A critique of the ACCC analysis of the FuelWatch scheme

SUMMARY

Much has been made of the Australian Competition & Consumer Commission analysis of the Western Australian FuelWatch scheme.  This paper investigates the ACCC analysis published last December (Appendix S) and comments briefly on the additional analysis the ACCC released on May 29, 2008.

The ACCC data has not been released to the public, nor have they been very clear as what analysis has been done.  The ACCC has been vague in reporting their econometric techniques and have simply published tables, expecting the public to accept their analysis at face value.

The ACCC did not investigate the entry of Coles into the WA market in their analysis.  The analysis shown below does do that, and finds that the "Coles effect" completely dominates the FuelWatch effect.  Once the Coles effect is included in the analysis it is clear that FuelWatch has had no effect on average monthly prices in the WA market.

The analysis below consists of comparing average monthly prices before and after FuelWatch started up and before and after Coles entered the WA market.  That very basic analysis is then confirmed using basic and standard (ordinary least squares) regression analysis.

The original ACCC analysis is found to be very sensitive to starting and end points, consequently the ACCC analysis can not be described as being "robust".

On May 29, 2008 the ACCC released new and apparently more sophisticated analysis, but do not say what type of econometric analysis they performed.  Indeed the analysis did not even report standard diagnostic statistics such as standard errors or p-values.  This makes it impossible to analyse the new results.  It is important to note, however, that in the later analysis the ACCC argues that "there is no evidence that the introduction of Fuelwatch in Western Australia led to any increase in prices", while originally they argued that the evidence showed that the relative price margins were lower after FuelWatch was introduced than before.

• The ACCC analysis is not convincing.
• The ACCC analysis remains unconvincing after 29 May -- the new analysis is even vaguer than the original analysis released in December 2007.
• The ACCC did not test for a "Coles effect" in their December 2007 analysis.
• The Coles effect totally dominates the FuelWatch effect.
• Based on the analysis shown below it appears that FuelWatch has had no effect on the average monthly price differential in WA relative to the eastern states.
• The ACCC claim to now test for a Coles effect, but do not say what test they have actually performed.

INTRODUCTION.

The FuelWatch scheme was introduced in Western Australia in January 2001.  The purpose of the scheme is to provide certainty to consumers as to petrol prices for a fixed period of time.  In practice, service stations are required to notify FuelWatch of their prices for the next day.  On the following day, beginning at 6am the service station prices are fixed for 24 hours.

In December 2007, the Australian Competition & Consumer Commission (ACCC) released its report into petrol pricing in Australia.  This report included an Appendix (Appendix S) that contained an econometric analysis of the FuelWatch scheme.  That econometric analysis has been widely cited as demonstrating that the FuelWatch scheme has led to lower prices in Western Australia.  This paper provides a critique of that analysis and shows that the ACCC analysis is not robust and does not demonstrate what it purports to demonstrate.

On the 29 May 2008 the ACCC released a document that purported to provide details of "further FuelWatch econometric analysis".  That document, however, moves the goalposts by claiming that "there is no evidence that the introduction of Fuelwatch in Western Australia led to any increase in prices".  The new ACCC analysis that the introduction of FuelWatch "appears to have resulted in a small price decrease overall".

THE ORIGINAL ACCC ANALYSIS.

The ACCC collected weekly, monthly and weekly minimum data for the period 1 August 1998 to 8 June 2007.  They then calculated the following Price Margin measure

Price Margin = (Retail price – lagged Mogas95 price – net taxes – fuel quality premium) _Perth

less

(Retail price – lagged Mogas95 price – net taxes – fuel quality premium) _{average of eastern capitals} (1)

The ACCC defend this measure on the basis that it removes factors that are beyond the control of FuelWatch.  The lagged Mosgas95 price is the base supply price of petrol and is lagged one week.  It is difficult to understand why this figure has been subtracted from the retail price as I imagine it would be constant across Australia.  Unfortunately, the ACCC analysis gives no indication as to whether this figure does vary across the various states.  Similarly it is not clear whether the net taxes figure varies across states.  The mandated fuel quality does vary across states, but the ACCC analysis gives no indication as to what those figures or variations might be.  In other words, the measure of interest is not transparent.  The ACCC does not provide any summary data.

The ACCC then undertakes a "unit-root test" to ensure the measure is stationary.  This is important for technical econometric reasons.  The ACCC analysis then investigates whether the data exhibit a structural change after the introduction of FuelWatch.  It appears that the ACCC estimated the following equation:

Price Margint = α + βFW_t + ε_t (2)

Where α = constant representing the average Price Margin before the FuelWatch scheme was introduced, β = the average impact of the FuelWatch scheme, FW_t is a dummy variable = 1 after 2 January 2001 and = 0 before 2 January 2001 and ε_t = an error term.

The ACCC estimate three versions of the equation, one for each of the three time series versions of Price Margin.  They report the results in their Table S2 (reproduced below).

Table S2 Structured break test ³ for relative price margin, cpl,
August 1998 to June 2007

Series	Average (August 1998 to December 2000)		Average (January 2001 to June 2007)
Weekly average	0.83	(0.002)	-1.92	(0.000)
Monthly average	0.88	(0.001)	-1.86	(0.000)
Weekly minimum	0.30	(0.277)	-0.90	(0.003)

³ Coefficient given with p-value in brackets.
Diagnostic testing indicated serial correlation so Newey West standard errors used.
Source:  ACCC estimates

To understand this table, look at the Monthly average row.  The number 0.88 indicates that there was, on average a 0.88 cent per litre (cpl) difference between the Perth net price and the average of the eastern capitals net price before FuelWatch was introduced.  This figure corresponds to the α-term in the equation (2).  The number in parenthesis (0.001) indicates that the 0.88cpl difference is statistically significantly different from zero.  The figure -1.86 represents the impact FuelWatch had on the Price Margin;  this is the β-term in equation (2).  This implies that the Perth net price fell, on average, by 1.86cpl relative to the average of the eastern capitals following the introduction of FuelWatch.  The number in parenthesis (0.000) indicates that the -1.86cpl difference is statistically significantly different from zero.

This analysis is consistent with the argument that the FuelWatch scheme lead to lower prices following its introduction in 2001.  The ACCC does, however, discuss some caveats to the analysis.  For example, the impact of the fuel quality premium is considered.  If we assume that the Mosgas95 price is equal across Australia and the net taxes on fuel are equal across Australia, the equation (1) can be reduced as follows:

Price margin = (Retail price _Perth – Retail price _{Average of eastern capitals})

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(Fuel quality premium _Perth + Fuel quality premium _{Average of eastern capitals})

If the relative retail price premium is reasonably constant over the whole time period, but the relative fuel quality premium increases over time, we might expect the β-term in (2) to be negative.  The ACCC claims that the difference in fuel quality premia has decreased over time.  Presumably the eastern states have increased the quality of their fuels and WA has not reduced the quality of its fuels.  In other words, the relative quality fuel premium could be explaining the results.  The ACCC claims to have investigated whether this is driving the results, but does not report that analysis other than to say the overall result is robust to the exclusion of the fuel quality premium.

AN ALTERNATE ANALYSIS.

The ACCC argue that, "Of potentially greater concern is the possibility that something else entirely has driven the improvement in the relative price margin." That is always a possibility.  The ACCC, however, do not investigate the most obvious other factor -- the entry of Coles into the WA market in March 2004.  Using monthly data collected from the Australian Automobile Association I investigate that possibility.

I calculate the following equation:

Relative Pricet = α + β₁FW_t + β₂Coles_t + ε_t (3)

Where Relative Price_t = Average Price _Perth – Average Price _{Eastern Capitals} in month t, α = a constant representing the average Relative Price before the FuelWatch scheme was introduced, β₁ = the average impact of the FuelWatch scheme, FW_t is a dummy variable = 1 after 2 January 2001 and = 0 before 2 January 2001, β₂ = the average impact of the entry of Coles, Coles_t is a dummy variable = 1 after March 2004 and = 0 before March 2004 and ε_t = an error term.

I calculate two measures for Relative Price.  The first measure P₁ is the Perth Average monthly price less the average of the monthly averages for Adelaide, Darwin, Melbourne, Hobart, Sydney and Brisbane.  The second measure P₂ is the Perth Average monthly price less the average of the monthly averages for Adelaide, Melbourne, Sydney and Brisbane;  this corresponds to the eastern capitals that the ACCC used in their analysis.  Consistent with the ACCC analysis, I use the time period August 1998 to June 2007 for the empirical analysis.  The graph shows the time series of the data and table one shows some summary statistics.

Looking at the graph, it is not clear that the relative price responded much to the introduction of FuelWatch in January 2001.  The large decline in the relative price occurred after December 2003 (when Woolworths entered into the WA market) and continued after Coles entered the WA market in March 2004.

Table One: Summary Statistics for Relative Price.

	P1	P2
Average Before FuelWatch	-0.50	2.60
Average After FuelWatch	-1.33	1.57
	(0.0244)	(0.0041)
Average After Coles	-2.51	0.45
	(0.0000)	(0.0000)
Average After FuelWatch before Coles	-0.03	2.84
	(0.0539)	(0.1905)

The numbers in parenthesis are p-values from a two-sided t-test for equality of averages.

The analysis in table one is initially consistent with the ACCC analysis.  Simply looking at the before and after FuelWatch averages and the associated t-test p-values, it appears that prices in WA did fall after the introduction of FuelWatch.  The price effect, however, is far stronger after the introduction of Coles.  Finally, I look at the relative price after FuelWatch was introduced but before Coles entered the WA market.  The analysis suggests that prices rose by a statistically significant amount, on average, for P₁, but not by a statistically significant amount for P₂.

In order to establish the base case, I first estimate equation (3) without the Coles variable.  Results are shown in table two.

Table Two: FuelWatch structural break test for relative prices
(August 1998 – June 2007).

	Constant		FuelWatch		Adj-R2
P1	-0.5107	(0.0434)	-0.8202	(0.0813)	0.0375
P2	2.5931	(0.0000)	-1.0328	(0.0290)	0.0675

Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.
P₁ compares average WA prices to all other states,
P₂ compares average WA prices to SA, QLD, Vic and NSW.

The results are broadly consistent with the ACCC analysis.  P₂ corresponds more closely to the ACCC analysis as it compares the average WA price to the same four eastern states as the ACCC analysis.  P₁ compares the average WA price to all the other states.  It is interesting to note that the effect of FuelWatch is much weaker when Tasmania and the Northern Territory are added to the mix.  Indeed, the price reduction is less than 1cpl, and only statistically significant at the 10 percent level.  The P₂ analysis, however, has FuelWatch delivering a saving of 1.03 cpl on average, and is statistically significantly different from zero.  The ACCC did not report adjusted R² measures in their analysis -- but it can be seen that they are very low.

I now include the Coles variable into the analysis.  Results are shown in table three.

Table Three: FuelWatch and Coles structural break test for relative prices
(August 1998 – June 2007).

	Constant		FuelWatch		Coles		Adj-R2
P1	-0.5107	(0.0444)	0.4814	(0.2422)	-2.5382	(0.0000)	0.4478
P2	2.5931	(0.0000)	0.2411	(0.5413)	-2.4842	(0.0000)	0.4734

Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.
P₁ compares average WA prices to all other states,
P₂ compares average WA prices to SA, QLD, Vic and NSW.

The results are very different from the ACCC analysis.  The dummy variable associated with FuelWatch is now not statistically significant.  The Coles variable is highly statistically significant and indicates that greater competition in the form of Coles entering the market caused the relative price of fuel to fall by about 2.5cpl.  In addition the adjusted R₂ are now much higher than before.

In table four I estimate the equation without the FuelWatch variable.

Table Four: Coles structural break test for relative prices
(August 1998 – June 2007).

	Constant		Coles		Adj-R2
P1	-0.2376	(0.3172)	-2.3299	(0.0000)	0.4404
P2	2.7299	(0.0000)	-2.3799	(0.0000)	0.4752

Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.
P₁ compares average WA prices to all other states,
P₂ compares average WA prices to SA, QLD, Vic and NSW.

The impact Coles had on relative prices is now slightly smaller than before at about 2.3cpl, while the adjusted R₂ is still very high.  This confirms, to my mind, that the petrol price saving in WA is due to the entry of Coles into the market in 2004 and not the introduction of the FuelWatch scheme in 2001.  The ACCC analysis does not consider this possibility at all and is, at least, fundamentally incomplete and flawed as a consequence.

OTHER CONCERNS.

As one of the ACCC caveats they write, "Different timeframes could conceivably give different results".  That is very true.  The ACCC regression analysis begins in August 1998.  They claim that they cannot go before that date given the price deregulation that had occurred.  That is a plausible argument.  But what happens if they were to begin their analysis using later data?  In table five I show what happens to the FuelWatch term as the starting period moves later.

Table Five: Starting Point Sensitivity Analysis.

FuelWatch
Start Date	P1		P2
Aug-98	-0.69	(0.0813)	-1.03	(0.0290)
Sep-98	-0.75	(0.0721)	-1.05	(0.0287)
Oct-98	-0.80	(0.0816)	-1.02	(0.0349)
Nov-98	-0.84	(0.0979)	-0.99	(0.0414)
Dec-98	-0.86	(0.1222)	-0.94	(0.0530)
Jan-99	-0.82	(0.1570)	-0.86	(0.0807)

Table shows the β-term from equation (2),
substituting Relative Price for Price Margin,
and the associated Newey-West adjusted p-value.

As can be seen, the benefit of the FuelWatch scheme declines as the starting period changes.  By December 1998, the benefit using the P₁ measure is no longer statistically significant, while the P₂ measure (the one chosen by the ACCC) benefit remains significant at the 10 percent level of confidence, but is much smaller than before.

I also investigate what would have happened if the FuelWatch scheme had been evaluated at the end of 2003 i.e. before Coles entered the market in March 2004 (and at the same time Woolworths entered the market in December 2003).  Results are shown in table six.  As can be seen the FuelWatch scheme would have been declared to have had no effect at all on relative prices.  While the FuelWatch terms are positive, they are not statistically significantly different from zero.

Table Six: End Point Sensitivity Analysis.

	Constant		FuelWatch		Adj-R2
P1	-0.5107	(0.0370)	0.5141	(0.2028)	0.0305
P2	2.5931	(0.0000)	0.2680	(0.4898)	0.0015

Table shows the β₂-term from equation (3) and the associated Newey-West adjusted p-value.
Data ends at December 2003.

THE MAY 29 ACCC ANALYSIS.

The ACCC claim to have undertaken an "endogenous selection of structural break points".  Unfortunately, it is not at all clear what this may mean;  the ACCC do not even state which econometric test they have performed.  They purport to show results but do not indicate whether these results are statistically significant.  Without any knowledge of the test being performed or any tests of significance it is impossible to evaluate this effort.

Market should set pay

Suddenly it seems everyone in business and government wants to see a considerable increase in teachers' salaries.  The Business Council of Australia is leading the charge, calling for a doubling of the present top rates of $75,000 a year, which it says will give fresh impetus to growth.  Doubtless a case will be put for financing this from one of the infrastructure funds into which excessive taxation collections are being siphoned.

The premium level of salary is designed to go only to the teachers who have the greatest merit.  This intent represents a triumph of hope over experience.

All public sector increments started out as being merit based but the outcome has been an automatic shift up the scale except for those exhibiting grossly egregious behaviour.

Moreover, the council, in making the case for rewarding excellence, appears to have taken little account of market situations.  There are a great many people involved in skilled and worthy work who don't get the rewards they and others consider they merit.  Think of nurses, sewerage workers and top policy advisers within the public service.

In the case of teachers, one-third of senior schoolchildren are taught in non-government schools that have no wage cap.  If demand for excellent teachers was outstripping supply or if outstanding teachers were demonstrably better than those who are simply superb or just pretty good, this would surely be reflected in private school teachers' salaries.

Yet the available evidence is that non-government school teachers earn little more than those in the public school system.

Though teaching is a valued profession, it has features that offer compensation for salary levels that at the peak are less than 40 per cent above those of the average full-time worker.

Among the offsetting benefits is the risk-free nature of the job:  nobody is in any danger of being laid off.  In addition, it has far more generous leave provisions than any other job.  And for the ambitious there is also considerable scope for advancement within school and education administration.  For these reasons, notwithstanding full employment, there appears to be no lack of new recruits to the profession.  Shortages are confined to maths and science, which can be dealt with selectively.

Teachers are not the only public sector employees with claims to higher salaries.  Similar pressures are always present regarding the salaries of senior public servants.  The most successful business executives earn several times the $500,000 a year the most senior bureaucrats pick up.  However, there are market checks on remuneration for business leaders.  The firm's shareholders have a vested interest in ensuring they do not over-pay since this reduces their profits.  The firm's owners, represented by the board of directors, have to weigh up the benefits of paying more for managerial talent against this loss of their own income.

Such determinations are far less easy to undertake in the case of public servants.  Many point to private sector remuneration levels as evidence that they are underpaid.  This is clearly not the case with teachers, where direct comparisons can be made with private sector employees.

Finding a yardstick against which to measure remuneration claims for senior public servants is not so easy.

If senior public servants had skills similar to captains of industry -- those they measure their claims against -- you would expect to see them offering their services to that better remunerated vocation.

Yet surprisingly few do or at least do so successfully.  Those who leave the public sector and make careers in business with few exceptions are employed in consultancy or government relations roles.  The latter would rarely command stratospheric salaries, while the former are small, not big businesses with very variable remuneration levels.

This suggests a different skill-set between senior public servants and top business managers, with no real correspondence between the two.  It probably also means that we are over-paying senior executives in the public sector because their next best employment opportunities, as revealed by their continuance within the sector many claim to be grossly underpaying them, is another public sector job.

The lack of interaction between senior management in the private and public sectors also means paying senior mandarins more would not have an impact on remuneration of top private sector managers.  By contrast, paying public school teachers more would automatically force up wages in private schools.  This would require increased fees, a bonus for those such as Education Minister Julie Gillard, who makes no bones about her hostility to private education.

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Rudd as tricky as the price of petrol

It has taken just six months for the electorate to realise the Rudd Government is tricky.  Kevin Rudd never promised to lower petrol prices.  At the ALP campaign launch, he promised to appoint a petrol commissioner -- a promise kept with the appointment of Pat Walker.

Rudd even said this was not a silver bullet but a practical measure to help working families under financial pressure.

This week somebody thought to ask what that "promise" meant.  Rudd now says Walker will have only a marginal impact on petrol prices.  Competition and Consumer Affairs Minister Chris Bowden suggests that "marginal impact" might be as little as $0.02 a litre.

The Government is relying on an analysis by the Australian Competition and Consumer Commission, published last December, to justify that $0.02-a-litre saving.  That apparently is the saving associated with the West Australian FuelWatch scheme -- closely associated with Walker. Petrol stations will be have to notify the ACCC in advance and fix their prices for 24 hours.

By any understanding of economic theory, this constitutes a reduction in retail competition.  If the ACCC is to be believed, a decrease in competition will lead to a fall in prices.  This must be embarrassing;  the ACCC was established to promote competition.

Unfortunately for working families -- and everyone else -- the $0.02-a-litre claim is nonsense.  The small print and caveats contained in the ACCC report indicate that the regulator itself doesn't quite believe it.

But even beyond the ACCC's doubts, there are good reasons to be suspicious.  The ACCC did not actually compare retail prices in WA and eastern states before and after the introduction of the FuelWatch scheme.  Instead, it compared a relative profitability measure of selling petrol in WA relative to eastern capitals.

The $0.02-a-litre claim is not based on prices consumers actually pay and so it is fundamentally misleading.  When I replicate the ACCC analysis using consumer prices -- surely the measure in question -- I find FuelWatch had no impact on relative prices in WA.

That is not to suggest that WA motorists have not benefited from somewhat lower prices in recent years.  An analysis undertaken by Informed Sources -- a Queensland-based information management firm -- has shown that the introduction of supermarket competition into the petrol market in 2004 lowered average consumer prices by about $0.025 a litre in Perth.

The effects are much smaller in other states.  Greater competition, not government regulation, has delivered some price relief to Perth.  Mind you, that hasn't stopped the new petrol commissioner from criticising those schemes.

The ACCC does not even consider the possibility of fuel dockets lowering prices.  All it can say after giving a whole range of reasons why its analysis may be wrong is:  "Of potentially greater concern is the possibility that something else entirely has driven the improvement in the relative price margin".  The ACCC does not really know what has happened, or why.  Its whole argument is flawed and should be discounted.

The Government is now promising to look at unwinding the GST-excise tax interaction, a saving of about $0.04 a litre.  The Howard government had always argued that this tax on a tax was too hard to untangle, and for a saving of $0.04 not economically viable.  Yet Rudd's petrol commissioner would, at best, save $0.02 a litre.

Consumers were being told just 10 days ago that the Coalition plan to cut excise by $0.05 a litre was irresponsible and blew a hole in the budget.  Of course, good tax cuts always reduce the budget.  While the Government is planning to salt away $40 billion into slush funds to subsidise future spending, we can afford tax cuts.

Unravelling the tax on a tax is itself good tax policy, while reducing excise would be a practical measure that worked.  There is no reason to wait for the next election to reduce excise -- Rudd could do so now.

This is a Government long on form and short on substance. The electorate has good reason to be aggrieved on this issue.  The general perception is that Rudd promised action, yet has failed to deliver.  All the Government has done is to roll out a poorly tested policy proposal with a marginal impact.

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Planning laws rob consumers

Imagine a world in which the government outlawed your business competitors.  You wouldn't have to worry about pesky things like keeping your customers happy.  You wouldn't need to concern yourself with improving the quality of what you sold and you certainly wouldn't be engaged in any price discounting.

Naturally you'd have to ensure that you didn't let standards slip too far lest customers stopped buying your product altogether -- that's unless you were lucky enough to be selling things people couldn't avoid buying, like food.

Sounds far-fetched?  Thanks to our town planning laws such a world is actually not too far removed from the reality of this country's grocery business.

The excuse used to justify banning competition varies, but the absence of competition invariably produces the same sort of results regardless of whether what is being regulated is airline travel, television channels or supermarkets.  Consumers pay higher prices, and suppliers and producers have no incentive to innovate.

The focus of the Australian Competition and Consumer Commission inquiry into grocery prices is on the supposed collusion between the big supermarket chains.  So far, not too much evidence of supposed collusion has been uncovered.  That's because the ACCC is looking in the wrong spot as it searches for the culprit responsible for high grocery prices.

The behaviour of the supermarket chains is not the problem.  As usual the problem is with government itself.  State and local government planning laws operate to prevent new supermarkets from opening and existing ones from expanding.  These laws are a large part of the reason why Australia's grocery prices are rising faster than in other similar countries.  What's obvious from the submissions to the ACCC inquiry is that it's the anti-competitive behaviour of local councils that the ACCC should be investigating.  Despite promising to do so for more than a decade, state governments have not yet made their planning laws conform to the principles of national competition policy.

Eliminating anti-competitive planning laws could reduce food prices by about 20 per cent, and reduce prices for other household items by 30 per cent.  This is a finding of research published last week, commissioned by Urban Taskforce Australia, an industry association of property developers and equity financiers.

In its submission to the ACCC inquiry, the taskforce argued that NSW's supermarkets and shopping malls were one of the most heavily regulated sectors of the economy, alongside mines, casinos and brothels.  As the taskforce commented:  "Frankly, this is bizarre."

In NSW, the Environmental Planning and Assessment Act makes the planning minister responsible for the "planning of the distribution of population and economic activity within the state".

Giving a minister from the worst-run government in the federation the authority to organise their state's "economic activity" sounds like something out of Bulgaria in the 1960s.  Yet that's the law that applies in NSW in 2008.  Local government planning schemes allow councils to block the entry and expansion of supermarkets if they have the potential to adversely affect the financial viability of existing retailers.  Yet the whole point of competition is that it works because it has the potential to adversely affect existing operators.

The case a few years ago of a Penrith fruit and vegetable shop owner who attempted to sell cheese highlights the ridiculous condition of our planning laws.  The owner wanted to add a "deli counter" and sell cheese.  The problem was that cheese wasn't listed as one of the products approved for sale from the shop under the council's original planning approval.  Penrith City Council refused the development application and the owner appealed to the NSW Land and Environment Court.

The court ruled that the shop was not allowed to sell cheese.  According to the court, if the shop started selling cheese then its character would change to become a "general store".  Under the Penrith local environment plan, general stores were required to be located at least three kilometres from each other.  The fruit and vegetable shop could therefore not sell cheese because it was located within 1.5 kilometres of an existing general store.

Planning laws originally intended to control things like traffic flow are now the instruments used by urban planners to impose their economic and social visions on the rest of society.  Planning laws are being used to stop competition between grocery retailers -- and because of these laws Kevin Rudd's "working families" end up paying more for their food.

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The regiments of left and right now march to market

The left has lost.  So say the left!  This is not a point-scoring statement from someone from the right but the words of the people from the left themselves.  They say that market-based capitalism has proven it works.  They no longer hate it.

This may seem simple but it is staggering in its consequences for politics in Australia.  It is seminal and all embracing.

The old left-right battle is now no longer primary to understanding the fundamentals of Australian politics.  Deeper analysis and deeper meaning must be investigated.

The shift is blunt.  The central plank of left politics has always been that the capitalist system necessitated war between two classes;  the workers and the bosses.  The bosses (capitalists and managers), would always seek to exploit the workers.  The economic system required this and concentrated power with the bosses.  Consequently, workers had to bond collectively to prevent being exploited.  This inevitability of class warfare is the core of the left's economic and political world view.

But in the past few years the left has accepted the falsehood of this assumption, particularly as it applies to Australia.  That's a huge step for the left.  It recognises and accepts that market-based capitalism clearly delivers sustained economic growth and maximises equitable distribution of wealth.  Exploitation is not inherent in market capitalism.  The left no longer hates market capitalism.  It has embraced it.

It recognises that deprivation is not a consequence of market capitalism but is the product of other human situations;  namely family dysfunction, ill health, disability, poor education and substance abuse.

This shift by the left is new and can be identified in fairly recent writings of leading left academics and the repositioning of the Left of the Labor Party.  It's not something they are yelling out loud but it's a huge political development.  It holds huge implications for economic management, business operations, workplace relations and social policy.

It explains why the Australian Labor Party is now politically dominant in Australia.  With the conversion of the left to market capitalism, the economic rationalists within the ALP and the left are able to work together without suspicion.  It's why factional division within the ALP has largely disintegrated.

Under Hawke and Keating, the economic rationalists pushed through economic reform but they had to stomp on the left to do so.  The Left and the Right in the ALP did battle.  The battle is largely over;  the Left have mostly converted.

The old-style lefties who remain in the ALP are frustrated.  Some are young.  They are isolated and locked out from the real levers of power in Labor. Many have resigned from the ALP and joined the Greens.  This suits Labor.  Parked in the Greens, they are politically more manageable than if they continued to work the numbers within the ALP.

The Liberals are strategically blindsided.  They are in determined denial about the changed ALP.  They have missed the shift, failed to read the changed environment and hence failed to redefine and reposition their beliefs and brand.

The core change inside the ALP has been a long time in the making.  It started with practical people recognising that the electorate no longer defined itself along class lines.  This developed into practical political strategies that have affected Labor philosophy.

The Labor movement is a conglomerate and culture of thinkers.  Political argument, frequently aggressive and fiery, is a core function.  Ideas with passion matter.  It causes great divisions.  But when cohesive themes emerge, formidable strength is the outcome.

About six years ago, some of the most influential and important left thinkers in the Labor movement made the shift to acceptance of market capitalism.  It rocked the thought processes inside Labor.  It broke through politically in a dramatic way with the emergence of Kevin Rudd as federal leader.

Before that, the Bracks/ Brumby governments in Victoria, the Beatty/ Bligh governments in Queensland and the Rann Government in South Australia were and are the result of political pragmatism sitting atop a newly emerged ideology.  Application of free-market principles defines their focus.

Even the less competent Labor governments of Western Australia and Tasmania are in tune with the new way.  Only NSW has remained hopelessly corrupted by left-leaning and pretty ugly tribalism.  Left-Right war still rages in NSW Labor.  But the shift in NSW has begun, witnessed by Premier Morris Iemma's push against his party machine over electricity privatisation.

None of this means the task of government for the ALP is easy.  There are huge tensions to be managed.  But it does mean that ALP governments are not torn over fundamentals.  To understand Labor now means appreciating different tensions.  This requires deeper investigation and analysis than just thinking in left-right frameworks.

Even though the left has accepted that market capitalism delivers economic results, it has not by any means said no job is to be done.  There's a new theme that is neither left nor right but lifestyle and happiness focused.

The argument is that wealth does not deliver happiness.  Australia and Australians are fantastically rich compared with past generations and to most nations across the globe.  But in our wealth we have defined ourselves and our worth by what we consume.  Obsession with consumption has overpowered us and demeaned us.  The new politics, so the argument goes, requires two thrusts.  The first is to continue to manage the success of market capitalism.  This is hard enough.  The second involves connecting with the human desire for meaning.  This is incredibly complex, leading into untested territory.  But it's created a new political reality totally disconnected from any left-right discussion.

A close look at the Rudd Government allows these twin elements to be seen.  It's why respectful discussion of spirituality, relationships, family and self-worth are comfortably interwoven with economics, business, finance and tax.

It's a new framework for politics and public policy debate.  The simple two-way split has gone.  For each of the political parties, for business, unions and individuals, it's a new environment.

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GM Good -- if doing nothing is worse

A summit on genetically modified (GM) crops held in Melbourne last week attracted lots of big names in this debate, including Western Australia's Julie Newman, who leads the Network of Concerned Farmers, and the deputy chief of CSIRO's Plant Industry division, T.J. Higgins.

But perhaps the most interesting presentation was from Lucy Carter, who talked about the ethical debate surrounding GM crops.

Dr Carter is from the School of History, Philosophy, Religion and Classics at the University of Queensland.  She has previously investigated the quality of arguments for and against the development and use of GM crop plants as part of her PhD.

She told the summit she had taken a pragmatic approach acknowledging that some applications of science are objectionable to some sectors of the community whose deeply-felt concerns should not be ignored.  Nevertheless she had sought to work through these concerns in a spirit of compromise, utility and resolution, recognizing that both proponents and opponents have vested interests in the regulation of GM.

Dr Carter recognised several strong themes in the debate including environmental concerns, in particular the impacts of gene flow;  end product labelling, risk and consumer autonomy;  food safety assessment;  developing world hunger and opportunities;  the "precautionary principle";  social, cultural and economic considerations;  the role of functional foods in the industrial world;  and naturalistic objections to GM.

The following assumptions were made:  GM confers several advantages over traditional agricultural methods;  GM can improve a plant's performance by increasing its tolerance to various environmental factors;  and agronomic traits such as pest resistance, herbicide tolerance and salinity tolerances have the potential to improve yield quantities and/or decrease input.

Dr Carter concluded that the expectation by organicists for absolute non-interference is unreasonable and unjustifiable and that the organic community cannot set standards that exclude other agriculturalists from taking part in legitimate agricultural activity.

But, in fact, they had, particularly with moratoriums banning the planting of GM food crops which are still in place in Western Australia, South Australia and Tasmania.

Dr Carter also concluded that co-existence of GM and non-GM crops was possible, as has been demonstrated in the US.  She said co-existence was morally desirable;  conventional, organic and GM agriculture were not mutually exclusive enterprises, and the incommensurability claim made by the organic community was arbitrary.

Dr Carter also stated that GM has the potential to decrease future environmental degradation.

Because of this we could use the precautionary principle to justify GM use on the grounds that to do nothing might be worse for the present situation.

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Petrol price promise proves non-core

Kevin Rudd's election promise to keep petrol prices low has been exposed as non-core.  That was confirmed when Climate Change and Water Minister Penny Wong announced that the cost of carbon credits from the forthcoming emissions trading scheme would apply to petrol.  The cost is likely to be equivalent to doubling the GST at the bowser.

The cost of signing the Kyoto Protocol and establishing an emissions trading scheme was always going to flow on to the price at the bowser.  The cost of the next international agreement, to be completed in Copenhagen in 2009, is unknown but will probably only amplify the pain.  And the tax increases on petrol will flow throughout the rest of the economy as higher transport costs increase grocery prices.

Now that he's in government, Rudd cannot deliver on his empty promises and is drawing voter ire.  The absurdity is that Rudd seems genuinely surprised by the Opposition and the public's anger over rising petrol prices when he promised to keep them low.

Rudd can hardly feign ignorance.  In Opposition he played the same kitchen-table politics that is being used against him to tap into voter resentment over the rising cost of living.  Further, in 2001, Treasurer Wayne Swan led the Opposition's attack that ensured the Howard government capped petrol excise.

Soon after coming to government, Rudd attempted to deflect attention from his non-core promise by establishing a petrol commissioner at the Australian Competition and Consumer Commission to watch over petrol prices.  Following a naming-and-shaming of Coles Express for increasing prices, the commissioner, Pat Walker, claimed he was helping to stop price rises.

Walker's claim is akin to suggesting he can stare down prices.  In fact, Coles Express was merely the first petrol retailer to increase prices that day.  Its competitors followed with similar price rises later that day.  The irony is that if all the companies had increased their prices at once, the ACCC would have complained about collusion.  Petrol retailers simply cannot win.

The Government is claiming that a petrol commissioner will help reduce prices by having an observant watchdog that will increase transparency.  But petrol is already a highly transparent consumer product.  Standard unleaded petrol is an interchangeable product that can be bought from any service station.  As a result, consumers are able to buy petrol from any retailer they like.

Further, petrol prices are advertised on large boards along the road.  If consumers don't like the price they see they can simply drive to the next service station.  But there is one significant exception in the pricing transparency:  government taxes.  Oil companies make only a few cents' profit from each litre of petrol sold.  By comparison, state and federal taxes are more than 41 per cent of the final sale price.

In his budget reply speech, Brendan Nelson proposed a reduction in fuel excise to reduce the burden on working families.  Nelson's proposal is reasonable and economically responsible.  The federal Government imposes the GST on petrol after including excise.  Because the GST is percentage-driven, the Government take increases as the price goes up.  Therefore, any loss of government revenue from reduced excise will be reclaimed through the increased GST take.

Rudd's response has been to review the application of the GST component on retail petrol before the excise.  Doing so will reduce state revenue from petrol without harming the federal take.

Now Rudd is considering options to stop intra-day price changes at the bowser.  The consequences are predictable.  By removing the opportunity to reduce or raise prices, petrol retailers are left with limited options and are likelier to raise the price than reduce it for fear of lost profits.

A similar regime already operates in Western Australia.  Some petrol stations have been fined for reducing, not increasing, the price of petrol.

What is clear is that Rudd was deliberately deceptive or hadn't done his homework.  World petrol prices are largely set by supply and demand.  Demand is up and therefore so are prices. China's consumption has increased by more than 50 per cent in seven years and is meeting this demand almost entirely from new imports.

The vast majority of Australian petrol is sourced locally but is priced at the market rate of our region's local trading hub, Singapore.  The reason is simple.  Why should Australian producers sell oil cheaper than the world price when it can be exported to the highest bidder?

Rudd should not be surprised that voters are angry about his failure to keep petrol prices low.  The only way he can redeem himself is to reduce the Government's profit margin on petrol, the excise.  Instead, Rudd and Wong are proposing to increase the Government's tax take through all of the costs that come with reducing carbon dioxide emissions, and with it placing further pressure on working families.

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Taxes key to petrol prices

The ACCC's new Petrol Commissioner cannot do anything to reduce the price of petrol.  Creating a Petrol Commissioner is also a distraction from how government can actually reduce the price of petrol:  reduce Government taxes.

Petrol is priced by the simple forces of the market -- supply and demand.  Despite the fact that Australia sources most of its petrol locally, prices cannot help but be set at the world price.  This is because if it were priced lower, Australian petrol would simply attract a higher price internationally and be sold there.  The net result for Australians world be petrol shortages.

Specifically, the Australian world price marker is the Singapore market price.  Singapore is the major oil trading hub in our region.  Despite its petrol price hysteria, the ACCC has found that Australian bowser prices closely correlate with the Singapore price.  The ACCC's own evidence defuses suggestions that petrol companies are deliberately gouging consumers.

The Petrol Commissioner cannot reduce the price of petrol without effectively getting petrol retailers to sell below market price.

One of the supposed benefits of the new Petrol Commissioner's office is that it has increased pricing transparency.  But prices do not go down just because someone watches them.  When the Petrol Commissioner Pat Walker named-and-shamed Coles Express for a recent increase in petrol prices, he argued that his action proved the need for his role.

But the facts don't support Walker.  Coles Express was merely the first of the petrol stations to so increase their prices -- they were shortly followed by other stations on the same day.  The Petrol Commissioner did nothing to stop price rises;  only managing to condemn one company as a scapegoat.

LOSE LOSE

The irony is that if one company increases its prices first and others follow, they are attacked by the ACCC for increasing prices.  If all the companies do it in unison they are attacked by the ACCC for collusion.  Either way petrol companies cannot win.

The reason petrol prices are consistent is not because of a lack of transparency.  Quite the opposite -- it is because they are transparent that they seem uniform.  Standard Unleaded Petrol is an interchangeable product and can be bought from any service station regardless of the car you drive.  Petrol prices are advertised on giant billboards alongside roads, so if consumers are not happy with the price they can drive to another station for a better price.

Blaming petrol companies for the high cost of petrol also ignores one of the major reasons that petrol is expensive:  government taxes.  Petrol companies make only a few cents profit per litre of petrol.  In comparison, 41 per cent of the price of petrol is state and federal taxes.

If the Federal Government really wants to reduce prices they can reduce fuel excise.  In his budget reply speech Federal Opposition Leader, Brendan Nelson, proposed a fuel excise cut.  The Government has attacked the proposal for being economically irresponsible.  It is not.

Fuel excise is added onto the price of petrol before the GST.  The GST is a percentage tax that is added after excise and increases as the final price.  As the market price of petrol continues to rise, so does the Government's GST take.  Any cut in excise will be sufficiently compensated in the increased take from the GST.

SHORT REPRIEVE

Even if the Government cuts fuel excise it will be a short reprieve for consumers.  The Government has proposed a new scheme to stop retailers from changing petrol prices throughout the day.  In Western Australia a similar program already exists and retailers have been fined for reducing prices.

Further, the Government has already proposed a new tax on petrol through the carbon trading scheme.  Along with electricity, transport is one of the primary emitters of carbon dioxide.  And under a carbon trading scheme the Rudd Government will impose additional costs at the bowser.  Modelled projections show that the cost of the carbon trading scheme on petrol prices could effectively double the GST component.

Consumers should be wary of hollow promises to reduce petrol prices by Government.  The real obstacle to keeping petrol prices low is government taxes.  And if you think they are bad now, just wait until the cost of a carbon trading scheme hits you when you fill up.

Watchdog misses chain reactions

The ACCC's inquiry into grocery prices illustrates the danger of imposing an overstaffed and overzealous government agency on an industry.  There are three major supermarket players and plenty of rivalry.  Most large shopping centres have at least a Coles and a Safeway, and often also an IGA supermarket.

All three chains know that shoppers understand grocery prices better than those of any other goods.  And it is hardly surprising that the chains keep a sharp eye on their competitors' prices.

Like hawkers in open-air markets, they are constantly adjusting prices in the light of their competitors' pricing decisions.  The goods are so price-sensitive that vast swathes of market share would be lost if prices of one chain were to drift above those of another by more than a few percentage points.

Astonishingly, this does not seem to be understood by the Australian Competition and Consumer Commission and its chairman, Graeme Samuel.  Samuel noted evidence from the chief executive of Woolworths that its managers were instructed to meet the prices of their competitors and drew attention to similar testimony given by IGA.  In a statement that offers powerful insights into his lack of commercial experience, he said:  "If Coles' instruction is exactly the same as Woolworths, we've got a pretty cosy arrangement, haven't we?"

Well, hardly cosy.  In fact it's a dog-eat-dog world out there in commerce, where success depends on pleasing consumers and doing so in the midst of competitors whose own success, even survival, means providing better value to customers.  The intensity of the competition depends on keeping costs as low as possible through bearing down on wages, eating into the margins of suppliers and choosing and presenting stock carefully.  Unlike the ACCC, the supermarkets cannot simply whistle up ever-increasing funding courtesy of taxpayers.

Understandably, in view of the powers of the ACCC and its willingness to prosecute businesses that offer consumers goods at low prices, Woolworths' CEO declined to answer a pointed question about whether the company would sell below cost to match competitors' prices.

Ironically, during the course of the hearings, a report was issued by Concept Economics, Choice Free Zone, which had Samuel's predecessor, Allan Fels, as its lead author.  The report points to issues that impede competition from bringing the lowest possible prices.  These are the planning rules that restrict competition by designating areas for supermarkets.

Work I have done has found that Australia has less than half the shopping centre space per head than North America because of our planning laws.

This raises the cost of land for supermarkets and those costs must inevitably be factored into the prices consumers pay.

Supermarkets, in return for getting access to sites at a premium cost, will demand that rivals who have not paid these costs are excluded from the sites and prevented from setting up elsewhere.

The planning-derived scarcity of land for retailing has been muted in the case of whitegoods and some fashion lines.

State planning land supply restrictions have been countered by the sudden appearance of surplus Commonwealth land around airports, and with excellent transport infrastructure.  This has led to the growth of Direct Factory Outlet sites around all our capital cities and the consequent unleashing of competition has brought a tremendous benefit to consumers.

Such areas are less well suited to supermarkets and have not therefore had the same effect in placing downward pressure on prices.

The Concept Economics report is particularly scathing about the planning restraints imposed on Sydney consumers.  It argues that food prices in smaller shops may be up to 22% higher because of the constraints on competitive provision.

Rather than berating businesses for engaging in rivalry, the ACCC should concentrate on testing such claims.  If they are found to have merit, their rectification falls squarely within the ACCC's competition bailiwick and the agency will have found a meaningful public service to pursue.

There is a range of overseas supermarket chains -- Wal-Mart, Sainsbury's, Pick n Pay -- that have been unable to find satisfactory sites in Australia.  Removing barriers to these companies entering the market is the key measure to promoting lower prices.

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Conspiracy theory lunacy

The September 11 terrorist attacks were arguably the most watched event in human history.  As a result, the facts about what happened seem indisputable.  We have all seen the footage of planes flying into the World Trade Centre towers over and over.

Yet, a group of conspiracy theorists continue to claim that the official account of what happened that day amounts to the greatest cover up in the history of modern civilisation.

ABC Unleashed last week published the claims of Hereward Fenton of the 9/11 Truth Movement in Australia, a movement which disputes the official story and claims that the World Trade Centre did not actually collapse as the result of planes hitting the towers, but rather as the result of a controlled demolition.

When I last wrote about the lunacy of this theory in March 2007 my opinions were later attacked on the website that Fenton is a researcher for.  Anonymous posts on the website www.911oz.com accused me of being a Mossad agent, telling me to go "back to Israel and fortify your bunkers".  These comments highlight some of the prejudices that can often fuel these theories.

The 9/11 Commission set up in 2002 interviewed over 1,200 people in 10 countries and reviewed over two and a half million pages of documents before releasing a 571-page report explaining how and why the World Trade Centre buildings collapsed.

The report found "no corroborating evidence" for alternative hypotheses suggesting that the WTC towers were brought down by controlled demolition using explosives planted prior to September 11, 2001.

So why do these theories continue to have support in the community?  The theories are motivated from a variety of factors sometimes relating to anti-Americanism and most commonly from a psychology of mistrust and paranoia.

Those involved establish their conclusions first, and gather their evidence later.  Contradictory evidence is either ignored or discredited.

Popular Mechanics, who have debunked the theories surrounding the attacks, argue that conspiracy theories "share a basic thought pattern: great tragedies must have great reasons".

In the most watched documentary promoting the conspiracy theories, Loose Change, which has been viewed by millions of people on Youtube, the narrator reflects ... "That 19 hijackers are going to completely bypass security and crash four commercial airliners in a span of two hours, with no interruption from the military forces, in the most guarded airspace in the United States and the world?  That to me is a conspiracy theory."

We all wondered on September 12, "How could this happen?"  But just because something seems implausible does not provide evidence of a conspiracy.  It's strange that the moon and the sun appear to be exactly the same size from the earth, but so what?

The conspiracy theories have been able to gather a strong following because they explain elements of the story that the official account is unable to explain easily to a lay person.

The main concern of those in the 9/11 Truth Movement is that they think it would be impossible for the World Trade Centre to fall in the uniform fashion that we all witnessed without it being the result of a controlled demolition.  It is true that the temperatures inside the towers would not have reached levels that would have melted the metal, thus causing the buildings to collapse.

Steel's melting temperature is 1,500°C and there is consensus that temperatures inside the World Trade Centre would not have likely exceeded 1,100°C.  However, the theorists fail to mention that steel that is heated to over 1,000°C softens to such an extent that its strength is reduced by up to 90 per cent.

They also fail to look at factors such as the internal damage to the building support structures and fire-proofing insulation which inevitably led to the collapse of both towers.

The conspiracy theorists are oppositional by nature.  They will believe 11 different versions of what occurred, even if they are all contradictory, but only as long as they are not related to the official version of events.

One theorist who claims that a missile was fired into the Pentagon will associate himself with another theorist who is certain that the attack was carried out by an unmanned remotely controlled plane.

To account for this problem groups such as the 9/11 Truth Movement have tried to classify themselves under two main headings.  They identify themselves as either MIHOPs (Made It Happen On Purpose) or LIHOPs (Let It Happen On Purpose).

Both these groups believe that the US government had something to do with the attacks but divide themselves over whether the government let it happen or made it happen.

Perhaps the CIA did plant explosives inside the World Trade Centre and demolish it by controlled demolition.  And maybe the military did fire a missile into its own headquarters at the Pentagon.  Or maybe 19 terrorists, with links to Al Qaeda, hijacked four commercial airliners and used them as weapons to kill almost 3,000 people.

It is clear from the report into the attacks that the Bush administration was incompetent in stopping the terrorist attacks, but that does not mean that they were involved.  To suggest that they were disrespects the lives of every person who died as a result of the attacks.

Perhaps the story would make a great Hollywood blockbuster, but in the real world it has less credibility than the idea that Prime Minister Harold Holt was captured by a Chinese submarine whilst swimming off Point Nepean.

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Who will cut the apron strings of government?

Kevin Rudd's vision for the country is now starting to emerge.  It's nothing if not ambitious.  He has promised to change our health system, our education system, our industrial relations system and our tax system.  Even our federal system and method of government is up for renovation.

However, there's one thing the Prime Minister won't be changing.  The transformation of Australia into a nanny state will continue unabated.  From what we've seen so far, Rudd is happy to accelerate that trend.

The issues that the Government now regulates and offers advice on range from the trivial to the significant.  And it all adds up to the further erosion of individual autonomy and undermines the notion that we should be responsible for our own actions.

Last month an official Federal Government press release warned "grey nomads" travelling north during the winter of "the extra risk posed by the hotter and more humid climate when preparing and storing food".  They were reminded they should have clean hands when preparing food.

Presumably a bureaucrat in the Department of Health and Ageing imagined that once they reached retirement age, they would forget the lessons of a lifetime.  It's no wonder that citizens are sceptical of government, when ministers are reduced to issuing press releases urging people to wash their hands before dinner.

At the other end of the spectrum, government appears increasingly willing to intrude in areas in which just a few years ago we would have said it had no place.  The Federal Government funds Family Relationship Centres that provide advice on personal and family matters.  No doubt the centres meet a need in the community, but it's debatable whether this need should be fulfilled by government.

For one thing, government-funded and organised activities of this kind invariably crowd out privately funded voluntary activities.  A more important objection is that advice on personal relationships is necessarily immensely personal.  Any advice given either directly by the government or by an agency funded by it will inevitably be shaped according to a set of subjective value judgements.

By deciding which services it funds, there is enormous potential for government to impose its own assumptions and beliefs about personal behaviour.  In many cases, counselling services might reflect community attitudes and standards.  But there's a chance that services might on occasion reflect the views not of the community but of a government keen to impose its ideology.

Higher taxes on "alcopops" are just the latest instance of ministers imposing their opinion on the rest of the population.  The Prime Minister did not justify the tax rise as an attempt to get more money.  If he had, the public wouldn't have liked the decision but at least it would have understood the reasoning.

Instead Rudd said the tax increase was aimed at reducing teenage drinking.  As so often happens with nanny state measures, the proposal was soon revealed to be arbitrary, contradictory and self-defeating.

Adults who enjoy ready-to-drink mixed spirits have been punished with higher taxes because of the actions of a small number of teenagers.  And teenagers determined to get drunk may now turn to cheaper and more dangerous alternatives.

The Brumby Government is not immune from nanny-statism either.  The proposal to prevent patrons from entering Melbourne's nightclubs after 2am follows a familiar pattern.  The majority are inconvenienced because of the actions of a minority.

Of course the police are in favour of a 2am lockout.  It makes their job easier.  If the police had their choice, no doubt they'd prefer a lockout at midnight or even 10pm -- at the price of substantially reducing the amenity of the population.

At the moment there's a strange disconnect between Labor's rhetoric on economic and social policy.  When they talk about business, ministers preach competition and deregulation.  But when they talk about the rules that affect the way citizens live, the rhetoric changes.

We're facing a situation in the not-too-distant future when government will be more than just your nanny -- it will be your doctor, your marriage counsellor and your psychologist, too.

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Don't strangle communication networks

The marriage of politics and commerce is a destructive one.  This is a lesson the Labor Party should be learning as it tries to work with the telecommunications industry.

Despite Communications Minister Stephen Conroy's promise that his broadband plan would cut through the barriers holding back a national fibre-optic network, the grand soap opera that is telecommunications policy doesn't look as if will be ending any time soon.  Bidders for the Government's tender are required to lodge a bond by Friday and provide their full proposals by late July.  But Telstra's rivals have been claiming the carrier is not providing enough information about existing infrastructure.  And the G9 consortium is pushing hard for a five-month delay in the tender process so it can get its proposal together.

There has been aggressive and highly public criticism of the tender process, the cost of the bond required to tender and the regulations that will govern this still hypothetical network.

Telstra, AAPT and Optus have even been holding talks to negotiate a broadband settlement, as if they were great world powers preparing a ceasefire agreement.  After a decade of government subsidies, regulatory gamesmanship and legislative inaction, the Australian telecommunications industry has never been so highly politicised.  But while the fibre-optic network debate has dominated headlines for more than a year, the real action in broadband is elsewhere.

Compared with the lumbering environment of rent seeking created by the regulations that apply to our fixed-line network, Australia's mobile networks are a paradise of laissez-faire entrepreneurship.  In the mobile sphere, there is the rapid innovation and the large-scale investment federal governments have long desired.

Optus modestly announced earlier this month that it was expanding its 3G mobile network to challenge Telstra's Next G mobile broadband network.

Both Telstra and Optus plan to upgrade the speed of these mobile networks to 42 megabits per second -- significantly faster than the fastest wired broadband available at the moment -- in the next two years.  Both these networks will dramatically exceed the Labor Party's broadband promise, which it says will provide a 12Mbps internet connection.  And it plans to use $4.7 billion of taxpayers' money to do so.

This pattern of innovation and investment in mobile networks while highly regulated fixed-line networks are bogged down in politics and regulation is repeated throughout the world.  In many developing nations, entrepreneurs are bypassing state-owned and corrupt monopoly carriers to build mobile networks instead.

The consequence, widespread mobile ownership, is fundamentally changing these emergent economies for the better.  Small producers can easily communicate with their suppliers and customers thanks to the ubiquitous communications networks that the state-run carriers were too incompetent to provide.

The situation in developing nations and Australia is disconcertingly similar.  Recall that part of the reason Telstra originally decided to build its Next G network was out of frustration with poor regulations affecting fixed-line services.  But just because Australia's mobile networks are relatively unregulated at the moment, this doesn't mean the regulatory wolf isn't howling at the door.  The political games played earlier this year over the shutdown of Telstra's CDMA mobile network illustrates how comfortably the Government can threaten this energetic commercial environment.

Back in the late 1990s, Telstra received $400 million from Canberra to help extend its CDMA network into otherwise uneconomical rural and regional areas.  For everyone involved at the time, this seemed like a win-win deal.  The government was able to claim it was providing something akin to the universal service that Telstra is compelled to provide for the home phone network.  And Telstra received hundreds of millions of dollars to expand its market share.  But, at the time, Telstra owned the GSM mobile service as well as CDMA.

When Telstra announced in 2007 it was going to replace both with the snazzy new Next G service, the embattled Coalition government altered the CDMA licence to require Telstra to keep it open until the new network provided equivalent coverage.  The result is that the Next G network, and likely any future mobile network that Telstra would choose to replace it, is subject to an unspoken but very real universal service mandate.

Regrettably, having been vested with the power to set the terms and conditions of the spectrum licences that all mobile networks require to operate, politicians cannot resist manipulating Australia's telecommunications for their own political purposes.

But hopefully the federal Government can draw the right lessons from the success of Australia's mobile networks.  Where politics is absent, there is innovation and investment.

If the federal Government wants Australia to have world-class broadband and mobile networks, it needs to get the politics out of the telecommunications industry.

Don't close the door on our envied bar culture

Premier John Brumby probably wasn't expecting a backlash this big.

Nearly 30,000 distressed drinkers have signed just one of the many Facebook petitions opposing the 2am lockout -- the Victorian Government's new policy that will ban entry to bars, pubs and clubs in the inner city after 2am.  And more than 6000 people have promised to angrily party on the steps of Parliament when the ban goes into force on June 3.

The lockout is being vigorously debated in street magazines and online music forums that would never think to debate the finer points of more "traditional" policy concerns such as means-tested baby bonuses or first-home buyers' grants.

There is good reason for these protesters to be upset about the 2am lockout.  It is a dramatic restriction on our freedom to go to our favourite venues that, in turn, want to have us as customers.  The Government is obviously worried that the word "curfew" sounds a little too much like they fear a coup d'etat.

But even if you're not convinced that we have been endowed with an inalienable right to party, the 2am lockout is still bad public policy.

Certainly, a lockout has precedents across the country.  Mooloolaba on the Sunshine Coast has a lockout at 1.30am, Mackay locks patrons out at 2am, and Newcastle introduced a 3am lockout in March this year.  In Victoria, Ballarat, Bendigo and Warrnambool all have lockouts in place.

In many of these cities, police claim that late-night violence has been reduced.  But Brisbane has had a 3am lockout since 2005, and the Royal Brisbane and Women's Hospital told a documentary film crew that it had seen no reduction in total assaults since the ban was enacted.  The correlation between bar-hopping and violent assault may not be as simple as the Government would like.

In the absence of a clear model of cause and effect, the policy aims to restrict the behaviour of a huge number of Melburnians in the questionable hope that doing so will set off a chain reaction that ends in the pacification of a few violent idiots.  But wishful thinking and guesswork rarely result in good policy.

The evidence from other cities reveals that violent behaviour late at night is clustered only around a few hot spots.  In Wollongong, 67% of violent incidents are attributable to just six pubs.  Identifying and closely policing these places would be a far more effective strategy to combat the violence than a lockout could ever be.

Unfortunately, haphazardly targeting all late night venues is clever politics.  Whipping up fear in the community about violence in the street has always been an effective strategy to build political support.  And imposing a lockout doesn't require the Government to devote any extra resources to the problem.  Lockouts don't affect the state budget at all -- the burden of administering the lockout falls squarely on the venues.

Furthermore, changes to liquor licences and lockouts target a group of people who do not have a strong electoral voice.  Young people are not known for their skills as lobbyists.

While the 2am lockout has received the most media attention, it is only one part of the Government's assault against late-night venues.  Consumer Affairs Victoria quietly announced earlier this month a "freeze" on granting liquor licences that plan to trade after 1am.

This means that, at least for the next 12 months while the freeze is in place, there will be no new bars, clubs or pubs opening in the inner suburbs that can pour a late-night beer.

And any already operating venue that needs to alter its licence in some minor way -- to build an outdoor smokers' area, for instance, since smokers will no longer be able to go outside pubs after 2am without being locked out -- will only be able to apply for a new licence that is loaded with the 1am limit.

Like many regulatory increases, these sorts of burdens disproportionately hurt small businesses, which do not have the resources to lobby for exemptions or the financial slack to adjust to the new regulations.

It all adds up to a major attack on Melbourne's hole-in-the-wall bar culture -- a culture that only a few months ago Sydney was enviously eyeballing.

It would be sad if in the future we had to fly to NSW to find the nightlife we have so long been enjoying at home.

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Federal Budget mainly smoke and mirrors

Most of the gotta-get-a-life types who have examined the details of this year's Federal Budget were relieved.  There were few new spending and taxing measures.

The big ticket spending items were pretty much as expected.

Health and education each got an annual additional billion dollars or so.

Climate change programs got half a billion a year on top of the current $3 billion a year in subsidies and regulatory measures.

Few areas saw cuts in taxpayer-funded spending, which now totals $320 billion a year.  But Treasurer Wayne Swan claimed savings of some $7 billion compared to previous plans.

On closer examination, these savings are mainly illusory.  Many result from changed assumptions about spending and consumer reactions to existing programs.

The supposed savings also included $800 million a year from a higher alcopops tax.  If that much more money is raised, the tax increase will not have curbed the binge drinking it ostensibly addresses.

Actually, $800 million will not be raised in any case because people will switch from spirit-based to lower taxed, cheaper wine-based drink mixes.

Other savings include new oil taxes ($600 million) and an increased luxury car tax ($150 million).

These are part of a clutch of new imposts on business, described disarmingly as "fairness and integrity in the tax system".

Also falling in this category is a $600 million a year hike in the tax on tools and computer software.

There is also a new hit amounting to $200 million on firms that provide meals for their employees.  And there is a series of changes that will add $260 million in taxes on property sales, employee shares and on those winding down their businesses.

Many of these measures get little attention because they are taxes on business rather than on consumers.

Yet, impositions on business will always get passed on in higher prices.  Firms have to recoup higher costs and the consumer pays for this.

In addition to these "fairness and integrity" savings, the budget also claims some savings from "realising efficiencies".

Among these is the breathtaking claim of a near $1 billion gain from abandoning the deal to subsidise the Optus consortium's broadband network.  This is billed as "responsible economic management" but the budget contains no figure for the Government's own $4.7 billion broadband network.

Oddly, the Government also claims to be pocketing $269 million over the next few years by not proceeding with the sale of Medibank Private.  No countervailing loss from the forgone sales revenues appears.

One of the few budget savings that did look genuine was the "efficiency dividend" from reducing the number of public servants.

Even that turns out to be a pea-and-thimble trick.  Top Canberra public servant Terry Moran has revealed that "new government initiatives" will recoup the numbers.

So there we have it.  The first ALP Federal Government budget in 13 years does little harm and is mainly smoke and mirrors.

But the ALP may yet add lead weights to the economy's saddlebags in foreshadowed spending and taxing programs.  These range from measures to combat carbon emissions to "Think Big" new infrastructure funds.

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Hard choices yet to come

Wayne Swan played the media like an accordion in the lead-up to the budget.  The Treasurer may have proved that he has more political savvy than people give him credit for.  His media management skills might not yet compare to Paul Keating's or Peter Costello's, but he's studied the secrets of the masters and he's learned a thing or two.

Before Tuesday, the Treasurer talked tough about fighting inflation and fiscal restraint.  He practically said we should prepare for a "horror" budget.  And the media believed his every word.  Swan's pre-budget pronouncements earned him credibility from business and from sceptical financial markets.  Just as importantly, his warnings would have been noted around the board table at the Reserve Bank of Australia.

In the absence of inheriting a budget black hole, Swan had to invent something to complain about.  And so the inflation "genie" came into being.  He defined his budget as about the need to slay the inflation genie.

Within the Labor caucus, Swan's colleagues were conditioned to expect the worst.  An important task for any treasurer is to inspire fear (and sometimes loathing) in the hearts of ministers.  Ministers need to learn that if they're going to spend taxpayers' money, they must explain themselves to the treasurer.  And the job of treasurers, aided and abetted by finance ministers, is to stop ministers spending that money.  Fulfilling their responsibilities has, of course, had consequences for the subsequent careers of treasurers -- as both Keating and Costello discovered.

The upside is that treasurers can gain the gratitude of appreciative backbenchers who are grateful for any crumbs of largesse able to be gathered for their constituents.  As we now know, the worst did not eventuate.  In fact the worst was never going to eventuate.

Brendan Nelson and Malcolm Turnbull were proved right.  There was no dire need to cut the Howard government's programs.  Whether or not the programs should have been cut is an entirely different question.

Swan succeeded in portraying the opposition as arguing for more spending and bigger government, while he presented himself as the paragon of financial stringency.  Such was Swan's good fortune (or good management) that even the few cuts he did make proved popular.  The baby bonus dominated public debate.  Seldom has such a small budget cut received so much publicity.  And seldom has such a budget cut received so much good publicity.  According to opinion polls, a majority of Australians agreed that the baby bonus should be means-tested.

Means-testing the baby bonus saves $60 million.  Total federal government spending is $320 billion.  Limiting access to the baby bonus reduces government spending by 0.018 per cent.  In the scheme of things this is a minute amount that represents little more than a rounding error.  But it was presented as an unprecedented attack on middle-class welfare.  Means-testing the baby bonus and some family allowances is at least a start on winding back middle-class welfare, but it hardly constitutes an all-out assault.  If only Labor was as scrupulous at scrutinising the equity of every other government program.

Perhaps the government could start with universities.  Middle-class students dominate the ranks of the country's undergraduates and they pay only a fraction of the cost of their education.

It will be some time, though, before we witness a Labor government attempting to dismantle what constitutes probably the nation's biggest middle-class welfare scheme, namely higher education funding.  Indeed, this budget has an extra $11 billion for universities.

In Canberra during the Howard years, discussion about new ideas and policies was often concluded with a Promise -- "that's on the agenda for the next term".  In the end the Howard government ran out of next terms.  Good things were accomplished in John Howard's third and fourth terms, but much of what he did in those later terms could have been started earlier.

The general rule of Australian politics is that governments make all the tough decisions in their first budget.  If the Rudd government has made any tough decisions in this budget, it's difficult to see what they are.  One day the government is going to have to make a decision that's a lot more difficult than merely means-testing the baby bonus.  The problem with waiting too long to take the tough decisions is that the appetite for risk-taking doesn't increase the longer a government's been in power.  Quite the reverse.

Maybe Kevin Rudd and Wayne Swan are attempting to break the political rule about first budgets.  Or maybe they think there are no more tough decisions to make.

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Acid Sulfate Blame Floating Upstream

South Australians seem to really know how to whinge -- now they are blaming an acid sulphate soil problem on NSW irrigators.  The latest moaning is from star South Australian Senator and Federal Water Minister, Penny Wong, and her State colleague, South Australian Minister for the Murray, Karlene Maywald.

Both are both blaming upstream irrigators for a problem with exposure of acid sulphate soils (ASS) in the Lower Lakes and other areas adjacent to the River Murray's mouth.  Potential acid sulphate soils (ASS) are common along much of the Australian coastline -- just ask sugar cane producers on the North Coast about their experiences in recent decades.

These soils formed after the last major sea level rise, which began about 10,000 years ago.  The soils are harmless as long as they remain waterlogged.  But, if the water table is lowered the sulphide in the soils will react with oxygen forming sulphuric acid.  In the case of the lower lakes near the mouth of the Murray River in South Australia, the barrages built 80 years ago are stopping inundation from seawater;  in the same way the dykes in Holland are used to reclaim land.

Indeed the Dutch have been managing associated acid sulphate soil problems for more than four centuries.  ASS have been associated with fish kills in coastal Queensland and New South Wales when land has been inappropriately drained.  For example, about 700 hectares of land near Cairns was drained in 1976, and since then it has been estimated that 72,000 tonnes of acid has flowed into Trinity Inlet.

Approximately 50 percent of the NSW cane land is underlain with potential ASS and inappropriate drainage of these soils caused a major fish kill in the Tweed River in 1987.  NSW farmers have since solved the problem through the implementation of less intrusive drainage and liming.

The can-do NSW farmers got on and fixed their problem, but the South Australians have instead provided money to CSIRO Land and Water to undertake a study, including to, establish the severity and spatial extent of the problem.

In the interim there will be lots of media releases and whinging, including about how they should be received more stored irrigation water from the Hume Dam in the Upper Murray or else their lake turns to acid.  There is in fact a simple solution to their problem, they could open their barrages and let seawater re-flood the area.

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A Pinocchio, not Robin Hood, budget

The Rudd Government's first budget did not deliver Robin Hood, but has almost delivered Pinocchio.  The Swan inflation narrative is now entirely discredited.  He had sought to blame the previous government for the high levels of cost-push inflation the economy is currently experiencing.

He made a song and dance about the inflation genie being out of the bottle only to have that metaphor flatly denied by the RBA Governor on 4 April.  Swan had also spoken of the need for a tough budget to control inflation.  On that score he has failed.

His failure can be seen on two fronts.  First and foremost, spending increased in real terms from last year.  In no way can the budget be said to have cut spending.  The most generous interpretation is that the Rudd government have reduced the rate of increase in spending.  This does not augur well for future spending.  Indeed, this budget accelerated one of the Howard government's worst budget features -- the off-balance sheet slush fund.

The second comparison is to look the budget relative to last year's projections.  For all we heard about efficiency dividends and razor gangs, the expenditure on general public services is up.  The other numbers are not dramatically different.  The rhetoric has changed but the overall spending pattern was in place before the election.  So much for Brutopia.

Some of the detail within the budget is troubling.  The Rudd government made much of the alcopop tax increase -- to reduce binge drinking.  Indeed, in economic circles such a policy is known as Pigovian taxation and has certain respectability.  We should expect to see a decline in alcopop consumption and so revenue from this measure should be low. Yet, that is not what we see. Revenue from RTD excise is forecast to grow faster than inflation.

Health Minister Nicola Roxon told the ABC that the change to the Medicare Levy Surcharge would have an uncertain impact on private healthcare membership.  Yet the budget shows a $660 million cost to revenue over four years and expenditure on the private health care rebate to decline by $959.7 million.  This implies that Treasury expect a lot of people to drop out of private cover.  Means testing the baby bonus is said to have a saving of $354.5 million over four years.  That implies about 17,750 babies per year will miss out.  This number is massively overstated.

Where does this Budget leave us?  Swan has argued inflation is out of control, yet does little to address this.  The budget itself indicates unemployment will rise.  Slush funds to finance future spending are being established and some of the numbers in the budget are dodgy.  Existing policy has been relabelled and repackaged.

Rather than taking some of the froth off the economy, this is all froth and no cappuccino budget.

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Why a solar system still lacks power

In the range of energy supply systems designed to reduce greenhouse gases, the most expensive is photovoltaic cells, or solar panels.  Engineering firm SKM has estimated that rooftop solar power is eight to 12 times more costly than regular electricity.  The panels also cost three to five times more than the inefficient wind turbines that, on the back of subsidies, are increasingly dotting the landscape.

The Howard government provided grants for half the cost of the installation of rooftop solar panels, up to $8000 a house.

Like some other state governments, the Victorian Government also requires electricity retailers to buy back surplus energy from the panels at 60 cents per kilowatt-hour.  While ostensibly 60 cents is "only" fourfold, the true electricity price is virtually zero.  The cost of this buyback is hidden in consumers' bills.

So we have a capital grant to promote an uncompetitive source of energy compounded by an additional hidden subsidy from other consumers.

Yet the promoters of these panels want more.  They want the subsidy paid for the electricity generated from rooftops also to be paid when it is used in the house itself.  That is like promoting commuting to work by horseback, having the government pay half the horse's purchase price and requiring other commuters to pick up four-fifths of its upkeep.

At least the Brumby Government, in what it claimed was compassion towards "working families", rejected these even more extreme claims for handouts by the industry and environmental zealots.

As well as allegedly doing its bit to save the world, according to the photovoltaic (PV) cell supporters, a subsidy will father a new industry.  Sustained employment growth based on such subsidies never works in Australia.

Solar power cells are part of a galaxy of Victorian Government electricity-focused regulations that will add costs to consumers.  New-home buyers, already obliged to install more insulation than they need, are to be slugged with additional requirements.  And Victoria has its own energy efficiency target starting in January that will force energy retailers to incur new costs in buying energy from high-cost sources and pass them on in customer bills.

All this is despite greenhouse policy being unambiguously within the federal, not state, government sphere.  The previous excuse the Victorian Government gave for state meddling was that the Liberals in Canberra had refused to implement an appropriate national emission reduction program.

The Rudd ascendancy has made no difference.  There is a persistence of fragmented state government policies being introduced.  Not only do these lack a Gordon Ramsay finesse in mixing ingredients but they are a superfluous tier on the heralded federal emission trading scheme.

Nevertheless, the people of Victoria may be fortunate in having an ALP rather than a Liberal government taking decisions on this issue.  Judging by the statements of the Opposition's spokesman, David Davis, the Liberals would add even greater consumer burdens to help the solar industry.  Sadly, Victoria has seen the politics of pandering to pressure groups replacing judgements made in the interests of the wider public.

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