Professors of philosophy at San Jose State University have refused to teach using a MOOC (i.e. a ‘massive open on-line course’) and have written an ‘open letter’ (via the subscriber only Chronicle of Higher Education) rejecting the use of MOOCs.

Nominally the letter is written to the Harvard University professor who has designed the MOOC.

In fact, the letter is one of the first shots in the MOOC counter-revolution.

The counter-revolution had to come. And it had to come from university academics because the development of on-line courses has serious implications for these academics.

The authors of the letter note, the potential of MOOCs to create a world of higher education ‘haves’ and ‘have nots’. The authors fear two classes of university:

“[O]ne well funded colleges and universities in which privileged students get their own real professor; the other, financially stressed private and public universities in which students watch a bunch of videotaped lectures and interact, if indeed any interaction is available on their home campuses, with a professor that this model of education has turned into a glorified teaching assistant”.

This anti-MOOC protest highlights a simple point. On-line materials, like MOOCs, can be a complement or a substitute for the on-campus experience. As a complement they can improve student learning. As a substitute they can save money. The question for Australian academics is simple. Which way will our universities go?

MOOCs are simply an early stage of on-line education. Poor quality MOOCs involve videoed ‘chalk and talk’. Higher quality MOOCs are based around short videos that use a variety of approaches to communicate with students. One example, by Kevin Werbach from the University of Pennsylvania is discussed here.

But as Professor Werbach notes:

“The biggest thing I learned is that MOOC students want to feel like they are interacting with a real person”.

This is a problem for MOOCs. How do you have a ‘massive’ course but maintain interaction between the teacher and the students and, more importantly, between the students themselves? While MOOCs can deliver excellent on-line material that can replace lectures, they cannot easily create the environment where students can interact and learn from each other.

One potential future for MOOCs and other on-line material is as an input to an inverted classroom. Courses will be redesigned so that students do the preparatory work (on-line) before class, are tested (on-line) before class then come onto campus for interactive learning such as moderated question-and-answer session and facilitated problem solving and debates. If used in this way, on-line materials will revolutionise university education and improve student learning.

Is this possible? Yes! I am beginning the process of ‘inverting’ my large first year microeconomics course and I am not the first by a long way.

However, on-line materials may also be used as a substitute for on-campus learning. Rather than enhancing the classroom, on-line materials may be used to replace lectures, reduce student contact hours and push the professors out.

This risk is real. Universities are businesses, whether we like it or not. University administrators have budgets to meet and the demands on scarce university funding always exceeds the size of that funding. Administrators may see an opportunity to reduce the funding for teaching (along with academic headcount) by using on-line material as a replacement for student face time.

This risk is greater in an ‘undifferentiated’ university sector like Australia.

In the United States, some universities compete on teaching excellence. It is not surprising that the elite liberal arts Amherst College decided not to follow the MOOC route. Its reputation depends on its teaching. In the competitive US higher education market, Amherst competes by the quality of its teaching and its on-campus experience. When you depend on quality teaching for your student income, on-line materials will be a complement, not a substitute for on-campus interaction.

So in the US, liberal arts colleges will have an incentive to use on-line material to improve teaching. And, hopefully, they will drag other universities in their wake.

In contrast, Australian universities generally do not compete on teaching quality. Student demand depends on history and research reputation. When student demand is, at best, loosely connected to teaching quality, the incentives to use on-line materials as a substitute to save money will be tempting for university administrators.

So Australian tertiary education is fast approaching a tipping point. Will on-line material be used to complement and improve the on-campus experience? Or will it be used as a money-saving substitute that downgrades student learning and reduces academic employment?

When Woolworths is looking at parallel importation, you know that the Australian retail sector has a problem.

Today’s Australian Financial Review states that:

“Woolworths has been buying Australian-made Lynx, Rexona and Impulse deodorants from Singapore for 60 to 75 per cent of the price it pays locally”.

Of course, this is nothing new to most consumers. Fairfax media notes that:

“Australian shoppers are so besotted with online retailer ASOS, the British fashion site is flying nearly four jumbo jets full of clothing into the country each week. … Australian shoppers make a purchase from the ASOS website every six seconds”.

Parallel importing is where a retailer buys a product overseas and resells it here, avoiding the local arm of the relevant manufacturer.

It is not new. For example, Aldi has been parallel importing Nescafe instant coffee from overseas since around 2005. They are careful to point out that it is an imported product and to make sure consumers are not misled. And the coffee from Indonesia or Brazil is much cheaper than the ‘local brew’.

Parallel importing is just one part of the general move by Australians to purchase goods and services cheaper off-shore. These purchases appear to be driven by price discrimination. Manufacturers often sell products at a higher price in Australia than overseas. The most blatant examples appear to be in the software industry as reported to a parliamentary inquiry earlier this year:

“One example given last week was a suite of Microsoft products that in the US cost $2324, in Canada $3105, in Australia $4136 and $2324 in Singapore, an 86 per cent difference”.

However, examples are everywhere. I now have a lifetime supply of a well-known brand of toothpaste. It costs about one-third of the Australian price in India so my wife brought a bag-full home from her last trip!

Of course, manufacturers price discriminate between countries because it raises their profits. And they retaliate when Australian retailers or consumers try to undermine that discrimination.

When Aldi started parallel importing instant coffee, Nestle tried to intervene under the guise of ‘consumer protection. The ACCC looked into the matter and didn’t agree. (Conflict of interest warning – I was a Member of the ACCC at the time).

As the Australian Financial Review notes:

“[w]hen the manufacturer … discovered that Woolworths was parallel importing three of its top-selling brands, its first reaction was to shut down Woolworth’s source of supply …”.

And for software buyers, try to download from an overseas site at a lower price and you will quickly have your location checked and the download blocked.

International price discrimination against Australia is hurting our retail sector. There are a lot of problems in our ‘bricks and mortar’ retail sector at present. It is under siege by the internet. And in some areas it will undoubtedly die. However, we do not need our retail sector undermined by multi-national companies who choose to charge higher prices in Australia.

And the solution is clear. Australians – whether businesses or consumers – should be ‘free to buy’ legal products from any where in the world for own-use or resale in Australia. In many areas this can be achieved by simple legislative change. In other cases, like software, there are issues of intellectual property and copyright. But if a consumer is purchasing a legitimate product in an overseas country, our copyright and intellectual property rules should not prevent that consumer using (or reselling) that product in Australia.

When it comes to international price discrimination, Australia has long been the bunnies. It is time for the bunnies to fight back!

What does a sustainable superannuation system look like? And do the reforms announced by the Treasurer make our system more or less sustainable?

Let’s start with the first question. My assumption is that superannuation is ‘forced’ savings that are designed to reduce retirees' reliance on the government-funded old-age pension. Those who can afford to save enough during their lifetime to take financial care of themselves in their old age should be encouraged to do so.

But if this is the underlying principle, our superannuation system clearly lacks one key element.

At present, if you are over 60 and retired, you can take your superannuation as a tax-free lump sum. You can spend it or arrange your affairs so that your income is reduced and you are at least partially eligible for the pension.

In contrast, a sustainable superannuation system would require retirees to turn their superannuation savings into a flow of income (a lifetime annuity). This would reduce the pension paid to retirees by the government. Tax benefits on superannuation savings would make sense because they would help reduce future government pension liabilities. The old-age pension would be a true safety net.

I have discussed this before. Alan Kohler notes that such required lifetime annuities are used in the UK and Canada.

If the government does move to an ‘annuity’ approach, how should it tax superannuation contributions? At present this is a ‘dog’s breakfast’, as John Freebairn explains.

So let’s do a little ‘hypothetical’. Given the current old age pension, what level of superannuation contribution would be ‘neutral’ for the government in terms of revenues and receipts. I will work from the single pension which I will round up to $20,000 per year. This is income tested. So if your income exceeds about $4,000 per year you start to lose the pension at a rate of 50 cents for every extra dollar of income. Your pension is eliminated once your annual income (as a single person) exceeds about $44,000.(The rounding means my figures are approximate – but fine for illustrative purposes).

Now, suppose that you receive income from an annuity that you were required to buy with your superannuation. Then if your annuity payout was between $4,000 and $44,000 per year the government would save 50 cents for every extra dollar you receive in your annuity every year. So if you save another dollar in superannuation then the government saves about 50 cents in terms of the present value of future pension payouts.

In this sense, a tax concession of up to 50 cents per dollar saved as superannuation would be roughly ‘revenue neutral’ for the government.

Of course, if your annuity is more than $44,000 per year then you save the government nothing. You are ineligible for the pension and an extra dollar in superannuation simply gives you a tax concession with no reduced government spending when you retire.

Or put another way, if your superannuation balance is more than about $1 million, the tax concession on further superannuation savings is a cost to the government without any offsetting benefit to the government when you retire.

So how should the superannuation system be reformed? Introduce a ‘required annuity’. Rationalise the hodge-podge of taxes while at the same time designing the pension scheme to mesh seamlessly with the superannuation system. And introduce a tax on superannuation income for those retirees who are ‘clear’ of the pension thresholds.

So what did the Treasurer do? He announced one of these changes – which is better than nothing. The reforms “[c]ap the tax exemption for earnings on superannuation assets supporting income streams at $100,000, with a concessional tax rate of 15 per cent applying thereafter …”.

Now this is a long way above $44,000 but the press release does ‘tie the figure’ back to the current pension. Good!

Also, 15% is not 50%, the current effective marginal ‘tax rate’ for a pensioner who loses 50 cents pension for each extra dollar earned. But this is probably a good thing because a higher tax rate would just lead to more ‘rearranging’ of retirees' affairs to avoid the tax.

But clearly this is just a first step. The pension and superannuation systems need to be thought of as a single system. This means that some or all of superannuation savings have to become a ‘pension replacing’ annuity. It means the income testing for the pension needs to be tied into the superannuation tax concessions. More broadly, it means clarifying the role of government and individual responsibility for retirement.

We have taken the first step. Now the government needs to take a few more.

The debate on superannuation reached farcical levels with Labor MP Joel Fitzgibbon claiming that “In Sydney’s west you can be on a quarter of a million dollars family income a year and you’re still struggling”.

Are households on $250,000 gross income per year ‘the battlers’? No! They are in the top 5% of households by gross income. While family circumstances matter, few if any of these households are ‘doing it tough’.

The problem with such argument is that it diverts attention from the real need to reform our superannuation system.

Is the Australian superannuation system broken? No! It is half a good system – but only half.

Should the government reform aspects of the superannuation system? Yes! But it should do so carefully. Otherwise it risks stuffing up the ‘good half’ without fixing the ‘bad half’.

Let me explain.

Nine months ago Monash and Warwick universities ran a joint conference on superannuation. It quickly became clear that the rest of the world is envious of the pre-retirement part of our superannuation system. It has led to sizable funds being accumulated to fund retirement. And it has broad community support. Most other developed countries have been less successful and face government pension problems as baby-boomers start to retire.

However, it also became apparent that Australia’s post-retirement scheme is ad hoc. Superannuation is to fund retirement and reduce the need for government pensions. But our superannuation system almost ignores post-retirement. Our overseas guests greeted the idea that a retiree could withdraw a large percentage of his or her superannuation as a lump sum, spend it, then go on a government pension, with laughter. In countries like Finland, savings through ‘superannuation’ must be channelled into an annuity that replaces or supplements government support.

If superannuation is designed to deal with post-retirement then it must provide a pension-replacement. However, annuities have not been popular with Australian retirees. This is to be expected. In 2009-10, average superannuation balances for men entering retirement were about $200,000. Roughly speaking, this buys an annuity that pays only about $10,000 per year. For women the average balance on retirement was just over $110,000 or about $5,000 per year in an annuity.

Given the small annual payouts, it is little wonder that the government pension looks an attractive (and necessary) alternative.

While annuities may provide a small supplement to government support for many retired people, they still reduce the burden on the government. And at the high end of the spectrum, they ensure that those retirees with substantial superannuation balances will not draw on government support.

So the real area for government superannuation reform is post retirement. Should retirees be required to turn some or all of their superannuation savings into an annuity? And if this is required, how does the annuity affect their ability to also gain government support in retirement?

Requiring retirees to take their superannuation as an annuity makes the policy objective transparent. Superannuation is required savings that receives preferred taxation status today in order to reduce government expenditure in the future. In particular, high income earners are required to save through superannuation, and they get tax benefits on this forced saving, but they are effectively excluded from government pensions in retirement.

Of course, there will always be debate about the right level of the tax concessions. But what the government must avoid is undermining support for the existing world-class pre-retirement system that we have in place. And the best way to undermine that support, as we have recently seen in Cyprus, is uncertainty and the fear that the government is about to ‘steal our money’.

The government has raised the spectre of changing the tax benefits on superannuation. But it is not clear how these changes will be brought in – or if they will occur. The prospect of taxing superannuation payouts has been raised. But what level of superannuation will this apply to? Reducing tax concessions for high income earners has been mentioned. But it is not clear who will be counted ‘in’ this group. The government is not helping by fuelling this pre-budget speculation.

People view their superannuation balances as ‘their money’. As the experience in Cyprus shows, if a government threatens to ‘take’ some of that money, people get very upset. And this threatens to undermine the community support for the superannuation system.

By focusing on short term ‘opportunistic’ reforms and failing to quell rumours and speculation, the federal government is undermining Australia’s superannuation system. It is also diverting attention away from real reform that is needed to make the system sustainable.

Is the 457 visa system open to rorting? I don’t know. There appear to be plenty of safeguards in place to ensure that business has to jump through lots of bureaucratic hoops in order to bring an overseas skilled worker to Australia.

However, one thing is clear. The 457 visa program is not significantly increasing unemployment.

“There were 125,070 workers on 457 visas in Australia in the 2011-12 financial year”. This is less than 1% of the Australian workforce. So even if the 457 visa program resulted in a one-for-one ‘loss’ of jobs to local workers the effect would be to raise unemployment from 5.4% to about 6.2%. This would be undesirable, even though a 6.2% unemployment rate would be greeted with joy by most European countries.

But the 457 visa program does not have a one-for-one effect on unemployment. Indeed, it is quite likely that the program reduces unemployment in Australia and creates jobs.

How? Well the overseas workers who are employed under 457 visas have to live here. They will eat, drink, buy entertainment, buy clothes, run a car, and so on. In other words, they have to be part of our economy. And every time a 457 visa worker spends a dollar, that is an extra dollar of demand for things that we sell in Australia. And that makes jobs for other Aussies.

So what is the net effect? About a decade ago, the Melbourne Institute looked at ‘working holiday makers’ (WHMs) and their effect on the Australian labour market. Their conclusion?

“This means that for an annual intake of 80,000 WHMs, about 41,000 effective full-year jobs will be taken by WHMs, but about 49,000 effective full year jobs will be created through the WHM expenditure. This indicates that about 8,000 effective full year jobs are created by an intake of 80,000 WHMs" (page 9).

In other words, the working holiday visa scheme probably led to net job creation in Australia. The WHM’s not only had jobs but they spent their earnings, and that created more local jobs.

Now, WHMs are different to skilled workers, and it can be argued that they take ‘undesirable’ jobs and tend to bring funds into the country. So the WHM effect may be higher than the skilled migrant effect.

However, the WHMs can directly ‘take’ local jobs. A 457 visa applicant can only gain a job where there is no appropriate local worker. So it could be argued that 457 visa applicants will have a more positive jobs effect than WHMs. They fill jobs that would otherwise be vacant, and then spend their wages creating more jobs.

In the absence of a proper study we do not know which effect dominates. But we can conclude that any ‘unemployment’ effect from 457 visa applicants will, at most, be very small, and is quite likely to be negative. In other words, bringing skilled workers to Australia under the 457 visa programs may lead to a net creation of jobs in Australia.

Of course, this is only one effect. Having overseas skilled workers also improves the quality of what we produce in Australia.

As an example, the university sector has a relatively open international labour market. Australia’s top universities recruit young graduates and leading academics from around the world. That is why Australia has six universities in the world’s top 100. We punch well above our weight in tertiary education because we bring in the best people from around the world.

By bringing in skilled workers from overseas, the 457 visa system improves the quality of the services Australian’s receive. This is particularly the case for healthcare and social services, the areas with the biggest intake of 457 workers. But it applies to all areas of our economy.

If the 457 visa scheme provides significant economic benefits, why is there a debate about ‘tightening up’ the scheme instead of expanding it?

Unfortunately, the debate reflects political opportunism, not economics. By creating a false picture of ‘job stealing foreigners’, our politicians hope to stoke our fears to their own advantage.

Instead of recognising the employment and productivity benefits that Australia gains from overseas skilled workers, our politicians are creating a scare campaign. This may be good politics, but it is very bad economics.

As Channel Ten hires its fifth CEO in two years, does free-to-air television have a future?

If we take the new CEO’s comments at face value, the answer appears to be ‘yes’! Channel Ten’s new CEO, Hamish McLennan told the Australian Financial Review that “the embattled free-to-air network is fixable”.

But if we look at the strategy that McLennan is adopting, the real answer appears to be a firm ‘no’.

McLennan has made it clear that Channel Ten is going to change its focus from a young to an older demographic. The culprit appears to the Internet. According to McLennan Channel Ten “had veered too far away from an older audience towards a generation that is increasingly not watching television on the free-to-air networks”.

But if McLennan is right, then the future for all free-to-air networks looks grim. If the Internet is a successful competitor, particularly for younger viewers, then the networks risk fighting over an ever smaller viewing audience.

It’s eyeballs that matter

Commentary on the change at Channel Ten has focused on ratings. These have been poor. As the AFR notes:

“Ten has been smashed in the ratings this year by rivals Seven and Nine, with its share of metropolitan ad revenue hovering just above the 20 per cent mark – a historically low level.”

This is backed up by recent ratings figures that show Channel Ten well down the list in terms of top rating programs.

But ratings, whether in viewer share or comparative viewer numbers on particular days, miss the point. What matters for the profitability of Channel Ten – and all other free-to-air television networks – is not their share of ratings but the number and ‘quality’ of eyeballs that they deliver to advertisers.

Free-to-air television makes its money by selling airtime to advertisers. The more viewers that a network delivers, the more it can charge advertisers.

But to paraphrase an old television ad, ‘eyeballs ain’t eyeballs’. Advertisers are trying to sell their wares and this depends not only on the number of viewers but the demographic. There is no point trying to sell European cruises to a young audience or street-wear to an audience of retirees.

So not only has Channel Ten failed to deliver absolute numbers of eyeballs, their focus on a younger demographic appears to have failed to deliver the types of eyeballs that advertisers value. As the Business Spectator notes:

“Ten’s share of the metropolitan TV advertising market has fallen from 27 per cent to about 21 per cent since … the start of 2012, while the network’s advertising revenue dropped 23 per cent in the six months to December, representing a $100 million drop in revenue.”

Put simply, the young demographic that Channel Ten has focused on generally are not watching television and those who are do not buy what the advertisers are selling.

This pressure is going to increase over time as more viewers migrate to the Internet, particularly as the NBN (or its alternative) allows the Internet to compete using high quality streamed video. And the problem is going to affect all networks.

How will the free-to-air networks respond?

So what do the free-to-air networks do? First, they can try and embrace the Internet and use it as an extra source of eyeballs. All the networks have done this to some degree. However, with the exception of the ABC’s iview, the networks’ Internet offerings are clunky and are likely to be overwhelmed by material gained over the Internet through ‘other sources’.

These other sources may be illegal (i.e. pirated video) or semi-legal (e.g. from overseas network sites using a virtual IP address to overcome geographic restrictions).

Over time, these other sources will expand. Indeed, in a decade, it is likely that we will get overseas programming directly from the source network. So an Internet-based model dooms the local networks to rely on local content and there is simply not enough of that to go around.

Alternatively, the networks, or at least some of them, can die. To the degree that free-to-air television becomes obsolete, the networks will fight out a war of attrition over an ever diminishing audience. In a decade the free-to-air networks may have gone the way of videocassettes. One network may survive, although this is likely to depend on government funding as a ‘free’ service to ‘older people’ or those who have a limited ability to use the Internet.

Third, the free-to-air networks can try to change their funding model and use government muscle to prop them up.

For example, in the UK, the BBC has been largely funded by a system of ‘television licenses’ since 1946. License systems are common in Europe and Australia had a system of television licenses until 1974. Expect the free-to-air television networks in Australia to dust off their history books and to argue for public funding as ‘essential services’ even as their audience diminishes.

The death of Australia’s free-to-air networks will not be pretty. No industry likes to become obsolete. However, if Channel Ten’s new CEO is correct, and if the networks cannot find a new business model, then that is the future.

BrisConections has been placed into administration only seven months after opening the Brisbane Airport Link toll road/tunnel. It has not had sufficient users to make the project viable. So what does this mean for future public-private partnerships (PPPs)?

In the short term, it will mean very little. The citizens of Brisbane have a great tunnel that (from my experience) cuts significant time off a trip to the airport. The investors have done their dough. And there may be various lawsuits about who misled whom.

However, this is the fourth in a series of PPP toll road failures, including Sydney’s Lane Cove and Cross City tunnels, and Brisbane’s Clem7. If PPPs are to have a future, we need better ways to handle the project risk.

The risk associated with large infrastructure projects can be significant. For toll roads, the viability of a project depends on projections of future traffic flows. But these flows may be highly variable, depending on a range of choices by the government and car users.

Under a traditional PPP contract, much of this risk is directly borne by the private investors. However, this risk will be reflected in the contract that underpins the PPP. So the risk will be indirectly borne by car users and taxpayers.

Most obviously, the greater the risk, the higher the tolls that will be demanded by the private participants in the PPP. So car users bear the risk of the project through high toll charges. This can undermine the social benefits of the toll road. Instead of taking traffic off congested suburban roads, high tolls may mean too few cars use the toll road.

More subtly, car users may bear the risk through limits placed on the government. The PPP contract may restrict future government transport policies that would alter traffic flows – even if these policies were in the publics’ best interest. If the government wants to implement these policies in the future then it will need to renegotiate the PPP contract. This can be a messy and costly process, meaning that desirable transport policies are left in the ‘too hard’ basket.

Taxpayers may also bear the risk of a PPP through guarantees on revenue or via ‘take or pay’ contracts that guarantee a flow of government funds.

In the extreme, taxpayers bear the risk through the potential for a government bail out. If the government decides that a PPP can’t be allowed to fail for political reasons, taxpayer funds may be used to protect private investors.

If car users and taxpayers are going to bear the risk of a PPP toll road, what is the point of using private funding? The government can fund a PPP and directly bear the project risk, even if it is built and operated by the private sector. And government funding is currently significantly cheaper than private funding. Indeed, as Michael Pascoe notes in the Age:

“Australian governments can borrow more cheaply than the private sector to invest in infrastructure. The federal government in particular can borrow extremely cheaply on very long terms”.

Unfortunately, this option for improving the nation’s infrastructure appears to be off the agenda. The current ‘budget surplus’ fetish means that long-term government borrowing and investment in public projects is ruled out on the grounds of short-term political pragmatism.

So, if we want on-going investment in public infrastructure, we need better PPPs that handle the risk in clever ways. One alternative, being investigated by Melbourne University’s Centre for Market Design, is to provide the private investors with a fixed return in current dollar terms.

Rather than specifying a length of time for the toll operator to charge road users, this approach allows the private operator to charge tolls until it receives a certain amount of money. This shares the risk between the private operator and the car users. If traffic volumes are high, the private operator will get their return quickly and the road will move back into government hands sooner than expected. If traffic volumes are low, the private operator will have a longer time to get their return.

Such an approach to a PPP will not save private investors when traffic flows are so poorly predicted that they can never get their money back. But it does protect them from short-term fluctuations.

The approach also improves flexibility over future government policies. To the degree that government policies change traffic flows, the private operator is protected. Changed traffic flows automatically change the length of time for the payback to the private investors. The PPP contract will only need to be renegotiated if the changes in traffic flows are so significant that the private operator cannot ever receive the full return on their investment.

The failure of BrisConnections does not spell the end of PPPs. If we want infrastructure investment and government budget surpluses, then PPPs are a must. But it does spell the end of naïve PPPs and it signals the need for research in order to design better PPPs. That is, unless we can find some more private sector bunnies who are happy to lose their money building roads for the rest of us.