Monday, August 31, 2015

How high-paid men have hijacked tax reform

It's difficult to get a man to understand something when his after-tax salary depends on him not understanding it, to misquote Upton Sinclair.

This may explain why there's a glaring weakness in the thinking of business people, economists and politicians who see countering bracket creep and cutting the top tax rate as the key "reforms" needed to "reward hard work" and increase participation in the labour force.

Joe Hockey's repeated claim that our tax system remains much the same as it was in the 1950s is silly but, as Professor Patricia Apps, of the University of Sydney, argues in a recent paper, it's true in one important respect.

Then, our system of levying income tax on the individual, rather than the joint income of couples, fitted well with our (very Australian) system of tightly means-testing welfare benefits on the basis of family income.

Why? Because, in those days, few women continued in paid employment once they were married and, certainly, once the kids started arriving.

What's changed is a decline in the fertility rate from about 3.5 children per female to 1.9, a rise in young women's academic attainment to levels exceeding young men's, and a desire by most young mothers to return to paid employment.

Get it? Without intending to we've moved away from having the individual as the unit of taxation – a choice that scores well on both efficiency and equity – to a "quasi-joint" system of taxing families.

In consequence, when one partner – usually the father – has a full-time job, and the child-caring partner thinks about returning to paid employment, her degree of participation is discouraged not just by marginal tax rates that have risen somewhat thanks to bracket creep but, far more significantly, by the rate at which the family tax benefit is withdrawn as the wife's income is added to the husband's.

This means women deciding whether to work, and how long to work, face "effective" marginal rates of taxation far higher than the top rate of 47 per cent faced by all the executives Hockey fears will become tax exiles at any moment.

Apps demonstrates from 2010 survey figures that, before a couple's kids arrive, women, on average, work almost as many hours as men. Women's hours fall markedly when the couple has at least one child of preschool age.

That's to be expected. But Apps shows that when the average couple reaches the stage where all dependent children are of school age, mothers' hours recover to only a little more than half those of the husbands'.

The gap is only a little narrower when couples reach the stage where both parents are still of working age but have no dependent children at home.

In other words, decisions made to reduce participation in the labour force in the preschool years tend to persist even as the kids grow up.

Why could this be? Surely not because "secondary earners" (aka mothers) face effective marginal tax rates in the high double figures. If so, countering bracket creep and cutting the top rate aren't likely make much difference.

Apps' analysis goes a long way towards explaining why rates of female participation in Australia are significantly lower than in comparable countries – even New Zealand – particularly when you remember our unusually high rates of part-time female participation.

If so, she also goes a long way towards identifying the area where tax reform is likely to be most effective in encouraging work effort and participation.

Apps uses Australian data to support an empirical truth long understood by tax economists, but long forgotten by other economists and never believed by high-paid businessmen (see opening quote): the price "elasticity" (sensitivity) of labour supply is not at all high for "primary" income earners (men with full-time jobs). Other studies show much higher elasticity for "secondary" earners.

This is common sense: full-time jobs tend to come in set lumps of 38 hours or so a week, whereas mothers have far more discretion over how many hours a week they want to work. It's mainly the shift from part-time to full-time that our unintended "quasi-joint" unit of taxation is stuffing up.

There's nothing new about high effective marginal tax rates. So why do economists and their high-paid male masters keep forgetting it?

Because if they can con the pollies into cutting the top tax rate rather than fixing the means-testing of family benefits, they pay a lot less tax whether or not the "reform" encourages greater work effort in general and whether or not they personally choose to work harder or take Wednesday afternoons off for golf.

Saturday, August 29, 2015

Try a little compromise to fix the budget

It was easy to miss, but a proposal with much practical potential arose from this week's meeting of the great and good at the National Reform Summit. It was an idea that could break the budget impasse.

Australia is seen to have so many economic problems at present that the participants at the summit from business, union and community peak bodies got to four of them before later remembering one I would have had at the top of my list. As someone thought to write into the final statement, "unconstrained climate change would have serious environmental, economic and social impacts on Australia".

Oh yes, that probably could be a bother, couldn't it? Glad we remembered to pop it in.

The problems that got more considered attention were: lifting productivity growth and workforce participation, tax reform, sustainable retirement incomes policy and, of course, "fiscal policy for a growing economy".

On fiscal policy – the budget – the participants began by acknowledging that "governments have a key role to play in providing or funding public services, a social security safety net and economic and social infrastructure essential for economic growth".

Here's an important point of agreement: "All expenditure programs, including direct expenditures and tax concessions, should be subject to rigorous evaluation to ensure efficiency and effectiveness over time."

To date, the Abbott government has insisted on excluding tax concessions.

Government income-support payments should be appropriately targeted to those who most need them, we're told, but also this: "Gaps in the basic social safety net should be closed, such as improving the adequacy of income support for unemployed people and affordable housing for people on the lowest incomes, and services to people with a disability."

Plus this: "People on low incomes or who are otherwise vulnerable should be protected from the impacts of fiscal reform."

See how much more reasonable business people become when you bring them face-to-face with the unions and welfare organisations?

The participants' list of things governments should do says they should "rigorously monitor the effectiveness of all expenditure programs, including tax and direct concessions, and make findings public".

You might think that, no matter how bad our budgetary system is, it couldn't be as bad as the Americans'. That's probably true, but in one respect they beat us hollow: Congress is diligent in monitoring the effectiveness of spending programs and making the results public.

Our taxpayers would save a lot of money if only ministers and their department heads were more willing to check how well their programs were achieving their stated objectives and then let us in on the secret.

So far, the summiteers' statement of principles is all very sensible, but what about Tony Abbott's "budget emergency" – do we have one or don't we?

We don't, but we will if we're not careful.

"While we currently have low public debt levels by international standards, expenditure in a number of key areas is rising rapidly, owing largely to population ageing in areas like pensions and age care, and rising health costs for all," the final statement says.

"Weaknesses are emerging in our public revenue base. These have been papered over temporarily by income tax bracket creep at the Commonwealth level and a surge in housing stamp-duty revenues in some states, but neither is a sustainable source of public revenue . . .

"If current policy settings persist, federal and state governments are likely to post substantial deficits for many years to come."

Just so. Which brings us to our present impasse on the budget. In 2014 the government allowed us to see the harsh recommendations of its commission of audit only a week or so before its first budget, which implemented a version of them.

The public reacted in amazed horror, partly because they involved breaking a lot of election promises, but mainly because they were seen as unfair to low and middle income earners. Not surprisingly, the Senate declined to pass many of the worst measures.

Abbott's standing in the opinion polls has never recovered from the unpopularity of that first budget, even though he used his second to backtrack on many of his stalled measures and to buy a bit of approval from couples needing childcare and from small business.

Joe Hockey used some dodgy assumptions to claim the budget was still on track to return to surplus in 2020, but few at the summit believed him. With 2016's a pre-election budget, it's hard to foresee a renewed effort to get things heading in the right direction.

But this is where the summiteers' good idea comes in. Partly in response to comments at the summit by Dr Martin Parkinson, the former Treasury secretary, Peter Harris, of the Productivity Commission, and Professor Peter Whiteford, of the Australian National University, the peak bodies got together and came up with a plan to return the budget to "structural balance" within 10 years.

The idea is to separate significant structural reform of the budget from the annual budgeting process conducted by Treasury and Finance. A new assemblage of peak bodies would be given two years to develop a plan to get the budget back to balance over the following eight years.

On the spending side, the new outfit would focus on the biggest and fastest-growing programs, such as health, where inefficiencies were identified and removed while protecting their adequacy and fairness. (Any medico will tell you there's plenty of wasteful spending in health.)

On the revenue side, reforms would focus on tax concessions that were no longer "fit for purpose".

Such a process would be more public, would produce more "buy in" by key interest groups, would impose greater pressure on vested interests to make concessions for the greater good and, if done well, would do more to help voters see the need for reform and the measures proposed.

Well worth a try.

Friday, August 28, 2015

Talk to VCTA Teachers Day, Melbourne,

Talk to VCTA Teachers Day, Melbourne, Friday, August 28, 2015

Since it’s an important part of the course, I thought it might be useful if I give you an update on recent facts, figures and trends in the key indicators of what’s happening in the labour market, to help you keep up-to-date. I’ll be relying heavily on an article by professors Roger Wilkins and Mark Wooden, both of the Melbourne Institute, Two Decades of Change: The Australian Labour Market, 1993 - 2013, published in the December 2014 issue of the Australian Economic Review. We’ll start on the supply side, with participation, then move to the demand side and on to indicators showing the outcome of the interaction of demand and supply, such as unemployment.

Labour force participation

If you look at the overall participation rate since 1993, after the recovery from severe recession of the early 90s had begun, you see a reasonably strong rate of increase until the global financial crisis in late 2008. But this is misleading. All the increase came from rising female participation. Among men, the long-term downward trend continued, though at a slower rate of decline. However, in the five years before the GFC male participation rose a little. Since the GFC it has fallen by 2 pc points.

Note that some part of the fall in the male and overall part rates since the GFC is explained by demographic factors - that is, the retirement of the baby-boomer bulge. To get an indication of the size of this effect, Wilkins and Wooden calculated that if the age structure of the population - that is, the proportions in each age group - in 2013 was the same as it had been in 1993, the overall part rate would have been 2.2 percentage points higher. That is, population ageing seems to have reduced the part rate by a least 2 percentage points so far. We need to remember this when we look at the lower part rate in recent times - demographic as well as cyclical factors are at work.

Looking at the part rates for men, over the 20 years to 2013 the overall rate has fallen form 73.5 pc to 71.4 pc. The fall has been greatest for men aged 15 to 24, mainly because more are staying longer in the education system before starting work. Part rates for prime-age men - 25 to 54 years old - have fallen to lesser extents. But the part rate for men aged 55 to 59 has risen from its low in 1993 by 9 pc points to 80.8 pc in 2013. For those aged 60 to 64, it’s risen from a low in 1998 by 17 pc points to 62.5 pc. And for those aged 65 and above, the part rate has more than doubled over the 20 years to almost 17 pc.

The trend to early retirement - voluntary and involuntary - that started in the 70s and ran through to the early 90s, has really turned around since then and more men are waiting longer before retiring. A significant minority are continuing to work beyond age-pension age of 65, no doubt many of them part-time. I think this would be happening because many felt they hadn’t yet saved enough to live comfortably in retirement on an income above the pension, because more of them would be in better health and expecting to live longer than earlier generations were and more of them would have worked in less physically demanding jobs.

Turning to women, their overall part rate has risen continuously over the past 20 years, by almost 7 pc points to 58.6 pc. That’s true of all age ranges except for a very recent decline among those aged 20 to 24 - no doubt because more young women are going on to uni. By far the biggest pc point increases have been for those aged 55 to 59 (up more than 28 pc points to 65 pc) and 60 to 64 (up 30 pc points to 45 pc). Even the part rate for women 65 and over has risen by almost 6 pc points to 8 pc. The reasons for great proportions of older women remaining in the labour force longer include those I listed for men, plus the raising of women’s age-pension age from 60 to 65, and the fact that, with so many women now more highly educated and hence better paid, more of them, having returned to the workforce after having children, would want to stay there for the duration.

 Looking to the future, there is plenty of scope for part rates among older people to continue rising. So, is the retirement of the baby-boomer bulge lowering the overall part rate or isn’t it? As you’ve probably realised, these days a fully-furnished economics teacher needs to know a bit about demography. Here we are balancing two separate effects. The fact that some older workers are choosing to retire later doesn’t alter the fact that population ageing is causing a lower proportion of the population to be of prime working age and a higher proportion to be of later age. This change in proportions guarantees that overall part rates will be lower. The decision of some older workers not to retire as early as they might have reduces the extent of the ageing-caused fall in the overall part rate, but is unlikely ever to eliminate it. This is because, although some choose to keep working, most do not. It’s unlikely we’d ever get to the stage where part rates among the over-60s were just as high as for prime-age workers.


Roughly half the increased supply of labour comes from ‘natural increase’ (young people joining the labour force exceeding old people leaving it) and half from ‘net migration’. Immigration has been making a significant addition to the labour force since the end of World War II, and today accounts for more than a fifth of it. The main change since the turn of the century is that a smaller proportion comes on permanent visa and a much higher proportion on various classes of temporary visas.

In March 2014 there were 880,000 people on temporary visas with work rights, including 200,000 on temporary skilled (457) visas and 370,000 on student visas (not including many young people on working holiday visas). If all these people were actually participating in the labour force they would account for 7 pc of it. In addition there were 640,000 people on visas for New Zealanders. Since the early 2000s the annual intake of people on 457 visas has risen from 40,000 to 130,000 in 2012-13. These figures compare with an annual intake of skilled permanent migrants of about 130,000. In practice, many permanent visas are issued to people on temporary visa who decide to stay.

This shift to temporary migration has made the labour force more flexible in its ability to respond quickly to changes in demand for skilled workers without producing excessive rises in skilled wages. However, it has probably also reduced the incentive for employers to invest in training local workers. Note, too, that levels of net migration tend to vary with the strength of our business cycle.

Educational attainment

Now let’s move from the size of the supply of labour to its quality. The past two decades have seen continued growth in the proportion of the labour force with post-school qualifications. The proportion with a university degree has more than doubled from 12 pc to 28 pc. The proportion with trade qualifications has risen from 16 pc to more than 20 pc.


The best indicator of labour demand is the employment-to-population ratio - the ratio of total employment to the total population of working age (15 and over). Because the base is the total population rather than the labour force it will always be lower than the part rate. This employment ratio is getting more attention because it is now being included in the monthly labour force survey.

The employment ratio tends to vary directly with the business cycle. In mid-1993 following the recession of the early 90s it got to a low of 55.4 pc, but then slowly rose to a peak of 62.8 pc in late 2008 before the GFC, falling to 61.7 pc about a year later. It recovered temporally until late 2011 when it began falling again, reaching a low of 60.6 pc at the end of 2014. By July, however, it had recovered to 60.9 pc. The employment rate is reduced by population ageing, of course.

Unemployment and labour underutilisation

Unemployment represents the mismatch between labour supply and labour demand, the extent to which the labour market has failed to clear. The official unemployment rate is derived from the monthly labour force sample survey of more than 26,000 households. The official rate reached peaks of 10.4 pc in the recession of the early 80s and 11 pc in the recession of the early 90s. By 1993 it had fallen little, but over the following 15 years to early 2008, before the GFC, it got down to 4.1 pc. By mid-2009 it had risen to a peak of 5.8 pc, but recovered to a low of 4.9 pc in early 2011. It slowly worsened thereafter, but by mid-2015, however, it seemed to have stabilised at about 6 pc.

The official unemployment rate has not been tampered with by politicians, as many people believe, nor has the Bureau of Statistics changed its definition of unemployment for many decades. It is true that this definition is very narrow, in that anyone working as little as one hour a week is classed as employed. This narrow definition clearly understates the full extent of unemployment.

This explains why, some years ago, the bureau began publishing the under-employment rate, representing the proportion of the labour force that is employed but working fewer hours than desired. The underemployment rate did not slowly decline over the 90s and the noughties as the unemployment rate did, but stayed fairly steady over that period and has edged up a little during the 2010s. This means that, by the turn of the century, it went from being below the unemployment rate to being above it. Figures for the underemployment rate are published quarterly, for the middle month of the quarter. In May 2015 it stood at 8.4 pc, compared with the unemployment rate of 6.2 pc. Adding the two together gives a “labour force underutilisation rate” of 14.6 pc.

Note, however, that the underutilisation rate tends to go too far the other way by overstating the extent of the problem. This is because it counts the number of underemployed employees (and unemployed workers) without taking account of each person’s degree of underutilisation, whether they were a part-time worker wanting only an extra hour or two of work or, at the other extreme, were an unemployed worker seeking a full-time job. The bureau calculates a “volume-based” measure of underutilisation for August each year. In August 2014 it was 8 pc, compared with the “headcount-based” measure of 14.4 pc.

Wilkins and Wooden discuss another dimension of underutilisation: the extent that workers were not making use of all their skills and qualifications in their paid employment. Using data from the annual HILDA survey rather than the bureau’s surveys, another group of academics has estimated that, during the period from 2001 to 2006, 14 pc of workers were severely over-skilled (ie they made very little use of their skills and abilities in their current job), while a further 30 pc were moderately over-skilled. Wilkins and Wooden detected no trend in this measure over the past decade.

Youth unemployment

The rate of unemployment is always significantly higher among the young than among older workers. This partly because the young are more inclined to leave one job in the hope of trying another, because their lack of experience may make them less attractive to employers and because they suffer the brunt when the economy turns down. More recent employees may be the first to be laid off. And policies of reducing staff sizes by natural attrition usually involve suspending the annual entry-level intake at the expense of youngsters leaving the education system. The longer they remain unemployed, the harder it becomes for them to find a job.

In July 2015, the overall rate of unemployment was 6.3 pc, whereas the rate for 20 to 24-year-olds was 10 pc and for 15 to 19-year-olds was 19.3 pc. That is pretty much the highest it’s been since November 1997. Many of these teenagers would have quit school early, often with inadequate literacy and numeracy. Six years after overall unemployment reached its peak following the GFC, the overall rate rose by 0.3 pc points, whereas the rate for 20 to 24-year-olds rose by 1.4 points and for 15 to 19-year-olds rose by 2.5 points. This means one in five unemployed Australians is a teenager.

Note, however, that a teenage unemployment rate of almost 20 pc doesn’t mean that one teenager in five is unemployed. This is because it’s 20 pc of the teenage labour force (not the teenage population) and many teenagers are not in the labour force because they are in full-time education and not working or actively seeking work. It’s nearer one teenager in 10 that is unemployed.

Non-accelerating-inflation rate of unemployment

The NAIRU - or natural rate of unemployment - is the lowest rate to which unemployment can fall without shortages of labour leading to rising wage and price inflation. It’s regarded as the modern level of full capacity or full employment, or the lowest sustainable rate of unemployment.

The NAIRU changes over time with changes in labour market institutions and no one can say with certainty what its level is. Different economists do different calculations and reach a range of answers. However, the consensus among the econocrats is that the NAIRU is “about 5 pc”. But the only sure way to determine where it actually is, is to see how low it can get when the economy has been growing strongly before signs of wage pressure emerge. Considering the extent to which wages growth has slowed - to 2.3 pc a year - at a time when the official unemployment rate has risen only to a bit above 6 pc, my guess is the NAIRU may be nearer 4 pc than 5, maybe even less than 4.

The hardest question I have to answer from the public is how full employment could possibly be as sky-high as 5 pc. Wasn’t it less than 2 pc in the post-war years? Yes it was. But the structure of the economy has changed hugely since then, and most of the increase in the rate of full employment would be an increase in structural unemployment. Many people don’t realise that the unemployed tend to be unskilled and unsuited to fill whatever job vacancies are available. Figures taken from the HILDA survey by the Brotherhood of St Laurence show that in 2008, when the economy was booming just before the GFC and the unemployment rate got to a low of 4.1 pc, 45 pc of the unemployed were early school-leavers and a further 20 pc had gone only to year 12. That left 16 pc with trade qualifications and less than 20 pc had degrees. The problem is there aren’t as many jobs available for unskilled and low-skilled workers in the digital age as there were in the 1960s.


Apart from the rise in part-time employment, the 1980s and 90s saw a marked increase in the proportion of men working very long hours. In the noughties, however, the proportion of male full-timers working 50 hours or more a week fell from 31 pc in 2003 to 27 pc in 2013. This has occurred despite an increase in the proportion of men working as managers and professionals. Among women, the proportion of hours worked changed little over the period.

Job insecurity and “precarious employment”

It’s widely believed that there is an ever-growing incidence of “precarious employment” - people in casual jobs, or on short-term contracts, or working for labour hire companies or temping agencies, or being cast adrift by their employer without benefits as supposedly self-employed. I know it’s widely believed among teachers that, these days, no one stays in the same job - even the same occupation - for long. More and more people are being made redundant. A young person leaving education can expect to have many different jobs before finally they retire at 70.

These perceptions may be widely held, but there is little evidence to support them. It is true we have a lot of part-time and casual employment in Australia - more than in most other rich countries - much of it done by mothers with young families and students who aren’t wanting a full-time job. And, these days, by people in semi-retirement. It’s also true that the number of part-time and casual jobs grew rapidly for several decades. It’s still growing, but much more slowly. According to Wilkins and Wooden, over the 10 years to 2013 the proportion of men working part-time has increased by 2 pc points to just under 18 pc, while the portion of women has been steady at almost 48 pc.

While most part-timers are also casuals, the two groups don’t overlap completely. The Bureau of Statistics defines casual employment as not receiving paid annual leave and sick leave. Its figures show that, for men, the proportion of casuals has been relatively steady since the late 1990s, fluctuating around 20 pc. Among women the share has fallen from about 31 pc to less than 27 pc.

The annual HILDA survey shows that more than two-thirds of workers were in permanent or ongoing employment in 2012, an increase of 1.5 pc points since 2001, when the survey began. HILDA suggests the share of labour-hire and temporary-employment agency jobs has fallen over that time from 3.7 pc to 2.7 pc. (It would be much higher than that in particular industries, of course.)

Nor can Wilkins and Wooden find any evidence that there’s been a shift away from employment to greater use of self-employment. Indeed, the bureau’s figures show the proportion of self-employed in the workforce has being steadily declining over the past 20 years, from 14 pc to 10 pc in 2013.

Then there’s the widespread perception that these days people are always losing their jobs and having to move on. When employers announce mass layoffs it invariably gets much attention from the media. When there’s nothing to announce it gets no attention. The bureau’s figures for average job duration and rates of job mobility show little sign that jobs have become less stable, according to Wilkins and Wooden. In February 2013, just 18 pc of the employed had been in their job for less than a year, down from 22 pc in 1994. In the latest figures, just over one worker in four had been in their job for at least 10 years, up from 23.6 pc in 1994.

How long people stay in the same jobs is determined by dismissals and quits. If jobs are becoming less secure you’d expect dismissals to be up and voluntary departures down. Both of these vary with the ups and downs of the business cycle but, even so, they’ve tended to decline. In February 2013, less than 3 pc of all the people who’d had a job in the previous 12 months had been retrenched. The proportion losing their jobs for any reason was 6 pc. About 10 pc of people had quit their jobs.


The 20 years to 2013 have seen strong growth in real wages as the economy’s upswing continued. The real average weekly earnings of full-time employees grew by 38 pc for men and 37 pc for women. But the period saw no convergence between men and women in average weekly earnings, with the gap being 25 pc and 1993 and 26 pc in 2013. Other figures show the real hourly earnings of part-time workers increasing between 1995 and 2012 by 33 pc for men and 24 pc for women.

By contrast, between 1998 and 2013 the federal adult minimum wage rose by just 8 pc in real terms (compared with a 25 pc increase in real average weekly earnings over the period). Historically, the ratio of minimum wages to average wages has been a lot higher in Australia than in other developed countries, but this suggests it has been dropping back to the pack.

It also suggests that wage gains have not been uniform across the earnings distribution. Wilkins and Wooden use the bureau’s income survey to show that, comparing real earnings in 2012 with those in 1995, the percentage increase in the earnings of full-time employees is highest at the top of the distribution and lowest at the bottom. At the 10th percentile the increase was 15 pc, whereas at the 90th percentile it was almost 50 pc. So earnings inequality increased over the two decades. The Gini coefficient rose significantly from 0.26 to 0.29 for men (ie by 12pc) and from 0.21 to 0.25 (ie by 19 pc) for women. So, unlike in the United States, real wages at the bottom have grown to a fair extent, but higher wages have grown by a lot more, with middle wages growth somewhere in between.

The authors say the causes of this increased inequality in earnings aren’t well understood. In the US, increased international trade and skill-biased technological change are regarded as the most likely causes, with more emphasis on skill-biased change (ie computerisation that tends to reduce demand for less-skilled workers and increase it for high-skilled workers) than on trade (ie manufacturing and less-skilled service jobs shifting to developed countries). Both causes may have been at work in Australia. Ian Watson has argued that the increase in earnings inequality is the result of “neo-liberal” policies, such as deregulation, contracting out, reduced protection and privatisation. Another likely candidate is the decentralisation of wage-fixing with the move to enterprise bargaining.

Note that earnings inequality is not the same as income inequality. This is because, wages are not the only form of income, because the unit of analysis for earnings is the individual worker, whereas for income it’s usually the household (which may contain one or two earners, each on very different wage levels), and because measures of income inequality usually take account of the income redistribution brought about by income tax and cash transfers (including to non-workers, such as the aged, the unemployed and many sole parents). For these reasons, income inequality hasn’t increased to nearly the same extent that earnings inequality has.


The first of the big changes in the labour market we’ve seen over the past 10 or 20 years is the effect of the retirement of the baby-boomer bulge in significantly lowering the participation rate, which has been only partly offset by the reversal of the trend to early retirement, including more people continuing to work beyond the age-pension age of 65. Immigration continues to account for about half the annual growth in the labour market. The main changes have been the increased emphasis on skilled migration and on the issue of temporary rather than permanent visas, which has probably discouraged employers from doing as much training of local young people. Levels of educational attainment continue to rise. The narrowness of the standard definition of unemployment has led to publication of broader measures, which reveal a much greater underutilisation problem. The NAIRU is said to be about 5 pc, reflecting higher structural unemployment. The wide belief that jobs are getting more insecure and lasting fewer years is contradicted by the evidence. Earnings have become much more unequal, but other changes have limited the effect of this on income inequality.


Wednesday, August 26, 2015

Don't believe all you're told about bracket creep

Beware of treasurers promising to protect you from the ravages of bracket creep. They're like Mafia bosses promising to protect you from robbers and thieves. Maybe they're offering something nice, or maybe they're working some kind of con.

Joe Hockey's speech about tax reform on Monday was more an advert than a policy announcement. He said the government would have to do something about the evil of bracket creep, but didn't say what or when, nor how it would be paid for.

The firmest we got was a hint that the Abbott government would go to the election next year promising a tax reform package involving a cut in income tax.

Hockey explained that "bracket creep occurs when people are pushed into higher tax brackets as a result of inflation and rising wages". Not quite right, but near enough.

Hockey warned that the average income earner on about $77,000 a year is just below the second highest tax bracket of 37¢ in the dollar, which kicks in above $80,000.

He estimates that, if nothing is done in the next two years, about 300,000 people will move into that bracket. And if nothing were done in the next 10 years, more than 40 per cent of taxpayers would be in the top two tax brackets. (Remember that the rate you pay on the last part of your income is much higher than the average rate you pay on all your income. Those on just over $80,000 pay an average rate of 22¢ in the dollar.)

The truth is, all treasurers have form when it comes to bracket creep. It can be prevented easily by increasing the four bracket limits once a year in line with the inflation rate. Malcolm Fraser and John Howard tried this in the late 1970s, but soon gave up.

Why? Because it delivered annual tax cuts that were too small and too mechanical for voters to notice and be grateful for. Much better to let bracket creep rip for three years or so, then have a bigger tax cut just before or after an election.

Every year that bracket limits aren't raised, the treasurer is knowingly letting brackets creep up, unless he (or one day, she) grants discretionary tax cuts. With help from Wayne Swan, Peter Costello delivered eight such tax cuts in a row between 2003 and 2010.

Those discretionary cuts cut a lot deeper and cost a lot more than eight years of "tax indexation" as we called it. They were part of the excesses of the resources boom and turned out to be far more generous than we could afford – as we realised after falling coal and iron ore prices started slashing company tax collections.

This is why, since 2010, successive governments have let bracket creep rip. They're trying to increase income tax collections so they play their part in getting the budget back into surplus. We've had our fun, now we're suffering the hangover.

This means the man who now professes to be so concerned to end bracket creep is the same man who used projections of years of further creep in this year's budget to prove he was getting on top of the deficit.

If you think that sounds a bit sus, try this. The low and middle-income earners suffering most from bracket creep at present, weren't the taxpayers who gained most from the eight tax cuts – those were the high income-earners (such as yours truly).

If alleviating bracket creep was Hockey's true motivation for wanting tax cuts, his response would be simple: leave the rates of income tax unchanged, just raise the bracket limits by as much as you could afford.

But in his next breath Hockey was arguing that the top tax rate – 45¢ in the dollar – which cuts in when incomes hit $180,000 a year, was far too high and needed cutting.

See the scope for trickery? Justify tax cuts by telling the majority of voters on low and middle incomes how tough they're doing it, then give most relief to high-income earners again. Lawyers call it "bait and switch".

Hockey is right in arguing that (thanks mainly to the bias in the eight tax cuts), bracket creep hits low and middle-income earners proportionately harder that it hits high-income earners, thus making bracket creep "regressive".

But this raises an obvious question: how would the tax cuts be paid for? Could we be sure the cure wasn't worse than the disease? Assuming Hockey wouldn't have the effrontery to allow them simply to add to the budget deficit, one way would be for their cost to be covered by (massive) cuts in government spending.

We know from his first budget that this would rebound on the very low and middle-income earners he was purporting to help.

But it's a reasonable bet Hockey is hoping for a deal in which the cost of the cuts in income tax is covered by an increase in the rate of the goods and services tax.

Trouble is, the GST is also regressive. And a recent paper by Professor Patricia Apps, of the University of Sydney, demonstrates that an increase in the GST would be more regressive than the bracket creep it corrected. Why? Because it would hit all those people whose incomes were below the income tax threshold.

Beware of treasurers promising to protect you from bracket creep.

Monday, August 24, 2015

Libs deserve share of reform credit

I am a career-long admirer of Paul Keating. He opened our economy to the world, dragging us into the era of globalisation. Of the 13 treasurers I've observed in my career, I judge him to be far and away the best – though he did have his failings.

But last week Keating came out fighting when John Howard argued that the Coalition opposition of the time also deserved praise "because it gave bipartisan support to so many of [Keating's] reforms".

Keating objected to "a creeping part of the orthodoxy of late that the reformation of Australia's financial, product and labour markets . . . was not executed by the Hawke and Keating governments but was some kind of project undertaken with the active co-operation of the then Liberal-National opposition".

"Nothing could be further from the truth."

Sorry, but Howard has a point.

It's true there was no overt co-operation between Labor and the Coalition, nor any atmosphere of sweetness and light. The Liberals never said anything good about Labor and always found plenty to criticise and oppose. To the casual observer, it was adversarial politics as usual.

In particular, the Libs vigorously opposed almost all of Labor's tax reforms, particularly the taxes on fringe benefits and capital gains, the compulsory superannuation levy and even the restoration of the assets test for the age pension.

They also vigorously opposed Medicare and Labor's Accord with the union movement.

Howard may be happy to praise the Hawke and Keating reforms at this late stage, but he didn't at the time, nor during the almost 12 years he was prime minister. This is an old trick: praising long departed opponents as a way of criticising the present incumbents.

I don't doubt that, had a Howard-led government been elected in 1983, it wouldn't have instigated all the reforms Keating made in the following 13 years. It would have lacked the vision, drive, courage and sense of urgency Keating had – not to mention the support of its Labor opposition.

Keating is no doubt right in saying his biggest problem in pushing reform was getting the Labor caucus and the unions lined up behind him. In this the Accord was a great help, meaning ACTU secretary Bill Kelty deserves his share of the reform credit.

The Labor faithful may regard Keating as a saint up there with Whitlam today, but at the time they thought of him as a turncoat.

But the fact is Howard is right in listing all the reforms the Coalition, under the influence particularly of him and his former adviser, Professor John Hewson, did not oppose: privatisation of Qantas and the Commonwealth Bank, deregulation of bank lending rates, floating the dollar, admitting foreign banks, ending import quotas and virtual phasing out of tariffs, and introducing the HECS scheme for university fees.

Urged on by Hewson, Howard instigated the whole financial deregulation project by commissioning the Campbell report. He implemented as many of its recommendations as Malcolm Fraser would let him, before the Fraser government was swept from office.

It's noteworthy that nothing Keating went on to do was mentioned in the 1983 election campaign. In opposition, Keating joined the rest of Labor in vigorously attacking financial deregulation.

In office, he changed his tune, used a quickie report by the banker Vic Martin to sanctify the Campbell proposals, and proceeded to implement them all.

Howard is right in saying the most politically courageous reform was ending the protection of manufacturing. Until then, protectionism had been a bipartisan policy for decades, strongly supported by business and the unions. It remains supported by the public to this day.

It was usual for protection to be stepped up during recessions. But in the depths of the recession of the early '90s – our worst since the Depression – Keating actually instigated the second stage of its removal.

Never was there a better opportunity for the Libs to rally the nation against this monstrous act of folly. By then they were being led by Hewson and his criticism remains burnt on my brain: Labor should have gone further.

Keating says he never worried about the Libs, never even spoke to them about things. I believe him. What I don't believe is his implication that, had they opposed his reforms, nothing would have been any different.

In the key areas Howard listed, Keating knew his opponents would not attempt to score points against him, that the interest groups and voters adversely affected would have no political flag to rally under. This hugely strengthened his hand.

It was a unique period in our economic history, for which the Libs deserve their share of credit.

Saturday, August 22, 2015

More to infrastructure than just spending more

Everyone knows our federal and state governments haven't been spending nearly as much as they should on public infrastructure. But, sorry, the full story isn't nearly that simple.

Adequate and well-functioning infrastructure has an important role to play in the efficiency of the economy by raising the productivity (productiveness) of our labour.

According to figures quoted by Adrian Hart, of BIS Shrapnel, we went through much of the 1980s and '90s with little increase in annual federal and state spending on infrastructure. This, no doubt, is how we got it into our heads that we have a huge "backlog" of investment in infrastructure.

Over the noughties, however, annual spending just about doubled, reaching a peak of $76 billion in 2009-10. So don't think we haven't been spending a lot – we have.

Since then, however, annual spending has actually fallen in real terms. By 12 per cent to 2013-14 and, according to Hart's estimates, by another 10 per cent in 2014-15.

Now, the macro-economic commentators are right when they say this is crazy at a time when the mining construction boom is coming to an end and leaving a vacuum in the heavy engineering construction industry and the long-term interest rates paid by governments are at record lows.

But this is where the story gets interesting. As the Productivity Commission says in a recent report, "not all public infrastructure supports productivity and generates economic growth and wellbeing". Poorly selected projects may actually make things worse.

As the Grattan Institute put it more bluntly, "the capacity to waste money is a serious risk for infrastructure, given the very large amounts of money involved".

Get it? If we take the attitude that more is always better, and more is never enough, the pollies will happily spend more of our money, but much of it will be wasted.

So just as important as making sure our infrastructure spending is adequate is making sure what we do spend is spent wisely. But how?

First point, at a time when budgets are tight, governments face a temptation to underspend on maintenance. This can shorten the useful life of existing infrastructure, bringing forward the need to spend a fortune building a new one.

The trouble here is that maintenance spending is politically invisible, whereas opening a new facility offers visible, concrete proof of progress on the pollies' watch, gives them a ribbon-cutting photo op and leaves their name on the plaque for decades to come.

Next, consumers and businesses often have to pay a price for the services of infrastructure – for power and water, for instance. Where no price is charged – road use, for instance – it often should be.

If you undercharge you get excessive demand for the service, which prompts you to build more infrastructure than you really need. Overcharge, however, and you get suppressed demand and don't build as much infrastructure as would be in our interests.

The correct price will incorporate the "social" costs involved in the activity, such as the cost its users impose on the rest of the community arising from its adverse effect on the environment.

So get infrastructure pricing right before you rush off and build more stuff.

Case in point: part of the reason for the recent fall in infrastructure spending is the fall in spending by the electricity poles-and-wires businesses now the regulation of their prices has been tightened up.

Before that, they were being granted big price rises to allow them to gold-plate their networks to cope with imagined future peak-load problems, which weren't going to happen and, in any case, should have been solved by the use of smart meters. This stuff-up was brought to you by the nation's economic reformers.

Finally, pick your projects carefully by undertaking rigorous, published comparisons of each project's benefits and costs. The commission says it "found numerous examples of poor value for money arising from inadequate project selection and prioritisation".

To ensure you pick projects with the highest return to the community as a whole, you need to assess social benefits and costs. That is, you also take account of benefits other than the revenue stream the project would generate so as to include any positive or negative effects on economic activity, social activities and the environment.

The point is to analyse information in a logical, consistent way and encourage decision-makers to consider all the costs and benefits of a project rather than focusing on just a few. You should be evaluating the other ways of achieving the same objective – recycling water rather than building a desalination plant, for instance.

Some important costs or benefits may be hard to quantify. You should quantify as much as you can, then compare this result with the unquantifiable factors, so they don't get overlooked.

As a general rule, you should rank all potential projects according to the extent to which their benefits exceed their costs, then implement the most beneficial until you've hit your budget limit.

The experience of the feds' review body, Infrastructure Australia, is that smaller projects (such as fixing rail crossings or traffic hotspots) tend to have much higher benefit-cost ratios than big projects (such as expressways), many of which have benefits only marginally exceeding costs.

But the commission finds that governments prefer the bigger projects because the private firms participating in public-private partnerships need bigger projects to cover their fixed costs.

Unfortunately, there can be ulterior motives: to get the debt associated with the project off the government's balance sheet and onto the private sector's. Or because fixing traffic lights doesn't impress the punters the way opening a new expressway does.

The commission doesn't say it, but what we need is to take an outfit like Infrastructure Australia and give it the statutory independence to conduct rigorous evaluations and make them public, so all of us can know whenever the pollies are planning to do something crazy.

Wednesday, August 19, 2015

We can't divorce the economy from the environment

In case you haven't noticed, a lot of economists are very concerned about Tony Abbott's choice of target for the reduction in greenhouse gas emissions by 2030, to be taken to the international climate change conference at Paris in December.

But if you think that means they believe Abbott's target is too tough and will do too much damage to the economy, you've got the wrong end of the stick.

Most would be likely to believe the target should be more ambitious, and few would be concerned that such a target would do significant economic harm. Conventional economic modelling almost invariably shows the loss of economic growth would be surprisingly small, almost trivial.

They'd be more concerned to ensure the instruments used to achieve the target were those likely to do so at the lowest cost in terms of economic growth forgone. That's why few would have approved of Abbott's decision to abandon Julia Gillard's hybrid carbon tax/emissions trading scheme and replace it with "direct action" payments from the budget.

I'm not claiming every economist thinks this way, of course; just the great majority. There are a few exceptions, naturally, just as you can find the odd scientist who disagrees with the overwhelming majority view that global warming is real and caused by humans.

If you hadn't noticed, consider the leading part played by economists in urging that Australia be at the forefront of international efforts to reduce emissions. First, the various reports by Professor Ross Garnaut​, then the chairman of the independent Climate Change Authority, Bernie Fraser – former Reserve Bank governor and former secretary of the Treasury – then leading non-government experts such as Professor Frank Jotzo​ and Professor Warwick McKibbin, both of the Australian National University.

Note, too, the role of Dr Martin Parkinson, who worked first on John Howard's emissions trading scheme, then on Labor's as the first head of the Department of Climate Change. When Parkinson moved on to become head of Treasury, he was succeeded by another Treasury chap, Blair Comley​.

In fact, there were so many senior Treasury people at the top of the Climate Change department, it was a virtual outpost of Treasury. Both Parkinson and Comley were sacked as one of Abbott's first acts on becoming Prime Minister. Presumably, they were punished for caring too much about global warming.

Remember too that, internationally, both the emissions trading scheme and the carbon and other pollution taxes are inventions of economists. A trading scheme was used with great effect by the Americans in their efforts to reduce acid rain.

Two characteristics of economists stand out when it comes to climate change. First, they accept what the scientists are telling us without argument. Unlike some, they're not disposed to explain to the experts where they're getting it wrong.

Second, they don't believe we can go on thinking "the economy" can be kept in a separate box to "the environment". There are major interactions between the two that can't be ignored.

But, as a journalist, I'm not a member of the economists' union, so to speak, so let me stop describing their majority views and give you mine. My thinking has been influenced by the more radical opinions of yet another economist, Professor Herman Daly, of the University of Maryland.

In defending his latest target, Abbott pledged he'd never put the environment ahead of the economy and jobs. This separate-box thinking is like saying you'd never put staying alive ahead of going to work. Lose your life and whether you get to work or not hardly matters.

Daly says the economy is a "wholly owned subsidiary of the environment". Whether at a national or global level, the economy exists inside the environment – the ecosystem. It's a box inside a circle, if you like.

The point is, all human activity – all our producing and consuming – depends directly on the natural environment. The air we breathe, the water we drink, the food we eat, the clothes we wear, the shelters we build and the energy we use all come from the ecosystem that surrounds us.

Much of our economic activity involves misusing, overusing and abusing the natural environment. We've done great damage to our soil, rivers and aquifers, we've destroyed much habitat and many species, and now the world's overuse of fossil fuels is playing havoc with the climate.

We can be divided into those who want to do what we can to stop the destruction and start on the clean-up, and those who want to put it out of mind and keep on as we are, leaving the bill to be picked up by the next generation.

The latter group will always justify their insouciance by claiming to be putting jobs first. Yeah, sure. For the next few years, at least.

Let me be honest with you. I don't believe those modelling exercises seeming to prove that the economic costs of acting to reduce greenhouse gas emissions will be minor. Such results are a product of the assumptions built into all conventional economic models that, whatever shock the economy is hit by, after 20 years or so, everything will be back to where it would have been.

So, the cost in terms of growth and jobs forgone might be greater than we're being told. But of one thing I'm sure: the longer we leave it, the higher those costs will be.

Monday, August 17, 2015

Shift to services is boosting exports and jobs

For economy watchers, the most fascinating game in town is the continuing effort to explain why employment and unemployment are performing better than you'd expect while growth in the economy has been so modest.

Despite the Bureau of Statistics' latest national accounts showing that real gross domestic product grew by just 2.3 per cent over the year to March, its smoothed seasonally adjusted labour force figures show employment growing by 2.1 per cent – or 240,000 jobs – over the year to July, with the rate of unemployment seeming to have stabilised at about 6 per cent.

So far in the Reserve Bank's efforts to explain this puzzle, we've heard that it's probably a consequence of slower than expected population growth, helped by surprisingly weak growth in wage rates.

But now an assistant governor of the Reserve Bank, Dr Christopher Kent, has used a speech to the Economic Society in Brisbane to add a third factor: the employment consequences of the economy's accelerated shift from goods to services.

Recent figures show that total population growth has slowed from 1.8 per cent in 2012 to 1.4 per cent in 2014. This slowdown is mainly the result of a decline in the rate of net immigration as skilled workers on temporary 457 visas attracted by the resources boom leave for home when their jobs end, and Kiwi workers go home or stay home.

Slower population growth means slower growth in demand but, equally, slower growth in the population of working age and thus in the economy's supply-side potential or "trend" rate of growth.

This has prompted the Reserve to lower its growth forecasts for 2016 a fraction but eliminate its earlier forecast of rising unemployment, leaving it little changed over the next 18 months.

Since the working population hasn't grown as fast as had been expected, this implies the improvement in the productivity of labour has been a fraction greater than first thought.

Last week's figures from the bureau show wage rates rising just 2.3 per cent over the year to June. Wage growth has slowed to a similar extent as happened in the recession of the early 1990s, even though unemployment has risen by much less than it did then.

Kent says wages may have become more flexible over time and there may have been some general decline in the bargaining power of labour.

Whatever, "low wage growth across the economy has enabled firms to employ more labour than would otherwise have been the case".

But Kent says his sense is that "low wage growth only goes some way to explaining the recent pick-up in labour demand".

Now the likely role of a change in the composition of economic activity. Consumer spending, home building and net exports of services (that is, exports of services minus imports of services) have grown reasonably strongly over the past year, even though overall GDP growth has slowed a fraction.

Surveys suggest that business conditions for firms providing services to households have improved greatly since mid-2013. Conditions for firms providing services to businesses are above average. But those for firms producing or distributing goods remain below average.

These survey results line up reasonably well with employment growth in the three sectors. They also fit with the continuing weakness in business investment spending.

Kent's figuring shows, on average, each worker in the household services sector requires the backing of only about $100,000 worth of capital equipment, whereas each worker in the goods sector (including mining) requires capital equipment of almost $400,000.

Get it? If the fastest-growing parts of the economy are labour-intensive, they can grow and create more jobs without this requiring the same degree of increase in business investment spending and, hence, the same degree of overall growth in the economy.

This compositional change in demand from goods to services – from capital-intensive to labour-intensive industries – is a long-term trend.

But Kent argues there is also a cyclical element to it, as mining investment unwinds and growth in housing construction and consumption – which is increasingly dominated by services – picks up.

Another part of it is that the fall in the dollar has encouraged Australians and foreigners to direct more of their spending to Australian tourism, education and business services.

Over the past three years, the extra workers employed in service industries have outnumbered the extra workers employed in the goods sector by five to one.

It adds up to two things. With slower population growth, we can grow more slowly without being worse off materially. And we don't need to grow as fast to get unemployment falling.

Saturday, August 15, 2015

Micro reform: what Treasury wants to change

Under its newish secretary, John Fraser, Treasury has a new slogan. It is proud to be "fiscally conservative, market-oriented and reform-driven". So just what reform does Treasury advocate?

Well, in a speech last week Fraser spelt it out. But first he noted that the key element of market-oriented reform is that it almost always involves heightening competition. He illustrated the point by summarising what happened during the golden age of micro-economic reform in the 1980s and '90s.

When business speaks of the need for Australian firms to be more competitive, it usually means  the government should do something that makes it easier for firms to compete with their foreign rivals.

But this is the opposite of what economists mean when they see heightened competition as the key driver of improved economic performance. They mean Australian firms should be forced to improve their own performance by exposing them to greater competition with other Aussie firms and by making it easier for foreign firms to compete with them.

As Fraser explains, competition is at the heart of how market economies are organised. "Competitive markets generally deliver benefits for all Australians in a way that sheltered markets fail to do so," he says.

"Effective competition in our economy is a key part of its strength and dynamism. Competitive markets benefit consumers by putting downward pressure on prices.

"And over time, competitive pressures drive innovation and investment in new technologies and the development of new products and quality services that meet the needs of consumers. This process of innovation is what drives economic growth and improvements in living standards in the long term."

The modern era of opening Australia to greater pressure from the world economy began when Gough Whitlam cut import tariffs in 1973, he says.

Successive tariff cuts in the '80s and '90s "put Australian manufacturing under increased competitive pressure but, behind the border, changes gave manufacturers flexibility to respond".

Significant among these changes were financial market deregulation and the move to enterprise bargaining, as well as the oft-forgotten reductions to the top personal marginal tax rate from a 60 per cent in 1985-86, to 47 per cent in 1990-91, Fraser says.

The process of reform culminated with the agreement across all levels of government to form the "national competition policy" that began in 1995 and ran through to 2005.

Government businesses were restructured to make them more commercially focused. The electricity, gas, water and rail sectors were transformed.

Legislation was reviewed so it enhanced rather than restricted competition. And a national access regime was established for essential infrastructure. That is, the public or private owners of monopoly networks were obliged to make them available to competitors at reasonable prices.

"Where creativity was once stifled by regulation, competition in product and service markets drove management to change work practices. A liberalised financial sector and a sound macro-economic environment supported strong investment."

Fraser says this era of huge changes offers three lessons on how to get policy reforms accepted.

"First, it was a holistic set of structural reforms. This is important because winners and losers differed and all Australians benefited from at least some of these reforms.

Second, in order to achieve reform we built a political consensus and, more importantly, a community consensus that things had to change and that a delay would make matters worse.

Third, the business community – both large and small – was a big part of this changing culture.
"Managers, no longer distracted by currying [for] government protection, were better able to focus outwards on new markets and inwards on cost savings."

So what's on Treasury's latest reform to-do list? Tax reform, for one. Then there's the financial system. Australia's banking system is relatively concentrated by international standards and the Murray financial system inquiry recommended that regulators increase the emphasis on competition relative to their other objectives.

Then, labour market reform. "I am heartened by Peter Harris and the Productivity Commission's report on workplace relations. Genuine reform  ... can be expected to have positive effects on employment and productivity and to reduce business compliance costs."

Next, competition laws. "It is important that firms that have market power are not able to use that position to exclude competitors and potential competitors. This is why we have competition laws."

The review of competition  by Professor Ian Harper found that current  laws need to be overhauled to make them fit for purpose.

"There remain substantial restrictions on who can supply goods and services, including: professional licensing requirements, liquor and gambling regulation, media and broadcasting restrictions , and the well-known issues of pharmacies and taxis," Fraser says.

"There are restrictions on what can be supplied through product standards, agricultural marketing boards, parallel import restrictions and intellectual property protections. And restrictions on where and when supply can occur: air service agreements, retail trading hours restrictions, and planning and zoning rules."

Fraser concedes that the goal here should not always be deregulation. Regulations are often justified to pursue social goals. "But these goals should be approached through better regulation that doesn't have the side effect of curtailing competition.

"To my mind, foremost among this list, for immediate economic bang for the buck, is planning and zoning."

Planning and zoning systems may create excessive barriers to the entry of new businesses  by limiting  number and size of outlets and  types of business models permissible.

"In other areas, the challenge for governments is not so much to reform regulation as to make way for 'digital disruption'. Uber  connects passengers with drivers and AirBnB  connects travellers with spaces.

"We should welcome competition here too – governments should not be too quick to assume they will always be better regulators than the private sector."

Clearly, Fraser has an ambitious agenda. It's different to mine, but sometimes my duty is to make sure you know what the econocrats are thinking.

Wednesday, August 12, 2015

Our poor treatment of mental illness is costing us

Don't take this as implying that I condone the misuse of taxpayers' money, but the almighty to-do over politicians' "entitlements" reminds me that small things annoy small minds.

If you think the odd unnecessary $5000 helicopter ride constitutes the worst of the wastage of our money – or that it makes much difference to the $430 billion the federal government spends each year – you haven't done enough thinking.

As several people reminded me at the Byron Bay Writers' Festival at the weekend, such matters as politicians' pay and perks pale into insignificance compared with the threat to our way of life posed by climate change and other continuing environmental damage.

My conscience tells me that, for as long our response to that threat remains so inadequate – including our inadequate contribution to the success of the Paris climate change conference in December – I shouldn't be writing about anything less consequential.

But we ought to be able to juggle more than one problem at a time, and although climate change is our most pressing problem, it's far from our only one.

One combined threat and opportunity that 'coptergate prevented from getting the attention it deserved last week is one we should have been on to long ago. It was raised in a noteworthy speech to the National Press Club by Professor Allan Fels, now chairman of the National Mental Health Commission (and with a family interest in the topic).

Fels' point was that we've been making a hash of mental health for ages, but that if we got our act together, we could not only reduce the misery of up to 3.7 million Australians, but eventually do everyone else a favour.

Fels is, of course, a professor of economics. So he spoke with authority when he argued that mental health is not just a significant social issue – although that should be enough to make us pay attention – it's a significant economic problem as well.

"Mental health is a significant problem for our economy – as significant as, often more significant than, tax or micro-economic reform," he says. (More significant than tax? Not possible.)

"Many people do not get the support they need, and governments get poor returns on substantial investment. The economic or gross domestic product gains from better mental health would dwarf most of the gains – often modest ones – being talked about in current economic reform debates."

The Organisation for Economic Co-operation and Development estimates that the average overall cost of mental health problems to developed countries is about 4 per cent of GDP. In Australia, this would equate to more than $60 billion a year, or about $4000 for each person who lodges a tax return, or more than $10,000 a family.

Those costs include the direct costs of treatment, plus the indirect costs, such as disability support pensions, imprisonment, accommodation and so on, plus the costs of lost production and income, plus the costs to carers and families and their reduced participation in the workforce.

But just what is the mental illness we're talking about? Of the 3.7 million Australians estimated to have mental health problems in any year, 3 million have a mild to moderate condition, such as anxiety or depression at a clinical level.

It's because so many people with "common" mental disorders are employed – and unemployed – that mental ill-health has such big implications for economic production and productivity. It causes about 12 million days of reduced productivity each year, arising from absenteeism and "presenteeism" (being at work but not getting much done).

The remaining 700,000 people have persistent complex and chronic illness, such as schizophrenia or severe depression.

Seven people die every day from suicide, about double the road toll. But while the number of deaths on our roads has diminished substantially, there has been no major reduction in the suicide rate over the past decade, we're told.

Death from suicide among Aboriginal and Torres Strait Islander peoples is twice that of non-Indigenous Australians.

Fels says there are excellent examples of suicide prevention, treatment, follow-up and "postvention" in Australia.

Even so, the government review conducted by Fels concluded that much of the $10 billion a year the feds spend on mental health "is neither effective nor efficient".

Almost 90 per cent of it is spend on "downstream programs", such as income support for sufferers, payments to support state hospitals and mental health-related medical and pharmaceutical benefit payments.

"Much of this is payment for failure, payment for failure to treat the problems early and cost-effectively," Fels says.

"I believe this heavy expenditure could be reduced with greater emphasis and investment in prevention, early detection, a focus on recovery from mental ill-health and the prevention of suicide."

If we enable people to live contributing lives – to have relationships, stable housing, and to maximise participation in education, employment and the community more broadly – we will help build economically and socially thriving communities and a more productive Australia, Fels says.

I'm not a believer that things we should be doing for social or cultural reasons must first be asked to justify themselves on economic grounds. We're rich enough to afford to look after those among us with problems, and to pursue knowledge for its own sake.

But the argument that doing better on mental health would improve economic outcomes seems unassailable.