Monday, April 29, 2013

Beware the one-eyed budget brigade

A great journalistic delusion is that politicians and others are always resorting to spin, so what journos do is remove the spin and tell it like it is. But too often they replace the speaker's spin with their own.

Consider the treatment of the Grattan Institute's report on budget pressures facing Australian governments. One paper reported it as concluding that "federal and state budgets will be generating yearly combined deficits of $80 billion within a decade unless welfare, health and education spending is cut".

Another national daily's version was that "Australian governments are facing a budget black hole so large that politically painful cuts to growth in public health and education spending are all but unavoidable if the nation is to avoid a European-style debt quagmire".

What the report actually said was that strong growth in government spending - particularly health spending - combined with weaker-than-expected tax collections could leave us with deficits equivalent to 4 per cent of gross domestic product in the next 10 years.

Its figuring shows this deficiency divides equally between increased spending and weak tax collections. So what solution did it propose? "That means finding savings and tax increases of $60 billion a year."

It also said: "There is no reason why a balanced budget, or more efficient government, necessarily requires smaller government. [However] history suggests that successful budget repair invariably involves both tax increases and expenditure reductions."

See the spin? So what's their motive? Probably a combination of the editors' personal ideology, self-interest (I pay too much tax already, don't ask me to pay more) and a belief that tailoring your reporting to fit your readers' prejudices will sell more papers.

But it is not just the media that take such a one-eyed approach to budgeting. Most business lobby groups do, too, plus a lot of economists. Many economists believe the answer to budget deficits is always to cut spending and never to raise tax collections, because of the libertarian political ideology implicit in their dominant "neoclassical" model.

The model assumes people are rational in all their decisions (implying governments can never know what's in my interest better than I know myself); each of us is a rugged individualist with nothing in the model to acknowledge the benefits we gain from acting collectively; each of us has roughly equal bargaining power in the market place (that's a good one); and wide disparities in the distribution of income and wealth are of no relevance.

Even so, as the Grattan report acknowledges, there is little economic support for the view that smaller government is always better than bigger.

You often hear people noting that a high proportion of the "structural saves" Wayne Swan likes to boast about constitute tax increases rather than spending cuts, as though this was some sort of crime or con trick.

But such people reveal their economic ignorance. Most of the supposed tax increases represent not the introduction of a new tax or an increase in the rate of an existing tax but the reduction or elimination of special concessions.

Economists refer to the latter as "tax expenditures" precisely to remind us they are essentially equivalent to actual expenditure. It often doesn't make a difference whether assistance to people in some category is delivered by a cheque from the government or a reduction in the tax they would otherwise have to pay.

One-eyed economists love to quote studies showing that, on average, every $1 of tax that governments raise generates a "deadweight loss" of about 30? in reduced economic efficiency because of the tax's effect in distorting taxpayers' behaviour. They use this to imply economics teaches us to minimise taxation. But they don't mention the hidden assumptions in the calculation, particularly that $1 of tax buys, at best, $1 of gross benefit to the community. In truth, $1 of spending on public goods may deliver benefits worth another, say, 30?.

In any case, the more legitimate use of such deadweight-loss calculations is to compare the inefficiency of particular taxes, with a view to correcting the features of those taxes that make them more economically distorting than others.

This is where tax expenditures come in. The way to reduce the 30 per cent deadweight loss is to eliminate the special concessions built in to so many taxes and thereby reduce the tax's distortion of people's choices.

The list of tax expenditures whose removal could reduce the budget deficit and make the allocation of resources more efficient at the same time is long, but includes negative gearing, the senior Australians tax offset, the 50 per cent discount on capital gains tax, exemption of super payments to people over 60 and the various exemptions from the GST.
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Saturday, April 27, 2013

Why a little inflation isn't such a bad thing

I was in a taxi on Wednesday when we heard on the radio that the consumer price index had risen by just 2.5 per cent over the year to March - smack in the middle of the Reserve Bank's target, leaving it room to cut interest rates further if need be. So, no probs there.

"But why do we have any inflation?" the cab driver asked me. "When I came to Australia I could buy a rock cake for 8? - the other day they wanted $3.50."

It was a simple, sensible question. Unfortunately, the answer isn't at all simple. The short answer, however, is that it's a policy choice. That is, the monetary authorities - the central bank and the government - believe a moderate rate of inflation (moderate meaning between 2 per cent and 3 per cent, on average) is, on balance, a good thing.

Inflation refers to a persistent rise in the general level of prices. It may surprise you that in Britain over many centuries there was no net rise in the level of prices. Prices would rise during wars, but then fall back after the war was over. Governments controlled the price level by tying the amount of money in circulation to the amount of gold, and then controlling the amount of gold.

But this "gold standard" broke down during the Great Depression, and after World War II it was replaced by the Bretton Woods system where each country's currency was fixed to the US dollar, with the US dollar fixed to a gold price of $US35 an ounce.

This system meant all other countries effectively imported their inflation rate from the US economy. The Americans kept inflation pretty low until they began financing the Vietnam War by printing money rather than borrowing from the public.

This caused the fixed exchange-rate system to break down in the early 1970s, with most developed countries allowing their currencies to float. This gave them the ability to control inflation for themselves.

The trick, however, is that they - and we - do so not by controlling the quantity of money in circulation (as the monetarists tried and failed to do in the old days), but by using their ability to control the price of money - interest rates - to keep the demand for goods and services pretty much in line with the supply of goods and services. But if the authorities have the ability - in principle, at least - to use their control of interest rates to control the price level, why don't they keep it completely stable, thus allowing a zero increase in the CPI? Why do they permit inflation averaging a couple of per cent a year, and call this "practical price stability" (as they do).

Short answer: because they care about unemployment as well as inflation. The first reason is their belief that, due to practical limitations, the CPI tends to overstate the rise in the price level. Huh? This is because of the delay in including new products in the CPI basket of goods and services, and also because it treats as inflation price rises actually caused by an improvement in the quality of goods in the basket. For instance, part of the reason for the price of the new model Holden being higher than the price of the previous model is that it's a better car - better under the bonnet or better accessories.

If you accept that the CPI tends to overstate inflation then achieving zero inflation as measured by the CPI would involve keeping money so tight you were actually forcing prices down, which would be quite damaging to the economy and employment.

The second reason the econocrats like a bit of inflation is that there can be times when wages grow too quickly and make employing people too expensive. Wages need to fall back a bit, but workers are hugely resistant to cuts in their wages (and sensible employers don't fancy the idea, either).

The thing is that, if there's a positive rate of inflation it's much easier to cut wages in real terms by raising them less than the inflation rate. This is what happens in every recession.

The third reason the econocrats regard a bit of inflation as helpful is that, in a deep recession, they may judge it necessary to stimulate the economy not just by cutting interest rates but by cutting them so far they're negative in real terms - that is, cutting them until they're actually lower than the inflation rate (as they are right now in the US and Britain).

Think it through: when real rates are negative, lenders are actually paying people to borrow from them (after you allow for the effect of inflation), so this should be highly stimulatory. But, clearly, you can't bring about negative interest rates - something you'd only ever do in an emergency - unless you've got a positive inflation rate to go below.

So those are the three reasons the Reserve Bank is satisfied with an inflation rate averaging 2 to 3 per cent and defines this as practical price stability.

But back to my taxi driver. It's all very well to remember how much less you had to pay for things in the old days and feel cheated, but you shouldn't forget your income is also a lot higher than it was in the old days. In fact, just about everyone's income - whether wages or the pension - grows a bit faster than prices are rising, so there's no cause to feel cheated by the system. That is, almost everyone's income has risen in real terms over the years.

This real income growth is the reason economists are so unimpressed by punters and pollies carrying on about the trouble they're having keeping up with "the cost of living". You can achieve that delusion only by focusing on what's happened to the prices you pay and ignoring what's happened to your income.
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Wednesday, April 24, 2013

Budget surplus suddenly out of political fashion

Something highly significant has happened in just the past week: it's become clear the tide has turned in our politicians' demonisation of budget deficits and debt. What used to be anathema is so no longer.

Predictably, it's happened not because the pollies have seen the light, but because they've been mugged by reality. In consequence, the Grattan Institute's John Daley may well be right in saying we face a "decade of deficits".

That's not to say we'll hear no more of unpopular cuts in government spending, however. We'll get more of those in Wayne Swan's budget next month, and a lot more should Tony Abbott win the election in September. But these will be about stopping the parties' expensive election promises making the budget deficit even bigger, not about getting back to surplus. In Abbott's case it will involve cutting away Labor's favourite programs and replacing them with his own.

I won't be sorry to see an end to the economically illiterate nonsense the pollies have been spouting for so long about the evils of deficits and debt. That's because there are times when deficits are exactly what governments should be running and when modest levels of debt are nothing to worry about.

But, equally, there are times when surpluses are just what governments should be running. And we'd have to be terribly unlucky for such times not to return well before another 10 years have passed.

Governments have been agonising over the need to restrain budget deficits for almost all of the four decades I've been observing them - usually without much success. But the fashion for outright demonising of deficits began when Peter Costello became treasurer in 1996, claimed to have inherited a "budget black hole" from his Labor predecessors but, after one super-tough, promise-breaking budget, soon found the budget had swung back into surplus, only to stay there for the rest of the Howard government's 11-year term.

The steady stream of surpluses, combined with the proceeds from privatising Telstra, allowed him to eliminate the manageable debt he had also inherited. Costello used this experience to argue incessantly that deficits are always bad and surpluses always good, with the Liberals the party of surpluses and Labor the party of deficits.

When the global financial crisis hit in late 2008 and pushed the budget back into deficit, with Kevin Rudd's stimulus spending adding to that deficit, the immediate effect of the crisis on our economy proved surprisingly modest and it suited both sides to claim we had escaped recession.

Labor claimed this proved what a good economic manager it was, whereas the Libs used it to prove Labor's stimulus spending was unnecessary and wasteful, leaving our children and grandchildren weighed down by horrendous government debt.

The more years have passed with unemployment, inflation and interest rates all staying low during Labor's term, the more the Libs have focused on attacking its economic management by repeating the Costello line that deficits are always bad and by exaggerating the size of its debt.

Rather than patiently explaining the economic ignorance of this deficit demonising, however, Labor capitulated to it, with Julia Gillard promising faithfully in the 2010 election campaign to have the budget back to surplus by this financial year.

Problem is, the budget has not played ball. Much to the amazement of economists (and the consternation of Treasury's forecasters), the recovery in the economy has not been accompanied by a commensurate recovery in tax collections. Among the many reasons for this, the main one seems to be that our dollar has stayed high even though the prices for our mineral exports have fallen back.

This dawning reality is what forced Wayne Swan to concede just before Christmas that the budget would remain in deficit this financial year. Knowing the weakness on the budget's revenue side is likely to continue indefinitely, he's made no new commitment on when it will be returned to surplus.

But he and Penny Wong keep saying they won't be cutting government spending just to get the budget back to surplus, for fear of this costing jobs. Clearly, they've allowed their membership of the Deficits Are Evil Club to lapse.

For years the Libs have condemned Labor's timid explanations as mere excuses and have been promising to return the budget to surplus as soon as they got back to office. But the reality of the budget's revenue weakness has finally dawned on them, too.

Last Thursday, Abbott declared that "all bets are off" on the question of when a Coalition government would achieve a surplus. He's repeated the warning since. And also on Thursday, shadow treasurer Joe Hockey advised that "we are not going to go down the path of austerity simply to bring the budget back to surplus because it would end up being a temporary surplus".

So though we can expect to hear a lot more about Labor's alleged bad budgeting, we'll be hearing nothing more about achieving surplus ASAP. For both sides it's now a mere "aspirational objective".

I fear, however, we're swinging from one extreme to the other, from falsely claiming budget deficits are always evil to complacently accepting them long after it's become prudent to eliminate them and start repaying debt.

To say deficits aren't always evil is not to say they're always OK. So be warned: when budget surpluses fall out of fashion with the politicians, it won't be long before they're back in favour with economists - and commentators such as me.
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Sunday, April 14, 2013

GITTINS’ GOSPEL: THE ECONOMICS OF JUST ABOUT EVERYTHING

I read that the Anglican Archbishop of Sydney, Dr Peter Jensen, very much disapproves of playing I Did It My Way at people’s funerals, describing it as ‘vulgar egotism’. This is a pity because, in my own vulgar and egotistical way, I like to think that, in the more than 30 years I’ve been the Herald’s economics editor, I’ve tried to do it my way, not the way other journalists would do it. The besetting sin of journalists is to write to impress other journalists. Failing that, they write to impress their contacts. But I’ve always believed in writing for the benefit of the Herald’s readers, for the intelligent layperson.

Perhaps because I didn’t take enough notice of the economics they tried to teach me at Newcastle Uni, I’ve had to work to understand economics, to understand what’s happening in the economy and understand the rationale behind the economic policy of the government of the day. But once I’ve figured it out, I’ve been keen to pass on that understanding to my readers. I write for the person who, though they lack formal training in economics, knows the topic is important and is keen to learn about it.

In my latest book, Gittins’ Gospel, a selection of my columns, I confess that my father was a preacher and I’ve inherited his sermon-delivering habit. Like his sermons, mine have been less fire-and-brimstone and more about teaching, although since journalists aren’t supposed to teach I prefer to say I’m an exponent of ‘explanatory journalism’. In the first part of my career I acted as a kind of missionary, trying to convert people to the economists’ way of thinking (and, indeed, there is a section of the book devoted to helping people understand how economists think). But as my career has progressed - as I’ve read more about economics and got older and, I hope, wiser - I’ve become more aware of, and critical of, the limitations of economists and conventional economics. So these days I see my role as more like that of the Herald’s theatre critic - I explain economics and the economy, but I also offer my readers a critique of economics and economists, pointing out their weaknesses and helping readers make up their own minds on how much to believe and not believe.

The full title of the book is: Gittins’ Gospel: the economics of just about everything. ‘The economics of just about everything’ is the title for our meeting tonight, and Ross Kerridge has given me a list of just about everything he wants me to talk about. I’ll get on to that in a minute, but first I should say something about why I was so vulgar and egotistical as to call a book, Gittins’ Gospel.

Well, it was partly an allusion to the sermonising habit I inherited from my father - who, by the way, delivered his sermons to tiny congregations in New Lambton (where I was born) and Cessnock, went away for some years but came back to Lambton, Merewether, East Maitland and Shortland. But it was also a reference to the main conclusions I’ve come to in almost 40 years of studying the topic, and the main messages I’ve been trying to get over.

Economics need not be stratospheric or incomprehensible: it’s about the ordinary business of life, about going to work, earning and income, then spending that income on all the things we need. But it’s about the material side of life and, important though that is, it’s not the only dimension of our lives, and we oughtn’t to focus on it to the exclusion of the other important dimensions: the relational, the social and even the spiritual. Similarly, the community and our political leaders need to take their advice from a much wider range of experts than just economists. Nor should we allow economists to advise us on matters outside their field of competence - as they often try to do. In other words, a big part of my gospel is that economics needs to be kept in context.

Another theme of my gospel is that the modern practice of lobby groups, and even governments, commissioning supposedly ‘independent modelling’ to bolster their case for or against some policy change is almost always an attempt to blind the public with science. I see part of my role as to demystify econometric modelling. Economic modelling is at once hugely complicated and surprisingly primitive. It rarely proves what the people who paid for it say it proves. It’s always built on assumptions - which are rarely spelt out by the people waving around its conclusions - and it’s always possible to vary the assumptions to ensure you get the results the outfit paying for the research was hoping for. The media should be a lot more sceptical in its reporting of the results of supposedly independent modelling, and in the book I look at three well-publicised cases and show how the modellers managed to produce the misleading results they did.

I love being a journalist, but the longer I stay in the business the more critical I become of the way the media do their job. A lot of what they do can be misleading, and in the book I devote a section to explaining how not to be misled. Literally, the word ‘gospel’ means ‘good news’ - but the media seem increasingly, almost exclusively, full of bad news - which some readers are finding increasingly off-putting. Well, I’m an optimist and, though I’m not afraid to face up to the problems we encounter - as of course we do - nor am I reluctant to point to the respects in which we’re doing quite well. This book is a book for optimists.

Economics is meant to be about people and for people; take the people out of an economy and you don’t have an economy. But much of the economics you read seems remarkably impersonal. So another theme of my gospel is that we need to get the people back into economics. We need an economics fit for humans. You often see me writing that conventional economics incorporates a misleading model of human behaviour. Its two big weaknesses are its assumptions that we’re all coldly rational calculators of what’s in our interests, and then that we’re all rugged individualists - that our attitudes and behaviour are never influence by the attitudes and behaviour of those around us, and that we never act in groups. In truth, the findings of modern psychology show we’re highly instinctive and emotional animals, and also that we’re highly social, ‘groupish’ animals. So in recent years I’ve been reading a lot more widely than conventional economics so as to get a better picture of how humans actually behave. And when that reading leads me to something interesting and important, I pass it on to my readers. The book contains a section - We’re only human - that brings together 10 of the columns I’ve written about these findings.

For instance, rationality tells us we need to be completely realistic about the state of the world and our place in it. But psychological research tells us that’s bunkum. It turns out to be healthier and more useful to hold a few unrealistic views about ourselves and the world.

People with high self-esteem---which is most of us---believe themselves to be healthier, more intelligent, more ethical, less prejudiced and better able to get along with other people than average. Obviously, a lot of those judgments are unrealistic. But that’s beside the point. The point is that self-esteem makes us both happier and better equipped to deal with the world. The lack of self-esteem is highly debilitating.

People with the freedom to control their own lives, make their own choices and decisions---at work and at home---are happier and even healthier. But it’s a question of perception---how much control you think you have. People with a positive attitude to their boss, for instance, may see themselves as having more freedom of action than those who see their boss as censorious and untrustworthy. (What’s more, in my experience such attitudes tend to be self-fulfilling.)

But nowhere is self-deception more prominent than in the personal characteristic of optimism. Indeed, it’s virtually built into the definition of optimism. Optimists are people who take the credit for their successes but blame their failures on others or on circumstances. They regard setbacks as temporary rather than permanent, and specific (I happened to strike a bad teacher) rather than universal (all teachers are bad).

So optimists tend to overestimate their abilities and their chances of success in dealing with the world, whereas pessimists tend to underestimate their abilities and their chances of success. Fortunately, most of us are optimists, which does much to explain why most of us are reasonably happy most of the time.

So much for the virtues of a little self-deception.  Now let me ask you a personal question: how honest are you? According to the people who study these things, not as much as you think you are. In an experiment in which people were asked to solve puzzles and were paid a set amount for each puzzle they solved, some participants were told to check their answers against an answer sheet, count the number of questions answered correctly, put their answer form through a shredder, report the number of questions they got right to the experimenter and receive the money they had earnt. A second group wasn’t allowed to shred their answers before reporting how many they got right. Those whose claims about how many they got right couldn’t be checked claimed to have got significantly more correct than the second group.

Those who cheated probably counted a problem they would have answered correctly if only they hadn’t made a careless mistake. Or they counted a problem they would have got right if only they’d had another 10 seconds. In other words, they didn’t tell blatant lies, they just gave themselves the benefit of any doubt, bent the rules a little bit in their own favour. And get this: they wouldn’t have thought they were cheating. When subjects are asked to rate how ethical they are compared to other people on a scale of zero to 100, where 50 is average, the average rating is usually about 75. That is, almost all of us consider ourselves to be more ethical than other people. Clearly, that’s not possible.

We’re often unaware of how inconsistent we are. We may think of ourselves as scrupulously honest because we’d never steal and would always return a wallet we found, forgetting that we take home office stationery because this is ‘not the same thing’. That’s why it’s always hypocritical to accuse others of hypocrisy---all of us are hypocrites.

The psychologists who study ‘behavioural ethics’ say our ethical behaviour is often inconsistent and, at times, even hypocritical. ‘People have the innate ability to maintain a belief while acting contrary to it,’ they say. ‘Moral hypocrisy occurs when individuals’ evaluations of their own moral transgressions differ substantially from their evaluations of the same transgressions committed by others.’ Hypocrisy is part of the human condition; we’re all guilty of it. So you could say accusing someone else of being hypocritical is itself a hypocritical act.

One lesson from a new field of study known as ‘neuro-economics’ is that our brains seem to have different systems for ‘wanting’ and ‘liking’. Wanting is about motivation, whereas liking is about pleasure. Think of the kid who begs and begs his parents to buy a pet---or a guitar---then loses interest in it within a few days. There was a yawning gap between wanting and liking. All of us have times when we lack the motivation to do something we know we’d enjoy. That’s almost the definition of being depressed. It’s given rise to a psychological therapy called PAT---pleasant activity training: make a list of the things you enjoy doing and then do them more often. Don’t scoff.

That’s just a sample of the topics I cover in the book, so I hope you enjoy it.


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Thursday, April 11, 2013

THE ECONOMIC LANDSCAPE AND FUTURE CHALLENGES

Talk to The Salvation Army Moneycare Financial Counselling Conference, Collaroy

Asking an economics specialist to talk about the economic landscape and future challenges, as Tony Devlin did, is an open invitation for the specialist to whip out all his slides and bang on about his forecasts for economic growth, unemployment, inflation, interest rates and all the rest. Fortunately, I’m an economic commentator rather than a forecaster, so I don’t have a set of forecasts to dazzle you with - or bore you with - and, in any case, I’m sceptical about the value of forecasts.  Economists don’t have a good record on accurately forecasting what will happen.

All I’d say is that, although you’d never know it from all the complaints we hear, it’s now been about 22 years since the last time Australia had a severe recession, and in that time the economy has grown at a reasonably steady rate with the official unemployment falling from about 11 per cent in 1991 to something around 5 per cent - which most economists regard as about as low as it can go without causing inflation problems. You’d have to say this record period without a severe recession obviously can’t go on forever, and when we do have another severe recession, that’s when a lot of businesses fail and unemployment shoots up, causing a lot of us to realise for the first time just how good we’ve had it for so long. It will also be when the demand for your services as financial counsellors grows far beyond your ability to cope.

But I have no particular reason to expect the next severe recession will occur any time soon, so my best guess is that the economy will continue growing much as it has been, with various industries continuing to feel the pain of a high dollar, but with enough growth to limit any great rise in the official unemployment rate. However, I do expect people - particularly business people - to cheer up a lot if, as everyone expects, Tony Abbott wins the election in September. This is partly because all newly elected governments enjoy a honeymoon period in which everyone’s pleased to see the back of the last lot and hopeful the new lot will be much better, but also because I’m convinced a lot of the gloom we’re hearing from business - big and small - has more to do with politics than the actual state of the economy. People forget the day-to-day management of the economy is done by the central bankers, not politicians.

The other thing my crystal ball tells me is that an Abbott government will have a lot of trouble keeping all the promises it has made on the budget, which means budgeting is likely to remain tight and probably get tighter in the coming years. This suggests continuing pressure on grants to outfits like the Army, particularly so when you see the Coalition promising not to make budget savings at the expense of high income-earners.

Before I move on, you may have noticed that all my references were to ‘severe’ recessions. This is because, contrary to the conventional wisdom propagated by both sides of politics, I believe we did have recession in Australia - though a mild one - at the time of the global financial crisis in late 2008 and early 2009. The claim that we escaped recession rests on the slender fact that the contraction in the economy was concentrated in one quarter (0.7pc in Dec q 08) rather than spread over two consecutive quarters, even though the rate of unemployment jumped by 1.6 percentage points in just nine months (trend figures: 4.2% in Aug 08 to 5.8% in May 2009; part rate fell by 0.3pcps; using SA figures, increased by 1.8pcps in 10 months between Aug 08 and June 09 to 5.9%). But while this deterioration was too small and too brief to be noticed by most Australians, my guess is it was noticed by the Army in the form of less generous donations and by an increase in the number of people needing financial counselling - no doubt after a delay. Because downturns always hit the bottom harder than the middle and the top, I suspect the Army’s ‘recession meter’ is a lot more sensitive than other people’s.

 I've been thinking a fair bit lately about differences in people’s perspectives and perceptions of the economy. Whereas economists form their views about the state of the economy using economy-wide statistics - meaning they view the economy from a helicopter, so to speak - most business people and ordinary citizens base their views on their own experience and the experience of those around them. What’s happening to me is what’s happening to the economy. If I’m a shopkeeper and my sales are down, it’s obvious the economy’s very weak. If I’m a worker but I haven’t been able to find a job for months, it’s obvious the economy’s stuffed.

The second, more ephemeral factor that influences the views of non-economists is what they see and hear from the media about the state of the economy. But apart from when it’s quoting the official statistics, most of what the media tell us is quite unrepresentative of what's happening to most people. Why? Because the media tell stories about the experiences of individuals, and the stories the media choose to tell are those they believe their audience will find interesting. But the stories we find most interesting are those that are unusual rather than usual, thus making them unrepresentative of the economy rather than representative. This explains the media’s overwhelming preference for bad news rather than good news: people find bad news far more interesting. So, for example, any factory that decides to lay off 350 people will hit the headlines, whereas a factory that took on 350 workers would hardly rate a mention.

Another thing to bear in mind is that, in general, the people to whom the Army provides financial counselling come from the opposite side of the tracks to the relatively well-off and well-educated readers I write for. I often take a fairly unsympathetic line to the complaints of the comfortably off precisely because I'm aware of the genuine, often extreme financial hardship suffered by people struggling to manage on very much lower incomes. But just as I try to remind my readers how comparatively well off they are, so you need to remember that the people you see are also unrepresentative of the wider economy. If one in five adult Australians experience financial stress each year, then four in five don’t experience stress to any great extent.

When the people you counsel complain about the high cost of living, I’m inclined to believe them and be sympathetic. But in recent years it’s become fashionable for people in the comfortable world also to complain about the high cost of living, and there is little objective evidence to support these complaints. Nothing special.

I suspect people complain about the cost of living when they don’t have anything more serious to worry about - such as having to find a job or even the risk they may lose their job. I also suspect the complaints of the comfortably off mostly boil down not to the high cost of living but the difficulty some people encounter achieving the higher standard of living to which they aspire. No matter how high your income, it's always possible feel financially stressed if you over-commit yourself. You can often have difficulty making ends meet if your income is always fully committed and you leave yourself no buffer to cope with unexpected expenses, such as a big increase in utility bills.

As financial counsellors well know, many people have a low level of financial literacy. Many people also have low factual knowledge of the hip-pocket effects of government tax and benefit changes. A recent survey by the progressive think tank Per Capita found that more than half of respondents believed the carbon tax had increased the price of petrol, when it doesn’t apply to petrol. Most respondents estimated the tax had increased their cost of living by $20 a week or more, whereas the Treasury estimate was just under $10 a week. And almost half of respondents claimed to have received no compensation from the government in tax cuts or benefit increases, whereas Treasury’s estimate was that 90 per cent of households would get some compensation and about two-thirds would be fully compensated.

And then, of course, there are the many better-off people who imagine themselves to be middle income-earners when they are, in fact, in the top 10, 5 or even 2 per cent.

Everyone has their own perspective on the economy. There’s the reality and the perception - and the two are often very far apart.


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Monday, April 1, 2013

Easter message to business is think relationships

At this time of year it's worth pondering: many business people and economists think of themselves as Christians, but what implications does this carry for the way they view the world and conduct their affairs?

According to Michael Schluter, founder of Relationships Global and, these days, a business consultant, Christianity is a "relational" religion. If so, it doesn't sit easily with market capitalism as it is conceptualised by economists and practised by business people.

The primary emphasis of economics and business is on satisfying the wants of the individual. In this they give little priority to individuals' human relationships.

Is Christianity much different? Certainly, in the Evangelical version I grew up with, it too focuses on the individual. And you could be forgiven for wondering whether it pays much attention to relationships.

But here Schluter begs to differ. He says all of Christianity is a relational story. It starts with humankind created in God's image, but then the relationship is ruptured in the Garden of Eden. Finally, God comes to earth as a baby and ends up dying on a cross with the expressed purpose of restoring the broken relationship with humankind.

What does God require of us? Jesus summarised it: all the law and the prophets depend on two commandments - love God with all your heart, and love your neighbour as you love yourself. What could be more relational than that?

Schluter says life can be viewed from many perspectives: financial, environmental, individual, material. But "as Christians, we need to see all of reality through a relational lens if we are to look at the world as God sees it".

All of life is ultimately about relationships. For example, he says, "every financial transaction is an expression of an underlying relationship between nations, organisations or individuals".

The development of a society can be measured not in terms of economic growth but by the quality of relationships between individuals and between ethnic and other social groupings.

Education's goal can be defined as acquisition of wisdom for children to be able to serve their family and community, rather than acquisition of technical skills merely for personal career advantage.

"At a personal level, our happiness and wellbeing are determined primarily by the quality of our relationships. Arguably, financial issues - for example, debt and savings - matter to us primarily due to their relational implications," he says.

Above a certain income, wellbeing indices point to the central importance of relationships. Even for those below this income threshold it's not clear if the priority of income is for personal benefit or for group benefit, such as the care of children.

Debt is closely associated with depression and also with divorce, child abuse and social isolation, he says. Survival rates after serious illness are more closely associated with levels of relational support than with levels of income.

"It is easier to find someone financially rich and miserable than someone relationally rich and miserable," he says. "It is hard to find someone on their death bed who says, 'I wish I had spent more time in the office'."

The individualism of our culture leads us to miscalculate the significance of events because it takes little or no account of "externalities" - that is, the effects on third parties.

For example, companies and public service agencies move staff to new locations to maximise economic productivity, and economic analysis applauds their decision to do so. But no attempt is made to measure the social or relational costs of such dislocation, especially to spouses or partners, children, friends and parents and grandparents whose relationships have been disrupted.

Schluter says business, finance and public sector organisations are increasingly coming to recognise that financial evaluation of performance is insufficient.

"The purpose of companies is increasingly defined inclusively to recognise the significance of company decisions for many stakeholders, rather than instrumentally, where customers, suppliers and so on are regarded simply as means to increase shareholder profits."

Low levels of national debt - a measure of inter-generational loyalty - decrease economic instability and aid economic growth. Political stability is a foundation for economic prosperity, but depends on peaceful relations between ethnic and religious groups and between rich and poor.

"To see the world in relational terms requires a re-education process as the media, corporate advertising and our own inclinations constantly point us towards seeing things from an individualistic or materialistic point of view," Schluter concludes.
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