Showing posts with label abs. Show all posts
Showing posts with label abs. Show all posts

Saturday, May 23, 2020

Women, part-timers and the young hardest hit by jobs crisis

At a time like this, measuring the rise in joblessness is very important. But it’s a trickier job than many realise. You have to draw boundaries somewhere, and where they should go can always be debated.

But some who don’t like comparing shades of grey think the problem can be reduced to good guys and bad guys. Why do the figures look strange? Because some prime minister a few years back changed the definition of unemployment to make it look smaller. Would you believe that someone who’s worked as little as one hour in a week is counted as employed?

Sorry, this fiddling is an urban myth. The truth isn’t nearly so exciting. But before I deflate the balloon, let me show you the circumstantial evidence.

The most recent figures, for April, show America’s rate of unemployment leaping more than 10 percentage points to 14.7 per cent – in just a month. Canada’s unemployment jumped 5 points to 13 per cent.

What happened to our rate? It crept up from 5.2 per cent to 6.2 per cent. Really? Are you kidding? What’s that if it’s not a fiddle?

Or, consider this. Our figures show that about 900,000 people lost their jobs in the four weeks to mid-April. But they also show that unemployment increased during the period by only about 100,000. How’s that possible? What’s that if it’s not a fiddle?

Actually, it’s support for one of my favourite sayings: the world is a complicated place. There are puzzles everywhere. If you want everything to be black or white – all good or all bad - you should never have left the security of primary school.

So, it may look like a conspiracy, but it ain’t. A sign that we’re dealing with a myth is that the identity of the PM who did the dirty deed changes with the political sympathies of the person who tells you they remember him doing it.

The figures we get each month for how many people are employed, unemployed or neither (“not in the labour force”) come from a huge monthly survey of households conducted by the Australian Bureau of Statistics, which brooks no interference from politicians.

The bureau follows international conventions set by the United Nations' International Labour Organisation, in Geneva. Its definitions haven’t changed in many decades. (I once ran into a union-movement economist who was an Australian representative on the ILO committee reviewing the definitions. To my surprise, he staunchly defended the decision to leave them unchanged, including the bit about one hour’s work meaning you were employed.)

As the bureau explains in its release, the main reason the North Americans’ unemployment rates are so much higher than ours has to do with workers who’ve been “stood down” for some weeks because the boss has no work for them, but hopes to bring them back when things improve.

We class such people a still employed, whereas the North Americans class them as unemployed. The bureau estimates that, if we did it the American way, our unemployment rate would be not 6.2 per cent, but 11.7 per cent.

Although about 900,000 Australians ceased to be employed during the four weeks to mid-April, it may amaze you that, in the same period, about 300,000 people went from not having a job to having one. This surprises people because they don’t realise how much coming and going there is in the labour force, even during recessions.

The bureau estimates that, even in a month where total employment seems hardly to have changed, on average about 300,000 people leave employment and about the same number move into employment.

It’s the net fall in employment of about 600,000 that matters. Why then did unemployment rise by only about 100,000? Because part of the definition of being unemployed is that you must be actively looking for job. Since we were in lockdown, 500,000 of these people didn’t start looking for another job, and so were classed as “not in the labour force”. As soon as they do start looking, they’ll be unemployed.

People make too much of the rule that an hour’s work means you’re not unemployed. Only 2.5 per cent of all those employed in March worked for only one to five hours a week. It’s true, however, that the international definition of unemployment is too narrow, especially in a world where one-third of our jobs are part-time.

This is why the bureau always calculates the rate of under-employment – people who have (mainly) part-time jobs, but would prefer to be working more hours than they’re able to, maybe even full-time hours.

The coronacession has meant many workers are having their hours cut. The number of underemployed people jumped by 100,000 to 800,000, taking the underemployed proportion of the labour force from 8.8 per cent to 13.7 per cent.

Delving into the figures, about 55 per cent of the 600,000 jobs lost in April were held by women, even though women accounted for only 47 per cent of the workforce. Almost two-thirds of the jobs lost were part-time.

Employment of people aged 15 to 24 fell by about 11 per cent, compared with a fall of 3 per cent for prime-aged workers (aged 25 to 54). Unemployment is a much bigger problem for the young, as is underemployment.

While your head’s still spinning, one last puzzle. Being counted as unemployed by the bureau is not the same thing as being eligible to receive unemployment benefits - the “JobSeeker” payment - from Centrelink.

Some people counted as unemployed aren’t eligible for the dole (often because their spouse’s income is too high), whereas some people eligible for the dole aren’t counted as unemployed (because they’re allowed to work a few hours a week before the dole cuts out).

Right now, however (and partly thanks to a temporary increase in how much your spouse may earn), there are 800,000 people counted as unemployed, but twice as many – 1.6 million – getting the JobSeeker payment.

Monday, December 23, 2019

Living in the post-inflation era turns out to be no fun

It’s Christmas shopping time, when the bills mount up and your money never goes far enough. So how come people are saying the inflation rate should be higher? I thought inflation was meant to be a bad thing?

It’s a good question when one of those people is Reserve Bank governor Dr Philip Lowe. He keeps saying we need to get unemployment lower and inflation back up into the 2 to 3 per cent target range. (At last count the annual rate of increase in consumer prices was "only" 1.7 per cent. I can remember when, for a brief period in the 1970s, it was 17 per cent.)

The short answer is that Lowe doesn’t see higher prices as a good thing in themselves. Rather, he sees them as a means to an end. Or better, as a symptom or by-product of something that is a good thing.

Why do prices rise? Because the demand for goods and services – the desire to purchase them – is growing faster than the supply of them – our businesses’ ability to produce them. So the rate of price inflation is a symptom or sign of strong demand.

And strong demand for goods and services is a good thing because it means the economy is growing and so is employers’ need for workers to help produce more goods and services. Employment increases and unemployment falls.

So Lowe wants to see higher prices simply because they’re a means to the end of lower unemployment. What’s more, increased employer demand for labour relative to its supply makes labour – particularly skilled labour – scarcer and so puts upward pressure on its price, otherwise known as wages.

And, as he’s often said, Lowe would like to see employers paying higher wages than they are, because consumer spending – consumer demand – is so weak at present mainly because wages are hardly growing faster than consumer prices, and real wages are the main thing that drives consumer spending.

All that make sense? Good – because now I’ll give you the more complicated answer. Surely, although strong demand is good for the economy, it would be better if supply was just as strong, meaning we could have growth in jobs and living standards without any inflation?

That makes sense in principle, but not in practice. The managers of the macro economy believe we need some inflation, though not too much. For two reasons. First, though you’ll find this hard to credit, economists are sure our consumer price index (like other countries’ CPIs) overstates inflation.

That’s because the official statisticians are unable to pick up all the cases where prices rise not simply because the firm’s costs have risen, but because the quality of the product has been improved. If so, aiming for a measured inflation rate of zero would require you to crunch the economy hard enough to make actual inflation less than zero – that is, prices would be falling.

The second reason is that sometimes, when the economy is growing too strongly, wages rise too much, prompting firms to lay off workers. Trouble is, workers hate having their wages cut. But if you’ve got a bit of inflation in the system, you can cut wages in real terms simply by skipping an annual pay rise, which workers find less unpalatable.

When the Reserve Bank set its target for inflation in the early 1990s, it settled on 2 to 3 per cent a year ("on average over the medium term"). It thought such a range would overcome both problems and insisted such a target range constituted "practical price stability".

But things in our economy and all the advanced economies have changed a lot since the 1990s. Demand has been chronically weak relative to supply since the global financial crisis and, in consequence, inflation rates have been below-target everywhere.

Some people have suggested we move to a lower, more realistic target range, but Lowe has resisted, arguing that to do so would lower firms’ and workers’ expectations about inflation, making our weak-demand problem even worse. He may be right.

But now try this thought. Inflation is 1.7 per a year, while wages are growing by 2.2 per cent and workers aren’t at all happy. I’ve had several top economists agree with my contention that, if we could wave a magic wand and raise both inflation and wages by, say, 2 percentage points, so that wages were growing by 4.2 per cent, workers would be a lot less discontented.

Why? Because of a phenomenon that economists used to talk about a lot in in the 1960s, but rarely mention today, called "money illusion". People who aren’t economists keep forgetting to allow for inflation. If so, the era of very low inflation isn’t proving to be much fun.

Monday, November 19, 2018

Benefits from big data at risk from untrustworthy politicians

The digital revolution holds the potential to use mere “data” to improve the budget and the economy, and hence our businesses and our lives. But you have to wonder whether our politicians are up to the challenge.

In a speech last week, the Australian Statistician, boss of the Australian Bureau of Statistics, David Kalisch, said the new statistical frontier is “data integration” – you take two or more separate sets of statistics and put them together in ways that reveal new information. Things you didn’t know about how bits of the world work.

This is just exploring the huge, still largely untapped potential of computers to manipulate a lot of figures and produce useful information about what’s going on in this field or that. But it also involves new statistical techniques for combining data in ways that make sense and don’t mislead.

(This, BTW, raises a bugbear of mine. Digitisation, which allows us to measure any number of aspects of a company’s performance cheaply and easily, has given rise to the enthusiasm for “metrics”. But bosses who allow their metrics to be chosen and presented by people who know a lot about IT but nothing about the science of statistics, or who draw conclusions from those metrics without any knowledge of stats, are asking to be led up the garden path. They never know when the metric is answering a different question to what they imagine.)

Kalisch says data integration is already delivering new insights, such as improved estimates of Indigenous life expectancy, understanding outcomes for successive cohorts of migrants, and the importance of small to medium enterprises for job creation (not as outstanding as the propaganda would lead you to expect).

There’s much more of that kind of thing we could do. But Kalisch points also to the considerable untapped potential to use data integration to assess the performance of government policies and programs, and thus to target budget funding to programs assessed as more likely to be effective.

Kalisch says “Australia does not have a strong tradition of rigorously evaluating outcomes of government programs and policies”. That’s putting it politely. The Americans do (because Congress insists on it) and so do many other countries – even those backward and poverty-stricken Kiwis do.

Why don’t we? Because too many ministers and department heads fear the embarrassment if rigorous assessment showed a program was a waste of money, as many would. And also because Treasury and Finance don’t bother pushing it – perhaps because program evaluation costs money upfront, and only saves money down the track.

But that’s only one reason we risk failing to exploit all the benefits of big data analysis. The biggest is the very real probability bully-boy politicians and over-zealous agency heads try to ram through data aggregation schemes over the worries of people concerned about breaches of their privacy.

Consider the hash they’re making of My Health Record where, among other things, the instigators are relying more on slick ads than honest explanation. Consider the long running attempt by the masterful Alan Tudge, the department and the Centrelink PR man to deny there was any problem with robodebt, until the full extent of the fiasco – and the hurt it caused many innocent victims – could no longer be concealed.

Then consider the way Tudge used the shield of Parliament to reveal very private information about a woman who'd had the temerity to criticise him. And he escaped uncensured.

Such episodes, and many years of spin doctor-led politicians playing the true-but-misleading game, have hugely reduced the public’s trust in politicians and their happy assurances that nothing could possibly go wrong.

We stand on the cusp of reaping huge benefits from data analysis, or stuffing it up so badly the electorate punishes any government that touches it.

Part of this is the risk that government penny-pinching doesn’t give the data gatherers enough funding to install adequate privacy safeguards, or enough resources to respond honestly and adequately to the public’s questioning.

But that’s just part of a bigger money question: data integration isn’t particularly dear relative to the benefits of greater understanding, better public policy and more effective government spending it offers, but that doesn’t mean the pollies have the sense to cough up.

Operational funding of our bureau of statistics has been cut by 30 per cent in real terms over the past decade, by governments of both colours.

An independent benchmarking exercise in 2016 found that our bureau’s funding was about half the funding provided to Statistics Canada for roughly equivalent work. Even New Zealand’s official statistician got more than ours did. Smart thinking.

Monday, September 3, 2018

How to damage Australia: don’t collect good data

You don’t have to be very bright to see that as we enter the information age, realise decisions need to be evidence-based, and glimpse the huge potential of “big data”, we need the Australian Bureau of Statistics to be at the top of its game. But you do have to be brighter than our econocrats and politicians.

They’ve been cutting the bureau’s funding every year for more than a decade – meaning both parties have been at it – in the name of increased efficiency. The Orwellian annual “efficiency dividend”, cutting up to 2.5 per cent off running expenses, is a flowing fount of false economy.

According to the bureau’s boss, David Kalisch, it has suffered a reduction in real resources of more than 20 per cent over the past decade. Meanwhile, funding from big users of its data – which now accounts for between 10 and 20 per cent of its total funding - has increased only slightly.

The majority of its social statistical collections are only possible through user funding, with budget funding devoted predominantly to its economic and population stats.

The cutbacks have obliged the bureau to “prioritise”. It has reduced or stopped a number of statistical collections, with Kalisch admitting it hasn’t undertaken a survey of the way Australians use their time, nor a survey of mental health, for more than a decade.

“If the [bureau] continues to be subject to efficiency dividends over the next decade, at the same trajectory as it has for the past decade, some of the core information currently taken for granted by governments, business and the community may no longer be available,” he told a conference last month.

“Our capacity to continue producing all of the detailed statistics around our labour market, industry activity and population would increasingly be at risk.”

It oughtn’t be necessary to remind politicians, bureaucrats, marketers, academics, journalists and ordinary citizens just how heavily we rely on our national statistical office for reliable, objective information about a hundred dimensions of what’s actually happening around us, including to the natural environment.

The bureau’s data inform “fiscal and monetary policy settings, social support programs and infrastructure spending . . . many pertinent public policy debates, such as housing affordability, income and wealth inequality, cost of living, energy prices, the quality of life in our cities and regions, education and health outcomes, needs-based school funding, immigration policy and much more,” Kalisch told a conference of economists.

That’s not to mention that official data are “key to the effective functioning of our democracy, with population data helping establish fair electoral boundaries and our official statistics informing choices by voters and political aspirants”.

But it’s not just that we’d be much more poorly informed if government spending cuts robbed us of any of the information we presently collect. Our economy, society and natural environment keep changing, meaning we need to measure more than we do at present, as well as improving the way we measure things because they’ve changed from what they were.

Kalisch says globalisation and the digital economy introduce new measurement challenges. Over the past 15 years, the services sector has grown at an average rate of 6 per cent a year, meaning it now accounts for 63 per cent of gross domestic product [and a much higher proportion of total employment].

Measuring services is more difficult – conceptually and empirically – than goods. Good measurement of two key industries – health and education – is particularly important.

“Policy-makers and service providers are confronting wicked [difficult or impossible] problems across social policy and the environment that require a more sophisticated evidence base,” he says.

The bureau was an early public sector adopter in using computers, but in 2013 Kalisch’s predecessor blew the whistle on its “fragile ageing statistical infrastructure”. In 2015 the government agreed to provide most of the additional funding to build new systems.

In 2016 the bureau struck trouble with its first go at having many people complete their Census forms online. At the start of the filing period, the system was offline for nearly two days.

It was a “teachable moment”, but the bureau “owned the process errors, has reflected upon the learnings from this experience" and has revised its operating arrangements across the bureau. As proof it has learnt its lesson, Kalisch points to its trouble-free conduct of the same-sex marriage postal survey.

And all this before we get to big data. Any fool can see its huge potential for improving our evidence base at relatively low cost. But it takes a bit more brain to see that if we barge on with little attention to the public’s concerns over privacy and Big Brother governance, we could derail the whole show before we even get going.

Just the right time to cut the funding of the national statistical agency and decide we can afford to do stats on the cheap.

Saturday, June 30, 2018

Economic growth doesn't have to wreck environment

Do you care about the natural environment and the damage our economic activity is doing to it? What if an official agency published some good news on the subject? Would you be interested? Would you be pleased?

Apparently not. Two weeks ago the Australian Bureau of Statistics published its “Australian environmental-economic accounts” for 2015-16, which contained what certainly looks like good news, but they attracted minimal interest from the media and environmental groups.

Perhaps had the news been bad there’d have been more interest. Instead, the bureau found that, in 2015-16, the Australian population grew by 2 per cent and the economy – measured by the quantity of goods and services produced during the year – grew by 3 per cent.

But our emissions of greenhouse gases grew by just under 1 per cent, while our consumption of energy increased by less than 1 per cent and our consumption of water actually fell by 7 per cent.

Get it? We increased our output of goods and services – the amount of our economic activity – but increased our inputs of some key natural resources by less. Our generation of a particularly pernicious form of waste, greenhouse gas emissions, also increased by less.

In other words, we improved the economy’s ecological productivity. Is that not worth noting?

Actually, those figures need to be examined a lot more closely before we pop too many champagne corks. But first, we need to remember why, whether the news they bring is good or bad, it’s worth taking a lot more interest in the annual “national environmental-economic accounts” than we have been.

Which raises a less conspiratorial explanation for our lack of interest in the environmental-economic accounts: because, as associate professor Michael Vardon, of the Australian National University, has pointed out, they’re still a work in progress, with not many people knowing of their existence and even fewer knowing how to extract from their raw numbers the message they’re sending about how much progress we’ve made on the path to ecological sustainability.

That the economy exists within the natural environment, and depends on it for the renewable and non-renewable natural resources we put into our production process, for the “ecosystem services” that grow our food, among many other things, and even for somewhere to dump all the material and airborne waste we generate, is undeniable.

Yet from the moment people started thinking about “the economy”, they viewed it in isolation from the natural environment that sustains it.

A hundred years ago, this seemed sensible. The world’s human population was a fraction of what it is today and we were much poorer than we are now, so it seemed human activity was having only a small impact on the huge natural world.

We knew little about soil erosion and salinity, the wider effects of fertilisers, damming rivers and overfishing, let alone that too much burning of fossil fuels and land clearing could change the climate.

Our economic national accounts and their bottom line, gross domestic product, rest on the happy assumption that we can measure the economy without reference to the natural environment that sustains it.

As greenies never tire of pointing out, GDP takes little or no account of the environmental costs that come with the economic benefits. It even counts spending to remedy environmental damage as another benefit.

Little wonder so many people have been looking for ways to bring the two sides into reconciliation, getting them into the same box, putting their measurement on a comparable basis, so economic benefits can be weighed against environmental costs.

Under the auspices of the United Nations Statistical Commission, the world’s official statisticians have been working to expand the long-accepted rules for measuring GDP, the “system of national accounts”, into a “system of environmental-economic accounting”, or SEEA.

Our bureau of statistics has been active in this project and in 2012 the official SEEA “central framework” was published by the UN. The bureau has been working on the huge task of carrying out and integrating all the physical and monetary measurements needed to put flesh on that framework for Australia.

Progress has been slow, especially because the government’s extraction of annual alleged “efficiency dividends” from the bureau's budget has reduced the work it can do.

But now let’s examine the news that we increased our ecological productivity in 2015-16, presumably leaving us better off both economically and environmentally.

First, this is a caution for all those environmentalists who keep repeating that, in a natural world of fixed size, it’s impossible for the economy to keep growing every year forever.

They’re right, of course, but the economic growth they’re thinking of – growth in the throughput of natural resources – isn’t the growth that GDP measures. Much GDP growth comes not from increased physical throughput in the economic machine, but from increased efficiency in the machine’s conversion of inputs (the greatest of which is not natural resources, but human labour) into outputs of goods and services, aka improved productivity.

So it is conceptually possible for GDP to grow while the use of natural resources doesn’t, or even declines. If that happens, it’s good news all round.

Second, these relationships are far too complex for it to make sense to look just at the change over a period as short as a year. The accounts show that, over the nine years to 2015-16, our population grew by 16 per cent and real GDP by 28 per cent, while energy consumption increased by only 6 per cent and water consumption decreased by 2 per cent.

Emissions of greenhouse gases decreased by 13 per cent relative to 2006-07. But generation of material waste seemed to be growing at about the same rate as GDP. Not good.

Finally, we need to know a lot more about the factors driving these changes, and whether they’re lasting or temporary, before we can conclude we’re making ecological progress.

And remember we need our consumption of fossil fuel energy to be falling rapidly if we’re to make the contribution we should to global efforts to halt global warming.

Saturday, February 3, 2018

CPI a more accurate measure of living costs than we imagine

Ask any pollie, pollster or punter in the pub and they'll all tell you there are no political issues hotter than the soaring cost of living. But this week the Australian Bureau of Statistics issued its consumer price index for the December quarter.

Oh no. It showed prices rising by 0.6 per cent in the quarter and a mere 1.9 per cent over the year to December.

That's a soaring cost of living? What are these guys smoking? Has the government got to the statisticians? Or do the bureaucrats sit in some office in Canberra making up the numbers?

None of the above. In truth, the bureau puts an enormous amount of expertise, care and effort into making the CPI as accurate as possible. Which is not to say the indicator is without its limitations – nothing in the real world is.

The care is shown in an explanatory paper the bureau issued this week to accompany its latest six-yearly updating of the index.

The CPI is purpose-built to measure changes in the price of a fixed quantity of goods and services bought by people living in metropolitan households.

"Metropolitan" means the eight capital cities, and the households include wage-earners, the self-employed, self-funded retirees, age pensioners and social welfare beneficiaries. That covers almost two-thirds of all Australian households, leaving out only those in regional areas.

The index measures the change in the price of a metaphorical basket containing fixed quantities of goods and services bought in each of the capital cities. It looks at thousands of prices of individual items, divided into 87 expenditure classes, 33 sub-groups and 11 major groups.

These are: food and beverages (accounting for 16 per cent of the total basket), alcohol and tobacco (7 per cent), clothing and footwear (4 per cent), housing (23 per cent), furnishings, household equipment and services (9 per cent), health (5 per cent), transport (10 per cent), communication (3 per cent), recreation and culture (13 per cent), education (4 per cent), and insurance and financial services (6 per cent).

How does the bureau know which particular goods and services to include in the basket and, more especially, what "weight" (relative importance) to give each class of expenditure?

Every six years it conducts a survey of more than 10,000 households, asking them to keep diaries of the spending they do. As spending patterns change over time, it updates the contents and the weights given to the items in the basket.

This week it applied new weights derived from the household expenditure survey it conducted in 2015-16.  From now on, however, the weights will be updated yearly.

The bureau checks the prices consumers are being charged by regularly visiting shops and offices, by phoning businesses, and, increasingly, by checking online supermarket sites and records of scanner transactions in stores.

It checks the prices of items at least once a quarter, but more frequently if prices – petrol, for example – keep changing. It aims to show the average price charged during the quarter.

It measures the retail prices we actually pay, so prices include the goods and services tax, and excise taxes, embedded in them, but also any government price subsidies for items such as private health insurance or childcare.

It takes account of widespread "specials", provided the items are of normal quality. It seeks to measure "pure" price changes, meaning it tries to exclude price changes attributable to a change in the quality or quantity of the latest version.

If some producer tries to disguise a price increase by leaving the price of a can of baked beans unchanged, but reducing the amount of beans, the bureau uses the actual price increase per gram.

When the latest laptop or mobile phone is more powerful than the previous model, or does more tricks, the bureau tries to take account of this quality improvement by calculating the underlying or "pure" price change – often a price fall.

But if the bureau takes so much care to measure price changes accurately, why do its figures invariably seem much lower than our impression of the price rises we've experienced?

Short answer: because we don't take nearly as much care as it does. We don't keep meticulous records, but form impressions. And, as behavioural economists tell us, our memories of prices changes are subject to predictable biases.

Price changes we don't like stick in our minds, while those we don't mind are soon forgotten. We remember clearly a few big price increases – the shock we got when we saw our quarterly electricity bill – but don't remember price falls (of which there are far more in these days of digital disruption). And it never occurs to us to take account of all the many items whose prices hardly change.

As a statistician would say, we don't attach the right weights to the price changes (including zero changes) that come our way.

So, for instance, we carry on (justifiably) about ever-rising power prices, but forget that electricity accounts for just 2.2 per cent of the average household's total consumer spending.

Of course, no particular household's experience is likely to be perfectly represented by such a broad average. The index lumps together people in different cities, smokers and non-smokers, drinkers and non-drinkers, renters, mortgagees and outright home owners.

The bureau tries to reduce this problem by also publishing special living cost indexes for certain types of households. Over the year to September, in which the CPI rose by 1.8 per cent, living costs rose by 1.5 per cent for employee households, 1.6 per cent for self-funded retirees, 1.7 per cent for age pensioners, and by 2.1 per cent for unemployed households.

Sorry, but the notion that the prices I pay rose way more than other people's did is just another of our happy self-delusions.

Wednesday, August 16, 2017

How we delude ourselves about the cost of living

Let me tell you a home truth no politician would dare to: We don't have a problem with the cost of living. In fact, consumer prices rose at the unusually slow pace of just 1.9 per cent over the year to June.

I don't expect that telling you you're kidding yourself will make me popular – which, of course, is why the pollies aren't game to tell you, even though they know it's true.

But how on earth can I claim there's no problem with the cost of living when, in this column only last week, I wrote that the retail cost of electricity had more than doubled over the past decade, and was now rising by a further 15 or 20 per cent?

Because electricity bills do not the cost of living make.

Households have to buy a hundred other things apart from power, and it's changes in the combined cost of all those things that determine what's happening to the cost of living.

Trouble is, humans are not good at keeping track of what's happening to all the prices of the 101 things we buy.

We tend to focus hard on some price changes, while ignoring loads of others. Which ones do we focus on? The ones that are rising rapidly, of course.

Which ones do we ignore? The ones that don't change much. We even fail to notice or remember for long the prices that are falling.

Nothing's better suited to misleading us than bills for water, gas or electricity. They tend to come only once a quarter, which makes them a large dollar figure.

When they're a lot higher this quarter than they were last – and when we struggle to find the money to pay them – we're left convinced the cost of living is out of control.

Actually, it says we could be better at budgeting – could hold more spare cash aside for unexpected bills. But it's easier for us to shift the blame to someone else – the gov'ment, for instance.

All this subjectivity is why we get a reasonably realistic picture of changes in the cost of living only by accepting what we're told by the people whose job it is to keep a careful record of price changes, the Australian Bureau Statistics, with its consumer price index.

The index measures changes in the prices of a fixed basket of goods and services bought by households in the eight capital cities. The bureau conducts a detailed survey every six years to ensure the items in the basket reflect changes in our purchasing habits.

The basket includes 87 different classes of expenditure, covering – as we'll see – far more than just the things we buy in supermarkets. The bureau checks about 100,000 individual prices every quarter, across the eight capitals, mainly by having its workers go into shops to see for themselves, or by contacting service providers.

It tries to get the actual prices people are paying, and to adjust for changes in quality and quantity (such as when a producer reduces the size of a tin or package without reducing the price commensurately).

The index confirms that, over the decade to June, the price of electricity rose by 116 per cent, while the combined price of all the goods and services in the basket rose by just 26 per cent.

How is that possible? Because most prices rose by far less than electricity did, some prices actually fell, and – get this – electricity accounts for less than 2 per cent of the cost of all the many things we buy. (For age pensioners, it's 3.4 per cent.)

Let's look closely at that 1.9 per cent rise in consumer prices over the year to June. It includes a 7.8 per cent rise in electricity prices.

But food prices (accounting for 17 per cent of the total cost of the basket) rose 1.9 per cent, alcohol and tobacco prices by 5.9 per cent, clothing and footwear prices fell by 1.9 per cent, housing costs rose 2.4 per cent, while prices for furnishings and household equipment and services were unchanged.

Out-of-pocket health costs rose 3.8 per cent, transport costs rose 2.1 per cent, communication costs (mainly phones) fell 3.8 per cent, recreation costs (mainly audio, visual and computer costs) fell 0.1 per cent, education costs (mainly private school and uni fees) rose 3.3 per cent, and the cost of insurance and financial services rose 2.1 per cent.

This means prices fell for categories worth 17 per cent of the total cost of the basket and were unchanged for a category worth 9 per cent of the basket.

The truth so many people can't see is not that the cost of living – consumer prices – has been rising rapidly, but that wages are only just keeping up with prices.

Over the four years to March, consumer prices rose by 8.3 per cent, whereas the index for wage rates rose by an unusually weak 9.2 per cent.

What's really making us dissatisfied is not that the cost of living is rising rapidly, but that our wages haven't been rising by the 1 per cent or so per year faster than prices that we're used to, thus preventing us from increasing our standard of living.

That is, our ability to buy a bit more stuff than we bought last year.

Saturday, November 8, 2014

Too busy chopping to make spending effective

The federal government spends a lot of money trying to "close the gap" between indigenous Australians and the rest of us. Actually, we've been spending a lot for years without making much headway. So what should we do?

I suspect there are people within Treasury and Finance who think the answer's obvious: if the spending ain't working, give it the chop. Didn't you know we have a deficit problem?

But the gap between us is so wide in so many respects - life expectancy, health, income, employment, victimisation, incarceration and education - we couldn't in all conscience abandon our efforts to reduce it.

So I have a radical suggestion: why don't the people in charge of the government moneybags get off their backsides and put a hell of a lot more effort into ensuring taxpayers' funds are spent more effectively? Instead of wringing their hands, why don't they bring a bit of science to bear?

Last week Dr Rebecca Reeve, a senior research fellow of the Centre for Health Economics Research and Evaluation at the University of Technology, Sydney, outlined to a meeting of the Economic Society the results of her research evaluating the policies aimed at closing the gap.

She used econometric tools to analyse several surveys conducted by the Bureau of Statistics, noting that the nature of indigenous disadvantage and the best solutions to it may depend on where people are located.

It may surprise you that indigenous disadvantage isn't limited to people living in remote areas. And the majority of Aboriginal and Torres Strait islanders don't live in remote areas. Indeed, more live in NSW than other states or territories. Of those who do, 43 per cent live in major cities and another third live in inner regional areas. Reeve's studies focused on people in the major cities of NSW.

She found that rates of poverty were much higher for indigenous people, home ownership was lower, significantly fewer had completed year 12 and rates of employment were lower. The proportions reporting their health to be poor or fair were at least double those for other people. And the proportion who had been victims of assault was a lot higher.

Although indigenous people make up only about 3 per cent of the NSW population, they accounted for 23 per cent of prisoners. Young people are 26 times more likely to be in juvenile detention.

That's the gap. Reeve used sophisticated regression analysis to identify the key drivers of those gaps. She found that having been at school beyond year 10 made you more likely to be employed, as did participating in more than four types of social activity.

Being a lone parent, being a married female with children or being disabled made you significantly less likely to be employed.

The most significant predictors of having been a victim of physical or threatened violence in the past year were being disabled or having suffered stress from drug or alcohol use.

In this context, "disabled" means having a health problem lasting six months or more. Reeve found that by far the most significant predictor of being disabled was having been a victim of assault.

By far the most powerful predictor of being in jail was having been charged with some offence as a child. And by far the most powerful predictor of having been charged as a child was being male.

What these findings demonstrate is the interdependence of the various aspects of indigenous disadvantage. Problems such as involvement with the criminal justice system, long-term ill-health, victimisation and not having a job are all connected.

In a way, this is good news. It means targeting areas that are expected to reduce one or more of these problems should also mean improvements in other problems.

For instance, Reeve finds that an extra year of education should improve someone's employment prospects directly, but also improve them indirectly by reducing the likelihood of the person being in jail.

And get this one: her findings suggest that reducing drug and alcohol problems should reduce victimisation, which should reduce long-term health problems, which should increase employment, which should increase income.

The downside, however, is that failure to generate improvements in the key drivers of disadvantage will hinder progress in many areas.

The Council of Australian Governments' national indigenous reform agreement recognises the significance of interdependency: an improvement in one building block is reliant on improvements in other building blocks.

But though the COAG reform agenda aligns with Reeve's econometric evidence, the "close-the-gap report card" finds that targets have not been achieved in many areas. And in some areas gaps are widening.

A separate study by Reeve and colleagues on factors driving the gap in rates of diabetes also finds that, although programs are targeting the right areas, there's been no reduction in the high prevalence of diabetes among indigenous people.

I'd be surprised if Treasury and Finance have shown any interest in learning from Reeve's research. The usefulness of that research in showing "what works and what doesn't" seems to have been limited by the lack of detail in the existing official surveys it relied upon.

If we're to become better informed about why all the money we're spending isn't delivering better value we probably need to undertake more detailed, even purpose-built surveys, including longitudinal surveys that make it easier to distinguish between cause and effect.

But as we were reminded this week with all the problems the bureau has had with its jobs survey, successive governments have been reducing our statistical effort, not increasing it.

If Treasury and Finance warned the Abbott government that extracting yet more "efficiency dividends" from government agencies has become counterproductive - making government spending more wasteful in the name of making it less wasteful - there's been no whisper of it.

Reminds me of one of my father's sayings: too busy chopping wood to sharpen the axe.

Wednesday, March 13, 2013

'Wealth creators' push materialism over social side

There is a contradiction at the heart of the way we organise our lives, the way governments regulate society and even the way the Bureau of Statistics decides what it needs to measure and what it doesn't. Ask people what's the most important thing in their lives and very few will answer making money and getting rich. Almost everyone will tell you it's their human relationships that matter most.

And yet much of the time that's not the way we behave. Too many of us spend too much time working and making money, and too little time enjoying the company of family and friends.

We live in an era of heightened materialism, where getting and spending crowds out the social and the spiritual. That's the way most of us order our lives and it's the way governments order our society. They worry about the economy above all else.

Indeed, the parties' chief area of competition is over their ability to manage the economy. The opposition's latest criticism is that under Labor we're losing our "enterprise culture". What's an enterprise culture? One where all the focus is on "creating wealth" - making money, to you and me - and none is on how that wealth should be distributed between households or what it should be spent on.

It's one where the demands of the "wealth creators" (read business people) should receive priority over the selfish concerns of the wealth recipients and dissipaters (read you and me). But above all, it's one where the chief responsibility of governments is to hasten the growth of gross domestic product.

On the face of it, Julia Gillard seems to fit the opposition's criticism. This week she's hoping to make progress in putting her long-cherished national disability insurance scheme into law. Last week she was in the western suburbs of Sydney celebrating international women's day and offering "a pledge to all women and girls" that "Australia is promoting a world where women and girls can thrive and where their safety is guaranteed".

And Gillard used the occasion of her visit to the west to demonstrate her practical concern about growing traffic congestion and to announce a "national plan to tackle gangs, organised crime and the illegal firearms market".

At one level, all this is true, none of it's made up. At another level, however, it's carefully crafted image building, intended to highlight the difference between Gillard and her opponent and emphasise those differences considered most likely to appeal to traditional Labor voters who show every intention of changing sides.

The deeper truth is that, like most politicians, Gillard is working both sides of the street. Ask her and she'll assure you her government is just as good at managing the economy - and "creating wealth" - as her opponents, if not better.

Unsurprisingly, this other, harsher side of Labor was revealed at the weekend by the Treasurer. Wayne Swan opened his weekly economic note thus: "Putting a budget together is always about priorities. For the Gillard government, our No. 1 priority will always be putting in place the right strategies to support jobs and growth to keep our economy one of the best performing in the developed world."

Ah, yes. Labor professes to be just as devoted to the great god GDP as its evil, uncaring opponents. As part of this, it's been struggling - unsuccessfully so far - to get its budget back to surplus. And as part of this struggle it has required all government agencies to economise in their use of resources.

The Bureau of Statistics has been required to find savings of between $1.1 million and $1.4 million a year - hardly a huge sum in a government budget of $387 billion. But the bureau has found a way to solve its problem for the coming financial year pretty much in one go. It's decided to cancel the "work, life and family survey" long scheduled for this year.

This is mainly a survey of how people use their time, requiring a random sample of households to keep diaries of the way their time was spent for a short period. GDP measures only the value of work that's been paid for in the marketplace. It ignores all the unpaid work performed in the home, including caring for kids, and the work of volunteers.

Time-use surveys fill that gap. How much time are women spending in paid and unpaid work? How is women's participation in the paid workforce changing over time as they become better educated? How much paid work is being done by people of retirement age? To what extent is paid work encroaching on our weekends? How is the burden of housework being shared between husbands and wives in two-income families?

It had been hoped that this year's survey would shed more light on changes in the time devoted to caring for invalids and the frail aged as governments try to save money by keeping people out of institutional care. And while we're at it, what has growing traffic congestion done to the time we spend commuting?

One of the most popular maxims of the wealth creators is: you can't manage what you don't measure. Directly or indirectly, most of the Bureau of Statistics' efforts are directed at measuring GDP. It's so important it's measured four times a year. Our time use hasn't been measured since 2006. The cancellation of this year's survey means it won't be measured again until 2019.

How do we keep on our present, hyper-materialist path? One of the ways is by failing to measure its consequences.

Saturday, December 22, 2012

Adding the environment to the national accounts

Over the eight years to 2010-11, gross domestic product increased by 28 per cent, whereas Australia's net energy use increased by 18 per cent. So our "energy intensity" - energy used per $1 of GDP - is falling at the rate of 1 per cent a year.

In 2010-11 we produced 89 per cent of our total energy supply domestically, with the remaining 11 per cent being mainly imported oil. This took our total annual supply of energy to almost 19,000 petajoules. Of this we exported 71 per cent - mainly coal, uranium and natural gas.

Turning from energy to water, the price charged to households rose by 17 per cent in 2010-11, while the amount of water consumed by households fell by 8 per cent. On average, households were paying $2.44 a kilolitre. Of total water consumption of more than 13,000 gigalitres, 54 per cent went to agriculture and 33 per cent to the rest of industry, leaving just 13 per cent going to households.

Turning from water to land, Victoria's 23 million hectares of rateable land are valued at more than $1 trillion. Residential land accounts for 83 per cent of this total value, even though it accounts for only 5 per cent of the state's total area.

How do I know all this? Because I've been reading the "energy account", the "water account" and the "land account (Victoria, experimental estimates)", each published by the Bureau of Statistics in the past few weeks.

You may think from the examples I've given that the sort of information contained in these "accounts" is mildly interesting. But this exercise is really important and, to those of us who worry about the ecological sustainability of economic activity, even exciting.

You've seen me bang on before about the need for us to stop thinking of the economy being in one box and the environment in a completely separate box. The economy can't sensibly be separated from the environment because it exists within the natural environment - the ecosystem, if you prefer.

The economy depends on the ecosystem for its continued existence. It draws renewable and non-renewable natural resources and "ecosystem services" (such as photosynthesis and other natural processes) from the natural environment, then pumps all manner of pollution and waste back into the ecosystem.

It's clear that if our neglect of the ecosystem as we run the economy causes damage or depletion to the ecosystem, a point could be reached where the malfunctioning of the ecosystem inflicts damage and loss back on the economy. We could get into an adverse feedback loop between the economy and the environment.

This, of course, is exactly what's worrying us about climate change. The extensive burning of fossil fuels is causing emissions of carbon dioxide and other gasses which, partly because the clearing of land has reduced the role of forests as carbon sinks, are building up in the atmosphere, trapping in heat and interfering with the world's climate.

I fear climate change is just the first and most pressing instance of adverse feedback between the economy and the environment. If so, we need to become a lot more conscious of the interaction between the two.

But how did we get into the habit of thinking of the economy in isolation from the environment? The rest of us fell into the habit because that's the way the economists have always thought of it.

In the second half of the 19th century, when economists were setting in concrete their way of conceptualising the economy and analysing its workings, it made sense for them to conclude the environment could be excluded from the model without any great loss of relevance.

At the time, global economic activity was quite small relative to the vastness of the natural world. They couldn't know how hugely economic activity would grow, with a rapidly multiplying global population and an ever-rising worldwide average material standard of living.

Nor could they know how damming rivers, irrigating crops and sinking bores would interfere with the water cycle, how clearing land, running farm animals and growing crops would interfere with soil quality, or how ever-improving fishing technology would almost denude our oceans of fish.

Another problem was that their model was built on the role of market prices in co-ordinating economic activity. Many aspects of the natural environment, vital though they were to the functioning of the economy, weren't privately owned and didn't have a market price, so were "external" to the model.

Yet another part of the reason we've fallen into the habit of ignoring the environment when we think about the economy is that this is the way we've constructed our economic indicators - our gauges of how it's travelling. The chief gauge is the "national accounts" with their bottom line, gross domestic product.

We've taken to sharing the macro-economists' obsession with GDP, a measure of market production of goods and services during a period and the income generated by that production. It's a good indicator of employment prospects, but it takes no account of the using up of natural resources, nor of the cost of the damage economic activity is doing to the ecosystem.

But though economists may be stuck in their ways, the world's national statisticians aren't so hidebound. The concepts, classifications and accounting rules needed to calculate the national accounts in member countries have long been set down by the United Nations Statistical Commission. Earlier this year the commission decided to introduce a system of integrated environmental and economic accounting. This will involve developing environmental accounts on a comparable basis to the existing economic accounts, so they can be combined to give a more comprehensive picture of how the economy is affecting the environment and the environment is affecting the economy.

This "system of environmental-economic accounting" - SEEA - is a huge project, involving the measurement of various environmental dimensions not presently measured and the conversion of physical measures - such as petajoules and gigalitres - into dollar values.

Our Bureau of Statistics is at the forefront of this international development. Its recently published energy, water and land accounts are stepping stones in this great advance.

Publishing integrated economic and environmental accounts won't magically solve all our environmental problems, but it will make it much harder to forget these two aspects of our existence are inextricably joined.

Monday, June 11, 2012

Why we can't read the economy without help

The nation's economists, commentators and business people got caught with their pants down last week. They'd convinced themselves the economy was weak, but the Bureau of Statistics produced figures showing it was remarkably strong.

It's not the first time they've failed such a reality test. They prefer not to think about such embarrassing, humbling occurrences, but it's important to ask ourselves why we got it so wrong.

The bureau told us real gross domestic product grew by 1.3 per cent in the March quarter and by 4.3 per cent over the year to March. Then it produced labour force figures for May, showing employment has been growing at the rate of 25,000 a month this year, with much of that growth in NSW and Victoria.

So why is there such a yawning gap between what we thought was happening in the economy and what statistics say is happening?

Well, one possibility is the figures are wrong. That's likely to be true - to some extent. They're highly volatile from quarter to quarter and month to month, and much of that volatility is likely to be statistical "noise" rather than "signal".

But the financial markets, economists and media knowingly add to the noise by insisting on using the seasonally adjusted figures rather than the trend (smoothed seasonally adjusted) figures as the bureau urges them to. Truth is, both markets and media have a vested interest in volatility for its own sake - it makes for better bets and better stories.

However, even if the latest figures are likely to be revised down, their "back story" still contradicts the conventional wisdom. Cut March quarter growth back to the 0.6 per cent economists were forecasting and you're still left with above-trend annual growth of 3.6 per cent.

Consumer spending may not have grown by as much as 1.6 per cent in the March quarter, but - and notwithstanding all the retailers' complaints - it's been growing at above-trend rates for a year.

Another argument embarrassed economists are making is that the March quarter figures are "backward looking". All the news since March has been bad. They always use that excuse. But there's nothing out of date about job figures for May, and they, too, tell a story of strengthening growth.

If you accept, as you should, the figures are roughly right - especially viewed over a run of months or quarters - you have to ask how our perceptions of the economy have got so far astray from statistical reality.

It's less surprising business people's perceptions are off the mark. They're not students of economic theory or statistical indicators; their judgments are unashamedly subjective, based on direct experience and the anecdotes they hear from other business people, plus an overlay of what the media tell them.

More surprising is the evidence economists' judgments and forecasts aren't as rigorously objective and indicator-based as they like to imagine. They're affected by the mood of the business people they associate with and aren't immune to the distorted picture of reality spread by the media (because they highlight events that are interesting - and, hence, predominantly bad - rather than representative).

Like the punters, business people probably overestimate the macro-economic significance of falls in the sharemarket - particularly when our sharemarket is taking its lead from overseas markets reacting to economic news in the US and Europe that doesn't have much direct bearing on our economy.

Similarly, all the bad news from America and, particularly, Europe we're hearing from the media night after night can't help infecting our views about our economy. We're getting more economic news from China these days but we hear about the threats rather than the opportunities.

The familiar refrain about the alleged two-speed economy is tailor-made for the media but, as last week's figures make clear, an exaggeration of the truth. Consumer spending is reasonably strong in the non-mining states, as is employment growth this year.

In the absence of anything better, economists and the media persist in setting too much weight on the bureau's quarterly figures for state final demand, unaware they give an exaggerated picture of the differences in gross state product between the mining and non-mining states (because Western Australia and Queensland use much of their income to buy goods and services from NSW and Victoria).

The risk is the more we repeat the two-speed story to ourselves the more it becomes a self-fulfilling prophesy. This may be part of the explanation for the weakness in non-mining business investment spending, but as yet it doesn't seem to have affected consumer spending.

The media's highlighting of announced job lay-offs is a classic example of the way their inevitably selective reporting of job movements leaves the public, business people and maybe even economists with a falsely negative impression of the state of the labour market.

A recent list of 25 lay-off announcements showed total job losses of 17,000. When people wonder how the bureau's employment figures could be right when we know so many jobs are being lost, they're showing their ignorance of how selective media reporting is and how big the labour market is.

In a workforce of 11.5 million people, job losses of 17,000 are peanuts (though not, of course, to the individuals involved). Far more than 17,000 workers leave their jobs every month and far more take up jobs every month. The media tell us about just some of the job losses and about virtually none of the job gains.

The unvarnished truth - which none of us can admit, even to ourselves - is we think we know what's happening in the economy, but we don't. We're too fallible, and it's too big and complicated.

Monday, September 12, 2011

Rising unemployment more puzzle than worry

The unemployment rate has risen by 0.2 percentage points for two months in a row. Taken at face value, that says the economy is rapidly heading into recession. But it's always a mistake to take economic statistics at face value and, fortunately, the truth is likely to be far more reassuring.

The trick to using economic indicators to understand what's happening in the economy is not to overreact to the latest reading from one indicator. The new figure has to be put into the context of the particular indicator's trajectory and the general message coming from all the indicators.

Some indicators are more important than others. The quarterly national accounts - the centrepiece of which is gross domestic product - are the most important because they constitute the summation of a host of ''partial indicators''. GDP may be a poor guide to the nation's overall well-being, but it's a good guide to the outlook for income and jobs.

The monthly figures for employment and unemployment are very important because that's one of the main things we expect the economy to do for us: generate jobs for all those who want them.

The next question to ask when you get a new reading from an indicator is: how reliable is it? The job figures are based on a rotating sample survey, meaning they're subject to sampling error (as well as a lot of opportunity for other, human errors).

They tend to bounce around from month to month for reasons you can never put your finger on, but which don't reflect the more stable reality of the labour market. The national accounts also bounce around and are subject to heavy revision as more reliable data come to hand.

So both the key indicators are a bit ropey, and economists often use one as a check on the other. We know from last week's national accounts that, though natural disasters caused the economy to go backwards in the March quarter, it bounced back strongly in the June quarter and will recover further over the rest of the year as flooded coalmines get working again.

Last week's jobs figures told us that national employment - which totals 11.4 million - fell by 4000 in July and 10,000 last month. These are trivial amounts; they're saying not that employment is falling, but just that it's not growing. Trouble is, we need employment to keep growing because the population of people wanting jobs keeps growing. We need employment to grow by about 10,000 a month just to hold the rate of unemployment steady. Fortunately, this is less than half the rate of employment growth we needed a year or two ago because the rate of growth in immigration is now so much lower.

Note, unemployment has risen not because people are losing their jobs, but because additional jobs aren't being created. As a general proposition, we need the economy to be growing steadily because that's what creates additional jobs. Stepping back to view a longer run of figures, we see that employment was growing very strongly until November, since when it's shown virtually no growth. Though the economy contracted sharply in the March quarter, this contraction was weather-related and concentrated heavily in mining. And, as we've seen, the economy grew strongly in the June quarter.

So the pattern of growth in employment isn't easily reconciled with the pattern of growth in production (GDP). We need to examine the jobs figures to see how robust they are.

One way to see if there may be problems with the rotating sampling process is to look at what's happening to the ''matched'' sample (the part of the sample that's unchanged from one month to the next). Kieran Davies, of the Royal Bank of Scotland, has done this and finds that ''smoothed matched-sample employment is growing at 17,000 a month, while headline employment is broadly flat''. Hmmm.

Examining the breakdown of the (headline) employment figures shows the weakness is heavily concentrated among men rather than women. It also shows the problem is concentrated in Queensland (where in two months the unemployment rate has risen 0.9 percentage points to 6.2 per cent) and Western Australia (where in one month the unemployment rate has risen 0.4 percentage points to 4.4 per cent).

I don't trust those figures. But if you take them literally, both they and the national accounts are saying the precise opposite to the conventional wisdom about the ''two-speed economy'': all the weakness is in mining and the mining states, while all the strength is in the so-called non-mining economy.

But here's another puzzle. While there's been no growth in the number of people employed this year, the total number of hours worked has been rising solidly, with average hours per worker rising from 34.7 to 35.6 hours a week.

As Davies has argued, this sort of behaviour by employers - where they work existing staff harder rather than employing more workers - is what often happens when the economy is recovering from a recession and the media is wringing its hands over ''jobless growth''. It may be that, fearing skilled labour shortages, employers stocked up with workers last year, but this year they're not hiring any more until they need to.

The forward indicators of employment (job ads, vacancies etc) are weaker than they were, but still not weak. And the outlook is for strengthening GDP growth over the rest of this year, with the Reserve Bank's forecast of 3.25 per cent growth over the year to December still in with a chance.

So whatever the job figures are telling us, it's not that we're sliding rapidly towards recession - even in the so-called non-mining economy.


Saturday, December 4, 2010

Keep your shirt on, life could be worse

Oh! No! The economy was roaring along in June quarter, growing by 1.1 per cent, but now it has almost come to a halt, up just 0.2 per cent in the September quarter. What's more, take out a leap in rural production and we actually went backwards.

It made a great story this week - thrills and spills in econoland - but I wouldn't believe it. Why not? Because in real life economies don't soar and dive in the space of six months without there being a very big and obvious reason - the introduction of the goods and services tax, for instance, or the collapse of Lehman Brothers and its aftermath scaring the pants off businesses and consumers.

You need to know that both the financial markets and the media have a vested interest in statistical volatility.

It gives them something to bet on or write stories about and makes their lives more interesting. So it suits them to take economic statistics literally, ignoring their well-known limitations.

Sensible people, however, always take them with a grain of salt, knowing the economy is far more stable than the stats - especially quarter-to-quarter changes - show it to be.

The making of the ''national accounts'' - the bottom line of which is gross domestic product - is like the making of sausages: you're better off not knowing what goes into them. They're pulled together using bits and pieces from thousands of different sources.

Often, inferior sources are used because the more reliable information isn't yet available. Sometimes no information is available, so the statisticians take a guess. When the better information does come along, the figures are changed. Since the better data come along at different times, the figures for a particular quarter are constantly being changed, for at least the next two years.

The original figure for growth in the December quarter of 2008 - the quarter when Lehman Brothers collapsed - was minus 0.5 per cent. It was then revised down each quarter until it reached minus 0.9 per cent. Then it was revised up each quarter, reaching minus 0.7 per cent three months ago.

This week it was revised down to minus 1 per cent. So we're now being told the contraction was twice the size we were originally told. And there were people at the time imagining that figure had been written by God on tablets of stone.

Or, let's try another one. Three months ago we were told real GDP grew by 3.3 per cent over the year to June. Now we're told it grew by 2.7 per cent over the year to September.

Why the sudden slowdown? Well, not primarily because of the alleged virtual cessation of growth in the September quarter, but because revisions shifted 0.4 percentage points of growth out of the December quarter of 2009 and into the September quarter of 2009 (which dropped out of the annual calculation).

The Bureau of Statistics acknowledges the ropiness of its figures, which is why it tries to direct users to its ''trend estimates'', which simply average out the quarterly ups and downs. But for good reasons and bad, economists, the markets and the media invariably ignore the trend figures and focus on the more volatile unsmoothed ones.

The point is that much of the quarter-to-quarter volatility in the growth figures isn't real but just ''statistical noise''. You have to ignore the noise to hear the true ''signal'' underneath it.

Remember, too, it's easy to be bamboozled by quarterly changes. If some big transaction is accidentally put into the wrong quarter, this distorts the quarterly change for three successive quarters.

Because a big thing such as a national economy - or an ocean liner - is actually quite hard to speed up or slow down, when the figures show it rapidly speeding up in one quarter, the greatest likelihood is that the figures for the following quarter will show it rapidly slowing down.

And that's just what the past two quarters' figures show. Logical deduction: the economy didn't really grow that fast in the June quarter and didn't really slow that much in the September quarter.

There's an old trick Treasury used to reduce the statistical noise and get a clearer signal: add the last two quarters together and take an average. That says the economy has probably been growing at a quarterly rate of about 0.65 per cent over the past six months ([1.1 + 0.2] ÷ 2).

That makes more sense, but even it seems too low. How can I say that? Because we have an independent (and less volatile) set of stats to measure the national accounts against: the employment figures.

These show employment growing fairly steadily over the past year, growing particularly strongly in the September quarter and increasing by 3.2 per cent for the year. That's not an economy that's suddenly run out of juice.

So when we peer through the statistical haze, what do we see in the national accounts? First, we see that the pick-up in business investment spending - particularly in the mining sector - is occurring, in line with what the companies have long been telling us about their plans for huge spending over the coming year and longer.

Second, despite strong growth in household disposable income (fed by strong growth in employment and rising real wages), consumer spending isn't growing nearly as strongly, meaning households are saving a lot more. (The figures say the household saving rate was 10 per cent of disposable income - which is too high to believe, but undoubtedly saving is high.)

This is bad news for retailers but good news for the economy generally because it postpones the time when, with the economy nearing full employment, the economic managers are struggling to cope with a massive mining investment boom and a consumption boom.

The way they'll cope with a double boom is simple: they'll jack up interest rates (which will also add upward pressure to the exchange rate) to discourage consumer spending. So the longer households keep thinking now's a good time to get on top of their debts, the better off we'll be. The bad news in the accounts, however, is the continuing weakness in the building of new homes and also in commercial (as opposed to industrial) construction.

This suggests inadequate supply will soon be pushing up rents and thus increasing inflation pressure.

So a literal reading of this week's accounts sends us just the opposite message to the true position.


Saturday, September 18, 2010

Getting richer as we mess up our world

I guess you've heard the good news: the devastation of the Christchurch earthquake will be a godsend to New Zealand's gross domestic product, giving it an almighty and much-needed boost.

So maybe it's a pity earthquakes don't happen more often. Perhaps we could do the Kiwis a favour and send our air force bombers over there to use a few cities for target practice.

If you think this sounds stupid, you're right. To anyone in their right mind, an earthquake that destroys many buildings, roads, bridges and vehicles - and disrupts many people's lives - can't possibly be a good thing.

But it will boost gross domestic product. GDP measures market production (and the income that production generates). So as the South Islanders spend a couple of billion repairing and rebuilding their main city, much extra production will occur and many additional jobs will be created.

But what about the loss of all the valuable assets destroyed by the quake - doesn't that count? Short answer: no. GDP is a sum that's all pluses and no minuses. It counts the benefits, but ignores the costs.

It doesn't count the destruction caused by natural disasters, nor the depletion of renewable and non-renewable resources. Production involves the emission of many forms of pollution, but this cost too is ignored.

If the clearing of land to build a town involves destroying the habitat of animals, perhaps leading to their extinction, the cost of the clearing and the building counts as a plus, but the loss of habitat or species doesn't count as a minus.

So, does that make GDP a giant con job? Yes and no. Economists will tell you GDP is an accurate measure of what it's intended to measure: market production and national income; it's not, and was never intended to be, a measure of the nation's well-being.

But this is disingenuous. Economists don't understand it's possible to know things without that knowledge being reflected in our behaviour. And though all economists know GDP is not a measure of well-being, they still treat it as though it is, obsessing over it, ignoring other indicators and encouraging us to do the same.

If GDP is so defective as a measure of well-being or social progress, why doesn't someone try to fix it? Well, many people have tried, but they've had little success. Trouble is, many of the factors affecting our well-being can't be measured in dollars, so they can't be included in the sum that is GDP.

This is the conclusion our own Bureau of Statistics soon came to when it set out to answer the question: is life in Australia getting better? To answer that you need to look at a diverse range of indicators and it's not possible to convert those indicators to a common basis so they can be added up to give a single, summary indicator.

Instead, each year the bureau produces Measures of Australia's Progress. It collects 17 indicators, gathered under three headings - economy, society and environment - trying to judge whether we've progressed or regressed on each indicator over the past 10 years.

Its latest issue was released this week to coincide with its NatStats conference on the topic, "Measuring What Counts: economic development, well-being and progress in 21st century Australia".

It shouldn't surprise you we've made progress on most of the economic indicators. Real net national disposable income (about the most meaningful derivative of GDP) increased from $35,000 a year per person in 1999 to $45,300 in 2009. It grew at an average rate of 2.6 per cent a year, well up on 1.5 per cent annual growth for the previous decade.

The nation's real net worth (assets minus liabilities) grew at the average rate of 0.9 per cent a year over the decade to reach $314,000 per person.

But not all the key economic indicators are good. The affordability of rent by low-income households - that is, housing costs as a proportion of gross income for low-income renters - has stayed constant at 27 per cent over the decade.

And the level of "multifactor productivity" - a measure of the efficiency with which the economy transforms inputs into outputs - has been relatively flat throughout most of the decade. So our economic growth came more from using additional inputs than from using inputs more efficiently.

With that mixed picture on the economy, let's move on to the key social indicators. Over the past decade, life expectancy at birth has increased by 2.2 years for girls and 3.3 years for boys. Over the same period, the proportion of people aged 25 to 64 who have a vocational or higher education qualification has risen from 49 per cent to 63 per cent. And the annual average rate of unemployment fell from 6.9 per cent to 5.6 per cent.

On crime, 6.3 per cent of all Australians aged 15 and over say they were victims of at least one assault in 2008-09. On family, community and social cohesion, there's no summary measure that captures the story. But the proportion of children living without an employed parent has fallen from 18 per cent to 13 per cent; the proportion of adults doing voluntary work during a year has risen by half to 34 per cent, and suicide rates have fallen for both sexes.

Turning to the environment, the past decade has seen the number of threatened fauna species increase from 312 to 427. In that time our net greenhouse gas emissions per year have increased by 16 per cent.

We have no summary indicator on our use of land, but the amount of annual land-clearing has fallen by a third, whereas the area of native forest remaining has fallen by 10 per cent. There's no summary indicator of our use and abuse of inland waters, oceans and estuaries. The volume of waste generated in Australia has nearly doubled.

We're entitled to draw two conclusions. First, when you drill down you find the general impression of ever-increasing well-being given to us by politicians, business people and economists is misleading. GDP might be growing rapidly, and the available social indicators may be all right, but we're going backwards on most environmental indicators.

Second, it's clear that, historically, much of the bureau's effort has gone into measuring the components of GDP, with too little effort being devoted to measuring the other, social and environmental dimensions of our well-being. Until that imbalance is corrected, the bureau's output will continue to mislead us.


Wednesday, May 19, 2010

Prosperity cannot be paid forever by maxing out our green credit

The most thought-provoking comment I've seen on the budget came from Senator Christine Milne of the Greens. ''Every Australian knows,'' she said, ''that if you have two credit cards, it is very bad management to pay off your debt on one of them by racking it up on the other.'' The budget ''pulled down the national economic debt, but it continued the process of racking up our ecological debt''.

Sadly, it's true. The budget formally records Kevin Rudd's failure of leadership with his cowardly and illogical decision to shelve his emissions trading scheme.

It shows he took steps to avoid being accused of using the abandonment of the scheme to hasten the budget's return to surplus by using the net cash saving involved - $653 million - to increase spending on renewable energy.

The reversal did make it possible for the Government to meet its commitment to limit the real growth in its spending to 2 per cent a year.

And it did mean it was abandoning a ''great big new tax on everything'' in favour of a great big new tax on the mining companies, with the proceeds to be used to buy votes with a range of tax cuts and concessions - surely a net political gain.

Even so, if the government wants to insist it was motivated more by lack of political courage than by budgetary expediency, I accept its protestation.

No, that's not the point. It's that the budget continues our practice of worrying intensely about what we're doing to the economy while ignoring what we're doing to the environment. We just took a decision to take our chances on global warming - to do nothing to prepare for global action on climate change and nothing to set an example others might follow - but nowhere does that show up as a cost or liability.

It's not in the budget, nor in gross domestic product. It's invisible. We carefully measure and hugely publicise any increase in government debt or setback in economic growth, but what our actions and inactions are doing to the environment is largely out of sight.

When we run down our non-renewable resources (as we're hoping to do at a much faster rate with the return of the resources boom), nowhere does this show up as a cost or reduction of our assets. When we continue to deplete renewable resources at a rate much faster than they can renew themselves, nowhere does this show up as any kind of negative.

When we continue pumping our waste back into the environment - including greenhouse gases, but also other air and water pollution, garbage and human waste - at a faster rate than it can absorb, nowhere is this recorded as a cost.

GDP, our great de facto measure of progress, counts the short-term benefits from all this exploitation, but ignores its long-term costs. So Milne is right: we have been paying off our economic credit card by racking up debt on our environmental credit card.

But as the still-unfolding global financial crisis reminds us, you can get away with racking up debt only for so long. And with the environment the day of reckoning has already started to dawn. Lift your head from the economic statistics and you see rising average temperatures, the clearing of native forests, the destruction of habitat, the decline in fish stocks, the damage we've done to the Murray-Darling and other river systems and the degrading of our soil.

So far we've managed to keep the economy separate from the environment, but we won't get away with that much longer. Why not? Because, in the words of a former US senator, ''the economy is a wholly owned subsidiary of the environment''.

The economy exists within the natural environment and is dependent on it. Logically, you could have the natural world without an economy - that is, without human activity - but you couldn't have an economy without a natural world.

We can go for a period running our economy at the expense of the environment - plundering its natural resources on one hand, pumping out our waste on the other - but eventually we start to get feedback. The despoiled and depleted ecosystem begins to malfunction, with serious consequences for the continued functioning of our economy.

We get a lot more extreme (and thus expensive) weather events, a rising sea level forces us to move back from the coast, we start running out of native forests and some mineral resources and fossil fuels (making energy and fertiliser a lot dearer), we see the destruction of international tourist attractions such as the Great Barrier Reef,

we have to move agriculture north to where the rain is, but the elimination of fish stocks and degradation of soil makes food production a lot harder and more expensive the world over.

How did we get into the mindset that allowed us to take the environment for granted? Well, mainly it's because economic activity is simply more visible than the environment. And because, until relatively recently, we could plunder the natural world with impunity.

But also because we're wedded to a way of thinking about (and measuring) the economy that, because it has changed little in the past 150 years, simply ignores the environment. Because at the time global economic activity was so small relative to the huge natural world, it made sense for the early economists to treat the environment as a ''free good'' - something so plentiful it comes without cost.

But with the human population having more than trebled since 1927 and the global standard of living also having risen considerably, it's no longer sensible to treat the environment as an ''externality''.

We need a new economic model - and a new way of measuring progress - that recognises the centrality of the environment to our wellbeing and keeps recording and reminding us when we charge things up on our environmental credit card, as Rudd has just done.

Friday, July 17, 2009


Talk to ABS seminar, Canberra
June 17, 2009

When Geoff Neideck invited me to talk to you he said you’d be interested in getting a perspective on the use of ABS data in the media, and I’m happy to oblige. I’m happy to be here talking to the bean counters because I’ve been a bean counter all my working life. I started as an accountant, then graduated to the economy. As that epithet implies, people concerned with the intricacies of counting things are not highly regarded. The glory goes to those who make the beans, or those who use the counts to draw interesting conclusions.

But years in the counting business have convinced me of an under-rated truth: what gets measured gets taken seriously, whereas things that aren’t measured tend to be ignored. The problem is that we tend to measure what’s easily measured, but many things difficult to measure are more important. The problem is compounded when we seize on a readily available measurement without bothering to inquire of the boring bean counters whether it measures what we think it does.

I want to talk about the media’s use and abuse of ABS statistics, but first I want to make a qualification. Among journalists there are two kinds of users of your statistics, the professionals and the amateurs. The most intensive users of ABS stats are the economic journalists, who are professional users. These are people such as me, Tim Colebatch, Alan Mitchell, Michael Stutchbury, Alan Wood, Peter Martin, David Uren and Stephen Long who, by both education and experience, can be expected to use and interpret your stats with care and accuracy. If you see us misinterpreting your data we’d be most grateful for a quiet phone call explaining where we went wrong. We have younger economic reporters working for us, often with less experience of the intricacies of economic statistics, but rest assured that we’re training them in those mysteries and drawing to their attention any misunderstandings we find in their copy, even if (as in my case) it’s after they appear in print.

That’s enough about the professional, specialist users of ABS data. You’re entitled to expect high standards from them and, for the most part, I think you get it. All the rest of what I’ve got to say about the media’s use and abuse of statistics applies to the amateur users: journalists whose use of your data is infrequent and quite unqualified. These users range from political journalists here in Canberra to reporters in the state capitals who occasionally get hold of social statistics, right up to the editors. The main thing I want to do is explain why the media so often use stats in ways you disapprove of. I want to give you an insight into how it is from our perspective. This will contribute little to reducing the misuse of statistics, but it will help you understand what you’re up against.

Many of the complaints about misuse of stats arise from the headlines on stories and the truth is that the headline on a story heavily influences a reader’s perception of what the story is saying. But headlines are written by sub-editors, not reporters, and sometimes there’s a gap between what the story actually says and what the headline says it says. If there is, most readers won’t notice it. Such gaps can occur for three reasons: because the hard-pressed sub doesn’t accurately comprehend what the story’s actually saying; because the reporter has left some ambiguity in his copy and the sub, who generally knows far less about the topic than the reporter, has jumped the wrong way; or because the sub knowingly writes a headline that makes the story sound more exciting than it actually is. The first two explanations - misunderstandings - are more likely to be the case on broadsheet newspapers; the third - misrepresentation - is more likely to be found in tabloid newspapers.

In one offending Herald story, the NSW Bureau of Crime Statistics issued a report and an accompanying press release saying that the prison terms for most offences had increased, whereas the headline on the story said they’d fallen. The interesting question is why the reporter wrote his story in a way that encouraged that error to be made - why he focused on unrepresentative falls rather than the representative rises. I’ll try to answer that when we get to the question of motive - why the media behave the way they do. Perhaps here I should remind you that journalists have to draw the essence from sometimes long and complex reports or events in just an hour or two - under pressure from bosses to make it quick and make it sexy - so it’s not surprising errors and misinterpretations occur.

Now let me give you some relevant background information. Much of the news the media publish comes to them in the form of press releases. The ABS’s releases have some of the characteristics of a press release, and sometimes they’re accompanied by an actual summarising press release. It’s often alleged that the media are so lazy they largely publish uncritically the press releases sent to them by powerful government, business and other interests. In my experience that’s usually not the case; quite the reverse. These days most interest groups seek to use the media to advance their own interests. They employ PR people to put their own spin on the information they release to the media. Most journalists aren’t lazy and they see it as their job to get past the spin, finding the news their audience would like to know about but which the powerful interest would like to conceal. When they receive a report or a press release they think: there’s probably an interesting story in here somewhere, but I’ll have to dig for it; certainly, it won’t be the one the people who put out the press release put at the top of the release. There’s so much spin in the world that many journalists come to the conclusion that everyone’s trying to pull the wool over their eyes. You may regard the ABS as a beacon of independent truth-seeking, but I guess many journalists would suspect it’s just another government agency pumping out bromide at the behest of its political masters. There’s a saying in journalism that news is anything somebody somewhere doesn’t want you to know. My guess is that the Herald journalist in question waded through the crime bureau’s report until he found the bit he thought the NSW Government wouldn’t want people to know: that in the case of five significant offences, rates of imprisonment are going down not up.

Much of the misrepresentation of ABS data arises from statistical misinterpretation. You can misrepresent a time series in a host of obvious ways: by choosing a convenient time period for your comparison, by ignoring random variation (ie failing to ignore outliers), by ignoring seasonal variation, by ignoring base effects (eg saying some rate has doubled when it’s gone from 2 a year to 4 a year) and by ignoring the effect of government policy.

The question is whether the journos who commit these statistical crimes are knaves or fools. I couldn’t deny there’s a lot of knavery - journos who know they’re distorting the statistics’ message, but don’t care - but there are more fools than you may imagine. Most journalists are arts-degree types with a very weak grasp on maths and little clue about how to interpret statistical information. If they did understand those things they’d be an economics editor by now. But the question goes deeper: many journalists wouldn’t be sure the diligent performance of their job required them to take account of those statistical niceties. The rules of statistical interpretation aim to ensure the user draws from the stats an accurate or representative picture of the aspect of the world the stats relate to. But that’s simply not the objective of journalism. Journalism pays no heed to the scientific method.

So let’s turn to the question of why the media sometimes misuse statistics and misrepresent their message. Let’s look at motive. Much of the criticism of the media rests on the unspoken assumption that the media’s role is to give us an accurate picture of the world around us. We don’t have first hand experience of much of what’s happening around us and we need the media to inform us.

If that’s the role you think the media play - or should play - I have shocking news. The news media are on about news. What is news worthy? Anything happening out there that our audience will find interesting or important, although the interesting will always trump the important. Paris Hilton is interesting but of no importance; the latest change in the superannuation rules is important but deadly dull - guess which one gets more media overage?

Maybe 99 per cent of what happens in the world is of little interest: 99 per cent of the motorists who crossed the Sydney Harbour Bridge today made it without incident; someone you’ve never heard of went to work as usual and sold a new ring to someone you don’t know; Australia didn’t declare war on New Zealand . . . the list of uninteresting things that happen is endless. Journalists sort through all the things that happen looking for things they believe their audience will find interesting: the 10-car pile-up on the Bridge, Brad Pitt bought a ring for Angelina Jolie to make up after a fight, the Dutch withdrew their troops from Afghanistan.

When social scientists take a random sample they may examine the sample and discard any outliers that could distort their survey, throwing them on the floor. A journalist is someone who comes along, finds them on the floor and says, ‘these would make a great story’. I happened to be in the Herald’s daily news conference last February on the day Kevin Rudd’s $42 billion stimulus package was announced, with all its (then) $950 cash handouts. We discussed searching for a farmer who’d get $950 because he was in exceptional circumstances, $950 because he paid tax last year, $950 because his wife also works, $4750 because he has five school-age kids, and maybe another $950 because one of the kids is doing a training course. And, of course, he’d have a big mortgage, meaning he’d also save $250 a month because of the 1 per cent cut in interest rates announced the same day. Had we found such a person and taken a good photo of him he’d have been all over our front page. The point is that we were search for the most unrepresentative person we could find. Why? Because our readers would have been fascinated to read about him. It’s reasonable to expect the media to be accurate in the facts they report but, even if they are, it’s idle to expect them to give us a representative picture of the world.

And that takes me to an even more shocking thought: if the media aren’t on about giving us a representative picture of the world around us, why would journalists bother adhering to the rules of statistical interpretation? Why not highlight a quite unrepresentative statistical comparison if it happens to be the most interesting comparison?

It’s often claimed that the media focus heavily on bad news, often ignoring good news. Guilty as charged. But we do so for a simple reason: we know our audience finds bad news a lot more interesting than good news. So I’m not particularly apologetic for this state of affairs: our failings are the failings of our audience, which are the failings of human nature. Why do people find bad news more interesting than good news? As I’ve written elsewhere (SMH 12.4.2006), I believe the explanation can be found in our evolutionary history. Our brains are hardwired to perpetually scan our environment for threats, and now the chances of our being eaten by a lion have diminished we’re left with a strong appetite for bad news about, for instance, the threat of crime.

Communications research tells us we read much more for reinforcement than enlightenment. While there’s a niche market for columns that challenge the conventional wisdom, and news about some new and unexpected twist in a standard story will be found interesting, journalists know the news that goes down best is the news that confirms people prejudices. Perhaps thanks to the efforts of the media themselves, most people know as a self-evident truth that crime is increasing. Most stories about crime are intended to reinforce that belief.

The media’s defence against criticism is that their failings are those of their audience; they do what they do because their audience demands it of them. But shouldn’t we hold the media to a higher standard than we hold ourselves? Yes we should. We can expect less crass commercialism and more professionalism. Doctors, for instance, don’t ask patients what disease they want to be told they have and don’t let patients pick the medicine they want prescribed.

And there’s a limit of inaccuracy and sensationalism below which market punishment sets in. Mediums that play too lightly with the truth eventually lose their credibility and their audience’s respect. This means there are checks and balances. Mediums that value their credibility - in commercial as well as ethical terms - often employ commentators who set a high store on making sure their audience isn’t misled, even when those commentators spend a fair bit of time highlighting the media’s own failings and trying to beat down some of the things that get beaten up on the front page. My guess is that, as information overload and infotainment continue to grow, at least the better-educated audience will gravitate to those journalists and journals they perceive to be committed to the search for truth. What’s more, it is possible to be truthful and interesting at the same time.

Turning to the question of community expectations and perceptions of the ABS, from where I sit the community knows little about the role and functions of the ABS and spends very little time thinking about it. In particular, people have no understanding of the bureau’s independence and see it as just another government department doing what the government tells it to do.

Some years ago someone from the bureau came to the Herald’s office to give a few of our senior people a little seminar on the virtues of the trend estimates over the seasonal adjusted figures. After it was over the editor at the time said to me: ‘Well, we won’t be using trend figures - they’re only estimates.’ He was quite surprised when I explained that almost all the bureau’s figures were estimates. When I was an economic reporter in Canberra 34 years ago, the chief sub-editor told me not to use seasonally adjusted figures because the Herald only reported the real figures, not figures some statistician had played around with. These days, of course, we use the seasonally adjusted figures as a matter of course without even bothering to say we’re doing so.

But you will have noted that, notwithstanding all the bureau’s efforts to give greater prominence to the trend figures, the media - like the business economists - largely ignores them and continues to highlight the seasonally adjusted estimates. We do this mainly because, like the financial markets, we have a vested interest in volatility. The more the figures bounce around, the more interesting the stories we can write - and the more exciting the markets’ betting games. But the econocrats prefer the seasonally adjusted figures, too. And whatever our true motives, we all have a good statistical excuse: our interest is in the figure for the most recent month or quarter, and here the trend estimate runs into the ‘end-point problem’ - the inability to centre the moving average.

You probably know that many people - maybe most - regard the CPI as something that’s made up in a government department somewhere with the intention of understating the true inflation rate. That’s because their own mental estimate of price increase is so much higher than the bureau’s. The question of why that’s the case is one to which I’ve given much thought over the years. You can say that, were I to carefully calculate a personal CPI it would differ from the official figure because the weights in my basket would differ from the eight-capital average. You can say that I may not adequately distinguish between quality improvements and pure price increases.

That’s true, but it doesn’t get to the heart of the disparity. A bigger problem is that people don’t weight the price changes they encounter. An even bigger problem is what psychologists call the ‘availability heuristic’. Large prices rises stick in our mind more than small increases and price rises are easier to remember than price falls. And get this: in most people’s mental CPI, prices that don’t change would get a weighting of zero.

There’s probably not a lot the bureau can do about that, but there’s one key economic indicator whose low credibility with the public it can act to improve - the measure of unemployment - and now it has. A large number of people believe the official unemployment figures are a fraud and have been manipulated by the Government to understate the true position. They have a vague but firm memory of the Howard government changing the definition of unemployment. They get muddled between being unemployed and being on the dole. They have no perception of the bureau’s independence and no notion of international conventions that haven’t changed in decades.

I have to tell you, however, that I’ve tired of trying to dispel the public’s misconceptions on this issue and my sympathy for the bureau has run out. The unvarnished truth is that, for whatever reason, the official unemployment figures are misleading, they do significantly understate the true extent of the problem, and the bureau could publish less misleading figures if it wanted to. The fact is that the international rule that doing an hour’s work a week means you’re not unemployed may have made sense once and may still make sense in some countries, but it makes no sense in a country like ours where part-time employment accounts for 28 per cent of total employment. And if the bureau can publish estimates of underemployment once a year it’s hard to see why it can’t publish broader estimates of labour underutilisation every month. I’m here to tell you I can’t think of an issue that has done greater damage to the bureau’s credibility with the public, so I’m delighted to see your latest decision to publish the underutilisation rate monthly.