Monday, June 11, 2018

Economists: male, upper class, out of touch

Could there ever be a shortage of economists? And if there were, would that be a bad thing?

At the risk of being drummed out of the economists’ union, it wouldn’t be a big worry of mine.

What I do find of concern is the decline in the number of students studying economics at school and university, as outlined by the Reserve Bank’s Dr  Jacqui Dwyer in a recent speech.

Why should people study economics? Well, as the world’s greatest female economist, Joan Robinson – a contemporary of Keynes – famously said, “the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

Too true. But Dwyer offers a more positive sales pitch: “Economics is relevant to us all. Every day our lives are affected by economic decisions – ones we make personally and ones that are made by others.

“Economics is about how individuals and societies choose to allocate their limited resources to meet their needs and wants. It’s about how we respond to incentives, make trade-offs, weigh up costs and benefits – and how we decide what is efficient and [sometimes] what is fair.”

I’ve been known to find fault with the performance of economists on the odd occasion, but Dwyer is dead right to say economics “contains some powerful concepts and useful frameworks”.

At its best, economics “can help us better understand the choices involved in many personal decisions we make, and better understand the economic conditions and policies that affect our lives”.

If economics is relevant to daily life, and economic literacy brings benefits to society, how widely is it studied at school and university? Short answer: much less than it was.

Dwyer says that year 12 enrolments in economics have fallen by about 70 per cent over the past 25 years. In NSW the decline has been greater, beginning in the early 1990s when economics was displaced by the introduction of business studies, a subject Dwyer diplomatically refers to as “less analytically demanding”. The name of a Disney character comes to mind.

In 1991, economics was the third most popular subject choice in NSW, surpassed only by English and maths. It was taught in nearly all high schools. These days, it’s taught in less than a third of NSW government schools (many of them selective schools) and a little over half of non-government schools (particularly independent schools).

Back in the day, there were roughly equal numbers of males and females, whereas today males outnumber females roughly two to one. Dwyer says this gender imbalance is worse even than for the STEM subjects – science, technology, engineering and maths.

“So over the course of a generation, there has been a pronounced fall in the size and diversity of the economics student population at Australian high schools,” Dwyer says.

At university, Dwyer’s figures are, on their face, better news: the number of economics enrolments have been fairly constant since the early 1990s, falling only slightly since 2001.

But this isn’t so reassuring when you remember that, over the 15 years to 2016, total under-grad and post-graduate enrolments have grown at the average rate of more than 3 per cent a year.


The average annual rate of growth in enrolments has been about 3.6 per cent for banking and finance, 2.75 per cent for management and commerce, and even about 2.5 per cent for STEM, but a small negative for economics.

It’s not known whether this decline represents reduced demand for economists in the job market. But for those who are economically literate, a clue is that graduate starting salaries are higher for economics students than for those taking business-oriented subjects.

I wonder if the apparent decline in economics is partly just the unis’ greater marketing emphasis in naming their degrees. “Finance”, for instance, is actually a specialisation within economics. And banking, management, commerce and accounting are so theory-light that many such degrees would be beefed up intellectually with a fair bit of economics (as was my own commerce degree).

One strange fact is that of the many fewer unis still offering economics, more than half of those that do are in NSW and the ACT.

But the biggest cause for concern are the signs of diminishing diversity among uni students of economics. The proportion of females has fallen to about a third. And well over half of uni economics students are in the top quarter of socio-economic status, with only about 10 per cent in the bottom quarter. It’s similar, but not quite so extreme, for high school economics students.

If you rank the relevant uni degrees according to the proportion of students from high socio-economic status families, economics comes well ahead of banking and finance, then management and commerce, which is well ahead of STEM.

Oh, dearie me. This may explain a lot.
Read more >>

Saturday, June 9, 2018

Sorry Scott, it's not clear the economy now has lift-off

It’s been the week of an economic miracle. Three months’ ago we were told the economy’s annual growth was a pathetic 2.4 per cent, but this week’s news is it’s now a very healthy 3.1 per cent. And wasn’t Treasurer Scott Morrison cock-a-hoop.

This is the vindication of everything he’s ever told us. It’s the proof the government’s plan for Jobs and Growth  is working a treat.

Last calendar year saw the strongest jobs growth on record, with more than 1000 jobs created on average every day.

Like a favourite footy team, Australia has “climbed back to the top of the global leaderboard”, growing faster than all seven of the biggest rich countries.

“Importantly,” he said, “today’s results validate our budget forecasts and confirm the strengthening economic outlook we presented in the budget just a few weeks ago.”

Sorry to rain on ScoMo’s parade, but each of those happy claims is misleading.

The national accounts for the March quarter, issued by the Australian Bureau of Statistics this week, showed that real gross domestic product grew by 1 per cent during the quarter and by 3.1 per cent over the year to March.

Trouble is, initial quarterly national accounts come in two kinds: “not as bad as they look” and “not as good as they look”. Three months’ ago they were the former and now they’re the latter.

For the past two years they’ve had an almost perfect pattern of implausibly weak one quarter and implausibly strong the next. The problem is that it’s almost impossible for the bureau to measure the economy’s growth from quarter to quarter with any accuracy.

This is why sensible people – which excludes the media, the financial markets and many macro-economists – take the bureau’s advice and focus on its “trend” (or smoothed) estimates.

Three months’ ago they showed annual growth of 2.6 per cent (since revised up to 2.7 per cent) and now they’re showing 2.8 per cent – which is probably as close to the truth as we’re likely to come.

What ScoMo says about employment growth in 2017 is perfectly true and genuinely impressive. About three-quarters of the extra 400,000 jobs created were full-time – one in the eye for those supposed experts who depress our youth by telling them the era of good jobs is over.

But 2017 is receding into history. And in the first four months of this year, the average rate of job creation has slowed from more than 1000 a day to nearer 600.

As for our economy growing faster than the bigger developed countries’ economies, it’s not hard when our population’s growing faster than theirs. Our population grew by 1.6 per cent over the year to March, which explains why growth of 3.1 per cent in the economy turned into growth of 1.5 per cent per person.

As for the latest figures validating the budget’s optimistic forecasts out to 2019-20 (let alone its power-of-positive-thinking projections out to 2028-29), that’s a big call.

The budget forecasts growth in real GDP in 2017-18 of 2.75 per cent. You may think growth of 3.1 per cent over the year to March puts achieving that forecast beyond doubt, but you’d be bamboozled by the different ways of measuring growth.

It’s 3.1 per cent “through the year” from March 2017 to March 2018, whereas the budget forecast is for a “year average” of 2.75 per cent (that is, the whole of 2017-18 compared with the whole of 2016-17).

By my figuring, and assuming no further revisions, real GDP will need to grow by another 1 per cent in the June quarter for the budget forecast to be reached – which is possible, but unlikely.

Similarly, the budget forecasts that the increase in the wage price index will quicken to 2.25 per cent through the year to June 2018. But the figures for the March quarter showed it treading water at 2.1 per cent.

Turning to the detail, about half the 1 per cent growth in real GDP came from a surge in the volume exports, though increased imports cut the contribution of net exports (exports minus imports) to 0.3 percentage points.

Trouble is, part of the surge was explained by a catch-up after production problems in the middle of last year, and part by a new natural gas export facility coming on line, suggesting exports are unlikely to continue growing so strongly.

Growth in public sector spending contributed 0.4 percentage points to the overall GDP growth in the March quarter, with strong public consumption spending (probably mainly the roll-out of the national disability insurance scheme) in the quarter, plus state government spending on transport infrastructure explaining the strength of public investment spending in earlier quarters.

New housing construction made a small contribution to growth in the quarter, but it’s clear the housing boom is waning and so is likely to make little further contribution.

Business investment spending made only a small contribution to quarterly growth, with a fall of 6 per cent in mining investment (and 16.4 per cent over the year) largely offsetting the 3.6 per cent growth (and 14 per cent over the year) in the much-bigger non-mining investment.

So business investment is slowly recovering from the end of the resources boom as we’ve long hoped it would, but the biggest worry in the accounts is the lack of good news on the single most important driver of GDP growth, consumer spending.

It grew by a reasonable 2.9 per cent over the year but, after strengthening in the December quarter, grew by a pathetic 0.3 per cent in the March quarter.

And that required a further fall in households’ rate of saving, from 2.3 per cent to 2.1 per cent of their disposable income, with that rate down from a peak of 10 per cent after the global financial crisis in 2008.

With household debt already so high, not many families will want to borrow more to boost their consumption. And the falls in Sydney and Melbourne house prices mean no encouragement to consume from the "wealth effect" - the higher value of my home means I can afford to spend.

The big problem is the absence of real growth in wages to drive consumer spending. It may or may not come.

Apart from ScoMo’s boundless optimism, there’s no certainty we’ve now achieved lift-off.


Read more >>

Wednesday, June 6, 2018

How we could revive faith in democracy

How much is our disillusionment with politicians, governments and even democracy the result of our pollies’ 30-year love affair with that newly recognised mega-evil “neoliberalism”?

To a considerable extent, according to Dr Richard Denniss, of the Australia Institute, in the latest Quarterly Essay, Dead Right.

I’m not sure I’m fully convinced by his argument, but it’s a thought-provoking thesis that’s worth exploring.

Like “globalisation” in the 1990s, neoliberalism has become the all-purpose political swearword of the 2010s. Anything economic that you don’t approve of can be condemned as neoliberalism.

But Denniss provides some more specific attributes. “The intellectual core of neoliberalism is the idea that the profit motive of companies, combined with consumers’ ability to choose the product that suits them best, will result in the best possible social and economic outcomes,” he says.

Implicit in this is the belief that government intervention in markets is always suspect and should be reduced to a minimum, just as taxation is an onerous “burden” which must be reduced if we are to prosper.

Dennis argues that neoliberalism hasn’t just involved much deregulation, privatisation, outsourcing of government services and cuts in government spending, it’s also changed our culture – the way we think about politics and political issues.

Its focus on the individual has sanctified selfishness, releasing people from the restraints of solidarity with the rest of the community and legitimating the lobbying mentality. We’re all free to press our own interests on the government, and if that means I extract more than you do, that just proves I worked harder than you.

But the greatest cultural change, according to Denniss, is the belief that economic issues outweigh all other considerations. “The trick of neoliberalism was to convince the public that it is the economic dimension of big issues that we must focus on,” he says.

“Past generations . . . did not see the need to delay all significant debates about the shape and direction of their society until tax and industrial relations policies were optimised according to specific principles understood by a tiny proportion of the population.”

Denniss says we no longer talk about the inherent value of educating our children, but of the increase in skills and productivity that their education will bring to the economy.

A big part of this is the obsession with maximising the growth of the economy – or, in Malcolm Turnbull’s more enticing packaging, Jobs and Growth.

“After 27 years of continuous economic growth, it is inconceivable that the thing Australia needs most is to ‘grow our economy’ some more.

“What we really need is to rebuild trust in our institutions and confidence in our country. We need to debate far more specific and important national goals, and then show ourselves that when we work together we can make things better. We have done it before and other countries are doing it right now.”

What if Australian parliaments stopped trying to fix the industrial relations system or the tax system for a few years, and focused instead on things that Australians really care about?

“For 30 years Australians have been told that what is good for gross domestic product is good for the economy, and hence for the country. But that is like saying that the more money a family earns, the happier the children will be.

“It is the shape of our economy that determines our wellbeing, not its size. Spending $1 billion subsidising the Adani coalmine will create economic activity [and jobs], but so will spending that money promoting Australian tourism or improving Sydney’s pubic transport.

“The important question isn’t whether a project will ‘create activity’, but whether a project will make Australia a better place or not.”

Like waiters in a restaurant, says Denniss, politicians and bureaucrats are not there to tell us what we must order, but to show us the menu and explain the specials.

So one of his proposals is to replace the Productivity Commission with a national interest commission, to provide both governments and the public with broad advice on the advantages (as opposed to benefits) and disadvantages (as opposed to costs) that, say, a major project or a universal basic income, might entail.

The opposite of the narrow economic agenda of neoliberalism isn’t a progressive economic reform agenda, Denniss says, it’s the re-establishment of a broad debate about the national interest.

“After 30 years of hearing that politicians, government and taxes are the things that ruin the economy, it is time for the public to hear and see that politicians, government and taxes are the foundations on which prosperous democratic nations are built.”

There are dozens of popular things that state and federal governments could get on with that would make Australians happy, make Australia a nicer place to live and, most importantly, show the Australian public that the decisions made by parliament do make a difference.

Such as? “Bans on political donations, the establishment of strong anti-corruption watchdogs, reform to parliamentary entitlements, higher taxes on annual incomes over $1 million, closing loopholes that allow companies to pay billions in dividends and nothing in tax, legalising marijuana, banning poker machines, and preserving all existing parks from property development.”

The world is full of alternatives and choices, Denniss concludes. “Neoliberalism’s real power came from convincing us that we had none. We do, and making them is the democratic role of citizens – not the technocratic role of economists, nor that of any self-serving elite."
Read more >>

Monday, June 4, 2018

Turnbull changes tune for a lower-taxes election

Q: When is a move to increase tax collections not a move to increase taxes? A: When it’s an “integrity” measure.

The overwhelming purpose of this year’s budget has been to portray the Turnbull government as committed to lower taxes – not like those appalling Labor Party people, who want to whack up taxes everywhere.

Hence Scott Morrison’s seven-year plan to cut personal income tax at a cumulative cost of $144 billion over 10 years.

The government’s determination to push on with cutting the rate of company tax for big business is further proof of its commitment to lower taxes.

Trouble is, Malcolm Turnbull’s true conversion to the Down, Down Taxes Down party is rather recent.

Go back to his previous pre-election budget, in 2016, and he was busy increasing taxes to help pay for his 10-year phase-down in company tax.

If you remember, that budget copied Labor’s plan for four years of huge increases in tobacco excise, introduced the Coalition’s version of Labor’s major cutbacks in super tax concessions to high-income earners, introduced its own version of a tax on multinational tax avoiders and a “tax integrity package” establishing a tax avoidance taskforce.

Turnbull also explored the possibility of doing something to match Labor’s plan to curtail negative gearing, but finally decided that doing nothing would make easier to portray Labor as the high-taxing party.

Coming to last year’s budget, the government stuck with its company tax cuts, but still needed revenue. ScoMo announced a new tax on the five major banks and, from July 2019, an increase in the Medicare levy from 2 to 2.5 per cent of taxable income, to cover the rapidly rising cost of the National Disability Insurance Scheme.

This budget included another tax integrity package, which extended the special reporting requirements on payments to contractors and improved the “integrity” of GST payments on property transactions.

Now this year’s budget. This time a “black economy package” involving “new and enhanced enforcement” and further extension of reporting requirements on payments to contractors.

That’s not to mention a once-off draw-forward of duty on tobacco, “better targeting” of the research and development tax incentive, “ensuring individuals meet their tax obligations” and “better integrity over deductions for personal super contributions”.

All told, these “integrity measures” are expected to raise almost $10 billion over four years – though remember that when the tax man (or Centrelink) estimates that a new crackdown on the crackdown will raise $X billion, we have no way of knowing whether that guess proved to be too high, too low or spot on. Hmmm.

That $10 billion compares with the first-four-year cost of the personal tax cuts of $13.4 billion. But something the media has judged far too conceptual to adequately report is the decision not to go ahead with the 0.5 percentage point increase in the Medicare levy.

Deciding not to do something you hadn’t yet done adds to zilch, doesn’t it? Not if you’ve ever heard of opportunity cost. Nor if you know how budgets are constructed. The change of tune worsens the budget bottom line by $12.8 billion over four years – almost doubling the budgetary cost of the actual tax cuts.

It’s not hard to see why Turnbull lost his enthusiasm for securing the funding of the disability scheme. Bit hard to claim to be the champion of lower taxes when, with the other hand, you’re putting ’em up. (Just as long as the punters don’t notice your third hand adding to the tax system’s “integrity”.)

Equally debatable is ScoMo’s claim to be the scourge of bracket creep. Since the disaster of its first budget cured the government of any real desire to cut government spending, its main strategy for returning the budget to structural surplus has been to sit back and wait for bracket creep to do the job for it.

Had the government been travelling better in the polls that might still be its budget-repair strategy, rather than throwing the switch to fanciful fiscal forecasts.

But with bracket creep pushing up tax bills every year since the last tax cuts in 2012, beware of ScoMo playing a three-card trick: cuts that should be regarded as the partial restoration of past bracket creep being packaged as protection against future creep.

As ScoMo’s three-step, seven-year tax plan now stands, the huge proportion of taxpayers still earning less than $87,000 a year would get a tax cut of $10 a week to compensate them for all the bracket creep they will have suffered during the 16 years to 2028-29.

Don’t get me wrong. I think we should be paying higher taxes to cover the ever-better public services we unceasingly demand. The actions of both sides of politics say they agree with me. It’s just their words you shouldn’t believe.
Read more >>

Saturday, June 2, 2018

We have debts to pay before we give ourselves tax cuts

How much should we worry about leaving government debt to our children and grandchildren? A fair bit, though not as much as some people imagine.

The central claim of this year’s budget is that we can have our cake and eat it.

We can award ourselves personal income tax cuts worth $144 billion over 10 years, but still halt the growth in the federal government’s net debt at $350 billion by the end of June next year, and then have it fall away as the proceeds from successive, ever-growing annual budget surpluses are used to pay off the debt.

I’ve devoted much space to explaining how Treasurer Scott Morrison was able to conjure up this seeming fiscal miracle, by staging the tax cuts over seven years and by resorting to overly optimistic forecasts and projections.

So how worried should we be by the possibility that the debt will keep growing despite ScoMo’s unbounded optimism?

Well, the first thing to remember is that the federal government isn’t like a household. A household or family has to be careful about how much it borrows because it has a finite life. Eventually, the kids leave home and mum and dad die.

Of course, many families borrow amounts that are several multiples of their annual salary to buy the home they live in. They’ll take 20 or 30 years to pay off their mortgage, but few people regard this as terribly worrying.

Why not? Because the home they buy provides them with a flow of service for as long as they need it to: somewhere to live. It saves them having to pay rent.

Buying your home is an investment in an asset and, provided the family can fit the mortgage payments within their budget, no one would accuse the family of “living beyond its means”.

It would be living beyond its means, however, if it was regularly spending more on living expenses than its after-tax income.

By contrast, the government has an infinite life. It provides services for about 9 million households, who pay taxes that are usually sufficient to cover the cost of those services. As the people in those households die, their place is taken by others.

If the households aren’t paying enough tax to cover the government’s spending, the government can always increase taxes. How many households do you know that can solve their money problems by imposing a tax on other households?

This is why it’s a mistake to imagine the rules that apply to your family also apply to the government. The government’s power to raise taxes means there’s never any shortage of people willing to lend it money.

Even so, there are some valid analogies between households and governments. A government can rightly be said to be living beyond its means if it’s not raising enough tax even to cover its day-to-day expenses.

This happens automatically when the economy turns down, and isn’t a bad thing: it helps to prop up the 9 million households when times are tough. But when the economy improves, the government needs to ensure its income exceeds its ordinary spending so the debt incurred isn’t left to burden people who gained no benefit from it.

And, just as a household shouldn’t be said to be living beyond its means because it’s borrowed to buy a home, so a government that’s borrowed to build worthwhile infrastructure – roads, rail lines, airports etcetera – shouldn’t be thought to be living beyond its means.

Why not? Because, like a house, that infrastructure will deliver a flow of services for decades to come.

If the children and grandchildren who inherit that debt also inherit the infrastructure it paid for, they don’t have a lot to complain about.

So, how much of the net debt can be attributed to living beyond our means while the economy’s been below par, and how much to investing in infrastructure that’s a valuable inheritance for the next generation?

This year’s budget statement four proudly informs us that the financial year just ending is expected to be the last in which the government will have to borrow to fully cover its “recurrent” spending to keep the government working for another year.

The government had to begin borrowing for recurrent expenses (including “depreciation” - the cost of another year’s wear and tear on the physical assets the government uses in its recurrent operations) from the time of the global financial crisis in late 2008.

Updating the figures provided in last year’s statement four allows us to calculate that the cumulative recurrent deficit over the 10 years is roughly $200 billion, although you’d have to add interest costs to that.

In principle, the rest of our total net debt of about $340 billion by the end of this month has been incurred to build infrastructure, which will deliver a flow of services to the present and future generations extending over many decades.

So we need be in no hurry to pay off that part of the debt – it will do our offspring no harm.

But two qualifications. First, though economic theory indicates no level to which it’s prudent to borrow – it’s a judgment call – it is prudent to borrow less than the full cost – say, 80 or 90 per cent – of the infrastructure we build each year.

Second, it’s likely that a fair bit of the federal government’s spending on capital works has been selected more for political than economic and social reasons, and so won’t deliver much in the way of valuable services to the next generation.

If so, we should probably regard it as more in the nature of consumption or recurrent spending, and so pay for it ourselves rather than lumber our kids with it.

All of which says, yes, there is a fair bit of the total debt we should be getting on with paying off – and do so before we start awarding ourselves big tax cuts.
Read more >>