Friday, October 30, 2009

Do Speed Limits Save Lives?

The latest figures, released yesterday, show that the road toll in New South Wales is well up on the same time last year, and quite understandably questions are being asked about why this is so. At the same time there has been a call from the National Motorists Association of Australia to actually increase speed limits on some rural highways, arguing that frustration and fatigue are contributing to the road toll. They say that higher speed limits will reduce intimidating and aggressive driving because drivers won’t by frustrated by speed limits that don’t always seem to make sense. While this might seem to be illogical, is it possible that they have a point?

There are parts of the world where high speed driving is normal, and one of the most frequently quoted examples is the German Autobahn system. Studies there have shown that while the Autobahns carry 30% of the nation’s traffic, they account for only 3% of the crashes. Further, the unrestricted sections of the Autobahn are reported to have no more crashes that any other part of the motorway. In Australia, the Northern Territory had unrestricted roads until a speed limit of 130 kilometres per hour was introduced only a few years ago. After the limit was imposed, the number of crashes actually increased. Apparently the same thing happened in Montana in the United States when the previously unrestricted roads had a 120 kmh limit imposed and the rate of road crashes almost doubled.

Of course, the safety of driving at high speed is very much dependent on the standard of the road. Here in New South Wales the standard of our roads ranges from first class motorways right through to country roads that wouldn’t be safe for a wheel barrow race. Nobody in their right mind would recommend high speed driving on roads that are simply not up to a reasonable standard, but one of the things which has prompted this debate is the proposal that the speed limit on sections of the Newell Highway should be cut from 110 down to 100. It is doubtful that such a change would do anything to improve road safety, while it is certain that it would increase both travelling time and the levels of frustration of motorists who become stuck behind long haul trucks.

On long country highways where the traffic is not as congested as an urban motorway, it would seem that perhaps there is an argument for high speed limits. But the one thing that annoys drivers more than anything else is speed limits which are inconsistent and which make no sense. For example, there is no problem with driving at 100 kmh on a single lane highway in the bush, but if an eight lane motorway has one lane closed off everybody is expected to slow down to 80 or 60 or sometimes even 40, in what would normally be a 110 zone. Even more baffling is the need to slow down to a crawl so far before a roadworks site that it takes all day to get to where the actual roadworks are taking place, and the ultimate nonsense is the speed limit imposed on a roadworks site when no work is actually being done and the road itself is not obstructed. But just because there is some machinery parked off the shoulder and some barricades alongside the road we all have to slow down anyway. It is that kind of ridiculous imposition which leaves drivers frustrated and confused, and perhaps less likely to respect speed limits at all.

It is already a requirement that drivers should drive to suit the prevailing road conditions regardless of the posted speed limit. That means that if the weather is bad we should slow down. If there is an obstacle we should slow down. If there are roadworks, we should slow down, even if there isn’t an official sign telling us to do so. We should be smart enough and responsible enough to do the right thing anyway. But in this increasingly dumbed-down, politically correct world, apparently it is necessary to put a sign on everything, and make a law about everything, to control everything we all do. It would seem speed limits are no different, and although they have an important place in built up areas, suburbs, school zones, and so on, out on the open road it may be that we are being confronted with an excess of regulation with no real improvement in actual safety.

In the end there is one thing that we should all realize. If we do crash, the speed at which we are travelling can make a dramatic difference to the outcome of the accident.

Thursday, October 29, 2009

Interest Rate Rise Too Much Too Soon

With the release of yesterday’s inflation figures it seems that if you are looking for a dead certainty on Melbourne Cup Day it is that interest rates will go up. The only question is by how much. While the annual inflation rate remains low at 1.3%, that’s only part of the picture. The September quarter increase of 1% is a big chunk of that annual figure, and following on the previous quarterly results represents an alarmingly rapid upward trend. But further complicating the matter is the fact that the most significant price increases occurred with electricity, up 11.4%, water and sewerage, up 14.1%, and petrol, up 4%, which also flowed through to higher transport costs. Since utilities charges are largely determined by state government policy, and petrol prices by international markets, these price increases do not necessarily form an accurate reflection of local economic conditions. They are also not directly influenced by monetary policy, that is the interest rates determined by the Reserve Bank.

For this reason, when the Reserve Bank Board meets to consider interest rates, the most important measure of inflation will not be the headline rate, but instead the so called rate of underlying inflation. That rate is running at about 0.8% per quarter, or around 3.5% annually. That’s outside the Reserve Bank comfort zone of 2 to 3%, further adding to the case for an increase in interest rates. The third factor indicating an increase is the repeated advice form the Reserve bank Governor that the current low settings are at an emergency level, and that as the economic emergency eases interest rates must return to a more normal level. “Normal” means somewhere around 5%, which means there’s still 1.75 percentage points of interest rate rises ahead of us.

So what is the likely size of the increase to be decided next Tuesday? The broad consensus appears to be 25 basis points, although some observes are warning that we should not be surprised if the Bank opts for 50 points in the wake of the inflation figures. But while the inflation level is an important concern, it is not the only factor to be considered. The Treasury forecast for rising unemployment still stands, and the level of business investment is still fragile, and both of these indicators are vulnerable to increases to interest rates. Business borrowers in particular have for the most part not yet received the full benefit of previous interest rate falls, so any increase now is effectively a double whammy. The point is that while the economy has weathered the Global Financial Crisis better than expected, it is still fragile and vulnerable to any further adverse events.

The housing market is also presenting something of a conundrum at present with house prices rising strongly on the one hand, but actual sales falling. Combined with a lack of investment in new dwellings and of course the prospect of rising interest rates, this adds up to more problems with housing affordability. People who are looking for a house are less able to afford one, while people who have a house are enjoying an increase in the supposed value, but might find it difficult to actually find a buyer. It’s a situation which is not sustainable, and something has to give, but as long as there is a housing shortage the paradox will prevail, and when interest rates rise it will hurt both home buyers and home owners. The flow through will also impact on rental prices too.

On balance, an increase of 25 basis points next week might appear to be the safe option, but since much of the apparent inflation threat is driven by outside factors I suspect that even that much could be too much too soon.

Wednesday, October 28, 2009

Taxpayers Ultimately Shortchanged By Cost Cuts

The move by the government to reduce the Medicare rebate for cataract surgery has resulted in a stand off in the senate, with opposition and independent senators moving to disallow the bill. While it is their intention to prevent the rebate form being reduced, it seems that such a motion could actually result in the existing rebate being disallowed altogether. Regardless of the outcome of that particular dilemma, the question remains why should the rebate be reduced at all? The government claims that advances in medical technology mean that the procedure should now be cheaper, but the Australian Medical Association says that the government doesn’t understand the cost structure involved.

Of course the government has a responsibility to spend taxpayers’ money wisely and it is wrong to pay too much for services. But it is also important not to pay too little. Just ask anybody who has tried to save money on servicing their car only to have to pay more when the engine seizes up. I can’t help but wonder if the real motivation is just good old fashioned cost cutting. After all, the government is now confronted with the task of dealing with an unprecedented deficit in the wake of the Global Financial Crisis. As a result, the government will be looking for expenditure cuts anywhere it can and we are going to see a lot of that in the next couple of years. I suspect that this is not just about cataracts, but about the government’s overall efficiency drive, and that’s why the wisdom should be questioned.

It’s all very well to be cutting costs to save money, but in the end you tend to get what you pay for. The trouble is that the bottom line thinking which has been a feature of the prevailing business philosophy of the past decade or so has infected both corporate culture and government policy. It is the philosophy which seeks to achieve profit by removing all unnecessary expense, leaving no margin for error, no capacity for contingency, and no reward for employees who do the actual work. Quality and customer service, along with employees, are seen as an expense rather than an investment. The irony is that when taken to extremes this approach will cripple any enterprise and sometimes even destroy it. In the corporate world, that means that the cowboys at the top walk away with their multi million dollar payouts without a care for the carnage they have left behind, because they have got what they were after, which is maximum profits for themselves. When the same philosophy is applied to government, the result is that taxpayers are actually denied the services they have paid for. Ironically, cutting costs in this way doesn’t really save money for taxpayers at all. Instead, it shortchanges them.

In the case of the Medicare rebate for cataract surgery, there has been criticism leveled at doctors seeking to retain high incomes for themselves at the expense of consumers. I believe that the criticism is misdirected. I believe that there is nothing wrong with ophthalmologists receiving high incomes. They are highly skilled, highly trained, highly talented people who deliver a highly specialized service which is of great value. It is not only right to pay them well for that service, it is essential that the value of what they do is properly recognized. That is the basis of our market based economy, as well as the foundation of our society, that a person’s contribution to society should be appropriately rewarded. On that basis, it is vastly more appropriate that an ophthalmologist earn four or five hundred thousand dollars a year than it is for the corporate cowboys to be paid ten or fifteen million dollars a year, and even more in termination payments to get rid of them when they screw up.

In contrast, money paid to surgeons who save people’s eyesight, or who save people’s lives, is worth every cent.

Tuesday, October 27, 2009

Bank Admits Error, Customers To Benefit

It seems like I have been chastising the banks for years. Although they might seem to make easy targets, and criticism could even be viewed as a cheap shot, they have collectively done so much for so long to deserve it. The list of grievances is so long it can be hard to know where to begin, but unnecessary fees and charges come to mind pretty quickly. Then there’s the huge differential between the tiny interest rates they pay on transaction accounts and the huge rates they charge on credit cards. There’s the relatively relaxed pace at which they pass on interest rate reductions to home loan customers as compared to the unseemly rush to pass on any increases as quickly as possible. And of course, the perceived decline in customer service which has resulted from branch closures and the preference for automated banking.

But recently there have been signs of the big banks finally coming to their senses. After years of copping a caning for exorbitant fees and charges, the big banks have started to cut them back or even cut them out completely. It seems that they have finally heard the message that charging their customers for opening an envelope has been hurting not only their customers but their business. Now, something which previously appeared to be impossible has come to pass. A senior bank executive has admitted that closing branches over the last two decades was a big mistake. Peter Hanlon of the Westpac bank has said, “Closing branches has been a complete failure. We have closed branches in places we simply should not have closed them. This is an admission we made a mistake.”

Now, wait a minute! I could have told him that years ago. In fact, I did. Every time banks were in the news for closing a branch in a suburb or a small town, I told anybody who would listen that it was not only bad for the community, it was also a mistake for the bank. At a time when building societies and credit unions were working hard to increase their customer base, the big banks were literally throwing away the one thing that small institutions could not match. They were destroying the single point of difference that gave them a competitive advantage over the smaller operators. The big banks could offer customers a physical presence and face to face service in just about every suburb and town in Australia, and their competitors couldn’t match it. But through some sort of lunacy, they failed to recognize that unique competitive edge and just threw it away.

While it is tempting to say “I told you so”, the important point is that it appears that the banks are finally coming to their senses and realizing that it is not enough to simply talk about customer service in expensive and glossy television commercials, it is important to actually deliver it. At last, we are seeing the first glimmers of hope that banks might actually understand that looking after their customers is not an expense, but an investment which will show a return on the bottom line. Peter Hanlon is talking about people coming to respect banks and bank managers again, just as they once did years ago. It would seem that he understands that customers will be far more likely to give that respect if the bank first shows the same respect to them.

And who knows. If it works, perhaps it will catch on in other businesses too… like telephone companies.

Monday, October 26, 2009

Asbestos Battle Was Won, But The War Goes On

Despite the fact that the battle has been won, the war goes on. After many years of hard fought negotiations James Hardie Industries was forced to set up the Asbestos Injury Compensation Fund to provide for the needs of those who suffer diseases caused by the products manufactured by that company for decades. Despite the large numbers of people already diagnosed and predictions of many more victims to emerge in the years ahead, the company made very clear representations that the fund would be more than adequate. Those promises may have been made in good faith at the time, but they were made without taking into account the effects of the Global Financial Crisis, and now it is clear that the fund is on the brink of drying up.

Of course, no one could have been expected to foresee the financial crisis, but the result is that the Hardie has not been sufficiently profitable for it to be compelled to make any payments into the fund for two of the last three years. Legally, the company has been honoring the terms of the agreement, but that is no comfort to victims who will not live long enough to see their families properly cared for. Ethically, many people believe that the company should be doing more to honor the spirit of the agreement, and make at least some sort of contribution to keep the fund afloat. Nobody may have seen the GFC coming, but the shortfall in the fund has been recognized since April, but so far nothing has been done to fix it.

Part of the problem is that nobody seems to want to take responsibility for dealing with this new challenge. It has been suggested that both the state and federal governments should play a role in underwriting the fund so that victims continue to receive assistance even while the company is experiencing difficult times, on the understanding that when it returns to normal levels of profitability it can repay the government. One suggestion points to the $150 million collected from Hardie by the federal government in back taxes as a way of financing such an underwriting, with the government putting up the money now, and getting it back again later when Hardie is once again in a position to meet its commitments.

The trouble is that none of that is going to happen if there isn’t somebody driving the process to seek an outcome. In the original negotiations that role was undertaken largely by the A.C.T.U. along with the New South Wales state government. Greg Combet was secretary of the A.C.T.U. and was instrumental in winning the original battle and achieving a satisfactory result. The same sort of thing needs to happen now, and whether it is the unions or either the state or federal government doesn’t really matter. What matters is that they all stop waiting for somebody else to take the lead and just get on with the job of facing up to the shortfall.

Until then, the war of words will go on, even though the battle was supposed to have been won years ago.