Economy's rebound goes well, but now for the hard part

Does the economy’s strong growth last quarter mean the recession is over? Only to those silly enough to believe in "technical" recessions. Since few economists are that silly, it’s probably more accurate to call it a "journalists’ recession". Makes for great headlines; doesn’t make sense.

It’s probably true – though not guaranteed - we’ll suffer no more quarters where the economy gets smaller rather than bigger. But people fear recessions not because they deliver growth rates with a minus sign in front of them, but because they destroy businesses and jobs.

You’ll know from walking down the main street that some businesses have closed and not been replaced. You’ll probably also know of family or friends who’ve lost their jobs or now aren’t getting as much casual work as they need and were used to.

By any sensible measure, this recession won’t be over until the rates of unemployment and underemployment are at least back down to where they were at the end of last year, before the virus struck. And Reserve Bank governor Dr Philip Lowe said this week that wasn’t likely for more than two years.

On a brighter note, the increase of 3.3 per cent in real gross domestic product during the September quarter, revealed by the Australian Bureau of Statistics in this week’s "national accounts", does mean the recovery from recession is off to a good start.

So far, however, what we’ve had is not so much a recovery as a rebound. Remember, this unique recession was caused not by an economic threat, as normal, but by a health threat.

The contraction in GDP of a record 7 per cent in the June quarter was caused primarily by a sudden collapse in consumer spending of 12.5 per cent. Why? Because, to halt the spread of the virus, governments ordered many retail businesses and venues to close, employees to work from home if possible, and everyone to stay in their homes and leave them as little as possible.

As a result, people who’d kept their jobs had plenty of money to spend, but greatly reduced opportunity to spend it. Even people who’d lost their jobs had their income protected by the JobKeeper wage subsidy scheme and the temporary supplement to the JobSeeker unemployment benefit.

Turns out that, despite the loss of jobs, those two big support measures actually caused a jump in the disposable incomes of the nation’s households in the June quarter. But, since it was impossible to keep spending, the proportion of households’ income that was saved rather than spent leapt from 7.6 per cent to 22.1 per cent.

The worst-hit parts of the economy were hotels, cafes and restaurants, recreation and culture, and transport (public transport, motoring, domestic and overseas air travel).

But this initial lockdown lasted only about six weeks before it was gradually lifted in all states bar Victoria. In consequence, consumer spending jumped by 7.9 per cent in the September quarter, more than enough to account for the 3.3 per cent jump in overall GDP.

Guess what? The strongest categories of increased spending were hotels, cafes and restaurants, recreation and culture, and transport services. Spending on healthcare rebounded as deferred elective surgery and visits to GPs resumed.

The quarter saw the rate of household saving fall only to 18.9 per cent – meaning people still have plenty of money to spend in coming quarters, even if pay rises will be very thin on the ground. And, since Victoria makes up a quarter of the national economy, its delayed removal of the lockdown ensures the rebound will continue in the present, December quarter.

See the point I’m making? When the greatest part of the collapse in economic activity was caused by a government-ordered lockdown, it’s not surprising most of that activity quickly returns as the lockdown is unwound.

But this is just a rebound to something not quite normal, not a conventional recovery as the usual drivers of economic growth recover and resume their upward impetus.

Thanks to the massive support from JobKeeper and JobSeeker, the rebound is the easy, almost automatic bit. But even the rebound is far from complete. The lockdown will leave plenty of lasting damage to businesses and careers – and the psychological and physical recovery is much harder matter to get moving.

Treasurer Josh Frydenberg boasts that, of the 1.3 million Australians who either lost their jobs or saw their working hours reduced to zero at the start of the pandemic, 80 per cent are now back at work.

Which is great news. But 80 per cent is still a long way short of 100 per cent. And even when 100 per cent is finally attained, that only gets us back to square one. It doesn’t provide additional jobs for those young people who’ll be needing employment in coming years.

Note, too, that most of the rebound in employment has been in part-time jobs. So far, less than 40 per cent of the 360,000 full-time jobs lost between March and June this year have returned.

In March, the rate of unemployment was 5.2 per cent; now it’s 7 per cent. The rate of underemployment was 8.8 per cent; now it’s 10.4 per cent.

And, returning to this week’s figures for GDP in the September quarter, once you look past the rebound in consumer spending, you don’t see much strength in the rest of the economy. Output in mining fell by 1.7 per cent, while production in agriculture was down 0.6 per cent.

One bright spot was home building, which ended a run of eight quarters of decline to grow by 0.6 per cent. Many new building approvals say this growth will continue.

But non-mining business investment in new equipment, buildings and structures incurred its sixth consecutive quarterly fall, with subdued investment intentions suggesting the government’s investment incentives will have limited success.

Little wonder the Reserve’s Lowe has warned the recovery will be "uneven, bumpy and drawn out". Don’t pop the champagne just yet.

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It'll be a long haul to get the economy going properly

If you’ve been away on Mars for the past five months, it will have been a huge surprise to learn this week that the economy is now "officially" in recession. For the rest of us, the news is the size of the recession, how it compares, what contributed most to the contraction, and the cloudy outlook for recovery.

The Australian Bureau of Statistics’ "national accounts" show real gross domestic product fell by 7 per cent in the June quarter, on top of the 0.3 per cent fall in the previous quarter. This is by far the largest fall in any quarter since we began measuring quarterly GDP in 1959.

The next biggest was a fall of 2 per cent in the June quarter of 1974. As Callam Pickering, of the Indeed global job website, reminds us, our total fall since December compares with peak-to-trough falls of 1.4 per cent in our previous recession in the early 1990s, and 3.7 per cent in the recession of the early 1980s.

So, no doubt this is indeed the worst recession since the Great Depression of the 1930s. Why so bad? Because, as David Bassanese of BetaShares tells us, "this is a recession like no other," being caused by the almost instantaneous spread around the world of a deadly virus and the consequences of our efforts to suppress the virus by ceasing much economic activity.

This coronacession is distinguished by its very front-loaded and cruelly uneven nature. “Unlike past recessions, which usually evolve over a year or so, most of the contraction in the economy took place within two short months,” Bassanese says.

The sudden need to lock down much of the economy and get people to leave their homes as little as possible raises the hope that, as the economy is re-opened, much of that activity will be resumed. And if we switch the focus from what’s happening to GDP – the economy’s production of goods and services – to the more important issue of what’s happening to jobs, we see this is already happening.

Treasurer Josh Frydenberg reminds us that, of the 1.3 million people who either lost their job or were stood down on zero hours following the outbreak, more than half were back at work by July.

This suggests we should be able to expect a significant bounce-back in production in the present September quarter, which has less than a month to run. Sorry, Victoria’s second wave and return to lockdown have put paid to that fond hope.

With the rest of the nation re-opening, but Victoria accounting for about a quarter of GDP, the optimists in Treasury are hoping for a line-ball result, but most business economists seem to be expecting a further (though much smaller) fall.

With any luck, however, Victoria should have started re-re-opening by the end of this month. So, a big recovery in production in the run up to Christmas? Sorry. Unless the government changes its tune by then, the economy will be struggling to cope with the withdrawal of much of Scott Morrison’s budgetary support.

Time for some good news. Remember that, no matter how tough things are looking in Oz, they’re looking better than in the rest of the developed world, with the United States losing 9 per cent during the June quarter, the Europeans down 12 per cent, and Britain down 20 per cent.

Why have we been hit less hard? Because we closed our borders earlier and had more success at containing the virus. We didn’t have to lock down as hard and were able to re-open earlier.

Now back to the details of how our 7 per cent contraction came about. The great bulk of it came from consumer spending - accounting for well over half of GDP – which fell by a remarkable 12.1 per cent during the quarter.

Consumption of goods fell a bit, while consumption of services fell hugely. Why? Because staying at home and social distancing slashed our spending on services such as hospitality, recreation and transport (public, car and air).

To the fall in consumer spending we must add falls of 6.8 per cent in new home building and 6.2 per cent in business investment in new equipment and structures. Note that this continued the declines in these two areas that began well before the virus arrived, showing the economy was weak even before the crisis.

This collapse in private sector spending was partly offset by growth in two parts of the economy. First, public sector spending grew by 2.5 per cent, mainly reflecting greater health care costs. (Note that, being "transfer payments", the huge spending on the JobKeeper wage subsidy scheme shows up as an addition to wage income, while the greater spending on JobSeeker unemployment benefits also shows up as an addition to household disposable income.)

This increased government assistance, at a time when job losses meant wage income was falling, actually caused household disposable income to rise by 2.2 per cent. Combined with the remarkable fall in consumer spending, however, this helps explain why the rate of household saving leapt from 6 per cent of household income to almost 20 per cent.

Second, our international trade made a 1 percentage point positive contribution to growth because, although the volume of our exports of goods and services fell, the volume of our imports of goods and services (which subtract from growth) fell by more.

(Just so you know, partly because of this we recorded our largest quarterly current account surplus on record of $18 billion, or 3.8 per cent of GDP. This is our fifth consecutive surplus, the longest run of surpluses since the 1970s. For a financial capital-importing economy like ours, this is actually a sign of economic weakness.)

Remembering that the outlook for coming quarters isn’t bright, I leave the last, sobering word to the ANZ Bank’s economics team: “Significant further stimulus over the next few years is likely to be required to generate growth and jobs and drive the unemployment rate down.”

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Virus lockdown pushes already weak economy into recession

If you needed the news that the economy contracted in the March quarter or Treasurer Josh Frydenberg’s official admission that, because Treasury expects the present quarter to be much worse, we are now in recession, go to the bottom of the class. Sorry, but you just don’t get it.

To anyone who can tell which side is up, what characterises a recession is not what happens to gross domestic product in two successive quarters or even half a dozen, it’s what happens to employment.

The role of the economy is to provide 13 million Australians with their livelihoods. When it falters in that role, that’s what we really care about. We call it a recession, and it’s why just hearing that word should frighten the pants off you. It means hundreds of thousands – maybe millions – of families will be in hardship, anxiety and fear about the future, which could go on for months and months.

So you should have been in no doubt that the economy was in recession from the day, weeks ago, you turned on the telly to see footage of hundreds of people queueing round the block to get into Centrelink and register for unemployment benefits – the JobSeeker payment as it’s now called.

The statistical confirmation of recession came not this week, but more than three weeks ago when the Australian Bureau of Statistics issued labour force figures showing that, in just the four weeks to mid-April, the number of Australians with jobs fell by an unprecedented 600,000.

What more proof did you need? There was more. The total number of hours worked during the month fell by more than 9 per cent. Also unprecedented. In consequence, the rate of under-employment (mainly part-timers wishing to work more hours than they are) leapt by almost 5 percentage points to 13.7 per cent. “Gee, do you think a recession might be coming?”

Of course, what happens to jobs is closely related to what happens to GDP – the volume of goods and services being produced during a period. When firms or government agencies decide to reduce the goods or services they’re producing, it’s a safe bet they’ll also reduce the number of workers they need to help with the producing.

No, my point is just, don’t get the monkey confused with the organ-grinder. We don’t need GDP to tell us whether we’re in recession, we need it to help us understand why we’re in recession and which aspects and industries are most affected.

So let’s start again. The “national accounts” issued by the bureau this week showed real GDP fell by 0.3 per cent in the March quarter so that the economy grew by only 1.4 per cent over the year to March.

To put that 0.3 per cent fall into context, had the economy continued growing at its previous rate it would have increased by about 0.5 per cent. So it’s a fall of 0.8 per cent from what might have occurred. A bit of that fall is explained by the bushfires, but most of it by the early stages of the economic response to the coronavirus – particularly the travel bans and first two weeks of the lockdown.

The largest factor explaining the actual fall is consumer spending, which fell by 1.1 per cent and so contributed minus 0.6 percentage points to the overall fall of 0.3 per cent. Some of this fall was involuntary (as the early days of the lockdown closed many businesses and prevented housebound families from getting out to shop), but much would have been deliberate, as households tightened their belts in anticipation of tough times to come.

Investment spending on new homes and alterations continued to fall – by 1.7 per cent – and business investment spending fell by 0.8 per cent. So, all told, the private sector’s subtraction from growth increased to 0.8 percentage points.

In contrast, government consumption spending (which included spending related to the bushfires and the virus) grew by 1.8 per cent. Add modest growth in infrastructure spending and the public sector made a positive contribution of 0.3 percentage points to the overall fall in GDP during the quarter.

Apart from a fall in inventories that subtracted 0.3 points from the overall change, that leaves “net exports” (exports minus imports) making a positive contribution of 0.5 percentage points. But that’s not as good as it sounds. The volume of our exports actually fell by 3.5 per cent, so we got a positive contribution only because the volume of imports fell by more.

The main factor influencing trade was the travel bans, which hit inbound tourism and incoming overseas students (both exports) and hit outbound tourism (an import) harder. We’re a net importer of tourism.

You see happening in this recession what happens in every recession: it’s the private sector that contracts, whereas the public sector (via federal and state budgets) expands to fill the vacuum. The extent to which governments apply “fiscal stimulus” and allow their budget deficits to rise has a big influence on how severe the recession is, how high unemployment goes and how long it takes to get everyone back to work.

Frydenberg claimed on Wednesday that the economy entered the crisis “from a position of strength”. This is simply untrue. People will stop believing what the Treasurer says if he continues playing so lightly with the truth.

The truth comes from economist David Bassanese of BetaShares: “Let’s not forget the economy was already struggling before the virus crisis due to a downturn in housing construction, weak business investment and tapped out consumer spending. Those fundamental challenges have not gone away, and the shock of COVID-19 has only exacerbated them.”

The truth Frydenberg is so unwilling to face up to is that, with the private sector already so weak, we were relying on the federal and state budgets to prop up the economy for many quarters before the virus arrived. Pretending otherwise won’t create a single job.

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Some major contagions have nothing to do with you-know-what

It’s a long weekend so, though we’re barred from enjoying it in the usual way, let’s at least forget the V-word. How about a quiz?

Let’s say the government is preparing for the outbreak of an unusual disease (no, not that kind of disease) that, should we take no action, is expected to kill 600 people. The government could act to combat the disease in either of two ways.

If program A is adopted, 200 people will be saved. If program B is adopted, there’s a one-third chance that 600 people will be saved, and a two-thirds chance that no one will be saved. Which one would you choose?

If you chose A, congradulations. You’re in good company. When this psychology experiment is run, about 72 per cent of subjects favour A and only 28 per cent favour B.

But then the government consults the epidemiologists. Their advice is: forget A and B, and consider program C or program D. If C is adopted, 400 people will die. If program D is adopted, there’s a one-third chance no one will die and a two-thirds chance that 600 will die. Which one would you choose?

If you chose D, more applause. In laboratory experiments, that’s what 78 per cent of subjects choose, leaving only 22 per cent choosing C.

But if you look at the four options again you find that program A and program C are the same. Under A, 200 out of 600 are saved; under C, 400 out of 600 die. It’s just that A highlights the positive, whereas C highlights the negative.

That 72 per cent of subjects favoured A, but only 22 per cent favoured C tells that most of us instinctively favour the safer, more certain outcome. Program B, remember, contained a two-thirds chance that no one would be saved. This instinctive preference confirms economists’ conventional assumption that most people are “risk-averse”.

But a closer look also reveals that program B and program D are the same. Program B offers a one-third chance that 600 people will be saved and a two-thirds chance that no one will be saved, whereas program D offers a one-third chance no one will die and a two-thirds chance that 600 will die.

(If you can’t see that, remember that, in probability theory, the expected outcome is the possible outcome multiplied by the probability of it happening. So B is ⅓(600) + ⅔(0) = 200. And D is ⅓(600) + ⅔(0) = 200.)

But if options B and D are the same thing expressed in different ways, how come the experiments show only 28 per cent of subjects choosing B, but 78 per cent choosing D? It’s because, relative to option C, which offered only the certainty that 400 people would die, option D offered a one-third chance that no one would die, and most subjects thought that was a risk worth taking.

This shows that, while it’s generally true that most people are risk-averse, as conventional economics assumes, a more powerful human characteristic – which conventional economics ignores – is that most of us are “loss-averse”.

A key insight of behavioural economics is that we hate losing something much more than we love gaining something of the same value. So much so that, surprisingly, we’re willing to run risks to avoid any loss.

If you hadn’t noticed, when you look closely you see that all four options offered the same “expected value”: 200 people saved, 400 lost. If everyone had realised this at the time, they should have been equally divided between the options.

Why were we so sure that A and C were much more attractive that B and D? Well, one possibility is that most of us aren’t much good at maths. But the more important explanation is that we are heavily influenced by the way a proposition is presented to us – by the way it’s “framed”, as psychologists say. The same proposition can be packaged in a way we find attractive or repellent.

This, too, is a truth that conventional economics knows nothing of, but behavioural economics – the school of economic thought that uses psychology to throw light on economic issues – has brought to economists’ attention.

Putting it differently, the choices we make are heavily influenced by the context in which we make them. This is one of the key arguments advanced by Robert Frank, an economics professor at Cornell University, is his new book, Under the Influence.

Frank notes that standard economic theory says the spending decisions we make depend only on our incomes and relative prices. People’s assessments of their needs and wants are assumed to be completely independent of the spending decisions of others around them.

But this too is where the assumptions of standard theory are unrealistic. In real life, the things we buy and do are often heavily influenced by the “context” of what our friends are buying and doing.

We wear the clothes we think are fashionable, and we judge what’s fashionable by what our friends are wearing. The best way to predict whether a young person will take up smoking is whether their friends smoke.

We have an impulse to conform – which is stronger than we often realise. That’s why we can’t resist buying toilet paper when others are grabbing it, or selling our shares when others are quitting the market.

Psychologists call this phenomenon “behavioural contagion” – our tendency to mimic the behaviour of others. When some things start to become popular, they often become very popular. Same if they start becoming unpopular.

Frank notes that our tendency to copy what others are doing can have positive consequences (as when people exercise more because their friends are doing it) or negative consequences (as when we drink heavily because the people we live with are).

He argues that economists ought to be more conscious of behavioural contagion because of the opportunities they present for governments to use taxation to encourage us to make better choices.

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At last we’ve been shown the virus game plan. Boring

I grew up in the Great Depression. Well, not really, but there were times when it certainly felt like it. The Depression was my father’s favourite topic of breakfast conversation and I got to hear a lot about it, particularly the questionable behaviour of someone called Jack Lang.

It wasn’t until long after my father had been "promoted to Glory", as the Salvos say, I learnt from my sisters that the Depression had been his finest hour. In those terrible times, a generous government made thousands of unemployed men trudge from town to town to be eligible for "the susso" – a woefully inadequate sustenance allowance, often paid in kind.

Men moving around the backblocks of Queensland soon learnt to come to the back door of my father’s Salvation Army quarters, where the captain would go to quite extraordinary lengths to help them along their way.

Now, I’m not for a moment implying that what we’re about to go through as we cope with the coronavirus bears any comparison with the Depression, which lasted for most of the 1930s and drove the rate of unemployment to reach 20 or 30 per cent.

No, I’m just saying this crisis will turn our lives on their head for so much of this year that we’ll remember it for the rest of our lives and won’t fail to tell our kids about it in years to come.

It’s clear that, after a few weeks of unthinking panic and silliness, we’ve reached the business end of the epidemic as "community transmission" – spreading of the disease between people who had no known contact with a confirmed case or who had arrived from a badly affected country – begins in earnest and the authorities get progressively tougher in imposing "social distancing" – slowing the spread of the virus by keeping people apart.

This is a steep learning curve for everyone: politicians, medical experts and even all-knowing journalists. But the road map of where we’re headed, what it involves and roughly how long it will last – say, six months – is now apparent.

The authorities faced a choice between letting the contagion rip – getting it over quickly, but with an overwhelmed health system, serious cases going untreated and too many oldies and medically compromised people dying – or trying to slow the spread so the health system copes and deaths are minimised.

Unsurprisingly, they chose to "flatten the curve", using self-quarantine of people who may have the disease or do have a mild case, self-isolation (staying at home to avoid contact with others) and social distancing – banning large gatherings, restricting travel, maybe closing schools, encouraging people to work from home, and urging people to minimise their contact with others.

While slowing the spread reduces the number of deaths, it’s by no means certain it will reduce the number of people contracting the disease. The big price to be paid is prolonging the disruption to people’s daily lives and, hence, to the economy. Less paid work will be done, many will earn less income, less money will be spent, and unemployment and underemployment will rise.

A less obvious price is that the extraordinary lengths we will be going to to limit deaths will leave many people fearing the virus is a much greater risk to their health than it is. The great majority of people who get it will suffer no worse than a bout of flu. But the fear may be a good thing if it makes the hale and hearty more diligent in their hand-washing and avoidance of social contact.

Have you realised what this means for most of us? We’re about to go though a period of weeks or months of staying at home and rarely going out. This is obvious for the elderly and health-impaired, but will also apply to those who have to work from home, those casual workers whose shifts are cancelled, school and uni students attending classes online, and parents who can’t work because they have kids to mind (and shouldn’t be asking old grandparents to help out).

As I contemplate it for myself (I’ll soon be off on five weeks’ staycation), a word springs to mind, starting with b and ending in -ing. Social work academics are writing papers about "cabin fever" – fever in more ways than one.

It won’t be lost on a lot of people that the arrival of pandemics – this may be the worst, but it’s not the first and won’t be the last – is an unwelcome consequence of the globalisation of the world economy.

Against that, however, the digital revolution has made it easier for many screen-based workers to work from home and for students to view lectures. Teleconferencing is a reasonable substitute for face-to-face meetings and interstate business trips. The range of home entertainment is a lot wider and of better quality since the advent of such things as streaming video. You may not be able to attend football matches, but you can still watch them on telly.

Mobile phones make it much easier to co-ordinate with family members, and Facebook lets you keep up with friends. And not forgetting that e-commerce lets you keep spending. Which will be nice. But it doesn’t change the fact that "social distancing" is contrary to all our instincts as social animals.

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Coronavirus will hit an economy that’s already weak

It’s good to know the economy wasn’t as weak as we’d been told, but it’s not nearly good enough. Not when we know it’s getting walloped this quarter by the bushfires and the coronavirus.

This time three months ago, we were told that real gross domestic product had grown by just 1.7 per cent over the year to September. This week the Australian Bureau of Statistics announced that real GDP grew by 0.5 per cent during the December quarter and by 2.2 per cent over the calendar year.

On the face of it, this was the “gentle turning point” long promised by Reserve Bank governor Dr Philip Lowe. But when you look behind the headline numbers, it’s clear the economy’s basic problems continued unchanged.

Households are the bedrock of every economy, with consumer spending accounting for more than 60 per cent of total spending (aka “aggregate demand”). Obviously, households spend out of their income after paying income tax – their “disposable” income.

The greatest single factor driving household disposable income is income from wages. We know that employment has long been growing surprisingly strongly, so the income from the extra jobs is adding to household income.

But the main growth in wage income comes from pay rises. And we also know that, for five or six years now, wage rises haven’t been much bigger than the rises in the prices consumers pay. So if “real” wages aren’t growing strongly, it’s hard to see how real GDP – aggregate demand – can be growing strongly. Not in any sustainable way.

The full story is more complicated than that, of course, but that’s what an economist would call the “underlying” reality. So until strong growth in real wages returns, we’ll be spending our time examining the ups and downs in all the other, complicating factors that, over the short- to medium-term, cause the growth in real GDP to be a bit stronger or a bit weaker than the real growth in wages would lead us to expect.

(Should real wages never seem to return to the growth rate we were used to, we’d have to reassess our notions of what constitutes “strong” and “weak” growth – but that’s a story for another day.)

Back to the complications. Consumer spending grew by 0.4 per cent during the December quarter, which was a big improvement on its growth of 0.1 per cent in the previous quarter, but growth of 1.2 per cent over the year is less than half what it should be.

Much household spending goes on housing – whether renting or buying. And when people change houses they tend to have a burst of spending on “consumer durables” such as new furniture and appliances.

The buying and selling of existing homes doesn’t generate much economic activity, except to increase real estate agents’ commissions (and you’ll be delighted to hear that the increase in home sales, which is both a cause and an effect of the renewed rise in house prices in Sydney and Melbourne, caused such a boost in those commissions that it accounted for 0.2 percentage points of the overall increase of 0.5 per cent in GDP during the quarter).

But what does form a big part of GDP is investment in the building of new houses and units, plus alterations and additions. Here the news was not good. Home building activity fell by 3.4 per during the quarter and by 9.7 per cent over the year. It was the fifth quarter of contraction in a row.

Directly or indirectly, investment by businesses in new buildings, constructions and equipment is aimed at satisfying the expected demand for goods and services by households (although, when those households live overseas, we call it demand for exports).

So if consumers’ demand for goods and services has been weak for quite a few years, it’s not surprising that businesses’ investment spending on expanding their production capacity has also been weak. Although our miners have resumed investment, investment by the non-mining sector fell. Overall, business investment spending fell by 0.8 per cent during the quarter.

Put those three things together – consumer spending, new housing investment and business investment – and you’ve got the total demand of the private sector. It showed no growth during the quarter, and its annual contribution to overall GDP growth over the past few years has now fallen to zero.

So where is the growth coming from? From spending by the public sector. In previous quarters this has included strong growth in spending on infrastructure (mainly by the state governments), but this quarter it fell a bit. That left government spending on the provision of services (particularly on the federal rollout of the National Disability Insurance Scheme) growing by 0.7 per cent during the quarter and by 5.3 per cent over the year.

Now do you understand why governor Lowe keeps banging on about the need for governments to spend up?

The second factor helping to keep us growing is the “external sector” – specifically “net exports” (exports minus imports). The volume of exports of goods and services was unchanged during the quarter, but grew by 3.4 per cent over the year.

And the volume of imports of goods and services fell by 0.5 per cent during the quarter and by 1.5 per cent over the year. Which means that both the increase in exports and the fall in imports contributed to the overall growth in real GDP.

But ask yourself this: why would imports be falling? Because both consumer spending and business investment spending are so weak. Oh.

A final sign of the economy’s weakness comes when you remember how strongly our population’s been growing. Allow for this and you find that real GDP per person grew by just 0.2 per cent during the quarter and by only 0.7 per cent during the year.

And that’s before the economy’s hit by the bushfires and the economic disruption caused by our efforts to limit the spread of the coronavirus.

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Your antidote to Frydenberg’s budget-update talking points

At a time when the Prime Minister is refusing to accept that our weak economy needs a boost rather than a drag from the budget, stand by for loads of look-over-there spin from his unfortunate Treasurer Josh Frydenberg when he unveils the mid-year budget update today.

That was Frydenberg’s way of bluffing his way round the news earlier this month that the economy had grown by a disappointing 1.7 per cent over the year to September. So it wouldn’t be surprising to see some of those talking points get another run today.

He started with the line that, despite a result that laughed at his forecasts made only eight months earlier, the economy remains “remarkably resilient in the face of significant global and domestic economic headwinds”.

That’s a spin doctor’s way of saying “it could have been even worse”. Arithmetically true, but cold comfort. Since Frydenberg is boasting about our strong growth in exports, it’s hard to see much evidence of the global headwinds he claims are holding us back. And the domestic headwinds we’re suffering are home-grown and all too evidently a sign of poor economic management.

But Josh has more: “While other major developed economies like Germany, the United Kingdom, South Korea and Singapore have experienced negative economic growth, the Australian economy is in its 29th consecutive year of economic growth.”

Yes, but at present almost all our growth is coming from high immigration-fed population growth, not rising prosperity. As AMP Capital’s Dr Shane Oliver has noted, our annual growth in gross domestic product per person is just 0.2 per cent, compared with America’s 1.4 per cent, Japan’s 1.6 per cent and even the Eurozone’s 1 per cent.

In the first of his look-over-there arguments, Frydenberg boasts that we’ve maintained our AAA credit rating from three leading US rating agencies. Since these agencies’ lapse in ethical standards contributed significantly to the global financial crisis, this isn’t a recommendation I’d be skiting about. Any government that lets those disreputable characters dictate its budget policy lacks the courage of its convictions.

Next, we’ve seen our current account on the balance of payments “return to surplus for the first time in more than 40 years”. Not sure whether this boast is a sign of our Treasurer’s economic illiteracy, or his assessment of ours. Only the same people who think now’s a good time for the budget to take more out of the economy than it puts back – that is, return to surplus – would be foolish enough to think a current account surplus was a sign of economic strength.

It’s actually a sign that business investment is so unusually weak that our households, companies and governments are saving more than is needed to fund our national investment in new productive assets. Our usual current account deficit would be a much better sign of strong investment in future expansion.

Then we’re told that “welfare dependency is at its lowest level in 30 years”. With the unemployment rate at 5.3 per cent and the under-employment rate at 8.5 per cent, that’s not because they’ve all got jobs, it’s because of the government’s greater use of excuses to cut people off the dole and make them reliant on charity for their survival. Talk about reversion to the mean.

In a breathtaking case of Orwell’s Newspeak, Frydenberg claimed “growth has been broad-based with household consumption, public final demand and net exports all contributing to GDP growth”.

This is the very opposite of the truth. Since growth in consumer spending was a negligible 0.1 per cent during the quarter, the vast private sector of the economy actually went backwards, with what little growth we got coming from the much smaller (and despised) public sector and from net exports.

Growth in the September quarter was weaker than expected because Frydenberg’s repeated assurances that his middle-income tax offset would boost consumer spending failed to happen. Talk about chutzpah. He changed his line to “whether spent or saved, the tax cuts are putting households in a stronger economic position, making them more financially secure with more money in their pockets” without a blush.

Finally, it’s the drought’s fault – and you surely can’t blame the government for that. “Farm GDP is 5.9 per cent lower through the year to the September quarter and falling in four of the past five quarters. Rural exports fell by 2.8 per cent in the quarter,” Frydenberg said.

Arithmetically correct, but calculated to mislead. What he hopes you won’t remember is that, these days, agriculture accounts for only about 2 per cent of GDP, meaning the drought shaved only 0.1 percentage points off growth in the quarter, and 0.2 points over the year.

All this is the balderdash we get when pollies give politics priority over policy.

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Sorry, the economy can't grow much without higher wages

I usually pooh-pooh all alleged recessions that have to be qualified with an adjective. With recessions, it’s the whole economy or nothing. But I’ll make an exception for the "household recession" – which tells you why this week’s news of continuing weakness in the economy provides no support for Scott Morrison’s refusal to stimulate it.

Households are only part of the economy, of course, but they’re the part that matters above all others. Why? Because they contain all the people. And because all the other parts – the corporate sector, the public sector and the "external" sector of exports and imports – exist solely to serve we the people.

The economy’s "national accounts", issued this week by the Australian Bureau of Statistics, showed weak growth for the fifth quarter in a row, with real gross domestic product growing by just 0.3 per cent in the September quarter of last year, 0.2 per cent in the December quarter, 0.5 per in March quarter this year, 0.6 per cent in the June quarter and now a disappointing 0.4 per cent for this September quarter.

That took the annual growth in real GDP up from a (revised) 1.6 per cent over the year to June, to 1.7 per cent over the year to September. Morrison needed a lot better than that to convince anyone bar his my-party-right-or-wrong supporters that a response to the Reserve Bank’s repeated pleas for budgetary stimulus could be delayed until the budget in May.

To see how weak that is, remember our economy’s estimated "trend" or average rate of growth over the medium term is 2.75 per cent a year – about 0.7 per cent a quarter.

But let’s get back to households and their finances. Their spending on consumption grew by an almost infinitesimal 0.1 per cent in real terms during the latest quarter, or by 0.5 per cent before taking account of inflation.

Sticking to before-inflation figures (even though all the other national-account figures I quote are always inflation-adjusted), the quarter saw households’ main source of income – wages – grow by 1.1 per cent, which other, lesser income sources shaved to growth of 0.8 per cent in total household income.

However, the amount households had to pay in income tax fell by 6.8 per cent, thanks mainly to the arrival of the government’s new middle-income tax offset. This meant that households’ disposable income grew by a much healthier 2.5 per cent.

But something led most households to save rather than spend the tax break, causing their total saving during the quarter to jump by 80 per cent and their ratio of saving to household disposable income to leap from 2.5 per cent to 4.8 per cent. That’s why their consumer spending grew by only 0.5 per cent, as we’ve seen.

It’s possible people will get around to spending more of their tax cut but, with household debt at record levels after years of rising house prices, and continuing weak wage growth, it’s not hard to believe they’re too worried to spend up at a time when the economy's hardly onward-and-upward.

They may be intending to pay down some debt, just as it’s likely many people with mortgages have allowed the fall in the interest rates they’re being charged just to speed up their repayment of the loan.

Whatever, the faster consumer spending Morrison and his loyal lieutenant assured us their tax cut would bring about hasn’t materialised. And it’s noteworthy that what little consumer spending we’ve seen has been on essentials rather than discretionary items.

One discretionary spending decision is whether to buy a new car. Separate figures show new car sales in November were down 9.8 per cent on November last year.

So if the biggest part of the economy has done next to nothing to generate what little growth we’ve seen, where’s it coming from?

Well, not from the business end of the private sector. Spending on the building of new homes was down 1.7 per cent in the September quarter and by 9.6 per cent over the year to September. Business investment spending was down 2 per cent during the quarter and by 1.7 per cent over the year.

All told, the private sector – consumer spending, home building plus business investment – fell for the second quarter in a row and is 0.3 per cent lower than a year ago.

By contrast, public sector spending – the thing Morrison & Co profess to disapprove of – is going strong, with government consumption spending up by 0.9 per cent in the quarter, and 6 per cent over the year, mainly because of the continuing rollout of the National Disability Insurance Scheme.

Public investment in infrastructure – mainly by the state governments – grew 5.4 per cent in the quarter, to be 2.1 per cent up on a year earlier. All told, growth in the public sector accounted for most of the growth in the economy overall in the September quarter.

That leaves the external sector – aka "net exports" – making a positive contribution to overall growth during the quarter, with the volume of exports up 0.7 per cent while the volume of imports was down 0.2 per cent. (Falling imports, however, are a sign of a weak domestic economy.)

Another seeming bad sign – worsening productivity, with GDP per hour worked down 0.2 per cent in the quarter and 0.2 per cent over the year – wasn’t as bad as it seems, however.

When you’ve had the good news that employment has grown faster than you’d expect given the weak growth in output of goods and services, productivity – output per unit of input – falls as a matter of arithmetic. Does that make the employment growth a bad thing?

I’ll leave the last word to Callam Pickering, of the Indeed job site: "As long as wage growth remains so low, it will be difficult for the economy to return to annual growth of 3 per cent or higher. Quite simply, it is almost impossible to have a strong economy without a healthy household sector."

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Worried Lowe flouts convention to push for wage rises - now

The most important piece of local economic news this week was no news: the wage price index remained stuck at an annual growth rate of 2.3 per cent for yet another quarter. I’ve said it before but I’ll keep saying it until it’s sunk into the skull of every last politician: we won’t get back to healthy growth in the economy until we get back to healthy growth in wages.

That’s because economies are circular: all of us standing in a circle, buying and selling to everyone else. What’s the main thing people in the circle sell? Their labour. What do they do with the wages they earn? Buy stuff from the rest of the economy.

Business people (and Coalition politicians) are very conscience of the truth that wages are a cost to business. They’ve thus long had the attitude that wages should be kept as low as possible.

But equally, wages are income to wage-earners, and by far the biggest source of income for the nation’s nine million households. So the less wages grow, the less growth there is in the income households use to buy the goods and services produced by the nation’s businesses. Not good.

Get it? In the end, business has as much to lose from weak wage growth as workers do. This is the bit that many businesspeople and politicians don’t get. They’re so used to seeing the economy as my lot versus the other lot, they can’t see that, as the Salvos say, "we’re all in this together".

People – even the media – keep saying wages are flat. That’s not true. What’s true is that, according to the Australian Bureau of Statistics, the rate at which wages are rising has been flat, at 2.3 per cent a year, for the fourth quarter in a row.

In fact, wage growth has been surprisingly low since the end of 2013 – five and a half years ago.

Another point to be clear on is that it’s not low wage growth, as such, that’s the problem. If consumer prices weren’t growing, annual wage growth of 2.3 per cent wouldn’t be bad. It would be fantastic.

So it’s the rate at which wages are growing relative to the growth in consumer prices that matters. Real wages, in other words.

Standard economic theory says that, provided their real growth is no faster than the rate of improvement in the productivity of labour (that is, output per hour worked), wages can grow faster than prices without causing increased inflation.

What’s more, if wage-earners are to get their fair share of the benefit from improved productivity, real wages should be growing in line with the medium-term trend (average) rate of growth in labour productivity, which is about 1.1 per cent a year.

And because wages are the greatest single factor driving household income, household income is the greatest single factor driving consumer spending, and consumer spending accounts for about 60 per cent of gross domestic product, the economy won’t be back to a healthy rate of growth until real wages are back to growing pretty much in line with average productivity improvement.

Which, it turns out, is a bit of a worry. Why? Because it isn’t happening and doesn’t look like happening any time soon.

In the April budget, the government confidently predicted that wage growth would return to something approaching the old normal, accelerating to 2.5 per cent over the year to June this year, then 2.75 per cent by next June, and 3.25 per cent by June the year after.

We learnt this week that, as measured by the wage price index, wages fell short of the first hurdle, coming in at 2.3 per cent rather 2.5 per cent.

Worse, last week we learnt that even the Reserve Bank doesn’t share the government’s optimism.

The Reserve’s revised forecasts now see no advance on 2.3 per cent by June next year, and only the tiniest improvement to 2.4 per cent in two years’ time.

Admittedly, contrary to my contention that we won’t get to decent growth in the economy until we get decent growth in wages, the Reserve is predicting that real GDP will have strengthened to a healthy 2.7 per cent by June next year, and an even healthier 3 per cent by June 2021.

With wage growth forecast to continue weak, the Reserve is expected this improvement to happen with out much help from stronger consumer spending.

So how? Mainly through strong growth in business investment spending, exports and public sector spending on infrastructure.

Consumer spending would be helped a bit by the latest tax cuts and the cuts in interest rates. Other help would come from the falling dollar’s improvement to the price competitiveness of our export and import-competing industries, the brighter outlook for mining investment, and some stabilisation of the housing market.

Maybe. I remain sceptical. And if his behaviour last week is any guide, Reserve governor Dr Philip Lowe is pretty worried about the continuing weakness in wage growth.

It is simply not done for leading econocrats to tell employers they should be paying higher wages. But that’s just what Lowe did in his appearance before the House economics committee.

"At the aggregate [overall] level," he said, "my view is that a further pick-up in wages growth is both affordable and desirable."

Not after we’ve achieved greater productivity improvement, please note, but now. By how much does he think wages should be growing? By about 3 per cent a year, as he’s said on various occasions.

What’s more, federal and state governments – Labor as well as Coalition - should be setting the private sector a better example – or "norm" in Lowe's words – by raising the 2 to 2.5 per cent caps they’ve imposed on their own employees’ wage rises.

Thank goodness somebody’s minding the shop.

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Election hype about strong growth now back to grim reality

The grim news this week is that the weakening in the economy continued for the third quarter in row, with economic activity needing to be propped up by government spending.

The Australian Bureau of Statistics’ “national accounts” showed real gross domestic product – the nation’s production of market goods and services – grew by just 0.3 per cent in the September quarter of last year, 0.2 per cent in the December quarter and now 0.4 per cent in the March quarter of this year, cutting the annual rate of growth down to 1.8 per cent.

That compares with official estimates of our “potential” or possible growth rate of 2.75 per cent a year. It laughs at Treasurer Josh Frydenberg’s claim in the April budget – and Scott Morrison’s claim in the election campaign - to have returned the economy to “strong growth”, which will roll on for a decade without missing a beat.

It suggests Frydenberg’s boast of having achieved budget surpluses in the coming four financial years – and Labor’s boast that its surpluses would be bigger – are little more than wishful thinking, manufactured by a politicised Treasury.

The future may turn out to be golden but, even if it does, the econocrats have no way of knowing that in advance – they’re just guessing - and the road between now and then looks pretty rocky.

Why is the immediate outlook for the economy so weak and uncertain? Not primarily because of any great threat from abroad – though a flare-up in Donald Trump’s trade war with China could certainly make things worse – but primarily because of one big and well-known problem inside our economy: five years of weak growth in wages.

When you examine the national accounts, that’s what you find. Over the nine months to March, the income Australia’s households received from wages grew by 3.5 per cent, before adjusting for inflation.

That wasn’t because of strong growth in wage rates, but because more people had jobs. Weakness in other forms of household income meant that total household income grew by just 2.4 per cent.

But households’ payments of income tax grew by 4.5 per cent, thanks mainly to bracket creep. This helped cut the growth in household disposable income to 2 per cent. Even so, households’ spending on consumer goods and services grew by 2.2 per cent – meaning they had to reduce their rate of saving.

Actually, the last big fall in households’ rate of saving occurred in the September quarter. Since then, households have tightened their belts, cutting the growth in their consumer spending so as to raise their rate of saving from 2.5 per cent of their disposable income to 2.8 per cent.

Reverting to “real” (inflation-adjusted) figures, this explains why consumer spending has grown by only about 0.3 per cent a quarter since June, reducing its growth over the year to March to an anaemic 1.8 per cent.

The bureau noted that the weakness in consumer spending was greatest in discretionary spending categories, including on recreation, cafes and restaurants, and clothing and footwear – a further sign that households are feeling the pinch.

Since consumer spending accounts for almost 60 per cent of GDP, that’s all the explanation you need as to why the economy’s now so weak. But there are other factors contributing.

One is the end of the housing boom. Home-building’s contribution to growth peaked in the September quarter, with building activity falling by 2.9 per cent and 2.5 per cent in the following two quarters. It will keep falling for some time yet.

And business investment is also weak. While non-mining investment grew by 2 per cent in the quarter, mining investment fell a further 1.8 per cent. Overall, business investment was up 0.6 per cent in the quarter, but down 1.3 per cent over the year to March.

External demand is helping, however. With the volume of exports growing, while the volume of imports was “flat to down” - another sign of weak domestic demand - “net exports” (exports minus imports) are contributing to growth.

Even so, total private sector demand (spending) has actually fallen for the second quarter in a row. So, apart from the contribution from net exports, any growth is coming from public sector demand.

It grew by 0.7 per cent in the quarter to be 5.5 per cent higher over the year. This reflects the rollout of the National Disability Insurance Scheme and state spending on infrastructure. It means government spending contributed half the growth in GDP during the quarter and more than 70 per cent of total GDP growth over the year to March.

Note, it’s not a bad thing for government spending to be contributing to growth. That’s exactly what it should be doing when private demand is weak. No, the concern is not that public spending is strong, it’s that private spending is so weak.

Dividing GDP by the population shows that GDP per person fell fractionally for another quarter, and grew by a mere 0.1 per cent over the year to March.

This tells us not that the economy is on the edge of recession – how could GDP contract when a growing population is making it ever bigger? – but that, as Jo Masters of Ernst & Young has said, “growth is being driven by population growth alone, and not increased participation or productivity”.

The economy’s getting bigger, but it’s not leaving us any better off.

Speaking of productivity, the productivity of labour deteriorated by 0.5 per cent in the March quarter and by 1 per cent over the year.

Is this a terrible thing? Well, before you slit your wrists, remember that when employment is growing a lot faster than the growth in the economy would lead you to expect, a fall in GDP per worker (or, in this case, per hour worked) is just what the laws of arithmetic would lead you to expect.

Surprisingly strong growth in employment – most of it full-time – doesn’t sound like a bad thing to me. It’s just hard to see how it can last much longer.

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High immigration hiding the economy's long-running weakness

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Economists: lonely, misunderstood angels in shining armour

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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You'd be surprised what's propping up our living standard

It’s the last lazy long weekend before the year really gets started, making it a good time to ponder a question that’s trickier than it seems: where has our wealth come from?

The question comes from a reader.

“Australia has been without a recession for 25 or more years, the economy seems booming to me, just by looking around: employment, housing prices, explosive building in major capitals, etc. Where is the wealth coming from? Mining? Other exports? Because the resources have to come from somewhere,” he writes.

That’s the first thing he’s got right: it’s not money that matters (the central bank can create as much of that stuff as it sees fit) it’s what money is used to buy: access to “real resources” – which economists summarise as land (including minerals and other raw materials), labour and (physical) capital.

But here’s the first surprise: of those three, when you trace it right back, probably the most important resource is labour – all the work we do.

The first complication, however, is the word “wealth”, which can mean different things. It’s best used to refer to the value of the community’s assets: its housing, other land and works of art, the equipment, structures and intellectual property owned by businesses (part of which is represented by capitalised value of shares on the stock exchange), plus publicly owned infrastructure (railways, roads, bridges and so forth) and structures.

To get net wealth you subtract any debts or other liabilities acquired in the process of amassing the wealth. In the case of a national economy, the debts we owe each other cancel out, leaving what we owe to foreigners. (According to our national balance sheet, as calculated by the Australian Bureau of Statistics, at June last year our assets totalled $15.4 trillion, less net liabilities to the rest of the world of $3.5 trillion.)

But often the word wealth is used to refer to our annual income, the total value of goods and services produced in the market during a year, as measured by gross domestic product (which in the year to June was $1.8 trillion).

The people in an economy generate income by applying their labour to land and physical capital, to produce myriad goods and services. Most of these they sell to each other, but some of which they sell to foreigners. Why? So they can buy other countries’ exports of goods and services.

Only about 20 per cent of our income comes from selling stuff to foreigners and only 20 per cent or so of the stuff we buy comes from foreigners. This exchange leaves us better off when we sell the stuff we’re better at producing than they are, and buy the stuff they’re better at than we are.

Much of what we sell to foreigners is minerals and energy we pull from the ground and food and fibres we grow in the ground. So it’s true that a fair bit of our wealth is explained by what economists call our “natural endowment”, though it’s also true that we’re much more skilled at doing the mining and farming than most other countries are.

Speaking of skills, the more skilled our workers are – the better educated and trained – the greater our income and wealth. Economists call this “human capital” – and it’s worth big bucks to us.

How do the people in an economy add a bit more to their wealth each year? Mainly by saving some of their income rather than consuming it all. We save not just through bank accounts, but by slowly paying off our mortgages and putting 9.5 per cent of our wages into superannuation.

It’s the role of the financial sector to lend our savings to people wanting to invest in the assets we count as wealth: homes, business structures and equipment and public infrastructure. So if most of our annual income comes from wages, most of our savings come from wage income and our savings finance much of the investment in additional assets.

But because our natural endowment and human capital give us more investment opportunities that can be financed from our savings, we long have called on the savings of foreigners to allow us to invest more in new productive assets each year than we could without their participation.

Some of the foreigners’ savings come as “equity investment” – their ownership of Australian businesses and a bit of our real estate – but much of it is just borrowed. These days, however, our companies’ (and super funds’) ownership of businesses or shares in businesses in other countries is worth roughly as much as foreigners’ equity investments in Oz, meaning all our net liability to the rest of the world is debt.

Naturally, the foreigners have to be rewarded for the savings they’ve sunk into our economy. We pay them about $60 billion a year in interest and dividends, on top of the interest and dividends they pay us.

The main thing we get in return for this foreign investment in our economy is more jobs (and thus wage income) than we’d otherwise have, plus the taxes the foreigners pay.

People worry we can’t go on forever getting wealthy by digging up our minerals and flogging them off to foreigners. It’s true we may one day run out of stuff to sell, but our reserves – proved and yet to be proved – are so huge that day is maybe a century away (and the world will have stopped buying our coal long before we run out).

A bigger worry is the damage we’re doing to our natural environment in the meantime, which should be counted as reducing our wealth, but isn’t.

But mining activity accounts for a smaller part of our high standard of living than most people imagine – only about 8 per cent of our annual income.

Most of our prosperity – our wealth, if you like – derives from the skill, enterprise and technology-enhanced hard work of our people.

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How to get more bang from your bucks

They say people who think money doesn’t buy happiness just don’t know where to shop. Sorry to have left it so late in your preparations for Christmas and summer, but on this score I have breaking news.

It’s a funny thing that, though economists hold consumption to be the “sole end and purpose” of all economic activity, it’s not a subject that greatly interests them. They’ll help you maximise how much you’ve got to spend, but they’ll give you no help in deciding how to spend it in a way that yields the most happiness – or, as they prefer to say, “satisfaction”.

No, for advice on how to get the biggest bang from your bucks, the experts are social psychologists.

For the past 15 years, their prevailing wisdom has been that spending on experiences – from an overseas holiday to a trip to the movies – yields more happiness than buying more stuff.

The pleasure you get from buying a new CD or pair of shoes or car or even a new home falls off surprisingly quickly, whereas the enjoyment you get from what the US psychologist Tom Gilovich has dubbed “experiential consumption” tends to be longer-lasting.

Subsequent research has found three reasons why experiences provide greater happiness. First, experiential purchases enhance our social relationships more readily and effectively than do material goods.

That is, a lot of the enjoyment comes from our interaction with the people we share the experience with. (This, BTW, gets closer to what I really believe about all this: deep satisfaction comes from our human relationships, not from what we buy.)

Second, experiential purchases form a bigger part of a person’s identity. We are the sum of our life’s experiences – pleasant and otherwise – much more than the sum of our material possessions.

Third, experiential purchases are evaluated more on their own terms and evoke fewer social comparisons than material purchases.

Good point. A lot of our spending goes on keeping up with the Joneses or on buying “positional goods” – goods that demonstrate to the world how well we’re doing in the battle for social status. Trouble is, my delight in my new Volvo is punctured when the chap next door arrives home with his new Beemer.

We make sure our house is as well-appointed as the others in the street, the lawn’s always mown, the car in our driveway is late-model European, and the kids go to private schools. But the one thing the neighbours can never see is how your total debt compares with everyone else’s.

If keeping up with the neighbours has required you to rack up a crippling debt, you’re unlikely to be enjoying a care-free life. Ditto if your financial commitments keep you chained to a well-paying job you hate.

But, as the researchers say, when you’re spending money on experiences, you do it much more for your enjoyment of that experience than to impress the neighbours – unless, of course, you’re into matching their skiing trip to the Snowies with yours to Aspen.

Actually, I think there’s more to it even than those three points. Major experiences such as overseas touring holidays yield pleasure in expectation of them, pleasure while you’re doing it, and pleasure while you’re reliving them and recounting your adventures to family and friends.

And the great beauty of thinking about past holidays is that you remember the highlights, laugh about the bad bits, and forget the boring bits – such as the trouble you had trying to find a public toilet.

Sorry, I promised you breaking news on the experiential front. Research out this year, by Lee, Hall and Wood, finds it’s not as simple as experiences good, stuff bad.

Turns out, which of the two yields the higher happiness count depends on your social class, with class being measured according to income, education or self-assessment.

Dividing people into two categories – higher or lower – the researchers found that “experiential advantage” held for the top half, whereas the bottom half either rated experiences and material purchases equally or rated goods more highly than experiences.

It seems people of higher social class have an abundance of resources, meaning they can afford to focus more on their internal growth and self-development.

In contrast, people who have fewer resources are likely to be more concerned about making wise purchases of the stuff they still needed.

I think it’s probably a gradient: as your material affluence rises you pass through the point where experiences and things deliver roughly equal satisfaction, until eventually your material needs are pretty much satisfied and its experiences that do most to make you happy.

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A beautiful set of numbers gets you only so far

This week’s national accounts don’t leave any doubt that the economy grew strongly in the first half of this year. But whether it can sustain that growth rate is doubtful.

According to figures issued by the Australian Bureau of Statistics, real gross domestic product grew by 0.9 per cent in the June quarter and an upwardly revised 1.1 per cent in the March quarter, yielding growth of 3.4 per cent over the year to June.

For once, the bureau’s “trend” (smoothed) estimates tell the same story.

Annual growth of 3.4 per cent is well above the economy’s medium-term “potential” growth rate of about 2.75 per cent, suggesting we’ve started making inroads into our unused production capacity.

It also means we’ve now completed 27 years of continuous growth since our last severe recession of the early 1990s. (We had recessions too small to remember in 2000 and again at the time of the global financial crisis in 2008, but let’s not spoil the party.)

The figures vindicate the Reserve Bank’s steadfast forecast of growth returning to “a bit above 3 per cent” in 2018 and 2019.

This growth of 3.4 per cent from one June quarter to the next amounts to growth averaged over the whole of the 2017-18 financial year of 2.9 per cent – meaning that (contrary to what I was expecting) the government has comfortably exceeded its budget forecast of 2.75 per cent.

Where’s the growth coming from? Over the year, the biggest contributions came from consumer spending and government consumption spending (mainly the wages of people working in health and education), business investment spending and public investment in infrastructure.

Since the volume of imports grew a lot faster than the volume of exports, the external sector subtracted from growth.

It was, however, a financial year of two halves, with growth at an annualised rate of less than 3 per cent in the last half of 2017, but more than 4 per cent in the first half of this year.

Trouble is, no one sees the economy continuing to grow at an annualised rate as high as 4 per cent – not private forecasters or the Reserve Bank, nor even the government.

Why not? Because the biggest contributor to growth – whether over the year to June or in the latest quarter – has been strong consumer spending.

Consumer spending accounts for more than half of GDP. And its growth does much to stimulate growth in business investment spending, particularly non-mining business investment. (It’s when demand for your product threatens to exceed your production capacity that you expand your business.)

Growth in consumer spending is driven by growth in households’ disposable income. Household disposable income, in turn, is driven mainly by growth in wages. That’s real growth in wages – wages growing a per cent or so faster than prices are rising.

But this is just what’s not been happening over the past three or four years. And although Reserve Bank governor Dr Philip Lowe remains confident we’ll get back to heathly real wage growth eventually, he keeps warning the recovery will be a long time coming.

This gives us good reason to doubt that the rapid growth of the first half of this year will be sustained. But, before we get to that, how’s it been achieved so far?

The first part of the explanation is the extraordinarily strong growth in employment. As you may have heard (many times), employment grew by a calendar-year record of 400,000 in 2017, about double the annual average.

This week the new Treasurer, Josh Frydenberg, noted that 2017-18 saw jobs growth of more than 330,000 – the largest jobs growth in a financial year since 2004-05.

Notice the diminishing superlatives? If you use trend figures to break that into half years, you find 70 per cent of it occurred in the first half and only 30 per cent in the second. Hmmm.

While wage rises are the main source of increase in household disposable income, the secondary source is increased employment – more people earning income in more households.

To illustrate, total wages paid to households (“compensation of employees”, in the jargon) rose by 0.7 per cent in nominal terms in the June quarter, whereas average wages per worker rose by 0.1 per cent. Get it? Increased employment accounted for almost all the growth in total wages.

But that employment growth is not the main thing that kept consumer spending growing strongly despite weak growth in household income. The bigger factor was households cutting their rate of saving.

The ratio of household saving to household disposable income continued its fall, dropping from 2.8 per cent to 1.4 per cent (using trend figures). This is down from a peak of 9 per cent after the financial crisis.

Note, this means households added to their savings at a lesser rate, not that they reduced the amount of their savings.

This is what economists call “consumption smoothing”. If the growth in your income is weak, you reduce your rate of saving to avoid having to tighten your belt and consume less.

Nothing wrong with that. But there’s not much scope left for further cuts in the saving rate.

Dr Shane Oliver, of AMP Capital, offers this summary of the outlook for the economy: “While housing construction will slow and consumer spending is constrained, a lesser drag from mining investment [because it’s almost hit bottom] along with solid export growth provide an offset, and are expected to see growth of between 2.5 and 3 per cent going forward.”

I’m more optimistic than that. I hope the Reserve’s “a bit above 3 per cent” will be on the money.

But be clear on this: no matter how wonderful the latest figures look - and there are two more quarterly announcements to come before an election in May - strong growth in the economy isn’t sustainable until workers are back to getting their share of the benefits of national productivity improvement in the form of real wage growth of a per cent or two a year.

Until then, voters aren’t likely to be greatly impressed by "a beautiful set of numbers”.

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Corporate crime is far too common

If we’re to believe what we see in the media, we’re being engulfed by a corporate crime wave. An outbreak of business lawlessness that engages in “wage theft”, mistreatment of franchisees, abuse of workers on temporary visas, and much else.

But should we believe it? Regrettably, my years as a journalist have taught me not to believe everything I read in the paper (this august organ excepted, naturally).

News gathering is a process of what when I was an accountant I would have called “exception reporting”. That’s because people find the exceptions more interesting than the ordinary, everyday occurrences.

When the exceptions pile up, however, the risk is that they’re taken by readers to be representative of the wider reality.

So, in the case of businesses behaving badly, how exceptional are the exceptions? The answer from Rod Sims, chairman of the Australian Competition and Consumer Commission, in a speech he gave last Friday night, is not as exceptional as you’d hope.

To prove his point, Sims offered an extraordinary list of the commission’s enforcement activity, just in the month of April this year.

Ford was ordered to pay $10 million in penalties after it admitted that it had engaged in unconscionable conduct in the way it dealt with complaints about PowerShift transmission cars, sometimes telling customers that shuddering was the result of the customer’s driving style despite knowing the problems with these cars.

Telstra was ordered to pay penalties of $10 million in relation to its third-party billing service known as “premium direct billing” under which it exposed thousands of its own mobile phone customers to unauthorised charges.

Thermomix paid penalties of more than $4.5 million for making false or misleading representations to certain customers through its silence about a safety issue affecting one of its products which the company knew about from a point in time.

Flight Centre was ordered to pay $12.5 million in penalties for attempting to induce three international airlines to enter into price-fixing agreements.

K-Line, a Japanese shipping company, pleaded guilty to criminal cartel conduct concerning the international shipping of cars, trucks and busses to Australia.

Woolworths had proceedings instituted against it alleging that the environmental representations made about some of its Homebrand picnic products were false, misleading and deceptive.

Phew. Surely that was an exceptional month. But Sims has more cases to list.

Earlier this year, the Federal Court found that the food manufacturer Heinz had made misleading claims that its Little Kids Shredz products were beneficial for young children, when they contained about two-thirds sugar.

Who could forget the case of four Nurofen specific pain products? Their packaging claimed that each was specifically formulated to treat a particular type of pain when, in fact, each product contained the same active ingredient and was no more effective at treating that type of pain than any of the others. “The key difference was that the specific pain products were near double the price of the standard Nurofen product,” Sims says.

Hotel giant Meriton was caught taking deliberate steps to prevent guests it suspected would give an unfavourable review from receiving TripAdvisor’s “review express” prompt email, including by inserting additional letters into guests’ email addresses.

The court found this to be a deliberate strategy by Meriton to minimise the number of negative reviews its guests posted on TripAdvisor.

Optus Internet recently admitted to making misleading representations to about 14,000 customers about their transition to the national broadband network, including stating that their services would be disconnected if they didn’t move to the NBN, when under its contracts it could not force disconnection within the timeframe claimed.

Pental has admitted that it made misleading claims about its White King “flushable” cleaning wipes, saying they would disintegrate in the sewerage system when flushed, just like toilet paper, when our wastewater authorities are having big problems because the wipes can cause blockages in their systems.

Shocking. But, you may object, isn’t this just more anecdotes? How representative are they? Sims acknowledges that not all companies behave poorly.

He says that “poor behaviour usually occurs on a spectrum, with few companies behaving badly often, but rather many engaging in occasional significant instances of bad behaviour” – which, he insists, remains unacceptable.

So what can the commission and the government do to reduce the incidence of unacceptable behaviour?

Since businesses commit these excesses in their completely legitimate pursuit of higher profits, the key is to increase the cost to them of bad behaviour.

Many firms invest heavily in their brand reputation, which is a signal that they can be trusted. “The greater the likelihood that bad behaviour will be exposed and made public [see above], the more companies will do to guard against such behaviours.”

In their amoral, dollar-obsessed way, economists assess the attractions of law breaking by weighing the benefit to be gained against the cost of being caught multiplied by the probability of being caught.

Leaving aside the cost of reputational damage (just ask AMP if it knows about that), if you can’t do as much as you should to increase the chance of being caught, you should at least wack up the fines.

Sims says that “the penalties for misconduct, given the likelihood of detection, are comparatively weak”. He believes he’s had some success in persuading the Turnbull government to increase them.

“Just imagine if the penalties I mentioned [see above] were 10 to 20 times higher,” he concludes.

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Why protection from imports isn't smart

With The Donald now busy playing poker with Little Rocket Man, the threat of a trade war has receded. Good. Gives us time to get our thinking straight before the threat returns.

Everyone knows a trade war would be a terrible thing, but most people's reason for thinking so is wrong. This misunderstanding means such a war could happen, even though everyone knows it would be bad.

It seems common sense for a country to want to protect its industry by imposing a tax – known as a tariff or import duty – on imports competing with locally-produced goods. After all, we win and foreigners lose.

The problem arises only if the foreigners retaliate and slap a tariff on our exporters. That's bad for us because it may lead to job losses among those of our workers who earn their living making goods for export.

Is that the way you figure it? Sorry, it may be common sense, but it's wrong. You need to have learnt a bit of economics to see why, because the case against protection is "counterintuitive" – it doesn't seem right, but it is.

The reason people can't see what's wrong with protection is that every baby is born with a disease called mercantilism.

Mercantilism is the belief that exports are good, but imports are bad. Why? Because we – Australia – make money selling exports to foreigners, whereas it costs us money to buy imports, the foreigners' exports.

So mercantilists see Australia as like a company, and our balance of trade as like a company's profit and loss statement. The more you can export and the less you can import – the higher your trade surplus - the richer you become.

What's wrong with that way of thinking? Plenty. For a start, it's the mentality of a miser – someone who loves money for its own sake, not for what it will buy.

Money is just a means to an end, not an end in itself. The economic game is about producing goods and services so we can consume them. Production is the means; consumption is the end. Focus on one at the expense of the other and you've actually done badly in the game.

Similarly, jobs are just a means to an end. Why do people want jobs? So they can earn money and then spend it.

Exports are production, imports are consumption (although much of our imports are of machines we use in the production process). Production without consumption makes sense only to a miser.

Get this: 80 per cent of the way Australia makes its living is by all the workers and businesses and governments producing goods and services and selling them to other Australian workers, businesses and governments, so they can be consumed.

In principle, we could raise the 80 per cent to 100 per cent by only selling to and buying from ourselves. So why do we sell about 20 per cent of the things we produce to foreigners?

Not because it makes us richer, nor because it creates more jobs. It's solely so we can afford to buy some of the goods and services produced by businesses and workers in other countries, when we judge them to be better or cheaper than the stuff made locally.

Exports are good solely because we can use the proceeds to pay for imports – and imports are also good because they raise our material standard of living by giving all of us (workers, would-be workers and dependents) access to goods and services that are better or cheaper than those made in Australia.

If we weren't willing to use the proceeds from our exports to pay for imports from other countries, those countries would refuse to buy our exports.

Refusing to buy our exports would leave those countries worse off (because they'd lose their ability to buy the things we can produce better or cheaper than they can), as well as leaving us worse off because we lost our ability to use our export income to buy their exports.

This, BTW, is why trade wars are mutually self-harming. A group exercise in cutting off your nose to spite your face.

Why wouldn't it be better to be 100 per cent self-sufficient? Because this would limit the benefits to us from "specialisation and exchange". Our domestic economy is organised on the basis that we're all better off if each of us specialises in producing what we're good at, then uses money to exchange what we've produced with what other specialists have produced.

Opening our economy to trade with other countries merely extends this principle, on which we've always run our domestic economy, beyond our borders.

This is why the mercantilists' assumption that trade is a zero-sum game – if you win, I lose – is wrong. Both sides win because both benefit from the "mutual gains from trade".

It follows that the mercantilist notion that foreigners are the only people who lose when we decide to protect some of our industries is wrong. The biggest losers are every other industry and every Australian who loses their access to cheaper or better imported goods and has to pay more for the local version.

That is, tariffs are a tax, not on foreigners, but on Australian producers and consumers. A way of favouring some Australian industries at the expense of all the others. A redistribution of income to favoured industries from those that aren't favoured, and from Australian consumers generally. A form of rent-seeking.

And thus, an attempt to protect some jobs at the expense of all other jobs. Great idea.

Trade wars are destructive not primarily because it's crazy for other countries to retaliate – which it is – but because the country that provokes the retaliation by protecting some favoured industries is damaging itself.

Better to let it stew in its own juice than punish it by harming yourself.

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