Other economics
Supermarkets again
Who could have thought that Oreo cookies would be at the centre of a $100 million + lawsuit on economic policy?
For a long time Oreo cookies were on the shelves of a major supermarket at a price of $3.50. The price was raised to $5.00 for 22 days, and then dropped to $4.50. and advertised as a price drop.
Neat, eh?
The ACCC is taking Woolworths and Coles to court over those “Prices dropped” and “Down down” claims, which it alleges are misleading.
In a 9-minute interview on Radio National’s Drive former ACCC head Allan Fels explains the details of the ACCC’s concerns, which relate specifically to advertised bargains.
The consumer organization Choice explains the ACCC’s move in more detail in its short article Coles and Woolworths accused of misleading shoppers.
There are variants of these consumer lures, but as Fels explains, they are all intended to give the impression that there has been a price reduction when there hasn’t been one at all – in fact a price rise in the Oreo example. He is reasonably sure that such behaviour is “deceptive and misleading” (a strong accusation in consumer law). “It’s systematic, it’s deceptive and it’s price gouging” he says.
If the cases succeed the retailers could be up for heavy penalties, in the hundreds of millions perhaps. It would not be possible to write off such penalties as a cost of doing business.
In a post on the ABC’s website by Josh Robertson – Former competition tsar says “power of the business lobby” shielding supermarket giants from key reform – Fels goes into the political economy of supermarkets’ behaviour. He favours, in principle, the government using divestiture powers to break companies’ market power, but he realizes that there would be practical impediments to using these powers in relation to supermarkets.
But Fels’ point should not be lost in detail. Our governments and business lobbies sing the praises of capitalism, but they baulk at unleashing the full and tough forces of competition on our coddled duopolies and oligopolies.
If the move by the ACCC is effective in improving the behaviour of our supermarket giants, no doubt the government will claim credit, but as the ABC’s Lucia Stern points out in her post Coles and Woolworths hit with more reputational damage after year of negative headlines, the push on the ACCC has come from peoplepower – fastidious individuals who, over a period, looked at the prices of particular products. The Commission received tens of thousands of submissions, she notes.
Any move against supermarkets in the realm of competition policy isn’t going to provide much relief to consumers. For substantial savings to occur we need to be less dependent on the high-cost business model employed by large supermarkets – a model that devotes huge resources to advertising and other forms of consumer persuasion, including loyalty programs, rather than price competition.
To break this model governments other than the Commonwealth need to be involved. State and local governments are intimately involved in zoning issues, particularly in new suburban developments, which seem to be guided by a default rule that shopping malls will be anchored by one or the other of the two main firms.
Quite separately from the ACCC action, the government has published its draft of the mandatory food and grocery code, a code designed to ensure that supermarkets deal with suppliers in good faith. Andrew Leigh explains the draft in a 9-minute interview on Radio National’s Drive program, and in the Saturday Paper Mike Seccombe has an article Craig Emerson on the supermarket code of conduct review.
Annabel Crabb suggests that these reforms requiring supermarkets to deal more fairly with suppliers could actually lead to price rises. She is right, but in the longer term reforms that improve the behaviour of our big corporations should have benefits all around. The only losers might be the advertising agents and the pulp media that depend on advertising. Would anyone miss supermarket advertisements?
On Friday the ACCC released its interim report on supermarkets, covering both retail and supplier issues. It is mainly concerned with structural issues in the supermarket industry, particularly barriers to entry faced by possible competitors. In this regard it notes that it has taken Aldi more than 20 years to achieve a 9 percent market share, and it notes the way planning and zoning laws, and land banking by the big supermarkets, can make it hard for new entrants. Suppliers and consumers alike are dissatisfied with the behaviour of the big supermarkets.
The ACCC’s next step in this inquiry is to look specifically at 14 products, including biscuits.
More economists please
If you have ever sat in an economics lecture, you may have noticed that the students are predominately male. Less obviously, your fellow students are likely to have enjoyed more advantaged backgrounds than students in other disciplines.
This lack of diversity is noted by Sydney Morning Herald economics writer Millie Muroi, posting on Ross Gittins’ site: Economists have a glaring problem: themselves. She endorses Treasurer Chalmers’ statement that “the economics profession will need to reflect the diversity of our country”, and she notes with approval that three of our most important economic institutions – the Reserve Bank, the Department of Finance, and the Productivity Commission – are now headed by women.
She cites research indicating that women in the economics profession are more likely than men to believe that income should be distributed more equally.
But she notes that in schools and universities economics is still a blokey discipline, and that it does not reflect our ethnic diversity. She is also concerned that economics has become a less attractive choice for students: the conceptually lighter discipline of business studies has attracted students away from economics.
She says that the fall in the number of students has weakened the economic literacy in the general population. Low economic literacy results in people making poor personal economic choices and poor collective economic choices at the ballot box.
She holds back from illustrating those generalities with specific examples. People’s preference to invest in real estate rather than in equities is surely an example of poor personal choice. The persistent belief that the Coalition is competent in economic management is an example of a poor collective choice. It has seen us elect governments whose economic policies combine the worst aspects of economic populism and crony capitalism.
The Productivity Commission – a very Australian institution
As you look around the world you will find most “developed” countries have a reserve bank, and one or two economic departments serving executive government, similar to our treasury and finance departments.
In Australia we have another established economic institution, the Productivity Commission. Its commissioners are appointed by the government, its funding comes through Treasury, and it has some specified duties, but otherwise its brief as an independent advisory body is reasonably broad.
It also has more than 100 years of history, going back to 1921 in its initial incarnation as the Tariff Board, tasked at setting levels of tariff assistance in order to protect Australian industry. In a process involving changes in charters and names, it went from a protectionist orientation to an advocate of economic openness.
What has not changed is its expertise in estimating the costs of economic policies – protection of our car and clothing industries in earlier times, and government programs including water reform, school reform, and incentives for philanthropy, to name some recent inquiries. That same expertise gives it capacity to evaluate macroeconomic progress in productivity and progress towards Closing the Gap.
It would always describe its task as one of evaluating costs and benefits, but that is far from an exact science. While consumer organizations have often welcomed the Commission’s preference for the workings of competitive markets, it has generally copped criticism from unions and social welfare agencies for endorsing neoliberal policies, and underestimating the economic benefits of interventions to correct market failure. As recently as January last year Richard Denniss of the Australia Institute described the Productivity Commission as “largely irrelevant”, and urged the government to reform it or perhaps even to abolish it.
Because its work often exposes how the benefits to a few come at the cost to the whole community, it has few friends.
That’s all background to a speech by the Commission Chair, Danielle Wood, who delivered the Ted Evans Lecture at the University of Queensland: Economists have lost their power. Here’s how to fix it. Woods took up her appointment last November, having been CEO of the Grattan Institute, a body well-known for its thorough economic research and advocacy for economic reform.
In that speech she admits that economists have not always served the community well:
For a long time, many economists have been wilfully blind to questions of distribution – arguing “it’s not our job” to consider economic inequality, let alone exploring the feedback loops between inequality, mobility and growth.
(In fact in many university basic economics courses students have been taught that economics is not concerned, and should not be concerned, with distribution.)
She goes on to point out that there have been failures in government human service markets “where the gates were thrown open to private providers without enough thought to market design and regulatory oversight”.
That is strong language. To neoliberals it is heresy to suggest that markets should be “designed” and subject to regulation. Similarly it is a betrayal of the “new public management” school to suggest that governments should be involved in such practicalities.
She comes back to defend the Commission as a body that exposes the cost of government interventions:
Economists can be a pain in the arse: our focus on trade-offs, demand for evidence on costs and benefits, and penchant for pointing to the potential for unintended consequences, can be tiresome for those who would prefer less scrutiny or more decisions on the “vibes”.
(Are the advocates of nuclear power, rent control, supermarket divestiture, and subsidies for private health insurance listening?)
The link above is to an extract form her speech mounted on the Commission’s website. For some reason it has chosen not to mount her full speech, but the ABC’s Gareth Hutchens reports on other aspects of her speech, including her comments on the government’s Future Made in Australia scheme. She comes close to accepting that, in response to other countries’ industry policies, we too should have an industry policy (to give it a full endorsement would put her a long way out on a limb). And she sees benefits in policies that draw on our key human and mineral resources.
She comes back to the theme that any such interventions should be evaluated against economic criteria, so that we know the costs of those interventions. That is not advocacy: it’s simply reminding us that choices have costs, and it’s a humble admission that economists do not have all the wisdom in evaluating public policy.
Muddled thinking about working from home
There was quite a flow of media reaction when Amazon, TabCorp and the New South Wales government ordered their employees back to the office.
Atlassian’s Mike Cannon-Brookes is highly critical of return-to-office mandates. Atlassian has been allowing its staff to work from anywhere since 2020. A senior Atlassian manager says workers forced to work in offices are “drowning in fake work”, and are “lost in endless meetings and messages”.
One view, pushed by return-to-office advocates, is that WFH is a passing phenomenon, boosted by Covid-19, and that life will return to normal in time, particularly as unemployment starts to rise, putting more power back to the hands of the bosses. That sees WFH as some privilege patronisingly allowed by “employers”, rather than as a practical working arrangement.
The other view is that WFH is here to stay, and it will have significant effects not only on the nature of work, but also on the spatial distribution of the population and on workforce flexibility.
There are claims and counter-claims about productivity, that seem to be informed more by gut feelings than by evidence, and there are generalizations that tend to overlook the nature of specific work tasks. WFH may be ideal for a computer programmer but out of the question for a nurse or crane operator. The ABC’s Chantelle Al-Khouri has sought the opinions of experts on productivity gains and losses from WFH: there is no simple generalisation because so many considerations come to play.
There is an accumulating body of research on WFH, including the regularly-updated US Survey of Working Arrangements and Attitudes, maintained by the Hoover Institution and Stanford University.
Unsurprisingly they find that WFH is most likely to be practiced in information technology, finance, insurance, professional and business services industries, and least likely to be found in hospitality and food services, transport and warehousing, retail trade and manufacturing.
Also unsurprisingly they find that while the most common working arrangement applying to 58 percent of employees is “fully on site”, 29 percent are in “hybrid” arrangements and the remaining 13 percent are in “full WFH” arrangements.
When they survey employees’ attitudes they find that people differ in their preferences, as shown in the two charts below.
Note that some like spending more time with friends and family, while others like clear boundaries, and that some find home quieter while others find work quieter. Again, it all depends on specific circumstances.
There is a podcast Work from home and productivity, with Nick Bloom of the Hoover Institution, going into other aspects of WFH. It’s suitable not only for professionals such as IT specialists, but it’s also suitable for workers doing routine clerical work, where there can be large increases in productivity because workers find it easier to start work on time, for example. WFH can also help expand the labour supply, by providing for people with special needs or caring responsibilities. On the other hand for people engaged in non-routine work requiring collaboration, WFH is less suitable.
Bloom and his colleagues believe that WFH is here to stay, as they predicted in their 2020 National Bureau of Economics Research working paper Why working from home will stick. Their subsequent work shows that although WFH fell after the Covid peak, it has tended to stabilize over the last two years: about 30 percent of paid work days for full-time employees are now done at home. WFH has its greatest stickability in big cities. (We can speculate on the positive benefits for transport infrastructure, and the possible negative impacts on city life.)
Not covered in this research are issues of personal power and status that may override considerations of productivity. As students of organization behaviour know, workplaces are important in giving people support, a sense of purpose and a defined role. But they can also be the stages on which people can display their status, can impress those up the line, and can enjoy exercising control over those down the line. The fully-enclosed office, the semi-enclosed office, and the open office are all props in this play. If WFH leads to the demise of the open office it will surely result in a boost in productivity.
Let’s face it: we collect too little tax in Australia
Matt Grudnoff of the Australia Institute has written a paper busting the myth that Australia collects too much income tax.
It’s a myth with some traction, because in comparison with other “developed” countries, a large share of our taxes is in the form of income tax. That’s because our total tax collection is low in comparison with those other countries. That’s primary-school arithmetic: if the denominator is small the fraction will seem to be high.
As has often been pointed out in these roundups, data from the OECD and other sources consistently confirms that Australia is struggling to provide an adequate level of public services and to maintain our common wealth. We are a low-tax country with an impoverished public sector.
Grudnoff corrects a common assertion that it’s difficult to make comparisons with other countries because those countries include social security contributions in their tax data, while we have a privatized superannuation scheme which doesn’t show up in our data. He explains clearly, that taxes are collected for the public purpose, while our superannuation scheme is for personal benefit.
Our superannuation is not a tax, and doesn’t even qualify as a “privatized tax”. While taxes generally have distributive benefis our superannuation scheme contributes to wealth inequality.
He presents five suggestions for raising more public revenue, which have generally been suggested by tax experts in the recent past. He doesn’t suggest raising personal income tax, and he steers clear of saying we should collect more GST. Taxes on fossil fuels and carbon emissions are in his list, but if we are to meet our climate change targets, these can be only a short-term source: they should diminish to zero over time.
My only reservation with Grudnoff’s presentation is that in using data from all OECD countries he has understated the extent to which Australia’s taxes are out of line with other countries. The OECD is no longer a “rich countries’ club”. It now includes countries such as Mexico, Turkey and Colombia as members – countries with poorly-developed public services and weak tax bases.
The graph below is essentially the same as the graph of Grudnoff’s opening page, but it includes only countries with GDP per-capita greater than $US55 000. (By the same measure our GDP per-capita is about $US70 000, about the same as Germany’s and Sweden’s.)
Note that among these high-income countries only three countries come below Australia, two of which are tax havens. As for the USA, it gets away with low taxes by running a massive budget deficit – 6.9 percent of GDP, compared with our modest 1.5 percent of GDP. If the USA had to fund its public services in the same way as other high-income countries do, it would need to collect about another four percent of GDP in taxes, putting it well to the right of Australia in that graph.
Voluntary taxation
Ours are more modest
News has come that the South Australian Department of Infrastructure and Transport has sold a car number plate (SA 8) for $2.3 million in an online auction. More than $4 million was raised in the whole two-week auction. Revenue raised will go to road maintenance.
South Australia is not the only state to sell number plates, but that $2.3 million may be a record price. South Australia raises about $900 million in motor vehicle taxes each year: $4 million is a handy supplement.