Monday, March 11, 2019

Economists: lonely, misunderstood angels in shining armour

If you’re tempted by the shocking thought that economists end up as handmaidens to the rich and powerful – as I’m tempted – Dr Martin Parkinson wishes to remind us that’s not how it’s supposed to be. The first mission of economists is to make this world a better world, he says. But don’t expect it to make you popular.

Let me tell you about a talk he gave on Friday night. It was a pep talk to the first of what’s hoped to be a regular social gathering for young economists come to Canberra to study, teach or work in government or consulting.

Apparently, working in Canberra can be a tough gig if you don’t know many economist mates to be assortative with.

Parkinson’s own career has had its downs and ups. He was sacked as Treasury secretary by Tony Abbott – who feared he actually believed in the climate change policy the Rudd government had him designing – then resurrected by Malcolm Turnbull as secretary of the Department of Prime Minister and Cabinet, the Treasury secretary’s bureaucratic boss.

He began the pep talk with a story about the woman with only six months to live, who’s advised by her doctor to marry an economist so as to make it seem like a lifetime.

That may be because, as Parko says, economists are trained to be analytical. To be rigorously logical and rational in their thinking. (I define an economist as someone who thinks their partner is the only irrational person in the economy.)

“Economics gives you insights into the way the world works that other professions cannot,” he says. Economists see things that others can’t. Sometimes that’s because the others have incentives not to see them.

As Upton Sinclair famously put it, it’s difficult to get someone to understand something when their salary depends on them not understanding it.

Ain’t that the truth. The endless bickering between our politicians explained in a single quote. And the economists’ limited success in persuading people to take their advice.

Economists are trained to see “opportunity cost” which, according to Parko, is “the core tenet of the profession”. “This under underlies everything we do.

“This leads us to positions that are often counter-intuitive [the opposite of common sense] and unpopular – but are right.”

True. It may amaze you that so much of what economists bang on about boils down to no more than yet another application of opportunity cost: be careful how you spend your money, because you can only spend it once.

It’s a pathetically obvious insight, but it’s part of the human condition to always be forgetting it. So it’s the economist’s role to be the one who keeps reminding us of the obvious. If economists do no more than that, they’ll have made an invaluable contribution to society – to making this world a better world - and earned their keep.

But here’s the bit I found most inspiring in Parko’s pep talk. “Economists are not ‘for capital’ or ‘for labour’ . . . We do not see the world through constructs of power or identity, even though we see the importance of them.

“We are ‘for’ individual wellbeing regardless of race, gender, sexual orientation or capabilities. Because of this, we are often against entrenched interests and for those without a seat at the decision table.

“Economists view the past as ‘sunk’ [there’s nothing you can do to change it] and argue for decisions about the future to be made free of sentiment and in opposition to special interests. Now, this is in sharp contrast to the incentives in our political system, which favour producer interests over that of consumers.”

Ah, that’s the point. The ethic of neo-classical economics is that the customer is king (or queen). Consumer interests come first, whereas “producer interests” (which include unions as well as business) matter only because they are a means to the ultimate end of the consumers’ greater good.

Economists believe in exposing business to intense competition, to keep prices no higher than costs (including a reasonable rate of return on capital) and profits no higher than necessary. Competition should spur innovation and technological advance, while ensuring the benefits flow through to customers rather staying with business.

Business doesn’t see it that way, of course. Unlike some, my policy is to tell business what it needs to know, not what it wants to hear. Some people – suffering from a touch of the Upton Sinclairs – tell themselves this makes me anti-business. No, it makes me pro-consumer. That’s the ethic we so often fall short of.
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Saturday, March 9, 2019

Forget what’s happening in the economy, just find a scary label

If you want the unvarnished truth, the economy’s rate of growth slowed surprisingly sharply in the second half of last year. If you prefer titillating silliness, we’ve entered a “per capita recession”.

The national accounts for the December quarter, issued by the Australian Bureau of Statistics this week, show real gross domestic product growing by only 0.2 per cent during the quarter, following growth of only 0.3 per cent in the September quarter.

That compares with growth in the first half of 2018 of 0.8 in the June quarter and 1.1 per cent in the March quarter. Six months ago, it looked like the economy was moving into top gear. Now we realise it was changing down.

You’d think that would be bad enough for those tireless in their search for bad news. But, no, they delved around in the fine print and discovered that real GDP per person actually fell by 0.2 per cent in the December quarter and by 0.2 per cent in the previous quarter.

So, that must mean we’re in a “GPD per capita recession”. Eureka! Much scarier. (And saying it in Latin rather than English makes it even more so.)

Making it more entertaining obscures the truth, of course, but you can’t have everything.

Speaking of truth, let me give you a tip: any “recession” that has to be qualified by an adjective ain’t the real deal.

The more excitable end of the economy-watchers – the financial markets and the media – is always looking for an excuse to shock mum by using the ultimate in economic bad language, the r-word. Over the years they’ve given us “technical” recessions, “manufacturing” recessions, “growth” recessions and now “per capita” recessions.

There is no science behind the notion that two successive quarters of “negative growth” – contraction – equal a God-given licence to use the r-word. It’s no more than a rule of thumb, whose one virtue is that it allows the over-excitable to shout Recession! within seconds of seeing a new set of figures, when they really should look and wait for more convincing information.

It’s no more than circumstantial evidence, when you can’t find the body or the murder weapon. No economist I know is comfortable with it as a way of judging whether we really are in recession.

What they know is that, as a test, it delivers too many false readings. Because it’s so arbitrary, it can tell you you’ve got a recession when you don’t, or tell you you don’t when you do.

The national accounts’ first stab at measuring the growth during a quarter is so rough and ready, and will be changed so many times before it stabilises, that two successive negative quarters can easily be revised out of existence.

The real world is too messy for such simple rules of thumb to be reliable.

Treasurer Josh Frydenberg tweeted that “in 2000 and 2006 the Howard government had consecutive quarters of negative GDP per capita growth, and Rudd and Gillard had five negative quarters”.

And all this while our record period of continuous economic growth – now up to 27 years – remained unbroken. See what I mean about false positives?

But even if you do use the successive-quarters test, you’re supposed to apply it to the whole economy, not just to the bit that happens to qualify.

That’s why Scott Morrison was justified in dismissing the “per capita recession” as “made-up statistics”. The figures may have been calculated by the bureau, but it didn’t say anything about recession. That notion was spread by the media.

The bureau calculates about eight different versions of GDP (page 21 of the release). The excitables ignored the six that didn’t show two successive minuses, and zeroed in on one of the two that did. It was a contrivance in search of a headline.

The various versions of GDP are calculated to answer different questions. GDP per person is not designed to tell us whether we’re in recession. It’s designed to show how much of the growth in the economy is coming just from population increase rather than rising prosperity.

Making it a useful indicator. For instance, Frydenberg boasted that “Australia continues to grow faster than all of the G7 nations except the United States”.

True, but GDP per person tells us why. It’s because our population’s growing so much faster than theirs. (Of course, if you’re looking for a job, the growth caused by a higher population should make it easier.)

Admittedly, GDP per person is often used as a measure of what’s happening to the standard of living. But it’s a terribly crude measure. Which is why economists agree that one of the other measures, “real net national disposable income per person”, is the best you’ll get just by modifying GDP itself.

Trouble is, it shows the income of households growing by 0.8 per cent in December and by 2.1 per cent over the year. Wouldn’t get a headline out of that.

Time for a reality check: why is it that the r-word strikes fear into the minds of ordinary people? Because they know that genuine recessions involve falling employment and rapidly rising unemployment. Businesses fail, people lose their jobs, and the rest of us fear we’ll be next.

Any sign of that happening? No. The reverse, in fact. Using the bureau’s “trend” (smoothed) figures, over the six months to December, employment increased by 175,000, with 87 per cent of the extra jobs being full-time, and the proportion of people aged 15 and over with jobs at a record 62.4 per cent.

The unemployment rate fell by 0.3 percentage points to 5.1 per cent and the under-employment rate fell 0.2 points 8.7 per cent.

That’s how terrible a per capita recession is.
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Wednesday, March 6, 2019

How to lose water, waste money and wreck the environment

If you want a salutary example of the taxpayers’ money that can be wasted and the harm that can be done when governments yield to the temptation to prop up declining – and, in this case, environmentally damaging – industries, look no further than Melbourne’s water supply.

The industry in question is the tiny native-forest logging industry in Victoria’s Central Highlands. The value it adds to national production of goods and services is a mere $12 million a year (using figures for 2013-14).

The industry's employment in the region was 430 to 660 people in 2012 – though it would be less than that by now. Few of those jobs would be permanent, with the rest being people working for contractors, who could be deployed elsewhere.

Successive state governments have kept the native-timber industry alive by undercharging it for logs taken from state forests. The state-owned logging company, VicForests, operates at a loss, which is hidden by grants from other parts of the government.

Coalition governments are urged to keep propping up the industry by the National Party; Labor governments by the Construction Forestry Maritime Mining and Energy Union.

What’s this got to do with Melbourne’s water supply? Ah, that’s the beauty of a case study by David Lindenmayer, Heather Keith, Michael Vardon, John Stein and Chris Taylor and others from the Australian National University’s Fenner School of Environment and Society.

I’ve written before in praise of the United Nations’ system of economic and environmental accounts (SEEA), which extends our long-standing way of measuring the economy (to reach gross domestic product) to include our use of natural resources and “ecosystem services” – the many benefits humans get from nature, such as photosynthesis.

Lindenmayer and co’s case study is one of the first to use the SEEA framework to join the dots between the economy (in this case, native forestry) and the environment (Melbourne’s water supply).

Melbourne’s population of 5 million is growing so rapidly it won’t be long before it overtakes Sydney as the nation’s largest city.

So many people require a lot of clean water, a need that can only grow. Almost all of Melbourne’s water comes from water catchments to the city’s north-east.

Logging of native forests has been banned in all those catchments except the biggest, the Thomson catchment, which holds about 59 per cent of Melbourne’s water storage.

Trouble is, the water that runs off native forests is significantly reduced by bushfires – and logging.

This is the consequence of an ecosystem service scientists call “evapo-transpiration” – the product of leaf transpiration and interception and soil evaporation losses.

This means the oldest forests produce the most water run-off. When old trees are lost through fire or logging, the regrowth that takes their place absorbs much more water.

Logging done many years ago can still reduce a forest’s water run-off yield today. The Fenner people calculate that past logging of the Thomson catchment has reduced its present water yield by 26 per cent, or more than 15,000 megalitres a year. They calculate that, should logging continue to 2050, this loss would increase to about 35,000 megalitres a year.

Assuming the average person uses 161 litres of water a day, the loss of water yield resulting from logging would have met the needs of nearly 600,000 people by 2050.

The SEEA-based case study shows the economic value of the water in all of Melbourne’s catchments is more than 25 times the economic value of the timber, woodchips and pulp produced from all Victoria’s native forests.

This is partly because, thanks to past fires and overcutting, only one-eighth of the native timber logged in Victoria is good enough for valuable sawlogs, with the remainder turned into low-value pulp and woodchips for making paper. (This is true even though the trees being logged include lovely mountain ash, alpine ash and shining gums.)

Turning to the Central Highlands alone, in 2013-14 the annual economic value of water supply to Melbourne was $310 million, about the same as the value of its agriculture. Its tourism was worth $260 million – all compared to its native timber production worth $12 million.

But the main thing to note is the trade-off between the different uses to which land can be put. Use it to produce water supply, and it’s very valuable. Use it to produce water supply and native timber, however, and you reduce the value of the water by far more than the chips and pulp are worth.

And why? To save a relative handful of workers the pain of moving to a different industry in a different town. And save the mill owners the expense of adapting their mills to chipping plantation wood rather than native wood. When did they deserve the kid-glove treatment the rest of us don’t get?

As for all the water that won’t be available to meet Melbourne’s growing needs, how will we replace it? Not to worry. We’ll get it from the desalination plant. It will cost $1650 more per megalitre than catchment water, but the Nats and the CFMMEU know we won’t mind paying through the nose to continue wrecking our native forests.
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Monday, March 4, 2019

Beware of groupthink on why the economy’s growth is so weak

According to our top econocrats, the underlying cause of the economy’s greatest vulnerability – weak real wage growth – is obvious: weak improvement in productivity. But I fear they’ve got that the wrong way round.

We all agree that, in a well-functioning economy, the growth in wage rates exceeds the rise in prices by a percentage point or two each year. On average over a few years, this “real” growth in wages is not inflationary, but is justified by the improvement in the productivity of the workers’ labour.

If this real growth in wages doesn’t happen, then real growth in gross domestic product will be chronically weak. That’s because consumer spending accounts for about 60 per cent of GDP.

Consumer spending is driven by household disposable income which, in turn, is driven mainly by wage growth.

We would get some growth in GDP, however, because our rate of population growth is so high. But look at growth per person, and you find it’s growing by only about 1 per cent a year.

It’s long been believed that real wages and productivity are kept in line by some underlying (but unexplained) equilibrating force built into the market economy.

Since the two have kept pretty much in line over the decades, few economists have doubted the existence of this magical force, nor wondered how it worked.

In America, however, real wages haven’t kept up with productivity improvement for the past 30 years or more.

And, as Reserve Bank governor Dr Philip Lowe acknowledged while appearing before a parliamentary committee recently, for the past five years nor have they in Australia.

Unlike the unions, which see the weakness in wage growth as the result of past industrial relations “reform” shifting the balance of wage-bargaining power too far in favour of employers, Lowe remains confident the problem is temporary rather than structural.

“Workers and firms right around the world feel like there’s more competition, and they feel more uncertain about the future because of technology and competition,” he said.

So, be patient. As the economy continues to grow and unemployment falls further, workers and their bosses will become more confident, wages will start growing faster than inflation and everything will be back to normal.

To be fair, Lowe is saying we have had “reasonable” productivity improvement over the past five years, which hasn’t been passed on to wages.

It would be better if productivity was stronger, of course, and “there’s been no shortage of reports giving . . . ideas of what could be done” to strengthen it.

But last week the newish chairman of the Productivity Commission, Michael Brennan, broke his public silence to give an exclusive statement to the Australian Financial Review.

“Productivity growth has been disappointing over the last few years in Australia, as it has been in many countries. There are no magic wands . . . but there are some clear remedies for Australia that should start with a focus on governments’ capacity to influence economic dynamism and productivity,” he said.

Oh, no, not that tired old line again. If wages aren’t growing satisfactorily, that’s because productivity isn’t improving satisfactorily, and the only way to improve productivity is for governments to instigate “more micro-economic reform”.

So, weak wage growth turns out to be the workers’ own fault. Their electoral opposition to “more micro reform” is making governments too afraid to do the thing that would raise their real wages.

We’ve become so used our econocrats’ neo-classical way of thinking that we don’t see its weaknesses.

It’s saying that, if the problem is weak demand, the cause must be weak supply, and the solution must be faster productivity improvement, which can be brought about only by “more micro reform”.

This ignores the alternative, more Keynesian way of analysing the problem: if the problem is weak demand, the obvious solution is to fix demand, not improve supply.

Since the global financial crisis, the developed countries, including us, have suffered a decade of exceptionally weak growth.

We’ve had weak consumer spending because of weak wage growth, the product of globalisation and skill-biased technological change, which has diverted much income to those with a lower propensity to consume.

With weak growth in consumer spending, there’s been little incentive to increase business investment rather than return capital to shareholders.

It’s this weakness in business investment spending that’s the most obvious explanation for weak productivity improvement.

That’s because it’s when businesses replace their equipment with the latest model that advances in technology are disseminated through the economy.

Our econocrats are like the drunk searching for his keys under the lamppost because that’s where the supply-side light shines brightest.
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Saturday, March 2, 2019

Who pays for Google and Facebook's free lunch?

There may be banks that are too big to be allowed to fail, but don’t fear that the behemoths of the digital revolution are too big to be regulated. It won’t be long before Google and Facebook cease to be laws unto themselves.

It’s the old story: the lawmakers always take a while to catch up with the innovators. But there are growing signs that governments around the developed world – particularly in Europe and Britain - are closing in on the digital giants.

And here in Australia, the Australian Competition and Consumer Commission is busy with the world’s most wide-ranging inquiry so far, which will report to the newly elected federal government in June. The commission’s boss, Rod Sims, gave a speech about it a few weeks ago, and another this week.

Sims says the commission’s purpose is “making markets work” by promoting competition and achieving well-informed consumers, so as to deliver good outcomes for consumers and the economy.

With this inquiry into the operations of “digital platforms”, he acknowledges that they have brought huge benefits to both our lives as individuals and our society more broadly.

“They are rightly regarded as impressive and successful, and very focused, commercial businesses. Google and Facebook are rapidly transforming the way consumers communicate, access news, and view advertising,” Sims says.

Each month, he says, about 19 million Australians use Google to search the internet, 17 million access Facebook, 17 million watch content on YouTube (owned by Google), and 11 million double tap on Instagram (owned by Facebook, along with WhatsApp).

The inquiry has satisfied itself that this huge size gives the two companies considerable “market power” – ability to influence the prices charged in certain markets.

“However,” Sims says, “being big is not a sin. Australian competition law does not prohibit a business from possessing substantial market power or using its efficiencies or skills to outperform its rivals.”

But the dominance of Google and Facebook does mean their behaviour should be scrutinised to see if it is harming competition or consumers.

To this end, the inquiry is focused on three potential areas of harm. First, the well-publicised issues of privacy and the collection and sale of users’ data.

Second, the digital platforms’ role in the advertising market, which is moving increasingly on line, where it’s estimated that 68¢ in every digital advertising dollar is going to Google (47¢) and Facebook (21¢).

And that’s not including classified advertising, the loss of which has been the biggest single blow to this august organ.

Sims says Google sells "search advertising", aimed at making an immediate sale, whereas Facebook sells "display advertising", aimed a making consumers aware of the product.

The pair sell ad space in their own right while also facilitating the advertising space sold by others, particularly the media companies. But the opacity of their algorithms and arrangements make it hard to know whether they favour their own ads over other people’s.

Advertisers say they don’t know what they’re paying for, where their ads are being displayed or to whom. This makes it harder for media companies to capture their share of advertising moving online.

Of course, higher costs for advertisers translate to higher prices for consumers.

Third is the digital platforms’ effect on the supply of news and journalism, the primary issue given to the inquiry.

Sims says newspapers and free-to-air radio and television are a classic example of a “two-sided market”. They serve consumers but, rather than charging them directly for the service as other businesses do, they cover their costs and profits by charging advertisers for access to their audience. (Newspaper subscriptions and cover prices accounted for only a fraction of their costs.)

Digital platforms aren’t just two-sided, they’re multi-sided. They, too, provide their services free, and charge advertisers, but also collect and sell to advertisers information about their users’ habits.

Google and Facebook select, curate, evaluate, rank, arrange and disseminate news stories. But they use stories created by others; they don’t create any news stories of their own. If they did, we could see this as no more than tough luck for the existing news media.

But as well as using the existing media’s stories to attract consumers and advertisers, about half the traffic on the Australian news media’s websites comes via Google and Facebook. So they have “a significant influence over what news and journalism Australians do and don’t see,” Sims says.

With the existing media having lost so much of its advertising revenue to the platforms, it’s not surprising they’ve had to get rid of at least a quarter of their journalists. There are a few new digital-only news outlets, but even they are having trouble making it pay.

Trouble is, news and journalism aren’t like most commercial products. They not only benefit the individual consumer, they benefit society as a whole. “Society clearly benefits from having citizens who are able to make well-informed economic, social and political decisions,” Sim says.

So news and journalism is a “public good” – if left to the profit-making private sector, not as much news and journalism will be supplied as is in the interests of society.

Public goods are usually paid for or subsidised by governments using taxpayers’ funds. If we want the benefits of Google and Facebook without losing the benefits of active, independent and challenging news media, taxpayers will have to help out.

Sims is canvassing several proposals before completing his final report. Since the former newspaper companies have realised they’ll never get much of a share of digital advertising, they’re now putting more hope in persuading their regular users to pay directly by buying subscriptions.

With the long-established attitude that everything on the internet should be free (or, at least, seem free), they’re finding it hard going.

That’s why I think Sims’ best suggestion is making personal subscriptions to the news media tax deductible, provided the outlet is bound by an acceptable code of conduct.
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Thursday, February 28, 2019

Top economy manager wants you to get bigger pay rises

This year more than usually, if you want straight talking about the state of the economy and its prospects, listen to the econocrats not the election-crazed politicians.

Late last week, Reserve Bank governor Dr Philip Lowe had more sensible things to say in three hours than we usually get in a month.

He was giving evidence to the House of Representatives standing committee on economics. For a start, he left little doubt about his disapproval of the way the two sides are turning the election campaign into a bidding war.

It’s clear the reason the election is being delayed until May is so Scott Morrison can use the April 2 budget to announce tax cuts in addition to the three-stage, $144 billion-over-10-years cuts he announced in last year’s budget.

He’s upping the ante not just because he’s behind in the polls, but also because Bill Shorten is promising to make the first-stage cuts about twice the size of Morrison’s. And big increases in spending on health and education.

Plus Shorten is claiming he’d have bigger budget surpluses. How? By reducing tax breaks used mainly by higher income-earners. The risk, however, is that Labor could get locked into cutting taxes and increasing spending, but not be able to get its revenue-raising measures through the Senate.

What would be worrying Lowe is that, just as we’ve come within sight of returning the budget to (tiny) surplus – but before we’ve made any progress in repaying the huge debt successive governments have racked up over the past decade – both sides have declared Mission Accomplished and started promising tax cuts galore.

Lowe said we should be running big budget surpluses and cutting back the debt as a sort of insurance policy against the next downturn in the economy – which he doesn’t see happening in the next year or two, but will happen one day.

Consider this. When the global financial crisis hit in October 2008, Lowe’s predecessor acted to protect us from the tsunami by cutting the official interest rate by 4 percentage points in about as many months.

Trouble is, we’ve since entered a low growth, low inflation world, and interest rates have remained low. The official interest rate is just 1.5 per cent. So the central bank has little scope to stimulate the economy the way it did last time.

In that case, the government should use its budget to stimulate the economy by splashing cash, spending on school playgrounds and the like.

See the problem? We won’t have much scope to do that, either, if we’ve been so busy awarding ourselves tax cuts that we’ve made little progress in reducing all the debt we’ll be starting with.

Moving on, Lowe said the economy’s two main worries were the weak growth in wages and falling house prices. But he stressed that wages and household income were far more significant than house prices.

If you were thinking it was the other way round, that may be because the media have misled you. “It’s largely the income story which doesn’t get talked about enough, because the media love talking about property prices,” he said.

Whereas household income, coming mainly from wages, used to grow by about 6 per cent a year (before allowing for inflation), in recent years it’s grown by less than 3 per cent.

Lowe didn’t say it, but what economists see as weak growth in wages, most ordinary mortals perceive as the worsening “cost of living” – which polling shows is now voters’ greatest concern.

People are having trouble balancing their own budgets, not because prices generally are soaring, but because their wages aren’t growing a per cent or two faster than prices, the way they used to.

Lowe is confident wages will gradually improve, but “if we have another five years where workers don’t get their normal share of productivity growth [that is, if wages don’t return to growing a per cent or so faster than prices each year], we’ll have all sorts of economic, social and political problems”.

Gosh. He did have some good news, however. He’s confident employment will continue growing strongly because the rate of job vacancies is higher than it’s ever been.

And whereas economists have long believed the rate of unemployment couldn’t fall below “about 5 per cent” before we started getting excessive wage settlements and rising inflation, Lowe now believes unemployment can fall further to “about 4.5 per cent” before there’s a problem. (May not sound much to you, but it gives us scope for 67,000 more jobs.)

Lowe says there’s more competition between the big banks than we’re told about. Remember a few months ago when they raised their mortgage interest rates by between 0.1 and 0.15 percentage points?

That’s what they told the media and what they wrote on their price lists. In truth, however, rates rose by only 0.03 or 0.04 points. Why? Because too many of their customers threatened to take their business elsewhere.

Finally, some free advice from the nation’s most powerful economist: “I encourage everyone who has a mortgage, if they haven’t done so recently, to go and ask their bank for a better deal. And if the bank says no, go look for another bank.”
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Monday, February 25, 2019

It’s not business-bashing, it’s the public’s moment of truth

With the federal election campaign being fought over which side will do the better job of re-regulating the banks, the energy companies and business generally, big business seems to be going through the stages of grief. It’s reached denial.

According to the Australian Financial Review, the Business Council of Australia is most put out that the Morrison government has yielded to pressure from Labor and some Nationals to support a bill making it easier for smaller businesses to take legal action against big businesses.

Apparently, Scott Morrison and his lieutenants had the temerity to make the decision without giving the council an opportunity for private lobbying.

Which would have been intend to avoid “harmful unintended consequences,” including any possible drag on the economy. Of course.

Apparently, it’s just another instance of the growing level of “business bashing” in this campaign.

Sorry, guys, you’ve got to have a better argument than that. Accusing your critics of business-bashing or teacher-bashing or bank-bashing is what you say when you haven’t got a defence and are succumbing to a persecution complex.

It makes you and your mates feel better, but that’s all.

It’s a refusal to accept any responsibility for the bad performance of which people are complaining. Since it’s entirely the fault of others – usually, the government – any attempt to make me and my mates bare our share of responsibility can be explained only by ignorance and malice.

Such denial offers big business no way forward. Much better to admit there’s a fair bit of truth to the criticisms and accept that your performance will have to be a lot better.

The Business Council needs to admit to itself that this is not some passing phase of populist madness, it’s the end of the line for the “bizonomics” that micro-economic reform degenerated into – the belief that what’s good for big business is good for the economy.

The simple truth is that, when you go for years abusing your market power, the electorate eventually wakes up and hits back, threatening to toss out any government that isn’t prepared to set things to rights.

Now the scales of economic fundamentalism have fallen from our eyes, who could doubt that big businesses use their superior power – including their ability to afford the best legal advice – to unreasonably impose their will on smaller businesses, just as they impose incomprehensible and utterly non-negotiable terms and conditions on their customers. Like it or lump it.

One of the greatest weaknesses of “perfect competition” – the oversimplified model of market behaviour that permeates the thinking of economists, both consciously and unconsciously – is its implicit assumption that the parties to economic transactions are of roughly equal bargaining power.

In the era of oligopoly, however – where so many markets are dominated by four or even two huge corporations - nothing could be further from the truth.

It’s thus perfectly reasonable for governments to intervene in markets to bolster the bargaining power of the smaller and weaker parties – whether employees permitted to bargain collectively and go on strike, small businesses helped to seek legal redress from much bigger businesses, or customers protected from misleading advertising, high-pressure selling and other abuses.

It’s because economists’ thinking is so deeply infected by their model’s unrealistic assumptions that they fell for the notion that merely providing consumers with more information on labels and in “product statements” (quickly sabotaged by being turned into pages of legalese) would protect them from exploitation.

Though oligopolies have existed for decades, economists have put remarkably little effort into studying how they work and, more particularly, how they can be regulated to ensure the economies of scale they have been designed to capture are passed through to their customers.

The trouble is that oligopolies do all they can to avoid competing on price.

A part of this is offering a range of products that are almost impossible to compare with other firms’ products.

In the complex, busy world we live in, it’s utterly unrealistic to expect ordinary consumers to devote hours of precious leisure time to checking to see whether their present provider of bank accounts, credit cards, mortgages, mobile phones, electricity, gas and even superannuation is quietly taking advantage of them.

This is the case for government regulation to impose standardised comparisons and default products, statutory guarantees, legal obligations to act in the client’s best interests, and much else.

The other thing we’ve learnt in recent times – from the banking inquiry and many other examples – is that if businesses large and small are confident they won’t get caught, there’s no certainty they’ll obey the law.
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Saturday, February 23, 2019

We've had plenty of new jobs - for the young, not so much

You can be sure Scott Morrison and Josh Frydenberg will be boasting about this week’s job figures, which show the jobs market remaining unusually strong. But their critics know not to believe the numbers.

The Australian Bureau of Statistics’ figures for January show the seasonally adjusted rate of unemployment steady at 5 per cent – the lowest it has been since the start of the decade. The more reliable “trend” (smoothed) estimate is little different at 5.1 per cent.

Sticking with the trend figures, employment has increased by more than 295,000 people over the past year. That’s a rise of 2.4 per cent – a lot bigger than the average annual growth rate over the past 20 years of 2 per cent.

Almost three-quarters of those extra jobs were full-time. Full-time employment has been growing particularly strongly in the past few years.

Another good indicator of how well the economy is going at providing jobs for those who want to work is the employment ratio – the proportion of everyone in the population aged 15 and over who has a job. It’s steady at 62.4 per cent, the highest it’s been.

Just during January, employment increased by 24,900 to reach 12.7 million. That’s an increase of 0.2 per cent, above the monthly average growth rate over the past 20 years of 0.16 per cent.

But don’t get the idea this means all of us stayed in our jobs while another 24,900 joined us. That’s just the net increase. There was a lot more coming and going than that. Indeed, the bureau informs us that, each month, about 300,000 people leave employment and about 300,000 enter it.

Looking at that strong performance over the past couple of years, what’s not to like? With a federal election coming up, why shouldn’t Morrison and Frydenberg boast about the great job they’ve done on jobs?

Well, a lot of their critics would be happy to tell you. They know the official unemployment figures understate the true extent of joblessness.

Did you realise, for instance, that the bureau counts you as employed even if you’ve worked for as little as one hour a week?

This means that, as well as the 680,000 people counted as being unemployed, there are another 1.1 million people who are under-employed – those who have a part-time job, but want to work more hours a week than they are.

Those 1.1 million represent 8.3 per cent of the “labour force” (all those with jobs or looking for jobs). Add that 8.3 per cent to the official unemployment rate and you get a total “labour under-utilisation rate” of 13.3 per cent.

This is down from 14 per cent a year ago, with under-employment accounting for just 0.2 percentage points of the fall and unemployment accounting for the rest.

So the under-employment rate, which rose in the years after the global financial crisis, has fallen since its peak of 8.8 per cent in early 2017, but much more slowly than the fall in unemployment.

That’s the standard critique of the official story: the “true” extent of joblessness is far higher than the official unemployment rate tells us, and when you take account of widespread under-employment you see also that the rate of improvement has been a lot smaller.

What are we to make of this criticism? Well, it’s correct factually, but when you look deeper you see it goes to the other extreme of overstating the extent of the problem.

Take, for instance, the oft-repeated news that people are counted as unemployed if they work for as little as an hour a week. That’s true, but how many people do work as little as an hour?

Answer: almost no one. This week the bureau issued a special note about this matter. It says that only about 14,500 people do, out of total workforce of 12.7 million – that is, 0.1 per cent. (If you think 14,500 people is a lot, you don't realise how big our economy is.)

Make it people working up to three hours a week and you’re still only up to 100,400 people, or 0.8 per cent. In fact, about 97 per cent of workers usually work seven hours or more a week. That’s at least one full shift a week.

The point is that you have to draw the dividing line between unemployed and employed somewhere, and by adhering to the longstanding international convention of drawing it at an hour a week, we are not significantly overstating the position.

Many people assume the only good job is one that’s full-time. Wrong. Many students, parents and semi-retired people are perfectly happy working only part-time.

Further, many people assume that every part-time worker who says they’d like to work more hours is someone who’d rather have a full-time job if only they could find one. That’s wrong, too. Though many would indeed prefer a full-time job, many part-timers want to stay part-time, but wouldn’t mind working a few extra hours.

So when you take the unemployment rate (people with no job) and simply add the under-employment rate of 8.3 per cent on to it, you’re exaggerating the number of people working significantly fewer hours than they want to.

But let’s take a closer look at under-employment. As the bureau has explained, it is concentrated among the young. More than a third of the under-employed are aged 15 to 24. About 18 per cent of all workers in this age group are under-employed.

It seems clear that education-leavers have borne more than their fair share of the pain during the period of below-par growth since the global financial crisis in 2008. Many people leaving university have had to settle for a part-time job and, until quite recently, they’ve taken more months to make it into full-time employment.

The latest figures from the universities show their new graduates are now taking less time to find a decent job than they were.

But, in any case, caring about the troubles of young people is deeply unfashionable. It’s the well-off elderly we should be worrying about.
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Wednesday, February 20, 2019

If only the Indigenous had the worries of the well-off aged

One thing I hate about elections is the way politicians on both sides seek to advance their careers by appealing to our own self-centredness. I suppose when they know how little we respect them for their principles, they think bribing us is all that’s left.

The federal election campaign hasn’t started officially, but already the one issue to arouse any passion is the spectacle of the most well-off among our retired screaming to high heaven over the proposal that, though granted the concession of paying no tax on income from superannuation, they should no longer receive tax refunds as though they were paying it.

We teach our children to respect the needs and feelings of others, and to take turns with their toys, but when it comes to politics you just get in there and fight for as much lolly as you can grab. And if my voice is louder and elbows sharper than yours, tough luck.

When someone at one of those rallies of the righteous retired had the bad manners to suggest that the saving would be used to increase spending on health and education (and increase the tax cut going to those middle-income families still required to pay tax on their incomes) they were howled down. Health and education? Don’t ask me to pay.

You gave me this unbelievably good tax deal, I paid the experts to rearrange my share portfolio so as to fully exploit it, and now you tell me you’ve discovered you can’t afford it and other people’s needs take priority. It so unfair.

Meanwhile, at the other end of the income spectrum, Scott Morrison delivered a Closing the Gap report to Parliament last Thursday. It was the 11th report since the practice began, following Kevin Rudd’s National Apology in 2008.

Morrison was the fifth prime minister to have delivered the report. The fifth obliged to admit how little progress has been made in achieving the seven targets we set ourselves.

The original targets were to halve the gap in child mortality by 2018, to have 95 per cent of all Indigenous four-year-olds enrolled in early childhood education by 2025, to close the gap in school attendance by 2018, to halve the gap in reading and numeracy by 2018, to halve the gap in year 12 attainment by 2020, to halve the gap in employment by 2018, and to close the gap in life expectancy by 2031.

As you see, four of the seven targets expired last year. None of them was achieved. They’re being replaced by updated – and more realistic – targets.

In his progress report, Morrison was able to say only that two out of the seven targets were on track to be met.

The first of these is the goal of having 95 per cent of Indigenous children in early childhood education by 2025. This was achieved in the latest figures, for 2017, with NSW, Victoria, South Australia, Western Australia and the ACT now at 95 per cent or more.

The other is halving the gap in year 12 attainment by 2020. Morrison says this is the area of biggest improvement, with the Indigenous proportion jumping by 18 percentage points since 2006.

With the key target of life expectancy, the figures show some improvement for Indigenous people from birth, but associate professor Nicholas Biddle, of the Centre for Aboriginal Economic Policy Research at the Australian National University, warns that the figures are dodgy.

So why have we been doing so badly? Biddle and a colleague argue that the original targets were so ambitious they couldn’t have been achieved without radically different policies, not the business-as-usual policies that transpired.

That’s one way to put it. It’s common for politicians to announce grand targets that make a splash on the day, without wondering too hard about how or whether their successors will achieve them. And no one was more prone to such “hubris” (Morrison’s word) than Kevin07.

A second reason, they say, is that successive governments’ policy actions haven’t always matched their stated policy goals. Their employment target, for instance, hasn’t been helped by the present government’s abolition of its key Indigenous job creation program, the community development employment project.

Then there’s the present government’s soft-target approach to limiting the growth in government spending, which has involved repeated cuts to the Indigenous affairs budget, particularly in Tony Abbott’s first budget.

The most significant Indigenous policy initiative in ages, the Northern Territory Intervention – which preceded Closing the Gap, but has been continued by governments of both colours – may have directly widened health and school attendance gaps.

As well as disempowering Aboriginal people in the territory, the immense amount of money and policy attention devoted to the Intervention “could have been better spent elsewhere”.

Third, they say, measures intended to achieve the targets have rarely been subject to careful evaluation and adjustment.

Morrison professes to have learnt these lessons. But, the authors say, if his “refreshed” approach “does not put resources – and the power to direct them – into Indigenous hands, the prospects for closing socio-economic gaps are likely to remain distant”.
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Monday, February 18, 2019

Having stuffed-up deregulation, don't stuff-up re-regulation

As the banking royal commission finishes, the aged care royal commission begins investigating the mistreatment of old people by – taking a wild guess – mainly the for-profit providers. Surely it won’t be long before the politicians, responding to the public’s shock and outrage, are swearing to really toughen up the regulation of aged care facilities.

It’s not hard to see we’ve passed the point of “peak deregulation” and governments will now be busy responding to the electorate’s demands for tighter regulation of an ever-growing list of industries found to have abused the trust of economic reformers past.

But having gone for several decades under-regulating many industries and employers, there’s a high risk we’ll now swing to the opposite extreme of over-regulation. That could happen if politicians simply respond to populist pressures to wield the big stick against greedy business people.

It could happen if politicians yield to one of the great temptations of our spin-doctoring age: caring more about being seen to be acting decisively than whether those actions actually do much good.

And it could happen if our econocrats refuse to admit the shortcomings of their earlier advocacy of deregulation – including their naive confidence that the power of market forces would ensure businesses treated their customers well – and go into a sulk, washing their hands of responsibility for what happens next.

But against all those risks that, in seeking to correct the failures of the previous regime we introduce something that’s just as bad only different, there’s one cause for optimism: as the first cab off the re-regulatory rank, Commissioner Kenneth Hayne’s guiding principles for turning things around. (To be fair, those principles seem to have been influenced by Treasury’s submission to the commission.)

His first principle is that, since almost all the misconduct he uncovered was already unlawful, there’s no need for a raft of legislation to make them doubly illegal. The problem is more getting people to obey the existing law.

Blindingly obvious? Not to a politician who wants to be seen by an angry but uncomprehending public to be acting immediately and decisively. On the rare occasions when Australia is touched by a terrorist act, we see Parliament recalled to pass urgent legislation making terrorism quintuplely illegal.

Hayne’s second principle is that compliance will be increased by making the law simpler, rather than more complex, so no one can be in any doubt about what’s required of them.

The more complex and voluminous you make the law, the more scope you give well-resourced offenders to pay lawyers to find loopholes and argue the toss and string out court proceedings. In the process, increasing the cost to taxpayers of bringing them to justice, increasing the likelihood of them getting off and increasing the reluctance of the regulators to take them on in the first place.

Hayne says the whole body of law needs to be rewritten to simplify and clarify the legislators’ intentions. In the meantime, however, some changes should be made more quickly.

One is to get rid of exceptions, carve-outs and qualifications. Examples are the “grandfathering” (leaving existing arrangements unaffected by new rules) of certain commissions, and the exclusion of funeral insurance from rules affecting other insurance.

As two law professors from the University of Melbourne have pointed out, the rule of law requires like cases to be treated alike. To make exceptions you need powerful arguments – which haven’t been made.

“Instead,” they say, “exceptions and carve-outs reflect the lobbying of powerful industry groups concerned to preserve their own self-interest.” True. There’s no principle of deregulation that says it’s OK to look after your mates.

In highlighting the shortcomings of existing legislation, Hayne stressed that “where possible, conflicts of interest and conflicts between duty and interest [such as not acting in the best interests of your client] should be removed”.

But his final guiding principle is that existing laws must be enforced. “Too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished,” he said.

Just so. And it raises a mode of response to the electorate’s wider discontents, as governments set out on the path of “re-regulating” industries other than financial services: regulations may need improving, but we don’t need a lot more of them.

No, what we need a lot more of is regulators doing – and being seen to be doing – their job of enforcing existing regulations with vigour and effectiveness, and governments being unstinting in providing them with resources.
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