Monthly Archives: December 2015

MYEFO shows Coalition promised a unicorn

The release of the latest MYEFO is more confirmation that the Coalition’s claim to superior budget restraint is an absolute joke.

The Coalition will try to blame international circumstances, but the budget papers show their own policies have made the deficits worse.

Decisions in the 2015-16 MYEFO have increased expected deficits over four years by $3.7 billion. Four of the Coalition’s five budget updates have been net spends:

coalition spending

Labor, on the other hand, delivered five net saving budget updates in a row:

labor  spending

The Coalition’s budget predicament is the inevitable outcome of its dishonesty at the last election.

It promised an impossible combination of lower taxes, new spending and reduced deficits. That didn’t add up then, and it doesn’t add up now.

Too many economic journalists – and even professional market economists – failed to strongly and consistently hold the Coalition to account.

The Coalition’s electoral platform was an innumerate unicorn drawn in crayon. It’s time to hold them to account.

Terrorism feeds off outsiders in a shallow and fragmented world

Over and over again we hear about alienated young people signing up to ISIS because they crave “community”. In this post I try to explain that phenomenon by reference to changes in technology and the economy. Warning: this is speculative and hand waivey.

They [Western society] teach us to work hard to buy a nice car and nice clothes but that isn’t happiness. I was a third-class human because I wasn’t integrated into a corrupted system. But I didn’t want to be a street gangster.   

The quote comes from a 24 year old French man on his decision to join Jabhat an-Nusra, a Syrian terrorist group. He touches on themes that repeatedly come up such accounts: a sense of low status and alienation from a world of shallow conspicuous consumption.

A major driver of terrorist recruitment is, in my view, social isolation caused by the atomising effects of today’s individualistic hyper-competitive mode of capitalism. It’s also influenced by a decline in respect and dignity for those at the bottom of status hierarchies. It’s not surprising that such people look for community and respect where they can find it.

Extremists are becoming specialist online recruiters of this demographic. ISIS is providing a sense of deep community in an increasingly shallow and fragmented world.

In Western liberal societies all kinds of relationships are increasingly short-term. We see this from Tinder to uber, to hyperglobalisation and robots taking our jobs. People are more replaceable. It becomes less rational for employers to make long-term investments in employees, and as a consequence, the converse is also true. It’s even become a thing for employers to mass dismiss their workers by text message.

By cutting search costs, the new model of human contracts is arguably efficient. Corresponding with increasing capacity to measure performance (think online rankings), the new model facilitates the constant reassessment and replacement of our fellow humans. But this is brutal on those who fail to make the cut. We are more likely to end up with an entrenched class of losers.

At the same time, there’s more conspicuous consumption, conspicuous leisure (Facebook holiday pics) and all-round status-flaunting. Society is splintering into a world of winners and losers.

Nicholas Gruen points out poll results showing the increasingly materialistic nature of college students. When asked of the importance of “being very well off financially”:

The latest data from 2013 for entering university students here in the US, 82% say that that is an important life goal. And back in the late ’60s and early ’70s only about 45% said that was an important life goal.

This is something of an anomaly because real incomes for college graduates have increased, so you would think they have less to worry financially. So why is it the opposite?

I propose:

(1) risks in the marketplace have increased due to disruptive competition and a less secure employment relationship (and we are loss averse, i.e. fear losing ground even if we have become richer);

(2) risks have increased outside the marketplace because social insurance has become more conditional;

(3) society is more monetised, so what you get depends more on how much you can afford to pay (other forms of resource allocation like queuing/first in best dressed provided ad hoc redistribution);

(4) within-country inequality is rising – people can see greater wealth around them, spurring a sense of indignity;

(5) norms against flaunting status have broken down – check out a rap film clip [One day I want to do a quantitative analysis of song lyrics over the past 60 years. Hypothesis: fall in pro-social themes and growth in narcissism and egoism];

(6) the institutions in which people traditionally found meaning and fulfillment outside the marketplace – like mass mainstream religious organisations, unions, scouts etc – are declining (marriage is also declining for all bar the rich and highly educated);

(7) there’s less social empathy (see here) and respect (see here and here ).

I suspect all seven contribute to health problems and unhappiness, but 3-7 are the most important for terrorism.

There are two main groups that will be disaffected by the rise of short-term relationships, decline of mass organisations, and emphasis on status:

(1) Those who just prefer deep loyalties, thick identities and intense communities. Some people more than others get stressed out by risk and insecurity (economic competition is stressful and damaging to mental health). Some people more than others crave meaning and deep fulfilment.

(2) The people who slip through the cracks, the “losers” in our cut throat society. Before they had an all-encompassing institution that would take them in, they would receive empathy, and could rely on respect for being a good citizen, union-member, church-goer etc. Now what do they have? Just their own individual deficiencies, apparently.

Both of these overlapping groups are prone to recruitment by extremist groups, offering a sense of community and something to believe in. These communities can provide a sense of honour and dignity to those who have been left behind. As one American boy who joined an online ISIS group was quoted in the New York Times:

For the first time I thought I was not only being taken seriously about very important and weighty topics, but was actually being asked for guidance.

It’s hard to imagine a move back to either long-term safe jobs or mass movement organisations because they are being killed by changes in the economy.

The future employment prospects look particularly grim for low status men. Throughout human history, they have been able to make a living from manual labour if nothing else. But the robot revolution will do away with much manual labour. Jobs increasingly depend on social skills. But gender norms have not caught up. To some extent, they still prime boys for interacting with things and girls for interacting with people. Marginal men are precisely the ones we see falling for terrorism (and many other socially destructive behavior).

While the economic causation of the fall of job-for-life manufacturing is obvious, the economic basis for the destruction of mass movement organisations is more subtle. The great development economist Dani Rodrik suggests that the rise of mass movement politics – vital for establishing good institutions – was in fact facilitated by production line manufacturing. Manufacturing brought people of different ethnicities and religions together on the job. In such a situation, workers could easily see they had shared interests (eg working conditions from the boss, civil liberties from a state that wanted to clamp down on striking rights etc).

Rodrik worries that, with the decline of manufacturing, developing countries may never undergo such a process:

The political consequences of premature deindustrialization are more subtle, but could be even more significant. Mass political parties have traditionally been a by-product of industrialization. Politics looks very different when urban production is organized largely around informality, a diffuse set of small enterprises and petty services. Common interests among the non-elite are harder to define, political organization faces greater obstacles, and personalistic or ethnic identities dominate over class solidarity. Elites do not face political actors that can claim to represent the non-elites and make binding commitments on their behalf. Moreover, elites may prefer – and have the ability – to divide and rule, pursuing populism and patronage politics, and playing one set of non-elites against another. Without the discipline and coordination that an organized labor force provides, the bargains between the elite and non-elite needed for democratic transitions and consolidation are less likely to take place. So premature deindustrialization may make democratization less likely and more fragile.

Unfortunately, in our increasingly atomised, uberised service economy, we lose sight of shared interests. It’s easier for reactionary forces to play divide and conquer between rival religious and ethnic groups.

It’s in this context that we see mass organisations like mass religious organisations and unions being replaced by networks of tribes that target particular demographics or specific opinions rather than a sweep of society. Aided by internet anonymity, this seems to encourage feedback loops of inter-tribal rage.

We live in a society that demands individual success but discriminates based on group membership. We demand people make their own way and accept disruptive risk but when they fail we lack institutions to pick them back up again. We demand hyper-discipline, with every aspect of performance increasingly measured and ranked, but this same society has more capacity to tempt and tap into weaknesses. That’s the downside of liberalism and technological progress.

In a more stressful world, temptation goods that enable people to self-medicate have never been more readily available thanks to rising real incomes and technological progress. I don’t think it’s any surprise that the unprecedented fall in longevity for American middle aged whites (who have been hit hard by hyperglobalisation) is driven by temptations: alcoholism, over-eating, drug-overdose.

For another demographic, the temptation is to slide into an alternative universe online and potentially fall for the siren song of extremism. In this case, the toxic medication offers a fickle sense of self-worth, belonging and power.

I wish I had the answer to this, but it seems wrapped up in the forces of contemporary capitalism.

MicroSpam alert: Gary Banks is wrong to bash penalty rates

Last week I posted about why econocrats’ should show humility in their advice. I coined the term “MicroSpam” to refer to the dogmatic devotion to simple MICRO101 intuition as an all-purpose policy solution. In its classic form, MicroSpam contains traces of both arrogance and naivety.

recent economists’ poll about penalty rates contained some very astute analysis from Australian economists, but unfortunately also a couple of sneaky pieces of pure MicroSpam.

The poll asked whether cutting Sunday penalty rates would increase employment and service availability on Sundays. As an aside, that’s not actually a useful question for policy, as comments by John Quiggin and other economists pointed out. Employment probably will increase on Sundays, but what matters for the economy is overall employment. The effect on overall employment is not clear at all, as work might just substitute to Sunday from other days. Unfortunately a very narrow question engineers a positive response.

Anyway, let’s look at the comment by Gary Banks – former head of the Productivity Commission – for some vintage MicroSpam.

After indicating a “strong agreement”, with a confidence of 10/10 that cutting penalty rates would increase Sunday employment, he comments:

And why stop there? Penalty rates penalise organisations that need to work seven days and workers for whom weekend work is preferred — including within the participation priorities of women and youth. Penalty rates as currently structured are the vestige of a bygone era. The only policy question is how best to effect the transition to modernity.

Umm, I have no idea Gary Banks, why stop there. What on earth could all these silly workers, unions and citizens be on about? They must actually oppose modernity! It’s well-known that the fundamental principles of modernity are sanitation, human rights and the absence of penalty rates.

The answer to Banks’ question, obvious to all people who haven’t headed the Productivity Commission, is that the proposal would transfer money from workers who give up their Sunday to employers (or possibly consumers). The question is therefore at least partly distributional, and questions of distribution depend on our values.

The second obvious answer is that it would be a step towards normalising the weekend as a regular working time. Maybe you like this, but many don’t. The answer is not self-evident.

In the real world, workers can be pressured to work weekends when they don’t really want to. Such work can hurt relationships with family and friends.

To use micro-speak, weekends have network externalities. A network externality refers to situations when the benefit of something to an individual increases with more people also taking part. I wouldn’t get much benefit from the internet if I owned the only computer in the world. But with each additional participant, my potential gain from the internet increases.

Weekends are similar. Most people do not work on the weekend, and their availability helps us have family and community activities. The weekend is therefore an institution that supports positive network externalities for social engagement.

There are some powerful arguments, from both the political left and the political right, that our communities are weakening and fragmenting. Do we really want to weaken them further?

Gary Banks also claims that penalty rates penalise workers. In some contorted language, he refers to women and youth. Is he actually suggesting the net impact on the welfare of weekend workers would be positive? I don’t think he really knows that, hence the contorted language.

A linguistic fudge gives an expert a licence to bullshit. They can’t be proven wrong because their words are ambiguous. This allows them to continue to sound confident even if they can’t actually prove what they’re insinuating.

Rather than knee-jerk scorn of popular social policies, econocrats should reflect on deeper reasons why these policies might be valued by the community.

Any economist should agree that people’s preferences are fundamentally important. Now that’s just MICRO101.

ISIS is building a network in Indonesia: What we can do to stop it

Crossed-Flag-Pins Indonesia-Australia

ISIS “study groups” are openly springing up across Indonesia.

Thousands of Indonesians have pledged allegiance to ISIS, and hundreds have gone to fight in Syria and some of these are starting to come back.

“In a much shorter space of time, more Indonesians are going to join ISIS than ever went to Afghanistan”, terrorism expert Sidney Jones told the Wall Street Journal.

It’s not against Indonesian law to support ISIS or fight for them in Syria.

Last week, ISIS has issued direct threats to murder six senior Indonesian federal police. Authorities have received specific intelligence of an attack planned on Shiites.

Terrorism experts believe Westerners will be next in line.

Authorities are clearly getting worried.

“We want Indonesia to be peaceful and not turn into Iraq or Syria,” Coordinating Minister for Political, Legal and Security Affairs Luhut Panjaitan said.

Nevertheless, ISIS “study groups” are apparently free to recruit and build networks. One major group, Ansharud Daulah Islamiyah (ADI), operates in Java, Sumatra, Kalimantan, Sulawesi and eastern Indonesia, according to Inside Indonesia. The group is openly recruiting fighters for ISIS in Syria.

Syamsudin Uba, a leader in ADI, told Inside Indonesia “For now, jihad is only obligatory in Syria and not here.” He says he is ready to turn violent when an order is given.

There’s history here. Jemaah Islamiyah (JI) operated for years as an openly armed, radical organisation. Until one day… they blew people up.

Jokowo favours “soft” religious and cultural approaches to deradicalisation, rather than the firm-hand of the law. Reaching out to people at risk is undoubtedly important.

Nevertheless, let’s hope the Indonesians authorities are also well-prepared for a crackdown. With ISIS networks ready to go, an attack’s only a matter of time.

I would estimate with 90% confidence that within the next year there will be a lethal ISIS-aligned attack in Indonesia. Within the next three years, I estimate with 90% confidence that at least ten Australians will die in ISIS-related attacks. There is considerable variance in my estimates. I put a 5% chance on more than 200 Australians dying in ISIS-related attacks over the next three years.

It is true that the overwhelming majority of Indonesians are peaceful. But Indonesia has 250 million people, so it’s just a numbers game. Even if only one in one million had the dedication and skill to go to make a return trip to Syria, that’s 250 hardened ISIS operatives who want to kill people. By comparison, it only took 19 terrorists to carry out the 11 September 2001 terror attacks.

The nightmare scenario is that the returning fighters set up training camps. They can hide in the juggle, as Indonesia’s most wanted terrorist, Santoso, does. They then launch a full-blown recruitment campaign, leveraging off the existing network of ISIS “study groups”.

There’s certainly recruitment potential. In a recent Pew survey, 4% of Indonesians expressed a favourable view of ISIS. This is obviously low as a proportion of the population, but equates to more than seven million people aged 15 or over. That’s equivalent to almost 40% of the population of Australia aged 15 or over in ISIS supporters. I’m not suggesting we should panic over this. It’s possible many of Indonesia’s poor and uneducated don’t even actually understand what ISIS is. They might have just inferred that since there was something “Islamic”, they should probably favour it. Nevertheless, complacency about these numbers isn’t warranted either.

Indonesia’s demographics are vulnerable to ISIS recruitment. It has a large number of young men. In addition, 11.3% of Indonesians live on less than $1.25 a day. The World Bank has just released a report on the growing divides in Indonesia caused by inequality that is rising at globally exceptional rates. ISIS can lure young men with the promise of a wage that lifts them out of deep poverty.

As I discussed in a previous post, Indonesia’s day-to-day harmony is remarkable given its turbulent history of religious and ethnic conflict. But the strains of this history are unlikely to have disappeared, even if they’re below the surface.

As the post also discussed, religious intolerance is growing in Indonesia. In this environment a spark might trigger an explosion.

Australia can make a modest contribution to Indonesia’s deradicalisation initiatives. Firstly, there must be a trusting relationship between Australian and Indonesian governments and police. This will facilitate cooperation and information sharing to stop the terrorists. The Indonesian police, with support from Australia, did an excellent job in destroying Jemaah Islamiyah.

Secondly, we should fund programs that support Indonesian justice and intelligence. We should strategically support Indonesian educational systems and programs to build tolerance. Cutting the aid budget was a bad idea.

Finally, the Australian community must maintain its open and tolerant principles. Discrimination only gives the terrorist recruiters ammunition. The overwhelming majority of Indonesians are peace-loving people. I have found Indonesians to be more warm to me, despite my language limitations, than any where else I’ve been in the world.

The terrorists are a threat to both Indonesia and Australia. They hate our shared values of peace and democracy. We can fight them best by working together.

Indonesians are world-leaders in cheeriness and giving


The streets of Jakarta are somewhat hectic, but there’s a buzzing social vibrancy to it.

It’s somewhat unusual to see people by themselves. You will see lines of people congregating along roadsides, standing or squatting, for no apparent reason other than to have a chat.

As I walk down the road, people will call out:


“Australia? Australia is a beautiful country!”

Last night I stumbled across the World Happiness Report 2015 and found a wealth of interesting data. In particular, it supports my anecdotal observations about Indonesians.

The measure of day-to-day happy mood is called “positive affect”. On this measure, Indonesia is in the top handful of countries in the world, year after year.

The most recent year with data available for both Australia and Indonesia is 2013. In 2013, Indonesia had the second highest “positive affect” out of 135 countries. Australia comes in at 25:

positive affect top 30 countries

In the World Happiness Report, positive affect is based on Gallup World Poll surveys asking whether responders experienced “happiness”, “laughter” and “enjoyment” on the previous day. The results presented above reflect the average of these three measures in terms of the portion of responders who said they experienced the respective emotion for a “LOT OF THE DAY”.

In a 2014 IPSOS poll of global happiness, Indonesia topped the 24th countries surveyed by a mile:

Smiling is a Javanese obsession. Virtually everyone smiles widely when coming into contact with someone – friend or stranger. Conspicuous displays of frustration, anger or disappointment are not done. In my six months in Jakarta, I can only recall seeing one openly grumpy conversation.

I find Indonesians very friendly. They forgive my effectively non-existent Indonesian; my staccato nouns, strung one after the other in one-word sentences, interspersed with English and pointing for the verbs.

My personal trainer epitomises the cheery Java stereotype. This despite working extreme hours. I see him giving classes at 6am, I see him giving classes at 10pm. His laughter is incessant. It’s almost ridiculous.

If he says he spent two hours in the traffic today: Bahahahahaha! If I say I ran out of time to eat breakfast today: Bahahahaha! When I attempt one too many push ups and collapse on my face: bahahahahaha!

Prior to coming to Indonesia, I had observed that laughter could serve very different social functions depending on context. It’s the old distinction between laughing with and laughing at.

Humour can be used as a weapon, as a tool of mockery; or humour can be used as a peace-keeping device. It can diffuse tensions, gloss over potentially awkward situations and allow people to save face.

When something goes wrong, a warm laugh from all involved can reaffirm group bonds by signalling that no one is really mad or upset. The mocking type of laughter is essentially non-existent in my Jakarta experience; warm laughter is so endemic it’s practically a cultural ideology.

What can explain Indonesians’ world-leading cheeriness?

According to the World Happiness Report two variables stand out as predictors of positive affect: freedom and generosity.

The report examines generosity based on responses to “Have you donated money to a charity in the past month?” in the World Gallop Poll. Of course, rich people who don’t need to worry about life’s essentials have more money to give, so the report controls for GDP per capita.

On this measure, Indonesia is the second most generous country in the world in 2014 out of 95 countries surveyed. It’s consistently in the top few countries. In 2013, the most recent year with data for both countries, Indonesia is third of 128 countries. Australia is also quite giving, coming in at number 13:

generosity by top 30 countriesThese survey results ring true for me. My anecdotal observation is that concern for the poor has a stronger influence over public discussion than in Australia. Of course, this might just be because absolute poverty is still a big problem in Indonesia, but my guess is it’s a bigger political issue than in comparable developing countries as well. It was a very important part of Jokowi’s electoral success.

In addition, Islamic institutions in Indonesia emphasise charitable giving to those in poverty.

The World Happiness Report notes there is no correlation between national income per capita and national levels of positive affect. (There is, however, a correlation between income and “life satisfaction”, which is a different concept of happiness.)

In summary, generosity strongly predicts “positive affect”, which in turn predicts how satisfied people say they are with their lives.

Negative affect – the presence of negative emotions – however, has no correlation with overall life satisfaction. It seems it is more important to have happy experiences than to avoid sad and stressful ones.

The take-away appears to be that generosity and cheeriness can help protect us from our hardships, and help us live happier, more fulfilling lives.

On this front, Australia – and the world – can learn from the cheerful and giving Indonesians.

Indonesia #2: Despite deep piety, Indonesia is tolerant of religious diversity

This is the second post in a series of Six things Australians should learn about Indonesia. (Introduction here and #1 on growth and poverty reduction here.)

Indonesia is a deeply religious society. 87% of Indonesian’s 250 million population are Muslim, making it the largest Muslim population on earth. In my inner Jakarta apartment, I wake daily at 4am to calls to prayer from at least six different mosques.

I happen to live next door to a church, which pumps out booming hymns several days a week. Sunday is epic. With the organ and choir in full swing for the main service, the clock strikes mid-day and the calls to prayer suddenly crash in over the top. It all blends into a blaring, indistinct drone, a full surround-sound experience.

Here’s how Australians and Indonesians compare when surveyed about the importance of religion:

indonesia religion 2

While religiosity in the Anglophone world is in decline, there is no evidence of a corresponding trend in Indonesia. If anything, it’s the opposite. The emerging middle class, the ‘aspirationals’ as we might call them in Australia, seem to be getting more pious, and conspicuously so.

Notwithstanding the religiosity, the vast majority of Indonesians are quite tolerant of religious diversity. Inter-religious harmony is a central principle of Indonesia’s national ideology, Pancasila, and its constitution.

Indonesia represents five different world religions in its public holidays (there are a lot of public holidays). This kind of openness would be a tough ask in (generally tolerant) Australia. I can picture the “Ban Sharia Halal Tax Day” protesters already.

Indonesia’s law can even be strangely liberal. For example, you can buy alcohol at local supermarkets, something that’s mostly banned in beer-swilling, wine-sipping Australia.

Indonesia is democratic. Islamic groups, given their mass public support, play a significant role in Indonesia’s civil society. The two major Islamic organisations – NU  and Muhammadiyah – have a proud record of promoting tolerance.

In Australia, we’re used to thinking of religious politics as pulling society towards intolerance, but in Indonesia these Muslim organisations, and their associated political wings, are the strongest voices for harmony.

The Indonesia’s 50 million-strong NU is the largest Muslim organisation in world. It has played a central role in establishing good governance in Indonesia.

The revered former leader of NU, and later Indonesian President, Abdurrahman Wahid was a leading figure establishing human rights after the Suharto-era. He was a principled activist for religious harmony, including lobbying for and protecting other faiths.

It should be noted that Indonesia’s brand of religious pluralism is quite different to secular liberalism. Indonesia is not an Islamic state, but it is explicitly a religious state. All citizens must indicate an affiliation with one of six major world religions. Ostentatious promotion of atheism can land you in jail.

Homosexuality is legal, but generally not open. LGBT groups risk bullying and intimidation from the hard-line Islamic Defenders Front. These guys make up a very small but very vocal proportion of the population

It’s fair to say hard-line thug groups are getting louder, and religious violence is creeping up again. The situation is particularly grim for Ahmadiyah, an unpopular Muslim sect. As Ahmadiyah is regarded as heretical distortion of true Islam, it lacks the constitutional protection enshrined for mainstream religious faiths.

In addition, there is some intolerance to Shiites, and Christian churches are burnt intermittently in certain areas (a recent spate of these in Aceh attracted condemnation from President Widodo). In Christian-majority Papua, there have been attacks against Muslims.

Questions have been raised about whether some authorities within Indonesia should have devoted more resources into tackling religious violence.

Given Indonesia’s complex decentralised structure and bureaucratic politics, there is a wide spectrum of ideologies and interests with a stake in law enforcement at the local level. As happens occasionally in Australia, some Indonesian councils exploit local planning powers as a dubious excuse to obstruct minority places of worship.

These growing tensions are a concern, and I plan on exploring this further in the future. But it’s also important not to overstate the situation. It’s coming from a low base. Apparently there were 220 incidents of religious violence in 2013. This might sound a lot, but it’s proportionately small in a country 250 million people.

The experience of day-to-day life in Indonesia is remarkably peaceful. If you look across human history, it’s uncommon for societies as intensely devout as Indonesia to have such successful inter-religious harmony. For a country with a turbulent history, establishing this has been an extraordinary achievement.