A new study should be the final nail for open-plan offices



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Who can concentrate under these conditions?
Shutterstock

Libby Sander, Bond University

Open-plan offices have taken off because of a desire to increase interaction and collaboration among workers. But an innovative new study has found that employees in open-plan offices spend 73% less time in face-to-face interactions. Email and messaging use shot up by over 67%.




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Get out of my face! We’re more antisocial in a shared office space


The study is the first to track the impacts of open-plan offices using objective measures of communication. It used electronic badges and microphones to monitor interactions among employees and tracked changes in email use.

The findings build on previous research, which has found, for instance, open-plan work environments compromise employees’ ability to focus and concentrate on their work.

Why go open plan?

Theoretically there are good reasons to move to an open-plan office. Our social environment plays a big role in our ability to be proactive and motivated.

And success in modern workplaces is often driven by how well individuals interact with each other and with the organisation.

Research has shown that the time employees spend on “collaborative activities” has “ballooned by 50% or more” in the past two decades.




Read more:
Open plan offices CAN actually work, under certain conditions


Workplaces that facilitate more frequent and higher-quality contact with others have been shown to have improved communication and collaboration on tasks, job satisfaction and social support.

The design of the workplace significantly influences this, by supporting or detracting from interdependent work.

Building a strong sense of community has been a key factor in the success of the coworking space provider WeWork. This has been largely achieved through the physical work environment – clean spaces, narrow hallways, communal kitchens and the like.

Privacy and concentration are critical

But despite the pursuit of collaboration in workplaces, the need for concentration and focused individual work is also increasing.

And research shows that when employees can’t concentrate, they tend to communicate less. They may even become indifferent to their coworkers.

Knowledge work requires employees to attend to specific tasks by gathering, analysing and making decisions using multiple sources of information. When any of these cognitive processes are interrupted, inefficiency and mistakes increase.




Read more:
Open plan offices attract highest levels of worker dissatisfaction: study


Being able to focus on a task without interruption or distraction is an essential foundation for effective work.

But research suggests that poor design can have unintended consequences – increasing the cognitive load on workers through high density or low privacy, both of which increase distraction.

Why open plan doesn’t necessarily lead to collaboration

In many open-plan offices, the drive for increased interaction and collaboration comes at the expense of the ability to focus and concentrate.

When distraction makes it hard for employees to focus, cognitive and emotional resources are depleted. The result is increasing stress and errors, undermining performance.

When employees can’t concentrate on their work, their desire to interact and collaborate with others is reduced.

In addition, new research suggests that increased crowding in the workplace and low levels of privacy lead to defensive behaviours and strain workplace relationships.




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The backlash against open-plan offices: segmented space


Other aspects of workplace design, such as views of nature or access to daylight, can replenish cognitive resources even in the presence of distractions.

An aesthetically pleasing environment may provide an experience that is restorative.

Additionally, research has shown that aesthetically pleasing workplaces can help create trust within organisations.

Getting the balance right

Emerging research has shown that individuals view similar work environments differently. Rather than a one-size-fits-all approach, as is traditional in open-plan design, work environments should provide various options that support employees working effectively.

Evolving models of workplace design are seeking to achieve this, by providing different zones for different types of work and different needs.

However, the effect of shared desk arrangements in these types of environments requires further investigation.




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The research on hot-desking and activity-based work isn’t so positive


Many employers are heavily focused on driving collaboration and interaction at the expense of privacy and concentration. This has negative outcomes for both productivity and work relationships.

Organisations should focus on providing workplaces that support the requirements for privacy and focus, as well as interaction and collaboration.

The ConversationTo achieve this, greater emphasis needs to be placed on both visual and auditory privacy, particularly the use of acoustic treatments, as well as the layout and appearance of the workplace as a whole.

Libby Sander, Assistant Professor of Organisational Behaviour, Bond Business School, Bond University

This article was originally published on The Conversation. Read the original article.

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Labor states keep the National Energy Guarantee in play but withhold agreement


Michelle Grattan, University of Canberra

The Labor states have kept the National Energy Guarantee (NEG) alive but withheld the in-principle support the federal government had originally hoped to extract from Friday’s meeting of the COAG Energy Council.

The next stage in the NEG battle is the Coalition parties’ crucial meeting on Tuesday, when Prime Minister Malcolm Turnbull and federal energy minister Josh Frydenberg will be confronted by Tony Abbott and other critics who want, in effect, the plan to be made less green.

The Labor jurisdictions are anxious both to ensure that the NEG plan won’t be derailed by the Coalition party room, and to extract concessions from the federal government.

Victoria’s energy minister Lily D’Ambrosio said that her state had withheld its support until conditions that it put earlier this week were met.

D’Ambrosio emphasised that Victoria was “not walking away from the table” but added that Turnbull and Frydenberg needed to “stare down the crazies in their party room”.

Friday’s meeting had at an earlier stage been billed as deadline day for the NEG, but D’Ambrosio said it was “far too soon” to sign off on the policy.




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What’s your state’s position at the crucial National Energy Guarantee meeting?


Queensland’s acting energy minister Cameron Dick said his state was pleased that Frydenberg “has accepted Queensland’s position that we need the Commonwealth legislation to go through the federal Coalition party room first”.

“The Coalition party room is the biggest risk to energy and price stability, and has been for 10 years, so we need that party room certainty,” he said.

Ministers from the non-Labor states of South Australia and New South Wales said they would have preferred to have moved forward more quickly.

Frydenberg put a positive spin on the meeting, saying that ministers had moved a step closer to implementing the NEG. They had agreed to release an exposure draft of the needed state legislative amendments to implement it. This would be done after a teleconference on Tuesday and the passage of federal legislation through the party room, he said.

“In the words of Energy Security Board Chair Dr Kerry Schott, today’s agreement is a ‘great step forward’,” he said.

But Frydenberg remained intransigent in the face of demands, which have been strongly pushed by Victoria, that the Commonwealth emissions reduction legislation should allow targets to be increased by regulation, rather than requiring more legislation.

Frydenberg said the federal government would not negotiate on that issue, and pointed out that Victoria’s own renewable energy target is enshrined in legislation.




Read more:
Emissions policy is under attack from all sides. We’ve been here before, and it rarely ends well


The Australian Industry Group said that continuing development of the NEG was a positive step. But its chief executive Innes Willox warned: “The COAG Energy Council will soon have to make a real decision or risk condemning Australian industry to years more of damaging uncertainty.”

The Business Council of Australia also welcomed the step forward.

In a round of interviews before the meeting, Frydenberg said he was confident that the governments “will agree to move forward” with the NEG.

“We had a very constructive dinner last night and there was a broad appreciation … of the importance of the National Energy Guarantee, of our responsibilities to deliver lower power prices and to increase the reliability of the system, and the importance of integrating energy and climate policy,” he said.

“So while some of the states maintain some of their concerns with the design, there is broad understanding of the importance of the guarantee.”

The ConversationGreens climate and energy spokesperson Adam Bandt said that the states were “hopefully realising the NEG is a dud”.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Treasury admits corporate governance is broken but baulks at systemic fixes


Andrew Linden, RMIT University and Warren Staples, RMIT University

With the Banking Royal Commission’s interim report looming, public jockeying to influence what Commissioner Kenneth Hayne might recommend is intensifying.

In response to damming evidence at the commission, the Australian Institute of Company Directors (AICD) has doubled down to maintain the policy status quo (which helpfully protects its professional director members).




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Solving deep problems with corporate governance requires more than rearranging deck chairs


The AICD is involved in a quick redraft of the ASX corporate governance code. It is advocating voluntary increases in board gender diversity and continues to claim that so-called independent non-executive directors should dominate boards.

Controversially, new AMP chair David Murray has repeatedly attacked the AICD’s policy position. He declared that “the board’s got to conduct itself in a way that it looks to the CEO for everything”.

Now in a submission just published on the royal commission website, Treasury, Australia’s paramount source of economic policy advice, has weighed in to make some startling public concessions about the state of corporate governance in Australia.

Treasury concedes that, based on evidence to the commission, shareholders have no interest in protecting customers, the wider community or the public interest. It notes:

… shareholders’ interests do not necessarily coincide with customers’ interests, particularly in the short-term; indeed much of the misconduct has generated significant returns to the firms that have flowed through to healthy dividends. Of course, when misconduct affecting consumers threatens profitability and reputation, the response of shareholders can be quick and strong.

The idea of shareholder primacy and maximisation of shareholder value has shaped public discourse, dominated political debate and determined what constitutes “good” corporate governance in Australia for the last three decades.

To rephrase Charlie Wilson’s observation about General Motors, it has been thought that what is good for shareholders is good for everyone.

Shareholder primacy has supported a political disposition favouring industry self-regulation and wars on red tape, as well as regulator cutbacks and passivity.

Treasury now says this received orthodoxy is dangerous.

Red flag calls for bolder reforms

This red flag on the dangers of shareholder primacy comes in the wake of a recent guidance note from the Australian Prudential Regulation Authority. APRA reminded directors they have core legislated duties that should not be equated with meeting shareholders’ demands and that boards are not the playthings of shareholders.

However, Treasury then baulks at even broaching reforms that evidence from other jurisdictions (see here and here) suggests will increase board accountability and lower systemic risk.




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Treasury devotes most of its paper to discussing important changes in prudential oversight and standards. It fails to mention these options for systemic corporate governance reform that could apply to all companies (not just banks).

For example, the British government is considering reforms such as employee directors. Even the UK equivalent of the AICD mentions this as a reform option.

Bizarrely, Treasury, perhaps anticipating the views of the government, then says a regulatory non-market-based response is its least preferred option for preventing systemic misconduct.

The Treasury’s confused response is underscored by the Australian Securities and Investments Commission’s recent approval of the revised banking code of conduct. The code is not mandatory and still relies on the banks to police themselves.

To be clear, relying on market-based responses, self-regulation and shareholder primacy will only result in more of the same.

For example, prominent corporate governance scholars claim that corporations ought to be regarded as republics and states-within-states. It’s easy to see how managers and directors can justify ignoring the law using that logic.

And the royal commission has heard damning evidence that banks chose to ignore the law to maximise profits.

Fix the structure of boards

Instead of looking to quick conventional fixes (as Treasury does), such as re-emphasising directors’ duties and increasing diversity through soft targets, we argue that the unitary board structure itself is an underlying factor in systemic misconduct.

Executive and non-executive directors sit on the same unitary board. This allows power to be concentrated in the hands of dominant (usually) executive directors. It’s exactly what the APRA report on the governance at CBA describes.

The unitary company board structure urgently needs reform.

It has long been recognised that unitary boards are self-perpetuating oligarchies. Imperial CEOs or chairs who are themselves dominant or controlling shareholders (or owe allegiance to one) preside over these boards.

The board structure in Australia is a relic of early Victorian-era company legislation. Like parliaments of this era, unitary board systems like Australia’s still use a property franchise to restrict voting eligibility and deny representation to other actors.

It’s hardly surprising then that corporations presided over by unitary boards are regularly described as dictatorships and have poor external accountability.

Agency theorists valorise hyper self-interest and corporate dictatorships. They ignore that corporations rely on legislated rules to exist and directors have public interest obligations (for example, to follow the law).

In this context the agency theory-inspired idea that shareholder interests can be equated with customer interests or the public interest now looks ludicrously naïve.




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So, if shareholders can’t (and won’t) protect customers and the wider public interest, who can?

As we have argued recently, to lessen the chance of systemic misconduct, board representation should be broadened and board functions should be split across two boards.

The ConversationThat Treasury fails even to broach this option after acknowledging the system is broken, and instead opts for piecemeal solutions, is a recipe for future disaster.

Andrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT University and Warren Staples, Senior Lecturer in Management, RMIT University

This article was originally published on The Conversation. Read the original article.

Australia has to prepare for life after the World Trade Organisation


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The Trump administration is rapidly breaking down the World Trade Organisation.
AAP

Giovanni Di Lieto, Monash University

The Trump administration’s economic policy is rapidly breaking down the World Trade Organisation (WTO) system and shattering the rules-based international order. On top of imposing tariffs, the United States is blocking the appointment of new judges to the body that interprets and enforces WTO rules, decisions and agreements.

If this continues, the WTO will virtually cease to function by the end of 2019.

This will cause a gradual breakdown of the multilateral trading system and lead to a new international economic order that is no longer anchored in liberal democratic values, nor fully constrained by the rule of law.




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America’s allies will bear the brunt of Trump’s trade protectionism


Australia must plan for a change in the globalised economy that has underpinned our 27 years without a recession.

In other words, Australia urgently needs a plan B should Donald Trump’s trade agenda lead to further protectionism.

This could include a so-called “border adjustment tax” – a flat tax on imports with a corresponding rebate on exports – or more emphasis on trade with noncompetitive economies such as India and Indonesia.

Breaking the World Trade Organisation

The US blocking of new judges to the WTO’s Appellate Body has caused a large backlog of disputes.

The Appellate Body is an international trade court of appeal typically composed of seven judges. They have the final say on the interpretation and enforcement of WTO rules, decisions and agreements.

The WTO is a member-driven, consensus-based organisation. Thus, the appointment of new Appellate Body judges can only occur “if no Member, present at the meeting when the decision is taken, formally objects”.

This is not exactly an equal veto power for all WTO members from mighty China to tiny Vanuatu. The larger economies can easily sway the minnows. The reverse is not true.

In practice, it takes the opposition of only one very powerful country to block any WTO process.




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From October 2018 there will be only three Appellate Body judges left, the minimum required to form a valid dispute settlement panel. Crucially, two more judges will conclude their quadrennial term in office on December 10 2019, thus reducing the Appellate Body to only one member.

This effectively means the WTO rules can no longer be implemented and enforced. A paralysed Appellate Body is the death knell for the multilateral trading system.

This is what Trump really meant when he said that “trade wars are good and easy to win”. They are indeed for countries allowed to act unilaterally without the constraints of enforceable multilateral rules.

An anti-globalisation strategy

Diminishing the Appellate Body is just the latest in the smash-and-grab tactics used by the Trump administration to counter globalisation.

It appears to be a two-pronged plan. First, break the WTO system. Second, implement sweeping tax changes to rebalance America’s trade accounts, using measures prohibited by the WTO.

The WTO Appellate Body crisis is a canary in the coalmine. Australia must act without delay to limit any damage from disrupted trade flows and to chase opportunistic gains from trade diversions in emerging regional value chains.

For example, Australian beef producers will be much more competitive in exporting to China as their American competitors have to grapple with a 25% tariff on their beef.

On the other side, Japan recently struck a deal with the European Union to drop tariffs on food imports in exchange for concessions on car exports hit by the US-China trade war. Australian food exporters will face stiffer competition from the EU in the Japanese market.

Life after the WTO

With the United States planning adjusting border taxes post-WTO, Australia must consider similar measures to keep the economy stable and competitive.

Australia should refocus diplomatic efforts towards bilateral ties within the Indo-Pacific region rather than the developed economies that are further away.

A new generation of bilateral trade and investment partnerships is better suited than dwindling WTO instruments to maximise Australia’s economic and security outcomes in a less-than-liberal international order.




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Rising imports make the case for Trump’s border adjustment tax in Australia


Strengthening Australia’s bilateral ties in the Indo-Pacific is especially necessary in a securitised trade environment that is pivoting to shorter yet knottier supply chains within regional clusters.

We can already spot the initial signs that Australian policymakers are repositioning to navigate life after the WTO. During recent discussions in Buenos Aires between Group of 20 finance ministers, Treasurer Scott Morrison called for a revamp of the WTO system, as it “failed to deal with long-standing issues” and was “built for a different time”.

The ConversationMorrison didn’t spell out what changes he thought were needed to ensure Australia is better off in the next trading system. This is a debate we need to have sooner rather than later.

Giovanni Di Lieto, Lecturer of international trade law, Monash Business School, Monash University

This article was originally published on The Conversation. Read the original article.

Vital Signs: inflation misses again, so where does the RBA go next?


Richard Holden, UNSW

Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.


The disturbing trend of persistently low inflation continues, as Wednesday’s data release shows.

Headline inflation was 2.1% for the last 12 months. But the more relevant “underlying” rate came in at 1.9%. This is even below the 2.0% the RBA forecast in May.

Given that the RBA’s target band for inflation is 2-3%, and that inflation has barely touched the bottom of that band over a protracted period, there are implications for monetary policy.

But, before we get to that, the obvious question to ask is: why is inflation so low?




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One strand of thinking involves the “Philips Curve”. This basically says that low unemployment pushes up wages growth and hence inflation.

We could get into a long discussion of whether the current 5.4% unemployment rate is “low”. And whether the effective rate really is 5.4% given anecdotal evidence about “underemployment”, the impact of recent decisions on penalty rates and minimum wage rises, and the robot revolution as a backdrop to the whole labour market.

But we don’t need to go there. There is barely any evidence of the Philips Curve in the data over the past quarter century, so let’s just reject that theory and move on.

Plausible factors keeping a lid on inflation

  1. Technology. The information technology and internet revolution has made lots of things much cheaper. Take music. Gone are the days of paying A$20-plus for a CD with maybe 16 songs on it. Streaming services like Apple Music and Spotify give access to literally millions of songs for a small monthly fee.

  2. China. The rise of Chinese manufacturing has led to everything from kids’ toys to cell phones being produced vastly more cheaply than if those things were manufactured with higher-cost labour.

  3. Globalisation and trade. The world has become radically more connected, and so have company supply chains. This not only allows access to lower-cost manufacturing but also leads to better specialisation through the principle of comparative advantage. This means that high-labour-cost countries like Australia can specialise in other components of goods and services, get better at producing those components, and reduce overall costs further.

  4. Wages. Wage growth has been subdued for a long time now. Since labour costs are an important component of many goods and services, this has served to tame inflation. One potential reason for low wage growth is that automation sits as a background threat to human labour. If labour costs get too high then processes get automated, which serves to keep wages in check.

  5. Leverage and consumer spending. A final factor is that given how heavily indebted Australian households are –largely through mortgage debt – they simply don’t have a lot of discretionary income. This limits consumer spending and makes price rises in the retail sector less likely.

These factors don’t look likely to change any time soon – with the possible exception of trade due to the Trump trade war. But even if that escalates dramatically it will shrink economic activity, further depressing prices.




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Explainer: why some economists think the RBA should drop its inflation target


So we have long-run, persistently low inflation. Is that a problem?

The major concern is that it could turn into deflation, although that doesn’t look terribly likely right now.

If, however, there was another significant economic downturn then deflation is a very real prospect. That would raise the spectre of Japan’s experience of the 1990s where deflation caused people to hoard money, severely contracting economic activity.

But for now the real impact of low inflation is on the RBA.

Faced with inflation below its target band for an extended period, the standard response would be to cut interest rates. The RBA is clearly worried about doing this.

One reason is housing prices – the RBA is worried about further fuelling the bubble.

With housing prices easing, this may become less of a concern, although household debt levels remain extremely high. Not encouraging households to become further indebted seems like a reasonable concern.

A second reason the RBA may be nervous about cutting rates is that it doesn’t have very far to go with the cash rate at 1.50%. If there is another major economic downturn then the RBA wants to have some firepower left to respond.

If short-term rates were already near zero then the only tools available to the central bank would be non-standard measures such as quantitative easing. That would be uncharted territory for the RBA, which seems reticent to explore that territory.

So, as with economic growth and wage rises, the RBA response seems to involve crossing as many fingers and toes as possible and to publicly proclaim that things are looking good, but may take a while.

The ConversationWe will get a better look into how that strategy is going when wage price index figures are released mid-August.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

Victorian Labor government shapes up to Canberra over NEG


Michelle Grattan, University of Canberra

The Victorian Labor government’s cabinet will consider on Monday a raft of demands around the National Energy Guarantee (NEG) ahead of a crucial federal-state energy ministers’ meeting later this week.

This comes as a broad group of business and industry bodies appeals to “federal, state and territory leaders to put aside politics and ideology and support the implementation of the National Energy Guarantee.

“Business and industry need policy certainty and stability in the energy sector. There can be no further delays,” they say in a statement issued on Monday.

Like Victoria, the Labor governments in Queensland and the ACT are pressing for changes and guarantees on the NEG package, but the Andrews government is shaping up as particularly gung ho. It is under intense political heat, facing an election in November, with contests against the Greens in inner city seats.

The Council of Australian Governments energy council meets on Friday. The federal government wants approval given to the NEG mechanism there. That mechanism requires state legislation.

If he can get in-principle agreement on the NEG mechanism on Friday, federal Energy Minister Josh Frydenberg will then take the planned federal legislation on emissions targets to the Coalition party room the following Tuesday, with the COAG energy council to sign off on the package after that meeting.

There would be a meeting about the final detail of the state legislation in September.

The Labor jurisdictions are discussing a range of demands.

These include that

… emissions targets could only be increased not reduced;

… increases in targets should be able to be made by regulation rather than requiring legislation that could be blocked by the Senate;

… the emissions reduction targets should be reviewed every three years. Frydenberg is proposing a five year review period, after initially planning for a ten year period.




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Victorian Premier Daniel Andrews said on Sunday: “There is significant doubt that the Prime Minister can even get through his own party room the reforms that he would like us to sign up to.” Andrews said that Tony Abbott, who is highly critical of the NEG, had significant support for his views in the party room.

Victoria wanted the Prime Minister to show he had party room support and then come back to the states, Andrews said, repeating the position his energy minister, Lily D’Ambrosio put last week. Frydenberg has said the states will get the chance for another look in the phone hook up after the Coalition party meeting.

Andrews said the federal government’s plan would in part see Victoria and other states “ceding to the Commonwealth the authority to set renewable energy targets, for instance, putting renewable energy jobs and putting additional supply into the grid into the hands of the some of those in the Prime Minister’s own party room”.

The ACT government last week said it could not support the NEG in its current form, with the territory’s legislative assembly passing a motion calling for improvements.

The Queensland Energy Minister, Anthony Lynham, will not be at Friday’s meeting – a surgeon, he is volunteering on a boat off Papua New Guinea. He will be represented by an acting minister. Queensland has expressed concerns about its renewables target – 50% of energy coming from renewables by 2030 – being compromised.

Federal sources are reacting sharply to the looming demands from the Labor states, saying that emissions targets are the responsibility of the federal government, not the states, and that nothing in the NEG restricts state governments’ renewable targets. They also say that Victoria has the second highest power prices.

As the NEG battle enters a crucial week, the statement from business and industry groups says: “Together our organisations represent businesses that employ millions of Australian workers. The business sector employs five out of six working Australians and contributes more than 80% of economic output in this country”.

The statement is put out by the Business Council of Australia, the Australian Industry Group, the Australian Chamber of Commerce and Industry, the Council of Small Business Organisations, the National Farmers’ Federation, the Australian Petroleum Production and Exploration Association, and the Australian Energy Council.

It says “a decade of policy uncertainty has only resulted in higher electricity prices and a less stable and reliable energy system”.

“Now is the time to act in Australia’s national interest. Australian households and businesses cannot afford the costs of yet another cycle of political sparring, indecision and inaction”.

The CEO of the Business Council of Australia, Jennifer Westacott, on Sunday made a forceful plea for the NEG to get support.

She said a “decade of dysfunction” needed to be ended and this was a scheme that businesses said could be made to work.

“Look, you can’t satisfy the extremes of this debate. If you took the extreme green movement, you do nothing because the community would not tolerate the deindustrialisation of the economy that basically they’re arguing for.

“You can’t satisfy the extreme right of this debate because again, you do nothing, ” she told Sky.

“So we keep dithering as a country and as we dither … prices continue to go up. Investment uncertainty continues to rise.

The Conversation“We’ll just have to get on with this and get some progress. If you’re trying to satisfy both ends of this debate … you will do nothing for another 20 years.”

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Could the NEG bring down power prices? It’s hard to be confident that it will


Salim Mazouz, Australian National University; Frank Jotzo, Crawford School of Public Policy, Australian National University, and Hugh Saddler, Australian National University

The final design document for the National Energy Guarantee (NEG), released this week, contains a range of claims about the policy’s ability to drive down both greenhouse emissions and electricity prices. But still there is precious little detail on how exactly these assertions are backed up.

Specifically, two claims in the new document released by the Energy Security Board (ESB) are difficult to reconcile with other reputable modelling results.

First is the claim that greenhouse emissions will fall further under the NEG than they would in the policy’s absence. But a fine-grained analysis published a week earlier by the Australian Energy Market Operator (AEMO) suggests that the target of cutting emissions by 26% will be met regardless of whether the NEG is implemented or not.

The ESB predicts that emissions will fall further under the NEG (purple line) than without it (orange line). But according to the AEMO’s forecast (blue line), emissions will drop by more than this, even without the NEG. NEG modelling data are approximate, derived from measuring graphics provided in the ESB report.
Hugh Saddler, Author provided

If the AEMO analysis is right, the NEG in its currently proposed form will do nothing to cut emissions.




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The second claim is that wholesale electricity prices will fall by a further 20% under the NEG. But it is hard to see how this will happen, given that the policy is not expected to trigger large changes to the energy landscape. The ESB’s document provides no raw data on this, but if we squint hard at the graphs provided in its modelling summary, we get the following:

Forecast changes to electricity generation capacity under the NEG. Modelling data are approximate, derived from measuring graphics provided in the ESB report.
Hugh Saddler, Author provided

This is not just a technical quibble. Much of the political justification for the NEG rests on the hope that it will deliver cheaper electricity. But how?

Taking the assumptions provided in the ESB’s document, we can attempt to deduce what will be the main drivers of price changes, in rough order of importance:

Contract coverage

The modelling assumes that contract coverage – electricity retailers and generators currently use electricity contracts to manage their exposure to fluctuating prices in the spot market – will increase by 5% under the NEG.

This is based on the notion that the NEG’s reliability requirement – which would require electricity retailers to hold an appropriate portfolio of electricity contracts in dispatchable sources of generation – would incentivise retailers to buy more electricity contracts.

Whether this would indeed drive an additional 5% of contract coverage is rather difficult to ascertain given the information provided. On the face of it, 5% seems a lot given that the reliability requirement is not expected to be triggered, noting that no reliability issues have been identified in the AEMC’s recent reliability standard and settings review and that even the base cases in AEMO’s Integrated System Plan do not trigger reliability problems.

Even if contracting does increase by 5%, how does that push down prices? This is a crucial point and yet it is not backed up by adequate analysis or evidence in the ESB report.

The ESB’s chain of reasoning appears to be: the NEG will result in a greater share of electricity output being sold under contract in anticipation of the reliability requirements kicking in; this will lead to lower spot market prices; this in turn will also pull down prices in the contract markets, reducing average wholesale prices overall.

So it all hinges on retailers changing their wholesale purchasing habits so as to ensure they meet the reliability requirement – even though, as discussed above, the reliability requirement is unlikely to be triggered Moreover, it is hard to believe that contract prices would fall as a result; it seems just as likely that the generating companies that sell those contracts (and which wield significant market power) would raise their prices, not lower them.

More renewables

The ESB assumes that the NEG will deliver an extra 1,000 megawatts of renewable capacity.

But this is an assumption, rather than a modelled outcome. The only justification offered is the ESB’s assertion that “recent renewable investment trends have been in part supported by the likelihood of an agreement to implement the guarantee”.

This is surprising, given that the NEG’s emissions target is so weak as to be ineffective, and ESB’s assumption that the policy will drive down power prices (and therefore profits for renewables generators). Any direct incentive for investment in renewables is highly unlikely to be coming from the NEG; the only plausible reasons would be greater confidence and lower financing costs.

Demand response

Demand response – in which consumers alter their power consumption so as to reduce peaks in electricity demand in exchange for payment – can potentially make a big difference to power prices by reducing the incidence of high-price events.

The use of this strategy is already growing strongly among electricity market participants. But once again, the ESB has given us little evidence to back up its assumption that the no policy case will have lower demand response than under the NEG. It all again hinges on the effect of the reliability requirement on contract coverage and on the extent to which emerging demand response products can take advantage of this. Very little analysis and no evidence to back up the choice of assumptions is contained in the ESB’s policy document.




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Financing cost

The ESB assumes that the NEG will reduce the uncertainty premium – an additional amount required to finance projects in the face of policy uncertainty – by 3 percentage points. It is clear that a policy uncertainty premium currently exists, although it is unclear how high it might be. The Finkel Review assumed it is 3%. So does that mean investment uncertainty would completely disappear once the NEG is legislated?

Certainly not. Given the highly publicised political disagreements (even within the government’s own ranks) about the NEG’s emissions target, it seems likely that substantial policy uncertainty will still linger.

Regardless, this scarcely matters for the price outcomes modelled by the ESB, given that the model is predicting very little new electricity investment and the small amount of additional investment in the model attributed to the NEG is entirely assumption-driven, rather than a modelling outcome.




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Overall, the latest policy details don’t inspire confidence that the NEG will actually drive down power prices relative to what will happen anyway. We need a credible analysis of these assumptions, and modelling to tease out the effect of varying them.

It is helpful that the final report by the ESB does include at least a summary of the modelling. From here, it would be useful for the ESB, and the modellers it hired, to provide an investigation of the issues we have outlined here, or to undertake one if this has not yet been done.

The ConversationAs per this week’s open letter from energy analysts calling for the release of the modelling, independent researchers have offered to provide peer review. Let’s hope the ESB takes us up on it.

Salim Mazouz, Research Manager, Centre for Climate Economics and Policy, Australian National University; Frank Jotzo, Director, Centre for Climate Economics and Policy, Crawford School of Public Policy, Australian National University, and Hugh Saddler, Honorary Associate Professor, Centre for Climate Economics and Policy, Australian National University

This article was originally published on The Conversation. Read the original article.

Think carefully before buying Bitcoin – and don’t buy the ‘safe haven’ claims


Lee Smales, University of Western Australia

The sharp rise and subsequent fall in Bitcoin’s value places it among the greatest market bubbles in history. It has outpaced the 17th-century tulip mania, the South Sea bubble of 1720, and the more recent Japanese asset price and dot-com bubbles.


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The rapid price rise garnered attention from an increasing number of academics and investment advisers. Some have suggested that Bitcoin improves portfolio performance and can even be used as a potential “safe haven” asset in place of gold.

Our work finds that much of this research is flawed and overlooks some important attributes that any investor should consider before allocating funds to such a speculative investment.

This is particularly relevant if investing in Bitcoin is rationalised as a prospective safe haven in times of market turmoil.

Hard to value

The first attribute investors consider is how to value Bitcoin. Typically, assets are valued based on the cash flows they produce. Bitcoin lacks this property.

This leads to ongoing debate as to the true value of Bitcoin and other cryptocurrencies. Some, such as the Winklevoss twins and other Bitcoin entrepreneurs, believe the price will soar far higher. Others, including Nobel prize winner Eugene Fama and esteemed investor Warren Buffett, believe the real value is closer to zero. Another Nobel winner, Robert Shiller, suggests the correct answer is “ambiguous”.

There is even wide variation in price across the various Bitcoin exchanges. This is common in fragmented markets and makes it difficult for an investor to find the best market price at any point in time – a process called price discovery.

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High price volatility

Bitcoin prices also have a high level of variation (volatility) when compared to other possible investments including bonds, stocks and gold. Even tech stocks such as Twitter, which are considered relatively volatile, are found to have less price variation. This adds to the difficulty investors face when trying to value Bitcoin and any portfolios that contain it.

This is of particular concern given the large daily losses that Bitcoin has experienced in its relatively short life. The largest one-day decline experienced by the popular S&P500 index since 2011 is 4.2%. Bitcoin has had nearly 200 days that were worse (and over 60 days worse than the biggest decline in the gold price of 10.2%).

Put another way, Bitcoin has had 200 days worse than the worst day on the stock market. This hardly seems like an enticing investment for most.

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Low liquidity

Investors should also consider the ease with which they are able to buy and sell any assets in which they invest. One method used to measure this liquidity attribute is the bid-ask spread – the difference in the price at which one is able to buy and sell the asset.

More liquid assets have a narrow bid-ask spread. Bitcoin’s bid-ask spread varies from one exchange to another, but in general it is much larger than for other assets.

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While bid-ask spreads provide one measure of implicit trading costs, investors also consider the explicit transaction fees they are charged when trading. Transaction fees for trading traditional investments are typically well known and have trended down over time.

While Bitcoin fees have recently declined, they have proven to be highly variable, ranging from over $30 to under $1. The time taken to process a transaction can also be greater than 78 minutes. This is much longer than for stocks or bonds and creates another layer of uncertainty for investors.

Only for the most risk-loving

Bitcoin is harder to value, more volatile, less liquid, and costlier to transact than other assets in normal market conditions. Potential investors should be wary and carefully consider whether such highly speculative assets are appropriate additions to any portfolio.

The ConversationGiven safe havens are typically in demand during financial crisis, when markets are more volatile and less liquid, it is highly unlikely that Bitcoin is even worth considering as a safe-haven asset.

Lee Smales, Associate Professor, Finance, University of Western Australia

This article was originally published on The Conversation. Read the original article.

Rising reliance on personal income tax signals need for bolder reforms


Phil Lewis, University of Canberra

The Parliamentary Budget Office (PBO) has just released a report on trends in Commonwealth taxation receipts. While supporting the expectations of a budget in balance by 2019-20, it exposes worrying trends in the balance of the burden of taxes in Australia. In particular, its analysis of trends in the composition of tax revenue identifies an increasing reliance on personal income tax.

The PBO shows that tax revenue from labour (mostly income tax) was 8.6% of GDP in 1971-72. By 2015/16, this had risen to 12.6% of GDP. Over the same period, tax collections from capital (mostly company tax) as a percentage of GDP was virtually unchanged, from 3.3% to 3.2% – although this increased noticeably during the “economic boom”, which ended when the Global Financial Crisis (GFC) hit in 2007.

Taxes on consumption (such a GST and excise duties) were 5.3% of GDP in 1971-72 and 5.7% of GDP in 2015-16. While the introduction of the GST in July 2001 raised consumption taxes temporarily, revenue from both GST and particularly excise taxes has been in decline as a percent of GDP since.

Figure 2 from the report shows these trends over the decades.

Trends in revenue from categories of Commonwealth taxes.
Source: ATO data and PBO analysis

The main emphasis of the PBO report is on the period since 2001-02. The chart below shows the increased reliance on income tax and declining importance of taxes on consumption and capital.

What is driving these shifts?

The main reason for the rise in income tax revenue is “bracket creep” as incomes increase and taxpayers move into higher marginal tax brackets. This is due to successive governments not fully indexing tax brackets to increases in CPI or average earnings.

Meanwhile, consumers have been changing their tastes and responding to prices by altering their consumption patterns. The so-called “sin taxes”, or rates of excise duties on alcohol and tobacco, have increased significantly over time.

This has been particularly true for tobacco where the volume of consumption has fallen as fewer people smoke and those who do smoke less. However, the percentage fall in consumption has been less than the percentage rise in tax, so tobacco tax revenue has risen.

For alcohol, consumers have been switching from more highly taxed beer to wine, which is more lightly taxed. For instance, a full-strength beer from your bottle shop carries a tax of $37.10 per litre of alcohol. A moderately priced bottle of wine bears a tax less than half that ($17.60 per litre).

What might be considered a distortion in the taxing of alcohol means that changes in tastes towards drinking wine reduce tax revenue. The system of taxing alcohol is distorting in that encourages changing consumption habits away from beer drinking to wine.

Fuel excise is levied on a number of fuels but revenue comes mainly from petrol sales. The indexing of fuel excise rates was abolished in 2001 before being reintroduced in 2014. This reduction in the real excise rates was accompanied by significant reduction in the volume of fuel per household, from 11.4 L/km in 2001 to 10.6 L/km in 2016, as vehicles became more fuel-efficient.

The combination of reduced real excise rates and reduced consumption have reduced fuel excise revenue as a percentage of GDP.

The GST, one of the principal aims of which was to provide a broadly based growth tax, is declining in relative importance. This is mainly due to the exemptions from the GST base. For instance, spending on education and health, which are exempt from GST, is growing faster than spending on other goods and services. There is also some loss in revenue due to online purchases from overseas, which the government is trying to address.

As the share of consumers’ spending continues to switch from GST-liable to GST-exempt items the share of GST revenue will continue to fall.

Company taxes have diminished in importance in Australia and elsewhere because of the way multinational companies can arrange their tax liabilities across national borders to minimise tax. However, there is also worldwide recognition of the need to reduce company tax rates because of the detrimental effects these have on investment and growth.

The need to cut ‘deadweight loss’

When discussing taxes economist often refer to “deadweight loss”, which is the loss to the economy over and above the amount recouped in tax revenue. When revenue is taken from individuals or companies this results in less of a service or good being produced.

It is argued that governments should put more reliance on taxes that cause less distortion – less deadweight loss. That is, they should have as little effect on individuals’ and firms’ behaviour as possible.

A broad-based GST is efficient because all goods and services bear the same tax rate and therefore will not change relative consumption. It is exemptions that bring about inefficiency by encouraging consumption of untaxed items and discouraging consumption of taxed items. Taxing wine more lightly than beer encourages wine consumption at the expense of beer.

The Australian Treasury has named company tax and income tax as having the “biggest deadweight loss” of all the Commonwealth taxes. International research backs this up. The deadweight loss falls on consumers and shareholders but mostly on workers and wages through lower investment.

The Treasury estimates the deadweight loss of company tax could be more than half the revenue raised from taxation. For income taxes, the deadweight loss is estimated to be 21 cents for every dollar of revenue. This comes about from reduced incentives to work, save or invest.

The ConversationThe PBO report suggests that with continuing trends in taxation revenue the budget’s reliance on personal income tax will increase if current levels of Commonwealth taxation are maintained as a percentage of GDP. While proposals to reduce company tax rates will reduce inefficiency of taxes somewhat, a heavy and increasing reliance on personal income tax points to the need for substantial tax reform. But that’s something neither major party seems prepared to do.

Phil Lewis, Professor of Economics, University of Canberra

This article was originally published on The Conversation. Read the original article.

Government report provides important opportunity to rethink Australia’s relationship with India



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Importantly, the new strategy is ambitious, and will be led by, at least for now, the governments of Malcolm Turnbull and Narendra Modi.
AAP/Ella Pellegrini

Craig Jeffrey, University of Melbourne

By 2060, India may be the world’s largest economy. It will certainly be the world’s most populous country. At that point, Australians will ask, “What did we do in the 2020s to build a relationship with this superpower?” They may also ask: “How did economic cooperation with India benefit both countries in the early 21st century?”

The federal government’s report, An India Economic Strategy to 2035, was launched last week in Brisbane. Written by University of Queensland Chancellor Peter Varghese, it is an excellent basis for reflecting on these questions and the wider issue of Australia-India cooperation.

The strategy identifies numerous sectors – health, education, and tourism, for example – that can help enhance economic cooperation, and in which Australia has some comparative advantage. It also specifies ten Indian states as targets for collaboration based on their economic heft, commitment to reform, and relevance to the sectors in which Australia has competitive advantages.

Importantly, the strategy is ambitious. It sets itself the goal by 2035 to lift India into Australia’s top three export markets. It intends for India to become “the third largest destination in Asia for Australian outward investment”, and for it to be brought “into the inner circle of Australia’s strategic partnerships.”




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The strategy emphasises two areas that need attention in order to meet these objectives. First, Australia needs to leverage the strengths of the Indian diaspora, which now numbers about 455,000.

The rapid growth of the Indian diaspora population can be a spur to economic cooperation. The Indian population in places like Silicon Valley drive the IT and biotech booms in India and the US. Canada is highly adept in enrolling its Indian diaspora in projects of national and international development.

Second, Australia needs to build more knowledge of India and support organisations that work on the bilateral relationship. While Australia made a pivot towards China in the last quarter of the 20th century, businesses, governments, and the public developed comparatively little knowledge about India.

The emphasis on China led to a neglect of India in education, media, and the policy sphere. There is a need to rebuild public understanding of India and the institutions that can activate this understanding to achieve lasting impact. Culture and arts will be very important here, both as a sector and enabler – points implicit in the strategy.

Varghese says we need to move beyond constantly drawing comparisons between India and China. “India is not the next China,” he writes. India is a distinct opportunity for engagement that merits discussion in its own terms.

The base from which Australia is working with respect to cooperation is certainly different: Australian exports to India are less than a sixth of those to China.

Two further issues will be crucial for the strategy’s successful implementation. The first concerns the relationship between growth and wellbeing. It is clear that the India Economic Strategy imagines enhanced cooperation not as a basis for economic growth as such, but also higher standards of living.

There is a need to reflect carefully here. We must think not only about spurring growth in the Australian and Indian economies, but also ensuring that growth is meaningful in four ways: that it addresses social and economic inequalities, creates jobs, is environmentally sustainable, and fosters opportunities to lead fulfilling social and cultural lives.

This is where the comparison between India and China is important. Since 2000, India’s economic growth has been not much more than half as effective at lifting people out of poverty as China’s economic growth. This means that for every 1% growth in Gross Democratic Product in China nearly twice as many people are elevated out of income poverty as in India. This partly reflects the depth of social inequalities in India.




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Australia and India: some way to go yet


In the context of rising concern over inequality in Australia as well, the key question is: How can international economic cooperation create growth that reduces inequalities, generates jobs, and protects the environment in the countries concerned? It is a question that puts Australia and India on the same side of the table.

A second issue concerns the term “navigation”, which is in the title of the strategy. As the Danish anthropologist Professor Henrik Vigh has pointed out, navigation is a great metaphor. It connotes plotting and re-plotting a course on a moving plane. The complexity of that plane in this case calls to mind the six degrees of motion of a boat: pitch, roll, yaw, sway, heave, and surge. The strategy’s recommendations and ideas are excellent, and can be re-calibrated as India and Australia pitch, heave, and yaw.

The ConversationThe India Economic Strategy is an exciting document written with confidence and ambition. It provides a foundation for reflecting on economic cooperation and striving for meaningful growth.

Craig Jeffrey, Director and CEO of the Australia India Institute; Professor of Development Geography, University of Melbourne

This article was originally published on The Conversation. Read the original article.