Thursday, March 30, 2017


Talk to Fairfax Employment Network lunch March 30, 2017

There aren’t many jokes about statisticians, so you’ve probably heard the one about the statistician with his head in the oven and his feet in the freezer. On average, he was perfectly comfortable. Sometimes averages give us a good picture of the typical situation, but sometimes the average is anything but representative of what’s really going on. It’s a bit like that in the economy and the jobs market at present.

I should start by warning you that economists have a terrible forecasting record. But that never stops them having another go, so I will too. The usual story we hear about the jobs market focuses on the national figures though, unlike me, it uses the figures that jump up and down from month to month – because it makes much more exciting stories – while I use the smoothed figures because they give you a much clearer idea of what’s going on.

They show that unemployment in February was 5.8 per cent, which is the same as it was a year earlier. Over that time, total employment grew by 100 thousand – less than 1 per cent – but more than all of that was accounted for by growth in part-time employment. In other words, full-time employment actually fell over the year, by about 21 thousand. At the same time there was an increase in the rate of under-employment – that is, the proportion of workers who’d like to be working more hours- from 8.4 per cent to 8.6 per cent.

So, at the national level, the performance of the jobs market has been, at best, disappointing – not disastrous, but not good either. The economy’s growth has been below par – about 2.4 per cent over last calendar year - and so has the story on employment and unemployment. What about the future? Well, the Reserve Bank is expecting the economy to speed up a bit to 3 per cent a year, which should improve employment growth and eventually get unemployment down a bit.

Why should the economy speed up? Because we’re getting close to completing our slow transition from an economy lead by mining expansion to an economy lead by all the other industries, particularly service industries. By the end of this year, for instance, we should be close to having completed the great fall-off in mining construction. Without that big negative, the growth figures will look a lot better. Meanwhile, the main source of growth in the economy and in employment – the services sector – will continue expanding and exporting. Services exports – particularly tourism and education, but also, increasingly, business services such as consulting – have been growing well and will continue growing. Even manufacturing is stabilising and getting ready for some growth – notwithstanding the continuing bad news in the media.

But this is where we get back to our statistician who’s comfortable on average. For more than the past decade – and because of the huge change in the structure of our economy brought about by the resources boom – the national-average story has been quite unrepresentative of any of the states of Australia. It gave us a two-speed economy and we’ve still got one – it’s just that the leaders and laggards have reversed. When export prices for coal and iron ore were shooting up and new mines and natural gas facilities being built, the two mining states – Q and WA – grew strongly, partly at the expense of the rest of Australia, particularly NSW and Victoria. Now, however, the roles are reversed. NSW and Victoria are steaming along quite strongly, helped by the big fall in interest rates and the dollar’s return to more normal levels, whereas WA and Q are still mired by the contraction in mining construction. That’s particularly true of WA, whose economy is dominated by mining, but less true of Queensland, which has a more balanced economy, being big on tourism as well as mining.

Together NSW and Vic account for more than half the national economy, whereas Q and WA account for more than a third, leaving SA, Tas and the territories accounting for the remaining eighth. This division between the mining and non-mining states turns out to have big implications all the worrying we’ve done about the weakness in non-mining business investment spending, when we need it to be growing strongly to counter the contraction in mining investment. Turns out non-mining investment is growing reasonably in Victoria, and quite strongly in NSW, but this has been masked in the national figures by falls in non-mining investment in the mining states.

Since I imagine that most of you do most of your business in Sydney and Melbourne, it’s really what’s happening in the NSW and Vic job markets that’s of most relevance. And here, as we’ve seen, the story is better. NSW’s unemployment rate of 5.2 per cent, is much better than the national average of 5.8 per cent. This too is unchanged from a year earlier. Even so, there’s been no growth in employment over the year, with a small fall in full-time employment largely offset by a rise in part-time employment. The story is best in Victoria, even though its unemployment rate of 6 per cent is a little higher than the national average. Its total employment grew by 100 thousand – more than 3 per cent – with more than half that growth coming from full-time jobs.

I conclude from all this that the economies and job markets of Melbourne and Sydney are in good shape, and likely to stay that way for the coming year and beyond.

While we’re on state differences, let me just note quickly that while WA and, to a much lesser extent, Qld, have outsized mining and construction sectors, and SA and particularly Tasmania have bigger rural sectors, dependence on manufacturing is spread fairly evenly spread between the states. Where NSW and Victoria stand out from the others is in their reliance on business services, particularly financial and insurance services, but also “professional, scientific and technical services. Sydneysiders know this, but I suspect many Victorians don’t.

Finally, let me say a few cautionary words about the recent debate about jobs and the future of jobs. Some people are taking the fact that all the extra jobs we’ve generated in recent times have been part-time, joining it with all the talk about the “gig economy” and concluding the nature of employment is about to change unrecognisably, if it hasn’t started already. Permanent full-time jobs will become a rarity, and most jobs will be based on short-term contracts, or be part-time and casual, with many people being self-employed and supplying services to a range of businesses at any one time.

It’s safe to predict that the nature of work and work relationships will change in coming years, but this dystopian vison is far-fetched.  The first objection is that the present absence of new full-time jobs is a product of temporary weakness in the economy, which won’t last, not the start of a long-running trend. The second objection is that it fundamentally misunderstands the needs of employers. The futurologists of digital disruption assume that businesses want to have as little contact with and commitment to their workers as possible. This has some truth, but it assumes all labour is the same – unskilled – and always in oversupply, that work is episodic, tasks are discontinuous and employers have no reason to care who they employ. It assumes away continuing relationships with customers, costs of recruitment and training, the need for people who work in teams to know and get along with the other team members, and the presence of what economists call “firm-specific knowledge” – the way we do things around here – not to mention institutional memory – we tried that and it didn’t work. A casually employed, ever-changing workforce is OK for some things - cleaning offices, making up rooms in a hotel, serving behind a counter, stacking shelves – but not for others. For many jobs, firms need skilled workers, whose skills are not easy to come by, who will make a long-term commitment to the firm and its goals, who know a lot about the business’s procedures, products, customers and suppliers, who are engaged enough to suggest small innovations, and who won’t run off to work for a competitor just for another sixpence.

I think that’s what most of you are on about, and are here to discuss how we may be able to help you with it.


Wednesday, March 29, 2017

Home affordability problem caused by generational conflict

You know the remarkably high price of homes is now a top issue for our politicians, state and federal. But you may need reminding that house prices are an intergenerational issue.

As a general rule, the younger generation buys its homes from an older generation, which means rising house prices constitute a transfer of wealth from younger to older generations.

Unfortunately, this conflict of interests between the generations makes it unlikely the measures in the "housing affordability packages" the pollies say they're working on will do much to limit the rise in prices.

Our problem in Australia isn't so much fake news as fake government – governments that, lacking the courage to implement controversial solutions to problems, just create the pretence of solving them.

Since the media usually fall for the trick – the recent excitement over Snowy 2.0 being a case in point – the pollies' preference for appearances over reality has worked well for years, although the drift of voters away from the mainstream parties is a warning the illusion is wearing thin.

As a general rule, older generations don't have much sympathy for younger generations – which is the pollies' dilemma.

We make an exception, of course, for our own kids. This is why parents who've benefited from the rise in house prices over the decades increasingly find it necessary to help their offspring make it onto the home-ownership merry-go-round.

I've done it myself. But get this: what we regard as an act of parental generosity, is actually an act of generational self-interest.

Huh? Everything parents do to help their kids afford seemingly unaffordable house prices helps keep those prices high.

Were parents to decline to help their kids, prices would have to come down until they could be afforded – which would be contrary to the interests of older sellers, such as parents.

Prices rise when demand for the item is growing faster than supply. One reason could be because the population has been growing faster than the number of dwellings has, but this seems less likely to be a big part of the story now we've had a surge in home building and face an excess of units in some state capitals.

It suits politicians to say the solution to affordability is to add to the supply of homes. Federal pollies say it because supply is essentially a state responsibility.

State pollies say it because allowing more homes to be built on the fringes of the city pleases developers without annoying many people.

Trouble is, this does little to increase the supply of homes where people want them to be: closer in – where the jobs and entertainment venues tend to be, and where road congestion and commute times aren't as bad.

State politicians are a lot less enthusiastic about increasing supply in middle-ring suburbs by changing planning rules to allow higher density development. The locals hate the idea.

Next the pollies pretend to help by giving special breaks to first home buyers, such as cuts in stamp duty on home purchases.

But as with help from the Bank of Mum and Dad, all this does is help young people meet and increase the higher prices. The benefit ends up with those older home-owners selling their homes to newbies.

What politicians rarely propose is measures to reduce the upward pressure on prices by reducing the demand for homes.

How? By distinguishing between the two main motives for wanting to own a home: the desire for secure tenure, to modify it as you see fit and minimise housing costs in retirement, as against the desire to own a rapidly appreciating, tax-preferred investment.

Many of the tax advantages politicians have loaded onto home ownership, in the name of encouraging it, have made home ownership more desirable to have but, by increasing the demand for homes, made it that much harder for would-be home owners to attain.

Exempting the family home from capital gains tax, for instance, encourages people to "invest" in improving their home rather than buying shares or securities.

Largely ignoring the value of the family home when assessing people's eligibility for the age pension under the assets test adds to the attraction of homes as an investment.

Then there's Australia's unusual tolerance of negative gearing, combined with the 50 per cent discount on the taxation of capital gains, which adds greatly to the demand for homes as an investment, while adding little to the supply of homes.

Even without all those tax advantages, homes would still be a good lifetime investment – though not as good.

The Great Australian Dream of owning your own home has always been about personal security and autonomy.

The attraction of home owning as an investment option has become a big issue only since the introduction of capital gains tax in 1985 and, more particularly, its modification in 1999.

See the scope for conflict between the two motives for wanting to be a home owner? Making housing less attractive as an investment would reduce the demand for it and so make it easier for first home buyers to get on board.

What makes the pollies reluctant to act is their knowledge that existing home owners – whose votes greatly outnumber first home buyers' – have come to value their home's (or homes') attractions as an investment.

It comes down to a conflict between the generations.


Monday, March 27, 2017

Company tax cut has a not-so-dirty little secret

Throughout their whole push for a cut in the company tax rate, there's been a key factor the business lobbies and government politicians simply haven't wanted to mention: our unusual system of dividend imputation.

That's because it so greatly weakens their case and questions their motives.

But that's not all. It's set to turn the limited reduction in company tax we're likely to get into tokenism: the cut will be of little benefit to the businesses receiving it, little net cost to the budget and little benefit to "jobs and growth".

Australia's problem isn't fake news, it's fake government. The coming company tax cut will be a classic case. But it will make the medium-term budget projections look a lot healthier.

Paul Keating introduced full dividend imputation in 1987 to eliminate the double taxation of company dividends. Domestic shareholders are given "franking [tax] credits" worth 30¢ in the dollar on those dividends that have already been taxed at 30 per cent in the company's hands.

Dividends are taxed at the shareholder's marginal tax rate, but less their franking credits. Should they not owe enough tax to extinguish the credit, the balance is refunded to them.

The effect of this for Australian shareholders and super funds is to render company tax little more than a withholding tax, like the income tax businesses withhold from their workers' pay packets.

This means the only significant continuing purpose of company tax is to tax foreign shareholders.

Since the franking credit rate moves up or down with the rate of company tax, Australian shareholders have little or nothing to gain from a cut in the company tax rate. Only foreign shareholders – present or prospective – would benefit.

When you remember how often the nation's chief executives make speeches claiming to have only their shareholders' interests at heart, it makes you wonder why the big business lobby has been so insistent on the need for lower company tax.

One possibility is they see their interests as managers as differing from their local shareholders'. Another is that outfits such as the Business Council of Australia are dominated by executives who owe their allegiance to foreign bosses and owners.

It hasn't suited the government to admit that its promised $48 billion, 10-year phase-down of company tax holds no benefits for local shareholders, only foreigners.

So anxious are the econocrats promoting lower company tax to avoid thinking about the implications of imputation that Treasury got caught overstating the (remarkably modest) benefits in its modelling. A rival modeller had to point out the error.

Smoke signals from Canberra suggest that all the government will manage to get through the Senate is a reduction to 27.5 per cent in the tax rate applying to companies with turnover of less than $10 million a year.

In other words, only small and medium incorporated businesses will get a cut.

Trouble is, almost all the shareholders in such businesses – many of them owner-managers – would be locals, not foreign investors, meaning they're already eligible for dividend imputation and so have little to gain from the lower tax rate.

In which case, their behaviour – their enthusiasm for creating "jobs and growth" – is unlikely to change.

But get this: since almost all the shareholders of small and medium-sized companies get franking credits, the reduced measure's net cost to the budget (less company tax collections, offset by a corresponding reduction in franking credits) is likely to be minor.

It's only when you're handing tax cuts to the foreign shareholders in much bigger companies, as originally planned, that the (mainly unfunded) cost starts to mount up in later years.

So if the smoke signals are right in predicting that, once the government's got the most it can get through the Senate, it will ditch the rest of its original plan, this will greatly improve the 10-year projections of the budget balance.

That's particularly so because the 10-year phase-down was partially funded by the tax increases announced in last year's budget: the further huge hikes in tobacco excise, the cut back in super tax concessions and the crackdown on multinational tax dodgers.

Further smoke signals say that, once the government's got through the Senate what it can of the unpassed, "zombie" spending cuts from its disastrous 2014 budget, it will abandon the remainder.

That will have quite an adverse effect on the 10-year budget projections – which is the very reason it has refused to kill the zombies until now.

Penny dropped? The time to kill off the zombie savings is when you're also killing off your grand plan to cut company tax to 25 per cent.

Saturday, March 25, 2017

Why the growth in wages is so slow

Economists may not be much chop at forecasting how fast the economy will grow in the next year or two, but that doesn't mean they haven't learnt a few things about how economies work that the rest of us could benefit from knowing.

It helps us get a better handle on the future if we remember the macro-economists' rule that economies move in cycles, not straight lines.

So something that's been going down will, one of these days, start going back up, and vice versa.

A related rule is that, at any point in time, what's been happening in the economy will be partly the result of "cyclical" (and thus temporary) factors, and partly the result of "structural" (longer-term, lasting) factors.

At any particular time, the bigger, easier-to-see factor is likely to be cyclical influences; the smaller, harder-to-see factor is the underlying, longer-term structural (or "secular") trend.

Let's use this understanding to look at the present weak rate of growth in wages.

As measured by the Bureau of Statistics' wage price index, wages have usually grown by between 3 and 4 per cent a year in nominal terms, though they got up to 4.3 per cent just before the global financial crisis.

Since their subsequent peak of 3.7 per cent over the year to September 2012, however, their rate of growth has slowed continuously to a pathetic 1.9 per cent over the year to December.

Some people have leapt to the conclusion that employers have finally got the upper hand over workers, so that wage slaves will never get another decent pay rise again and, indeed, will probably see their rises get even more microscopic.

Sorry, it ain't that simple.

The question of what's causing wage growth to be so low is examined in an article by James Bishop and Natasha Cassidy in the latest Reserve Bank Bulletin.

Not surprisingly, they account for much of the weakness as caused by cyclical factors – by the relatively weak state of the labour market.

Note that the fall in the rate of wage growth began after the prices we receive for our exports of coal and iron ore stopped shooting up and started falling rapidly.

When our "terms of trade" – export prices relative to import prices – were improving, the nation's real income was rising strongly (because we could now buy more imports with the same quantity of exports) and it wasn't surprising to see our wages growing strongly, more strongly than consumer prices were growing.

But when our terms of trade began deteriorating, it was equally unsurprising to see wages start growing more slowly, especially relative to consumer prices.

Roughly a year after minerals export prices started falling, the amount of mining construction activity began falling sharply as projects were completed and no new ones were begun.

Thus began a period of weakness in the economy. Mining construction activity contracted and we began the slow transition back to an economy led by the other sectors, which had been held back by the expansion of mining.

Economists expect wage growth to be slower when there's "slack" in the labour market – when unemployment is higher than normal, employers have less trouble finding the workers they need and workers and their unions are less inclined to campaign for big pay rises.

With the actual unemployment rate fairly steady at 5.8 per cent,  but economists having revised their estimate of full employment (known to economists as the non-accelerating-inflation rate of unemployment) down to 4.75 per cent, plus a relatively recent rise in under-employment, there's plenty of reason to expect wage rises to be small.

And, of course, there's less need for big pay rises because consumer price rises have been below the bottom of the Reserve Bank's 2 to 3 per cent inflation target for the past two years.

There's a circular, chicken-and-egg relationship between prices and wages. Wages don't need to rise as much when prices aren't rising much, but prices don't rise much when wages (the biggest cost most businesses face) aren't rising much.

Don't be a victim of what economists call "money illusion". It shouldn't matter to workers how big their wage rises are in nominal terms. What matters is how wages are rising relative to prices – that is, what's happening to real wages.

The good news is that real wage growth has generally been positive in recent years.

The bad news is that real increases have been minuscule, whereas in a normally functioning economy they should grow by a per cent or two most years, as workers get their share of the continuing improvement in the productivity of their labour.

The first point to make is that there are good cyclical reasons for wage growth to be low, meaning that as the economy completes its transition to more normal sources of growth, we can expect a return to more normal rates of consumer price inflation and wage rises.

But here at last is the point: the Reserve's Bishop and Cassidy admit that all the normal cyclical factors we've discussed simply aren't sufficient to fully explain why wage growth is so weak.

That is, there does seem to be some underlying structural change at work. And it's not peculiar to Oz.

"It has been posited in the international literature that low wage growth may reflect a decline in workers' bargaining power," they say.

With all the globalisation of production, all the technological change and digital disruption – plus, in Australia and elsewhere, all the changes to wage-fixing arrangements to shift bargaining power back to employers – that's not hard to believe.

It's a warning to governments that if they want to see their economies return to normal functioning - and workers return to voting for mainstream parties – they should have another think about whether they've got the balance of industrial relations bargaining power right. Doesn't look like it.

Wednesday, March 22, 2017

The future of work won't be as bad as we're told

I can't remember when there's been so much speculation about what the future holds for working life. Or when those who imagine they know what the future holds have worked so hard to scare the dickens out of our kids.
Getting on for 100 years ago – 1930, to be precise – the father of macro-economics, John Maynard Keynes, wrote an essay, Economic Possibilities for our Grandchildren, in which he calculated that if technological progress produced real economic growth per person averaging 2 per cent a year for 100 years, by then people would enjoy a comfortable standard of living while needing to work only 15 hours a week.
He was writing during the Great Depression, so I doubt if many people believed him. He was right, however, to predict the Depression would end and growth would resume, powered by continuing advances in technology.
By the 1960s and early '70s it was common for futurologists to predict that more and more labour-saving technology would allow big reductions in the standard 40-hour working week.
What a laugh. Today's futurologists – amateur and professional – are predicting roughly the opposite to what Keynes and the '60s futurologists were.
Thanks to continuing technological advance and the digital disruption it's producing, working life is getting ever tougher and less secure, we're told.
As we learnt last week, all the extra jobs created in Australia over the year to February – a mere net 100,000 – were part-time, with full-time jobs actually falling by 21,000.
So there's the proof we're going to the dogs – and it'll keep getting worse. All those part-time and casual jobs. The growing army of the "under-employed".
We're moving to the "gig economy", where full-time, permanent jobs become the exception and most workers are employed on short-term contracts, many are self-employed like Uber drivers or need a "portfolio" of jobs on different days.
Frightening, eh? I read someone confidently assuring school kids they'd have 10 different jobs – or was it 10 different occupations? – in their working lives. Then I read someone assuring kids they'd have 17 different jobs. Not 16, or 18, but 17.
This growing job insecurity is why there's a renewed push among progressives – including Greens leader Richard Di Natale – for a "universal basic income". It'll be needed because so many people will be earning little or nothing from employment.
Have you detected my scepticism? This is people during a period of weakness in the jobs market predicting – like Keynes's pessimists – it will stay weak forever – and get worse.
That's part of it. The other part is the futurologists who, unlike us mere mortals, can see with perfect clarity what our technological future holds.
If you think economists aren't good at forecasting, futurologists are much worse. Much of what they predict never comes to pass and most of what they correctly predict takes much longer than they expected. Then there's the things they failed to predict.
The only safe prediction is that the future will be different to the present. Any more specific prediction is mere speculation.
The futurologists generally know – or profess to know – a lot more than the rest of us about all the new tricks the latest technology will soon be able to do. What they almost always underestimate is the human factor: whether we'll want it to do those tricks.
If the futurologists had been right, by now most of us would be working from home. We aren't – because it suits neither bosses nor workers.
It's tempting to predict the digital revolution will eliminate many jobs in the services sector, leading to mass unemployment.
Trouble is, employers have been installing labour-saving equipment since the start of the Industrial Revolution, and so far the unemployment rate is hardly up to double figures.
That's because improving the productivity of a nation's labour increases its real income. When that income is spent, jobs are created somewhere in the economy.
Technological advance doesn't destroy jobs, it "displaces" them from one part of the economy to another.
It's possible the digital revolution is so different to all previous technological revolutions that what's been true for 200 years is no longer true. Possible, not probable.
Those predicting our kids will be tossed out of their jobs many times in their working lives forget that market forces involve the interaction of supply and demand.
Their prediction of almost universal job insecurity in the gig economy assumes this will happen because it's what the demanders of labour – employers – want.
This is naive. It assumes all labour is unskilled – so employers don't care who does it and never have trouble recruiting and training a constantly changing workforce – and that there's no such thing as "firm-specific knowledge".
No employer would treat skilled labour in such a cavalier fashion. Employers know the suppliers of labour – employees – wouldn't want to work for such an appalling outfit.
And such an apocalyptic prediction fails to allow for what economists call the "policy reaction function" – if things get too bad for too many workers, governments will step in and legally require employers to treat their staff fairly – just as they already impose paid public holidays, annual leave, minimum wages, penalty payments and much else on unwilling employers.
Why do they do it? Because, in a democracy, workers have far more votes than bosses.

Monday, March 20, 2017

Someone has to give if we’re to fix the budget

The nation's budget problem still won't be solved when, one day in the distant future, we get the federal budget back into surplus. Only a change in strategy is likely to produce a sustained solution.

As successive intergenerational reports demonstrate, on present policies government spending will just grow and grow, requiring ever-higher taxes.

If we don't like that idea – or politicians regard it as an impossible sell – we need to think a lot harder about what we're spending on, why it's growing so fast, what things we should stop spending on, and how we can make our spending more effective, in the process slowing the rate at which it's growing.

The five biggest areas of spending include welfare benefits, health, education and infrastructure. Infrastructure's too important to share a column, so we'll return to it.

But it, plus health and education, are even bigger when you remember how they dominate the states' budgets – a reminder that federal and state budgets need to be considered together, and that cutting federal grants to the states, and cost-shifting by the states back to the feds, aren't genuine solutions.

Of three categories – welfare benefits, health and education – the intergenerational reports make it clear health will be by far the fastest growing.

That's not so much because of ageing as because advances in medical technology are hugely expensive, and it's quite unrealistic to imagine that Australian voters will settle for anything less than gaining subsidised access to the latest and best technology ASAP.

Since this is the political reality, the problem (and much of the pressure on budgets) is easily solved.

Our politicians simply need to be brave and tell voters the truth: if they want ever more and better healthcare then, as with everything else, they'll have to pay more for it – in the form of, say, regular increases in the Medicare levy.

That's the fundamental solution, but we could also do more to slow the rate of growth in healthcare spending by removing at least some of the waste and inefficiency that everyone in the system tells us exists.

Much could be done to make education spending more effective. Instead, however, since the national knockback of the 2014 federal budget, the government's done little but crack down on the previous year's crackdown on the welfare cheats the Liberal hard right has convinced itself are ripping off billions every year.

Sorry, not nearly good enough. Nor is preaching the evils of tax increases while you wait for bracket creep to claw back the eight successive tax cuts we were awarded when Peter Costello thought the resources boom would run forever.

The trouble with many professed supporters of Smaller Government is that they want to have their cake and eat it.

They want to reduce government spending so they can pay less tax, but they don't want to give up the middle-class welfare they enjoy – much of it awarded to them by the great man who didn't believe in smaller government, John Howard.

Much of Howard's handouts to the comfortable came in the fifth big spending area, tax expenditures – which have the same cost to the budget as ordinary expenditures, but are hidden away on the tax side where they aren't noticed.

These include various new benefits for supposedly self-funded retirees, the private health insurance tax rebate, big increases in grants to non-government schools and Costello's unsustainably generous increase in superannuation tax concessions for high income earners.

To be fair, Malcolm Turnbull has made a good start to cutting back the super concessions – over the vociferous opposition of his hard right backbench.

More must be done to cut back rapidly growing tax expenditures.

But if we're genuine about achieving fiscal sustainability while restraining the rise in tax rates, we need to embrace a new principle to sit beside our heavily means-tested welfare system (which is the main reason Australia's overall level of taxation is so much lower than almost every other developed economy).

The companion principle should be: we're no longer prepared to subsidise positional goods in the name of encouraging "choice".

We'll put all our effort into providing a good public health system and a good public education system, and that's it.

Of course, it's a free country and if you think you can do better than the public system by making private arrangements, feel free.

But don't expect other taxpayers to subsidise your efforts to get better than they're getting.

In any case, the easier you make it for punters to enjoy positional goods, the less positional you make them, cheating the better-off of their feeling of superiority.

Saturday, March 18, 2017

Dig deep and you find the two-speed worm has turned

If you learn nothing else about the economy, remember that it moves not in straight lines but in cycles of good times followed by bad times, and bad times followed by good.

Nowhere is that truer than with our famed "two-speed economy".

For most of the decade to 2012, the resources boom meant that the two main mining states – Queensland and, especially, Western Australia – were growing much faster than the rest of the economy, which was being held back by the effect of the boom-caused high dollar on other export industries.

For the past few years, however, the roles have been reversed, with Queensland and WA now growing much more slowly than Victoria and NSW.

In an article in the latest Reserve Bank Bulletin, Thomas Carr, Kate Fernandes and Tom Rosewell argue that looking at what's been happening from state to state does much to help explain what the Australian Bureau of Statistics is telling us about developments in the national economy.

It also helps explain why Colin Barnett was thrown out of office so unceremoniously in WA last Saturday. Forget the politicos' obsession with the role of One Nation, the deeper explanation is economic.

After peaking at growth of 9.1 per cent in gross state product (the state equivalent of gross domestic product) in 2011-12 at the height of the mining boom, growth slumped to just 1.9 per cent in 2015-16.

There's nothing new about governments getting tossed out when their boom turns to bust. Especially when it becomes apparent what a hash you made of the good times, spending like there was no tomorrow.

To see how the two-speed worm has turned, consider this. In 2015-16, real GDP grew by 2.8 per cent for the year as a whole.

Within this, NSW's real GSP grew 3.5 per cent and Victoria's 3.3 per cent. By contrast, Queensland's grew 2 per cent and, as we've seen, WA's 1.9 per cent. (If you must know, South Australia's was 1.9 per cent and Tasmania's 1.3 per cent.)

What's that? You think WA's annual growth of 1.9 per cent doesn't sound all that terrible? It's being held up by the increased volume of WA's exports of iron ore and liquefied natural gas.

Trouble is, that generates next to no additional jobs. In mining, most of the jobs come from building new mines. When construction ends, the building workers go back where they came from (which ain't Perth).

Our trio from the RBA say that, over the period of the resources boom's build-up and let-down, differences between the performance of the states have been explained mainly by differences in private investment spending.

Consumer spending accounts for a far bigger slice of GDP/GSP than investment spending. And consumer spending has been much less variable between the states than investment spending – although it's been weakest in WA.

Consumers keep their spending reasonably smooth from year to year. They do this by cutting back their rate of saving when their incomes aren't growing fast enough.

We know from the national accounts that, while wages and employment growth have been weak in recent times, households have been progressively lowering their rate of saving to help keep their consumption steady.

That's normal cyclical behaviour. What we now know from the RBA trio's investigations, however, is that pretty much all the decline in the national saving ratio is explained by the actions of West Australians and Queenslanders. Ah.

Another national-level story we're familiar with says the economy is making a transition from mining-led to non-mining-led growth. So, as mining projects are completed and mining investment spending falls way back, we need strong growth in non-mining business investment to take its place.

The national accounts tell us it's not been happening. You've heard all the wailing and gnashing of teeth – not to mention speculation about causes – that's accompanied this bad news.

But here again the RBA trio's data diving shows the story in a different light. While mining investment was booming in the mining states, so was non-mining investment in those states. Confidence in one part of the local economy spills over to other parts.

While this was happening in the mining states, non-mining business investment in the other states was weak.

As the trio almost admit, this was part of the RBA's dastardly plan to ensure the mining boom didn't cause runaway inflation – as every previous commodity boom had.

While the politicians were letting foreign miners make all the crazy investments we now realise they did – leaving us with a gas-bonanza-caused energy crisis – the RBA had to "make room" for the miners by holding back the rest of the economy and, in particular, non-mining business investment.

It would have been willing to achieve this restraint by holding interest rates higher than otherwise needed but, fortunately for it, most of the work was done by the abnormally high exchange rate, which crunched manufacturers, tourism and foreign student education.

Back to the now. While the national figures reveal non-mining investment failing to show signs of recovery, the trio's data diving shows it's actually falling in the mining states (as lack of confidence in mining spills over) but recovering elsewhere.

In NSW, non-mining investment has grown at an average rate of 8 per cent a year for the past three years. In Victoria, it's been 4 per cent.

The obvious explanation for this recovery is the dollar's return to earth. But much of it's been in business services, including, in NSW, construction of new office buildings. In Victoria, there's been investment in wholesale and retail, with investment by manufacturers stabilising.

But the other private investment category – new housing – is also part of the story. Home building has fallen in the West (what a surprise), but grown strongly in NSW and Victoria.

It's surprising what you discover when you dig.

Wednesday, March 15, 2017

Private schools becoming less fashionable

It's drawn little comment, but the decades-long drift of students from government to non-government schools has ended.

Figures released by the Bureau of Statistics last month show that 65 per cent of our 3.8 million students went to public schools in 2016, the same proportion as in 2013. If anything, the public-school share is creeping up.

The non-government share divides between Catholic systemic schools with 20 per cent and independent schools with less than 15 per cent. I'll refer to both as private schools.

But the public schools' 65 per cent today is down from 79 per cent in 1977.

Let's start by trying to explain those many years of drift before we wonder about why it's stopped.

When Ipsos Public Affairs asked people why they thought other people sent their kids to private schools, the most commonly cited reasons included the higher standard of education (50 per cent), the better discipline (49 per cent), the better facilities (46 per cent), the size of classes (43 per cent) and because it's a status symbol (40 per cent).

Almost uniquely among other developed countries, Australian parents have a much higher proportion of private schools to choose, and have been given greater freedom to choose between government schools.

Successive federal and state governments have seen greater parental choice between public and private as a virtue, and have encouraged it by increasing their combined grants to private schools at a much faster rate than their funding of public schools.

But I have my own theory on why so many people have opted for private schooling. I think a lot of it gets down to parental guilt.

These days families have much fewer children, which means parents take a lot more active interest in their kids' schooling than they did when I was the last of four.

And these days both parents are more likely be in paid work – meaning they have more money to spend, but see less of their kids than their parents did.

So what more natural than for parents to believe that, in their decisions about how to spend their income, ensuring their kids get the best education possible should have high priority.

And what's more natural in our market economy than to assume that the more you have to pay for something, the higher quality it's likely to be.

It's the old male cop-out, spread to women: I may not see as much of my kids as I'd like to, but I'm working night and day so I can afford to give them the best of everything.

The more materialist you are, the more you're inclined to judge a school by the quality of its facilities – gyms and swimming pools, music, art and drama theatres – than by the quality of its teachers.

Of course, the former is, as economists say, much more "observable" than the latter.

But whatever people give as their reasons for preferring private schools, you'll never convince me they're not well aware of the status they gain by sending their kids to private schools, especially independent schools.

Private schools are among the things economists classify as "positional goods" – they reveal your position in the pecking order.

But what's changed? Why has the drift to private schools come to an end?

One possibility is that the slow wage growth of recent years has made it harder for parents to afford private school fees.

This may be particularly the case for independent schools, where the rate of increase in fees from year to year bears little relationship to rate at which teachers' salaries are rising.

Nor does the rate at which government grants have been growing seem to have had much effect in slowing the rate at which independent school fees have grown. (The extra government grants may have gone into improving schools' facilities.)

My guess is that, as economic textbooks predict, independent school fees rise according to what the market will bear. They judge how strongly demand for their product is growing relative to supply by the length of their waiting lists.

In any case, keeping the cost of independent schooling high is an essential element in maintaining its status as a positional good.

Another possible contributor to the end of the drift to private schools is the decision of state governments – particularly NSW governments – to increase the number of places at selective schools. Why pay fees when you can get what you want inside the government system?

As a parent who's had one of each – independent and selective – I can assure you selective schooling works well as an (intellectual) positional good.

But there's one last possible contributor to the end of the trend to private schools: maybe parents are realising that paying all those fees doesn't buy your kid superior academic results along with their old school tie.

Julia Gillard's My School website has done little to encourage greater competition between schools (a silly idea she got from economists), but it has provided a fabulous database for education researchers.

Various researchers have used it to demonstrate that the best predictor of children's academic results is the socio-economic status (including level of educational attainment) of their parents.

And when you take account of parents' socio-economic status, there's little evidence that kids of similar backgrounds do any better academically at one kind of school than another.

Tuesday, March 14, 2017


Gracewood Retirement Village 2017

I spent the first part of my working life as a chartered accountant, and people often ask how I went from accounting to journalism. Forty-four years ago I decided to take a break from my career as a chartered accountant, spend a year doing something interesting and then resume my accounting career. I spent the time doing the first year of what’s now the BA (Communications) at what’s now UTS. During that year I became the inaugural co-editor of the student newspaper at UTS, then called Newswit. As the year came to an end my journalism lecturer, Terry Mohan, asked me if I’d thought about making a career in journalism rather than accounting. I hadn’t, but on his prompting, I did. I applied to the ABC and the Fin Review and got nowhere, but Terry said he knew the cadet counsellor at the Herald and would get me an interview. It’s obvious to me now that he also put in a good word for me. I got the job and, at what was then considered to be the terribly mature age of 26, as a qualified chartered accountant, I started as a graduate cadet on a fraction of my former salary.

That was in 1974, the year following the first OPEC oil shock which ended the post-war Golden Age, the year our economy fell apart under the Whitlam government and the year newspapers discovered that politics was mainly about economics and decided they’d better start finding people who could write about economics. I was an accountant, not an economist, but the Herald decided that was near enough. I had a fair bit of economics in my commerce degree, of course. I soon realised the Herald was making quite extensive use of my professional qualifications, so I suggested it start paying me more appropriately and after about four months my cadetship was cut short and I was made a graded journalist. After less than a year I was sent to Canberra as the Herald’s economics correspondent. After a bit over a year I was brought back to Sydney as economics writer, replacing my mentor, Alan Wood, who had resigned as economics editor. About two years later - that is, about four years after I’d joined the Herald - I was promoted to economics editor. That was 39 years ago and I’ve been economics editor ever since.

Journalistic careers today aren’t as meteoric as mine was then. I just had the immense good fortune to be in the right place at the right time. But think of it another way: I’ve been doing almost exactly the same job for the best part of 40 years. I haven’t gone anywhere, haven’t had a promotion in 39 years. My one ambition in journalism was to be the Herald’s economics editor; I achieved that ambition in four years - far sooner than I ever imagined I would - and in all the time since I haven’t been able to think of any job I wanted to do more or any paper I wanted to work for more than what I had. The one big advance I’ve had in that time was when, a long time ago, The Age started running my columns. In terms of combined circulation and quality, newspapers can’t offer any bigger or better platform that the Herald plus The Age.


Use the right words

  • Strength in writing comes from the strength of the nouns and particularly the verbs you use. Excessive use of adjectives and adverbs is a sign of weak writing.

  • Narrow the gap between words you know, and words you use commonly. That is, wherever possible use a more interesting, less common word, as long as the reader will understand it easily.

  • Don’t try to impress people with big words and long sentences.

  • Short words with non-Latin origins are preferable, where possible. For example, don’t say ‘employment’ when you can say ‘jobs’.

  • Elegant variation: to avoid repetition, use synonyms when referring to something frequently.

  • Avoid jargon: don’t say ‘equities’ when you can say ‘share market’; don’t say ‘fresh data’ when you can say ‘new figures’.

  • Write as much as possible in the active voice, not the passive voice. A did B. Not, B was done by A.

  • Grab the reader’s attention with the first sentence and paragraph. Keep the sentence short, clear, and focused on the part of the story likely to interest readers.

Write for the reader

  • Explain concepts that are not immediately obvious. For example: ‘The dollar spiked yesterday’ should be followed by details that show the reader what ‘spiked’ means in this context.

  • Write about events from your reader’s point of view. For example: ‘The dollar’ is always the Australian dollar; foreign dollars need to be labeled as such.

  • Signal changes of direction clearly to readers. For example: If you say, ‘on the one hand’, you have to follow it up with ‘on the other...’

  • Write in a way that will be most easily understood: Don't say April if you can say ‘last month’.


  • A big part of the journalist’s job is to translate complex events into a simpler form, make coherence out chaos.

  • Be wary of the curse of knowledge. Don’t assume that because you know it, everyone else does.

  • What to explain? If it is not common knowledge, it should be explained to the reader. If the reader has probably forgotten it, it’s new and should be included.

  • When explaining a concept, use a concrete example that readers will understand wherever possible. For example: When referring to rural jobs, throw in an example, such as fruit-picker.

Be as clear as possible

  • Aim to write so clearly that people never have to read your sentences twice – you only have one shot to get your meaning across.

  • Write how you speak. For example, don’t say ‘said Ms Jones’ when you can say ‘Ms Jones said.’

  • Cut out the pompous and unnecessary language that often clutters economists' statements.

  • Don't sacrifice clarity for the sake of brevity. Unpack phrases that are not intuitive to readers. For example, 'the supply of money' is more meaningful than 'money supply'; don’t say ‘rate cut’ instead of ‘interest rate cut’.

  • Avoid words derived from Latin: don't say ‘per week’ instead of ‘a week’.

Other points

I don’t just assert my opinion, I try to argue a case, quoting lots of facts and acknowledging both sides of the argument (eg It’s true that X, but Y). Sometimes your role is to remind the reader of why they disagree with you. That’s fine by me. But no matter how judicious you are, you must, as a matter of artistry, come to a conclusion and state an opinion. Only during an election campaign would I limit myself to on the one hand, but on the other.

You have to combine information with entertainment. Well written and an easy, enjoyable read. An informal, chatty style goes down well. Should inject some of your own personality.

Predictability is the great enemy of all columnists. Try to avoid having obvious, run-of-the-mill opinions on a particular subject. That doesn’t mean always having a contrarian view, tho if you view happens to be opposite to everyone else, that’s a plus. No, you have to have a more thoughtful, better-informed and thus novel view, which you achieve by giving the subject more thought and research than the reader has.

But you also need to avoid being too predictable over time. ‘I stopped reading Paddy because I always knew what he was going to say about any subject’ is the kiss of death for a columnist. Good to have views that are complex - that acknowledge differing shades of grey - and that evolve over time as you learn more from your experience but also your reading.

Criticise from a fixed viewpoint - a fixed model or view of the way the world works or should work - don’t keep changing your vantage point until you’ve got something to criticise. That’s the mark of an amateur.

I sometimes write what you might call primativist columns (like primitive art) - columns intended to connect with the unsophisticated view ordinary readers might adopt towards some development and move them forward, not columns that simply contribute to a debate being conducted at the sophisticated level by my expert contacts. That is, I act as a populariser and a bridge between punter and expert.

Readers are more interested in stories about people than about ideas. And they like stories to be stories.