– Professor Richard Holden

The Prime Minister, Julia Gillard, recently announced that petrol would be exempted from Australia’s forthcoming carbon tax (sorry, “price on carbon”.) She declared, “Families, tradies, small business people do not have to worry about a petrol price increase.”

No doubt much will be said about the politics of it, but let’s talk about the economics of it. They’re not good, either.

There is a basic tradeoff here—an all too familiar one. A carbon tax internalizes externalities. That is, it forces people to make choices that take account, in this instance, of their impact on the environment. Why is this necessary? Because there are some things that aren’t part of the price mechanism, yet drive our economic choices. Pollution stemming from manufacturing is often not factored into the price of consumer goods, the price we pay for car registration typically doesn’t take into account traffic congestion, and so on.

What does a carbon tax do? If properly implemented, it internalizes these kinds of “externalities”—things that are not naturally part of the price mechanism. It makes people face the true prices—and hence consequences—of their individual decisions. Sounds perfect, right?

Not so fast. Some people will not be hurt very much by such a change, but some people will be hurt quite a lot—at least relative to their current incomes and expenditures. If there is suddenly a large tax increase on petrol and I walk to work, then that’s no big deal for me. If I drive a lot for my job (or for recreation), then that is a big deal. The Prime Minister apparently hears the pain of the latter group and has acted. That’s reasonable, in principle. There are distributional consequences of a carbon tax and she wants to mitigate them. Fair enough, no?

Too bad, then, that she has chosen the worst possible instrument with which to try and help. The whole reason for having a carbon tax is to change behavior—make people face the real price of their actions. Ms Gillard has chosen to exempt a large number of people from doing exactly that. It will significantly damage the effectiveness of the policy.

What she could have proposed, instead, was compensation for groups most likely to be affected by the carbon tax. Give them lump-sum compensation like a $1000 annual tax credit. Isn’t this the same thing? No, it’s not. Compensating people helps alleviate the hardship imposed, but still gives them the incentive to make personal choices about (say, petrol) consumption faced with true prices. The downside is that we can’t compensate everyone perfectly with tax credits. And there’s the rub. If you exempt the very users of something that isn’t priced then a tax has zero effect. If you don’t compensate the users to some degree, then they get hurt.

One might worry that compensation like this could be taken back in the future, but so could the proposed exemption. And moreover, Australia has proven very effective at maintaining compensation once in place when it’s the right thing to do.

There is an inherent tradeoff between economic efficiency and distribution. We shouldn’t fail to acknowledge it. And we shouldn’t inflict significant harm on certain groups—like tradespeople and farmers—simply because it is “economically efficient”. But we also shouldn’t enact a compensation scheme that undoes the whole point of pricing socially costly activities in the first place. That’s clearly bad economics, but it’s also bad politics.

Richard Holden is Professor of Economics at the Australian School of Business, University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review 11 July 2011.

Professor Alec Cameron

A current initiative of the Commonwealth Government is a Higher Education Base Funding Review.  The intent of this review is to inform university funding levels based on the (relative and absolute) costs of delivering courses in different disciplinary areas, such as medicine, engineering, science, law, business, arts, etc.  This supposes that the cost can be determined for delivering university courses.

We can, of course, measure the costs of what we currently do, notwithstanding that many university costs are fixed, and hence allocation on a per course, or per student, basis will always be contested.  What this reveals is the history of assumptions and compromises that underpin our current models of delivery of higher education.  Decisions around the number of contact hours per course, the number of students per class, and the teaching loads per academic, fundamentally determine the cost of course delivery.

Why is it the case that many business courses typically have three contact hours per week over a 12 week semester, comprising, for example, a two hour lecture each week in a class of up to 400 students, plus a one-hour tutorial with up to 30 students?  The simple answer is that this model is one to which we have evolved over time, driven, primarily, by budgetary considerations.  So the cost of delivering a course, is, quite simply, the funding which is provided.

If more budget was allocated to a course, the likely consequence is that the funding would be applied to more contact hours, smaller class sizes, or other support services, and, in turn, a richer educational experience.  Conversely, reduced funding would likely result in a reduction of student contact and support.

In looking at base funding for universities, the issue is not how much money is currently spent, as this is simply the money allocated, both to the university, and, via internal allocation models, within the university.  The issue is how does this compare with other systems with which we wish to compete.  If universities, or business schools, in North America, Asia or Europe receive higher funding per student for education, then, assuming they apply these funds well, they will be able to provide a better educational program.

The attempt of the government to determine the cost to deliver education by disciplinary area in Australia is a pointless exercise.  All it will do is reveal how funds have been allocated to date.  The more meaningful exercise would be to determine the funding levels of those international competitors with who we wish to compete, and ensure that we are funded at a comparable level.  Then we can ensure that we have the quality universities to which we aspire.

Alec Cameron is the dean of the Australian School of Business at the University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review Monday 18 July 2011.

Amid the debate about house prices, sparked by the deputy governor of the Bank of England saying that interest rates should rise to control inflation, a senior academic at the Australian School of Business has looked at house price forecasts.

Dr Jonathan Reeves, a financial economist at the Australian School of Business, says “Australian house prices have started to decline. It is likely that this is the beginning of a substantial housing correction, because the stimulus effects are continuing to fade.”

He says that in contrast to other developed countries, Australian house prices rose in 2009 and 2010, due to the government stimulus package that included specific housing stimulus.

He also notes the impact that an increase in interest rates may have on Australian house prices. “The magnitude of a fall in Australian house prices will most likely be influenced by overseas events, and the most immediate threat may come from the European sovereign debt crisis and the impact this could have on raising mortgage interest rates in Australia.”

The deputy governor of the Bank of England Charlie Bean said at a conference in Australia  yesterday that there may be little option for policy makers other than to clamp down on house price growth, even though this would be politically difficult and economically costly.

Dr Jonathan Reeves has also highlighted the impact of events in other overseas countries on Australian house prices. “Business cycles transmitted by China are also a high concern, along with the performance of the US economy, and in addition, falling house prices in New Zealand, with a weak New Zealand economy, may have substantial impacts on Australian banks operating in New Zealand.”

He says most Australian forecasters of house prices rely on Australian house price index returns, rather than overseas house price index returns, and this can lead to a fundamental problem in forecasting.

“There is simply insufficient historical Australian data available for reliable models to be constructed. In house price modelling with US and European data over the last century, the simple model of long run average house prices being a multiple of four times the average gross household salary, has proved to be a reliable guide. The economic rationale behind long run house prices not staying above a multiple of four for long periods is that households simply cannot afford this through all phases of the business cycle. Currently in Australia the multiple is over six and therefore they are very likely to fall.”

New research from the Australian School of Business indicates that just having one person who is lazy at work can drag down a high performing  team.

Benjamin Walker, a PhD student at the Australian School of Business, is studying the impact of a single “difficult personality” member on team effectiveness.

He says “all the research indicates that a single lazy person drags the team down, reducing its performance and hence the satisfaction of the other members of the group. It can be someone who isn’t proactive, someone who only does the minimum amount of work, or someone who is just plain disinterested in the job at hand. Even being excessively keen but producing little is generally a negative trait within a group.”

“It was previously thought that the average level of a personality trait – such as conscientiousness in a team defined its success. However conscientiousness has two sides to it: one is discipline and a need for achievement and the other is being painstaking and careful,” according to Benjamin Walker.

However he adds that “the person who contributes the least has a huge impact. Even if the rest of the team is generally pulling their weight, they won’t be able to compensate for that member and they won’t be happy about it. It really does show that one bad apple in the barrel can spoil it for everyone else.”

The study involved 158 students, divided into 33 teams, and examined how the dedication and hard work of individual team members affected the work of the entire group, concentrating on how just one member can influence the group.

Benjamin Walker will present the research at the ninth biennial Industrial and Organisational Psychology Conference, organised by the Australian Psychological Society, which is being held in Brisbane from Thursday 23rd June.