'SOME schools will receive so much money under Labor's proposed Gonski school funding reforms they will not know how to spend it and, in other cases, will not be able to buy the resources needed to make the crucial difference in students' education.

'Prominent education experts in two states have called into question how the National Plan for School Improvement will deliver appropriate accountability and oversight for schools, particularly in small and remote institutions where students will receive multiple disadvantage loadings under the scheme'.

Like the previous 'GFC cash splash' for schools, lack of money is not, repeat not, the cause of our schools failing to match best global standards for literacy and numeracy. And not in children acquiring a fierce desire to compete in an increasing global marketplace, either, I suspect.

In Henry's view - fostered by memories of his own schooling in the distant 1950s, plus close attention to his children's schooling in the 1990s and 2000s - there are three reasons for Australian children's suboptimal learning.

The first concerns quality of teachers. When Henry was a lad, most teachers, especially in primary schools, were women.  In those distant days, opportunities for women of talent were far fewer that they are now, so Australia had very high quality teachers and nurses, the two professions women were encouraged to join.

Sadly, as a perhaps unexpected implication of women becoming corporate and government leaders, and climbing heirarchies previously denied them, the pool of talented women available to teach others is limited. How to remedy this problem is hard to see, although Henry would if asked suggest that older workers of either gender retrenched in their middle fifties be retrained as teachers should they show appropriate aptitude and willingness.  The union might be a problem of course, but where there is a will there would be a way.  Worth a try in one state, Mr Naphthine?

A second factor is culture within the schools.  After a good performance in year five, Henry's first spelling test in year six was a disaster, with twelve mistakes.  Henry was given the strap and sent into his previous classroom to tell his year five teacher, who dismissed his by saying 'get back to your hutch, rabbit'. Henry's performance at the next spelling test was much improved.

A second act of what now would be called brutality came in year twelve.  'Hands up those who want to apply for a Commonwealth scholarship' said the class teacher. Henry's hand went up, even though he had no great knowledge of what said scholarship might involve. "You, Henry!' exclaimed the teacher, 'don't waste our time'. Naturally, a challenge like that could not be resisted, so the young Thornton insisted on applying, and surprised everyone by winning one, which he declined as by then he had a job.

Nowdays, of course, kids cannot be given the strap, nor one assumes can they be ridiculed in front of their class, although in the case of Henry's eldest child, he was given a pretty vigerous serve in the presence of his parents by one feisty teacher at his private school. Again, Henry does not propose turning back the clock to again allow beatings or ridicule to enter the curriculum, but it is undeniable that the classroom is a far softer and gentler place than it once was, perhaps past the optimal line for gentleness.

Third is the culture of parents. Now many parents strive to be 'friends' of their children, allowing a lot of time playing computer games, texting friends and generally promoting 'sensible work-life balance', rather than insisting on home-work (and supervising this at the kitchen table) and limiting the amount of happy relaxed leisure time.  Schooling, like work, is an important part of a person's life, and should be treated as such from the get-go.

Henry has not studied this matter closely, but has somehow absorbed from friends, including recent immigrants from Asia, and from exchange students from China living with the family, some important impressions. In summary, in all three catagories discussed above, those Asian nations that lead Australia in numeracy and literacy, and in will to win, schools and parents take an altogether more serious approach. Despite larger classes, supposed more rote learning and generally tougher regimes at home and schools, Asian kids outperform their Australian counterparts.  This of course shows up here too.  Simply look at the names on the lists of the highest-achieving students in each state's year twelve exams.

I rest my case, but welcome comments.

Contact Henry here.

The follow-up, from the Oz.

It is not an economic boom, because growth is tepid.

Supporting this conclusion are the facts that emerging stock markets are flat and commodity prices are low - in fact the dreaded 'D' for deflation word is being bandied about.

Nor is it due to a surge in profits. First quarter results for S&P companies exceeded expectations because of careful management of expectations - Mr Swan, Australian Treasury, please take note.

But, compared with the first quarter of 2012, S&P profits are up by only 5 %, clearly not boom time results.

The Bank of Japan's deflation busting monetary policy is 'perhaps the most popular explanation' and, supporting this explanation, Japan's Topix share mrket index is leading the global share boom - see graph.

The BoJ's expansive monetary policy is just the last in the line of extreme developed country monetary expansionn. and 'Such programs push down bond yields and encourage investors to buy risky assets'.

 Courtesy The Economist

Henry's research into monetary policy and asset inflation - using 145 years of US data - shows that expansionary monetary policy is strongly related to asset inflation and that this effect is at its strongest when goods and services inflation is held down, as it is now by the weakness of global growth and subdued goods and services inflation expectations. (The paper reporting this research is still being reviewed but is now available at SSRN.com.)

The Economist concludes on an optimistic note.

'... because of the unappealing nature of likely bond and cash returns, it would probably take a shock to derail the equity rally in the near term. Such a shock could be economic (a sudden surge in inflation that prompted a change in monetary policy, say) or geopolitical (a wider war in the Middle East, for example). But for now, the bulls see no need to worry'. Read on here.

A more worried view comes from the Financial Times, via the AFR. The headline is 'Those partying with US Fed's easy money will wake with a hangover'.

'The adage “don’t chase a rally” is a core principle of investing, but such advice counts for little at the moment as equities advance further into record territory in a year that has already generated a gain of more than 16 per cent for the US S&P 500'.

This market shrugs off poor data and 'partying like its 1999, while flirting with the danger that when the music stops the consequences of having brought anyway near the top are likely to be brutal and swift'.

So, feel free to choose your strategy, gentle readers. Henry's money is (still) on current momentum, but this week will include sincere efforts to test this proposition, as the FT's conclusion is surely correct.

And Ben Bernanke is speaking again this week, as he attempts to bring the excessive monetary expansion to an end without a bloodbath in the markets.

While budgets in the Howard-Costello government were uniformly conservative - ie underpredicting revenues - the Rudd-Gillard-Swan governments have suffered the opposite affliction, which is to overpredict revenues.

Over-optimism about revenues leads quite directly to overambitious spending plans. Plus, of course, a genetic disposition to spend other people's money on do-good schemes, which is fine if the budget allows that.

The great unanswered question is the extent to which the various predictions of revenues were provided by Treasury and the extent to which they were 'influenced' by the Treasurer. Henry heard one gruff oldtimer on ABC radio saying, with apparent authority, that the only estimates that are pure Treasury are those produced immediately before Federal elections.

Judith Sloan has tackled this matter at length in the Weekend Oz, and allocates blame mostly to the Treasurer, though Treasury has not enhanced its dwindling reputation either.

Henry's contribution from earlier this week is here - take pains to consider 'realistic worst case', comrades.

The budget battle is well and truly underway. 'Super funds lash Abbott 'betrayal' screams the AFR's front page. But Geoff Kitney says 'Anti-Abbott tactics misfire'.

The SMAge is, as usual, all over the place, but Peter Hartcher points out that 'The federal budget has prompted a good measure of old-fashioned responsibility on both sides of the political fence'.

Paul Kelly says 'The Great Abbott Scare campaign now begins in earnest'.

To Henry, the glum faces of the Prime minister and Treasurer during Tony Abbott's speech told the story.

This was the best budget reply speech Henry has seen since he began taking a serious interest in budgets in 1960, when Bob Menzies' credit squeeze neaarly ruined the family business

Markets

Records fall as US stocks soar, while the Australian dollar continues to slide.

'Thank goodness for the funds put into the US market' Henry tells Mrs Thornton.

'You're only as good as your latest play', Mrs T replies. 'That gold bar is not doing so well'.

'That was insurance, and the global crisis is not over yet'.

Treat of the week

It started as follows: 'In the commercial world that I have grown up in, eight elements of leadership must exist if you are to be
part of a high performance team. Intellect and skill are a pre-requisite, but these two characteristics
alone will not achieve your objective.

'Leaders must have a set of principles which recognise that people are your most important asset. These
principles are not exclusive but they have certainly helped me, and enabled me to test my principles
against others’ actions.

VISION – do you paint a picture of your objectives and are they shared?
TRUST – you will only be trusted if you trust others
INTEGRITY – do you show courage and promote courage in others?
PARTICIPATION – are you building adult relationships?
LEARNING – are you tapping into people’s discretionary effort?
DIVERSITY – have you confronted your own biases and prejudices?
CREATIVITY – do you know where the pockets of creativity lie?
COMMUNITY – have you created a healthy environment?

'The other characteristic which must be present is a clear understanding of how to manage the capital
of an enterprise which, for a time, you are the steward. That means that you must understand the
time value of money, so that a dollar you have to invest today is worth more than a dollar a year from
now or at least equal in value.

'In business you must earn above your weighted average cost of capital, that is, debt plus equity. If that
cost is competitive and realistic, then your enterprise will generate a cash flow which can be discounted
to determine today’s value of future cash flows and the economy as a whole is the beneficiary.

'I have a strong belief that economies that incentivise business to generate consistent added value
through profitable endeavours will grow, jobs will be created, and the tax revenues will increase for
the community as a whole'.

Read on here. 

Image of the week

 Courtesy The Oz

Mr. Abbott's speech has been well received, and his approach of keeping Labor 'saves' to help with the immediate budget crisis is good politics.  Also, by avoiding a sudden lurch in fiscal policy, sensible economics.

The glum looks on the Labor frontbench showed the extent to which they are well aware of the trouble they are in.

The biggest news of the day, however, was the 'debt warning' expose by Don Argus, AC, arguably one of Australia's greatest business leaders.

The Don, as he is called in Henry's circle of friends, has taken the trouble to assemble information on debt owed by government, households and business - the three legged stool of debt.  Data for both the USA and Australia is assembled, and naturally it is not a pretty picture.

Incurring debt is borrowing from the future, and repaying debt, as any honest enterprise or individual must do, imposes slower growth as repayments are made, unless the debt is used productively.

Rather than trying to summarise the Don's argumants, I invite readers to look for themselves.

Here is the link.

Alan Kohler has picked up on the Don's analysis also, and reviews Tony Abbott's budget reply here.

More economic news later.

In what is possibly his final performance as Treasurer, Wayne Swan showed a greater degree of sober realism than ever before, though many economists believe the risks to current forecasts are still biassed to the downside, and that current 'realism' is still not total.

One assumes there is some hard thinking going on within Treasury.  In Henry's day as a forecaster, it seemed logical to consider what we called 'realistic worst cases' as well as 'best guesses'.  Even a modest application of such an approach might have prevented the fiasco of Labor's entire time in office.  While budgets in the Howard-Costello government were uniformly conservative - ie underpredicting revenues - the Rudd-Gillard-Swan governments have suffered the opposite affliction, which is to overpredict revenues.

Over-optimism about revenues leads quite directly to overambitious spending plans.  Now the overspending has been encouraged by desire to make life as difficult as possible for Tony Abbott's government, or at least that is one plausible theory going about.

The great unanswered question is the extent to which the various predictions of revenues were provided by Treasury and the extent to which they were 'influenced' by the Treasurer. Henry heard one gruff oldtimer on ABC radio this morning (he missed his name) saying, with apparent authority, that the only estimates that are pure Treasury are those produced immediately before Federal elections.

If the one lesson from this experience is that 'realistic worst cases' should be built into forecasting exercises, it will be useful.

But of course, the deficient revenue projections and overambitious spending plans will have far larger consequences - a major set-back to Labor's reputation as economic managers, unnecessary pain when the consequences of overspending has to be unwound, confusion and unhappiness all round.

* A deficit of almost $20 billion, and not much lower next year.

* Economy forecast to resume trend growth (3 %) in fiscal 14-15, with unemployment reversing current uptick. (What if commodity prices fall further than now expected, comrades, or growth slows further?)

* Key 'Labor' spending initiatives announced but virtually unfunded, leaving the next government to cancel the programs or implement Labor's excessively ambitious policies.

* Spending increasing at Banana Republic rate, despite revenue dropping like a stone, (relative to inflated forecasts).

* Revenue fall, 'completely unforseeable' says the Treasurer. 

Blaming Treasury, naturally.  Has no-one told the Treasurer about risk management?

Sid Maher, Political correspondent concludes: 'WAYNE Swan has moved to entrench Labor's stamp on the nation beyond a predicted election defeat and set a political timebomb for Tony Abbott'. Read on here, but Bill Leake's cartoon tells this story.

  courtesy The Oz

'Targeting Tony the last shot in [Labor's] locker' is Paul Kelly's verdict.

He maintain's the 'bomb' analogy and offers the likely next PM a warning: 'If Abbott merely channels Labor, then he forfeits his flexibility as prime minister. But by rejecting much of the Gillard-Swan spend-and-save edifice, Abbott puts immense pre-election pressure on himself to reveal his own tough savings agenda.

'Beneath its Abbott trap, this budget runs a huge economic risk. Faced with revenue shortfalls, a budget blowout and a hazardous transition to non-resources growth, Labor has pressed the button on big and iconic spending initiatives out to 2020, designed to warm ALP hearts in the coming wilderness. It is a dangerous step. Swan assumes the economy stays buoyant, unemployment lifts only gently, revenue growth is firm (forecast at 7.3 per cent for next year) and the budget returns to surplus in just three years during 2015-16.

'Such optimism is heroic, and mocked by Labor's record, but the party is unlikely to be in office to be held accountable for another round of false optimism'.

You will access a nice video discussion when you hit the link to Paul Kelly's piece. Will save you lots of reading.

Henry's plan to repair the budget remains intact. Indeed, such a plan is needed more than ever.

And Henry recommends Laura Tingle's stirring summary: 'Wayne Swan’s sixth budget owes much to the scorched-earth tactics used over the centuries by the Russians retreating to Moscow in the face of a numerically superior enemy.

'At considerable cost, the Russians would systematically destroy their own land as they lured the enemy to follow them into country devoid of sustenance.

'In what is without doubt a courageous and highly unorthodox election-year budget, Labor has opted to look beyond election defeat, removing “easy” savings from the Coalition’s armoury and giving the government the best chance of reducing another deficit: its deficit on economic credibility in the race to September 14. At the same time, it is a strategy that locks in its legacy reforms in education and disability'.

Read on here, and do not miss the video.

Only four months to go, then we get to express our opinion in the most emphatic way possible.

'But even with the growth outlook turning more moderate, expectations for the Chinese economy – and the currency – have encouraged capital inflow since late last year (spurred on by quantitative easing by major central banks). These factors are creating a quandary for policy makers who have become increasingly concerned over building inflationary pressures and (arguably unsustainable) expansion in system credit. Consequently, this has added to the uncertainty surrounding the likely path of macro economic policy in China'.

(See earlier report here.)

Budget update

The journos and talking heads are just about locked up by now, it being 4 PM. The lock-up is a quaint but totally unnecessary custom when all the key features have been comprehensively leaked already.

'Plotting a path to surplus' seems to be the predominant theme, but 'restoring surplus without mindless austerity' seems to be the sub-theme.  Also '[try to] re-establish some credibility with the voters', while 'leaving landmines for Tony Abbott'.

What fun it all is, and such a waste of the time of high quality thinkers. (Who they might be I leave to the readers.)

The Lucky Culture and the Rise of an Australian Ruling Class

Last night Henry had the good fortune to hear Geoffrey Blainey launch Nick Cater's new book with the catchy title, and implied homage to Donald Horne.

The large hall at the Rendevous Hotel in Flinders Street was packed to overflowing by members and friends of the IPA and the Liberal book club.

This book will be a best seller, and may even be influential.

Henry will review it when time permits, but you can be sure it will be reviewed by the Australian, where Nick Cater is a 'senior editor', currently shaping the paper's opinions.

Lovely quote on the back page: 'The secret to Australia's good fortune is not found in its geography or history.  The key to its success is the Australian character, the nation's greatest renewable resource'.

This summary is provided by Henry Ergas, who goes on to point out that: 'Average real male earnings in 1995-96 were only 2 per cent higher than in 1982. In John Howard's period as PM, they rose 47 per cent. That didn't stop jobs growth, however, with unemployment falling to its lowest level since 1974.

'Middle-income earners were great winners, with Australia recording the highest growth rate of median income in the advanced economies after Ireland (which started from a much lower base and whose success was illusory). And strong employment growth, underpinned by increased labour market flexibility, not only spread prosperity but also proved the best form of welfare.

'In the early 1970s, fewer than 5 per cent of the working-age population received social security benefits. That proportion rose steadily to 26 per cent in 1996. Under John's government, however, it fell to 16 per cent, while the share of households mainly dependent on government benefits nearly halved to 12 per cent'.

Read on here, and if you can put up with David Koch spruiking a safe car website, you will get a fine pre-budget video to set you up for tomorrow night's econothon, Mr Swan's likely swansong.

The AFR presents a photo of five leaders of business groups grinning like very happy folk whilst complaining about 'budget chaos'.

Michael Smith reports: 'Australia’s four [there were two from the BCA] peak business groups have come together to demand an end to budget “chaos”, calling for a credible return to surplus and an overhaul of tax, carbon and workplace policies.

'In a rare united front, the business groups warned that the Gillard government had misread the post-global financial crisis challenges confronting the country and expressed concern that Tuesday’s federal budget would slug industry with higher taxes to fund ­election promises.

'Business Council of Australia chief executive Jennifer Westacott told an unprecedented round table discussion with The Australian Financial Review that Labor’s budget strategy was in ­“disarray’’ and called for an audit on the size, scope and efficiency of government'.

 Courtesy AFR

Business is 'concerned and alarmed', says the nation has become 'complacent', wants faster progress on IR reform and expects a mini-budget if the Coalition wins government.

Trouble with this otherwise exemplary plan, is that a new government will need a new narrative if people are going to cop the pain of a serious reform process.

This will take time, and the pre-election jostling and name-calling will contribute only marginally to the establishment of a more frugal, pro-growth agenda.

Fixing the budget will be a hurculean task, and is likely to take at least a year of hard grind.  When the budget is again on an even keel, with a path to meaningful surplusses clearly established, people may be ready for further reform.

More here in the latest Saturday Sanity Break, including a link to the latest RBA report on the economy.

From the business coalface.

'Business conditions remain very difficult', reports NAB, 'and confidence stumbles after showing signs of recovery earlier this year. Despite less negativity in retail & manufacturing, activity still very poor and labour market showing new signs of weakness. Also no sign of upward momentum – with forward orders, capacity utilisation and employment all very subdued and weaker. Tomorrow’s Budget to show lower growth forecasts and a fiscal position still retarding growth. We still expect one more cut (November) but could come earlier'.

The Great Gatsby

The US opening at the weekend was strong, with revenues a bit over US$ 50 million.

More comment here.

In recent weeks first the Treasurer revealed tax receipts were $7 billion below forecasts, then the PM said the number was $12.5 billion and two days later the Finance Minister said the number was $17 billion.

What the **** is going on comrades?  Is Treasury so incompetent that they have issued three new forecasts in three weeks, and two in two days?

Or is the government's tin ear that is responsible?  Or is it the frenzied 'new day, new policy' that has reduced budget preparation to a sick joke?

All will be revealed - possibly, because even Swannie is probably not fully up to speed on all this - next Tuesday and it will not be a pretty sight.  Readers should brace themselves for deficits as far as the eye can see, putting Australia into the same class as other developed nations.  With rate cuts into the danger zone, and more expected, we are in danger of joining the inflationist party of the major central banks.

It has become the rule in Australian politics not to leave anything in the cookie jar for one's opponants.  The Gillard guv'mint has set new standards, imposing a massive debt as well as an empty cookie jar. Here is a slightly satiric account of those at the top contributing personally to the process, from May Day 2013.

Here is a link to the RBA's sober report, which should only be read with a bottle of one's favourite tipple at one's side.

On the politics of the budget, Dennis Shanahan says 'Despite Julia Gillard's successful spiking of ambitions to restore Kevin Rudd to the leadership in March, there are Labor MPs who believe a resentful reaction to the budget and a steady diet of internal polling showing wipeouts will turn cold panic into an active hot panic.

'The Liberal Party is factoring in the possibility, albeit remote, that Tony Abbott could be facing someone else at the election - and not necessarily Rudd'.

Read on here.

Footy'n'stuff

Geelong easily won the battle for the top spot in last night's shootout against Essendon at the oddly named stadium with the roof.  Hawthorn vrs the Swans (no relation to the Treasurer one is quick to note) should be another ripper game and Henry sadly has to wait until Monday night to see Caaarlton! take on the Saints.  This looms as a danger game and one hopes not to be so exhausted from barracking that one is weakened for the budget presentation.

The Great Gatsby - coming soon

'Few will be shocked to learn that Luhrmann’s version of Fitzgerald’s short, spare, near-perfect novel is long, gaudy and flawed' says Tim Walker of the Independent. 'If you don’t care for his previous films, you’ll find little in the way of pleasant surprises here. But if you can abide the Australian’s lurid, hyperactive style, then there is much to admire nonetheless'.

Tim later refers to 'Luhrmann’s stonking lack of subtlety', which must be retained for all Australians abroad, and in Australia for Prime ministers and Treasurers.

A high Treasury official once told a meeting in Paris, the OECD as I recall: 'Let me, in my blunt Australian way, call a spade a bloody shovel'.

His successor with be able to improve on this with: 'Let me, with my native "stonking lack of subtlety" tell it like it is'.

And here is an advertisement including a long trailer.

No! (Yes, its called No!)

Fiona Prior reviews this political thriller.

'If you haven’t seen No and you enjoyed Ben Affleck’s Argo then do make the effort. Similar to Argo, No presents such an unlikely history-driven tale you will delight at the richness of reality’s twists and turns. No celebrates yet another victory of the against-all-odds, slightly insane long shot over what appear to be the most controlled of situations – the political strong-hold of Pinochet’s brutal, right-wing dictatorship in Chile, 1988'.

Image of the week - Prudent budgeter

 Courtesy Telegraph

A reader suggests tht Mr Swan be reminded of Mr Micawber's famous recipe for happiness:

"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

(Charles Dickens, David Copperfield)

More of the wit and wisdom of Charles Dickens here.

'Australia’s top corporate regulator has warned investors and their lenders that a search for profits triggered by low interest rates could lead to another wave of failed financial investments.

'Australian Securities and Investments Commission chairman Greg Medcraft expressed fears the Reserve Bank of Australia’s record low 2.75 per cent cash rate could lead many investors into attractive-sounding assets that are too sophisticated for them.

“This is the real high-level concern risk – in the search for yield, people invest in products that are probably inappropriate for their needs or they don’t understand,” he told The Australian Financial Review.

“That’s going to be a very, very important thing that we’ll focus on.” Read on here.

The commentariat is finally - finally! - getting agitated about the dilemma inherent in current economic policy settings here and abroad.

This is a matter Henry was worrying like a dog with its bone in Great Crises of Capitalism and more recently in his regular essay on monetary policy published here and in the Australian.

With great respect to the various 'money experts' quoted in the Fin and the Oz, the so-called experts have missed one key point. 'Monetary policy cannot serve two masters'. (M. Friedman.)  Think about this vital dictum from the world's leading monetary economist and ask yourself how it applies to Australia's current situation.  A shaft of light will eventually appear.

Almost to a man, the experts agree with ASIC that further rate cuts take the RBA into dangerous territory.

Vesna Poljac in the Fin reports: 'There's not much the Reserve Bank of Australia can do to weaken the dollar, cutting interest rates to a record low could store up trouble down the track and the Federal budget has got out of control, say Australia's top money managers and strategists'.

Paul Bloxham, the man who said the next change in interest rates would be up, reminds us, also in the Fin, that 'Cheap money is not the solution to all that ails an economy'.

The Oz has brought in one of the big guns, John B. Taylor of 'Taylor rule' fame, though the message is not so clear as those in the Fin.

'THE Reserve Bank's latest salvo into the emerging Asian currency war has failed to dent demand for the Australian dollar, which has clawed back most of Tuesday's losses following a surprise spike in China's trade performance. Leading international economists said artificial attempts to limit the dollar's ascent, underpinned since December by Japan's aggressive monetary loosening, could be damaging and futile.

'It clawed back almost half its losses yesterday, climbing back near $US1.02 following the news that China had posted a surprisingly strong trade surplus last month, suggesting global demand for Chinese goods was strong.

'John Taylor, the economics professor who designed one of the operating templates for modern monetary policy, warned central banks worldwide against the dangers of unilaterally undermining their currencies.

"If everyone tries to undermine the value of their currency with monetary policy, the results will not be good," Professor Taylor told The Australian yesterday.

'He argued that damaging commodity and asset price bubbles would ultimately result'. Right on, brother, but what is the solution for a small open economy that wants to avoid asset bubbles?
 
Clearly plan A has failed, and will almost certainly cause trouble.

Henry's plan B must surely get a run soon.  All spelt out in his 2013 articles on Australia's monetary policy.

But what would Henry know, comrades?