Consumer-first supermarket reform: The market, not government, knows how to best meet consumer demand

1.0 EXECUTIVE SUMMARY

• Consumers should be put before vested supermarket interests.  Competition means more retail outlets, not less.  Consumer demand should decide which outlets open, not regulator preference.
• Government policy should be designed to promote consumer-led competition, not create artificial competition and outcomes.
• Consumer-first policy justifies removing impediments to new and established retailers meeting market demands, not creating barriers in favour or against supermarkets, such as restricting shop trading hours.
• With more supermarket entrants (particularly the growth of ALDI and entry of Costco) the supermarket sector is more competitive and driving competitive pressure to cut prices.
• The expansion of private labelled goods by supermarkets is directly in response to competition driven by consumer demand.
• Government data shows consumers pay higher prices in smaller communities where non-major supermarkets operate.
• Based on the government's own data, the absence of major supermarkets outside of capital cities can increase the price of groceries by 17 per cent.
• A 17 per cent increase could equate to a $34.68 per week rise on the average household food budget, or nearly $1,800 a year.
• The consequences of any increase would disproportionately affect lower income households who spend more of their income on food, and those in new suburbs, outer suburbs and rural and regional communities.
• The consequences of any increase would have a multiplier effect on local communities and employment levels.
• There have been efforts to regulate a competitive market in the Australian Capital Territory.  My calculations on the ACT government's data shows these efforts place upward pressure on prices, with an increase in the mean price of an ACT basket of groceries of around $8.02 (or nearly 10 per cent higher) compared to the cheapest basket.
• Current regulation in the supermarket sector is driving unintended consequences, such as the creeping acquisition of liquor outlets.
• Australians are amongst the least loyal supermarket customers in the world with nearly 60 per cent of consumers prepared to change supermarkets for a 5 per cent price decrease.
• Current wholesale price deflation may be caused by the end of droughts and certain weather events, but retail price deflation only flows because there are competitive forces at work.
• Competition shouldn't just drive lower prices, but also deliver goods and services that meet multiple consumer concepts of value that meet different market segments.
• There are multiple concepts of consumer value including price, experience and convenience.
• ALDI and Costco meet the demands of consumers that are price sensitive, Woolworths and Coles meet the demands of consumers seeking convenience, location and competitive prices, and IGA and convenience stores suit consumers that value long trading hours and convenience.
• The last reliable measure of market concentration of the two major supermarkets for pre-packaged groceries is around 60 per cent, but is now likely to be much lower following the strong growth of ALDI and entry of CostCo.
• Market share by the two major supermarkets decreases when they are compared against all relevant competitors and drops to 38 per cent in meat, fish and poultry, 58 per cent in liquor, 59 per cent in bread and cakes and 61 per cent in fruit and vegetables.
• Such market concentration is broadly equivalent to comparable countries in terms of population.  Lower population countries have higher concentrations.
• The market share of the two major supermarkets is driven by consumer demand, as Coles and Woolworths only have broadly the equivalent number of stores to IGA and ALDI, who are quickly increasing their market presence.
• Profit margins (4 per cent) in supermarkets are low in comparison to other food retailers.  Meat, fish and poultry is 4.5 per cent, Fruit and vegetables, tobacconists and specialists, and convenience stores are 5 per cent, liquor is 5.5 per cent and bread and cakes are 10 per cent.
• Much of the opposition against lower prices is driven by producerism and vested interests whose profits are enhanced when consumers pay more.
• Continual Parliamentary and government inquiries have found the sector is competitive.

Rather than seeking to regulate a competitive market governments should:

• Liberalise shop trading hours and remove remaining barriers to supermarkets meeting consumer demand.
• Refrain from regulating against supermarkets providing cheap goods in an effort to appease preferred producer interests.  Doing so will lead to higher prices that disproportionately harm lower income households.
• Refrain from regulating against private labelled goods which are being provided in response to consumer demand and competition.
• Refrain from restricting expansion of any supermarket chain.  Doing so would diminish competition and lead to higher prices disproportionately impacting those on lower incomes, those in new and outer suburbs and rural and regional communities.

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2.0 ABBREVIATIONS

ABS	Australian Bureau of Statistics
ACCC	Australian Competition and Consumer Commission
BITRE	Bureau of Infrastructure, Transport and Regional Economics
CEDA	Committee for Economic Development of Australia
CPI	Consumer price index
Km	Kilometre
MSC	Major supermarket chains

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3.0 INTRODUCTION

Adam Smith's maxim is often described as the "primacy of the consumer".  It is not, apparently, as self-evident as he believed.

Consumers win with open and competitive markets.  Regulations and market restrictions boost vested interests, stop new market entrants and harm consumers.

But the recent price war between the two major supermarkets — Coles and Woolworths — shows some think otherwise.  Price competition has inspired at least three parliamentary inquiries into food production and retail law. ⁽¹⁾  Most importantly, it has underlined how the media and political system has an inbuilt and largely unquestioned bias to favour the interests of producers over consumers.

Of the 116 submissions to the 2011 inquiry into the impacts of supermarket price decisions on the dairy industry, only three were supportive of cheaper consumer prices for milk.  The rest were a mixed representation of producer interests.

With nearly thirty years of macro and microeconomic reform the Australian economy is one of the most open in the developed world.

Despite problems, the Australian retail sector is generally open and competitive.  High cost structures and online competition reduce the sector's competitiveness.

One of the most competitive sectors is supermarkets.  The Australian supermarket sector is regularly explained as a "duopoly" between Coles and Woolworths, and relevant subsidiaries.

Misconceptions of a "duopoly" lead to allegations one moment that the absence of competition leads to the chains gouging consumers, and then excessive competition leading to gouging primary producers.  And in response politicians advocate for regulation of the sector.

The reality is quite different.  Australia does have two major supermarket chains, but both face increasing competition on price from international competitors ALDI and CostCo, as well as on customer service and convenience from IGA stores.  IGA stores are also seeking to compete on price.

Considering the average Australian family spends nearly 20 per cent of its income on food and alcoholic beverages, and the lion's share goes to the two big supermarket chains, it is understandable that they come under scrutiny. ⁽²⁾

Despite the absence of a duopoly, there is emerging enthusiasm amongst politicians and regulators to consider regulating the supermarket sector in favour of an "ideal" competitive market.

Trying to regulate markets to achieve "ideal" competition is fraught with difficulty.  Regulations add cost and favour established interests against new market entrants.  Preferential regulations advance the interests of rent seekers and can be corrupted.  Only the free market properly holds companies accountable to the most deliberate and harshest critic — the consumer.

In attempting to regulate an "ideal" market, politicians and regulators often ignore consumer interest, or think consumers win when a market is designed.

The best advocates for consumer interest are consumers themselves.  They vote with their feet and decide market outcomes.

In a free market the number of market players and the influence they have is decided by the marketplace, not the government.

This paper explores an "ideal" competitive market in the supermarket sector from the only perspective that should matter — the consumer.

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4.0 THE IMPORTANCE OF COMPETITION AND CHOICE

Competition and choice are vital for any competitive market.  In the supermarket sector competition is particularly important because of the high volume of sales and consumer spending that is directed through our nation's supermarkets.

According to the recently released National Food Plan, in the 2010-11 financial year food retail sales were $130.4 billion.  Expenditure at supermarket and grocery stores (excluding non-food grocery items) was $81.3 billion amounting to 62 per cent of food retailing expenditure.  By comparison cafes and restaurant sales were $17.9 billion, takeaway food services sales were $14.2 billion, liquor retailing sales were $9.2 billion and other food sales were $7.8 billion. ⁽³⁾

If the regulatory framework governing Australia's food supply and retail markets does not favour consumers, it could have substantial negative consequences for households.  As Adam Smith identified in The Wealth of Nations:

"Consumption is the sole end and purpose of all production;  and the interest of the producer ought be attended to, only so far as it may be necessary for promoting that of the consumer.  This maxim is so perfectly self-evident, that it would be absurd to attempt to prove it". ⁽⁴⁾

In a market exchange, consumers and producers search for partners where their interests are aligned.  As producers are not compelled to sell, they search for the highest prices they can get.  Consumers are not compelled to buy, so they search for the lowest prices.  When a producer and consumer can negotiate a mutually agreeable price, the exchange is made.

But as Smith explained, the motives of both differ.  The final goal of a producer is to consume — the profits made from production are ultimately directed towards consumption.  On the other hand, no individual sees the purpose of consumption as to support the production of others;  rather, they understand the purpose of their own activities in production to support their own consumption.

While in a market exchange producer and consumer interests necessarily align, that is not the case in a political environment.  Public policy can favour some interests over others.  Most obviously, government subsidies to firms favour some special interests over taxpayers.  In housing, urban growth boundaries raise the price of houses, favouring sellers over buyers.  Some policies which are intended to help consumers can have counterproductive effects.  First home buyers grants superficially support buyers but, in reality, just raise the price of housing.  Austrian Economist, Carl Menger, described the market economy as "a pattern of economic governance exercised by consumer preferences".

The most important factor to ensure a marketplace prioritises the interests of consumers is that it is open and competitive.  Competition occurs when private enterprises compete to provide the goods and services consumers demand.  Hence, the ultimate arbiters of market outcomes in a free market are consumers.  When markets are influenced by non-consumer objectives it comes at the expense of meeting consumer demand.

Market forces occur both at the consumer and producer end.  Consumers send their preferences in favour of a single retail outlet, or multiple outlets, based on their concept of value.  At the producer end the number of outlets exists to provide sufficient choice to consumers based on what they demand.  Not all consumers demand the same thing.  Different consumers have concepts of value which can include price, branding and quality, to name a few.  If a consumer market exists a producer can fill it.  If a producer exits a market, or stops accommodating for it, a market opportunity exists for a new producer.

Markets are the evolution of an organic process between consumers and producers.  They cannot be perfectly designed because of the information asymmetry that exists between consumers and producers.  Whilst, there will always been information asymmetry between producers and consumers, a key benefit of markets is that the gap is narrowed because the consumer expresses their will through their consumption and the producer's interest is in understanding and meeting that demand.

Competition exists in different markets through different means.  Multiple factors can influence the number of market players including the size of the market for a good or service and cost structures.  Market opportunities also grow and retract.  They are not stagnant.

Despite perceptions, there is no magical number of market players to achieve competition.  Free markets evolve organically.  Businesses are established, they buy each other out, they merge, they grow to be large and new competitors come along to provide an alternative good or service.  A market can be competitive with only two or three players.  It can also be competitive with thousands.

The biggest risk to a competitive market is creating artificial barriers to entry by government.  Barriers to entry exist within any business.  Businesses can have high upfront capital costs, labour costs and require major distribution networks.  But many successful businesses can attract finance to cover those because they can establish a business case for repayment for investors.  Many businesses compete by operating around assumed cost structures and find new and innovative ways to deliver goods and services at lesser cost.

Government-imposed barriers to entry do not operate in the same way.

First, government-imposed barriers to entry through taxation and regulations add cost to existing and potential new businesses alike.  Adding regulatory costs make it harder for new competitors to establish operations.  While some companies innovate to avoid regulatory costs their arbitrary nature means they are far more likely to be absorbed.  The case study of cheaper milk (below) outlines a classic example of where consumers won with lower prices and the response of producers was to seek to use government to regulate against consumer interest.

Established businesses often like the imposition of certain taxes and regulations precisely because they unduly harm competitors or make the cost of a new competitor entering the market more difficult.  The relationship is especially true for big business.  Using scale big business can regularly diffuse the cost of taxes and regulations across their supply chain reducing the flow-through cost to the consumer.  Small and medium businesses do not enjoy the same scale and capacity to diffuse regulatory costs across a large number of sales meaning the costs passed onto consumers is proportionately higher making them less competitive.

Second, government-imposed barriers to entry can create preferential treatment through taxes and regulation designed to stop the entry of market competitors.  There have been many cases where consumers can only been able to buy certain goods and services from a government-owned company, this has been particularly prevalent in utilities.  Alternatively there are many cases when only government-approved businesses can operate and compete.  To ensure there is a competitive market the number of government-imposed barriers should be minimal.

Case study 1 | Cheap milk and the dairy inquiry The Senate inquiry into the impacts of supermarket price decisions on the dairy industry (Dairy Inquiry) was announced on 10 February 2011, just two weeks after the initial price cut by Coles.  This followed a major Senate inquiry, "Milking it for all it's worth — competition and pricing in the Australian dairy industry", which had tabled its report just ten months earlier. Of the 160 submissions to the Dairy Inquiry, 157 are publicly available on the inquiry's website.  The submissions overwhelmingly opposed the price reductions:  only 1.9% of respondents believed that cheap milk was beneficial. This striking imbalance was also reflected in the public hearings. Down the chain, milk processers condemned the price cuts.  Parmalat argued that the price reduction "has the potential to destroy the Queensland and North NSW dairy industries" and "will put at risk future investment plans of both processor and farmers". (5)  Norco claimed Coles' price cut would "adversely impact farmer returns, reduce processor margins, reduce consumer choice, cause significant damage to regional communities in Queensland and New South Wales and, ultimately, see the possible demise of the dairy industry." (6) The bulk of the submissions came from dairy farmers themselves.  They expressed concern that they would be forced to bear the brunt of the price cuts, that cost reductions would lead to an exodus out of the industry, that market consolidation would lead to corporate dominance over Australian agriculture, and that the supermarket discounting plan would ultimately lead to a shift from fresh milk to UHT long life milk.  More generally, these issues were packaged up in concerns about "food security" — a belief that these trends were going to undermine the ability for Australia to feed itself.

Similarly, governments cannot design a perfect market.  A top-down perspective on regulation of any sector assumes that the power of government and regulation can tinker with individual activities and actions to achieve a more competitive market equilibrium.  It is a false assumption.  The best possible outcome for consumers is achieved by the market itself based on price signals sent by consumer behaviour that identify which good or service is most desired and has the highest demand.  That is not the same as the one approved by government.

Government barriers are a particular risk in limiting new market entrants in the case of monopolies, or near monopolies.  If a business has a monopoly and other businesses are regulated out of competing consumers will lose.  But if an organic monopoly develops because a single business secures a very high share of market power it can only maintain that power for so long as it meets consumer demand.  If a monopoly abuses its market power it creates opportunities for new market players to enter and provide goods and services based on what consumers want.  By their nature monopolies tend to fail because they institutionally become less responsive to the demands of the marketplace.

Despite concerns about monopolies they very rarely occur and their hold on market power, except when it is endorsed by government, is short.

For example, in the past decade the world's largest global software company, Microsoft, was regularly attacked for its monopoly power.  The assumptions surrounding Microsoft were always wrong.  Microsoft's market power was driven by consumer demand.  Yet despite the nature of Microsoft's dominance, throughout the past decade the European Union, in particular, sought to undermine Microsoft's dominance through the judicial system to direct its commercial behaviour to ensure competition.  It was ineffective and did little, or nothing, to stop Microsoft's dominance.  Instead Microsoft was undermined by an open and competitive marketplace where competitors (old and new) provided goods and services that were in greater demand.  Today Microsoft is considered an albatross of the software world.  The Microsoft monopoly that never existed is a shadow of its former self.

An example closer to home exists in the banking sector.  With the "four pillars" policy of major banks the Australian banking sector has concentrated around four major banks and their sub-brands.  Because these larger banks focused on city-based customers, institutional customers and businesses they ignored individual and non-city customers where branches were merged or closed.  As a result Bendigo Bank identified a market opportunity left deserted by Australia's major banks and, working with local communities, opened Bendigo community banks throughout the country.  Ultimately all businesses would prefer absent competition.  Competition places pressure on businesses, makes securing profits more difficult and means that they need to remain nimble to consumer demand.  Competition also ensures that business has to take on different cost structures than they may otherwise prefer to by reducing profit margins through reduced prices and absorbing additional costs.

One of the great concerns around the Australian supermarket retail sector is that it is dominated by a duopoly — Coles and Woolworths.  The concern, backed up by complaints from competitors, suppliers, politicians and even consumers, is that a duopoly has no reason to compete and, as a result, extracts monopoly rents from consumers through the absence of competition.

This assumption is false.

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5.0 PERCEPTIONS OF AUSTRALIA'S SUPERMARKET SECTOR

There is no ambiguity that, based on market share on pre-packaged goods, there is some concentration in the marketplace.  But the supermarket sector is not static and the power and influence of the two major supermarkets only exists with the sanction of consumers.

However, the gift of market share from consumers has not stopped increasing criticism of the sector from commercial vested interests, politicians and regulators who argue the concentration of market share has unintended consequences for competition.

5.1 RECENT BUSINESS COMPETITION CONCERNS

Business self-interest has played a key role in critiquing the supermarket sector in its current form.  Current criticism only plays a part in the long continuum of criticism that comes from primary producers, manufacturers and wholesalers and retail competitors.  Their criticisms are outlined in Figure 1.

Figure 1 | Criticism of the two major supermarkets and their market share

The relevance of these arguments will be discussed throughout this paper.  However, the arguments proposed come from vested interests as either suppliers or competitors of major supermarkets.  Many suppliers and competitors to major supermarkets are impacted by their conduct and do lose income and profits.  But those impacts only result from supermarkets seeking to provide the best value for consumers.  Higher prices paid by supermarkets from primary producers and manufacturers result in higher prices for consumers.  In the example of competitors attacking supermarkets for opening large stores in areas expecting population growth The Australian's John Durie outlines the absurdity of the criticism:

"Some small businesses complain they [the major supermarkets] abuse their market power and the latest loony-tune attack came from a group called MasterGrocers, which argues Woolies and Coles are deliberately opening huge stores in small markets to drive out competitors.  Suffice it to say that's a tough claim to prove". ⁽⁷⁾

In the case Durie cites there is no dispute that the MasterGrocers' members risk competitive pressure from supermarkets.  But they only do so because consumers choose to shop at supermarkets and not their stores.  Consumers are motivated by varying factors and the appropriate response is not to seek to limit the commercial environment of competitors, but to identify better ways to meet market demand.

Even the arguments around the influence of supermarkets in their capacity to increase standards through the supply chain can be motivated by consumer concepts of value.  If consumers want goods to meet certain environmental, ethical or social standards throughout their supply chain and supermarkets only stock products that meet those standards, that influence only comes as a result of consumer demand.  Problems only arise when supermarkets seek to impose standards throughout the supply chain that are not demanded by customers that do add cost.  In some cases this has occurred. ⁽⁸⁾

5.2 RECENT POLITICAL COMPETITION CONCERNS

Political criticism of supermarkets has jumped between extremes in recent years.  In the lead up to the 2007 Federal election politicians attacked the supermarket sector claiming that the rise in cost of living was, at least in part, caused by the market power of the two major supermarket chains.  The Rudd opposition questioned whether there was sufficient competition to drive down prices.  After his election in 2007 then Prime Minister Kevin Rudd, and his Ministers, prompted an ACCC inquiry into the supermarket sector.  The over-riding conclusion of the inquiry was that there were not wide-scale problems with competition.  The ACCC review found that the sector was competitive, but there were limits to price competition, including:

• "High barriers to entry and expansion, particularly in relation to difficulties in finding new sites for development.
• The limited incentives for Coles and Woolworths to compete aggressively on price.
• Limited price competition that Coles and Woolworths face from the independent sector.  Independent supermarkets tend to focus on convenience and service.  A key factor inhibiting price competition from the independent retailers is the wholesale prices of packaged groceries supplied by Metcash". ⁽⁹⁾

Individual MPs have made similar arguments but from the perspective of suppliers to the two major supermarkets whom they represent.  In particular Federal Member for Kennedy, Bob Katter, has been a regular advocate against the Coles and Woolworths "duopoly" arguing that their purchasing power and market share drives down farm gate prices.  As a representative of a regional electorate Katter makes these arguments principally as a representative of local industry in his electorate, but also from the perspective of the consumer and the perceived national interest.

As Katter's criticism outlines, the arguments against supermarkets move quickly from one extreme to another.  In 2007 and 2008 Kevin Rudd and his government attacked the supermarkets for not being competitive enough.  Today the argument is that they are too competitive.

In 2011 the two major supermarkets launched a price war between each other over staples to attract customers.  The price war was primarily started by Coles who has sought to increase its market share from Woolworths after its takeover by Wesfarmers.  From 2011 Coles launched the price war by heavily discounting private label goods such as milk and other staples.  Other goods discounted included "bread, toilet paper, meat, and, as of January 2012, fruit and vegies [and] in January 2012, Coles announced it would slash the price of some fresh fruit and vegetables by as much as 50%". ⁽¹⁰⁾

The objective of the competition war is clear:  attract customers through cheaper staples with the hope that they would complete their entire shop at Coles supermarkets.  Coles followed up their efforts with the expansion of their FlyBuys program and the permanent discounting of a certain number of products.  Woolworths has responded in-kind by matching lower prices on select staples as well as heavily discounting other goods.

Considering only five years ago the criticism against the supermarkets was absent competition, the tables have now turned.  In its place politicians have attacked Coles and Woolworths because of the downstream consequences of their competition war.  Arguments have ranged from lower prices being unsustainable and therefore the cost of other goods are increased, to lower prices leading to degraded products, to lower prices ultimately resulting in higher prices in the medium and long term to lower prices harming producers at the farm gate.  Similar attacks are now emerging over the growth and expansion of private labelled goods because of the impact they have on manufacturers.

For example, Nationals Senator, John Williams, has been pushing for tighter regulation on supermarket chains because he fears that any short term price decrease in retail margins has longer term impacts on producers, processors and manufacturers whose profitability is lessened. ⁽¹¹⁾

What both extremes show is that for politicians there is always political gain from treating food as a political football, but rarely do consumers come first.  Despite the impact on consumers there is now a growing movement to further regulate supermarket competition from across the political aisle. ⁽¹²⁾  Only a small number of politicians are publicly willing to support consumer-interest outcomes. ⁽¹³⁾

In response to concerns around competition, politicians regularly propose policies designed to regulate a more competitive market.  However, that would ultimately compromise the interests of consumers in favour of alternate interests such as producers and other retailers whose interests are not lower and more competitive prices.

While politicians, and governments, continue to have concerns about the competitiveness of the supermarket sector it's notable that government has made it clear it does not intend to oversee competition concerns.  According to the National Food Plan, "the government believes the ACCC is best placed to deal with some competition issues". ⁽¹⁴⁾

The National Food Plan outlined that despite the concerns of stakeholders, "the government believes that so far there is insufficient evidence to support many of the misuse market power allegations against supermarkets". ⁽¹⁵⁾

5.3 RECENT REGULATOR COMPETITION CONCERNS

Off the back of politicians' concerns, the primary regulator of retailers, the ACCC, has raised its own concerns about supermarket competition.  While the ACCC's 2008 report highlighted that there were no fundamental concerns around supermarket competition, the regulator is now focusing on concerns around creeping acquisitions by Coles and Woolworths of smaller retails in groceries and liquor.

Though, in the 2008 Inquiry, the ACCC did identify the prospect of future concerns by the major supermarkets about creeping acquisitions.  The report stated:

"The ACCC does not consider that acquisitions by Coles and Woolworths of smaller competitors over time are a significant current concern in the grocery retail sector.  Most of the new growth by Coles and Woolworths in recent years has not come from acquisitions of independent supermarkets.  Of all new store openings by Coles and Woolworths in the last two years, only 10 per cent have involved acquiring or leasing a site which was previously operating as an independent supermarket.  However, that figure has been significantly higher for certain periods in the past.  Although such acquisitions do not appear to be a significant current concern in the supermarket retail sector, the ACCC maintains its support for the introduction of a general creeping acquisition law.  The ACCC considers that the supermarket industry, because of the particular structural features of the market, is one where creeping acquisitions are a potential area of concern". ⁽¹⁶⁾

These broad concerns have now been converted into more explicit concerns.  In June 2012 the head of the ACCC, Rod Sims, gave a speech to the Committee for Economic Development of Australia.  In that speech Sims argued that supermarkets, in particular the two majors Woolworths and Coles, were engaging in incremental acquisitions of smaller outlets that raised competition concerns.  In his speech Sims argued:

"When the major supermarket chains (MSC) acquire an independent player they remove an alternative from the market, with potentially a different product range and service offering.  This reduces consumer choice as well as, for example, competition generally if the number of players in a local market were to reduce from, say, four to three much less three to two.  That competition is unlikely to be replaced by either a chain or a new independent given local and/or national entry barriers".

Sims continued:

"There is no provision in our legislation to cap market shares or to take account of previous acquisitions when reviewing the competitive effect of the next transaction — that is, there is little or no scope to consider the accumulated effect of a series of separate acquisitions over time and instead we can only consider the competitive effect of each transaction ... With a number of markets at the state/national level already being quite concentrated the ACCC is concerned to ensure that further acquisitions in local markets do not ultimately lead to retail or indeed wholesale industry structures that may adversely affect the competitiveness of these markets and reduce choice for consumers". ⁽¹⁷⁾

Resulting from these concerns Sims argued:

"Either we can ignore the many current local acquisitions by Wesfarmers and Woolworths and in, say five years, see what market structure we have in key sectors.  Or we can examine each local acquisition now, as best we can and within our legislation, to see if there is a substantial lessening of competition.  The ACCC is choosing the latter course". ⁽¹⁸⁾

Sims' speech should not come as a surprise.  Questioning the behaviour of the Australian supermarket sector has become an increasing component of the public focus of the ACCC and concerns about their market structures. ⁽¹⁹⁾  Though, at least the ACCC does acknowledge that a consumer driven market does deliver dividends.  Sims argued in the same speech that, "growth by the major supermarket chains has brought benefits to consumers as a result of their scale". ⁽²⁰⁾

In September the ACCC started acting and has threatened to block one of the major supermarket's acquisition of land in Western Sydney. ⁽²¹⁾

The ACCC has also raised concerns about the growth of private labelling because of the market power it can afford supermarkets with efficient vertical integration.  According to Sims, "when you've got a supermarket that is selling both its own products and selling the products of competing businesses, that vertical relationship is a situation that always is a concern for misuse of market power". ⁽²²⁾

Combined with the arguments put forward by politicians and suppliers to the market place, competition concerns from the ACCC compound the probabilities that government and regulators will attempt to regulate markets.

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6.0 CONSUMERS BENEFIT FROM COMPETITION

Groceries continue to play an important role in household expenditure.  Food is a non-trivial part of Australian household budgets.

Supermarket price decisions can have a significant effect on household expenditures.  Regulatory imposts which increase the cost of food have a concrete effect on household budgets.

Australians spend more on food per week than any other expenditure, with the exception of housing costs.  Food and non-alcoholic beverages constitute 16.5 per cent of the average weekly expenditure of Australians.  This is more than transport (15.6 per cent), recreation (13.1 per cent), fuel, electricity, alcohol, tobacco, clothing and footwear, and medical care and health expenses combined (15.1 per cent).  It is only slightly lower than housing (18 per cent).  Figure 2 emphasises this:  the average Australian household spends $204 on food a week, just slightly below the $223 Australians spend on housing. ⁽²³⁾

Figure 2 | Average weekly household expenditure on goods and services

Source:  Australian Bureau of Statistics, Household expenditure Survey, Summary of Results, 2009-10, catalogue no 6530.0.

The importance of food as part of the weekly budget is even more obvious for lower income households.  While housing costs remain the highest across all income brackets, Figure 3 illustrates that the poorest Australians spend substantially more on food and non-alcoholic beverages than those with the highest incomes.

Figure 3 | Percentage of income spent on food and non-alcoholic beverages

Source:  Australian Bureau of Statistics, Household expenditure Survey, 2009-10, number 6530.0

A Galaxy survey commissioned in March 2012 found that 22 per cent of Australians were more concerned about food prices than all the other major household expenses.  The respondents most concerned about food prices were those in the lower income brackets:  those who are unemployed, work part time, or self-describe as "blue collar" workers. ⁽²⁴⁾

Many households are highly sensitive to food prices.  An Australian National University Poll conducted in July 2011 found that 16 per cent of Australians sometimes or often worried that their food would run out before they had enough money to buy more.  While only 8 per cent said that their food did often or sometimes run out, again there was a significant skew towards lower income households.  86 per cent of respondents who only had a primary and secondary education reported that they ran out of food. ⁽²⁵⁾

Concerns around food prices fits within a broader trend around prices.  ABS data shows that the cost of living is rising faster than inflation. ⁽²⁶⁾

Figure 4 | ABS CPI data — average percentage change from previous period for food and non-alcoholic beverages, alcohol & tobacco

Source:  Australian Bureau of Statistics, Catalogue no 6401.0

In recent years there has been no ambiguity around the increased price competition between the two major supermarket chains.  Since the 2008 ACCC report there has been an aggressive price war between Coles and Woolworths that has resulted in grocery price deflation.

The current price war was largely started by the dramatic resurgence of Coles as an aggressive competitor following the takeover of the chain from Wesfarmers.  The Coles-led aggressive competition is a deliberate attempt to increase Coles waning market share for consumer sales.  Recently Coles' Managing Director, Ian McLeod, was reported as saying, "I feel the focus on the customer has led to greater competition and given Australians a better supermarket offer than they had before, with better stores and better prices". ⁽²⁷⁾

That is certainly the experience in practice.  As Figure 4 shows, trend data from the Australian Bureau of Statistics (ABS) on price inflation for groceries identifies a notable decrease in price since aggressive competition has commenced.  In particular, Figure 5, shows that there has been a clear trend when food and alcoholic beverages have been aggregated since the millennium and has since declined.  OECD data shows that Australian grocery prices have increased by 41.3 per cent since 2000 and 18 per cent by 2004. ⁽²⁸⁾

Similarly, Figure 5 shows that there has been notable deflation in the cost of fruits and vegetables after earlier price spikes in Australia.  These earlier price spikes were largely caused by natural weather events that reduced the available supply of fresh produce.

In recent trends all categories have started to trend downward, except for alcoholic beverages.  Alcohol is a relatively unique product because it is less susceptible to the environment and heavily influenced by government policy.  In addition to the GST, excise taxes contribute a very large share of the final retail purchase price.  These taxes do not decrease.  Even with extreme competition the likely direction of CPI of alcohol is to increase.

By comparison dairy and related products have had a marked decreased from price high points in 2008/09, followed by a lesser decline in meats and seafoods.  Breads and cereal prices have stabilised.  As outlined earlier, fruit and vegetable prices are particularly volatile, but a rapid decline and trajectory consistent with other categories suggest there is a healthy degree of competition in the marketplace.

What's important is to note the comparison with international data.  Figure 6 shows the average direction of food prices for major comparable OECD countries.  Australia stands out for average price deflation in comparison to the rest of the world.  As Figure 6 shows, public concern around rising household bills in the lead up to 2008 were legitimate.  At the time Australians have the fastest rising average food prices of the countries sampled.  But since 2008 Australia has been overtaken by the United Kingdom and New Zealand.

The key notable and relevant trend that has occurred has been since the middle of 2011.  Since then the average food prices of Canada, the United Kingdom, the United States and the average of all OECD countries has continued to rise.  The notable exceptions have been Australia and New Zealand which have both seen a drop.

Figure 5 | CPI comparisons for Australian food and beverage group indexes, 1990 = 100

Source:  Australian Bureau of Statistics, Catalogue no 6401.0

Considering New Zealand's trade exposure to the Australian market it is not surprising to see a correlating pattern.  What's noticeably different is that in New Zealand there was a short, sharp decline in the average food price around the middle of 2011 that has now stabilised.  By comparison Australia's average food price also declined at the same time and continued falling from the start of 2011 for a full four quarters until the beginning of 2012.

Australia's average food price has since stabilised and fallen below all averages, except the United State.  Australia's average food price now sits below the average of all OECD countries — the first time since 2005.

Neither set of data confirms resolutely the influence of competition.  Both sets of data correlate strongly with the end of extreme weather events that impacted on primary producers as well as increased competition. ⁽²⁹⁾  But the fact that there has clearly been a drop in prices overall, and in almost all sectors except alcohol, indicates there is a clear trend in favour of the consumer.

Similarly, not all factors are local.  As the Australia Bureau of Agriculture and Resource Economics identified in 2005 the, "Australian food industry — producers, processors and retailers alike — competes with a global food market, and so while Coles and Woolworths are actively seeking to maximise returns, they are themselves responding to wide market pressures". ⁽³⁰⁾

Figure 6 | Moving averages of food price indexes for select OECD countries, 2005 = 100

Source:  Organisation for Economic Cooperation and Development.  2012.  Main Economic Indicators:  Food Prices.

The report continued identifying that, "many of the recent changes evident in the industry and the developments that are now unfolding reflect this.  For example, producers and processors compete in global export markets as well as with importers in the Australian domestic market". ⁽³¹⁾  As a consequence key competitors are, "forcing producers, including those in Australia, to achieve yet further productivity improvements and cost reductions in response". ⁽³²⁾

The key point about price deflation is that without price competition individual supermarkets needn't cut prices from previous highs.  Instead the wholesale cost could drop and they could simply extract higher profits.  Only competition forces supermarkets to pass on savings to consumers because not doing so would result in loss of market-share and profitability.

Food price deflation is flowing through to retail tenancies.  Supermarket land holdings are particularly unique because of the large parcel of available retail space needed in advance to establish a supermarket.  Because of food price deflation hitting the margins of the major supermarkets, landlords in shopping centres are turning to newer market entrants, such as ALDI, to rent stores. ⁽³³⁾

The importance of competition will come more to the fore in the next few years.  Food price deflation is expected to end by 2013.  Based on current analysis the cost of primary commodities is expected to rise in 2013 and is likely to be passed onto the consumer. ⁽³⁴⁾

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7.0 THE CURRENT STATE OF SUPERMARKET COMPETITION

A competitive market cannot be designed by government.  Even a relatively concentrated market can be part of a competitive market.

Assessing whether there is enough competition partially comes down to the metric used.  If competition is based on the floor space and number of outlets then no one market player has dominance.  If it is based on retail sales then Coles and Woolworths hold significant market share.

There seems little dispute that some market players do hold considerable market power.  And as the ACCC's 2008 report identified, it can be at both the retail and the wholesale end.  This is partly a consequence of the nature of the retail food and processing sectors. ⁽³⁵⁾

Popular perception is that Australia has a supermarket duopoly and that this duopoly is controlled by two major supermarket chains — Coles (owned by Wesfarmers) and Woolworths.  Data regularly cited argues that Coles and Woolworths' market concentration is around 70-80 per cent combined.  In December 2012 the head of the ACCC, Rod Sims, was quoted as saying, "With over 40 per cent of the supermarkets in the country in the case of Woolworths and over 30 per cent in the case of Coles — two players with over 70 per cent of the market — people can make their own view of whether its a concentrated market". ⁽³⁶⁾

But this has not traditionally been the position of the ACCC. ⁽³⁷⁾  Such data also assumes that all products in a supermarket are essentially only available from other supermarkets.

The ACCC's 2008 Inquiry took a different view.  According to the Inquiry:

"Based on the information available to it, the ACCC's view is that the MSCs account for between 55 per cent and 60 per cent of consumer expenditure on grocery items.  Woolworths accounts for at least 30 per cent and Coles around 25 per cent.  Although each of these shares of retail grocery sales are large for a single company, to say that the MSCs enjoy an 80 per cent share of grocery sales exaggerates the position of the retailers."

Figure 7 | Market participants in the grocery industry, 2007

Source:  PriceWaterhouseCoopers.  2007.  "The economic contribution of small to medium-sized grocery retailers to the Australian economy, with a particular focus on Western Australia".  Paper for the National Association of Retail Grocers of Australia.  June.

Interestingly, since 2008 the market has become more competitive, particularly with the entrance of ALDI and CostCo.  With these two new market entrants the market share of the two major supermarkets is likely to have declined.

Despite the lion's market share of supermarket retail sales falling to Coles and Woolworths, they are not doing so because they dominate the number of physical stores.  As Figure 7 outlines, based on 2007 data, Woolworths and Coles only account for around one quarter of the nation's grocery stores.  No individual sector dominates the number of grocery stores on offer.

Recent data, as outlined in Figure 8, from the Productivity Commission shows a roughly similar picture, but includes recognition of new market entrant, Costco, and the influence of non-supermarket retailers also owned by Woolworths and Wesfarmers.

Figure 8 | Major retailers and the number of their stores

Notes:

^a Includes Bi-Lo banded stores.
^b Excluding hotels.
^c Includes some convenience stores.

Source:  Productivity Commission, Coles, Woolworths and ALDI.

Figure 8 clearly outlines the significant growth of ALDI within a very short timeframe with more than 260 stores now operating across Australia, and the strong competitiveness that Metcash stores now pose to Woolworths and Coles.  In fact, what Figure 7 shows, disproportionate to the number of stores, Coles and Woolworths achieve their market share based on consumer demand as they attract a disproportionate number of sales in comparison to the number of stores.

Interestingly, Metcash is having an increasing influence in the sector.  Independent Grocers of Australia, or IGA, now has four major retail offerings including:

• Supa IGA — large format, full department offer and designed to compete with Woolworths and Coles.
• IGA — medium "top up" stores, selected department ranging and designed to fill market gaps where major supermarkets may not operate, and competes on geographic convenience and local identity.
• IGA X-press — Convenience format stores, targeted demographic range and designed to compete on geographic convenience and trading hours.
• IGA Marketplace — New "up market" larger format supermarkets that compete on quality of produce and service. ⁽³⁸⁾

Each of these different IGA supermarket offers is designed to compete in a market segment based on an identified need.  As Figure 9 outlines, the number of stores is now considerable and on par with the extent of Coles and Woolworths.

Figure 9 | Metcash Food and Grocery retailers

Source:  Metcash.  2012.  "Metcash Food & Grocery".

The extent of competition now in the sector is driving each retailer to recapitalise and invest in their offers.  All chains are investing in their store offerings to ensure they are modern and meet the demands of a contemporary consumer ranging from design to product offerings.

Figure 10 | Newly renovated "market format" Coles supermarket in Southland, Victoria

Photographer:  Tim Wilson

The weight of supermarket retail expenditure can partly be explained by the fact that supermarkets compete on different factors and also that consumers do buy a bulk of their groceries in one store during single visits.  But Australia's supermarket sector has some of the least loyal customers in the world, ⁽³⁹⁾ ensuring that market share can only be retained so long as the supermarket is competitive and responsive to consumer demand.

The lack of loyalty amongst supermarket shoppers can also be found in data from the 2008 ACCC Inquiry.  According to the Inquiry, as Figure 11 outlines, customers are extremely price sensitive and nearly 60 per cent of all shoppers are very likely or somewhat likely to change supermarkets for a mere 5 per cent price difference.

Figure 11 | Customers likely to change supermarkets for a 5 per cent price decrease

Source:  Australian Competition and Consumer Commission.  2008.  "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008".  Commonwealth of Australia.

Similarly, part of the problem with understanding supermarket competition is that they are not standalone operations.  They compete against other supermarkets as well as other retail outlets that offer a portion of the goods available in a supermarket, particularly in fresh produce.  As Figure 12 outlines, supermarkets dominate food retail, but they also compete against many competitors.  Supermarkets compete against traditional fresh produce markets, fruit and vegetable retail stores, butchers, bakeries and convenience stores within the same product categories, as well as pre-prepared, restaurant and fast food.

Figure 12 | Australian food retail market share, by outlet category, 2003-04

Source:  Delforce, R., Dickson, A. & Hogan, J. 2005.  "Australia's food industry:  recent changes and challenges".  Australian Bureau of Agriculture and Resource Economics.  Commonwealth of Australia.

As Figure 12 shows, despite having a large market share of supermarkets, once disaggregated against all competitors, the influence of the two major supermarkets declines significantly.  Combined, their market share only amounts to around 60 per cent of fruit and vegetable sales, 59 per cent of bread and cakes, 58 per cent of liquor and only 38 per cent of meat, fisher and poultry.

At only 38 per cent of the market share consumers are clearly seeking to purchase fresh meat, fish and poultry outside of the major supermarkets.

Based on this IBIS World data the two major supermarkets' influence is in processed foods and grocery items.  Their influence in fresh food is limited.

The extent of Coles and Woolworths market share regularly leads to allegations that their influence amounts to a "duopoly", and is inconsistent with the degree of competition that operates in other markets.  A 2005 study by the former Australian Bureau of Agriculture and Resource Economics (ABARE) found that the range of market share achieved by Australia's two major supermarket brands is only achieved when a larger group of supermarkets are aggregated.

The study found that, "comparable market shares (50-70 per cent) are typically only reached when the sales of the five largest food retailers are aggregated.  For example, the five largest food retailers account for 80 per cent of total retail food sales in France, 64 per cent in the United Kingdom, 62 per cent in Germany, 58 per cent in Spain and only 32 per cent in the United States". ⁽⁴⁰⁾

But each market has their own unique conditions and are impacted based on the urbanisation and concentration of populations, population size and regional differences.  With a highly urbanised population around geographically dispersed capital cities, it is hardly surprising that companies have to take advantage of market size and efficient logistics to achieve market competitiveness and reduce costs for consumers.

The ABARE report that analysed data from differing OECD economies generally reflects the conventional wisdom of the competitiveness of the sector.  But more recent data sheds light that Australia is not dissimilar to other countries.  In the Productivity Commission's 2011 review into the economic performance of the Australian retail sector the Commission identified the market, "share held by the top two and top four retailers is higher than in some countries, though overall is roughly in the middle of the range". ⁽⁴¹⁾  As Figure 14 shows the market share of the top grocery retailers in Australia is high, but roughly equivalent to Canada and not nearly as concentrated as New Zealand.

Figure 13 | Market share by industry players, 2011

Source:  IBIS World

Figure 14 | Grocery retailing market shares, between 2005 and 2007

Source:  Productivity Commission.  2011.  "Economic structure and performance of the Australian retail industry".  Productivity Commission Inquiry Report.  N54.  04/11/2011.

As the Productivity Commission states, "Market concentration alone does not provide much guidance to the competitiveness of a market.  What matters more are barriers to entry and, associated with these, the extent of market contestability.  There are many examples in Australia of highly concentrated markets where barriers to entry are low, exposure to international trade is high and competition is intense". ⁽⁴²⁾

Even with significant market share, competition is not undermined unless there is a clear case that the absence of competition is allowing businesses to abuse their market share.  This is not the case.  The recent National Food Plan came to this conclusion identifying, "that despite the concentration in the food retail sector, there is no evidence that market players are abusing their power". ⁽⁴³⁾

The evidence suggests this is the case and has been backed up by government inquiries.

Empirical data does not support the argument that there is absent competition.  If there is negligible competition within the marketplace the relevant players will be able to extract high profit margins.  High profit margins are attainable because the opportunities for consumers to choose alternatives are diminished and therefore providers can increase their margins without harming their market share.  But the data suggests this is not occurring in the case of supermarkets.

According to IBIS World data that appears in Figure 15 the profit margins in the supermarket sector, as a share of revenue, only sits at around 4 per cent.  The lion's share of revenue goes to purchases at 75 per cent, wages at 9 per cent and depreciation on assets at another 9 per cent.  Considering the volume of sales from the supermarket chains and the capacity to achieve efficiencies, a 4 per cent profit is not significant especially when compared across the food retail sector.

The same data shows all other sectors that supermarkets compete with extract equivalent or higher profit margins.  Most profit margins are around 1 per cent higher, despite speciality stores not having the volume and supply chain advantages of supermarkets.  The only food retail sector that enjoys a much healthier profit margin is bread and cakes doubling supermarkets and the rest of the sector at ten per cent.  Though its disproportionately low purchasing costs highlight the value-add contribution that the bread and cakes retailers provide enabling them to extract higher profit margins.

Figure 15 | Industry sector cost breakdown

Source:  IBIS World

In 2008 the ACCC completed an inquiry into the state of the grocery sector.  The ACCC's Grocery Inquiry report into the competitiveness of retail prices for standard groceries ⁽⁴⁴⁾ concluded that there was not a problem with supermarket retail competition concluding, "grocery retailing is workably competitive". ⁽⁴⁵⁾

However, the ACCC did identify some principal issues, including, "high barriers to entry and expansion, particularly in relation to difficulties in finding new sites for development", "limited price incentives for Coles and Woolworths to compete aggressively on price", and "limited price competition ... [because] Independent supermarkets tend to focus on convenience and service [and caused by] wholesale prices of packaged groceries". ⁽⁴⁶⁾

The most candid refutation that there are legitimate concerns surrounding competition came from the National Food Plan.  According to the National Food Plan, "at this stage there is no clear demonstration of a fundamental problem with the current competition law and policy framework as it applies to the food industry.  To date, insufficient evidence has been presented to substantiate various allegations raised in the media by some stakeholders". ⁽⁴⁷⁾

7.1 GROWTH IN OTHER RETAILERS

While there is clearly a degree of concentration in supermarket retailers in Australia, it is also clearly driven by consumer demand.  The number of non-major supermarket chains across the country is considerable.  But an area that should remain under a watching brief is the emergence of new players that have not fully been considered in the retail market.

Since the publication of the 2008 ACCC report there has been a change in the marketplace that addresses many of these concerns.  This point was made recently in the Federal government's National Food Plan, which stated:

"The retail grocery market has continued to evolve since the ACCC's grocery report.  ALDI has continued to expand and Costco has entered in three jurisdictions.  These businesses have the size and supply chains in place to provide substantial and differentiated choice to consumers in some parts of Australia". ⁽⁴⁸⁾

The view of the National Food Plan was supported by the Treasury that stated in its submission:

"International supermarket chains such as ALDI and Costco are also emerging as a new source of competition for the major supermarket chains in Australia.  Further retail competition is likely to put more downward pressure on prices, foster innovation and increase consumer choice". ⁽⁴⁹⁾

On 25 January 2001 German supermarket retailer, ALDI, entered the market with a small number of stores.  ALDI identified that amongst price sensitive consumers there was a market for a no-frills supermarket offering.  Backed with the resources, finance and logistics of a major supermarket competitor ALDI has increased its total number of stores to more than 200 within 11 years.  While data remains limited assessing ALDI's contribution, there is no ambiguity that ALDI's entry has placed downward pressure on prices.  The entry of ALDI had a big impact on retailers that targeted price-sensitive consumers, particularly Bi-Lo.  By 2007 Bi-Lo had reported an annual decline in its market share of 0.2 per cent. ⁽⁵⁰⁾

Similarly, the entrance of US-based multinational, Costco, has had a similar impact.  Unlike ALDI which provides a no-frills alternative to Coles and Woolworths, Costco provides an alternative warehouse supermarket shopping experience.  Costco also requires a membership to shop acting as a modest consumer barrier to entry.  Costco currently operates three stores in Canberra, Melbourne and Sydney.  But it is currently looking to expand the number of stores offered with new stores in Melbourne, Sydney and Brisbane. ⁽⁵¹⁾

Based on the US experience, the entry of Costco, "has placed further pressure on industry retailers to ensure their products are competitively priced and offer value for money to budget conscious shoppers". ⁽⁵²⁾  Costco intends to expand to 15 stores across Australia.

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8.0 WHAT DO CONSUMERS WANT?

In purchasing products from supermarkets consumers want different product offerings.  Concepts of "value" depend on circumstance.  For example, at 9pm on a weekday evening many consumers after a litre of milk may value convenience more than price.  At 9am on a Saturday morning a family doing their weekly shopping may value price over convenience.  High-income earners may place a higher premium on quality, brands or merely the feel of the store.  Middle-income earners with large families may value the capacity to shop in bulk to achieve discount prices.

Traditionally value has only been considered as price.  Price remains a very important factor in a consumer's concept of value.  Price is particularly important for many consumers, especially for those on lower and fixed incomes.  But it is not alone.

There is conflicting data, but there may have been a decline in the contribution of food as a share of household final consumption.  According to IBIS World data in 1980-81 around 15 per cent of household final consumption was spent on food.  By 2010-11 it was only 10.7 per cent. ⁽⁵³⁾  However ABS data suggests it is closer to 17 per cent by 2009-10. ⁽⁵⁴⁾

Contemporary factors to inform a consumer's concept of the selection of a supermarket can include:

• Brand identity & association
• Car park access
• Convenience
• Customer service
• Individual product qualities
• Individual products for sale
• Price
• Product diversity & range
• Product quality
• Reward & loyalty schemes
• Store cleanliness
• Store design & layout
• Store furnishings
• Store location
• Store opening hours
• Store proximity to home & work
• Taste
• Tradition
• Uniqueness

And different supermarkets clearly offer different concepts of value.  ALDI supermarkets only stock around 600 product lines, whereas Coles stocks nearly 30,000. ⁽⁵⁵⁾

These different concepts of "value" are backed up by an ACCC survey completed for its 2008 grocery inquiry report.  As Figure 16 shows, the ACCC survey found that consumers ranked influencers on their concept of "value" in priority, in approximate order, as food quality, price, store characteristics, availability of favourite brands, parking, range of types of products, range of brands, travel time, opening hours, fuel discounts, customer loyalty programs and then attached liquor store.

Figure 16 | Elements of the retail offer respondents rated as "very important"

Source:  Australian Competition and Consumer Commission.  2008.  Grocery Prices.

And from this data, the breakdown of priority placed on different groups based on their shopping frequency also varied.  Price was the primary factor for those who are likely to do one large shop a week.  Those who do multiple shops rated highest for the importance of travel time.  Those that do one large shop and some smaller shops rated highest for the range of brands stocked.  Parking was comparatively a lesser issue for those that did a number of small shops throughout the week.  Speculatively, that result is likely to be because they are less likely to shop during peak periods, though the data does not clearly show that is the case.

Similarly, according to the survey the biggest motivator to shop at a "speciality store" — generally a range specific store such as a fruit and vegetable store — was quality, followed by price and then range. ⁽⁵⁶⁾  The same survey also found nearly half of all consumers compared their prices, but the majority didn't compare them.

Within supermarkets there's limited publicly available data on consumer preferences.  However, data collected for the Martin Review into supermarket competition in the Australian Capital Territory provides an insight into the different values that consumers place on the different major supermarket offerings.  At the time Costco was not operating in the ACT and was therefore not surveyed.

As Figure 17 shows, in the ACT, Woolworths and Coles both rank highly for differing characteristics for consumer satisfaction and within the same categories:

• They have convenient trading hours.
• The offer discounts on petrol.
• They are close to home.
• The have easy parking.
• They are located where I do other shopping.

Woolworths only secured a ranking in the top 5 was that "they are close to home".  Instead Coles was rated more highly that their stores were "clean and tidy", though not at a level significantly different from Woolworths.

What the data appears to show is that there is no single motivator for attending a major supermarket, though the top rating categories do point towards the two major supermarkets providing a more desirable customer experience.  Coles and Woolworth customers are not just price-sensitive.

By comparison, ALDI and IGA stores got their highest rankings in alternate categories.  ALDI secured its strongest support from customers that:

• They have low prices.
• They are good value.
• They have easy parking.
• They have trolleys that are clean and work well.
• They are close to home.

Interestingly, ALDI secured the highest score of the survey for "they have low prices" at 76 per cent, as well as the fourth highest result for "they are good value" at 70 per cent.  What this consumer data shows is that price-sensitive consumers are more likely to shop at ALDI because they see prices and value as a better product offering, than the alternatives.  That conclusion is backed up with ALDI securing the highest scores for low fruit, vegetable and meat prices across the board.

IGA stores didn't attract such emphatic responses, but scored its highest ranks for:

• They are close to home.
• They have easy parking.
• They have convenient trading hours.
• They are clean and tidy.
• They give good service at the checkouts.

Like with the two major supermarkets, consumers who shop at IGA are looking for a different product offering than just price.  But the three highest ranking responses suggest that IGA consumers prefer convenience.

The absence of one consistent clear consumer preference between different retailers demonstrates that consumers are motivated by differing value propositions.  The fact that different retailers offer different value propositions also demonstrates that the market is being generally responsive to the expectations of the consumer marketplace.  They have good reason to do so.

According to surveys of Australian consumers they are some of the least loyal in the developed world who regularly change stores based on differing factors, though predominantly price.  It is part of the competition strategy of supermarkets that they poach customers from different outlets because of high mobility. ⁽⁵⁷⁾  In fact, it is argued that the supermarket chains have "trained" consumers to be disloyal. ⁽⁵⁸⁾

Figure 17 | Survey among store s own shoppers in the ACT, 2009

Source:  Martin, J. 2009.  "Review of ACT supermarket competition policy".  Martin Stone Pty Ltd.

The high mobility of supermarket consumers is evidence in action that consumers are not always after the same value proposition.  Consumers do seek different offerings based on external factors which could include their income, their geographic location to supermarkets at the intended time of shopping as well as the time of day.

Considering the significant market share between Coles and Woolworths the lack of supermarket loyalty adds a high degree of competitive pressure between the two retailers.  If both Coles and Woolworths had reliable, predictable consumers evidence of competition would be more scarce.

In recent years that degree of competition has materialised in Coles and Woolworths both investing in their overall store appearance, branching out with new supermarket offerings — such as speciality supermarket retailer, Thomas Dux, that caters to higher quality, less price competitive groceries and fresh produce — and the current price war.

The competition from ALDI and Costco, predominantly on price, is also having an impact.  The increase in the number of private labelled goods in the two major supermarkets is a direct result of the increasing influence of the non-majors, particularly ALDI, which offers a limited range of generic goods.

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9.0 CONSUMER TRENDS

Concepts of value vary from consumer to consumer.  Some are clearly motivated by price.  Others are motivated by a holistic approach to shopping.  But there are broader trends driven by consumers that the market is responding to.

9.1 "UPMARKET" STORES

While many consumers are clearly motivated by price, other factors are at play in different consumer market segments.  Inner-city consumers in traditionally wealthier suburbs are seeking value propositions including upmarket brands and produce that achieves certain qualities including that it is organic, free range or complies with certain certification standards.  As a result a new market has been opened for upmarket supermarket chains.

The trend was clearly started with the small chains, Macro, which were heavily modelled on the US supermarket chain, Wholefoods.  Macro was bought out by Woolworths who established the Thomas Dux brand of supermarket stores.  Thomas Dux currently has 11 stores around the nation.  They are all located in the inner-city suburbs of Melbourne and Sydney.

Woolworths are now being followed by IGA.  In May 2012 Metcash announced it would introduce IGA Marketplace.  IGA marketplace is designed to target more upmarket consumers in inner-city locations starting with Sydney's Darlinghurst.  It is the intent of Metcash to open 25 IGA Marketplace stores in the inner-city of Sydney, ⁽⁵⁹⁾ Melbourne and Brisbane.

9.2 CONVENIENCE

There is a strong trend by consumers towards convenience retailing.  It takes multiple forms.  Supermarkets do not just compete against other supermarkets.  They increasingly compete against other food retailers that provide consumers with convenience for their lifestyles. ⁽⁶⁰⁾  Supermarkets are now adapting to this trend and offering more pre-prepared meals targeting time-sensitive consumers and the rising number of single-person households.

Similarly, convenience also takes the form of goods being available at times convenient to consumers and at a convenient location.  Convenience stores compete directly with consumers, but rarely on a price basis.  Products sold by convenience stores are often the same as a supermarket, but with less stock and a more limited range, and at higher prices to reflect higher cost structures.  Though there has been growth in the range of products available in convenience stores which now include small supermarkets.  Because consumers that use convenience stores are less price-sensitive with the purchases they make the potential for profits is also considerable. According to IBIS World, "competition from supermarkets and other grocery stores will increase over 2012-13 as operators seek a larger share of the convenience market". ⁽⁶¹⁾

9.3 PRIVATE LABELLING

Considering price remains an important motivator for some consumers, it is not surprising that they have responded to food price inflation over recent years by switching to cheaper product ranges.  Similarly household budgets have been under strain with price increases faster than the rate of inflation. ⁽⁶²⁾

Australian expenditure on private label goods has grown from $9.96 billion in 2008 to $19.7 billion in 2012.  The increase has been reciprocated with supermarkets increasing the number of private label goods available for sale to be approximately a quarter of all stocked goods. ⁽⁶³⁾  By 2018 private label goods are expected to account for a third of all supermarket sales and be valued at $31.8 billion annually. ⁽⁶⁴⁾  The increase in private labelled goods is global.  A Nielsen survey across 53 countries surveying 27,000 consumers found, "more than half of the respondents stated that they purchased private label goods during the economic downturn and 91 per cent believed that they would continue to do so". ⁽⁶⁵⁾

The motivation to adopt private labelling is clear.  According to the Eye on Australia report, 51 per cent of Australians site, "the price of groceries" as one of their major concerns.  Australian consumers clearly associate private labelling with competitive pricing, a particular concern incomes are challenged by stagnation and rising prices.

The Eye on Australia report also found that 38 per cent spend more on housebrands, 55 per cent are checking supermarket prices more often, 53 per cent are checking the weekly grocery bill more and 59 per cent believe, "that many house brands are the same as regular brands".  That belief is most strongly felt by younger Australians. ⁽⁶⁶⁾

Private labelled goods packaged and branded by the supermarket chain tend to be cheaper than other retail goods stocked up supermarkets.  Supermarkets have expanded their private label goods also in response to competition, particularly from ALDI that has recognised they offer a key area of competitive advantage for the relatively new entrant into supermarket retailing in a new country. ⁽⁶⁷⁾  Supermarkets have also expanded their private labelled goods range with private labels designed to target price sensitive consumers to private labels targeted at health conscious consumers.

According to IBIS World the introduction of private labels, "has led to supermarket price wars and intense competition across the industry ... coupled with a recessive economic climate that cause consumers to be swayed by the tides of economy and value in their grocery purchases thus fanning the fires of discounting and aggressive price competition". ⁽⁶⁸⁾

Private label goods have been a source of attention recently.  Traditional manufacturers have become increasingly concerned about the presence of private labels on supermarket shelves that increase competition.  Their concerns are heightened even further because supermarkets are in the position to decide how products are displayed on supermarket shelves.  If private labelled goods are placed prominently a supermarket chain is in a position to capture a higher share of the profit from a basket.

9.4 LOYALTY SCHEMES

Some of the most aggressive competition within the supermarket sector has come from the introduction and recent expansion of loyalty schemes.  Both Coles and Woolworths have substantial reward schemes designed to attract and hold customers by offering them discounts and reward opportunities for their custom.

Considering the low level of loyalty of Australian consumers to an individual supermarket brand or store, loyalty schemes are specifically designed to increase the likelihood that consumers will keep their custom within a specific supermarket chain by channelling the "rewards" they can secure through "points" and other schemes which are redeemable for flights, consumables and discounts.

Coles recently sent out 8 million Flybuys membership cards to Australian households that allowed them to select a ten per cent discount from five "favourite" items as well as reward redeemable points for every dollar spent.  Woolworths is now responding on how to expand their everyday rewards scheme and also discount lead items in their stores. ⁽⁶⁹⁾

While not aligned to a rewards scheme, IGA supermarkets have responded with price cuts as high as 25 per cent on some items to address perceptions that they do not compete on price. ⁽⁷⁰⁾

9.5 ONLINE SHOPPING

Traditionally online shopping has been dominated by non-perishable consumables.  But online retailing is increasingly expanding in the groceries market.  Supermarkets are not the only providers of online retailers with others operating to meet market niches including speciality goods, alcohol and local Australian produce.

In its report into online shopping PriceWaterhouseCoopers & Frost Sullivan identified the trend.  According to the report, "growing categories [for online shopping] include Food/Groceries and Alcohol — indicating a change within the consumer online shopping habits, where commonplace tasks such as buying groceries are increasingly being transacted through digital channels". ⁽⁷¹⁾

According to the ABS, in 2009 Australians spent between $19 and $24 billion online.  Of that expenditure around 10 per cent was for food, groceries and alcohol.  The primary justifications for shopping online were convenience, lower prices and the wider availability of goods and services. ⁽⁷²⁾

Online grocery shopping is growing through major supermarket channels with both of the major supermarkets now offering an online service coupled with delivery designed to suit the needs of principally time-poor consumers.

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10.0 THE FAILURE OF RECENT POLICIES

In light of the increasing focus by competitors, the Federal government and regulators to regulate the supermarket sector recent efforts to regulate the sector are worth analysis.

10.1 GROCERYCHOICE

Responding to rising prices the then Rudd-led Labor Opposition committed to seeking a reduction in grocery prices.  The basis of the Opposition's concern was competition between the major retailers.  As a consequence the 2008 ACCC Inquiry into groceries was completed looking at competition between the major retailers.  Following the Inquiry the ACCC questioned the incentives for the two major supermarket chains to compete, but identified that there were no major issues to retail competition between supermarkets.

In response to the absent conclusions for policy reform, the Rudd government announced a government website to provide aggregate data of grocery prices in regions throughout Australia in August 2008. ⁽⁷³⁾  The site, GroceryChoice, ⁽⁷⁴⁾ collected the data for a basket of groceries from select supermarkets throughout the nation and then aggregated the data and averaged it across geographic regions.  The site did not include store-specific data.

While the GroceryChoice website initially attracted a lot of attention from the public its success in promoting competition was quickly brought into question.  Without store specific data the site provided little useful information to consumers.  Aggregate data for regions provided consumers with no information about which stores offered cheaper prices.  The site also did not provide information that recognised the multiple preferences of consumers, including trading hours and location etc.  What data the site did provide reinforced existing knowledge.  The site confirmed that on price ALDI provided the cheapest products, followed by Coles and Woolworths, and IGA had the most expensive stores.

While intended to increase competition, the intention of the site was arguably illogical in the first place.  Each week supermarkets spend thousands of dollars providing information to consumers on the price of groceries through catalogues to attract their custom.  There is a clear incentive for them to do so.  According to market research firm, IBIS World, "on average, catalogues can contribute between 20 per cent and 25 per cent sales lift". ⁽⁷⁵⁾

These catalogues are provided to consumers in their own homes with product specific and store specific data.  Importantly catalogues provide consumers with information about products that were specifically on special and attracted heavy discounts.  Catalogues also provide store-specific data, not aggregate data.  GroceryChoice did not provide any of this data.

The relative failure of GroceryChoice saw the government outsource management of the site in December 2008 to activist non-government organisation, CHOICE, with the support of a grant. ⁽⁷⁶⁾  By June 2009 the site had been closed down.  At the time the Consumer Minister, Craig Emerson, claimed, "The fact is that in Australia, there are thousands of supermarkets and even more thousands of grocery items ... the information requirements would have been enormous and they're just not feasible, in my view". ⁽⁷⁷⁾

10.2 REFORM PROPOSALS IN THE AUSTRALIAN CAPITAL TERRITORY

As outlined in my June 2010 paper, Forcing Prices Up, ⁽⁷⁸⁾ in June 2009 the ACT Chief Minister, Jon Stanhope, commissioned consultant, John Martin, to complete a review of the ACT's supermarkets policy.  In his brief Martin was required to report on the adequacy of the existing policy in light of the outcome of the ACCC Inquiry, the current and future dynamics of the sector, how government can support competition in both retail and wholesale, and frameworks, policies and procedures to promote competition. ⁽⁷⁹⁾

Importantly, the brief did not include policies that would result in cutting the price of grocery items, only competition.

The review concluded with fifteen recommendations about how the ACT government could address supermarket competition through policy.  Many of the recommendations mirrored those made by the ACCC in its Inquiry and principally focused on how government could foster competition for both grocery retailers and wholesalers, specific recommendations of which stores could be set up in growth areas and specifically recommended that, "any form of cap on the market share of participants should be rejected". ⁽⁸⁰⁾

However, the Martin Review attracted criticism from ACCC Chairman, Graeme Samuel.  Mr Samuel raised concerns that sections of the Martin Review were in conflict with the conclusions of the ACCC Inquiry and principles of the Trade Practices Act. ⁽⁸¹⁾

Following the completion of the Martin Review the ACT government released its ACT Supermarket Competition Policy Implementation Plan.  According to the Implementation Plan the ACT government developed a new framework to support supermarket competition, including supporting new entrants and larger and independent full line supermarkets to operate, supporting more wholesale competition, flexibility in zoning provisions, no cap on the market share of participants, interdepartmental coordination on policy and regular industry consultation.  Importantly the implementation plan included proposals for land release assessments for new supermarkets based on weighting criteria to support market outcomes. ⁽⁸²⁾

Following the release of the implementation plan on the 6th of May the ACT Chief Minister Stanhope announced the government's first implementation response to its new supermarkets policy.  As part of its announcement the ACT government decided that in:

• Kingston, a car park would be converted to develop a new Supabarn supermarket without the opportunity for any other supermarket chains to bid.
• Dickson, a large format supermarket site would be available for all players, except Woolworths, to bid for the development of a new store.
• Casey, sites would be released for an ALDI and Supabarn store.
• Amaroo, a site would be released for a large format supermarket that would be exclude Woolworths and Coles. ⁽⁸³⁾

The government is now in the process of implementing its proposals, and has claimed that, "importantly for Canberra shoppers there should, over time, be greater choice, lower prices and improved service". ⁽⁸⁴⁾

It is also clear that reducing prices was also the objective of industry.  Following the Chief Minister Stanhope's supermarkets policy announcement Managing Director of Supabarn, Eric Koundouris, said, "competition means lower prices". ⁽⁸⁵⁾

However the claims that the government's implementation will result in lower prices is highly contestable, as evidenced in its own data.

In 2010 the ACT Treasury released data based on the cost of a 29 item supermarket basket for most ACT supermarkets.  The data is provided as Figure 18.  According to the ACT Treasury data the twenty cheapest baskets were all found at Coles and Woolworths stores, which are predominantly the stores locked out of bidding for new supermarket sites following the introduction of the ACT's supermarkets Implementation Plan.

But the impact of the Implementation Plan is not to lower prices, but to increase them.  Based on calculations using the ACT Treasury's data of the mean cost of a basket of groceries for those chains entitled to bid at the Kingston, Dickson, Casey and Amaroo sites the impact of the ACT's competition model is to:

• Require the price of groceries at these news supermarket sites to be between $6.52 and $13.45 more expensive than the cheapest ACT supermarket site.
• Increase the price of the mean ACT basket of groceries to $8.02 compared to the cheapest basket available in the ACT amounting to a mean price nearly ten per cent higher than necessary.
• Increase the price of the mean basket of groceries in the ACT by $1.05 or 1.18 per cent, adding an additional third increase on top of inflation.

The conclusions of the likely price increases by interfering in the market appear to be supported by a little known 2009 analysis by Federal government agency, the Bureau of Infrastructure, Transport and Regional Economics.  Rural centres that have a Coles or Woolworths are, on average, likely to grocery prices 17 per cent lower than those that do not. ⁽⁸⁶⁾

Figure 18 | Impact of ACT Supermarkets policy on grocery prices

Sources:  ACT Treasury data sourced from Kretowicz, E., 2010, "It pays to shop around for groceries", Canberra Times, Canberra, Australia, Calculations and Reserve Bank of Australia

Notes:

¹ Based on the mean price of a basket of groceries from available data for non-Woolworths stores
² Data for ALDI is not available
³ Based on the mean price of a basket of groceries from available data for non-Woolworths and non-Coles stores
⁴ Mean of all supermarkets included in the table
⁵ Increase of the revised mean on the ACT Treasury's mean price for a basket of groceries

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11.0 CONSUMER FIRST COMPETITION POLICY

GroceryChoice was a wasteful, but ultimately harmless, effort by the Federal government to interfere in the marketplace.  The same cannot be said for the proposed ACT supermarket regulations that would lead to higher average prices for consumers.  Considering the growing interest of stakeholders to have government regulate the market in their favour the unintended consequences of further regulation needs to be properly assessed.

11.1 LIBERALISE SHOP TRADING HOURS

There's a clear trend by consumers toward convenience.  The growth in online shopping and the growth of convenience shopping reflects the demands of time-poor consumers.  Yet in some States shop trading hours continue to be regulated diminishing the capacity of the market to meet consumer demand.  However the general trend is toward deregulation.  In the 1990s the Victorian government liberalised shop trading hours against regular criticism that it would lead to negative economic consequences and decline in morality resulting in attendance at Church.  In both New South Wales and Victoria there is near full market liberalisation in shop trading hours except for a few days a year.

As Figures 19 and 20 show, there is still considerable inconsistency between shop trading hours during the week and on weekends.  Clearly those States that have liberalised their laws have not returned to regulated hours.  More rigid trading regulations continue to operate in South Australia, Queensland and Western Australia. ⁽⁸⁷⁾

Shop trading hours sits within the domain of State governments and should not be regulated by the Federal government.  Competitive federalism and policy innovation are still important considerations in policy development and delivery.  However, it would be worth State governments learning from the experiences of other State governments and liberalising their trading hours accordingly, especially when they deliver unintended market consequences.

But the primary reason States should liberalise shop trading hours is because they are clearly the preference and benefit consumers.  A recent report from the University of Western Australia looked specifically at WA shop trading hours and concluded:

"Consumers show a clear preference for the ability to shop outside of those hours historically allowed by government regulation [and that] in each jurisdiction that has undertaken shop trading hour reform, roughly equally divided consumer sentiment for deregulation pre-reform changes to overwhelming support post-reform.  Indeed, in those few examples that exist, most notably the Australian Capital Territory, attempts to reintroduce shop trading hours regulation following previous deregulation met with overwhelming consumer opposition".

And:

"Shop trading hours deregulation best accords with an approach that respects economic and personal freedom, including the freedom to choose without unnecessary government restraint or distortion". ⁽⁸⁸⁾

Figure 19 | The inconsistency of weekly shop trading hours across the States

Source:  Atkins, T. 2011.  "Shop Trading Hours in Western Australia:  A research report:  A legal, social and economic analysis of the regulation of shop trading hours in Western Australia".  Faculty of Law, The University of Western Australia.

Figure 20 | The inconsistency of Easter shop trading hours across the States

Note:  * unless exempt

Source:  Deloitte.  2011.  "The structure and performance of the Australian retail industry".  Report.  10 June 2011.

11.2 COMPETITION REQUIRES CHOICE

It should be a matter of fact, but competition requires consumer choice.  When businesses are successful, market signals are being sent to reward that business because it is reflecting consumer preferences.  When it is not it is a sign that the store is not meeting consumer demand.

There is increasing concern that the major supermarket are creeping their influence, particularly in new and outer suburban areas, and rural and regional areas, by purchasing smaller retailers and pre-purchasing land for the development of new sites.  There are multiple factors at play.

The cost of purchasing land the size of a supermarket is significant, and the competition to buy this land is high.  The need to acquire assets with long lead times was identified in the 2008 ACCC and 2009 ACT Martin Review.  The Reviews specifically identified that the high upfront costs of land purchasing acted as a barrier to entry in the supermarket sector.

Both Coles and Woolworths have been accused of progressively increasing their market share of smaller retailers by stealth.  There is certainly a dimension of truth to the claim.  In the past decade Woolworths has expanded its market share from 13 per cent to 37 per cent.  Coles is now around 21.3 per cent.  In Queensland both have also invested in pubs. ⁽⁸⁹⁾

While the practice of Coles and Woolworths may appear to be a sneaky attempt to increase market share by stealth, it is largely a response to the unintended consequences of regulation.  In Queensland liquor sales are restricted to pub owners.  Similarly, in some States there are restrictions on the number of caps for new licenses for liquor retailers, prompting acquisitions of existing retailers.  The purchasing of existing retailers has also come as a consequence of accessible land where existing pubs provide larger retail space. ⁽⁹⁰⁾

Much of the regulation being advocated for supermarkets by competitors and suppliers, regulators and politicians will disproportionately impact on those in newly established suburbs and rural and regional communities.  Established suburbs are rarely the target by the sector because the markets are already mature.

Supermarkets logically target new and pending development suburbs because they are markets for growth and early market entry can assist them in securing necessary land at more affordable prices.  New suburbs are also hotly contested because market penetration by an existing provider rarely exists.

Regional communities are also a target, though they already have established markets.  For chains the advantage of targeting regional communities is that with population growth their market size can grow and populations can reach a size where they can support a large supermarket when a smaller alternative may have previously sufficed.

As the ACCC has raised, there are multiple stakeholders in the community that are concerned about the rise in influence of major supermarkets.  But restricting their expansion also has consequences.

Unsurprisingly, further away from capital cities and major regional centres the number of major supermarket stores declines with the capacity for stable communities to support them as viable businesses.  Instead smaller supermarket retailers, such as IGAs, often fill the marketplace because their size is better suited for smaller populations and are often an evolution of smaller, local stores.  But single supermarket towns also tend to have higher costs because of both absent competition and because the stores operate on higher cost structures by lacking the efficiencies of nation-wide logistics.

The downward impact from large supermarket chains is backed up by Federal government data.

The Commonwealth Department of Infrastructure and Transport's Bureau of Infrastructure, Transport and Regional Economics (BITRE) completed a study analysing the impact of having major supermarkets on rural and regional communities.  The results are compelling on prices. ⁽⁹¹⁾  The BITRE study collected data from 236 supermarkets in 132 locations across Australia in 2005 and 2005 across 200 food items and 20 non-grocery items. ⁽⁹²⁾

As Figure 21 from the study shows, there is a very high correlation between price levels and population sizes — particularly amongst independent retailers.  There is a higher consistency amongst major chain stores though they are less likely to have stores in lower population centres.

Figure 21 | Grocery stores by supermarket index and population, locations under 100,000, 2006

Source:  Bureau of Infrastructure, Transport and Regional Economics.  2008.  "Impact of location on grocery prices and availability in regional Australia".  Submission to the Australian Competition and Consumer Commission grocery inquiry by the Bureau of Infrastructure, Transport and Regional Economics.  Department of Infrastructure and Transport.  Commonwealth of Australia.  Canberra.  Australia.

Similarly, in lower population centres major supermarket chains have less of a presence.  Instead "independent stores" have a much higher market penetration, especially when towns have a population under around 4,000 persons.  At that level the number of major supermarket chains declines rapidly and is almost entirely serviced by independent stores.

The low number of major supermarket chains also has an effect on prices.  Figure 22 clearly shows that with lower population centres the cost of groceries can quickly escalate and can be exceedingly more expensive in small population centres.  These high prices above the mean are almost entirely provided by smaller independent retailers.

The conclusions are hardly surprising once additional costs, such as transportation, as well as lower levels of competition are factored in.

Importantly, the same impacts are rarely felt within the major supermarkets which have much more consistent pricing despite the remoteness of the location of the store.

As Figure 22 outlines the deviation of the cost on groceries vary within a limited range within 1,000km of capital cities, excluding a couple of very remote stores.

Figure 22 | The effects of distance on prices charged by major chains

Source:  Bureau of Infrastructure, Transport and Regional Economics.  2008.  "Impact of location on grocery prices and availability in regional Australia".  Submission to the Australian Competition and Consumer Commission grocery inquiry by the Bureau of Infrastructure, Transport and Regional Economics.  Department of Infrastructure and Transport.  Commonwealth of Australia.  Canberra.  Australia.

In this context it is clear that major supermarket chains bring at least a steadying influence on prices in smaller communities.  Though, the BITRE study went further.  The BITRE report concluded, "larger chains often maintain the price of a larger number of items regardless of location ... [and that] from the consumers' point of view, the presence of a major chain store in a locality is likely to provide groceries at price levels broadly similar to those obtained in similar stores in the capital cities". ⁽⁹³⁾

Overall the study concluded that there is a 20 per cent saving in the cost of goods in areas that have a major supermarket chain, and 17 per cent when adjusted for population.  Similarly, positive data was reported on product range.  According to the study major chains contained an average of 96 per cent of all available sampled goods, whereas smaller independent stores only held an average of 63 per cent. ⁽⁹⁴⁾

The unintended consequences of restricting expansion of major supermarkets would clearly result in price increases.  The best arbiter of whether new and regional communities can support a major supermarket is consumers, based on population size and consumption levels that prompt different supermarket chains to invest in their communities.

Figure 23 | Current and adjusted household food and nonRalcoholic beverages expenditure

Source:  My calculations based on ABS data

If ABS data is used for the approximate average household expenditure for food and alcoholic beverages the consequences of diminishing competition can broadly be calculated.  Such calculations assume that all food purchases are made in supermarkets, but the ABS does not provide disaggregated data.

As Figure 23 outlines, if a 17 per cent increase was applied on the ABS data because of reduced competition a rough estimate is that it could add up to $34.68 per week to household food bills, or up to $1,800 a year.

Food expenditure already disproportionately impacts on lower income households who spend a substantially more on food and non-alcoholic beverages than those with the highest incomes.  Any price increase from lesser competition will also disproportionately impact the poor.

Similarly, any price increase from less competition would hit those in regional communities and the new and outer suburbs of Australia's capital cities.  Considering many families move to new and outer suburbs and outside capital cities specifically because of cost of living pressure, especially related to housing, such increases in cost of living staples diminishes any advantage in moving to new and outer suburbs and the regions.

Any increase in the price of groceries would also have a multiplier effect.  By increasing the price of groceries those costs would then flow on to less available money for other businesses in regional communities and the new and outer suburbs of Australia's capital cities.  The impact would be a reduced standard of living as well as an impact on other small and medium businesses that also operate within those communities.

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12.0 CONCLUSIONS AND RECOMMENDATIONS

Consumer focused policy would lead to liberalisation of shop trading hours and removing impediments to new and established market entrants, not creating regulatory barriers.

While there may have been concerns about supermarket competition a few years ago, especially amongst the major supermarkets, the entrance of ALDI and Costco has driven heavy price competition.  The expansion of private labelled goods is directly in response to consumer demand.

Competition shouldn't just drive lower prices, but also deliver goods and serves that meet multiple concepts of "value" in demand from different segments of the market.

Consumers clearly want diverse product offerings.  Amongst some segments of the market consumers are demanding more upmarket goods.  Price-sensitive consumers are demanding cheaper products, including private labelled goods.  Convenience is consistently in demand from consumers.

The government's own data shows that where major supermarket are absent the average cost of groceries can rise by an average of 17 per cent.  When such price increases are applied to the average household food expenditure ABS data households could indicatively see an increase of around $34.68 per week in food bills, or more than $1,800 a year.

Higher prices disproportionately harm lower income earners who spend more of their income on food than higher income earners.  Higher prices also disproportionately harm new and outer suburban families and families in rural and regional communities who are less likely to have pre-existing access to major supermarkets.

Efforts by governments to promote competition rarely result in price decreases, but can increase costs to consumers, as has been identified as a consequence of supermarket regulation in the ACT.

Rather than seeking to regulate a competitive market, governments should:

• liberalise shop trading hours and remove remaining barriers to supermarkets meeting consumer demand.
• not regulate against supermarkets providing cheap goods in an effort to prefer producer interests, doing so will lead to higher prices that disproportionately harm lower income households.
• not regulate against private labelled goods which are being provided in response to consumer demand and competition.
• not restrict expansion of any supermarket chain.  Doing so would diminish competition and lead to higher prices disproportionately impacting those on lower incomes, those in new and outer suburbs and rural and regional communities.

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13.0 REFERENCES

Atkins, T. 2011. "Shop Trading Hours in Western Australia: A research report: A legal, social and economic analysis of the regulation of shop trading hours in Western Australia". Faculty of Law, The University of Western Australia.

Australian Bureau of Agriculture and Resource Economics. 2005. "Australia's Food Industry". Australian Commodities. V12. N2. 06/2005.

Australian Bureau of Statistics. 2011. "Australian Social Trends June 2011: Online @ Home". Commonwealth of Australia. Catalogue no 4102.0.

Australian Bureau of Statistics. 2008. "Submission to the Australian Competition and Consumer Commission Inquiry". Submission no 245. Commonwealth of Australia.

Australian Bureau of Statistics. 2011. "Household expenditure survey: Summary of results". Catalogue no 6530.0. Commonwealth of Australia.

Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

Bita, N. 2012. "Cost of living rising faster than inflation". The Australian. 2 August 2012.

Bowen, C. 2008. "CHOICE to provide expertise in managing GroceryChoice". Media release. Commonwealth Treasury. Commonwealth of Australia. 22 December 2008.

Bowen, C. 2008. "Rudd government releases its preliminary action plan in response to the ACCC's grocery inquiry". Media release. Commonwealth Treasury. Commonwealth of Australia. 5 August 2008.

Bureau of Infrastructure, Transport and Regional Economics. 2008. "Impact of location on grocery prices and availability in regional Australia". Submission to the Australian Competition and Consumer Commission grocery inquiry by the Bureau of Infrastructure, Transport and Regional Economics. Department of Infrastructure and Transport. Commonwealth of Australia. Canberra. Australia.

Commonwealth Treasury. 2011. "Australia's food processing sector: Submission by the Treasury to the Senate Select Committee on Australia's Food Processing Sector". Submission to the Senate Select Committee on Australia's Food Processing Sector. Parliament of Australia. 2012.

Coorey, P. 2012. "Coalition in a froth over milk". Sydney Morning Herald. 29 February 2012.

Cranston, M. 2012. "Falling grocery prices hit mall values". Australian Financial Review. 09/05/2012.

Deloitte. 2011. "The structure and performance of the Australian retail industry". Report. 10 June 2011.

Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

Department of Land and Property Sales. 2010. "ACT Supermarket Competition Policy Implementation Plan". ACT Government, Canberra, Australia.

Durie, J. 2012. "ACCC Chairman Sims negotiates supermarket wars". The Australian. 12/06/2012.

Fielding, Z. 2012. "Costco to expand its footprint". Australian Financial Review. 09/07/2012.

"Eye on Australia. 2012. "The Waiting Game: Feelings about life and the future". Grey.

Ferguson, A. 2012. "Heat to go on grocery duopoly". The Age. 12/06/2012.

Ferguson, A. 2012. "Pushing back against the big two". Canberra Times. 12/06/2012.

IBIS World. 2012. "Convenience stores in Australia: Industry performance". G5112.

IBIS World. 2012. "Liquor retailing in Australia: Industry performance". G5123.

IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111.

IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry at a Glance". G5111

IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry performance". G5111.

IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Operating Conditions". G5111.

Kretowicz, E. 2010. "Woolies, Coles in planning shut-out". Canberra Times.

Lane, S. 2009. "Govt pulls plug on Grocery Choice website". Australian Broadcasting Corporation.

Lau, B. 2012. "Food commodity prices set to keep rising". Australian Financial Review. 24/07/2012.

Lockie, S. & Pietsch, P. 2012. "Public Opinion on Food Security". ANU College of Arts and Social Sciences. June 2012.

Martin, J. 2009. "Review of ACT supermarket competition policy". Martin Stone Pty Ltd.

Mitchell, S. 2012. "Inner-city IGA stores to go upmarket". Australian Financial Review. 18/05/2012.

Mitchell, S. 2012. "Private-label grocery share tipped to reach 33pc". Australian Financial Review. 19/07/2012.

Mitchell, S. 2012. "Retailers face tougher scrutiny". Australian Financial Review. 15 June 2012.

Mitchell, S. 2012. "The man who put the fire in Coles". Australian Financial Review. 25/05/2012.

Mitchell, S. 2012. "Woolworths creeps into ACCC sights". Australian Financial Review. 21 September 2012.

Mitchell, S. 2012. "Woolworths launches plan to win loyalty, aisle by aisle". Australian Financial Review. 23/04/2012.

Norco Co-operative Limited. 2011. "The impact of supermarket price decisions on the dairy industry". Submission 23.

Parmalat Australia. 2011. "Submission to the Inquiry into the impacts of supermarket price decisions on the dairy industry". Submission 117.

PriceWaterhouseCoopers & Frost & Sullivan. 2012. "The rapid growth of online shopping is driving structural changes in the retail market". July 2012.

Productivity Commission. 2011. "Economic structure and performance of the Australian retail industry". Productivity Commission Inquiry Report. N54. 04/11/2011.

Samuel, G., 2009, "Presentation to the Senate Economics Legislation Committee Estimates", Parliament of Australia, Canberra, Australia.

Senate Standing Committees on Economics. 2011. "he impacts of supermarket price decisions on the dairy industry", referred 10 February 2011;  Select Committee on Australia's Food Processing Sector, referred 24 March 2011;  Senate Standing Committees on Economics, "Constitutional Corporations (Farm Gate to Plate) Bill 2011", referred 15 September 2011.

Sims, R. 2012. "Better communicating the ACCC's role, its approach to reviewing mergers involving small retail acquisitions and the benefits of competition in electricity". Speech to the Committee for Economic Development of Australia. 14/06/2012.

Sims, R. cited in Murphy, J. 2012. "Sims to target house brands". Australian Financial Review. 02/08/2012.

Smith, A. 1776. "An inquiry into the Nature and Causes of the Wealth of Nations".

Smith, M. 2012. "No end to this food fight". Australian Financial Review. 24/04/2012.

Sprague, J. 2012. "Metcash finds its voice in price war". Australian Financial Review. 09/07/2012.

Stanhope, J, 2010. "Boost for supermarket competition". Media Release. Australian Capital Territory Government.

Stanhope, C. 2010. "Supermarket plan to deliver choices, cheaper prices". Business and Industry Development, ACT Chief Minister's Department, ACT Government.

Whitehall and Associates. 2004. "Price determination in the Australian food industry: A report". Department of Agriculture, Fisheries and Forestry. Commonwealth of Australia. Canberra, Australia.

Wilson, T. 2012. "New poll: Households concerned about energy and food prices". Media Release. 20 March 2012.

Wood, R.J. 2010. "Forcing Prices Up: The impact of the ACT government's supermarkets policy and implementation". June.

Wood, R.J. 2010. "Green excuses: Collusion to promote protectionism". August 2010.

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ENDNOTES

1. Senate Standing Committees on Economics. 2011. "The impacts of supermarket price decisions on the dairy industry", referred 10 February 2011;  Select Committee on Australia's Food Processing Sector, referred 24

2. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

3. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

4. Smith, A. 1776. "An inquiry into the Nature and Causes of the Wealth of Nations".

5. Parmalat Australia. 2011. "Submission to the Inquiry into the impacts of supermarket price decisions on the dairy industry". Submission 117.

6. Norco CoDoperative Limited. 2011. "The impact of supermarket price decisions on the dairy industry". Submission 23.

7. Durie, J. 2012. "ACCC Chairman Sims negotiates supermarket wars". The Australian. 12/06/2012.

8. Wood, R.J. 2010. "Green excuses: Collusion to promote protectionism". August 2010.

9. Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

10. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry performance". G5111.

11. Ferguson, A. 2012. "Pushing back against the big two". Canberra Times. 12/06/2012.

12. Ferguson, A. 2012. "Heat to go on grocery duopoly". The Age. 12/06/2012.

13. Coorey, P. 2012. "Coalition in a froth over milk". Sydney Morning Herald. 29 February 2012.

14. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

15. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

16. Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

17. Sims, R. 2012. "Better communicating the ACCC's role, its approach to reviewing mergers involving small retail acquisitions and the benefits of competition in electricity". Speech to the Committee for Economic Development of Australia. 14/06/2012.

18. Sims, R. 2012. "Better communicating the ACCC's role, its approach to reviewing mergers involving small retail acquisitions and the benefits of competition in electricity". Speech to the Committee for Economic Development of Australia. 14/06/2012.

19. Mitchell, S. 2012. "Retailers face tougher scrutiny". Australian Financial Review. 15/06/2012.

20. Sims, R. 2012. "Better communicating the ACCC's role, its approach to reviewing mergers involving small retail acquisitions and the benefits of competition in electricity". Speech to the Committee for Economic Development of Australia. Australian Competition and Consumer Commission. Commonwealth of Australia. 14/06/2012.

21. Mitchell, S. 2012. "Woolworths creeps into ACCC sights". Australian Financial Review. 21 September 2012.

22. Sims, R. cited in Murphy, J. 2012. "Sims to target house brands". Australian Financial Review. 02/08/2012.

23. Australian Bureau of Statistics. 2011. "Household expenditure survey: Summary of results". Catalogue no 6530.0. Commonwealth of Australia.

24. Wilson, T. 2012. "New poll: Households concerned about energy and food prices". Media Release. 20 March 2012.

25. Lockie, S. & Pietsch, P. 2012. "Public Opinion on Food Security". ANU College of Arts and Social Sciences. June 2012.

26. Bita, N. 2012. "Cost of living rising faster than inflation". The Australian. 2 August 2012.

27. Mitchell, S. 2012. "The man who put the fire in Coles". Australian Financial Review. 25/05/2012.

28. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry performance". G5111.

29. Australian Bureau of Statistics. 2008. "Submission to the Australian Competition and Consumer Commission Inquiry". Submission no 245. Commonwealth of Australia.

30. Australian Bureau of Agriculture and Resource Economics. 2005. "Australia's Food Industry". Australian Commodities. V12. N2. 06/2005.

31. Australian Bureau of Agriculture and Resource Economics. 2005. "Australia's Food Industry". Australian Commodities. V12. N2. 06/2005.

32. Australian Bureau of Agriculture and Resource Economics. 2005. "Australia's Food Industry". Australian Commodities. V12. N2. 06/2005.

33. Cranston, M. 2012. "Falling grocery prices hit mall values". Australian Financial Review. 09/05/2012.

34. Lau, B. 2012. "Food commodity prices set to keep rising". Australian Financial Review. 24/07/2012.

35. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

36. Mitchell, S. 2012. "Woolies pushes its trolley too fast". Australian Financial Review. 12/12/2012

37. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Major companies". G5111

38. Adapted from Metcash. 2012. "Metcash Food & Grocery".

39. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111

40. Australian Bureau of Agriculture and Resource Economics. 2005. "Australia's Food Industry". Australian Commodities. V12. N2. 06/2005.

41. Productivity Commission. 2011. "Economic structure and performance of the Australian retail industry". Productivity Commission Inquiry Report. N54. 04/11/2011.

42. Productivity Commission. 2011. "Economic structure and performance of the Australian retail industry". Productivity Commission Inquiry Report. V56. 04/11/0211.

43. Whitehall and Associates. 2004. "Price determination in the Australian food industry: A report". Department of Agriculture, Fisheries and Forestry. Commonwealth of Australia. Canberra, Australia.

44. Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

45. Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

46. Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

47. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

48. Department of Agriculture, Forestry and Fisheries. 2012. "National Food Plan". Green Paper. Commonwealth of Australia. July 2012.

49. Commonwealth Treasury. 2011. "Australia's food processing sector: Submission by the Treasury to the Senate Select Committee on Australia's Food Processing Sector". Submission to the Senate Select Committee on Australia's Food Processing Sector. Parliament of Australia. 2012.

50. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111

51. Fielding, Z. 2012. "Costco to expand its footprint". Australian Financial Review. 09/07/2012.

52. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111

53. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry performance". G5111

54. Australian Bureau of Statistics, Household expenditure Survey, 2009-10, number 6530.0

55. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111

56. Australian Competition and Consumer Commission. 2008. "Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008". Commonwealth of Australia.

57. Smith, M. 2012. "No end to this food fight". Australian Financial Review. 24/04/2012.

58. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111.

59. Mitchell, S. 2012. "Inner-city IGA stores to go upmarket". Australian Financial Review. 18/05/2012.

60. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry performance". G5111.

61. IBIS World. 2012. "Convenience stores in Australia: Industry performance". G5112.

62. Bita, N. 2012. "Cost of living rising faster than inflation". The Australian. 2 August 2012.

63. Productivity Commission. 2011. "Economic structure and performance of the Australian retail industry". Productivity Commission Inquiry Report. V56. 04/11/0211.

64. Mitchell, S. 2012. "Private-label grocery share tipped to reach 33pc". Australian Financial Review. 19/07/2012

65. Productivity Commission. 2011. "Economic structure and performance of the Australian retail industry". Productivity Commission Inquiry Report. V56. 04/11/0211.

66. "Eye on Australia. 2012. "The Waiting Game: Feelings about life and the future". Grey.

67. Productivity Commission. 2011. "Economic structure and performance of the Australian retail industry". Productivity Commission Inquiry Report. V56. 04/11/0211.

68. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Industry at a Glance". G5111

69. Mitchell, S. 2012. "Woolworths launches plan to win loyalty, aisle by aisle". Australian Financial Review. 23/04/2012

70. Sprague, J. 2012. "Metcash finds its voice in price war". Australian Financial Review. 09/07/2012.

71. PriceWaterhouseCoopers & Frost & Sullivan. 2012. "The rapid growth of online shopping is driving structural changes in the retail market". July.

72. Australian Bureau of Statistics. 2011. "Australian Social Trends June 2011: Online @ Home". Commonwealth of Australia. Catalogue no 4102.0.

73. Bowen, C. 2008. "Rudd government releases its preliminary action plan in response to the ACCC's grocery inquiry". Media release. Commonwealth Treasury. Commonwealth of Australia. 5 August 2008.

74. The site was available at www.grocerychice.gov.au

75. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Competitive Landscape". G5111.

76. Bowen, C. 2008. "CHOICE to provide expertise in managing GroceryChoice". Media release. Commonwealth Treasury. Commonwealth of Australia. 22 December 2008.

77. Lane, S. 2009. "Govt pulls plug on Grocery Choice website". Australian Broadcasting Corporation.

78. Wood, R.J. 2010. "Forcing Prices Up: The impact of the ACT government's supermarkets policy and implementation". June.

79. Martin, J. 2009. "Review of ACT supermarket competition policy". Martin Stone Pty Ltd.

80. Martin, J. 2009. "Review of ACT supermarket competition policy". Martin Stone Pty Ltd.

81. Samuel, G., 2009, "Presentation to the Senate Economics Legislation Committee Estimates", Parliament of Australia, Canberra, Australia.

82. Department of Land and Property Sales, 2010, "ACT Supermarket Competition Policy Implementation Plan", ACT Government, Canberra, Australia.

83. Stanhope, J, 2010. "Boost for supermarket competition". Media Release. Australian Capital Territory Government.

84. Stanhope, C. 2010. "Supermarket plan to deliver choices, cheaper prices". Business and Industry Development, ACT Chief Minister's Department, ACT Government.

85. Kretowicz, E. 2010. "Woolies, Coles in planning shut-out". Canberra Times.

86. Bureau of Infrastructure, Transport and Regional Economics. 2008. "Impact of location on grocery prices and availability in regional Australia". Submission to the Australian Competition and Consumer Commission grocery inquiry by the Bureau of Infrastructure, Transport and Regional Economics. Department of Infrastructure and Transport. Commonwealth of Australia. Canberra. Australia.

87. IBIS World. 2012. "Supermarkets and other grocery stores in Australia: Operating Conditions". G5111.

88. Atkins, T. 2011. "Shop Trading Hours in Western Australia: A research report: A legal, social and economic analysis of the regulation of shop trading hours in Western Australia". Faculty of Law, The University of Western Australia.

89. IBIS World. 2012. "Liquor retailing in Australia: Industry performance". G5123.

90. IBIS World. 2012. "Liquor retailing in Australia: Industry performance". G5123.

91. Bureau of Infrastructure, Transport and Regional Economics. 2008. "Impact of location on grocery prices and availability in regional Australia". Submission to the Australian Competition and Consumer Commission grocery inquiry by the Bureau of Infrastructure, Transport and Regional Economics. Department of Infrastructure and Transport. Commonwealth of Australia. Canberra. Australia.

92. More information on the methodology is available in the original paper.

93. Bureau of Infrastructure, Transport and Regional Economics. 2008. "Impact of location on grocery prices and availability in regional Australia". Submission to the Australian Competition and Consumer Commission grocery inquiry by the Bureau of Infrastructure, Transport and Regional Economics. Department of Infrastructure and Transport. Commonwealth of Australia. Canberra. Australia.

94. Major chains product range varied from a low of 88 per cent to a high of 100 per cent, and independent stores varied from a low of 7 per cent to a high of 93 per cent.

This doomsday endgame could last a long time

Earlier this month, the Bulletin of the Atomic Scientists counselled the leader of the free world about the apocalypse.

''Dear President Obama,'' the journal's science and security board wrote in an open letter, ''2012 was a year in which the problems of the world pressed forward, but too many of its citizens stood back.''  They darkly warned of nuclear proliferation, bioterrorism, climate change, and ''cyber technologies'' which ''could trigger a new kind of self-inflicted Doomsday''.

Yes, doomsday.  The bulletin scientists are the keepers of the Doomsday Clock, a symbolic clock face that shows how close the world is to global catastrophe.  The clock is now at five to midnight.  Their letter announced it is unchanged since last year — the scientists are not budging.  According to this well-credentialled hive mind, we're still teetering on the edge of annihilation.  Indeed, we have been for 65 years.

But perhaps the scientists would be better described as the clock's guardians, a word which has a more mystical, Star Trek quality.  That's the thing about prophets of the apocalypse.  They're always so confident;  so impressed by their own insight.

When the clock was first set in 1947, it was seven minutes to midnight.  The furthest it has ever gone back is 17 minutes, at the end of the Cold War.  The bulletin first threw climate change into the mix in 2007;  a transparent bid for relevancy, just as using the word ''cyber'' is now.

The clock has some particular political views.  When Ronald Reagan entered the Oval Office they pushed it closer to midnight.  When Obama became president they eased the clock back.  Reagan had said that to end the Cold War, the free world would have to win it.  This was a lot more prescient than Obama's Nobel peace prize.

Of course, we're nowhere near five to midnight.  It's sometime in the afternoon.  The world is safer and more free than ever in history.  We got through the entire Soviet-American contest without a nuclear shot fired.  And even the most extreme models of global warming don't predict catastrophic destruction but gradual change.

To paraphrase Adam Smith, there is a great deal of ruin in a civilisation.  But to believe that problems threaten the civilisation itself is a triumph of fear over experience.  We should not be complacent.  But we should be sober.  Judgment Day keeps being postponed.

The Doomsday scientists are a secular variation on an old type — apocalyptic preachers in modern garb.  They're not talking about science, they're preying on anxiety.  Why would anybody really believe ''cyber technology'' would bring us closer to Armageddon?  No reason, unless they were convinced mankind is inherently suicidal.  The bulletin's open letter to Obama must be the first time software has been described as an omen of the end of days.

Still, a prophet who prophesied modest challenges to be overcome in the fullness of time would be ignored.  The end needs to be nigh.

An American preacher Harold Camping predicted the rapture would occur in May 2011.  He'd only made this prediction a few years earlier.  Just as he predicted in 1992 the world would end in 1994.  In other words, he gave enough time to persuade sympathisers it was going to happen, and not too long for them to lose interest.

Once again, poor old Camping had to explain why his prophecy didn't occur.  Secular millennialists don't embarrass so easily.

This was a lesson environmental fearmongers learnt early.  Paul Ehrlich's The Population Bomb (1968) is a famous book in the green tradition but few care to remember Ehrlich included specific scenarios of starvation and nuclear winter set in the 1970s.  The most fretful now simply say we've reached the climate ''endgame''.  Here's a prediction — that endgame will last for a very long time.

Armageddon sells.  We like drama, and nothing is more dramatic than global catastrophe.  The human brain isn't very good at dealing with risk.  We overestimate the likelihood of major, conspicuous events like nuclear war and terrorism, and underestimate more pedestrian dangers, like drowning in a bathtub.

And doomsday flatters those who fear it.  It's an in-group thing.  While the rest of the population naively goes about their business, insiders are worrying about events to come.  This is as true for the Christian kids who devoured the Left Behind books about the rapture — they are the saved ones who understand the secrets of the world — as it is for the Whitehaven hoaxer Jonathan Moylan.  Defrauding the sharemarket only seems ethical if you believe coal is an existential threat to civilisation.  And if you do, well, securities law is for mere mortals.

In a speech in 1903, an optimistic H.G. Wells conceded:  ''One must admit that it is impossible to show why certain things should not utterly destroy and end the entire human race and story.''  Hypothetical catastrophe has sustained apocalyptic preachers for thousands of years.

Wells is right:  we can't absolutely guarantee the worst won't happen.  But we should ignore the people desperate to assume it will.

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The Aussie dream one of the most expensive

The ninth annual Demographia survey of house prices across the world was published this week.

It again shows Australian house prices, adjusted for income levels, are well above those in the UK, US, Canada, and Ireland.

Out of the 81 large cities in the survey, Melbourne's prices were the fifth highest.

The typical Melbourne house costs 7 ^1/2 years' average household income, more than twice the household income required in Chicago, Houston, Ottawa and Atlanta.

If you have owned your home in Melbourne for the past 10 years ask yourself, ''Could I afford to buy it today?''

In spite of low interest rates, chances are you couldn't.

That's because over the 10 years the average house price increased by 92 per cent while average earnings increased only 68 per cent.

The reduced affordability is due to skyrocketing land prices-prices for the ''bricks and mortar'' component increased by only 28 per cent.

New Zealand also has high house prices.  Commenting on the survey, New Zealand's Deputy Prime Minister Bill English placed the blame on ''regulation that locks up land for development'' making it artificially scarce.

He said the NZ Government was addressing misguided environmentalism, which he blamed for the cumbersome and restrictive planning controls that cause the excessive prices.

Victorian Planning Minister Matthew Guy has tried to increase building land availability.

But so far he has had little success.  Prices have remained high and new starts have remained depressed.

Politicians favouring deregulatory measures that allow land development are thwarted by several factors.

Among these ate concerns by existing homeowners that increased land supply may dampen property values.

Recent home buyers in the outer suburbs may be especially fearful of seeing negative equity in their home values.

Adding to such fears are noisy environmental lobby groups seeking to prevent ''urban sprawl''.

Even though only 0.5 per cent of Victoria's land area is urbanised, these slogans are attractive to many in the media and to politicians, who oppose development.

In addition, the accumulated regulatory barriers are formidable.  Thus, in Victoria, even proposals inside the Urban Growth Boundary face an array of further regulatory hurdles to clearing land and building houses.

Plans need to be prepared and approved by multiple government agencies.  Surveys must ensure there are no rare species or ''threatened ecological communities'' on the land and woe betide a prospect should there be any ''remnant native vegetation'' or traces of aboriginal settlement present.

According to the Victorian Government's Growth Areas Authority, 540 different regulatory ticks are required between an area being designated as open to urban development and the completion of a house on it.  This means years of uncertainty and costly too-ing and fro-ing, all adding to the cost.

Regulation once in place attracts vested interests making it difficult to remove, even though it imposes colossal costs to consumers and businesses.

In Victoria, the Government has recently established a Red Tape Commissioner to tackle over-regulation generally.

Planning regulations are only one target area, but for people being denied housing by regulatory inflated land prices relief cannot come too soon.

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Shameless use of tax to fund rights attack

The Gillard government's proposed anti-discrimination overhaul — which would make it unlawful to discuss almost any political idea in the workplace — has been slammed by everyone from ABC chairman Jim Spiegelman to Australia's largest media organisations.

But the human rights lobby wants the government to go even further.  According to the Australian Human Rights Commission's submission to the Senate inquiry into the draft Human Rights and Anti-Discrimination Bill 2012, they would like it to be unlawful to discuss any controversial political idea in all areas of public life.

And they would like to see religious exemptions scrapped.

What makes these extraordinary proposals even worse is that the Human Rights Commission is doing it all on taxpayers' money.

The debate over the draft bill has revealed the network of taxpayer-funded organisations and individuals lobbying incessantly for more government interference in our lives.

This human rights lobby includes the various federal and state human rights and anti-discrimination commissioners, university-based research centres and a small army of lawyers and academics.

They fixate unwaveringly on the kind of rights that require the government to do something.

Usually this means restricting certain behaviour.  The traditional ideal of human rights concerned protecting our lives and property from government.  The new idea of human rights brings government into our lives and property.

The human rights lobby's favourite new right is freedom from discrimination.  In its eyes, the right to sue other people for hurt feelings trumps the right to freedom of speech.  It simply uses the language of rights as a tool to achieve its ultimate goal:  state control over our lives.

The Australian Human Rights Commission uses its privileged position to great effect.  The AHRC is funded by taxpayers at a cost of more than $15 million a year, and one of its stated goals is to provide ''advice and submissions to parliaments and governments to develop laws, policies and programs''.

Not only does the commission want the government to increase the restrictions on speech, but it even congratulates the government on its proposal to reverse the burden of proof for complaints of discrimination.

It is astonishing that an organisation ostensibly dedicated to human rights would recommend that the government scrap one of our oldest and most basic legal protections.

Unsurprisingly, the commission would itself benefit from a massive increase in discrimination claims.

All discrimination claims go through the AHRC first, and it is funded accordingly.  Any new responsibilities will require more staff and a bigger budget.

The commission is also the sole provider of an accreditation scheme for businesses' anti-discrimination policies, and it has the power to grant legal immunity to those that sign up.

In recent weeks, AHRC president Gillian Triggs has been quoted in the media saying that the draft bill might go too far.  But her comments directly contradict the commission's formal submission to the inquiry, which unambiguously recommends extension of the draft bill.

Its submission fails to mention the significant threat to freedom of speech that the proposed law poses.

Indeed, her comments come only after widespread public outrage over the draft bill.  So why isn't the instinct of the commission to protect human rights?

Human rights organisations lobby for government favours as much as businesses do.  The only difference is that the public is suspicious of crony capitalism, while the human rights lobby campaigns behind a veil of goodwill.

The relationship is mutually beneficial:  the government gets its policies legitimised by support from so-called human rights experts and the human rights lobby gets to expand its empire.  Never mind that these experts are funded, if not directly appointed, by the government itself.

Other wings of the human rights lobby have approved the draft bill and called for it to go further.  In language that could have come directly from the Gillard government's own communications team, the Human Rights Law Centre entitled its submission:  A Fairer, Simpler Law for All.  Just how a subjective legal test and a reversal in the burden of proof makes the law fairer and simpler is unclear.

Nevertheless, this kind of support gives excellent cover to the government.  Attorney-General Nicola Roxon's recent article on this page demonstrates the kind of doublespeak the government feels it can get away with when human rights experts have got its back.  It was full of the usual spin we've come to expect from government ministers.

But Roxon was also knowingly deceptive about how the draft bill threatens free speech.  Her assertion that ''it is not the case that any conduct that a person finds offensive will be unlawful'' is blatantly untrue.  That's what the draft bill says.  Are we supposed to just hope the Australian Human Rights Commission will dismiss threats to legitimate speech?

As the government looks to restrict our freedoms and control our lives, we should not overlook the role that the human rights lobby plays in the process.

If freedom is to thrive in Australia, this dangerous symbiotic relationship must be broken.

Anti-discrimination laws: an act of confusion

Even when discussing complex pieces of legislation, it's worth trying to get basic concepts right.

The Gillard Government's proposed anti-discrimination changes fail this test.  They artlessly try to blend two concepts together — discrimination and harassment.

But to harass someone and to discriminate against someone are different things.

If a person misses out on a job in favour of a less-qualified person because of their skin colour, then that's discrimination.  Harassment is different.  You harass someone when you intentionally disturb or upset another person.

They're both bad, certainly.  But they're conceptually distinct, and have been that way since the first federal anti-discrimination law was passed in Australia in 1975.

The Government wants to ''consolidate'' a whole bunch of bills concerning discrimination — including the Racial Discrimination Act and the Sex Discrimination Act — into a grand Human Rights and Anti-Discrimination Bill.

Simplifying law is a usually good idea.  Yet what comes out is an incoherent mess.  And it's hard for citizens to obey an incoherent mess.

For example, if the bill goes through the Parliament, it will be unlawful to treat someone unfavourably by offending or insulting them because of their political opinions, industrial history, or social origin in any work-related area.

The concepts of ''offend or insult'' come from existing harassment law.  Unfavourable treatment is the mainstay of discrimination law.  Fusing the two together may superficially seem like a good idea, but read the previous paragraph again.  What wouldn't be captured by this new omnibus bill?

All political opinions are offensive in some fashion — politics is about controversy.  Almost everywhere is ''work-related'' for someone.  Offence is in the eye of the receiver, not the giver.  And what on earth is ''social origin''?

These anti-discrimination changes have a long and sad history.

Way back in 2008, Kevin Rudd and his Attorney-General Robert McClelland announced a broad inquiry into Australian human rights protection.

They put Father Frank Brennan in charge of this National Human Rights Consultation.  That year was the 60th anniversary of the United Nations Universal Declaration of Human Rights — a document which Labor's HV Evatt helped draft.  McClelland used the Evatt Foundation as his platform to kick it all off.  There was a big song and dance about the whole thing.  The committee received tens of thousands of submissions.

But the ambitions of 2008 disappeared.  Kevin Rudd's hyperactivity became nervousness and uncertainty.  In 2010 the government rejected the committee's major proposal — to implement a national charter of rights.

Rudd was dumped.  McClelland was jettisoned from the Attorney-General position in 2011.

But one minor government response to the consultation was a promise to consolidate all existing anti-discrimination laws to reduce ''uncertainty''.  And once started bureaucratic process does not stop.

This is one reason the anti-discrimination bill has ''human rights'' in the title.  It's a grand phrase for something that is purportedly only designed to merge a few acts together.  It's good public relations as well.  Who could oppose human rights?

Yet the consolidation of anti-discrimination law was barely mentioned in the final report of the Rudd-era consultation.  And the report did not explain why it was necessary.  Last year, a discussion paper about the potential consolidation took the need for legislative consolidation as a given.  We seem to have skipped a step.  Why is this all so urgent?

In The Australian earlier this month Roxon suggested we need consolidation because ''the community at large, including lawyers, is unsure or confused about what might already be discriminatory''.

No doubt many people are confused.  That's what happens when governments pass a lot of laws.

But rather than clarifying existing prohibitions, Roxon's department have chosen a brute-force approach — they plan to make everything discrimination.  They haven't just consolidated existing law.  By mixing harassment and hurt feelings with discrimination they've dramatically expanded it, opening up vast new opportunities for litigation.  The draft bill eliminates confusion, sure, but replaces it with chaos.

Lost in all this is any recognition of the importance of freedom of association.

Free association is one of our least defended liberties.  It is just as much a human right as any protection against discrimination.  It appears in both the American Bill of Rights and HV Evatt's Universal Declaration of Human Rights.  But anti-discrimination law — a passion of the human rights lobby — has steadily eroded it.

Now organisations have freedom of association only if they meet one of the exemptions specified in law.  It is the responsibility of religious organisations to justify why they should be allowed to choose employees according to religious doctrine, rather than the government to justify why those organisations should be prevented from doing so.

We have had anti-discrimination laws for nearly 40 years.  They've taken on a life of their own.  The Government is now putting more effort into specifying what is permitted, rather than what is prohibited.

It's hard to think of anything more contrary to the principle of human rights than that.

Cut leviathan's hunger for tax

The death last week of Nobel prize-winning economist James Buchanan captured newspaper headlines around the world, and for good reason.

Taught economics by some of the leading figures of the Chicago School, Buchanan later staked his own path of intellectual originality by suggesting that politicians, just like market participants, act in their own self-interest, and that institutional reform is central to improving the integrity of fiscal and monetary policymaking.

These features of Buchanan's work deserved the recognition they received over the past week, but his original, but somewhat unheralded work, on the economics of federal systems of government, is also relevant, especially for countries such as Australia.

A key feature of Buchanan's thought on federalism is his unflinching advocacy of fiscal decentralisation:  that is, the assignment of taxing and expenditure functions to lower levels of government as much as practicable.

In his iconic book The Power to Tax, co-authored with Australian economist Geoffrey Brennan, Buchanan indicates that decentralisation erodes the natural tendencies of governments wanting to maximise their revenue collections at the expense of private-sector economic activity.

Federalism suppresses leviathan's revenue appetite because otherwise fiscally persecuted owners of capital and labour can relocate to lower-taxing jurisdictions, so long as free trade and migration within the federation is maintained.

Buchanan's essential prediction was that in a federal system, ''total government intrusion into the economy should be smaller, ceteris paribus, the greater the extent to which taxes and expenditures are decentralised''.

But to reinforce the compatibility of political action with the interests of the citizenry within a federal system, Buchanan also advocated that communities be permitted to secede from an existing federal country.

Writing in 1995, he said ''secession, or the threat thereof, represents the only means through which the ultimate powers of the central government might be held in check''.

Based on Buchanan's theory, one could speculate that the refusal to grant Western Australia secession in the 1930s subsequently reduced the threat to both federal and state governments that large numbers of people would seek to break away politically in response to high taxes and onerous regulations.

In addition to the idea of federalism as a political constraint mechanism, whether through mobility or secession, another major contribution by Buchanan concerns the question of fiscal equalisation.

One of Buchanan's earliest papers, published in 1950, shows how fiscal transfers between jurisdictions can be designed to internalise the fiscal externalities arising from the movement of labour in response to different taxing and spending levels presented by the state governments.

While this contribution on achieving fiscal equity within a federation remains influential, the 1950 paper was by no means Buchanan's final words on the matter.

Buchanan later recognised that a fiscal equalisation system could be adopted as a vehicle to enforce a high-taxing ''fiscal cartel'', within which the central government monopolises access to the major taxing bases and disburses excess revenues back to the states in the form of grants.

In effect, the risk is that fiscal equalisation could be used to suppress competitive federalism, thereby allowing all governments within the federal system to grow to a level beyond that otherwise preferred by citizens.

It is not unfair to claim that the modern Australian federal system, with its extreme degree of vertical fiscal imbalance, combined with the world's most complex fiscal equalisation process, reasonably approximates the fiscal cartel model depicted by Buchanan.

In a paper written in 2002, Buchanan defends the theoretical integrity of his original 1950 fiscal transfer scheme but poignantly observes that problems posed by political incentives and policy implementation must be explicitly accounted for when evaluating equalisation models.

The failure of governments and economists alike to sufficiently recognise these caveats represents a blind spot in the ongoing Australian debate about GST distribution between the states.  Recently a number of prominent Australian political figures, such as former prime minister Bob Hawke and former Queensland premier Peter Beattie, have argued the case for abolishing the states altogether.

Such arguments are at the pointy end of the peculiar disconnect between Australian and international narratives, and indeed practices, concerning the acceptance of federalism as an organising principle for collective action.

Indeed, most other mature federations around the world put Australia in the shade when it comes to the decentralised nature of their fiscal and policy decision making.

The US may be falling in economic freedom rankings, thanks in no small part to its federal government, but competitive, low-taxing states such as Texas shine as beacons drawing in capital and labour, helping to maintain some semblance of American dynamism.

The Canadian provinces are similarly influential within a decentralised government structure where Ottawa largely keeps its hands off provincial affairs such as education, while Switzerland has maintained a system of vigorous tax competition, aiding its unrivalled position as a global financial centre.

Given our emaciated federalism, in which the federal government keeps the power of the purse and runs policy roughshod over the service-delivering states, calls to allocate at least the most important governmental functions to Canberra regrettably have widespread, albeit superficial, appeal.

But instead of surrendering everything of consequence to the likes of the Gillard government, Australia should take a leaf out of James Buchanan's book and decentralise, placing the centres of political powers and responsibilities as close to the people as possible.

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Tax exiles vote with their feet

In 1979 Kingsley Amis, author of Lucky Jim, wrote to a friend, the poet Philip Larkin.  Amis's son Martin had just published his third novel.

Kingsley was a conservative who hated feminism, welfare and the Labour Party.  Martin was a young radical who hated nuclear proliferation and the Vietnam War.  Martin had just left Britain.

''Did I tell you Martin is spending a year abroad as a TAX EXILE?'', the elder Amis wrote, obviously annoyed.

''Last year he earned 38,000 pounds.  Little sh*t.  29, he is.  Little sh*t.''

So that's a conservative father angry at his left-wing son for avoiding taxes.  Imagine how Kingsley felt when Martin published his most famous novel a few years later:  Money, a satire on eighties greed.

Yes, people have strong feelings about tax exile.

Gerard Depardieu left France in December because he didn't want to pay president Francois Hollande's 75 per cent top rate — the so-called ''millionaire tax''.

The Rolling Stones, Marvin Gaye, Michael Caine, Noël Coward, David Bowie, Sean Connery, and the journalist David Frost have all at one time in their careers left home to find a cheaper tax rate.

But their actions are rarely welcomed by taxpayers who remain behind.  When Depardieu joined the tax exile ranks, the French press was furious.

Take this piece in Libération by another actor, Philippe Torreton:

You are leaving the French boat in the middle of a storm?

Scroll through the whole thing.  Even muddled by Google Translate it's extraordinary.  Angry, deeply nationalist, and betrayed.  Torreton pretty much accuses Depardieu of treason.

To be fair, Depardieu is no freedom fighter.  He has gone to Russia, a country now famous for locking up musicians.  And he's not just running away from taxes.  Depardieu didn't appear at a drink driving hearing in France last week.  But, then again, those aren't the reasons Torreton is angry.

Why do tax exiles spark so much resentment?  Our views on immigration-as-tax-avoidance expose deep political differences.

But these differences are implicit rather than explicit.  We're used to sterile, utilitarian debates about the size of government or economic regulations.  The Amis family would have split on these issues along standard left and right lines.  Tax exile raises deeper, thornier questions about the relationship between nation and individual;  between democratic obligation and liberty.

In many ways, it's like the debate about compulsory voting.  We're not sure what the social contract actually says.

Democracy is a mechanism for making collective choices.  Universal suffrage gives those choices legitimacy.  That's all good.  But what happens to those who object to a democratic decision?  Depardieu obviously disagreed that his tax rate should be 75 per cent.  So he left.  Is this legitimate?  Is he being fair to France?

Let me give the classical liberal answer.  When faced with something we dislike we have two choices.  We can use our voice to get things changed — we can vote or protest or complain.  Or we can exit.  Depardieu took his business elsewhere.

But voice and exit are not mutually exclusive.  The threat of exit adds strength to the voice.  The fear people will send their money offshore is a powerful limitation on how much governments can tax.

So French taxpayers owe tax exiles like Depardieu some thanks.  The actor's highly-publicised flight demonstrates emigration is not an idle threat.

Reflecting in his memoir about when the Rolling Stones left England, Keith Richards wrote that:

The last thing I think the powers that be expected when we they hit us with super-super tax is that we'd say fine, we'll leave ... They just didn't factor that in.

Governments don't always remember their power is not absolute.  Allowing citizens to leave is as powerful a check on state power as a constitution or a bill of rights.

And of course if we care about liberty, then the freedom for an individual to choose where they live has to be respected.

One major source of resentment about tax exile is that it is a luxury of the rich.  A French dock worker, no matter how heavily he feels the tax burden, will not be personally welcomed into Russia by Vladimir Putin.

This is a reasonable objection.  But it's directed at the wrong culprit.  Around the world, immigration policies favour high-skilled, high net-worth individuals.  They specifically and intentionally keep out the poor and unskilled.  This is obviously unjust, but immigration policies are to blame, not tax exiles.

Depardieu is not unique.  France is experiencing a wave of tax exile much like Britain before the Thatcher years.  Musicians and actors fled Britain's high tax rates in endemic numbers.  There's a great story about Robert Plant, lead singer of Led Zeppelin, dragging himself out of hospital after a car accident and rushing to the airport in order to maintain his British non-resident status for tax purposes.

There was such interplay between culture and taxation in Britain that musical genres could be defined by where the artists stood on the tax ladder.  In 1976 Mick Jones of The Clash summarised the difference between new punk and old rock by saying:

We're all down [on] the dole anyway, coppin' our money off Rod Stewart's taxes.

Jones was teasing.  Stewart had left Britain the year before.

Many British tax exiles went to France.  Today many French exiles live in Britain.

If Francois Hollande persists with his supertax on high income earners (not a sure thing, as the 75 per cent rate was recently ruled unconstitutional) then tax flight will shape French culture this decade as sure as it shaped British culture before Margaret Thatcher.

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Punish Greens fraudsters

The press release hoax by anti-coal activist Jonathan Moylan represents a new and insidious form of sabotage by green extremists against productive activity in this country.

A member of the green activist group Front Line Action on Coal, Moylan distributed a fake press release to media outlets stating that the ANZ Bank cancelled a $1.2 billion loan to the developers of the Maules Creek coal project, located in the expansive Gunnedah Basin of NSW.

The share price for Whitehaven Coal, the Nathan Tinkler-owned company granted a tenement to develop the mine, fell from $3.52 to $3.21 within less than half an hour on the back of the fake release.

The fall in share price effectively wiped about $314 million from the value of Whitehaven, a significant blow for many shareholders with a stake in the company.

Perhaps unsurprisingly, Green politicians and prominent left-wing commentators have quickly lined up to praise Moylan's actions.

Federal Greens leader Christine Milne supported Moylan's actions as being ''part of a long and proud history of civil disobedience'', whereas Lee Rhiannon tweeted a congratulatory note to Moylan ''for exposing ANZ investment in coal mines''.

The former head of the green think-tank Australia Institute Clive Hamilton described the action as a ''highly creative'' example of ''virtuous malfeasance, hostile actions motivated by the public good aimed at damaging a company's interests''.

While the green-left might seek to elevate Moylan's actions to those of Mahatma Gandhi, it is closer to the truth to contend that the Moylan affair is a white-collar extension of systematic attempts by extremists to sabotage the mining sector, just as they have done to the native forest industry.

The symbolic epicentre of green activism against forestry companies and workers is in Tasmania, the political home of the Greens leader who herself has been intimately involved in campaigns to halt value-added production within the industry.

When people with extreme mindsets cannot win an intellectual argument in the first instance, they tend to resort in exasperation by throwing their own bodies against their perceived grievances.

And this was certainly the case for at least three decades, with many scenes documented of ecological protestors chaining themselves to trees, sabotaging bulldozers and other forestry capital equipment, and marching in numbers down the streets of Hobart and other capital cities.

Law enforcement authorities, who gradually dealt with violations of private property and infringements upon productive activity with an increasingly light touch, have done little to deter the desire of the extremists to oversee the demise of forestry as a viable concern in the Apple Isle.

Subsequent efforts to alter public opinion, such as indoctrinating school children into accepting the environmental agenda and tiring a protest-weary general public into acquiescing to the extreme green point of view, translated into the gradual infiltration of the original anti-foresters into houses of parliament.

The counterintuitive emergence of wealthy green patsies, such as Graeme Wood and Jan Cameron, led to unprecedented funding for the Greens not to mention the unconscionable act of buying the Triabunna woodchip mill for the purpose of closing it down.

The consequence of the unrelenting campaign by extremists to clamp down on timber production is the state of Tasmania has been diminished to that of a mass shrubbery, with residual eco-tourism activities on the side acceptable to the greens' expectations.

With an underlying world view that any productive activities which add value to natural resources is sacrilegious, the environmental campaigners have wandered from the dark, locked-up-by-regulation forests onto the plains of rural and remote Australia to repeat their anti-development mayhem against mining.

Just as their compatriots did in Tasmania, the green extremists have been fond of chaining themselves to railways and port infrastructures attached to coal and iron ore mines, blocking access to mining company-owned vehicles and other equipment, and unfurling anti-mining banners across bridges, buildings and other public places in the capitals.

The white-anting of Whitehaven's share price by Jonathan Moylan was applauded by the likes of Greenpeace as a new twist on the age-old protest movement adage of ''sticking it to the man''.

The immediate problem here is that the man, Nathan Tinkler, has by virtue of being the company's largest shareholder provided the company with equity finance assisting it in its endeavours to build a capital and employment base, benefiting thousands of men and women both directly and indirectly.

The broader problem is that this episode signals to the global mining investment community of the risks of attack by wilful anti-mining agitators against prospective ventures in Australia.

So, what is to be done?

In the first instance fraudulent activities of the nature conducted by Moylan ought to be prosecuted to the full extent of the law, and there have been reports suggesting the Australian Investments and Securities Commission is presently investigating the matter.

But there are also broader issues that must be confronted.

Companies should take a more willing stand against environmental NGOs and other extremist groups who demand that they exercise ''corporate social responsibility'' or cough up some ''social license'' to exist.

After all, one does not rationally deal with terrorists by acceding to their demands so why bow to the agenda of economic extremists who demonstrate no limit to their preparedness to frustrate growth and development?

With a federal election expected for later this year the Greens political party should be repudiated at the ballot box for its consistent hostility towards the mining sector, which has arguably held the Australian economy afloat during the post-global financial crisis stagnation.

The microscope of scrutiny should also be firmly trained on the federal government, presently on political life support thanks to Green preferences.

The maintenance of stringent environmental approval regulations are inducing significant delays for lucrative mining developments, and the bevy of carbon dioxide and mining taxes unduly erode the bottom line of profitable firms that do little but employ many thousands of Australians and augment our export incomes.

Although Australia has already inflicted much economic self-harm upon itself in response to the extremists' pressure, the best way to start rolling back the damaging green policy legacy is to draw a firm line against sabotage in all its forms affecting the mining sector.

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America fell off the fiscal cliff a long time ago. Now it's all about the landing

Karl Marx famously said history repeats itself:  first as tragedy, then as farce.

After avoiding the ''fiscal cliff'' a fortnight ago, the US faces yet another budget crisis in two months' time.  Yes, another one.  Another round of brinkmanship, another round of negotiations.

So, Karl, what comes after farce?

The deal struck between Republicans and Democrats on New Year's Day merely postponed what has been termed ''sequestration'':  a provision in a 2011 bill that automatically cuts government spending across the board if Congress won't reduce spending itself.  But this is all more a political crisis than an economic one.  The US budget drove off the fiscal cliff a long time ago.  This is the fifth year in a row the budget deficit will be above $US1 trillion — that is, there is a trillion dollar difference between what the government spends and what it taxes.  Out of a $3.6 trillion budget, this is an enormous shortfall.  A trillion dollars is nearly the size of the entire Australian economy.

The responses are predictable.  Democrats think taxes are too low, and want to raise them.  Republicans think spending is too high.  Yet for some reason it's fashionable in Australia to chalk the madness of the US budget crisis solely up to nut jobs in the Republican Party.  Wayne Swan called them ''cranks and crazies''.

According to received wisdom, Barack Obama and his fellow Democrats are pragmatic and reasonable while trying to negotiate with gun-wielding Tea Party fanatics across the aisle.  This is nonsense.  The Democrats are being just as stubborn as the Republicans, just as political, and, if anything, are more delusional about what has to be done to keep the country solvent.

In the middle of the negotiations, Obama reportedly told the Republican Speaker of the House, John Boehner, that ''we don't have a spending problem''.  Really?  Spending in the US budget has doubled since Bill Clinton left office.  It's grown far quicker than inflation or population growth.  What on earth would a spending problem look like?

The very bill that held back the crisis on January 1 shows how ludicrous Obama's claim is.  Buried in the 157-page bill are taxpayer subsidies for all sorts of weird and wonderful things:  two and three-wheeled electric vehicles, car racing, and even asparagus farming.  Reckless spending is pathological.  They can't help themselves.  Couldn't the government simply ramp up taxes on the rich?  The rich are always good for money.  As the Cato Institute's Michael D. Tanner has written, even if the government confiscated every dollar of income the rich of America earned in one year, there still wouldn't be enough.

Millionaires and billionaires earned $840 billion in 2010.  That money wouldn't cover the trillion dollar budget shortfall.  And even if the government confiscated everything they owned it wouldn't pay off accumulated US debt.  There's too much.

So it has to be spending.  And the only way spending is going to be reduced is if Congress insists.  Thank god for multiparty democracy.  But we can't exonerate the Republicans.  The Iraq war and the bank bailouts happened under George W. Bush.  And the reason Republicans are desperate to avoid the automatic spending cuts is because those cuts disproportionately target the military.

As they should.  A massive 48 per cent of all military spending on the planet is spent by the US.  The defence budget has nearly doubled since the Cold War.  There are still 75,000 US troops in Europe defending against a non-existent Soviet threat.  But sophisticated Republican thinking on foreign policy has disappeared to such a degree that military spending is sacred.  They won't touch it.

So sequestration may not be too bad.  Having your government cuts done automatically isn't the best way to go about things, but at least it's something.  American taxpayers might hope the next round of budget negotiations fail.

The Nobel-winning economist James M. Buchanan died last week.  Buchanan made his name by developing a theory of how public spending spirals out of control.

It's in the interest of taxpayers to keep taxes low, and in the interest of politicians and bureaucrats and special interests to keep spending high.  The only solution, Buchanan argued, was to write rules which prevented politicians from being reckless with taxpayer money.

In a way, that's what the fiscal cliff issue is all about:  constraining politicians.  Same with the ''debt ceiling'' — a legal limit on how much the government can borrow.  The current proposal to mint a trillion-dollar platinum coin is just a tricksy way to get around the limit.

But Congress will increase the debt ceiling.  It always has.  Buchanan would say a rule about government debt is a good idea.  But you have to enforce the rule somehow.

In March, Congress will kick the can down the road again.  Politicians first and foremost want to get to the next election.  But the US has already gone off the fiscal cliff.  We don't know what will happen when it hits the ground.

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Seeing red — and Greens

If someone vandalised a windfarm, Greens leader Christine Milne might feel a bit different about the virtues of civil disobedience.  Likewise if someone sent out a fraudulent press release about Wotif, and the company's share price fell 8 per cent.  The founder of Wotif, Graeme Wood, donated $1.68 million to the Greens.

At one level, Milne's response to the stunt that caused the shares of Whitehaven Coal to fall 8.8 per cent and which wiped $314 million from the company's value, is extraordinary.  As a democratically elected politician she can criticise laws and advocate they should be changed, but defending breaking laws is in an altogether different category.

Milne said the stunt was ''part of a long and proud history of civil disobedience, potentially breaking the law, to highlight something wrong''.  It would be interesting to know what other laws Milne believes should be broken in order to ''highlight something wrong''.

Jonathan Moylan is no Gandhi, Emily Pankhurst or Rosa Parks.  For Milne to put Moylan, the environmental activist who impersonated an ANZ Bank employee and issued a fake press release claiming the bank had withdrawn funding from Whitehaven, in the same category as those who have fought for basic human rights reveals an ignorance of history and a complete lack of perspective.

Milne will soon discover that advocating civil disobedience can quickly get quite tricky.

There are lots of people who feel strongly about lots of things.  In our system of government the way we decide the limits of what a person can do about things they believe in strongly is through the ballot box.

The Greens have been enthusiastic supporters of proposals to regulate the media and limit freedom of speech.  Many people feel such proposals are ''wrong'' and have no place in a country like Australia.  Keith Windschuttle, the editor of Quadrant,  said of the potential laws last year that if such an ''oppressive scheme is ever implemented, we would feel compelled to defend the long tradition of press freedom by engaging in civil disobedience.  While ever I am editor, Quadrant  would not recognise the News Media Council's authority, we would not observe its restrictions, and we would not obey its instructions, whatever the price.''

No doubt Milne feels just as strongly about stopping coalmining as Windschuttle does about defending freedom of speech.  It's unlikely, though, that Milne would come out and defend in this case Windschuttle's right ''to highlight something wrong''.

At another level there's nothing extraordinary at all in Milne's defence of what Moylan did.  It's just another example of the ridiculousness of the Greens.  After all, this is a party whose former leader addressed himself to extraterrestrials and who supports ''One World Government''.  On the very rare occasions when the media applies any scrutiny to the Greens, their supporters rush to cry foul.  After the ABC's Chris Uhlmann dared to ask Bob Brown about how the Greens proposed to replace the revenue lost if Australia's coal industry was shut down, GetUp! launched a petition complaining about the ABC.

The policies and behaviour of the Greens would all be something to laugh about if it wasn't for the fact that Julia Gillard relied on the Greens to make her Prime Minister, and that she relies on the Greens to get her legislation through the Senate.

The relationship between the Greens and the Liberal Party is a lot more interesting.  The Greens have their sole representative in Parliament's lower house because at the 2010 federal election the Liberal Party urged Liberal voters in the seat of Melbourne to give their second preference vote to the Greens rather than the Labor Party.  The justification for the Liberals' decision was tactical.

The decision a few months later of the Victorian Liberal Party to do the opposite and preference the Greens behind the ALP at the Victorian state election is credited as being one of the reasons Ted Baillieu won government by one seat.

When Milne this week took it upon herself to decide who can and who can't break the law, she again revealed the Greens' extremism and their attitude to things like the rule of law.

She has also given the Liberal Party yet another reason to preference the Greens last at this year's federal election, and so eliminate the Greens from the lower house.

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Obama gets real with appointment of new defence secretary

Since the Iraq invasion nearly a decade ago, it has been evident that the two major US political parties have undergone a role reversal on national security:  In historic terms, this is remarkable.

Once upon a time, Republicans were associated with ''realism'', a foreign policy that stressed an unsentimental focus on clearly defined economic and strategic national interests, pursued with a prudent calculation of commitments and resources:  Remember Dwight Eisenhower's warnings of sweeping ambition and the ''military industrial complex''.

That was then:  In the post-9/11 era, however, it is Republicans, especially neo-conservatives, who have become idealists bent on beefing up the defence establishment and remaking the world in America's image.

Meanwhile, Democrats had long been the great promoters of morality and a Pax Americana:  Recall John F. Kennedy's call for the US to ''pay any price'' and ''bear any burden'' in the cause of liberty:  In the past decade, however, it is Democrats who have embraced a more realist foreign policy that is free of the ideological hubris that led to the Iraq war.

This history is useful in understanding President Barack Obama's decision to nominate Chuck Hagel as his defence secretary.

A decorated Vietnam war veteran and two-term Republican senator, Hagel emerged as a leading realist critic of the Bush doctrine of preventive war, regime change and a division between those ''with us'' and ''against us'':  Among other things, Hagel lamented that the Bush administration had been dismissive of unpleasant compromises that a messy world inevitably demands.

Republicans in both Congress and the White House were outraged that one of their own had the gall to criticise his own side:  Meanwhile, Hagel's views not surprisingly resonated with many Democrats, not least Barack Obama with whom the maverick Republican served in the Senate for four years.

Hagel's appointment as defence secretary is further evidence of the President's desire to redefine the US role in the world in a way that fits America's more limited resources:  That includes paring down the bloated Defence Department, drawing down from Europe and disengaging from the Middle East.

True, Obama himself has mouthed platitudes about US global pre-eminence:  He has escalated drone strikes against Islamist terrorists:  He has also supported a ''pivot'' of US forces towards East Asia, which includes the Marine rotation to Darwin, something Hagel will continue to support.

Still, it's worth remembering that in the past four years Obama has jettisoned his predecessor's hawkish language of the ''Axis of Evil'' and ''war on terrorism'':  Under his leadership, Washington has kept out of hot spots such as the Syrian civil war while playing down the prospect of another preventive war in the Persian Gulf.

As for Israel's decision to expand West Bank settlements, his secretary of state Hillary Clinton denounced it as ''unhelpful'' — a change in tone that Jerusalem and Washington's powerful Israel Lobby have noted with alarm:  During last year's presidential campaign, moreover, Obama consistently declared that ''nation-building begins at home''.

All of this suggests that, with some qualifications (such as the troops surge in Afghanistan), Washington's policy stresses caution, prudence and discrimination in the world:  It is also one that reflects public attitudes:  According to a Chicago Council of Foreign Affairs survey last September, Americans are less likely to support the use of force in many circumstances and more likely to endorse defence spending cuts.

Why, then, will Hagel draw sharp criticism during his confirmation hearings?  Because many Republican senators, and even some Democrats, think their former colleague is soft on Iran, hostile to Israel and anti-military.

Never mind that Hagel does not rule out an attack on Tehran's nuclear facilities:  (He merely thinks the costs of any pre-emptive strike should be carefully weighed.)

Never mind that Hagel has won the support of the large and peace-oriented segment of pro-Israel opinion:  (He merely attracts the ire of the right-wing Israeli government's supporters in Washington for occasionally criticising Israel's military exercises and settlement excursions.)

And never mind that the US defence budget has nearly doubled since 9/11 and that Washington spends about as much on the military as the world's remaining nations put together.

Today's Republicans promote a domestic policy that seeks to downsize government and a foreign policy that is bound to increase it:  Hagel recognises that both goals are fundamentally incompatible and that defence spending often falls substantially as the US ends military actions.

Hagel is right on all these matters:  As the Bush era showed, idealism run amok is expensive — costly in blood and treasure as well as credibility and prestige:  In appointing Hagel as his defence secretary, Obama is recognising this reality.

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We could have a stronger economy

Trade Minister Craig Emerson has listed 13 reasons on why he is optimistic about Australia's growth prospects:  Among these is an improvement in national savings and increased investment.

As has always been the case, investment is the key to growth in gross domestic product:  And savings are the prerequisite for investment.

Of course, investment may not lead to economic growth if it is misdirected, as was the case in Communist countries:  Regulations may also dilute the impact of investment by requiring superfluous additional expenditures or, as was the case in Australia with tariff protection, bringing a misallocation in spending.

There are many such qualifications about the potency of investment as the instigator of growth but, nonetheless, it and hence saving is the dominant source of higher living standards.

High savings rates differentiate the rapidly growing developing country economies from those of the economically languishing developed world:  Compared to levels of around 20 per cent in developed economies (25 per cent in Australia) the savings share of GDP in China is a colossal 50 per cent — rather more than the 40 plus per cent registered in Japan and Singapore at the height of their growth surges:  India also has a high savings rate and might be able to use its savings more efficiently than China as a result of having a lower share of investment directed into state controlled enterprises, which, even though corporatised, are likely to have efficiency deficiencies.

Even though some of the savings of both Indians and Chinese are directed to covering budget deficits in the developed world, the expanded investment these savings permit means there is little doubt that their growth will be maintained for many years.

This propitious basis for continued expansion in the rapidly growing developing country behemoths is further enhanced by their low levels of government spending, which is in the main redistributive rather growth-inducing:  The size of government within GDP remains well under 30 per cent in China and India compared with 35-40 per cent in the US, Japan (though rising rapidly) and Australia:  Europe is commonly over 45 per cent with France at 56 per cent.

Borrowing levels exacerbate the negative effects of budget deficits and are 8-10 per cent of GDP in the US, Greece, Spain and the UK:  India also has a budget deficit in this league:  Australia's budget deficit remains more manageable, while China glows with a deficit of only 1 per cent of GDP (and the Germans are even more prudent).

Finally there is debt:  The importance of this is sometimes dismissed by those observing that British sovereign debt in 1815 was 250 per cent of GDP, a level approached only by Japan today:  But the level of non-sovereign debt 200 years ago was relatively low compared with today:  Moreover, contrary to current policies, the British approach two centuries ago was to combat indebtedness by rigorous expenditure trimming.

Today, among the affluent nations, Australia is reasonably well placed:  As well as having a budget deficit and debt levels lower than in other countries, growth remains positive a result of us supplying the booming Chinese and Indian economies:  Mr Emerson recognises this in his 13 reasons for optimism, but is unable to understand that our regulatory and tax regimes mean we have failed to fully exploit our advantageous situation and that we are precariously placed as a supplier in a world of many rivals.

Moreover, Treasurer Wayne Swan has now had to acknowledge that we are now in budget deficit territory:  In addition to the profligate spending the government has already unleashed there is a stockpile of measures being incubated:  These include the vast new expenditures lined up on disability pensions and the Gonski education splurge.

Whether or not these expenditure increases are warranted, our capacity to pay for them is being undermined by productivity-sapping carbon taxes and renewable energy standards, and resource rent taxes that hit at exploration, which is the R&D of mining:  Added to these are measures that reduce labour market flexibility including laws that are more forgiving of union thuggery and reintroduce mandatory penalty rates.

The capital, largely in the form of new mining investments, that we have built up to supply demand in the successful economies to our north allowed us to ride out the post 2007 economic storms:  We should have done better but government policies are now creating conditions that will further undermine the enterprises that have brought the modest success we have enjoyed this past four years.

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Both sides of politics should cease nanny-state meddling

Stopping the assault on people's freedom requires an attitudinal change to the role of government.

Last week Nick Cater wrote on this page, in ''Do-gooder laws nothing but a drag'' (January 3), about the dodgy social economics of anti-tobacco advocates who use what they admit are unrealistic assumptions and calculate costs without factoring in savings.

But anti-tobacco crusaders are not alone:  Similarly spectacular calculations have been made that purport to show that the social costs of alcohol consumption are about $15 billion a year.

Yet, subsequent industry-funded research found that more than $10bn of this amount was in private costs, such as a Sunday morning hangover:  Instead, public costs were closer to $3.8bn — less than the revenue that governments collected from taxes and excises on booze:  So, as with tobacco, government is a net beneficiary from the consumption of alcohol.

Unfortunately, these aren't isolated examples of the use of questionable ''social'' economics:  Similar methodology is used by health sociologists to tenderise the public into forgoing choice and to shock politicians into taxing, regulating and banning behaviours even if there will be limited benefit.

The NSW and Victorian governments have now banned solariums because tanning can contribute to the ''risk'' of cancer:  Meanwhile a giant, publicly available nuclear ball of gas emitting UV rays, colloquially known as the sun, continues to operate unregulated.

But manufacturing evidence to justify government encroachment over individual choice is only a symptom:  The much bigger issue is the belief that it is the role of government to decide how people live.

The foundations of liberal democracy are that the framework of government should provide for individuals to pursue their own interests:  In differing forms, Australia's mainstream political parties have traditionally subscribed to this governmental approach.

To varying extents, Liberals and Nationals have instinctively favoured empowering individuals to promote societal and economic growth:  Throughout most of the 20th century, a labourist Labor Party prioritised the dignity of workers and unionists, believing their interests were promoted by improving working conditions and their material lot:  But at the heart of both philosophies was a respect for the individual and their choices.

That liberal consensus no longer applies:  Having largely abandoned labourism, and coaxed by the Greens on its far-left flank, Labor has adopted a contemporary form of late-19th-century progressivism.

Contemporary advocates for progressive politics conveniently confuse the term progressive with progress:  But in political terms they mean radically different things.

Coupled with British Fabianism, progressivism philosophically promotes the idea that the power of government should be imposed to soften the consequences of an economy and society where free people pursue their own interests.

The fallacy of progressivism is that it views the economy and society as a playing field controlled by a government dashboard of levers and dials that can be tweaked to achieve an artificial level playing field.

Taxation provides the perfect example:  Progressives impose escalating taxes on an individual's income to help low-paid workers, and concurrently apply sin taxes that disproportionately hit the consumption habits of the same lowly paid people:  Similarly, energy policies (such as the carbon tax and the solar feed-in tariff) tax into competitiveness inefficient renewable technology, but act as a subsidy for multinational corporations that is paid for through the increased electricity bills of working Australians.

It's ironic that the two largest advocates for progressive, nanny-state regulations are those who are also the biggest advocates for a woman's right to choose what to do with her body.

In the 2006 debate on the use of RU486, former health minister and the present Attorney-General Nicola Roxon argued:  ''I do not believe that parliament should be some busybody neighbour or social policeman in our community.''

Tanya Plibersek, who is now the Health Minister, argued she ''respect(ed) women enough to believe that they have the ability and right to make such decisions for themselves''.

Sage words:  But they apply them only to abortion, and not when this principle conflicts with their government's policy priorities:  So many government encroachments into people's lives (for example alcopops taxes) are justified on the grounds of rising healthcare costs.

The models for progressivism and for liberal democracy are fundamentally contradictory:  Progressives look to the power of government to manage society and the economy top-down, while liberals use government to empower individuals to contribute to society from the bottom up.

The Centre-Left used to subscribe to a form of liberal democracy:  Today it has opted for progressivism.

The Centre-Right is also not immune from this impulse, as the absurd ban on solariums attests.

So the role of government has become to run a technocracy, the McKinsey consulting company view of the world where society is run by models and data is used to inform ''evidence-based policy'' to endlessly justify increasing the power of bigger government at the expense of rapidly shrinking citizens.

But progressive technocracies are intellectually vapid because they assume that the job of the government is to act, without questioning whether government should interfere in the first place.

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Les Mis: a revolution for our times

What do the revolutionaries in Les Misérables actually want?

This is not a pedantic question:  Victor Hugo's 1862 Les Misérables — or, at least, its 1980s musical adaptation — is now deeply embedded in the West's popular consciousness.

Its popularity extends far past those who know anything of 19th century French history:  Indeed, for many people the musical is a stand-in for the entire French Revolution, although it depicts events that occurred many decades later.

Popular culture profoundly shapes our political beliefs, and the idea of rebellion against injustice still resonates even in the democratic era:  See, for instance, Occupy.

Even those who haven't seen the musical would know its broad strokes:  A former convict who has broken parole tries to build a virtuous life while on the run:  The culmination of his personal struggle coincides with a doomed Paris uprising led by idealistic students.

But that uprising seems to be against ... what?  The monarchy?  A general sense of inequality?  It's not called Les Misérables — the victims, the wretched ones — for nothing:  The musical's logo incorporates an engraving of a young girl in rags:  The 2012 film has an energetic makeup artist who gives the poor of France gratuitously broken teeth and cholera.

But it's never clear why any of the students believe economic injustice will be resolved by barricading off a few city streets:  The student revolutionaries are hopelessly vague about their goals:  They're going to ''cut the fat ones down to size'':  There's some suggestion of a utopian ''tomorrow''.

The uprising depicted in Les Misérables was a real uprising that happened in June 1832:  It was an aftershock of a bigger political upheaval just two years earlier, which had replaced the royal restoration under the House of Bourbon with a new constitutional monarchy under the House of Orléans.

Those who really fought on the 5th and 6th of June 1832 were opposed to the new Orléanist monarchy, but for many different reasons:  There were radical Republicans, who wanted parliamentary democracy and universal suffrage:  There were also ultra-Royalists, who wanted the reversal of all the gains of 1789, and Bonepartists, who wanted to restore French imperial glory as it was under Napoleon:  With such a bizarre coalition, no wonder the people of Paris slept in their beds that night.

And France was hardly the stagnant, rotting, unchanging regime the musical suggests:  Between 1796 (when our hero Jean Valjean was arrested for stealing a loaf of bread) and 1832, France was governed by no less than five political systems, from the revolutionary Directory to the monarchy after 1830.

All this politics is missing in the musical, replaced by a vague sense of injustice and a group of students with a serious martyr complex.

Sure, the musical is a musical:  You can't ask for too much political exposition in songs:  It's easier to find a rhyme for ''love'' than a rhyme for ''chronic wealth disparity'' or ''post-revolutionary dynastic confusion''.

But Victor Hugo's original novel is not a whole lot clearer:  In his 2007 book The Temptation of the Impossible, Nobel laureate Mario Vargas Llosa argues that Hugo, too, is hopelessly vague on the purpose of the revolt:  One student forecasts if they succeed ''monsters will have given way to the angels'':  But that's about as specific as it gets.

One way to join the dots between the poor on the streets and the students' bloodshed is to depict the latter as proto communists:  The students might be Bolsheviks dedicated to a redistributive paradise.

But the narrator of Les Misérables was hostile to communism, writing that ''equal sharing abolishes competition and, in consequence, labour''.

And the cruellest oppression in the story isn't economic:  Hugo reserves his biggest criticism for the legal system:  Hugo himself was a political drifter, starting as a conservative royalist and ending life, loosely, as a liberal or a social democrat:  Virtually his only constant belief was opposition to the death penalty.

We think of Les Misérables as a primarily a story about revolution and social oppression:  The musical does not disabuse us of this idea:  But it is wrong:  Hugo is more preoccupied by God than politics.

The revolutionary students do not believe their uprising will succeed:  As Vargas Llosa writes, the students ''know and accept that they will be annihilated because this is the role that they must play'':  What comes across as a martyr complex in the musical is more for Hugo an acceptance of fate and the will of God:  The entire story is a grand morality tale of fate and redemption.

Contemporary versions of Les Misérables struggle to communicate Hugo's essentially religious message:  We live in a secular age:  Faith is a niche topic not a mass one.

Yet a modern reader can't help be struck that the first 70 or so pages of the novel are a detailed profile of someone marginal to the plot — Bishop Myriel, the good priest who forgives Jean Valjean for stealing his silver:  If the opening of a story sets its tone, then this is totally different from the vision of penal hardship set by the musical.

Hugo stripped the politics out of the 1832 uprising to tell a religious story:  Then the musical adaptation stripped most of the religion away.

There's not much left, except a vague exhortation to violently, pointlessly die on behalf of the poor:  The students are engaged in a vanity revolution:  This is insurrection as a lifestyle choice.

There's something very modern about that:  Our mature democracies are boringly practical:  For us, revolution is a romantic gesture which belongs in the past.

But real, historical revolutions have been about something:  tyranny or taxation or arcane theories of economic class.

In the Les Misérables musical — and our popular culture — revolution is little more than an honourable, nihilistic death-wish.

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There's no excuse for lazy policies milking the mining cash cow dry

Australia's resources boom of recent years is mirrored by similar developments in the US mid-western states and Canadian prairie provinces.

Longstanding North American production of coal, copper, nickel and uranium has been supplemented by substantial increases in shale oil production centred on the small American state of North Dakota, home to a population of less than 700,000 people but which fortuitously sits atop the expansive, oil-rich Bakken reserve.

Until recently, much of the Bakken reserve was not commercially exploitable.  However, private sector innovations in hydraulic rock fracturing (or ''fracking'') and horizontal well-boring have unleashed an American energy goliath.

Latest statistics show the state is producing almost 750,000 barrels of oil each day, up from less than 100,000 barrels a decade ago, with almost 7800 active oil wells primarily in the more sparsely populated western districts.

North Dakota has recently surpassed California and Alaska in terms of oil production and there are some expectations that, if current conditions persist, the state could exceed Texas as the leading US oil-producing region.

The shale oil boom has played a major role in delivering North Dakota unprecedented economic good news, setting it apart from the stumbling American economy more generally.

The state-wide unemployment rate is about 3 per cent, with jobless rates in Bakken counties below 2 per cent, and with record levels of employment there are cries of skills shortages similar to those heard throughout regional Queensland or Western Australia.

But it is also evident that clear tensions exist between the desire to ensure frackers remain free to explore and extract oil, including receiving adequate financial reward for effort, and a deeply entrenched ''prairie socialism'' favouring heavy redistribution of shale oil boom proceeds.

There is presently a major discussion about how to redistribute the state government's $US1.6 billion ($1.54bn) budget surplus among groups deemed to be politically deserving of a share of growing royalty and tax revenue collections.

So far, the North Dakota government has already expended substantial funds on a variety of boondoggles of questionable economic value.

These include university-based ''centres of excellence'' promoting renewable energies, separate public subsidies for biofuels, and funds set aside for affordable housing projects in the state's east.

With the active involvement of business groups and NGOs, the Republican governor recently established an Outdoor Heritage Fund whereby some of the state's oil revenues are channelled to environmentalists applying for wildlife conservation project grant funding.

On top of this, North Dakota retains a government-owned bank routinely providing loans to drilling companies that were unable to secure finances from private sector financial institutions.

Major oil and gas companies seeking to invest in North Dakota are also expected to donate their own funds to educational and other projects demonstrating their ''corporate social responsibility'' bona fides.

Such conduct is not confined to a quirky American prairie state with its own government-run flour mill, as politicians in most resource-intensive regions and countries seem to construe the mining, oil and gas industries as cash cows allowing them to dispense favours without economic consequence.

Australian resources states have jacked up royalty rates usually with the intent to expend the proceeds quickly, and in Western Australia the likes of the Barnett government's Royalties for Regions program is effectively captured by political interests.

The federal Gillard government's minerals resource rent tax may not be quite the revenue raiser as initially anticipated but the policy intention of the MRRT to raid mining company profits, and spend the taxes collected, remains intact.

As international mining consultancies have noted, the MRRT has inspired other governments overseas to raise their mining taxes, distorting the risk-return profile of global mining projects and rendering mining activity less attractive in numerous locations.

Apart from the short-sighted cash-cow mentality attached to mining, resources booms may engender lazy political attitudes concerning the need to implement economy-wide reforms so that economies remain prosperous as commodity prices level off.

What is extraordinary about the Rudd-Gillard economic record is that the government not only responded to the resources boom by imposing a new mining tax, but drove the budget into deficit on wasteful spending, increasing resource scarcities and fuelling the dollar's appreciation, and, for good measure, reregulated the labour market, raising the costs of employing labour.

These actions have not only compromised the robustness of Australia's resources boom but hurt trade-exposed agricultural, manufacturing and services sectors, which the government's punitive approach to mining was somehow designed to assist.

As impressive as the resources boom here and abroad may presently appear, tax-and-waste fiscal responses and reform complacency both fail to position economies for broad-based improvements in international competitiveness and economic prosperity in the long run.

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Soaking the rich won't work

The decision by French actor Gerard Depardieu to flee to lower-taxing Belgium serves as a high-profile example of the folly of targeting the rich for additional taxation.

While the actor stated his reasons for moving were numerous, the 2012 election commitment of French President Francois Hollande to impose a ''temporary supertax'' of 75 per cent on individuals earning more than €1 million ($1.3 million) annually clearly figured in Depardieu's decision.

Although the French Constitutional Court has recently declared Hollande's 75 per cent rate tax unconstitutional, the French government has signalled its determination to persist with its tax policy, albeit in revised form.

The concerning aspect of the ''Depardieu Shrugged'' affair is that the French policy stance is hardly an isolated instance in the post-global financial crisis economic environment.

Numerous Western governments have already implemented, or are advocating, extra taxes on the wealthy as an apparent quick-fix to plug burgeoning budget deficits and runaway public debts created by years of excessive expenditure.

Eurozone countries such as Greece, Ireland, Italy, Portugal and Spain have joined France in raising top marginal income tax rates, while France and Spain have increased or re-introduced wealth taxes respectively.

Over the past few years Britain has introduced a raft of tax increases, including on personal incomes and capital gains, targeting the wealthy:  In the US, Barack Obama called for raising taxes on families earning more than $250,000 during his 2012 re-election campaign, and has used this proposal as a key plank of recent ''fiscal cliff'' negotiations with his Republican adversaries.

Those possessing wealth may well be regarded by politicians as an instant source from which to collect extra revenues, but cases abound where governments pursuing ''soak the rich'' tax policies are subsequently frustrated by lower-than-expected revenues.

An important reason for such outcomes, as has been witnessed, for example, in Britain, as tax increases have not translated into substantial extra revenues, is that increasing taxation tends to dampen labour supply and capital accumulation, thereby hampering economic growth.

As a result of the disincentive effects of taxation, it is conceivable that present tax rates may be set so high that further increases in rates will actually reduce tax revenues received by the government.

Another important dimension to the problem, which seems to be continually discounted by revenue-hungry governments, is that the wealthy can prevent tax discrimination against them by relocating to lower-taxing jurisdictions.

In France, more than 400 homes have been placed on the Paris luxury property market since Hollande's election victory last May, and a number of French high net worth individuals have reportedly already relocated to countries such as Belgium, Luxembourg and Switzerland:  It has also been estimated that about two-thirds of Britain's millionaires left the country when the Cameron government increased the top marginal income tax rate to 50 per cent.

Movements by the wealthy to escape the burden of high taxes are also prevalent within highly decentralised federal systems, such as the US.

Data from the US Internal Revenue Service indicates that the numbers of wealthy tax filers in high-tax states, such as California and New York, have declined in recent years.

By contrast, the numbers of wealthy individuals have grown significantly in recent years in the likes of Texas, which does not impose a state income tax, suggesting some element of mobility from high-tax to low-tax US states in the process.

Even if the wealthy decide to physically remain in their country or region of residence, the integration of the global economy ensures they could relocate their finances or capital to less fiscally oppressive areas of the world with fewer obstacles.

One of the great paradoxes is how the political popularity of taxing the wealthy often overshadows the lack of economic and financial success that such policies deliver.

There seems little question that exorbitant taxes on the wealthy might appeal to the economically prejudiced who believe that rich people attained their wealth through ill-gotten profits raked from poor consumers.

To the extent that tax policies are rationalised on these grounds, the imposition of higher taxes on those with higher incomes in fact represents a political disendorsement of consumer choices.

After all, Bill Gates and Steve Jobs made their abundant fortunes by providing products which pleased customers around the world, just as Gerard Depardieu earned an enormous salary by gaining numerous admirers of his films.

Another populist view is that losing extra dollars in taxation will be far less painful to the wealthy than it would be for those in low to middle income brackets, so the wealthy ought to have their wealth shared about by the force of taxation.

But if high taxes on the wealthy indeed come with little or no pain, why is it that the wealthy often don't sit still, making efforts to relocate their wealth, and even their own person, to lower-taxing environments?

While tax-baiting the wealthy minority might bring politicians some plaudits among the less-wealthy majority, such policies are strewn with dashed revenue expectations and a lack of investor confidence of doing business in countries or regions that partake in such practices.

The weight of economic history will surely adjudge the Hollande supertax experiment as being not unlike a French souffle collapsing upon itself.

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Policy without politics is pointless

John McTernan is Julia Gillard's director of communications, a Scottish import, and, by all accounts, the man who convinced our Prime Minister to go hard on Tony Abbott's woman problem.

In a profile in the Monthly, Nick Bryant wrote that McTernan is ''renowned for his ruthlessness, and for being a hater''.  He has an ''all-out attack'' political style.  He's usually compared to Malcolm Tucker, the iconic Scottish bruiser in The Thick of It.

But he came to Australia in a very different guise — as an ''Adelaide Thinker-in-Residence'', the intellectual patronage program of former premier Mike Rann.

McTernan's final report was belatedly released after Christmas:  Are You Being Served?  Toward More Responsive Public Services.

This report has to be read to be believed.  It is superficial and scattershot and padded out with anecdotes.  Poor old South Australians apparently paid handsomely for this collection of folksy wisdom masquerading as serious thinking about public service reform.  In some parts it is actually quite funny.  McTernan uses the word ''synergies'' not once, but twice.

Yet the report has one virtue:  it exposes how barren thinking about public service delivery can be.

McTernan's ''challenge'' was to revolutionise the relationship between public services and public service users.

To this he proposes the government ''state and celebrate the purpose of public service overall'', seek to ''foster a culture that empowers citizens and government to jointly own the problems that need to be solved'', and ''establish a comprehensive state-wide approach to the development of 21st Century public service leadership''.

Those are the first three recommendations, word for word.

Only slightly more concrete is his call for ''e-government''.  Sure, e-government is a tantalising idea.  In theory, it could link public services together, reduce administrative costs, increase government responsiveness and transparency, and make dealing with bureaucracies simple — even convenient.

In practice ... well, you only need to see what the Australian Taxation Office's eTax software looks like to see why massive government departments don't do well in the online space.

E-government initiatives are, at their best, plodding and ineffective.  At their worst they can be dangerous:  government-run databases already have notorious privacy problems, and such problems multiply when those databases are linked together.

If e-government lends itself to fantastical thinking, even more indulgent is the claims made for the ''open data'' movement, where government releases wads of raw data for citizens to analyse and repurpose.  For McTernan, open data could ''increase transparency, accountability and collaboration''.

That all sounds great, but in reality, the most momentous open data success in Australia has been the National Public Toilet Map.  Cute, modestly helpful, but hardly a revitalisation of democracy.

The limits of open data are obvious.  The only data that is going to be released under an open data scheme is bland; anything which is controversial, potentially embarrassing, or even mildly off-message is going to be cleansed or suppressed.

Indeed, controlling the release of embarrassingly information is exactly the sort of thing that a communications director to a prime minister might be expected to do.

Public sector utopianism is always dashed upon the rocks of political expediency.  That's a worldly truth which makes most thinking about public service reform hopelessly naïve.

But in John McTernan's report, this truth is elevated into a great irony.  This supremely political person (the Monthly profile says McTernan can't resist involving himself in internal ALP factional fights) appears not to have factored politics into his thinking.

For instance, McTernan proposes a checklist of sound policy development and implementation.  (''Ask what is the problem?'', ''What are the facts and do we have them all?'', ''What are the solutions and do we have them all?'' and so on.)  That's nice, and reminiscent of the ''policy cycle'' described in first year public policy textbooks.

But the policy cycle is an ideal model.  It is deliberately simplified to the point of ridiculousness.

McTernan of all people knows that public policy is not developed by a steady, step-by-step process.

No, in a democracy, public policy is a compromise between interest groups brokered by politicians whose major interest is re-election.  It is constrained by a lack of information and confounded by real-world complexity.  It is implemented by bureaucracies driven by self-interest and it is evaluated by those who have a stake in its success.

All the problems McTernan implicitly identifies in the public service — excessive internal red tape, a lack of leadership, poor policy development — are not isolated problems to be surmounted but are innate features of the public sector.  They are the natural result of the political incentives faced by all whose job it is to develop, choose, and implement policy.

Until thinking on public sector reform comes to terms with the political constraints of government action, it will always be pointlessly utopian.

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