchandise sold overseas such as toys, paint and confectionary.

What might happen to our economy if the Chinese domino either falls or teeters about precariously?

For a start, there could be some local impacts.  Falling demand by the Chinese for Newcastle's coal and iron ore may, at the very least, dampen growth in local employment and business investment.  It could raise new questions about the economic viability of major projects such as the mooted expansion of the Port of Newcastle.

The ramifications of a China slowdown could branch out across the national economy.  It is estimated that a 20 per cent reduction in iron ore and coal prices could lower Australia's annual export earnings by some $20 billion.  The resource rich states of Western Australia and Queensland could be particularly affected.

Changes in China's economic outlook could affect the state budget.  On the tax side, mineral royalty payments could fall, as well as taxes sensitive to economic activities including payroll tax, stamp duties and motor vehicle taxes.  GST revenues, passed onfrom the Federal Government, could also fall if consumers spend less in a slowing national economy.

Without any cutbacks to government spending, falls in revenues could further erode an already diabolical state budget position.  The failure of the Carr, Iemma and Rees Labor governments to reduce excessive public spending in the good years means that the "fiscal crunch" from a slowing China would be a tortuous one.  The Rudd Labor Government is not immune from the potential impact of a China slowdown either.

Despite its assurances about a strong budget surplus, the take from federal income taxesand other levies could nonetheless decline.  This would place upward pressure on interest rates, and put in doubt big-ticket spending items such as the proposed $20 billion splurge on state infrastructure projects.  In a globalised world, it pays to carefully watch the ebbs and flows of economic conditions abroad and to act appropriately.

Consumers and businesses are already doing so, by way of tightening their belts during a time of economic uncertainty.  The key question is whether governments will follow suit by paring back the spending churn and waste of recent years.

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RBA got it wrong on rates

If anything, the 1 percentage-point drop in interest rates must shatter the myth of infallibility that has come to surround the Reserve Bank.  It is now clear it got monetary policy very wrong.  The RBA was not just caught on the wrong side of the market with high interest rates -- it was deliberately raising rates as the global credit crisis unfolded.

Raising interest rates during the last federal election may well have been a courageous decision -- in every sense -- but in retrospect, the RBA displayed very poor judgement.  It is now apparent to everyone it had no crystal ball.

Many politicians, however, are wary of criticising the RBA, and warn each other against making such criticism.  Being above criticism is a privilege not usually reserved for just another arm of government.

Accountability standards at the RBA are unusually lax.  The RBA governor and his senior staff testify to the Parliament before the very same politicians who are in the RBA's thrall.  There are, however, excellent arguments for maintaining the independence of the RBA and Australia does have the balance correct on that issue.  However, there needs to be some improvement in the accountability of the central bank.  Rather than just releasing the minutes of RBA meetings, the RBA should consider releasing transcripts.

Unfortunately the Government has yet to wake up to the causes and full implications of the current crisis.  Kevin Rudd is blaming it all on "free-market ideologues" and a "lack of regulation".  Similarly the US Congress is blaming excessive executive compensation.  In other words, it is business as usual.

It is true that the private sector mispriced risk, but the issue of importance is where that risk originated.  It is here that we see how government failures lead to the crisis.  Attempts by the Bush Administration to toughen up regulation of Fannie Mae and Freddie Mac were stymied by Democrats -- hardly known to be free-market fundamentalists.  The US Community Reinvestment Act and the Boston Federal Reserve acted to make US bank lending less conservative, and indeed somewhat irresponsible.  Apparently rigorous regulations based on so-called black box risk assessment models lead to regulatory complacency.  Finally, US interest rates were too low after 2003.

It is simply not true to say that a lack of regulation, or executive compensation, or free-market ideologues caused the crisis.  Governments and government intervention were at every step along the way.  In Australia our banks are in good shape, yet the international impact of the crisis on our economy will be exacerbated by the RBA's policy errors.

More importantly, the notion that government can easily and successfully mould markets for its own purposes has also been shown up.  This crisis highlights the collapse of regulatory capitalism.  The market cannot accommodate any number of regulatory interventions, even assuming that the government gets it right.  At some point the system fails and the market clears away the failed business and regulatory models.  That is what is happening now.

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Forget intervention, let the correction do its job

The Reserve Bank of Australia has proven itself unable to comprehend, still less to control, the nation's money supply.  Like the US Federal Reserve, the RBA is trying to address the market meltdown with the tools that analysts consider would have worked in previous crises.

The problem is that, like wars, no two financial breakdowns are identical.  And they are seldom due to a single cause.

The trigger for the current crisis was lax monetary policy in the US and elsewhere combined with regulatory pressure on US banks to widen the basis of their lending guidelines to cover poorer people, who were previously considered to be bad risks.

Underscoring these monetary and regulatory causes are shortfalls of savings in the US and other wealthy economies, shortfalls that were offset by huge capital inflows from oil states and poorer countries like China.  Australia has been one of the world's largest borrowers in relation to income levels.  And while capital inflow is to be welcomed when it supplements national savings, when it simply substitutes for inadequate domestic savings it is masking deep seated problems.

Australia appeared to be controlling the monetary repercussions of its undersupply of domestic savings liquidity until early 2006.  Interest rate rises seemed to reining in excessive liquidity.  Raising the official interest rate from 5.5 per cent to 7.25 per cent between 2006 and the middle of this year kept a lid on money growth.  Even so, monetary growth was excessive and was bringing inflation, though this was reflected in assets -- especially houses -- rather than in the normal goods and services measured by the consumer price index.

Cutting interest rates by 1.25 percentage points in the past couple of months in spite of rising levels of monetary growth smacks of panic.  In boosting money supply further, this will bring increased inflation and a need to take sterner remedial action later.

The fact is that Australia, like the US, has been on a consumption spree.  For a long time we have been spending more than we have been earning, and allowing ourselves to be fooled into thinking that our nest eggs were safe.  But those nest eggs, mainly housing, were artificially inflated by demand feeding on itself in a context of a casino underpinned by government-created housing land shortages.

This is now unravelling in the credit crunch.  An early area of vulnerability was real estate that smaller businesses used as collateral to obtain finance.  Once the US sub-prime crisis hit and raised the worldwide cost of wholesale finance, assets had to be liquidated.  Small businesses in particular have had to find more equity to support their borrowings.  This has meant selling real estate bringing softer prices, a process that is snowballing and amplifying the downturn.

No action by the Reserve Bank can arrest this process.  Borrowers are in hock and must reduce the size of their operations and liquidate assets.  The downward spiral is in place and hence, in the hackneyed phrases used in the US election parlance, the Wall Street meltdown is hitting Main Street.  This will soon be translated into a headlong retreat of house prices, a reduction in economic activity and a rise in unemployment.

Right now, state governments are seeking federal assistance to offset reduced demand.  And Prime Minister Kevin Rudd, who appears to see government as the answer to all travails, is eager to man the pump.

State governments are facing lower tax revenue from the housing downturn.  But Canberra too will have fewer resources to prime the pump.  And if Canberra raids community savings in the Future Fund, it is a certain bet that the expenditure will be on the trendy and unproductive.  This is already being foreshadowed in the criteria being set for spending, criteria which include measures to reduce greenhouse gas emissions and to "improve our quality of life".

Queensland and NSW are pitching for public transport upgrades to tap into the commonwealth's $20 billion infrastructure fund.  Victoria will doubtless seek an opportunity to finance its white elephant desalination proposal.

Australia's major savings and consumption imbalance must be addressed.  Individuals need to restore the real level of their savings.  And as a nation there is now an even greater urgency to ensure that our inadequate national savings are not misallocated into politically motivated investments with suboptimal economic returns.  This requires less, not more, government spending.

A major economic downturn is inevitable and essential to allow a correction of the inflated values and inadequate savings that have characterised the economy.  Energetic government intervention, which is second nature to Rudd, will aggravate the situation and could lead to a very prolonged period of instability and economic decline.

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Costello is the new Nixon

The former treasurer has something in common with the disgraced US president.

When I say that Peter Costello is the new Nixon, I do not mean -- as many Labor partisans would -- that Australia's longest-serving treasurer will join America's 37th president in the ash heap of most maligned political leaders.  I mean that Costello, like Nixon before him, may be on the verge of making a remarkable political comeback.  As this is decidedly a minority view among commentators and political professionals, let me explain.

Nixon, for all his faults, was one of the great political warriors of the modern era.  During a career that spanned his election to Congress in 1946 to his resignation as president in 1974, he was able to recover from each setback and bounce back with tremendous force.

We all know about Nixon's "last press conference" following his defeat in the Californian gubernatorial election in 1962.  "You won't have Nixon to kick around anymore," he sneered at the journalists, "because, gentlemen, this is my last press conference."  Less well known is the publication of Nixon's political memoirs -- or, as history showed, volume one at least -- in 1962.

Which brings us to Peter Costello.  Having spent the past month promoting what he himself calls "volume one of my memoirs", John Howard's former heir apparent is at precisely the same point in his political career as Nixon was during the 1964 Republican presidential convention.  Just as the GOP celebrated the arrival of its rising star Barry Goldwater, the Liberals are today embracing their own rising star Malcolm Turnbull.  And just as Nixon loyally backed his new leader on the sidelines only to see him crash spectacularly against LBJ and set the scene for Tricky Dick's own presidential victory in 1968, so is Costello loyally backing his new leader from the parliamentary back bench while he patiently waits for the political and economic circumstances to change.

During the past year, the conventional wisdom in Canberra is that Costello refused the very leadership he had been craving for more than a decade.  "I will not seek, nor will I accept, the Liberal party leadership," he has consistently insisted since the 24 November election.  Selfish, petulant, resentful, weak -- all of these adjectives have been hurled at the 18-year parliamentary veteran, and in the weeks since his book launch, the criticisms have become so widespread that virtually every commentator has ruled out Costello's leadership ambitions.  What Time magazine said of Nixon in 1962 could easily be said of Costello today:  that barring a miracle, his political career is over.

Not so fast.  For there are two good reasons why Costello will continue to sit tight on the back bench before he runs for the leadership.

Let's start with some history.  For one thing, every opposition leader whose party has just lost government struggles to gain traction against a newly elected prime minister.  Think of Kim Beazley against John Howard in 1996;  or Andrew Peacock against Bob Hawke in 1983;  or Bill Snedden against Gough Whitlam in 1973;  or Ben Chiefly against Robert Menzies in 1950.  One could provide more examples, but the point here is clear:  Brendan Nelson was only the latest opposition leader who could not make much headway into a new PM's popularity.  Australians, moreover, are temperamentally a conservative lot, wary of change and prepared to give the new government a fair go.  Remember:  we've changed governing parties only five times in the 23 elections since 1949.

In these circumstances, why would Costello want a poisoned chalice?  The people have made their decision to kick out an 11-and-a-half-year-old government, and they're unlikely to change their minds so quickly -- unless, of course, the Labor government turns out to be embarrassingly bad.  For all Rudd's flaws, though, his government is not quite in the same pathetic league as the Whitlam government, and even Gough, remember, somehow got re-elected.

The second reason why Costello wants a break from the rigorous life on the front benches is just that.  "Sometimes, people need time out," he recently told journalists.  "I remember Malcolm Fraser said to me once:  "The trouble with politics is that you should go and live in a monastery for three months every several years."  And I think if our politicians had the ability to spend some time thinking rather than the incessant demands of the media cycle, who knows, we might get better politicians."

He's right:  there's nothing wrong with a time-out from the front-line of political battles.  All successful leaders have periods spent outside of the limelight, waiting for the right moment to jump back into the fray just as the circumstances change.  Nixon is one among many.  Think of John Howard, following his loss of the Liberal leadership in 1989, who spent nearly a year on the opposition back bench and another five years on the shadow front bench before making his move for the leadership (and prime ministership) again.

Or think of Colin Barnett, the new Western Australian Premier, who had not only announced his retirement from politics but had also written his political memoirs.  And yet within weeks of the recent state election, he suspended both his retirement and publication plans and threw himself back into the arena.

For Costello, a "time-out" means spending time on the back bench, serving his constituents faithfully, and politely reminding people of the good old days from 1996 to 2007, over which he helped preside.  But when the circumstance changes -- the economy nosedives just as Turnbull crashes and burns, for example -- he will be ready to play another season on prime-time.

At last month's book launch, a journalist asked:  "You've said you'll give Malcolm Turnbull all the assistance that you can.  Wouldn't the best assistance be to resign from parliament, and so remove yourself as this sort of shadow in the background that's threatening his leadership?"

Costello's response:  "No.  You can see why I love the press."  Nixon could not have said it any better.

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