Public service balloons in Qld

Queensland has undoubtedly been one of Australia's boom states in the past 10 years, accounting for one third of Australia's growth.

As the population grows from Cairns through to Coolangatta, Queensland not only has a bigger economic base, but a greater cosmopolitan feel to it as well.

Queensland's economic growth is outpacing that of NSW and Victoria, and the unemployment rate is at its lowest for a generation.  While the economy still depends on mining and farming, the growth of services has also led to an increasingly diverse industrial base.

Queensland public servants have also had good times over the past 10 years.  Since the Beattie Labor government was elected in 1998, the number of bureaucrats has risen by more than 44,000 to a grand total of 261,500 in 2006/07, an increase of about 21 per cent over the life of the Beattie-Bligh tenure.  Looking at the core Queensland Public Service, numbers have risen from about 162,400 in 1998/99 to about 211,600 in 2006/07.

As bureaucrat numbers grew, the QPS has become a mish-mash of new agencies, expanded agencies (wine development, anyone!) together with old agencies with new names.  The Mines and Energy Department turned into Natural Resources and Mines, then Natural Resources, Mines and Energy, then Natural Resources and Mines, then Natural Resources, Mines and Water, and back to Mines and Energy.

Queensland's bureaucrats have also forged ahead on the wages front.  The amount of government funds to pay employee expenses has risen from about $9 billion in 1998/99 to about $15 billion in 2006/07, or a whopping 77 per cent over the period.

Total average weekly earnings of those working in the private sector have actually declined as a proportion of earnings for government workers.

A noticeable trend over the past year or so in all states is the increasingly vociferous campaigning by public sector unions seeking more pay at taxpayers' expense.  Whether it is public hospital staff or other bureaucrats striking for higher wages, or school teachers over housing accommodation in the far north, public sector unions realised long ago that governments are an easy target.

The taxpayer inevitably loses out, either through the inconvenience posed by stop-work campaigns or the greater fiscal burden to fund extra bureaucrat salaries.

Bureaucrat numbers and salaries are well up, but there is so little to show for it.  On any major performance indicator -- such as school student benchmark test results, waiting times for treatment at public hospitals, complaints about policing services or peak-hour travel times on major city roads -- it is clear that the service outcomes are mixed at best.  Indeed, on some indicators, Queensland has gone backwards compared with other states.

If taxpayers are to get real value for money, the unrestrained growth of the state's bureaucracy and wage conditions has to end at some time.  While State Treasurer Andrew Fraser denies it, the present global economic slowdown could hit the Government's budget bottom line through lower revenue growth.  This scenario would expose the State Government's record of lax spending, and finally force its hand to trim the excess fat out of its public service.

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Pokies unfairly stigmatised

Perhaps emboldened by having taken up his position in the Senate, Nick Xenophon seems to have moved from espousing further restrictions on poker machines to advocating their complete abolition.  He recently told a gambling industry conference that he sees a time when "common sense prevails and you are shut down for good".

In his speech, Xenophon repeated the usual piece of anti-pokies rhetoric that places a large proportion of the blame for their ongoing existence on state governments, which are allegedly so beholden to taxation on gambling.

Considering that in 2006-07, the states and territories received $4.7 billion in gambling taxes, out of a total state and territory revenue of almost $153 billion, it is hard to argue that a rate of a bit over 3 per cent for gambling as a whole, or 2 per cent for gaming machines, is unduly heavy reliance, when compared to property and payroll taxes.

Even more strange is the fact that anti-gambling campaigners often argue for increased gambling taxes, which would of course only increase the "reliance" they bemoan.  There is also evidence that pokies use has plateaued in recent years, with data showing a decline in the percentage they make up of household expenditure.

Of course, the main issue for the opponents seems to be not the total numbers who use the machines but the small percentage of problem gamblers.  A 1999 Productivity Commission report found that 2.1 per cent of poker machine users were problem gamblers.

While there has been no national study since then (the Productivity Commission will shortly commence a new study), most state-based surveys have indicated a rate of problem gambling at less than half that level.  And if surveys in Queensland are typical, it is a declining rate, in that state going from 0.83 per cent in 2001 to 0.47 per cent in 2006-07.

Anti-gambling crusaders constantly claim that problem gambling leads to financial hardship and personal stress.  In fact, less than two per cent of business bankruptcies in 2004-05 were gambling related, while a 2006 Relationships Australia survey placed gambling 22nd of 24 possible factors "negatively influencing relationship with partner", with a score of just 3 per cent.  Six times as many people had relationship problems due to disputes over housework and three times as many complained about the "influence of in laws".

Banning gambling is usually one of the first acts of authoritarian governments when they seize power, but imposing restrictions on it is also a common action of democracies.  However, what generally happens is that types of gambling that appeal to working class people, such as SP bookmaking for much of the twentieth century, and now poker machines, come under far greater attack than the gambling modes of choice of the elites.  Denying gambling choice to ordinary people is a rare area of common policy of conservatives and the Left.

As one of the most regulated industries in the nation, the gambling industry can reel off a lengthy list of good causes that the revenue it has generated has been applied to both in dealing with problem gambling and funding other initiatives.  Plus they point to the significant number of jobs provided directly, and indirectly, by the industry.

However, there is a much more fundamental issue at stake than these utilitarian benefits.  While there is no doubt that problems have been caused by gambling and by poker machines, these negatives do not justify stopping the 97.9 per cent, or more likely 99 per cent, of non-problem gamblers, from consuming a product they enjoy.  A 2003 survey in Victoria found that only 4 per cent of people had found gambling had a negative impact on their lives, compared to 21 per cent who found it had a positive impact (and 75 per cent for whom it made no difference).  Why should the needs of the 4 per cent outweigh the 21 per cent?

Of course, there are many aspects of our society where if one chooses to focus purely on the negative aspects one can mount an argument that the activity should be stopped.  For instance, car accidents destroy far more lives than poker machine addiction ever will.  In 2007, a total of 1,616 people lost their lives on Australia's roads, with some estimates of the economic costs of this being in the order of $25 billion per year.

If one followed the pokies model, politicians like Senator Xenophon would be proposing that in the short-term we remove ten per cent of cars from the road, with a long term aim of removing them altogether.

Whatever one's personal position on the potential costs and benefits of driving a car, or playing the pokies, that decision is clearly best left with the individual, rather than the state.

Senator Xenophon claimed in his speech to "believe strongly in freedom of choice".  He has a funny way of showing it.

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Change of climate an ill wind for carbon tax

THE Wall Street share market crash in October 1929 sparked off the Great Depression in the 1930s.  Will Wall Street's latest financial collapse bring a comparable debacle?

Certainly the origins are similar.  Central banks recklessly reduced interest rates resulting in price booms -- it was shares in 1929, it is houses in 2008.

In 1929, share prices fell 25 per cent in just two days and kept falling.  US house price falls of 20 per cent -- more in California -- triggered the September 2008 meltdown.  British house prices are also falling fast.  In both countries prices will fall further.

Excessive US house prices were due to planning regulations creating land shortages especially in the western states and Florida.  The price-boosting effects of such regulations were amplified by politicians requiring the government controlled mortgage giants, Fanny Mae and Freddie Mac, to lend to uncreditworthy borrowers.

Those two mortgage firms are now bankrupt.

All the major Wall Street investment banks have also gone under or needed government bailouts.  So too did the world's largest insurance firm, AIG, and Britain's largest mortgage supplier.

The policy response to the crash of 2008 confronts the same issue as was faced in 1929.  Both crashes revealed that assets -- shares in 1929, houses in 2008 -- were worth much less than their owners thought.

The US Senate has responded to the September 2008 crash by providing a $US700 billion ($A897 billion) bailout.  This is close to Australia's national income and might prove a waste of money.

Moreover, it is being negotiated by the people who caused the crisis -- the Bush Administration's top bureaucrat and banker, and the same Democratic Party Congressional leaders who insisted on reckless lending by the mortgage giants.

Australia has experienced the same kind of house price inflation as Britain and much of the US.  Restricted land availability has caused prices of existing houses to rise 30 per cent faster than new house prices.  If only for this reason, Australian prices will fall.

Here, as in the US and Britain, the new reality regarding the value of property requires people having to rebuild their savings.  And this means reducing every day consumption.

Last week, Kevin Rudd went to New York to urge action on climate change.  But the global financial meltdown trumped such distant concerns.

The Garnaut climate change report was released on the same day as the US stock market crashed.  Garnaut's starry-eyed technology assumptions allowed him to claim that we could reduce emissions sufficiently with a "mere" 37 per cent energy tax.  This fooled some commentators but the Herald Sun's Terry McCrann immediately recognised the report was "dead, dead, dead, before it hit the table".

The Garnaut carbon tax is not the only policy approach that died this week.  Governments, like ordinary people, will have to cut their spending.  State governments have been spending excessively, using revenues grabbed from the housing boom.  These and other revenue streams are now set to decline.

Governments will now have to re-evaluate the wisdom of dollar sucking policies that offer little value.

Victoria's candidates include a bloated bureaucracy, renewable energy, desalination and, perhaps, public transport.

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Congress no green house

There are two great myths perpetuated by Kevin Rudd and Climate Change Minister Penny Wong as a foundation for Australia introducing an emissions trading scheme.  Both are deceitful and misleading the public about the cost of an ETS.

The first myth appears in Wong's green paper, which argues Australia is "acting with the rest of the world" because other countries are supporting an ETS, in particular the US, where "both presidential candidates are committed to introducing schemes".

Wong is correct that Republican presidential candidate John McCain candidate and his Democratic rival, Barack Obama, support the introduction of a cap-and-trade system.  But their support doesn't guarantee anything and the $US700 billion ($895 billion) financial bailout package demonstrates why.  The bailout is one of the grandest bipartisan political measures taken in US history.  It was supported by Republicans President George W. Bush, Treasury Secretary Henry Paulson and McCain, and the Democrats' house Speaker Nancy Pelosi, Senate majority leader Harry Reid and Obama.

Yet the bill failed in the House ofRepresentatives.

A bill may yet pass, but it has nothing to do with bipartisan support.  There isn't similar party discipline as in Australia and therefore bipartisan support doesn't mean success.

Members of the House of Representatives are elected every two years and are highly accountable to their electorates.  Their allegiance is to their electorate first and their party second.  And US voters are very sensitive to thegovernment voting for legislation that will simply take money from their back pockets.

The present 110th Democrat-controlled Congress provides ample evidence.  To date there have been eight bills introduced to establish a cap-and-trade system.  None have passed.  Bush didn't even need to pull out his veto pen.

These failed bills are merely following in the footsteps of the Kyoto Protocol, which was voted down in the Senate 95-0.  Similarly, in 2003 McCain and then Democratic senator Joseph Lieberman proposed the Climate Stewardship Act.  The bill was defeated 55-43.

Both senators then proposed an amended version in 2005 that was defeated by an even wider margin.

Ultimately, the reason for each bill's demise has been the cost it would impose on American consumers and industry without corresponding costs on competitor nations.  The fallout from the financial crisis is just going to make negotiating an ETS harder.

And that leads to the second myth:  Australia needs to develop an ETS to participate in the forthcoming international trading scheme.  But there will not be a comprehensive international trading scheme.  Establishing one requires every major emitting country toparticipate.

At the G-8 meeting in Japan earlier this year Chinese President Hu Jintao reiterated what has long been the mantra of the Chinese Government:  "China's central task now is to develop the economy and make life better for the people".  The attitude of the Chinese Government is that "developed countries should make explicit commitments to continue to take the lead in emissions reduction".

China is not alone.  Indian Prime Minister Manmohan Singh said to the 63rd session of the UN General Assembly:  "The outcome must be fair and equitable ... we are committed to our per-capita emissions of greenhouse gases not exceeding those of the developed countries".  In short, India may only slow the growth of its emissions to correspond with developed country levels.

For the US to participate requires developing countries to take proportionate emissions cuts.  For developing countries to participate, developed countries need to shoulder most of the burden.  In this scenario the developed and developing world are caught in a game of climate chicken.  But outside Australia and the European Union no one appears interested in playing.

The final Garnaut report points out:  "The only realistic chance of achieving the depth, speed and breadth of action now required from all major emitters is allocation of internationally tradeable emissions rights across countries".  But it is simply not going to happen.  The likeliest outcome will be a voluntary international trading scheme.  Countries that participate will be guinea pigs.  Their role will be to iron out problems, such as developing an accounting system for an industry's carbon footprint, the equivalence of permits and how to respond to the nightmarish impacts on trade.

If we keep heading down this path, the myths will become clear, and it won't take long before Australians start to ask why we are harming our economy while achieving virtually no reduction in emissions.

It is an answer Rudd and Wong should think long and hard about.

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Farewell to politics of plenty

These days there's not too much talk about a soft landing for the global economy.  The descriptions of the landing we can now hope for from the credit crunch are hard, very hard, and like jumping onto a concrete slab from a second-storey balcony.

The US government bail-out of the banks might make a difference.  But then again it might not.  At the moment there are few certainties in the world.  As yet we simply don't know how the crisis will change the international and domestic financial system.

The calls for more regulation have already started but no one knows what regulations we should have more of.  If there's anything good to come out of what's happened in the past six months it is the realisation in the United States that the crisis is as much a product of too much regulation as of too little regulation.  The efforts of various administrations to force financial institutions to offer home loans to people who on most measures could not afford them completely distorted bank lending processes.

In the middle of a crisis, people's attention is usually either on the micro or the macro.  Questions about what the Dow will do tomorrow are interspersed with metaphysical speculation about whether we're facing the end of capitalism.  But in between the immediate and the generational there's the medium term of the next few years.  And in Australia the medium term nicely captures the period in which we'll have two federal elections.

One thing we can be sure of is that the political debate will change as a result of what's happening.  Even if Australia and the world avoid a recession, the fear of the R word will be enough to affect political behaviour.

For the past decade the electorate has thought the role of government is to distribute the benefits of the boom.  And politicians have themselves come to think of that as their task.  Voters and politicians have become accustomed to the good times of secure employment, growing equities value, and increasing house prices.  Five million Australian families own houses, and it's safe to assume that the majority of those families were expecting their house to be worth more next year than it is this year.

In recent years the toughest decision many Australian families have had to make is whether their new flat-screen television should be LCD or plasma.

It's been a long time since a federal or state government has had to make a difficult economic decision.  Treasury departments around the country have probably forgotten how to make a hard decision.  Until now their most difficult task has been to decide whether to award public servants a 4 or 5 per cent annual pay rise.  A reason state governments have shirked structural reform and taken the easy option of spending more money on a problem is because there's been more money to spend.  If the spend-more-money option is no longer available, the chances for real reform might actually improve.

Federal and state ministers haven't had much practice at saying, "I'm sorry, we can't afford it".  They didn't use this line because no one would have believed them.  They wouldn't have believed the line themselves.  There's been so much money in federal and state budgets that governments haven't known what to do with it.  The federal governments have had to invent various "future" funds as a way of spending the surplus revenue.

The assumption in Canberra has been that the government or the private sector could easily afford to pay for any new project, program, or policy.  The best example of this sort of thinking is of course climate change, but there are plenty of others.  The debate about increasing the aged pension is based on the belief that the government has got the extra $3 billion to pay for it.  The same applies to government-funded maternity leave.  Twelve months ago it sounded like a good idea.  Now the situation is different.  Even if taxpayers are funding the direct cost of the scheme, ministers have simply assumed that small business can afford all the additional costs that will be imposed.

Home owners and everyone with share portfolios are not the only ones in for a hard time in the months ahead.  Politicians will have to learn to stop making new promises.  And they might even have to learn how to unwind some of the promises they've made but which we can no longer afford.

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Case is overwhelming to extend shop hours

Already retail trading is troubling the new Barnett Government.  Big supermarket chains have been quick to press for reform, arguing the current restrictions mean shoppers are paying more for their groceries.

Their opponents, independent supermarkets, convenience stores and service stations like the current arrangements -- they can open while others must close and naturally this suits them.

Today, arguments for and against deregulation of shop trading hours are seen as a battle between big and small business -- the big, bad Coles and Woolies versus the small, struggling independent.  But this is not the full picture.  The data shows small business is also hurt by restrictions on shop trading hours.

It is no accident that the States with the greatest growth in small retailer numbers are those with the most liberal shop trading hours.  The chart, right, shows while Victorian small retailer numbers grew 30 per cent in the past decade, WA growth was only 2 per cent.

And this lack of new small shops is not surprising because the most successful shopping areas elsewhere are open at times consumers want to shop -- the weekend -- and combine big anchor tenants such as department stores with all the funky and individual boutiques and specialty shops that exemplify small business.

Far from the big guys swamping the small, the evidence from everywhere else is that they are complementary.  As the WA Chamber of Commerce and Industry notes, the biggest drop in small businesses as a proportion of total retailers happened in WA and South Australia, where trading-hour restrictions still exist.

Traditionally, trade unions and churches have opposed Sunday retail trade, based on the idea that nobody should be forced to work on a Sunday.  Twenty years ago, this argument had some merit because most employees were full-time workers.  These days, with many more part-time workers who fit employment around study, child care and other responsibilities, the pool of people choosing to work on Sunday is much greater.  Interestingly, both Coles and Woolworths make Sunday work voluntary while most smaller retailers have less flexibility and offer no choice over Sunday working hours.

The silent losers from all this argy-bargy between vested interests are consumers.  In every place shop trading hours have been liberalised there would be an outcry and electoral oblivion if major restrictions were reintroduced.  People get used to the freedom to shop on Sunday.

They weave it into their lives, so that Sunday trading becomes an ordinary thing, as commonplace as football on a Sunday.

Since shopping is so mundane, so much a habit, it is easy to believe that since we manage to survive now without Sunday trading we won't personally benefit from it if it were introduced.  Like most outmoded practices, once they're gone nobody misses them but until then we put up with the way it is now, pretty much without thinking about it a lot.

Freedom and flexibility are not the only benefits for consumers.  As a Choice survey proved, the supermarkets currently allowed to trade on Sundays charge significantly higher prices than Coles and Woolworths.  The fact that these otherwise uncompetitive stores do so well on Sunday, to the extent it is their biggest day of trade, tells us two things.  First, consumers want and need to shop for food on a Sunday, the demand is clearly there.  Second, consumers are losing from the trading hours restrictions -- they are forced to pay more for the "privilege" of shopping on a Sunday.

But some consumer apathy and confusion over the benefits is no excuse for Government apathy -- the broader economic effects are too important to ignore.  Places with deregulated shop trading, not just phoney tourist areas, have more shops, employ more people in retail trade and generate greater economic activity from retail.  The economy-wide benefits are significant.

And the economic benefits are not just from retail trade itself.  A growing and increasingly diversified population creates demand for greater variety, whether this is in retail, restaurants, entertainment or work.  Great cities cater to all sorts and increasingly the kinds of young, highly skilled workers WA needs are demanding more lifestyle options than the State is permitting.  The result is an outflow of young people to other States and to overseas, exactly the people WA is desperate to attract.

Eventually WA will totally deregulate shop trading hours.  Eventually somebody will be brave enough to take on the vested interests and act for the benefit of consumers and the State economy.  Once it happens the issue will go away:  nobody ever agitates for re-regulation.

Until then the pressure will keep mounting because the current situation is unsupportable, a gross distortion that benefits a tiny minority of food retailers against the interests of the whole community.  A new Liberal Government not beholden to vested interests is the obvious place to make this important change.

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Is Rudd in the right party?

Kevin Rudd has proved himself an unwitting disciple of the Prime Minister that he ousted from office.

Shortly after the 1972 US presidential election, Pauline Kael, the New Yorker's film critic, expressed astonishment at Richard Nixon's landslide victory over George McGovern.  "How can that be?" she asked.  "I don't know anybody who voted for him."  A similar state of disbelief gripped Australia's intellectuals during the decade of John Howard's election victories.

The Australian people finally made the right decision to vote their mendacious, conniving leader out of office last November.  As Maxine McKew's biographer Margot Saville acknowledged, she and her friends found "a new respect for democracy".  But the irony is that the same people who take it upon themselves to represent the country's conscience are now embracing a church-going, family-values politician almost as conservative as the former Prime Minister himself.

This is hardly remarkable.  After all, during the course of 2007, Kevin Rudd styled himself as an "economic conservative" and copy-catted Howard on virtually everything from his support for budget surpluses, income tax cuts, anti-terror laws and federal intervention in remote indigenous communities to his opposition to gay marriage, illegal immigration, teacher unions and zealous multiculturalism.  As a result, Rudd managed to convince the many so-called Howard Battlers -- aspirational and socially conservative working-class voters, particularly in the outer suburbs of Brisbane and the provincial Queensland and New South Wales coastal towns -- to come home to Labor without being embarrassed to tell their friends that they had done so.

One could, of course, argue that Howard was a conviction politician, whereas Rudd is a relentless opportunist who merely recognises that the centre of political gravity has swung right in recent years.  (Bear in mind that in 1996, Howard stressed that a future Howard government would not be a "pale imitation" of the Keating government, whereas Rudd spent 2007 signing himself up to Howard's policy agenda.)  Regardless of his motives, the point is that Rudd's policy platform has more in common with John Howard's than with Phillip Adams's.  Far from reflecting the thoughts and instincts of Paul Keating, Gough Whitlam and other darlings of the progressive Left, the Labor PM has made many conservative policies and values harder for the intellectual Left to attack.  For the truth is that, as much as Labor partisans and the liberal intelligentsia may hope otherwise, Australia is a much more conservative nation today than it was during the Keating era.

During the early-to-mid Nineties, there was almost universal consensus in the media about the virtues of Aboriginal welfarism, treaties, separatism, a politicians' republic, zealous multiculturalism, activist judges rewriting our constitution and the black armband of history which preached shame, not pride, about our past and pessimism, not confidence, about our future.  These days, however, things are very different.

On the political battlefields of history, economics, citizenship, national sovereignty and values generally, conservative ideas always compete and often prevail.  Who, for instance, still believes that welfare should be an unconditional right?  Or that the nanny state, weighed down by old-style union militancy, can deliver prosperity and opportunity for the broad cross-section of the electorate?  Or that cultural diversity is enough to sustain a nation?

Credit goes to Rudd for having the gumption to do what his party predecessors never contemplated:  fight Howard on his terrain and in the process modernise the Labor brand.  This remains, to be sure, an uphill battle.  The Left still controls the commanding heights of Australian culture, such as the universities, the arts and much of what passes for the "quality media".  Many conservative thinkers, such as the columnist Gerard Henderson, lament that Howard failed to win the culture wars.

Then again, he was by no means alone in failing to transform the nation's culture entirely.  Recall that Margaret Thatcher and Ronald Reagan themselves were unable to change substantially the entrenched attitudes of the Guardian, Oxford and the BBC in one case, or the New York Times, Harvard and Hollywood in the other.

Nonetheless, a strong case could be made that just as the Gipper helped set the scene for Bill Clinton's New Democrats and the Iron Lady paved the way for Tony Blair's New Labour, John Howard has pushed the ALP in a more conservative -- and politically appealing -- direction.  After all, during his nearly 12 years in power he was never afraid to challenge the old assumptions and provoke people into thinking and then arguing about the new attitudes on so many cultural and public policy issues.  And although Rudd expresses himself in different ways, his government's record thus far confirms this conservative trend.

Far from being in cahoots with big unions, Rudd is still adopting some flexible workplace agreements and is hardly reimposing a Byzantine straitjacket of labour regulations on small business.  He recently slapped down a union push for an early curb of the Australian Building and Construction Commission.  And his embracing of Peter Costello's agenda of income tax cuts and budget surpluses is constraining any latent spendthrift inclinations.  The spectre of Jim Cairns has not returned to haunt the economic landscape.

On education, instead of endorsing the class warfare waged by those who control the teachers' unions, Rudd is keeping faith with the Howard agenda of choice, performance pay and accountability of our schools.  He has announced that federal schools' funding to the states will depend on their providing information on how individual schools rate.  And his recent pilot programme means that parents whose children don't attend school will face being stripped of welfare payments.  That's a page right out of Howard's mutual obligation playbook.

Rudd has no time for indoctrinating students in politically correct fads and outcomes-based gobbledygook.  Instead, and again following the Howard precedent, he wants to give students a solid grounding in the factual and narrative history of their nation.  Not so long ago, Captain James Cook's landing in 1770 was regarded as the beginning of a long and shameful story of invasion and dispossession.  But Rudd, like Howard, has little time for such trendy, post-modern nonsense.  This is a man, remember, who sought to outflank Howard on the question of Anzac patriotism when he staged the infamous dawn service at Long Tan for the Seven Network's Sunrise programme last year.

Whereas during the Keating era, when white guilt morally and culturally disarmed the nation, in the Howard-Rudd era Australians have unapologetically championed the values of hard work, enterprise, faith and the "fair go" and allowed the greatness of Western civilisation to speak for itself.

When it comes to Aboriginal affairs, the Rudd government has kept faith with the Howard government's national emergency in remote indigenous communities of Northern Territory.  This way of thinking is a far cry from the mindset of the Whitlam-Fraser-Hawke-Keating years.  Back then, the conventional wisdom held that Aborigines should be allowed to live as they always had -- including wholly separate living arrangements and Aboriginal law.  The result was a crippling cycle of economic dependency on welfare handouts.

For more than a year, however, both Labor and the Coalition parties have championed the end of the decades-long experiment in Aboriginal separatism with its welfare handout mentality, substance and child abuse.  The right-based policies are a thing of the past.

Now, it is certainly true that Rudd gives the occasional wink and nod to the Labor party's true believers.  It is equally true that he recognises that the next election won't be won in the senior common rooms of all our great learned institutions, but in the sun-belt seats of Queensland and the outer reaches of Sydney.

Thus, he invites Cate Blanchett to chair a session at the gabfest of the nation's 1,000 smartest people, but he expresses a profound distaste for transgressional modern art.  He apologises to the Stolen Generation, but he ignores Sir Ronald Wilson's inflammatory claims of a calculated genocide against the Aboriginal people.  He pulls out our combat forces from Iraq, but he is an unashamed advocate of the US alliance.  He ratifies the Kyoto protocol on climate change, but he is in the process of watering down substantially his emissions trading scheme in order to assuage our energy-intensive industries.  And so his governing agenda goes in a conservative Howard-esque direction.

Which makes it very strange that many Liberal MPs and media commentators believe the federal Coalition should now move the opposite way.  In the post-Howard era, the argument goes, Liberals should become more "progressive" (read:  a bill of rights, soft border protection, lax drug laws, same-sex marriage).  But far from marking a return to the Treasury benches, such a strategy could guarantee a generation in the political wilderness for the Coalition.  That does not mean there is no room for adjustments and fine-tuning of policy.  It does mean recognising that the centre of political gravity is, and will in all likelihood remain, profoundly conservative.

Herein lies the challenge for the new Liberal leader, Malcolm Turnbull.  A social progressive who hails from a posh, inner-city Sydney electorate, the multi-millionaire former merchant banker needs to make sure that he is not outflanked from the right by a Labor prime minister.  This may be hard for a man who appears to have more in common with the sophisticates in his Wentworth seat than with the conservative heartland of Middle Australia.  Turnbull's "progressive" bona fides were most recently on display when he defended Bill Henson's "art" of photographing naked teenage girls.  Again, such views may reflect metropolitan fashion that dominates the universities and some media outlets, but they are not in touch with the feelings of the great mass of voters.

Socially conservative blue-collar workers formed John Howard's core electoral support.  It was these people to whom Kevin Rudd appealed as an economic conservative.  And it is these people to whom today's Liberals need to appeal in coming years.  As Peter Costello argues in his recent memoirs:  "The Liberal party should remember it is the guardian of the centre-right tradition in Australia."  He's right.  Turnbull and today's Liberals should remember that they will never defeat Labor by embracing the modern-day Pauline Kaels.

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The Politics and Science of Climate Change: The Wrong Stuff

2008 Harld Clough Lecture

I am pleased to present this lecture today in Perth.

I am particularly pleased to find that Perth is still here.  I last visited here in 2005 -- the year that Professor Tim Flannery suggested that Perth could become the first "ghost metropolis" due to reductions in rainfall because of climate change.

I must confess that I was somewhat bemused by this statement, because my visit to Perth was to present a paper on water policy under climate uncertainty.  I knew from my research for that paper that Perth was in fact better adapted to uncertainty in its water supply than any other capital city.

Perth and the south-west of the state have suffered a decline in rainfall, which appears to have shifted to the north-east.  The cause appears to be not the gradual accumulation of greenhouse gases, but a sudden shift in ocean currents.  This decline in rainfall has translated into a marked decline in catchment yields thanks to changed catchment management, and an increased yield can be obtained by thinning catchments.

Regardless, Perth has adapted to its natural environment with a number of responses:  demand management;  use of aquifers;  the construction of the Kwinana industrial recycling plant;  and now a desalination plant.

Professor Flannery was, of course, talking nonsense -- but, as sales of his book The Weathermakers and his subsequent selection as "Australian of the Year" showed, this is popular nonsense.

As Arthur Herman has shown in his book The Idea of Decline in Western History, the proposition that we are all going to hell in a handcart is a recurrent and persistent idea.  From the neo-Malthusianism of the Club of Rome to Y2K to bird flu pandemics, modern society has demonstrated that, despite the triumph of reason over belief in the Enlightenment (and the enormous improvements in human welfare it brought) it has more in common with the apocalypticism of numerous millenarian movements than it would readily admit.

Malthusian sentiment still abounds.  Paul Watson, Founder of the Sea Shepherd Conservation Society thinks mankind is "acting like a virus" and called for the human population to drop to less than 1 billion.

The head of the Science Museum in London and former head of the British Antarctic Survey, Chris Rapley, also thought we should get rid of a few billion people -- in the future in his case:  "I'm not advocating genocide", said Rapley, reassuringly.  He simply wanted to use "contraception, education and healthcare" to stop the world's population from reaching its current projected peak of 8-10 billion.

Aspects of Christianity (especially the Book of Revelation), Marxism and National Socialism (with its promise of a "Thousand Year Reich") all contain elements of millenarianism.  But just as we can be Christians or Marxists without signing up as millenarians, so can we be concerned about the environment without signing up for the Apocalypse.

I know of only one book-length study of environmentalism describing it as a middle-class millenarian movement.  This probably reflects the fact that most of us support the cause of environmental protection, and we tend to be less prepared to submit our own beliefs to critical scrutiny than we are those of others.  I have to confess to being a recovering neo-Malthusian, having once stood for elected office for an ecological political party.

I mention all of this because it reminds us that non-rational beliefs continue to hold us in their sway even when we think we have left them well behind.  And those non-rational beliefs can affect both the conduct of science and the risk assessments we collectively make on the basis of science.

The point I want to develop in this lecture is that environmental protection does not require that we adhere to millenarian beliefs, or ecocentric political philosophies, or biodynamic agriculture, or any of the other "New Age" or other non-rational elements we can find in contemporary environmentalism.

Rather, good environmental policy requires that we reject such beliefs and uphold the Enlightenment commitment to sceptical, rational humanism.  This also requires open contestation of science and the rejection of the idea that science can be too closely embedded within the affairs of the state.  In other words, it requires the political liberalism that also emerged from the Enlightenment.

This is because the conduct of both science and politics require openness and contestation.  Government, as Bernard Crick once observed, is not synonymous with politics, and governments do not always celebrate the playing out of political debate.  They seek to impose authoritative decisions, rather than celebrate alternative points of view, and this makes official endorsement of science particularly dangerous.

Yet officially endorsed science is what we have with climate change.  Governments have not only endorsed a particular point of view with respect to an area of science that is inherently uncertain, but they have gone the extra step of attempting both to marginalise competing points of view and convince their own citizens of the correctness of their interpretation in paid advertisements aimed at convincing the public of the seriousness of the situation.

These are dangerous moves.  I feel a little uncomfortable when a government spends my money to tell me whether and when I should be concerned.  I'm old-fashioned enough to think I should be telling them.

The attempt to marginalise dissenting views is best exemplified by the use of the term "Denier".  It has been used not just by Climate Change Minister Penny Wong and Prime Minister Kevin Rudd, but by their adviser Professor Ross Garnaut.  They all should know better.

To question the attribution of the current state of the Murray-Darling Basin to "climate change", rather than (more correctly) to mismanagement and over-allocation is not to deny anything, but -- rightly -- to speak truth to power.  (Senator Wong needs look no further than the Bureau of Meteorology rainfall records in the Basin to see that the current drought is not unprecedented).

Fortunately, we have some curmudgeonly types who are prepared to subject official science to critical scrutiny.  For example, Ian Castles, the former Australian Statistician, drew our attention recently to an inconsistency between the dire projections of increased drought frequency in a (non-peer reviewed) CSIRO/Bureau of Meteorology report for the government, and a couple of peer reviewed papers produced by some of the same authors.

It is instructive to ask where the use of the expression "Denier" came from.  It was first used, as far as I can tell, in an attempt to attack Bjorn Lomborg for his apostasy in suggesting the global environment was getting better, not worse according to most accepted statistical indicators.

Having misused the expression "sceptic" -- a badge of honour for any scientist worth their salt -- as a term of criticism, environmental activists and activist scientists quite deliberately sought to liken those who questioned the prevailing consensus on climate change to Holocaust deniers.  This was quite shameful spin -- but they have succeeded in having ministers and even prime ministers repeat the calumny.

Lomborg was excoriated because, among other things, he was not a "climate scientist".  This is an interesting charge, because it is not clear what counts as "climate science".  But it is a charge that is frequently levelled against dissenters, but rarely levelled against those supporting the prevailing consensus.

Understanding the global climate system is beyond any individual or individual scientific discipline.  It involves not just specialisations such as meteorology and atmospheric physics, but oceanography and glaciology.  It also requires a good knowledge of statistics -- Lomborg's discipline.  It is necessarily, as the historian of science Spencer Weart pointed out, a collective undertaking.  Collective decisions must be made about simplifications, adjustments to data, and so on.  This means, of course, that it is inevitably socially constructed - though (as Weart was quick to add) this does not mean it is only a social construction.

An interesting question these days is what actually qualifies a scientist as a "climate scientist".  One's qualifications as a climate scientist appear to depend not upon one's formal qualifications, but upon the soundness of ones views, whether one says "The Right Stuff".  Lomborg's credentials were questioned in a way that Professor Flannery's have not been.  Yet Professor Flannery, as a palaeontologist, would appear to be no better qualified than Professor Lomborg to pass comment on climate change matters.

Lomborg, it should be noted, largely confines himself to policy matters, such as priority setting;  Flannery's expertise seems to know no bounds -- he has commented not only on the causes of climate change and its impacts, but policy matters and even international negotiation processes.

Professor Flannery receives a free pass because he says The Right Stuff.

Many climate scientists turn out to have degrees in disciplines like biology and chemistry.  As with Flannery, few have questioned their right to speak on climate science -- even on issues where they would seem to lack expertise.  They say The Right Stuff.

NASA was once described by Tom Wolfe as having "The Right Stuff", but there is evidence that it now has The Wrong Stuff.

Interestingly, of the main datasets that track "mean global temperature" at the surface, the one that is an outlier (in that it tends to show the most warming in the recent past) is the so-called GISTEMP series maintained by NASA's Goddard Institute for Space Studies, run by James Hansen.

Let's leave aside for a moment the scope for social construction to affect the business of constructing highly complex models of the coupled atmosphere-ocean system, having them duplicate to a reasonable extent the recent climate history, inputting emissions scenarios based upon some economic scenarios and projecting the future climate 100 years hence.  Let's just focus on the business of producing this global mean surface air temperature (or SAT).

Note that, ironically, NASA's Goddard Institute for Space Studies prefers surface temperatures manually recorded to satellite data -- the only true global record.

The Goddard Institute website (responsible official James E. Hansen) tells us that this is a measure that depends enormously upon the assumptions made.  Whether we measure temperature 5ft, 10ft or 50ft above the ground makes a difference.  As Hansen states:  "To measure SAT we have to agree on what it is and as far as I know, no such standard has been suggested or generally adopted".

Then there is the problem of constructing a mean -- which is problematic, even on a daily basis for one location, let alone for a global annual mean.  Again, in Hansen's words:

"Again, there is no universally accepted correct answer.  Should we note the temperature every 6 hours and report the mean, should we do it every 2 hours, hourly, have a machine record it every second, or simply take the average of the highest and lowest temperature of the day?  On some days the various methods may lead to drastically different results".

This means that, even at the most fundamental level, climate science requires that assumptions and manipulations must be made -- to an extent that is considerable.  Data ain't data.  They must be prepared for inputting into computer models.

Novelist Michael Crichton once remarked (in the US context) that data is not Democrat or Republican, it's data.  But climate science provides considerable scope for data to acquire values as it is prepared for models.

This makes the GISTEMP data series interesting.

Steve McIntyre is the amateur scientist who exposed the folly of Michael Mann's "Hockey Stick" research that attempted to use proxies from tree rings to rewrite the climate history of the past millennium.  (Mann should have known better than to mix environmentalism with tree rings:  Henry David Thoreau, in a supreme irony, died in 1862 of complications of a cold caught while counting tree rings on a winter's day).

McIntyre has also audited the GISTEMP record, and showed that Hansen had been manipulating his raw data by adjusting the pre-1970 data downwards by as much as 0.5°, and his post-1970 figures upwards.  This, of course, has had the effect of amplifying the apparent recent warming.

McIntyre also found an error in the manipulation (essentially a Y2K error) that shifted the warmest year in the US data record from the 1990s to the 1930s.

Hansen endorsed Kerry against Bush in the 2004 presidential election, and has claimed that the Bush administration has attempted to muzzle him on climate change.  The Republicans were quick to point out that, since he had made approximately 1,400 media interviews, the muzzle was not particularly effective.  You might suspect, therefore, that his data (after adjustment) might be a little more Democrat than Republican.

Hansen, of course, has form.  It was his testimony before a Congressional committee in 1988 -- 20 years ago -- that got the contemporary concern over climate change going.  As Jonathon Lash, president of the World Resources Institute, put it in a story in the Washington Post to mark the 20^th anniversary of his testimony:  "Before Jim Hansen's testimony, global climate change was not on the political agenda. ... Hansen was clear, explicit and unequivocal".  It is instructive to look at how that political effect was achieved.

The power of Hansen's testimony before the Senate Energy and Natural Resources Committee was enhanced by the imagery -- relayed on television -- of the participants sweating and in shirt sleeves, as the cloying humidity of a hot June day in Washington "leaked in through the three big windows in [Room] Dirksen 366 [and] overpowered the air conditioner. ..." as Post reporter David A. Farenthold put it.  Sitting on the committee that day was a young Senator from Tennessee, Al Gore.  In the chair was Senator Tim Wirth from Colorado, later to serve in the Clinton-Gore administration as Under-Secretary of State for Global Affairs, with carriage of climate change negotiations.

Farenthold reported that Hansen had hoped for a sweltering day to underscore his message.  He quoted Hansen as saying:  "We were just lucky".

There is a saying that you make you own luck, and that turned out to be the case with Hansen.

Hansen's testimony was largely orchestrated by Hansen and Friends of the Earth for maximum political impact.  Rafe Pomerance, then President of Friends of the Earth, arranged for Hansen to testify, which he did as a private citizen to avoid the risk of censorship by his government employer.  He was originally to appear before the committee in November 1987, but he convinced Friends of the Earth that his testimony would not have maximum impact in the cold of autumn, and instead appeared on 23 June 1988, when Washington was sweltering in a hundred degree summer day.

The leaking of the windows that overwhelmed the air conditioning system was apparently given a helping hand by a Democrat staffer, who left the windows open overnight.  The air conditioning system didn't stand a chance.  The windows were framed.

As Andrew Revkin reported in the New York Times in 1997, "To get the point across at the time, staffers called the National Weather Service to be sure the hearing date would be a hot one.  'We had it on that day, and opened all the windows,' Mr Wirth recalled".

This is not a practice that appears to be limited to Dr Hansen.  NASA itself posted on its website a satellite image of the minimum Arctic ice extent in 1979, which I used on the cover of my recent book.  As sceptical climate scientist Pat Michaels pointed out, this was the beginning of a series of animated images that came at the end of a cool period, and told a story of shrinking ice cover.  But NASA did not have any data for the immediate polar region for the first five years or so, so it simply made it up.

It placed a solid white disk over the North Pole, but did so ineptly, so that the sharp edges of the disk can be clearly seen in several places.

If that is worrying enough, even more disconcerting is the fact that, once discovered, NASA has not owned up to its deceit, but simply improved the quality of its retouching, so that the falsification of the image is now much better.  This is not The Right Stuff.

It is a clear example of what Harry Frankfurt has called bullshit:  the deliberate creation of the impression that you know more than you do.  Laura Penny took this up in a book with a title that will resonate with anyone who has been kept on hold on the telephone (does that exclude anyone?):  Your Call Is Important to Us:  The Truth About Bullshit.

The fact that NASA would photoshop an image to enhance its persuasive power is worrying.  Even more worrying is the fact that it failed to notice for seven years an error that inflated recent warming in the United States.

NASA, like any organization can develop "groupthink" -- as the O-ring problem with Challenger showed us, and as the null corrector problem with the Hubble telescope showed us.  There's an old joke among engineers about the stages of any project, where "Praise for the Uninvolved" is followed by the "Search for the Guilty".  As shown by the searches for the guilty in the Challenger and Hubble cases -- the Rogers Commission and the Allen Commission -NASA had problems with its organisational culture.  Their science was good but the sceptical culture needed for good quality assurance was lacking.  The Right Stuff had become The Wrong Stuff.

The problem is an example of what I call virtuous corruption, or what in policing circles is known as "noble cause" corruption.  It is sometimes defended because it is all in a good cause.  But it is always wrong.

The problem is many climate scientists have strong beliefs, but beliefs are not scientific.  One erroneous belief many have is that they adhere to what Roger Pielke Jr has called a linear relationship between science and policy -- that science will compel a preferred set of actions.  The virtual science using computer models so common in climate science is seen as particularly valuable in this quest, because it gives the appearance of objectivity.  It is an example of a political strategy the late Aaron Wildavsky called "Look!  No hands!" We must do as the science compels us!  But we know, of course, that computers are only as good as the assumptions and data fed to them:  Garbage In produces Garbage Out.

Without healthy scepticism and open disclosure of data and contestation of ideas science can get it wrong.  Even getting it wrong by a matter of degree makes for bad policy.  It leads to wrong priorities and poor choices and has created a wasteful sense of urgency in international negotiations.

Everything we know about the development of effective international regimes tells us that they are best built from the ground up, with the evolution of shared understandings of causes and solutions, and respect for differences between parties.

As Gwyn Prins and Steve Rayner put it in the journal Nature last year, by rushing to targets and timetables too soon, pushed by blaming and shaming tactics, we have so far wasted 15 years during which a more successful climate change agreement could have been developed more slowly.

I will predict here and now that we are highly unlikely to get an effective agreement in Copenhagen next year, and we will continue to waste time and money making more haste but less speed, and thinking -- wrongly -- that misconstrued and exaggerated science can ever serve as the basis for good policy.

The climate change problem is inherently one of making decisions over the very long term, under conditions of considerable uncertainty.  Misrepresenting the problem as one where we can (with any degree of accuracy) set the global thermostat by limiting atmospheric CO₂ to any particular level is not productive in the long run.

Neither is defining the problem as one where we should necessarily focus on mitigating CO₂ to the neglect of adaptation or other mitigation efforts.

For all my criticism of James Hansen, I am a strong supporter of what became known as the Hansen Alternative Scenario, which involved pursuing "no regrets" options to mitigate CO₂ but a focus on other climate forcing factors that could be mitigated more readily, in a technical sense, more cheaply, or with greater co-benefits.

One such forcing factor was black carbon soot from inefficient combustion of diesel or of biofuels in places like India, where indoor air pollution kills an estimated 150,000 (mostly women and children) each year.  Such options offer opportunities for investment that might actually improve the chances of securing international agreement from developing countries.

But, in putting this scenario forward, Hansen was offering The Wrong Stuff.  He was misrepresented by the journal Nature, which then refused to print his corrective correspondence.  And he was excoriated by the Union of Concerned Scientists for providing President Bush with a possible alternative to Kyoto.  (Actually, what we need is a Union of Disinterested Scientists!)

This is a state of affairs that should be of concern to us no matter what our political allegiances.  In a recent essay, Rudd Government Minister Craig Emerson reminded us all that the great improvements in human welfare have stemmed from the advances of the Enlightenment and its emphasis on science, rationality, and humanism and their triumph over mere belief.

Where scepticism is at the heart of science, belief is its enemy.  Psychologist Leon Festinger developed his theory of cognitive dissonance to explain our ability to deflect information that might challenge our dearly held beliefs.  Festinger was also the co-author (with Riecken and Schachter) of a study into the response of a modern millenarian movement when confronted by evidence that their forecasts of apocalypse have not been met.  Their observations are worth quoting:

A man with a conviction is a hard man to change.  Tell him you disagree and he turns away.  Show him facts or figures and he questions your sources.  Appeal to logic and he fails to see your point.  But man's resourcefulness goes beyond simply protecting a belief.  Suppose an individual believes something with his whole heart;  suppose further that he has a commitment to this belief, that he has taken irrevocable actions because of it;  finally, suppose that he is presented with evidence, unequivocal and undeniable evidence, that his belief is wrong: what will happen?  The individual will frequently emerge, not only unshaken, but even more convinced of the truth of his beliefs than ever before.  Indeed, he may even show a new fervor about convincing and converting other people to his view.

When Prophecy Fails, 1956

If climate science is not to fit this description, it must celebrate scepticism and the challenging of beliefs, not marginalise dissent with terms like "denier".  And the institutions of government, be they NASA or the Australian government, must foster the dissident culture upon which the Enlightenment was based, not the culture of conformity that currently pervades climate science and climate policy.

At present, I believe we have The Wrong Stuff, and that means -- to use a line from Apollo 13 -- "Houston, we have a problem".

Science Joins the Sub-Prime

Well known British scientist and commentator, Phillip Stott, recently described "global warming" as sub-prime science, sub-prime economics and sub-prime politics, and suggested it could well go down with the sub-prime mortgage.

Certainly, climate change has slid in importance with the stock market.  Indeed many commentators believe whether Democrat, Barack Obama, or Republican, John McCain, is elected president come November, it is now unlikely that an additional tax by way of a carbon trading scheme will be introduced into the US.

One of the more significant institutional proponents of carbon trading in the US, Lehman Brothers, has gone bankrupt.  Just last year that bank put out two major reports on global warming broadly embracing and promoting the United Nations Intergovernmental Panel on Climate Change (IPCC) agenda including emissions trading.  The second report entitled, The Business of Climate Change 11, went as far as to suggest that it will be possible to reach an international agreement to limit greenhouse gas emissions within five years.

Lehman Brothers not only promoted global warming, but also various structured Asset Backed Securities (ABS) that many Local Governments in NSW purchased on the basis they were a good money earner and AAA rated.  But many of these highly rated securities incorporated low rated sub-prime mortgages and as a consequence some NSW Councils have lost a lot of money.

The risk of a climate crisis, like the risks associated with ABS, are calculated using complex computer models.  Like the models underpinning sub-prime mortgage securitisation, general circulation models (GCM) that are used to predict by how many degrees the world will warm, are too complex for the average punter to understand.

While some in the Australian agricultural sector have complained they are not included in preparations for the introduction of an emissions trading scheme in Australia, this may end up a blessing.  Indeed I am inclined to agree with Professor Stott that with global temperatures likely to cool during the next decade, with a world economy set in austere mode, and with the new politics of China, India and Brazil, the big Global Warming's boom days are surely coming to an end.

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The system suffers when everyone has somewhere to hide

This global financial crisis is testing to extremes every idea and tool economic regulators possess.  But regulators don't demonstrate any understanding of a major cause of instability.  It's an idea that sits outside economic orthodoxy.

The problem is that the legal, managerial and psychological processes of employment diminish the transparency so necessary to healthy economies.  This has been at play in this crisis.

A key objective of economic regulators is to smooth out the cycles of boom and bust and to target steady, sustained growth.

Regulators have strong but limited tools.  They manipulate interest rates and cash liquidity and impose regulatory oversight on companies.

Yet the human factor of unrestrained greed seems to overwhelm them.  Greed creates economic bubbles when transparency is low.

It's not unexpected that the FBI is investigating potential fraud in Fannie Mae, Freddie Mac, Lehman Brothers and insurer American International Group (AIG).  Given even recent history, it's reasonable to assume that fraud will be found and executives jailed.

Less than 10 years ago, parallel scenes were witnessed with Enron, WorldCom, Italy's food giant Parmalat and Australia's own HIA, Bond and Qintex.  It was greed at its worst.

What beats the regulators is that it's impossible to control or predict the behaviour of every executive in every business, every day.  Sensible economic management would say "don't try!" -- attempts to micro-manage business kills business and economic activity.

It's a difficult balance.  Free-market economies need minimal regulation to maximise economic outcomes.  But leave business to itself and eventually "smart" managers conjure financial trickery to give stupidity and even criminality the appearance of respectability.

Look at the essence of this crisis.  US housing loans were made en masse to people who clearly could not afford the payments.  They were conned into loans that began with

very low interest rates but locked in higher rates several years down the line.  Now, at the end of the line, they can't afford the higher payments and are loan defaulters.  Poor people are now destitute people.

The lenders who initiated the loans, were loan traffickers.  They packaged the loans, masked them and on-sold them.  They knew the loans were duds.  At each level, traders pocketed profit.  Reputable institutions wound up owning worthless loans.  The con became globally systemic.  Then it crashed.

The loans bubble was always ethically poor, but was probably also fraudulent.  It certainly required lots of people to ignore that the loans were destined to fail.  But why would people in business be willing to do such bad business?  Here's the question:  what is it about the free-market approach that makes economic success so possible, yet economic crisis so repetitive?  There's systemic failing here.

An answer is in understanding that free-market systems are not fully applied.  The problem is at company level, and the link with employment.

Economic theory says that companies cannot and must not function like free markets.

They allegedly need strict command-and-control systems to operate.  Employment is the legal contract that delivers managerial control, it locks in each employee's subservience to the people above.

It's called loyalty, and it's thought that this enables companies to capture value.

Consequently, a company operates like a socialist state.  Individuality is suppressed.  Moral reasoning is distorted.  Subservience is supreme.

Accountability belongs to the collective and not the individual.  When senior people behave badly or illegally, the command system sends signals that people beneath them must comply.  Only the very brave "blow the whistle", and they are rarely rewarded.

The outcome is that individual common sense and ethics must overcome the system, rather than be supported by it, and the result is the systemic suppression of transparency.  Under these circumstances, when businesses trade with each other, the incentive is to trade in low transparency.

This was the core problem with the dud US housing loans.

Achievement of temporary "fools' gold" profit induced the suppression of the financial truth.  Long-term accountability for the inevitable harm was never taken on by individuals.  Everyone had an incentive to ignore reality.  The contagion spread, rotting the integrity of the entire financial system.

Successful free-market economies depend on transparency and the allocation of individual accountability.

It's the millions of little things that matter.  Buy the wrong clothing and you'll be a fashion disaster.  Buy the wrong car and you'll spend too much on petrol.

Reliable information helps our decisions.  With individual accountability, we change our behaviour because we must accept reality.

The system of employment fails in this respect.  Accountability is not individual and truth can be ignored.  Applied throughout an economy, transparency is reduced, corrupting market signals and allowing speculative bubbles to grow.

If regulators fail to recognise that "employment" is a primary contributor to economic instability, they risk merely tackling symptoms of crisis, rather than root causes.

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Influencing innovation

Should we worry about innovation?  The Venturous Australia report to the Minister for Innovation, Industry, Science and Research ought to tell us that innovation is no business of the government -- but it does not.

It is a politically correct document that mentions the workplace and climate change but a word search has found no mention of working families.

Australia in the last 15 years has experienced steady growth placing it among the top performers in the OECD.  It is not clear that this growth has very much to do with our innovations, science or research policies in any direct way.

The urge to innovate by politicians is both long lasting and bi-partisan.  Indeed it is an OECD wide urge.  Professor Alan Hughes from Cambridge University has diagnosed the original condition.  The urge progresses through emphasising the importance of research and development, promoting the exploitation of science from research institutions through licensing and spinning out innovations and establishing new entrepreneurial spin-off companies

The popularity of this model arises from the view that this is the basis of the superior economic performance of the United States.  It is a cargo cult approach as it is picks out and emphasises selective elements and ignores others.

A study of productivity growth in the United States shows most of the growth in the last seven years came in "low-tech" activities.  "High-tech" activity is a small part of the US economy.  It is a minute part of the Australian economy.  However what is thought to be happening is that there is a spread of high technology applications enabling productivity improvements in the "low-tech" sectors of an economy.

In Australia the mining and agricultural sectors benefit from the dispersion of "high-tech" products.  It the use that counts but the innovations may be sourced world-wide.

Research institutions can be put in context by looking at university patenting, licensing and spin-offs and by comparing the scale of this to the actions within industry.  As an example, IBM registered 2,941 patents in 2005 while the University of California state system in the same period registered 388.  As far as spin-offs are concerned, some 500,000 new firms are started each year while in 2004 462 US university spin-offs were established.

Even more interesting are the sources of innovation for companies.  There are even Australian statistics for this which show the key sources of ideas are within business, customers, suppliers, meetings and competitors.  Universities score about 10 per cent and R&D enterprises or even less!

Entrepreneurial spin-off companies are, in general, not as important as established companies.  It is only in sectors where "destructive" technological change is creating opportunities that they have a chance to grow and prosper.  The spread of the Internet is an obvious example where established businesses are battling with newcomers for news, music, film and the general delivery of information.

However the universities and public R&D do play a contributing part.  It is the supply of human capital, making a key contribution in producing graduates who will invent, implement and deploy innovations for the benefit of their companies.  The published research enables a spreading of information that is a public good.  But most importantly the direct network of contacts from universities to companies and from companies to universities at many different levels provides what may well be the key link.

Perhaps the urge to innovate was seeded by universities.  Academics are very good at sensing what makes governments fund research.  There are also very persuasive in argument and innovation is a fascinating and important process.  If national economic growth could be coupled to innovation and as directly as possible to the role of the university in the community then policy makers and politicians would be more generous in their funding of research.

So where is Venturous Australia leading the Minister?  It looks like the same old troughs will be renamed and then refilled.  There is a gentle admission that innovation was not well understood in the 1980's and 90's.  The commercial pipeline is found to have S bends and even manifolds.  Now it is clear that collaboration is the key.  Most of this explanation is sheer nonsense as the complications of innovation should have been well known to any informed policy maker.

The spirit of picking winners still moves among the people.  There are National Needs, Innovation Councils and a review of the "Innovation System".  Policy makers should ponder the relevance of this to innovation following the American painter Barnett Newman's famous remark about art critics that "Art criticism is to art as ornithology is to the birds".

How does innovation happen?  In our own lifetime we have seen the arrival of the PC and the Internet.  Both of these developments have the characteristics of a random walk.  There are hardware and software contributions from many sources:  scientists, engineers, marketers, professional and of course amateurs -- who are often the first customers.  As the innovation develops the mighty are humbled, new businesses emerge and the products find increasing application that in turn creates new opportunities.

How much does government policy influence innovation?  Directly there is no influence but subtly it can make a difference through education, research support and buying power.  These three are obvious but what about business culture?

In a seminal book, Regional Advantage, Annalee Saxenian, a Professor of City Planning at UC Berkeley, discussed the growth of Silicon Valley and compared it to Route 128 around Boston back in 1994.  The lesson was the importance of culture.  In Silicon Valley the model was co-operation among firms while in Boston businesses were defensive castles and silos with the enemy beyond.

Who set the culture was also discussed -- as Saxenian is a sociologist.  It is probably, alas, beyond government.  It might emerge, as it has in the mining industry, if there are examples of success.  You need clusters of business and experience and clusters spring up in some university cities.  Universities attract students who often stay after graduating to work and some will found new businesses and some will cluster near a university.  So universities are important but it needs more than that.

Markets determine success and one of the difficulties in Australia is the small local market.  It is hard enough in California to get going in a big market where there are many imitators and predators so how can you do it in Australia?

Perhaps mining provides a clue.  Miners have the sole right to physically use their licensed property.  Patents provide the equivalent for inventions, but again it is not enough.  You need access to skills to take and shape a product through development and marketing.  Not all these skills are available in Australia but as we grow we learn and add to our abilities.  But patents might give us enough protection to occasionally win out.

None of the above has much to do with government.

Venturesome Australia calls for more development funding but this carries an opportunity cost for the taxpayer.  So what about some innovation in funding?  What about company R&D vouchers redeemable at universities or government labs?  Give the customer buying power and researchers get government funding only when there is sufficient outside interest to trigger funding.  Oh and forget about CRCs (Cooperative Research Centres).

Innovations have an ability to come from unexpected directions and the greatest contribution by a government would be to ensure that we have a well educated and technically literate community.  But remember that many innovations have nothing to do with new technology!

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Where's the local goodwill when it comes to rates

How do we know that our local councils have raised far more money than they need?

It isn't the fact that local governments have enough money to send councillors on "diplomatic" missions to negotiate "friendship city" relationships.  Moreland City Council proudly notes that it has relationships with councils in China, East Timor and on the beautiful island of Sicily.  Ararat City Council carefully points out on its website that it took "many visits" to forge its relationship with the city of Taishan in China.  And thank goodness for Latrobe City -- apparently its fraternity with cities in Japan and China is responsible for all that peace, goodwill and friendship around these days.

But that's not it.  And it's not because local councils have enough extra money and surplus bureaucrats to organise those cringe-inducing "community" events -- the sort of events that assume people wouldn't say hello to their neighbours unless they were coaxed to do so by a public servant.

Every council has a half-dozen silly programs that help the bureaucrats feel like they are encouraging diversity, harmony and other nice things.  Boroondara has a spring planting festival, Frankston has a pet's day out, Brimbank has a leisure challenge, Stonnington has a thrilling-sounding follow your recyclables tour and, rather ambitiously, Monash sponsors the clean up the world weekend.

No, what makes it most obvious that local councils have jacked our rates up far higher than they need to is this:  council workers appear to have woken up one day and decided that they were no longer petty bureaucrats deciding the orientation of road signs.  Instead, they decided that they were investment bankers, with striped suits and a large bundle of equity-leveraged, investment-shared, portfolio-bearing, interest-asset options.

Councils are harvesting such an enormous amount of money from home owners and businesses that they can afford to play the sharemarket.  So, obviously, the financial crisis has hit local governments hard.

In NSW, where the law lets councils invest in pretty much anything they feel like, the subprime crisis has sucked so much money out of council investments that they are trying to sue their way out of the crisis.  The ratepayers of Manly City Council probably didn't expect that by paying their rates they were also speculating in low-doc mortgages in San Diego.  They no doubt thought their money was going towards vital diplomatic missions to sunny Italy and essential dog beauty pageants.  Instead, their councillors were being seduced by stockbrokers eager to sell shiny new investment portfolios that may not have been technically blue chip, but were definitely a secure-looking aquamarine.

In Victoria, our councils' lesser subprime exposure is only due to the fact that they have been legally restrained from making the most stupid investments.  Local governments have never been very competent at the best of times -- if you want to organise a hard-rubbish pick-up in April, you had better get on to the council now -- but it is particularly damning that the only reason Victorian councils haven't all gone under from shonky trading is because the State Government made doing so illegal.

Of course, it's a bit ironic watching local governments fall foul of the financial crisis.  To a certain extent, it was local governments around the world that caused the crisis to begin with.  For many years, local governments have attentively listened to those prudish property owners who are eager to block their neighbours' development plans.  Council bureaucrats have had great fun heritage-listing otherwise useful buildings and blocking subdivisions.  And council planners have helped state governments restrict development in the name of stopping evil "sprawl".  These are the sorts of heavy-handed planning regulations that have artificially raised the price of housing and contributed to the housing bubble that spectacularly imploded earlier this year.

Admittedly, local governments didn't invent the hoarding of tax.  The Federal Government's Future Fund -- that accumulating mountain of cash -- has now morphed into a giant cheque account that tries to make a virtue of the fact that budget after budget, Canberra is taxing us more than even they can think of ways to spend.

But instead of funding overseas trips, or playing the stockmarket, or hoarding for the future, perhaps governments should think about not taxing so much in the first place.

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Small voice with big ambitions

Climate change forecasts by scientists are having a dominant influence on policy throughout the world.

Politicians and economists have popularised some of the more sensational scientific concerns regarding climate change.  Dengue fever, malaria and the loss of the Great Barrier Reef are key features of the debate in Australia.

The Labor Government has claimed ownership of the climate change issue.  Prime Minister Kevin Rudd is in New York trying to persuade other leaders to follow the path to increased energy costs that he wants Australia to travel.  The Turnbull Opposition, perhaps energised by Julia Gillard's claim that it is "an inelegant mix of climate change deniers", looks set to outflank Labor from the left.

Andrew Robb, previously a logical and safe politician, seems to have a leading role.  He has called for retrofitting of buildings to reduce greenhouse gas emissions -- surely one of the most expensive approaches available -- and he has called for Australia to learn from Singapore's water recycling initiatives.

Singapore is a city of comparable size and population to Melbourne but has four times the annual rainfall.  But, unlike Melbourne, Singapore is a stand-alone political entity with a hinterland, Malaysia, with which it has had political tensions.  Five years ago, then Malaysian prime minister Mahathir Mohamad said he wanted to renegotiate at a "fair price" what it charged Singapore for water, pointing out that Hong Kong paid China 260 times what Malaysia was charging Singapore.

If Melbourne follows Singapore on water, costs will be increased fourfold, with no carbon reduction benefits.

Costs and benefits must be central in any action to reduce carbon emissions.  Ross Garnaut suggests Australia would incur an 8% loss in income if no action is taken.  Such estimates are only made possible by grafting onto the warming forecasts future costs that are amplified by discount rates that are, at the very least, unorthodox.

The costs of measures to mitigate carbon dioxide emissions tend to be hidden by the nature of economic analysis and modelling.  But Australia already has a huge drain of resources to accommodate fears of climate change.  These amount to about $3 billion a year and include:

• Taxes to subsidise non-commercial research and "demonstration projects".
• Standards to require uneconomical expenditure on insulation.
• Specific incentives to use uncommercial power sources like wind.

The sacrifice to real income such measures entail is masked by national accounting conventions.  The policies in place involve three sorts of costs.  The first are costs to consumers of the higher taxes and from being forced to use less efficient energy.  The second are impacts on business of the higher costs of energy as inputs into production and new investment decisions.  The third are the riskscreated for new investments in fossil fuel, especially those involving coal.

Energy saving standards and renewable energy requirements force consumers into using inefficient energy sources and to incur increased housing costs, both of which result in a reduction in real income levels.

The effects of taxes and other emission reduction regulatory impositions are even more invasive for producers than for consumers.  Those producers using fossil fuel energy see costs increase.  For those exporting or competing with imports, these costs go straight to the bottom line.  Hence, a 10% cost increase, even where energy comprises only 2% of overall costs, still has an appreciable effect on profit.

For energy producers, especially those considering investment in coal-generated electricity, the risk of retrospective taxation is too great.  This prevents new investment.  The corollary is a progressive increase in price as demand gradually outstrips supply or as higher-cost new generators are commissioned.  Aside from risks of power outages, this means costly marginal plant becomes the supply setting price.  Already the shortfall in new coal-based electricity supply has brought a 60% increase in wholesale electricity prices over recent years.

Australia is also, perhaps uniquely, pursuing inconsistent policy directions with regard to coal.  At the same time as new coal-based electricity facilities are virtually banned and existing generators are encouraged to be phased out, activity is under way to expand coal exports, especially from Queensland.  The burning of the coal domestically or overseas has identical effects (if any) on climate change, yet one is considered to be a pariah activity and the other is supported.

Carbon mitigation policies lead to lower levels of real wealth and have contributed to wider economic woes as consumers and producers alike make adjustments.  The cost impost forced by emission control policies has doubtless contributed to economic slowdowns as a result of the pervasive and largely unsubstitutable nature of electricity within modern economies.

Australia has more to lose than almost any other country from costs imposed by carbon dioxide emission restraints.  Cheap coal-based electricity has been the bedrock on which much of our industrial development rests.  Smelting industries in particular gravitated to Australia after the 1970s oil price hikes but low-cost electricity has helped the competitiveness of all our tradeable goods industries.  While we might speculate on the long-term costs of global warming on Australia, the short-term costs of increasing the price of electricity supplies are evident.

With 1% of world gross domestic product, we are not particularly influential within world councils.  And while we have many well-qualified scientists, few of these are considered to be world authorities on climate change.  Accordingly, it is pure hubris for Australia to try to take the lead in abatement activity.

Any measures to mitigate Australian emissions should be made contingent upon actions from the rest of the world.  Further, the focus should be a single instrument, a tax or tradeable right.  We should also ditch inefficient emission reduction instruments measures like mandatory renewable targets and we should dismantle regulatory barriers, especially to nuclear facilities.

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Bet your sweet bippee it's a crisis

The meltdown on Wall Street will hit all world economies.

The cataclysm follows from bankers combining and repackaging mortgage and other debt to make it attractive to different sorts of investors.

The mortgages on our houses or businesses no longer remain with the bank we borrowed from.

Nowadays that mortgage is just as likely to be owned by a pension fund in Iceland as by an Australian bank.

Repackaging mortgages combines the good with the bad.

So, for example, debt from people with little equity in their homes was cocktailed with debt from those who had largely paid off their homes and could easily service their obligations.

Stirring this financial brew, the US Federal Reserve has been suppressing interest rates.

This cheap money policy was first introduced to restore confidence following the terrorist attacks of September 11 2001.  For a variety of reasons it has been kept in place most of the time since then.

Cheap money causes inflation, which unlike most recent experiences, impacts on asset prices rather than consumer prices.

Asset price inflation includes prices of company shares, which have increased well in excess of potential earnings.

The inflation of asset prices was especially evident with houses in areas where planning controls restrained new supply -- a regulatory approach seen in much of the US and the UK, Australia and New Zealand.

Once the US Fed tightened credit, houses prices and shares started fell.

Debt packages that included assets in which owners had little equity became vulnerable to non-payment.

Because investors were unable to identify the more exposed debt packages, they started bailing out of all markets.  This caused a general and cascading weakening of prices.

Hand in hand with these financial developments have been policies to reduce carbon emissions.

All developed countries, including Australia, have measures that deter the building of new coal-based power stations and require use of high cost wind power.

This has raised the cost of producing goods and services and helped cook up the perfect storm that now threatens to engulf economies.

Many argue that the excessive lending of US banks and UK building societies has not been seen in Australia.  Perhaps so, but will Australia still face a crisis?

In the words immortalised by the Rowan & Martin's Laugh-In, "You bet your sweet bippee we will!"

Like the US, Australia has also experienced poor financial management, restraint on new house building and investment-sapping policies on electricity generation.

This aside, financial crises are contagious.  Lenders and borrowers are no longer confined to national boundaries.

As well as our debt being held in overseas institutions, our superannuation savings are also spread around the world.

The declining prices of US shares and houses have joined with domestic weaknesses to lower our wealth.

The issue for Australia is will our governments amplify the national and international shock waves?

At the least, Commonwealth and state governments must reverse the policies on housing and energy that have boosted costs.  And the Reserve Bank also has to avoid over-expanding credit by a low interest rate policy.

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Chance for lucky Turnbull

Malcolm Turnbull has an opportunity to seize the initiative against a deteriorating economic outlook.

If there's such a thing as a good election to lose, then the 2007 federal election qualifies -- and Malcolm Turnbull could be the luckiest man in politics.  Consider what has happened since November: a financial crisis has gripped the world and the chances of a worldwide recession increase hourly.

Even those not having their superannuation shredded start to take notice when the Dow Jones Industrial Average drops 500 points in a day.

In the popular perception, Kevin Rudd is not particularly popular or unpopular.  There's a feeling the Prime Minister has exhausted his box of symbolic symbols.

FuelWatch and GROCERYchoice were meant to allay voters' concerns about petrol and food prices.  Labor has been only too happy to claim it has the solution to every problem.  One wonders what its solution will be to a world financial meltdown.

There have been big swings against Labor governments in Western Australia and the Northern Territory, while in NSW the ALP has imploded.

The coalition has a "brand" strong on economic management and the parliamentary party and, while containing differences of opinion, it is not riven by the factionalism of past years.  The swing the coalition needs to regain office is not huge.

Despite this, the odds would still be on Labor winning the next election.  Incumbency is powerful and, as yet, the federal ALP has not revealed itself corrupt or incompetent.  In any case, recessions don't guarantee victory for an opposition -- a recession wasn't much help to John Hewson in 1993.

Turnbull, due to circumstances outside his control, has become Opposition Leader at a propitious time.  His challenge is to ensure the things in his control are managed, and managed successfully, and the thing he has most control over is policy.

Turnbull shouldn't leave policy to his shadow ministers -- the job of policymaking is simply too important.  He has more policy ideas than practically all his shadow ministers put together.

So far, the media focus has been on his ideas about matters such as the republic and reconciliation.  But of more significance are his views on the role of government, on which he's quite different from John Howard.

Howard tolerated -- and sometimes encouraged -- bigger government and higher public spending on the basis that the middle class should be supported.

He was willing to let the commonwealth interfere in realms of policy that had once been the exclusive preserve of state governments -- such as health and education -- and he had no qualms about extending government's reach into people's lives and their domestic relationships.  "Big government conservatism" is an apt description of much of Howard's agenda.

Turnbull, on the other hand, believes government should be smaller, taxes should be cut and politicians shouldn't regulate personal behaviour.

In the present political context this is radical stuff -- not that Turnbull is afraid of suggesting radical things.  For instance, he's publicly advocated vouchers in school education to give parents choice and improve outcomes for students from disadvantaged backgrounds.

Not even Howard, a fierce defender of non-government schools, was willing to use the V word in public.

Similarly, Turnbull's instincts would lead him in the direction of the complete deregulation of the university system.

The same goes for telecommunications and the media.

Turnbull brings to the role of opposition leader great communication skills, an outstanding intellect and an enormous capacity for hard work.  In developing policy, he should follow his instincts because in nearly every case those instincts will be correct.  Except when it comes to climate change and the emissions trading scheme.

Turnbull has been at the forefront of the Liberals' support for an ETS.  But, given the prospects for the world economy, the last thing that the country needs is a new tax.

And the ETS is more than just a tax.  As Rudd and Ross Garnaut have admitted, the ETS involves nothing less than the total transformation of the national economy.  Life will be difficult enough for businesses without them having to navigate the bureaucratic and regulatory maze of an ETS.

Now is the worst possible time to embark on the ETS adventure.  If Turnbull was to withhold Liberal support for the ETS, there's a good chance Labor would grab this as an excuse to delay -- at the very least -- the introduction of the scheme.

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