3AW interview on the banks making a killing from PayWave and PayPass

I was interviewed on 24 March on 3AW in response to my New Matilda article on the banks taking a slice of every purchase we make when we tap or wave our cards.

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The banks make a killing every time you swipe your card

The banks are the big winners every time you tap or swipe or insert your card. Photo: AAP

By Warwick Smith

This article was originally published by New Matilda and republished by The New Daily.

The banks are rubbing their hands with glee as they now get a cut of almost every purchase we make.

PayWave and PayPass are changing the way we buy things. The latest figures from the Reserve Bank of Australia saw yet another fall in ATM use and an increase in the number of Australians who don’t carry any cash.

It’s worth pausing to take that in. Every time you tap or swipe or insert your card, the banks are getting a slice … every time you buy something. Now, admittedly, it’s a small percentage (around 1 or 2 per cent) but when it’s every transaction, it sure adds up.

This isn’t to pay for the machines. That’s covered in a separate rental charge. The question is, is it worth it? Are they providing enough of a service to make that worthwhile for you and the retailer?

There’s another thing we’re losing when we tap – our connection with our money and our budgets. This too is good for the banks – who really start to make money when we spend credit.

At the risk of showing my age, my earliest memories of banking involved a little book I would hand to the bank teller. In it would be printed all of my transactions and my current balance. The teller would put it in a little printer that would add my current transaction and the updated balance and I would leave with my cash and my bank book.

There was a clear and direct connection between income and money spent. You handed over your cash and saw how much was left in your wallet and the little number in your bank book told you how much was left in your account. While it’s true all of that information is now available on your phone, the connection is voluntary; it’s one step removed.

Sometimes you only find out there’s no money in your account when “declined” comes up on the machine. Often enough though, this isn’t a sign that you’ve run out of money – that happened long ago – it’s a sign you’ve run out of credit.

Who wins? The banks.

The banks are raking in huge revenue from our financial transactions.

As well as having some of the most profitable banks in the world, Australia currently has the highest level of debt in the world – no, not the much-hyped government debt, that’s very low. I’m talking about private debt.

Australian households owe a total of $2 trillion. That’s over $80,000 for every man, woman and child. This is primarily driven by the outrageous cost of housing or, more accurately, land. Who’s the biggest winner from ever-growing land prices and ever-growing private debt? You guessed it; the banks.

Starting to see a pattern here?

In my opinion, modern economies are vastly over financialised. The financial sector has moved well beyond the provision of beneficial goods and services to become a parasite that drains scarce resources from productive economic and social activity. Just like any host-parasite relationship, the bigger the parasite, the more the host suffers.

Think about those overinflated land prices. That’s essentially free money for the banks. Almost every purchase of a house involves a contract to hand over a very substantial proportion of household income every month to a bank – for decades. Where do they get the money to lend to you? They create it out of thin air. That’s another topic for another day but a banking licence is effectively a licence to print money.

Think also about superannuation. Every pay, 9.5 per cent of every person’s salary is compulsorily acquired by the financial sector who very happily look after it until we retire (for a price, of course).

Every time we spend money at the shops using a card, we hand over a cut to the banks. Add to that our mountain of credit card debt and you get a raging torrent of money flowing into the banks every day.

From a big picture perspective, we need to do something about overinflated land prices so that those resources can be put to more productive use. We need to stop seeing housing as a way to accumulate wealth and start to see it as … well, housing. This is largely a government policy responsibility and not something we can do as individuals.

However, we can claw back a little bit of control and cut out the banks as middle men by using cash when we spend. This is particularly useful for the small local businesses where we shop.

It could be the difference between them surviving and going under – or being able to pay staff versus working 12-hour days themselves. Those staff could be your kids or your friends.

Not only does it restrict the financial benefit to the purchaser and the seller, it also puts you more in touch with your spending and your budget.

Unless you’re a bank or an international credit card provider it’s a win-win scenario.

Warwick Smith is a research economist with progressive think tank Per Capita. His article first appeared on New Matilda and is republished here with permission.

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Listen up, Scott Morrison. It’s time to bust the myth of the budget surplus – The Guardian

Originally published at The Guardian on Jan 6 2017.

A fetish of recent decades, budget surpluses lead to private sector debt and are unsustainable in the long term. The current obsession could lead us to recession.


On Facebook, Malcolm Turnbull’s announcement of Treasury’s mid-year economic and fiscal outlook began with this flawed statement:

The Turnbull Government understands that like a household budget, when you are trying to pay off debt, you can’t spend more than you save.

Let’s be generous and assume that Turnbull meant “you can’t spend more than you earn” as the literal meaning of his sentence is obviously ridiculous. A quick look at the period directly after the second world war, when Australia’s public debt was at its highest, makes a mockery of Turnbull’s excuse for budget austerity.

Australian federal government debt and deficits since federation
 Photograph: A Owen/Philo Capital

As shown in the chart above, governments during the second world war ran massive deficits to fund the war effort and built up government debts totalling over 120% of GDP. The post war period saw that level of public debt steadily decline to about 10% by the end of the 1960s.

How was that mountain of debt paid off? It wasn’t. If it had been paid off Australia would have been an economic basket case during the 1950s and 60s. Menzies was prime minister for most of those years and his governments ran modest fiscal deficits every year.

To make sense of a shrinking debt burden during a time when government is spending more than it is taxing we need to understand that, despite what Scott Morrison and Malcolm Turnbull say, government finances bear absolutely no resemblance to household or business finances.

Government spending is such a significant part of the economy that it can determine national economic outcomes. By deficit spending in the 50s and 60s, the Menzies government stimulated economic growth and built up non-government financial assets. This growth increased government tax receipts and reduced the size of the debt burden without paying off the debt.

Add inflation to the equation, which reduces the real value of the debt, and you can understand how the debt-to-GDP ratio can fall so dramatically while the government continues to run deficits.

This clearly makes a mockery of Morrison and Turnbull’s stated reasons for cutting government expenditure. Recurring modest government deficits are sustainable in the long term. Government surpluses, by contrast, are not sustainable in the long term.

To demonstrate this, there is one basic accounting concept that needs to be explained. Somebody’s surplus is always somebody else’s deficit. This includes the federal government.

For a moment, imagine that Australia is the only country in the world. Imagine that the non-government sector in Australia has $100 in net financial wealth. That year, the federal government spends $45 on goods and services and taxes $50. That’s a federal budget surplus of $5. At the end of this period the non-government sector in Australia has $95 (the government spent $45 into the private economy and took $50 out in taxes). This is a non-government deficit precisely equal to the government surplus of $5. This is a simple accounting identity; it must be true. There is nowhere else for that government surplus to come from.

Adding the foreign sector and trade back in doesn’t change this picture, it just complicates it a bit. Imagine the government continues with the same budget the following year. The non-government sector now has $90 – and the year after $85. I presume you’re starting to see the problem if this continues.

So, the first key thing to understand is that a federal government surplus must be accompanied by a non-government deficit.

Let’s look at Scott Morrison’s fiscal strategy spelled out in Myefo:

The government’s medium-term fiscal strategy is to achieve budget surpluses, on average, over the course of the economic cycle.

What Scott Morrison is really telling you is:

“The government’s medium-term fiscal strategy is to achieve non-government deficits, on average, over the course of the economic cycle.

In the absence of persistent trade surpluses (we mostly run deficits), the only possible outcome of this is increased private sector debt (that’s Australian businesses and households) and, if sustained, eventual private sector bankruptcy.

Private sector debt in Australia is currently about 210% of GDP, compared to government debt of about 30%. What Scott Morrison needs to explain to the Australian people is why he’s so keen to increase the private debt they hold over their homes and businesses when it’s already so high.

With a background of massive government debt incurred during the second world war, the 1950s and 60s are often referred to as the “golden years”, when unemployment was around 2%, economic growth was high, wages grew strongly and inequality was falling. This was not despite persistent government deficits but partly because of them.

Recent decades have seen the quest for budget surpluses become a kind of fetish. It’s important to understand that this is relatively new and that it has no sound basis in monetary economics.

If Scott Morrison and Malcolm Turnbull get their way and run budget surpluses over the business cycle they will cause a recession – simple accounting tells us that, short of some sort of export miracle, there is no other possible outcome.

Warwick Smith is a research economist at progressive think tank Per Capita

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TV interview on ABC News 24

I was interviewed by Fauziah Ibrahim on ABC News 24’s evening program. The segment was looking at how prepared Australia is for the coming robotics and artificial intelligence revolution.

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History suggests Australia could be left behind by the next industrial revolution

Warwick Smith, and Mitchell Eddy, University of Melbourne

Originally published in The Conversation.industrial-revolution

This article was co-authored by Mitchell Eddy who has recently completed a Masters of International Relations at the University of Melbourne that included a placement at the think tank, Per Capita.

When the industrial revolution hit in the 1800s, countries with large disparities in wealth, low property ownership, deficient democracies and disparate education systems were left behind.

There’s a new industrial revolution just around the corner, driven by artificial intelligence and robotics. Deterioration within the key institutions of suffrage, education, and land policy indicate that Australia may be one of the countries left behind this time.

The first millennium

One way to anticipate the future is to look to the past.

British economist Angus Maddison has estimated that in the year 0, the population of Western Europe was 24.7 million. 1,000 years later it was 25.4 million – an increase of just 700,000. Total global population increased by only 37.3 million in a millennium. If we had continued at this pace, in 2015 there would have been 312 million people on Earth.

Gross domestic product fared even worse than population. Between the year 0 and 1,000, GDP per capita was stagnant or fell across all of Maddison’s seven global zones.

Over the next 800 years, the pace quickened (a little). World population quadrupled to crack the billion for the first time. By 1819, the Eastern European population of 91.2 million generated some $60.9 billion worth of stuff (1990 International $) or $665 per person.

Then in 1820 everything changed.

Well, sort of.

Fuelled by a potent mix of technology, ideas, appropriated resources and a distressing number of slaves, the Great European powers began to make themselves Great. Certain colonies prospered as well. Countries like the United States and Australia increased their output markedly, quickly distancing themselves from some of the other colonies.

Africa sample: Egypt, Ghana, Morocco and South Africa.
[Maddison, 2001]

What went right (or wrong)?

There are two key explanations for the changing fortunes of different colonies: factor endowments and institutions (or some combination of the two).

In Guns, Germs and Steel Jared Diamond proposed a particularly entertaining version of the former, where the ability to grow nutritious grains, the presence of draft animals and immunity-inducing epidemics saw Europe come to dominate the world.

Others have argued that, while factor endowments were important, it was the institutions that they gave rise to that really made the difference. With a focus on entrepreneurship and property rights, MIT professor Daron Acemoglu and his colleagues have argued that the presence of disease in certain colonies led to the development of “extractive” economies. Low settlement rates saw a small group of elites seek to concentrate power, appropriating as much wealth as possible and exporting resources back home.

Conversely, places without tropical diseases became “settler colonies”. When Europeans settled these places, the institutional arrangements there mimicked those of the home country. Land and livestock were privately owned by new migrants, which incentivised increases in productivity. Once the industrial revolution came to town, these colonies dramatically increased their output.

Without the hope of social mobility or the pressure of competition, extractive economies failed to take advantage of new opportunities and were left standing at the station while the Industrial Revolution brought wealth to the rest of the world.

While the “private property prescription” is a temptingly simple answer, evidence suggests that a more crucial factor appears to be whether a country developed institutions with a broad franchise (read: equality and equal opportunity) or narrow franchise (inequality and lack of social mobility). Private property certainly has a role to play, but only as part of a wider suite of institutional arrangements.

Characteristics of success

When we look across those countries that did well, a number of key factors stand out.

Suffrage: Countries that broke away from the pack in the 1800s were those in which citizens could vote. This makes sense; the more people that can have a say in government, then the more inclusive government policy should be. The rapid growth of the USA and Australia coincided with a high proportionate of the population able to vote.

In the USA 79.2% of the adult male population voted in the 1844 presidential election. In Australia, economic qualifications for voters were removed in South Australia, Victoria and New South Wales in the 1850s.

Conversely, colonies that were left behind often saw the vast proportion of the population excluded from participating in government elections. Indeed, it was not until the very late 1800s that a number of Latin American countries saw more than 1 or 2% of people voting

Education: Educated people are more productive, flexible and are able to take advantage of technological change. Australia’s egalitarian society saw educational opportunities extended to a broad spectrum of the populace. By 1844, approximately half of its non-Indigenous children were receiving a formal education. By 1901, literacy rates were around 80%.

This occurred in stark contrast to other colonies (including other British colonies, such as in the Caribbean). Despite immense wealth being generated, basic schooling infrastructure was not established on a broad scale – elites sent their children to private schools while other children went without. Up to 1900, literacy rates remained at or below 30% in Bolivia, Brazil, Guatemala, Honduras, Mexico and Paraguay, and was likely below 30% in Columbia, Peru, Puerto Rico and Venezuela.

Land policy: Epitomised by the encomienda system (a system popularised by the Spanish Crown, under which conquerors were rewarded with the labour of certain groups of people), land policy in countries that were left behind attempted to shut people out of the property market. Land was selectively offered in large chunks at prices only the wealthiest could afford.

In Australia, land policy was designed to encourage new migrants and sought to break down the system of class privilege that calcified Mother England. Country lands were sold for as little as £1 per acre, payable over time, and acreages were limited to prevent large holdings.

Future consequences?

Australia is becoming a more unequal country. Institutions that had previously fostered greater equality now do the opposite.

This is a problem because it was Australia’s relatively low levels of inequality that put us in an advantageous position during the last industrial revolution. Rapid advances in robotics, automation and Artificial Intelligence suggest a new industrial revolution is just around the corner, but Australia’s key institutions have been so badly eroded that we may be disadvantaged when the full force of this technological change hits.

Home ownership rates are falling and many are shut out of the market. There are substantial funding gaps between private and public schools and we are slipping in global education rankings. Australia still has universal suffrage, though only 43% of us believe that it makes any difference whether the Liberal-National Coalition or Labor are in the top spot.

Societies with these characteristics performed particularly badly during the last period of rapid technological change. Many have never recovered. We should be concerned that the institutions that once allowed us to pull ahead may soon be the reason we fall behind.

The Conversation

Warwick Smith, Research economist, University of Melbourne

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

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Trump: from crisis comes opportunity


17 November 2016

By Warwick Smith
Originally published at Per Capita Australia

The forward march of the neoliberal consensus had for decades appeared to be unstoppable.

Somehow the wealthy elite managed to hoodwink us into believing that competition was the key to prosperity, including competition between workers. They played down the inherent divergence of interests between employees and employers and mounted a multipronged attack on organised labour, resulting in workers competing against each other rather than working in solidarity for their shared interests.

Massive global trade deals touted as “free trade” were drafted in secret to favour and protect the power of the world’s biggest corporations and were championed by both sides of the narrow political divide in most of the world’s countries, Australia included.

Across much of the developed world, particularly the English-speaking world, this neoliberal paradigm had achieved political consensus. Here in Australia it was primarily the Hawke/Keating governments that cemented the consensus, privatising public institutions in the name of competition (and creating private monopolies and oligopolies in the process), taming unions into irrelevance and opening the economy to competition. The Coalition could never have gotten away with such neoliberal reforms.

It was this consensus that made neoliberalism appear unassailable for decades. Even the Global Financial Crisis didn’t result in any meaningful change to an obviously corrupt system but merely reinforced the subservience of the public to the financial elite as the former bore the costs of the latter’s decadence and folly.

However, it turns out that the consequences of the global financial crisis were on slow burn. The Occupy movement saw the problem but fizzled out due to lack of solution. There was a brief opportunity where established power was weak but progressives had no coherent plan with which to step into the breach.

When the dominant paradigm is breaking down, a new narrative is needed. If a new narrative is not created, old ones will re-emerge. That’s Trump and Brexit. There is nothing new in either story; bar the details.

Nationalism and xenophobia combined with nostalgic delusions of a past that never was are old, tried and true rally cries for the disillusioned. That said, the negative elements of Trump should not be overplayed. Many voted for Trump despite these things, not because of them. They voted for Trump because he wasn’t the status quo. In addition, many progressives didn’t vote, seeing an option between a misogynist, racist liar and the deeply imbedded political establishment represented by Clinton as a no-win choice. What would have been really interesting, is if Bernie Sanders had run against Trump.

The neoliberal consensus is broken but Trump will not give the disillusioned what they want. He has no serious or plausible plan to “make America great again”. This represents the biggest opportunity for progressives, both in the US and elsewhere, since the 1970s. If we can create a narrative and a genuine plan to replace neoliberalism, then we can step into the void that Trump will inevitably leave (and that is opening in Australia and elsewhere). The established political elite will have a great deal of trouble stepping back into that void with any hope of stability. They don’t have what the people want and their excuses are no longer palatable. They have been seen to be wearing no clothes.

There is a path from here to a reinvigorated and practical progressive politics. In fact, a populist cracking of the neoliberal consensus may have been the only such path – though one form of it could have seen Bernie Sanders in the White House instead of a serial sexual predator and bully.

Nationalism is a reflexive response to a loss of solidarity and belonging. Neoliberalism, and its underpinning in neoclassical economics, sees labour as a commodity just like any other. Absent is the acknowledgement that labour is the people who should be the beneficiaries of the system, not just another exchangeable part in it. Thus, labour (people) is expected to be mobile; willing to move wherever work is. It doesn’t matter that this dislocates people from family and friendships, that’s not part of the equation. When you include employment created as a competition between workers, you have a perfect recipe for isolation and loneliness.

The nuclear family has become the fundamental social unit, often dislocated from a broader support network. All of this combined with long commutes to work and high housing costs creates a society where everybody is perpetually busy and tired with no meaningful sense of belonging or purpose. Is it any wonder that people are abandoning business-as-usual politics and politicians?

A vote for Clinton was a vote for business-as-usual. A vote for Trump was a vote for shaking things up. Things do need shaking up.

We can shake things up in a positive, progressive and inclusive way and if we’re to manage it then we need to speak to the disillusioned and disenfranchised. Efforts to reinvigorate and modernise unions and other forms of worker solidarity are critical, as are careful consideration of urban planning and decentralisation.

Moving towards a four-day work week or a six-hour working day would help reduce unemployment, reduce pressure on families and create more time for socialising and community building.

In short, right now we have an opportunity to wrest some power from those who benefit from labour as a commodity and return it to the population. We should be asking what it means to live a good life in the 21st century and then shaping society in such a way that people can live that life; not just the wealthy, but all of us.

This is a real vision of the future to offer the disillusioned and disenfranchised. We should measure the progress of our society not by GDP but by the capacity of the broader population to live a fulfilling life. Of course, the health of the economy is important but only in that it serves the people. Growth as an ideology, untethered from human wellbeing, is ludicrous.

What’s missing from the modern political narrative is any sense of value or of progress aside from narrow and unfulfilling consumerism. In recent years, stagnating wages and out of control housing costs are combining to deny people even the illusion of progress through consumerism. This is a great opportunity for progressives but mere facts and arguments are incapable of creating change; we need a story of hope, progress and redemption. Like what Trump offered but without all the lies, misplaced reminiscences, bigotry and xenophobia. Doesn’t sound too difficult to me.

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Too old to work, too young to die – The Monthly

Pension changes, age discrimination and workplace automation are driving older Australians into poverty

The first of October is the International Day of Older Persons. The United Nations want us to put the spotlight on age discrimination, and so we should. A perfect storm is brewing against older workers: unless we think carefully about it, we’re going to end up with a huge cohort of older Australians spending 15 or 20 years on the dole, living in poverty, while they wait to qualify for the Age Pension.

Age discrimination is already rife in Australia, with over a quarter of older job seekers reporting being affected by it. When you combine this with the push to lift the Age Pension access age to 70, the rise of contract and casual employment, and the current and projected impact of technology on the demand for skills, the situation for many older workers looks grim. If you’re an older woman, trying to return to the workforce after raising children, then things are going to be particularly hard for you.

Many studies have been published over the last few years predicting that vast numbers of jobs (or tasks) are likely to be automated in the coming decades. There are differences between the predictions, but there are areas where they all agree. A recent report by the Committee for Economic Development of Australia estimated that 40% of Australian jobs are highly like to be replaced by artificial intelligence (AI) and robots in the next ten to 15 years. That’s a staggering change in such a short space of time. In a few decades, almost nobody will be driving vehicles for a living, and that transition is expected to begin in the next few years in wealthy western countries. (Uber and Lyft are already trialling self-driving cars with customers in the US – albeit with human engineers still, for the moment, sitting in the driver’s seat).

Some are predicting the demand for human labour will decrease – in other words there will actually be less jobs – while others suggest that this technological change will be like every other since the industrial revolution, where some jobs are destroyed while others are created. It doesn’t matter which is correct for many older workers: if their existing job is destroyed, their chance of retraining and restarting in a new career is slim.

This isn’t a dystopian vision of a distant future. It’s already happening.


Head over to The Monthly to finish reading the entire article.




Warwick Smith is a research economist at progressive think tank Per Capita.


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