Saturday, March 30, 2019

High immigration hiding the economy's long-running weakness

How’s our economy been doing in the five or six years since the Coalition returned to office? In the United States and other advanced economies there’s much talk of “secular stagnation”, but that doesn’t apply to us, surely?

After all, we’re now into our record-setting 28th year of continuous economic growth since the severe recession of the early 1990s. This means that, unlike the others, we escaped the Great Recession that followed the global financial crisis in 2008.

Recent years have seen employment growing strongly and the unemployment rate falling slowly to 5 per cent. And, of course, as Treasurer Josh Frydenberg never fails to remind us when we see the quarterly national accounts, our economy is among the fastest growing of all the rich economies.

So the talk of secular (meaning long-lasting, rather than worldly) stagnation can’t be our problem, can it? Don’t be so sure.

The argument that, since the global crisis, the developed world has fallen into a period of weak growth that looks likely to last quite a few years was first advanced by one of America’s leading economists, Professor Laurence Summers, of Harvard, a former secretary of the US Treasury in the Clinton administration.

He took the term from its earlier use during the Depression of the 1930s, using it to mean “a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions”.

The Economist magazine explains that secular stagnation means “the chronically weak growth that comes from having too few investment opportunities to absorb available savings”.

Let me tell you about some comparisons of our performance by decade, calculated by independent economist Saul Eslake in a chapter he contributed to the book, The Wages Crisis in Australia.

In the first eight years of the present decade, consumer spending – which typically accounts for just under 60 per cent of gross domestic product – has been slower than in any decade in the past 60 years.

The major reason for this is that the present decade has seen household disposable income grow at an average real rate of just 2.2 per cent a year, which is less than in any of the previous five decades.

The biggest component of household income is income from wages. Its real growth in the present decade has been slower than in any of the five preceding decades.

So, as I may have mentioned once or twice before, weaker growth in wages seems to be at the heart of weaker consumer spending growth and growth in the economy overall.

But the growth in consumer spending would have been even slower had households not reduced the proportion of their income that they saved rather than spent by 4 percentage points – to its lowest level since before the financial crisis.

The slow growth in wages in the present decade has meant a decline in the share of national income going to wages, which (along with higher mineral commodity prices) has contributed to the higher share of income going to the profits of corporations.

This “gross operating surplus” (which, Eslake says, is roughly equivalent to the sharemarket’s EBITDA – earnings before interest, tax, depreciation and amortisation) has averaged 26.7 per cent of GDP since 2000 – which is 3.5 percentage points more than it did in the 1980s and 1990s.

But this isn’t as good for business as it sounds. Eslake points out that, “while the share of the national-income pie going to corporate profits has increased, the pie itself has been growing at a much slower rate – so much so that the growth rate of corporate profits [as measured by gross operating surplus] has thus far during the current decade been slower than in any decade since the 1970s”.

Since it’s the rate of growth that share investors and business managers focus on, this says even business profits haven’t been doing wonderfully.

Which brings us to the national accounts’ bottom line – growth in real GDP. It’s averaged 2.7 per cent a year so far in this decade, which is less than in any decade since the 1930s.

And get this. More than half the real GDP growth so far this decade is directly attributable to growth in the population. Growth in real GDP per person has averaged 1.1 per cent a year – equal to its performance during the 1930s, and slower that anything we’ve had in between.

Get it? Allow for population growth – so you’re focusing on whether economic growth is actually leaving us better off on average – and our weak growth since the financial crisis becomes even weaker.

If our economic performance seems better than the other advanced economies’, that’s just because our population is growing much faster than theirs.

The symptoms of secular stagnation that other rich countries complain of are: weak growth in consumption and business investment, slow improvement in productivity, only small increases in wages and prices, and interest rates that are low not just because inflation is low, but also because real interest rates are low.

(The long-running slide in real long-term interest rates around the world demonstrates The Economist’s point that, globally, we’re saving more than households, businesses and governments want to borrow.)

We tick all those boxes. Unsurprisingly in our ever-more-connected world, we too are locked into secular stagnation of a seriousness not seen since the 1930s. It’s just that our rapid population growth – plus the ups and downs of the resources boom – has hidden it from us.

I remind you of all this today because it’s highly relevant to Tuesday’s federal budget: what it should be aiming to do, and how we should judge what it does do.
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Wednesday, March 27, 2019

Generational conflict comes to a polling place near you

The most memorable news photo I’ve seen in ages is one from the first School Strike 4 Climate late last year. It shows a young woman holding a sign: MESS WITH OUR CLIMATE & WE’LL MESS WITH YOUR PENSION.

One minute we oldies are berating the younger generation for their seeming lack of interest in politics (although, having arrived on the scene at a time when our politicians are behaving so badly, who could blame them?), the next we’re criticising them for missing a day of school.

When you remember how many days of uni the baby boomers missed with all their marches against the Vietnam war, the odd day off school hardly signifies. (Not that I’d want to discourage the ageing climate-change deniers from criticising the school-dodgers. When you’re growing up, defying adult authority is a big part of the motivation.)

Whenever I get the chance, I have a simple message for youngsters: you’d better start taking an interest in politics because it’s the people who aren’t watching that the pollies end up screwing.

The truth is our young people are interested in political issues, but that interest is unfashionably idealistic. They really care about fairness to the LGBTI community, climate change and the environment more broadly.

They’re not yet sufficiently old and cynical to have realised that politics has devolved into a self-centred free-for-all, where you jump into the ring to advance and protect your own interests at the expense of those with less muscle.

When last my colleague Jessica Irvine expressed support for Labor’s plan to end the refunding of unused dividend imputation credits to all except those receiving an age pension or part-pension, an angry reader accused her of “continuing to fuel the fire of inter-generational envy”.

Sorry, that argument doesn’t wash. It’s one the well-off and their champions have used for ages. What it’s really saying is, “it’s a sin for you to envy the fruits of my greed”.

When people accuse others of “the politics of envy” or inciting “class warfare”, their true message is: I’m winning, you’re losing, so why won’t you just accept it? Just be nice and stop trying to make things fairer.

(Speaking of sin, when last I supported the reform of imputation credits, a reader accused me of “preaching”. Sorry, when your father spent his life preaching two sermons a Sunday, it’s only to be expected. And I’m old enough to regard being likened to my father as a compliment, not an insult.)

Stripping away the religious overtones, there is, always has been and probably always will be plenty of scope for conflict between the generations. The solution is for the generation presently in power
to put its children’s interests ahead of its own (see climate change above).

Almost all of us do this in our private lives (it’s clear a lot of the well-off retired fighting to retain imputation credits are motivated by maximising their kids’ inheritance, and we’re happy for the bank of mum and dad to help our children into home-ownership), but when it comes to public policy we’re easily seduced by politicians seeking our votes with promises of short-term gain for long-term pain.

Not enough people realise that our system of taxes and benefits is explicitly designed to move money between the generations.

People – mainly younger people - with jobs and no kids pay a lot more in taxes (all taxes) than they get back in benefits (whether in cash or kind, such as education and healthcare), whereas families with kids get back a lot more than they pay. Couples whose kids have grown up but who are still working pay more than they get back, and then the retired get back a lot more than they pay.

Since almost all of us will progress through each of these stages, this money-shifting should pretty much even out over our lives. So, until relatively recently, it’s been seen as fair. It’s the basis for the oldies’ eternal sense of entitlement: “I’ve paid taxes all my life . . .”

But this has changed. As our leading independent think tank, the Grattan Institute, has demonstrated, tax changes over the past two decades have been “hugely generous” to older Australians.

“Older households pay $7500 [a year] less in income tax in real terms today than older households 20 years ago, despite high increases in average incomes,” it found. “Taxes on working-age households have risen over the same period.”

Most of this is explained by changes made by John Howard to benefit the alleged “self-funded retirees” (including making unused imputation credits refundable) and similar changes to superannuation tax breaks made by Peter Costello.

Add in Howard’s more favourable tax treatment of negatively geared property investments, and the young are dead right to believe the tax system has been biased against them and in favour of the better-off old (including me).

They’d also be right to see the looming federal election campaign as a battle between one side seeking to reduce the system’s bias against the young and the other fighting to protect the recently conferred perks of the well-off aged.

But a note to outraged Millennials: Howard is no baby boomer and the intended beneficiaries of his munificence were his own and earlier generations. Only some of the world’s evils were installed by my privileged generation.
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Monday, March 11, 2019

Economists: lonely, misunderstood angels in shining armour

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to lose water, waste money and wreck the environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who pays for Google and Facebook's free lunch?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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