Top economists think much further ahead than Morrison & Co

If Scott Morrison and Josh Frydenberg are looking for ideas about what more they could be doing to secure our economic future – after all, they’ll be seeking re-election soon enough – they could do worse than study the views of the 56 leading economists asked by the Economic Society of Australia to comment on this month’s budget.

Two points stand out. First, almost all the economists were happy to support the budget’s strategy of applying more fiscal stimulus to get unemployment below 5 per cent. They were pleased to see the government abandon its preoccupation with surpluses and debt.

As Professor Fabrizio Carmignani, of Griffith University, said, “the good thing about this budget is that it was not about repairing the deficit and debt accumulated in 2020”. Professor Sue Richardson, of Flinders University, said: “the debt and deficit mantra was never justified”.

Second, with one notable exception, the economists were critical of the government’s choice of things to spend on. The exception was its big spending on the “care economy” – aged care, childcare, disability care and mental health care – which most respondents welcomed. Indeed, quite a few thought there should have been more of it.

After that, the economists had plenty of constructive criticism of the government’s priorities. For instance, quite a number were happy to see big spending on “infrastructure”, but critical of the government’s narrow conception of what constitutes infrastructure.

Carmignani said: “there is in this budget – as in the past – an almost blind confidence in the power of investment in physical infrastructure to drive future growth and development. In fact, the future prosperity of Australia depends on innovation that requires social rather than physical infrastructures”.

Professor Gigi Foster, of the University of NSW, said: “childcare should be viewed as the social infrastructure that it is, and invested in as such. Instead, when we heard ‘infrastructure’, it was mainly code for transportation”.

So even in the area of physical infrastructure, the budget shows a lack of imagination. Professor Michael Keane, also of the University of NSW, said very little of the infrastructure money was “allocated to such urgent needs as renewable energy, climate change adaptation, environmental sustainability, water resources, etcetera. This shows a real lack of ambition.”

Richardson agrees. “The future is one of zero net greenhouse gas emissions,” she said. “The transformation of the energy, agricultural, transport and manufacturing systems that this requires is enormous, will require unprecedented levels of investment and needs to start now.“

Now that’s interesting. Historically, treasurers and their advisers have regarded the budget as the place for discussion on finances and economics, not the state of the natural environment nor the challenge of climate change.

The economy in one box, the environment in some other box. The natural environment has been seen as of such little relevance to topics such at the budget and the economy that it has barely rated a mention in the five-yearly supposed “intergenerational report”.

But that’s not how our leading economists see it. At least a dozen of them have criticised the budget’s failure to respond to the challenge of climate change. Professor Warwick McKibbin, of the Australian National University, warned that “the world is likely to be taking significant action on climate change which will substantially impact Australia’s fossil fuel exports and the future structure of the Australian economy”.

Another topic barely mentioned in the budget – one of the industries much damaged by the pandemic – was universities. Unsurprisingly, more than a dozen respondents noticed the omission. They’re self-interested, of course, but they make a good case.

Dr Leonora Risse, of RMIT University, said succinctly: “investment in the university sector [is a] generator of productivity-enhancing skills, knowledge and research”. Meanwhile, McKibbin added that “a key ingredient is an investment in human capital”.

But the academics’ concern is wider than their own patch. Risse has called for more attention to the long-running drivers of growth, such as “investment in the workforce capabilities, resourcing, wages and working conditions of high-need, high-growth sectors” such as the care economy.

Dr Michael Keating, a former top econocrat, said restoring past rates of economic growth won’t be possible without addressing the structural problems in the labour market. “This will involve much more investment in education, training and research” but “the extra money in this budget for apprentices and trainees only makes up for past cuts.”

Notice a theme emerging? Budgets should be about investment – spending money now, for payoffs to the economy later – but investment needs to be in people, not just in physical and traditional things such as roads and railways.

It’s easy to accuse academics of pontificating atop their ivory towers, but they seem able see much further into the economy’s future needs than our down-to-earth politicians.

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Wealth and happiness don't give meaning to our lives

Easter Monday’s a good a time to reflect on what we’re doing with our lives and why we’re doing it. I’ve been banging on about all things economic for more than 40 years, but if I’ve left you with the impression economics and economic growth is the be-all and end-all, let me apologise for misleading you.

The more I’ve learnt about economics, the more aware I’ve become of its limitations. Economics is the study of production and consumption, getting and spending. But as someone connected with Easter – not the Easter Bunny – once said, there’s more to life than bread alone.

Unfortunately, the conventional way of thinking about the economy has pretty much taken for granted the natural environment in which our economic activity occurs, and the use of natural resources and ecosystem services on which that activity depends.

We’re learning the hard way that this insouciance can’t continue. We’re damaging our environment in ways that can’t continue. I keep writing about the need for economic growth because, as the economy is presently organised, it’s pretty much the only way to provide sufficient jobs for our growing population.

But that just means we need to redefine economic growth to mean getting better, not bigger (and probably should do more to limit world population growth).

Conventional economics focuses on the material aspects of life: producing and consuming goods and services; buying and selling property. There’s no denying the inescapable importance of the material in our lives – “bread” – but conventional economics encourages our obsession with material accumulation at the expense of other important dimensions of our lives.

Some aspects of economic activity can damage our physical health – smoking, drinking, burning dirty fossil fuels, even eating fast foods – but we need to become more aware of the way the fast pace and competitive pressures of modern life also threaten our mental health. Too many people – particularly the young – suffer chronic stress, anxiety, depression and suicidal thoughts.

Too much emphasis on material success can also come at the expense of the social aspect of our lives – our relationships with family, friends and neighbours – which, when we’re thinking straight, we realise give us far more satisfaction than any new car or pay rise. Economists often advocate policies that will increase the efficiency of our use of resources without giving a moment’s thought to their effect on family life.

Nor should we allow our pursuit of material affluence to come at the expense of the moral and spiritual aspects of lives. I’ve just read social commentator Hugh Mackay’s book, Beyond Belief, which has done so much to clarify my thinking about Christianity, religion and spirituality that I’m sorry I didn’t get to it earlier.

Yet another thing that mars conventional economic thinking is its emphasis on the individual as opposed to the community, it’s effective sanctification of self-interest as the economy’s only relevant driving force, and its obsession with competition and neglect of the benefits of co-operation.

Mackay says that, if you ignore the doctrines and dogmas of the church – all the things you’re required to believe in – and focus on the teachings of Jesus, the first thing to strike you is that none of it was about the pursuit of personal happiness.

“The satisfactions offered or implied are all, at best, by-products of the good life,” he says. “The emphasis is on serving others and responding to their needs in the spirit of loving-kindness, the strong implication being that the pursuit of self-serving goals, like wealth or status, will be counterproductive.”

Jesus’ teachings “were all about how best to live: the consistent emphasis was on loving action, not belief. According to Jesus, the life of virtue – the life of goodness – is powered by faith in something greater than ourselves (love, actually), not by dogma.”

Mackay says we should “avoid the deadly trap of regarding faith as a pathway to personal happiness. The idea that you are entitled to happiness, or that the pursuit of personal happiness is a suitable goal for your life, is seriously misguided.

“If we know anything, we know that’s a fruitless, pointless quest – doomed to disappoint – because . . . our deepest satisfactions come from a sense of meaning in our lives, not from experiencing any particular emotional state like happiness or contentment.”

The self-absorbed mind’s entire focus is individualistic. It’s “the polar opposite of the moral mind. Its orientation is towards the self, not others; its currency is competition, not cooperation; it’s all about getting, not giving. Its goal is the feel-good achievement of personal gratification, however that might be achieved and regardless of any impact it might have on the wellbeing of ‘losers’.”

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Sorry, the economy's bum does look big. We've put on a lot of weight

If you’re like many readers, you think economists and business people are obsessed with gross domestic product and dollars, dollars, dollars. So, as a never-to-be-repeated offer, today I’m going to write not about what Australia’s production of goods and services is worth, but what it weighs.

Believe it or not, Dr Andrew Leigh, a federal Labor politician and former economics professor, is just publishing the paper Putting the Australian Economy on the Scales in the Australian Economic Review.

Using a lot of ancient statistics and making various assumptions – so that his figures are, on his own admission, “rough” but still indicative – Leigh estimates that the physical weight of the nation’s annual output of goods and services has gone from 55,000 tonnes in 1831, to 6 million tonnes in 1900, 62 million tonnes in 1960, 355 million tonnes in 2000, and 811 million tonnes in 2018.

Of course, our population has grown hugely in that time, but the weight of output per person is also way up. It was less than a tonne in 1831, six tonnes in 1960 and 32 tonnes per person in 2018. That’s a 47-fold increase.

Well, that’s nice to know. But who in their right mind would bother working out all that? What does it prove? More than you may think – especially if you worry about the impact all our economic activity is having on the natural environment.

You’ve heard, I’m sure, about our big and growing “material footprint” caused by our production and consumption of raw materials. It, too, is measured by weight. The United Nations Environment Program International Resource Panel publishes estimates of the footprints of 150 countries, with the Australian figures coming from the CSIRO and industrial ecologists at the universities of Sydney and NSW.

In measuring a country’s footprint, they take account of four kinds of raw materials: biomass (from grass to timber), metals, construction materials and fossil fuels. It turns out, for instance, that the footprint of a kilo of beef is 46 kilos.

The UN takes a great interest in countries’ material footprint because one of its sustainable development goals is to decouple economic growth from environmental degradation. Ecologists worry that, particularly as poor countries lift their living standards up towards those the rich countries have long enjoyed, the pressure on the globe's natural environment will be . . . well, unsustainable.

But whereas the ecologists’ figures show all countries’ material footprints getting bigger, a lot of economists argue that as economic growth and advances in technology continue, the economy is “dematerialising” – getting lighter.

This is because most of the growth in GDP has come from more provision of services rather than more production of goods through farming, mining and manufacturing. Human labour has no weight, even though it may involve more use of electricity and fuel.

But also because the physical weight of many goods is falling. Leigh reminds us that houses and vehicles are built from lighter materials. Domestic appliances are more compact. Transport networks are more energy-efficient. Software makes it possible to upgrade devices – from games to cars – that might previously have required new physical parts or total replacement.

These shifts led Alan Greenspan, former chairman of the US Federal Reserve, to claim in 2014 that “the considerable increase in the economic wellbeing of most advanced nations in recent decades has come about without much change in the bulk or weight of their gross domestic product”. Without question, he argued, the economy “has gotten lighter”.

So the point of Leigh’s calculations is to check who’s right: those economists claiming the economy is dematerialising, or the ecologists calculating that our material footprint is getting heavier.

Clearly, he comes down on the side of the ecologists. Although his method gives an estimate of the economy’s weight that’s about a fifth lower than the ecologists’, he confirms the general trajectory of their continuing increase. He estimates that a 10 per cent increase in real GDP is associated with a 12 per cent increase in its weight.

Now, you could argue that Australia’s huge “natural endowment” of minerals and energy makes us quite unrepresentative of the advanced economies. Our mining industry has been booming, on and off, since the late 1960s. All you need to know is that our production of (heavy) iron ore – most of it for export – has risen ninefold since 1990.

But Leigh believes all the rich economies have expanding material footprints. The goods they consume may have been getting lighter per piece, but they’ve gone on consuming a lot more of them. Planes may be more fuel-efficient, but far more people are flying far more often (when we’re allowed). Clothes may be lighter, but we buy more of them. Food packaging may be thinner – I can remember when fruit and veg arrived at the greengrocers in wooden boxes - but we’re eating more takeaway meals.

Leigh concludes that, like the paperless office, the weightless economy remains surprisingly elusive. Which doesn’t change the need for us to put the economy on an ecological diet.

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Experts work overtime to take the fun out of Christmas

Feeling bad about the way the pandemic is disrupting your Christmas arrangements? Cheer up, I have good news – of a sort. Keep reading and I’ll convince you Christmas has become so “problematic” you’re probably better off not bothering this year.

A bad-to-non-existent festive season is the perfect way to top off this horrible year, leaving us confident 2021 couldn’t possibly be worse. After this, it’s all upside.

With nowhere to go and nothing better to do, I’ve been searching the internet for ways of improving on the Joy of Christmas. Having consulted the earnest academic experts, I’ve realised Christmas is a minefield of impossible dreams, dashed expectations, overspending, overindulgence and waste, all of it threatened by the risk of a family fight.

And that’s before you remember the damage to the planet – the minimisation of which so many academics seem to see as the whole point of Christmas. (I warned you they were earnest.)

But first, a consumer warning: none of the facts and figures the academics toss around so confidently comes with a money-back guarantee. Read them, be impressed, do not commit to memory.

I must start by acknowledging the seminal contribution of economists to the Yuletide Killjoy movement. One economist who shall remain nameless made his name with a journal article and then book titled The Deadweight Loss of Christmas.

His point was that, in the frequent cases where the gifter of a gift paid more for it than the giftee valued it, the difference was a “deadweight loss” – money spent that yielded no benefit to either party.

His solution was that if you must keep giving presents, stick to cash. Great. Remember, the goal of all Christmas advice is to be admonitory rather than helpful. I’m smart; you're not so.

But the purveyors of the dismal science have no monopoly over the academy’s efforts to increase the dismality of Christmas. The charge is now being led by, of all people, the marketing experts, themselves led by Dr Adrian Camilleri of the University of Technology Sydney, and Professor Gary Mortimer of the Queensland University of Technology.

Camilleri’s research into the psychology of gift-giving finds there are two potentially conflicting goals. First is to make the recipient happy, which mostly depends on whether the gift is something they want.

Second is to strengthen the relationship between giver and recipient. This is achieved by giving a thoughtful and memorable gift – one that shows the giver really knows the recipient. “Usually this means figuring out what someone wants without directly asking,” Camilleri says.

See the problem? Asking them what they want is the way to achieve high marks on desirability, but yields a fail on communicating thoughtfulness.

But now we step up the analysis (stop me if I’m going too fast). Camilleri sets up a matrix, showing the four quadrants made when you account for degrees of thoughtfulness and then degrees of desirability.

In the top left-hand quadrant – unthoughtful and undesired – would be a gift of, say, a pair of socks. The top right-hand quadrant – unthoughtful and desired – would be, say, a gift of money. In the bottom left-hand quadrant – undesired but thoughtful – would be a present you’d never imagined getting, but quite liked. In the bottom right-hand box is a gift that’s both desired and thoughtful.

See how high are the chances of giving a present that misses the mark? “This is why buying a gift can be so anxiety-inducing,” he says. “There is a ‘social risk’ involved.”

But isn’t it the thought that counts? Not as much as you think. Research shows gift-givers tend to overestimate how well unsolicited gifts will be received. Research also shows people tend to overestimate their ability to discern what a recipient will like.

As well, gift-givers tend to overestimate the extent to which more expensive gifts will be received as being more thoughtful. Turns out recipients appreciate expensive and inexpensive gifts similarly.

And they actually feel closer to those who give convenient gifts such as a gift certificate for a nearby, ordinary restaurant, rather than a distant, flash restaurant.

Mortimer and colleagues warn against the evil of giving for giving’s sake. They report that $400 million unwanted presents were given in Christmas 2018, comprising about 10 million items, many of which probably went to landfill. Topping the unwanted list were (in order) novelty items, candles, pamper products, pyjamas or slippers and underwear or socks.

“The shopping frenzy is not good for the planet. It generates a mountain of waste, including plastics, decorations, wrapping paper and party paraphernalia only used once. It also involves thousands of air and road miles to transport goods, which creates up to 650kg of carbon dioxide per person," we're told.

Which brings us to overeating. Under the heading of “How not to give the gift of food guilt this holiday season”, Dr Kelly McGonigal, a psychologist at California’s Stanford University, asks: “Are you overloading your loved ones with indulgent treats they’ll regret?”

I tell you, we’re much better out of the whole thing.

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Productivity is magical, but don't forget the side effects

Something we’ve had to relearn in this annus horribilis is that the state governments still play a big part in the daily working of the economy. Another thing we’ve realised is that the Productivity Commission is so important that some of the states are setting up their own versions.

When you put the word “productivity” into the name of a government agency, you guarantee it will spend a lot of its time explaining what productivity is – a lot of people think it’s a high-sounding word for production; others that it means we need to work harder – and why it’s the closest economics comes to magic.

Earlier this year the NSW Productivity Commission issued a green paper that began with the best sales job for the concept I’ve seen. Its title said it all: Productivity drives prosperity.

Its simple definition of productivity is that it “measures how well we do with what we have. Productivity is the most important tool we have for improving our economic [I’d prefer to say our material] wellbeing,” it says.

“Our productivity grows as we learn how to produce more and better goods and services using less effort and resources. It is the main driver of improvements in welfare and overall [material] living standards.

“From decade to decade, productivity growth arguably matters more than any other number in an economy . . . Growth in productivity is the very essence of economic progress. It has given us the rich-world living standards we so enjoy.”

Productivity improvement itself is driven by increases in our stock of knowledge and expertise (or “human capital stock”) and by investment in physical capital (“physical capital stock”).

But by far the biggest long-term driver of productivity is the stock of advances known as “technological innovation” – a term that covers everything from new medicines to industrial machinery to global positioning systems.

Technology’s contribution to overall productivity growth has been estimated at 80 per cent, the paper says.

“Our future prosperity depends upon how well we do at growing more productive – how smart we are in organising ourselves, investing in people and technology, getting more out of both our physical and human potential.”

The (real) Productivity Commission has pointed out that on average it takes five days for an Australian worker to produce what a US worker can produce in four. (That’s not necessarily because the Yanks work harder than we do, but because they have fancier equipment to work with, and better organised offices and factories – not to mention greater economies of scale.)

The paper notes that productivity improvement hinges on people’s ability to change. “Unwelcome as it has been, the COVID-19 episode has shown that when we need to, we can change more rapidly than we thought. There is no reason we can’t do the same to achieve greater productivity and raise our future incomes.”

Technological innovation is the process of creating something valuable through a new idea. You may think that new technology destroys jobs – as the move to renewable energy is threatening the prospects of jobs in coal mining – but, if you take a wider view, you see that it actually moves jobs from one part of the economy to another and, because this makes our production more valuable, increases our real income and spending and so ends up increasing total employment.

“All through history,” the report adds, “[technological innovation] has been a huge source of new jobs, from medical technology to web design to solar panel installation. And as these new roles are created and filled, they in turn create new spending power that boosts demand for everything from buildings to home-delivered food.

But the thing I liked best about the NSW Productivity Commission’s sales pitch was the examples it quoted of how technology-driven productivity has improved our living standards.

Take, medicine. “The French king Louis XV was perhaps the world’s richest human being in 1774 – yet the healthcare of the day could not save him from smallpox. Today’s healthcare saves us from far worse conditions every day at affordable cost.”

Or farming. “In 1789, former burglar James Ruse produced [Australia’s] first successful grain harvest on a 12-hectare farm at Rose Hill. Today, the average NSW broadacre property is 2700 hectares and produced far more on every hectare, often with no more people.”

Or (pre-pandemic) travel. About “67 years after the invention of powered flight, in 1970, a Sydney-to-London return flight cost $4600, equivalent to more than $50,000 in today’s terms. Today, we can purchase that flight for less than $1400 – less than one-30th of its 1970 price.”

Or communications. “Australia’s first hand-held mobile call was made at the Sydney Opera House in February 1987 on a brick-like device costing $4000 ($10,000 in today’s terms). Today we can buy a new smartphone for just $150, and it has capabilities barely dreamt of a third of a century ago.”

There are just two points I need add. The first is that there’s a reason we’re getting so many glowing testimonials to the great benefits of productivity improvement: for the past decade, neither we nor the other rich countries have been seeing nearly as much improvement as we’ve been used to.

Second, economists, econocrats and business people have been used to talking about the economy in isolation from the natural environment in which it exists and upon which it depends, and defining “economic wellbeing” as though it’s unaffected by all the damage our economic activity does to the environment.

As each month passes, this not-my-department categorisation of “the economy” is becoming increasingly incongruous, misleading and “what planet are you guys living on?”.

What’s more, the growing evidence that all this year’s “social distancing” is having significant adverse effects on people’s mental health is a reminder we should stop assuming that ever-faster and more complicated economic life is causing no “negative externalities” for our mental wellbeing.

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The greenie good guys are wrong to oppose economic growth

Only a few sleeps to go before our annual Festival of Growth – otherwise known as the unveiling of this year’s federal budget. People will want to know whether Treasurer Josh Frydenberg has done enough to “stimulate” growth. And whether the government’s forecasts for growth are credible. But not everyone will be on the growth bandwagon.

A lot of people who worry about the natural environment will be dubious and disapproving. “Don’t these fools know that unending growth is physically impossible?” “What kind of wasteland is all this growth in the production of stuff turning the planet into?”.

I’ll be banging on next week about the need for growth, but I know I’ll be getting emails from reproving readers. “I thought you were one of the good guys. I thought you cared about the environment and had doubts about all the growth boosterism.”

Sorry, I do care about the environment and I do have doubts about the popular obsession with eternal growth. But I will still be marking the government down if it hasn’t done enough to foster growth over the next year or three.

The anti-growth lobby is half right and half wrong. They know a lot about science and they think this means they know all they need to know about economics. What they don’t know is the growth that scientists know about isn’t the same animal as the growth economists measure and business people and politicians care so much about.

And I have a challenge for the anti-growth brigade: don’t you care about the big jump in unemployment?

Let’s start with the immediate crisis. The pandemic and our attempts to suppress it have led to a fall of 7 per cent in the size of the economy in the June quarter – as measured by the quantity of Australia’s production of goods and services (real gross domestic product).

This massive contraction in production has involved a fall of more than 400,000 in the number of jobs, almost a million people unemployed and a jump in the rate of underemployment from 9 per cent to 12 per cent. Most of the people affected are young and female.

If you’re tempted to think that this fall in our production and consumption of “stuff” is a good thing and there ought to be more of it, what’s your plan for helping all those people who’ve lost their livelihood? Put ’em on the dole and forget ’em?

The standard plan for helping them get their livelihood back (or find their first proper job after leaving education) is to get production back up and keep it growing fast enough to provide jobs for those in our growing population who want to work.

Until we’ve instituted a better way of securing the livelihoods of our populous, that’s the solution I’ll be pushing for. And the growth we end up with won’t do nearly as much damage to the natural environment as the growth opponents imagine.

That’s because what our business people, economists and politicians are seeking is growth in real GDP, and growth in GDP doesn’t necessarily involve growth in our use (and abuse) of renewable and non-renewable natural resources. Indeed, as each year passes, GDP grows faster than growth in our use of natural resources.

What many environmentalists don’t understand is that increased digging up of minerals and energy, and increased damage to tree cover, soil, rivers and biodiversity as a result of farming and other human activity accounts for only a small part of the growth of GDP.

It’s wrong to imagine that growth in GDP simply involves growth in the production of “stuff” – things you can touch. What economists call “goods”. No, these days (and for decades past) most – though not all - of the growth in GDP has come from the growth in “services”.

That is, people - from the Prime Minister down to doctors, teachers, journalists, truck drivers and cleaners - who run around doing things for other people. Some of this running around involves the use and abuse of natural resources – including the burning of fossil fuels – but mostly it involves using a resource that’s economic but not environmental: the time of humans. And, of itself, human time doesn’t damage the environment.

The production of goods – by the agricultural, mining, manufacturing and construction industries – accounts for just 23 per cent of GDP, leaving the production of services accounting for the remaining 77 per cent.

Next, remember that a significant proportion of the growth in GDP over the years has come not from the application of more raw materials, land, capital equipment and labour, but from greater efficiency in the way a given quantity of those resources is combined to produce an increased quantity goods and services.

Economists call this improved “productivity” (output per unit of input). And it’s the main source of our higher material standard of living over recent centuries, not our use of ever-more natural resources per person.

In my experience, many people with a scientific background simply can’t get their head around the concept of productivity – which helps explain why many economists dismiss the anti-growth brigade as nutters. They can’t take seriously people who appear to think increased efficiency must be stopped.

A final point is that growth in population adds to environmental damage – although this is a moot point when most of the growth in a particular country’s population comes merely from immigration.

Now, let’s be clear: none of this is to dismiss concerns about the immense damage we’re doing to the natural environment, nor to imply that the global environment could cope with the world’s poor becoming as rich as we are.

No, the point is that concern should be directed to the right target: not economic growth in general, but those aspects of economic growth that do the environmental damage: world population growth, use of fossil fuels, indiscriminate land clearing, irrigation, over-fishing, use of damaging fertilisers and insecticides, and so on.

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Climate change: we can't stop it by refusing to change

After Donald Horne's book in the 1960s, we all know we live in the Lucky Country. What we've forgotten until now, however, is the qualification Horne added: "Australia is a lucky country run mainly by second-rate people." We haven't been feeling so lucky this burning, smoky summer. But our present leader, Scott Morrison, has certainly been looking second rate.

This summer we've had our Pearl Harbour moment. Just as the Japanese bombing of Hawaii in 1941 stopped Americans viewing World War II as some distant threat, so our season of unprecedented drought, heatwaves, bushfires and smoke haze has woken us up to the present reality of global warming.

There we were thinking climate change would be a problem for our children and grandchildren – who, we hoped, wouldn't remember our refusal in 2013 to pay a bit more for electricity so as to reduce greenhouse gas emissions.

Now we realise it's a problem – a frightening problem – for us. One likely at least to continue for the rest of our lives at its present level of harm and unpleasantness, and more likely get much worse in the years ahead unless something decisive is done by all the major economies, including us, to reduce net emissions to zero over the next 30 years and stop us cooking.

It's a wake-up moment not just for us, however, but for the entire rich world. They've been watching in fascinated horror as global warming has punished the Aussies for their repeated refusal to take it seriously.

Ostensibly, Morrison has realised we need to change course. "We want to reduce emissions and do the best job we possibly can and get better and better at it," he said when it dawned on him we were holding him responsible for the fires regardless of what the constitution says about them being a state responsibility.

"In the years ahead, we are going to continue to evolve our policy in this area to reduce emissions even further," he said. But then he started adding qualifications. "We're going to do it without a carbon tax, without putting up electricity prices and without shutting down traditional industries upon which regional Australians depend for their very livelihood."

Really? Sounds like he's promising us all the benefits without any of the costs. Nothing needs to change to make things much better. Which, in this age of cynicism and distrust of our lengthening string of second-rate leaders, makes you fear all that's changed is the marketing spiel.

What we need is a leader great enough to seize our Pearl Harbour moment and turn it into a Port Arthur moment – the moment when a prime minister exercises true leadership and uses the horrible reality of death and destruction to win public support for big changes to stop such things becoming regular events.

John Howard, Morrison's role model and mentor, saw such an opportunity and seized it. He did so not because it offered political gain, but because it was a leader's duty to deliver something great for those he led. He did so knowing it would prompt great resistance from within the Coalition. But with the public behind him and his political opponents unlikely to oppose him, that was a risk he was prepared to take.

Just the same conditions apply to Morrison's decision on whether to turn us from laggards to leaders in the global effort to halt the rise in average temperatures to less than 2 degrees. Has he the courage to stand up to the noisy minority of climate change deniers in the Coalition, who are now so badly out of step with public opinion?

There's a central lesson to be learnt from this appalling summer. The dichotomy Morrison has so far relied on – the environment versus the economy – is false. "We'd love to help the environment, but not if that involves a cost to the economy."

Sorry, since the economy sits within the natural environment, anything that damages the environment also imposes loss – of property, businesses, jobs, wellbeing, lives and health – on the economy and the humans who constitute it.

It follows that, in our obsession with the cost of fighting climate change, we can no longer ignore the far greater cost of not fighting it. The one option that's not available is no change. We can refuse to change, but nature will change things whether we like it or not.

The economy is always changing, as some industries expand and other contract. Jobs are continuously being lost in some fields and created in others. This is the very process by which we've become far more prosperous over the past two centuries.

So the notion that our steaming coal industry can be preserved in aspic is laughable. Its days are numbered. But we don't have to kill it, the rest of the world will do that for us as – like us – they increasingly turn to renewable energy and away from fossil fuels. Business can see that; Morrison professes not to.

Second-rate leaders throw in their lot with those who fear losing from change, letting the rest of us suffer while they attempt to resist the irresistible. First-rate leaders seek out ways we can benefit from that change, restoring the luck of the Lucky Country. How? Watch this space.

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It may upset you to think about climate change and the economy

It’s coming to something when we get so little leadership from the bloke we pay to lead us that the unelected have to fill the vacuum. Now 10 business organisations have united to urge Scott Morrison either to set out the climate policy rules to drive action by the private sector, or end up spending a shedload of taxpayers’ money fixing the problem himself.

It’s not just business that’s dissatisfied. The Morrison government may be dominated by climate-change deniers, but almost all economists accept the science of global warming and believe we should be doing our bit to help limit it.

And though our elected government may be in denial, the Reserve Bank – like other central banks – isn’t. Nor are the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.

The Queensland Treasurer, Jackie Trad, asked federal Treasurer Josh Frydenberg if the Reserve’s deputy governor, Dr Guy Debelle, could be invited to talk about climate change and the economy at the recent meeting of treasurers, but Frydenberg declined.

So what was it Frydenberg didn’t want his fellow treasurers thinking about? Well, we can get a fair idea of what Debelle would have said from a speech he gave earlier this year.

But first, why do so many economists accept the science? Because they know very little about the science and so accept the advice of the experts, especially since there’s so much agreement between them.

And there’s another reason. Economists believe they can use their expertise to help the community make the changes we need to make with the least amount of cost and disruption to the economy.

As Debelle reminds us, “the economics profession has examined the effects of climate change at least since Nobel Prize winner William Nordhaus in 1977. Since then it has become an area of considerably more active research in the profession. There has been a large body of work around the appropriate design of policies to address climate change (such as the design of carbon pricing mechanisms), but not that much in terms of what it might imply for macro-economic policies” – that is, for efforts to stabilise the macro economy as it moves through the ups and downs of the business cycle.

Debelle says the economy is changing all the time in response to a large number of forces, but few of them have the scale, persistence and risk to the system that climate change has.

Macro economists like to classify the various “shocks” that hit the economy as either positive or negative and as hitting the demand side of the economy or the supply side. For instance, they know a positive demand shock increases production (gross domestic product) and prices. The monetary policy response to such a shock is obvious: you raise interest rates to ensure inflation doesn’t get out of hand.

Shocks involving the climate affect the supply (output) side and are common. An unusually good growing season would be a positive supply shock, whereas a drought or cyclone or flood would be a negative supply shock, reducing output but increasing prices.

This is a trickier shock for monetary policy to respond to because it’s both contractionary (suggesting a cut in interest rates) and inflationary (suggesting higher rates). The Reserve’s usual response is to “look through” (ignore) the price increase, assuming its effect on inflation will be temporary.

Historically, the Reserve has assumed all climate events are temporary, with things soon returning to where they were. That is, they’re cyclical. It’s clear from the reports of the Intergovernmental Panel on Climate Change, however, that climate change is a trend - a lasting change in the structure of the economy, which will build up over many years.

Of course, though climate change’s impact on agriculture continues to be great, it presents significant risks and opportunities for a much broader part of the economy than agriculture.

Debelle says we need to reassess the frequency of climate events and our assumptions about the severity of those events. For example, the insurance industry has recognised that the frequency and severity of tropical cyclones has changed. It has “repriced” how it insures against such events.

Most of us are focused on “mitigating” – reducing – future climate change. But Debelle says we also need to think about how the economy is adapting to the climate change that’s already happened and how we’ll adapt to the further warming that’s coming, even if we do manage to get to zero net emissions before too long.

“The transition path to a less carbon-intensive world is clearly quite different depending on whether it is managed as a gradual process or is abrupt,” he says euphemistically. “The trend changes aren’t likely to be smooth. There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend.”

Both the physical impact of climate change and the adjustment to a warmer world are likely to have significant economic effects, he says.

Economists know from their experience with reducing import protection that the change from the old arrangements to the new involves adjustment costs to some people (workers who have to find jobs in other industries, for instance) even if most people (consumers of the now-cheaper imports, for instance) are left better off.

Economists press on with advocating such painful changes provided they believe the gains to the winners are sufficient to allow them to compensate the losers and still be ahead. But Debelle admits that, in practice, the compensation to the losers doesn’t always happen, leaving those losers very dissatisfied.

That’s bad enough. But Debelle fears that, with climate change and the move to renewables, the distribution of benefits and costs may be such that the gains to the winners in new renewables industries aren’t great enough to cover the losses to the losers even in principle, let alone in practice.

Nah, all too hard. Let’s just ignore it and hope it goes away.

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Recycling is all about being taken for a ride

Another day, another crisis. The crisis in kerbside recycling has been building since China effectively refused to take any more of our rubbish about 18 months ago. Then we sent it to other Asian countries, but now they’re jacking up, too.

The disruption to the local recycling industry has caused one company that accepted recycled material from local councils in Victoria and South Australia to collapse, leaving five big warehouses stuffed with baled paper and plastic that no one wants.

But then Scott Morrison took charge. At a meeting with the premiers, they agreed to establish a timetable to ban the export of waste plastic, paper, glass and tyres. In the meantime, he committed $20 million for “innovative projects to grow our domestic recycling industry”.

Morrison said Australia needed to take responsibility for its own waste, but this moral act should be seen as a money-making opportunity rather than a new economic burden. The changes should “not have to cost us more – in fact, hopefully, it’ll cost us less”.

Minister for Industry Karen Andrews said: “Boosting our onshore recycling industry has the potential to create over three times as many jobs as exporting our plastic waste, ensuring a more sustainable and prosperous future.”

Really? Sounds delusional to me. The truth is that most of what we put out each week is of little value to business – especially after you’ve had to move it, sort it, move it again, clean it up, melt it down or whatever.

It’s not clear that the cost of making our waste attractive to local businesses would be less than they were prepared to pay for it. If not, we’d pay through higher taxes. Of course, governments could compel businesses to use recycled materials, but if this increased their costs we’d pay through higher prices.

This is why, until now, so much of our waste – and that of the Americans, Japanese and Europeans – has been shipped around the world to Asian countries. That’s where wages are low enough to make feasible all the work involved in recovering waste materials.

But even they are now deciding it’s not worth all the air pollution, chemical emissions, discharge of untreated water and damage to workers’ health involved. A fair bit of the plastic can’t be recycled and gets burnt.

So we could spend a lot more than we do at present ensuring that we recycle a high proportion of our own household waste, but before we do we ought to ask ourselves how we’ve come to believe that recycling most of the stuff we discard is absolutely central to our efforts to reduce the damage we’re doing to the natural environment.

Why are we putting recycling on a higher pedestal than reducing carbon emissions? Because it’s easier? We’re learning it’s not as easy as it seems.

If the amount of household waste is such a problem, why are we emphasising recycling rather than reduced packaging? Because governments don’t like telling big business what it can and can’t do?

It amazes me that we’ve put recycling up there with motherhood and never stop to question whether it’s the best use of our time and money in the “environmental space”.

I think recycling involves a high degree of self-delusion (and don’t worry, I’ve been known to completely repack our bin so as to fit more in). It’s more about feeling good than doing good.

We’ve taken to recycling because, with just a small effort on our part, we’re able to convince ourselves we’re doing our bit to save the planet. (I remember shopping at a supermarket in California, with all its indulgences and absurd degree of choice. At the checkout, you were asked whether you wanted your stuff packed in “paper or plastic”. All you had to do was say “paper” and you emerged with a clear conscience.)

With kerbside recycling, it’s out of sight, out of mind. I played my part, what happens after that is up to the government. Turns out, we’ve been sweeping our dust under the carpet and only now are noticing the bulge.

Governments have found it easier to play along with our delusions – see above – than tell us the disillusioning truth. Green groups and ecologists also play along because they think it gives us something to do and keeps us engaged with their issue.

Nobody actually wants the stuff, so the authorities have been shipping it off to Asia on the q.t. Much of the stuff that doesn’t get shipped away ends up in landfill anyway.

What do we imagine recycling achieves? How much further use of fossil fuel, water, chemicals and other damage to the environment is justified to ensure the last bit of paper or bottle cap is recycled?

Recycling’s total effect on the environment is a far more complicated sum than it suits governments and experts to tell us.

For instance, we know how bad single-use plastic bags are. What we’re not told is that, according to a British government study, you have to use a paper bag three times – or a cotton bag 131 times – to be sure that, once the effect of producing the bag is taken into account, you’ve contributed to fewer carbon emissions.

We need to be sure we’re directing our effort and expense towards the most environmentally beneficial ends.

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One day the world's population will start falling

For those who worry about global warming and all the other damage humans are doing to our planet, the latest news on world population growth doesn’t seem good. Fortunately, however, the relationship between population and the environment is paradoxical.

The United Nations Population Division updated its projections in June. From its present 7.7 billion, the world’s population is projected to have grown by 2 billion in 2050. It should reach a peak of nearly 11 billion at about the end of this century, before it starts to fall.

Fortunately, projections are just projections, based on a lot of assumptions that may or may not prove to have been accurate. Some prominent demographers believe the UN’s assumptions are too pessimistic.

It’s a mistake to imagine that controlling world population growth is just a matter of access to effective contraception. Economic development also plays a big part.

It’s the activity of humans that generates greenhouse gas emissions and does other damage to the natural environment, using up non-renewable resources, over-using renewable resources such as fish stocks and forests, damaging soil and waterways, and making species extinct.

So the more people, the more damage. Most human activity is economic – people earning their living. And, the way economies are organised at present, the richer people become, the more damage they do.

But here’s the paradox: the richer people become, the fewer children they have.

As my favourite magazine, The Economist, noted in an article, before the Industrial Revolution the typical woman probably had seven or more children. In 1960, the global fertility rate was six children per woman. Today it’s 2.5.

Within that global average, the fertility rate in rich countries is 1.7 children, below the replacement rate for a stable population of 2.1. In middle-income countries it’s 2.4, not far above replacement. In poor countries, however, it’s 4.9 children.

The first economic factor to reduce family size is urbanisation. When you leave the farm, you don’t need as many kids to help with the work. (Both my parents grew up on farms early last century. Dad was one of 14, and Mum one of eight. Their four children, however, had an average fertility rate of 2.5.)

But perhaps the most important factor is the spread of education, particularly of girls. It’s well established that the more years girls spend at school, the fewer babies they have.

“Education reduces fertility by giving women other options,” The Economist says. “It increases their chances of finding paid work. It reduces their economic dependence on their husbands, making it easier to refuse to have more children even if he wants them.

“It equips them with the mental tools and self-confidence to question traditional norms, such as having as many children as possible. It makes it more likely they will understand, and use, contraception.

“It transforms their ambitions for their own children – and thus the number than they choose to have.”

Worldwide, the proportion of girls completing primary school has risen from 76 per cent in 1997 to 90 per cent today. The proportion completing lower secondary school is nearing 80 per cent.

Fertility rates are low in Europe – particularly in Italy (1.33) – and in Japan (1.37). They’re below replacement rate in New Zealand (1.9), Australia (1.83) and the US (1.78).

But the lowest fertility rates are in emerging Asia: Taiwan (1.15) and South Korea (1.11). In the world’s most populous country, China, it’s 1.69, thanks to the one-child policy. After the relaxation of that policy it rose only briefly. Flats are too small and childcare too limited.

By contrast, India’s rate is 2.24, pretty close to replacement. And it varies greatly from 1.8 in wealthy states such as Maharashtra, to more than 3 in poor states such as Uttar Pradesh. Even so, India's population is expected to overtake China’s in 2027.

Because fertility rates cover the whole child-bearing lives of women, it takes a long time for the population of a country that's a bit below the replacement rate to start falling – assuming they don’t top up with immigration, as we do.

Even so, 27 countries’ populations have fallen since 2010 – sometimes with low fertility rates reinforced by high emigration. Over the next 30 years, 55 countries’ populations are projected to fall – almost half of them by more than 10 per cent. China’s may fall by about 31 million, or 2 per cent.

So what’s the problem? In a word: Africa. Its painfully slow rate of economic development leaves it still with fertility rates of five or six, including big countries such as Nigeria, the Congo, Ethiopia and Tanzania.

The best hope that the world’s population will stop growing sooner than the UN projects is that it has underestimated the rise of girls’ education in Africa (and India and Pakistan).

Of course, economic development is two-edged. It may stop population growth, but it makes everyone else richer and thus makes more demands on the environment.

Just as we can limit climate change without reducing energy use by switching to renewable sources, so we could reorganise the economy in ways that ensured continued economic growth didn’t involve continued destruction of the environment. If we had the will.

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Change is inevitable. If we embrace it we win; resist it we lose

Will Australia’s future over the next 40 years be bright or pretty ordinary? It could go either way, depending on how we respond to the challenges facing us. So what do we have to do to rise to the occasion?

The challenges, choices and likely consequence we face are spelt out in the report, Australian National Outlook 2019, produced by the CSIRO in consultation with 50 leaders from companies, universities and non-profits. The group was chaired by Dr Ken Henry, former Treasury secretary, and David Thodey, former boss of Telstra.

The report identifies six main challenges we face between now and 2060. First is the rise of Asia and the way it is shifting the geopolitical and economic landscape.

Asia’s middle class is growing rapidly, but unless we improve our ability to compete and also diversify our exports, we risk missing out on this opportunity and will be vulnerable to external shocks.

Next is the challenge of technological change, such as artificial intelligence, automation and biotechnology, which is transforming existing industries and changing the skills required for high-quality jobs.

Third challenge is climate change, the environment and loss of biodiversity. These pose a significant economic, environmental and social threat to the world and to us. We could be on a path to 4 degrees global warming by the end of the century unless significant action is taken.

Then there’s the demographic challenge: at current growth rates Australia’s population may approach 41 million by 2060, with Sydney and Melbourne housing 8 to 9 million people each. At the same time, ageing means the population’s rate of participation in the workforce could drop from 66 per cent to 60 per cent. (I don’t accept that such a rate of population growth is either inevitable or desirable.)

The fifth challenge is that trust in governments, businesses, other organisations and the media has declined. Without a lot of trust, it will be much harder to agree on the often-tough measures needed to respond to all these challenges.

Finally, measures of social cohesion have fallen in the past decade, with many Australians feeling left behind. Inequality, financial stress, slow wage growth and poor housing affordability may be contributing to this.

The report develops two plausible but opposite scenarios of how things may develop over the next 40 years. The “slow decline” scenario is the muddle-through future, in which we resist change for as long as we can. In the “outlook vision” scenario we agree to bite the bullet, resist the lobbying of declining industries, make the needed policy changes and exploit the benefits of new technology and trading opportunities.

Under the low-road scenario, real gross domestic product grows at an average rate of 2.1 per cent a year, whereas under the high-road scenario it grows by 2.8 per cent. This would cause average real growth per person to be 39 per cent higher than under the low-road.

Real wages would be 90 per cent higher in 2060 than today, compared with 40 per cent higher under the low-road.

The low-road approach would allow cities to continue to sprawl, whereas the high-road would involve increasing the density of cities by about 75 per cent compared with today. This would keep our cities highly liveable.

Urban congestion could be reduced by higher density. Vehicle kilometres per person would fall by less than 25 per cent under the low-road, compared with up to 45 per cent under the high-road.

Net carbon emissions would fall by only 11 per cent under the low-road, with total energy use increasing by 61 per cent on 2016 levels, and only a modest improvement in energy productivity (efficiency).

By contrast, net zero emissions would be reached by 2050 under the high-road, with a doubling of energy productivity per unit of GDP and total energy use increasing by less than 45 per cent.

Whereas returns to landowners would increase by about $18 billion a year under the low-road, they’d increase by up to $84 billion a year under the high-road.

There’d be minimal environmental planting in 2060 under the low-road, but between 11 to 20 million hectares under the high-road, accounting for up to a quarter of intensive agricultural land. This “carbon forestry” explains why net zero emissions could be achieved without significant effect on economic growth.

More biodiverse plantings and better land management could help restore our ecosystems. And low-emission, low-cost sources of energy could even become a source of comparative advantage for us, with exports of hydrogen and high-voltage direct-current power.

The report says we need to achieve five key shifts to get us on to the high road. First, Industry. We need to allow a change in the structure of our industry, by increasing the adoption of new technology and so increasing productivity. We need to invest in the skills of our workers to keep their labour globally competitive and ready for the technology-enabled jobs of the future.

Second, urban sprawl. We need to plan for higher-density, multicentred and well-connected capital cities to reduce sprawl and congestion. We need to reform land-use zoning, so diverse high-quality housing options bring people closer to jobs, services and amenities. We must invest in transport infrastructure, including mass-transit, autonomous vehicles and "active transit", such as walking and cycling.

Third, energy. We must manage the shift to renewable energy, which will be driven by declining technology costs for generation, storage and grid support. We need to improve energy productivity using new technology to reduce the waste of power by households and industry.

Fourth, land. We need to use digital and genomic technology to improve food technology and to participate in new agricultural environmental markets to capitalise on our unique opportunities in global carbon markets. This will help to maintain, restore and invest in biodiversity and ecosystem health.

Finally, culture. We need to rebuild trust, encourage a healthy culture of risk-taking and deal with the social and environmental costs of reform policies.

Trouble is, a public that’s willing to re-elect the reactionary Morrison government seems more likely to settle for the low-road than strive for the best we could be.

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Kiwis go one up and bring happiness to the budget

Like the past, New Zealand is a foreign country. They do things differently there. While we’ve just had a budget promising what seems like the world’s biggest tax cut, the Kiwis have just had what may be the world’s first “wellbeing budget”. Bit of a contrast.

I’ve long believed that all government politicians everywhere, when they’re not simply delivering for their backers, are trying to make voters happy and thus get themselves re-elected. They just differ in how they go about it.

Like governments everywhere, our governments of both colours have seen delivering economic growth - and the jobs and higher material living standards it’s expected to bring - as the chief thing we want of them to make us happier.

To this end they’ve adopted as their chief indicator of success the rate of growth in GDP – gross domestic product – which measures the nation’s production of goods and services during a period.
They’ve largely assumed that the extra income produced by this growth is distributed fairly between us - though, in recent decades, the share going to those near the top has grown a lot faster than the shares of everyone else.

This, presumably, is Australian voters’ “revealed preference”, since we’ve just rejected the party promising to cut various tax breaks going mainly to high income-earners and use the proceeds to increase spending on hospitals, schools and childcare, in favour of the party offering tax cuts worth an immediate saving of $1080 a year to middle income-earners and delayed savings of up to $11,640 a year to those of us on $200,000 and above.

According to the Liberal winners, voters in outer suburbs and the regions turned away from Labor because it would have dashed their “aspirations” to one day be earning two or three times what they’re earning today and so be raking it in from family trusts, negatively geared investments and, above all, refunds of unused franking credits.

But if our aspirations to happiness revolve around more money in general and less tax in particular, our cousins across the dutch aspire to a radically different brand of happiness.

According to their Finance Minister Grant Robertson, in his budget speech, New Zealanders were asking “if we have declared success because we have a relatively high rate of GDP growth, why are the things that we value going backwards - like child wellbeing, a warm, dry home for all, mental health services or rivers and lakes we can swim in?

“The answer to that question was that the things New Zealanders valued were not being sufficiently valued by the government . . . So, today in this first wellbeing budget, we are measuring and focusing on what New Zealanders value – the health of our people and our environment, the strengths of our communities and the prosperity of our nation.

“Success is making New Zealand both a great place to make a living, and a great place to make a life.”

According to the nest of socialists who’ve overrun the NZ Treasury, “there is more to wellbeing than just a healthy economy”. So GDP has been moved from its central place, replaced by Treasury’s “living standards framework”, based on the four sources of capital: natural capital (land, soil, water, plants and animals, minerals and energy resources), human capital (the education, skills and health of the population), social capital (the behavioural norms and institutions that influence the way people live and work together) and human-made capital (factories, offices, equipment, houses and infrastructure).

The living standards framework covers 12 “domains”: income and consumption, and jobs and earnings (which two cover GDP), and “subjective wellbeing” (the $10 term for happiness), plus health, housing, knowledge and skills, the environment, civic engagement and governance, time use, safety and security, cultural identity and social connections.

The wellbeing budget then set out five government priorities: improving mental health, reducing child poverty, addressing inequalities faced by Maori and Pacific island people, thriving in a digital age, and transitioning to a low-emission, sustainable economy.

I’ve often thought this would be the right way for governments to go about increasing “aggregate happiness” – by focusing on reducing the main sources of un-happiness.

To make a start, the budget provides almost $1billion over five years to improve the wellbeing of children, including extra funding for low-income schools, more help for children affected by domestic and sexual violence, and indexing family benefits to wages rather than prices.

The budget’s expensive mental health package includes creation of a new frontline service and funds to help people with mild-to-moderate mental health problems rather than making them wait until their problems worsen. Helping people with addictions is also seen as a health issue.

A “sustainable land-use” package works on the environmental challenges facing agriculture, including excess nutrient flows into iconic lakes and rivers.

Despite all this, the budget sticks to the government’s budget responsibility rules, with surpluses forecast and reduction of public debt. According to Saint Jacinda of Ardern, the wellbeing budget “shows you can be both economically responsible and kind”.

So, those uppity Kiwis think they can walk and chew gum at the same time. Fortunately, we Aussies know not to try.

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How to lose water, waste money and wreck the environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Squaring the world's waste circle ain't that easy

If you think we’ve been standing still – even going backwards – on reconciling the economy with the natural environment, that’s not wholly true. While our refusal to get real on climate change drags on, we’ve started our journey to the nirvana of a “circular economy”.

Never heard the term? Heard of it, but not sure what it means? Really? It’s the great intellectual fashion statement of 2018.

And, since it has more merit than I suspect many of its advocates realise, we must hope it doesn’t fall out of fashion long before it’s done any good.

Governments around the world are doing things about it. Mainly, saying what a nice idea it is, writing reports and designing “road maps”.

The Organisation for Economic Co-operation and Development has taken up the cause in its RE-CIRCLE project. And no lesser bunch of worthies than the World Economic Forum (the Davos brigade) is enthusiastic.

Here in Oz, last year saw a favourable report from a Senate committee. The Victorian, South Australian and NSW governments have recently signalled their support, with the latter issuing a “circular economy policy statement” in October.

Some of my information comes from an explainer by the Victorian Parliamentary Library, written as recently as October. Circularity is hot, hot, hot.

The explainer explains that, as presently organised, market economies are linear. You take natural resources, process them into many and varied goods – from food to fancy electronic gizmos – which you and I consume before eventually disposing of them. Then we take more natural resources and start the process again.

In contrast, the goal of a circular economy is to keep natural resources in use for as long as possible, extract the maximum value from them while in use, then recover and regenerate products and materials at the end of their serviceable life.

Get it? The ultimate goal is to “decouple” economic growth from the consumption of natural resources.

The OECD points out that, over the last century, global use of raw materials grew at almost twice the rate that the population grew.

To minimise the – to some extent irreparable - damage that economic activity does to the natural environment, we need to ensure it involves less net use of natural resources.

The idea that natural resources should be recycled is one Australians – and people throughout the rich world – happily embraced ages ago. Almost all of us divide our garbage between recycling and the rest before we put it out.

But the concept of a truly circular economy requires us to go a lot further than that. We need to repair the durable products we use rather than throwing them out and buying another.

But that means changing the design of those products from disposable to repairable – and upgradeable. It means making much greater use of recycled materials in the manufacture of “new” products, as well as doing something sensible about all that packaging.

In my limited reading of all the circular economy bumf, I haven’t seen it explained that the basic problem arises from the first law of thermodynamics, which says that matter can be transformed from one form to another, but can be neither created nor destroyed.

In other words, something has to happen to all the natural resources we use to produce and consume. They don’t cease to exist, they just change form. They turn into multiple forms of waste, which we dispose of down the sewer and in landfill.

One important form of waste created by the economic process – particularly if it involves burning fossil fuels – is the emission of greenhouse gases. For more than 200 years we couldn’t see this happening, so we didn’t think it was a problem.

Now we know the gases hang around in the upper atmosphere, trap the earth’s heat from the sun like the roof of a greenhouse, and raise the earth’s temperature.

When you consider how much trouble we’re having agreeing on a solution to that small part of our waste problem, don’t kid yourself dealing with the rest of the waste will be a simple matter of everyone seeing the light and doing the right thing with a bit of encouragement from the government.

What worries me about the circular-economy push is not the objective – it’s dead right - it’s the naivety of those doing the pushing. They want to radically transform the economy, but haven’t seen the need to consult any economists about how you might go about it.

All the governments know better, of course, but they seem to have decided that, as long as it stays on the level of appealing to people to Do The Right Thing, it could keep the greenies diverted without doing much harm.

No one seems to have asked the obvious question: just why is the economy presently linear not circular? Answer: because all the powerful economic incentives push us in that direction.

Because the resources the environmentally aware care about – natural resources – are relatively cheap, whereas the resource they don’t think about, but everyone else does, labour, is relatively dear.

Why do you think the nation’s local councils have been taking most of our recycling and shipping it off to China? Because processing that stuff in a rich country like ours is uneconomic.

Why have the Chinese been taking it? Because their wages were low enough to make processing profitable (that is, economic).

Why have the Chinese now stopped taking it? Because their economic success has raised wage rates and made it no longer profitable.

So, how on earth could we make our economy circular?

Ask economists to figure out a plausible way of reversing our incentive structure. That's the kind of job they do when asked.

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What the economy really needs more of: trees

I think the first economist must have been named Horatio. He’s the one who had to be reminded there were more things in heaven and earth than dreamt of in his model.

I try to keep my horizons wide by regularly consulting my second-favourite website, The Conversation (with academics who know a lot of interesting things about a lot of topics), to which I’m indebted for most of what follows.

We’re meant to know all about photosynthesis, but did you realise it means that, “with a bit of sun, a tree uses the natural miracle of photosynthesis to combine a little water with carbon dioxide from the air to produce the building blocks for its own growth, as well as oxygen,” according to Associate Professor Cris Brack, of forest measurement and management at the Australian National University?

So, to oversimplify a little, we breathe in oxygen and breathe out carbon dioxide, whereas trees breathe in carbon dioxide and breathe out oxygen – making them useful things to have around when we have a problem with excess carbon emissions.

But trees do far more for us than help with our greenhouse problem. For a start, they cheer us up. Academics at the universities of Melbourne and Tasmania examined 2.2 million messages on Twitter and found that tweets made from parks contained more positive content - and less negativity - than tweets coming from built-up areas.

Why are people in parks likely to be happier? Because parks help them to recover from the stress and mental strain of living in cities, and provide a place to exercise, meet other people or attend special events.

The world is becoming more urbanised. There’s now more than half the world’s population living in cities. In Australia, two-thirds of us live in capital cities and nine out of 10 of us live in urban environments.

There are sound economic reasons why so many of us are piling into big cities, but it seems there are also health and social problems. According to the experts, cities are becoming the epicentres for chronic, non-communicable physical and mental health conditions.

But there’s growing recognition of the crucial role of urban green spaces in helping reduce these health problems. More than 40 years of research shows that experiences of nature are linked to a remarkable breadth of positive health outcomes, including improved physical health (such as reduced blood pressure and allergies, less death from cardio-vascular disease, and improved self-perceived general health), improved mental wellbeing (such as reduced stress and better restoration), greater social wellbeing and promotion of positive health behaviours (such as physical activity).

Our cities are getting hotter, more crowded and noisier, while climate change is bringing more heatwaves, according to environmental planners at Griffith University. The obvious answer is more air-conditioning, but this brings more carbon emissions, so a better answer is more infrastructure – “green infrastructure”, otherwise known as street trees, green roofs, vegetated surfaces and green walls. In reality, however, vegetation cover in cities is declining, not increasing.

Planting trees in parks, gardens or streets has many benefits, helping to cool cities, slowing stormwater run-off, filtering air pollution, providing habitat for some animals, making people happier and encouraging walking.

According to those environmental planners, shading from strategically placed street trees can lower surrounding temperatures by up to 6 degrees – or up to 20 degrees over roads. Green roofs and walls can naturally cool buildings, substantially lowering demand for air-conditioning.

By contrast, hard surfaces – including concrete, asphalt and stone – increase urban temperature by absorbing heat and radiating it back into the air.

But though scientists have much evidence that trees and other greenery improve our mood and health, they know less about the actual mechanisms by which this occurs. Japanese research, however, suggests that when we walk through bushland we breathe in three substances: beneficial bacteria, plant-derived essential oils and negatively-charged ions.

We live our lives surrounded by beneficial bacteria, breathing them in and sharing our bodies with them. Gut-dwelling bacteria break down the food we can’t digest and produce substances that benefit us physically and mentally.

Plants and the bacteria living on them produce essential oils that fight off harmful micro-organisms when we ingest them.

And despite the nonsense talked about negative-ion generating machines, there’s evidence that negative air ions may influence our mental outlook in beneficial ways.

This may sound very new and scientific to some (or pseudo-scientific to others) but, as Hugh Mackay observes in his latest book, Australia Reimagined, being connected to nature is a traditional source of relief from anxiety: gardening, bushwalking, strolling in a park, walking the dog, climbing a tree, swimming in the sea or sailing on it, picnicking in a tranquil and beautiful setting, playing games that take you outdoors and into a natural environment.

We know instinctively that “grass time” – running on it, rolling in it, throwing and catching a ball across it – is vital for the health and wellbeing of children. Particularly if they’ve been cooped up indoors, glued to a screen. But adults are no different, the wise man says.

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Growth in world economy will take a toll on the environment

If the world’s population keeps growing, and the poor world’s living standards keep catching up with the rich world’s, how on earth will the environment cope with the huge increase in extraction, processing and disposal of material resources?

It’s a question many people wonder and worry about – without much sign it’s even crossed the mind of the world’s governments.

Until now. The Organisation for Economic Co-operation and Development is about to publish a Global Material Resources Outlook, which uses much fancy modelling to make an educated guess about what’s likely to happen in the future.

The report projects that, over the 50 years to 2060, annual global use of materials – including metals, fossil fuels, biomass (food and fibres) and non-metallic minerals (mainly sand, gravel, limestone and other building materials) – will more than double, from 79 gigatonnes in 2011 to 167 Gt in 2060. Gosh.

So how did the report reach that figure? It started by estimating the likely growth in the world’s population. Although its rate of growth is expected to slow, the world population could increase from 7 billion to 10 billion by 2060.

At the same time, material living standards in the developing countries are expected to continue converging on those of the developed countries.

Gross domestic product per person is expected to continue growing at a much faster rate in the poorer countries than the rich ones. So much so that, by 2060, the global level of real GDP per person is expected to have reached where it was for just the (richer) OECD countries in 2011.

This implies a tripling in global income per person to about $US40,000 a year – after adjusting for PPP, purchasing-power parity, to allow for one US dollar buying a lot more in a poor country than it does Stateside. The fastest catch-up will be in China and, to a lesser extent, India and south-east Asia.

That’s good news for the world’s non-rich. It would be a bit rich for the well-off countries to expect the poor countries to stay poor just to reduce pressure on the natural environment in a way we’re not prepared to.

Multiply world population by world income per person and you get world GDP. It’s expected to quadruple.

Even so, its rate of growth may slow. Whereas at the turn of the century world GDP was growing at an average rate of about 3.5 per cent a year, it’s expected to stabilise at a rate of less than 2.5 per cent well before we reach 2060.

(Why? Partly because of arithmetic. It’s much easier for a small number to grow by a high percentage than for a big number to. But also because, when you’re way behind, it’s relatively easy to catch up with the world’s technological frontrunner, the US, by adopting its better existing technology. Once you’ve done the easy bits, however, it gets harder to grow as fast. China will account for much of the global slowing.)

But hang on. If world GDP is expected to quadruple, how come materials use is expected only to double?

It’s because other things – helpful things – will be going on at the same time. The first is that the world economy is “dematerialising”.

Machines and gadgets are getting smaller and using less metal, but more to the point is the “servitisation” of the world economy (there’s a new ugly buzz word to add to your collection) – the tendency for more of each dollar we spend to go on services rather than goods.

Services have lower materials “intensity” – materials use per unit of output - than goods. The shift in the mix from goods to services is a function of economic development. When you’re poor the main thing you want is more goods, but as you get richer there’s a limit to how much you want to eat or wear and how many cars and TV sets you need. But there’s no limit to how many things you’d like to pay other people to do for you.

This shift is already well advanced in the rich countries, but the poor countries have a lot of infrastructure and housing to build (and a lot of cars and TV sets to buy) before they begin to approach material satiation.

The share of services in world GDP is projected to rise from 50 per cent to 54 per cent over the 50 years.

A second helpful factor is that technological advance should increase the efficiency with which materials are used. The two factors are projected to reduce the materials intensity of world GDP at the faster average rate of 1.3 per cent a year.

So, the report finds, were materials use to keep up with economic growth, annual use would increase by 283 Gt to 362 Gt. But the shift to services will reduce that increase by 111 Gt and technological advance will reduce it by 84 Gt, meaning materials use rises to just 167 Gt in 2060.

Note, however, that this is growth in “primary” materials extraction, not “secondary” use of recycled materials, which the report says is likely to become more competitive and grow at the same rate. So increased recycling is another factor helping to explain the lesser growth in primary extraction.

With GDP growing faster than materials use, the report is expecting a partial “decoupling” of the two.

Of course, there’ll still be a big increase in pollution. Greenhouse gas emissions, but also acidification, freshwater aquatic ecotoxicity, terrestrial ecotoxicity, human toxicity via inhalation or the food chain, photochemical oxidation (smog), ozone layer depletion, and not forgetting increased land fill to dump the materials when we’re done with ’em.

Final point: this “baseline scenario” assumes no change in government policy. That’s the point: it’s intended to show the world’s governments how great is the need for them to make a policy response.

Such as? I’d like to see a tax on materials use, with the proceeds used to reduce the tax on labour income. Similar to a price on carbon, this would do much to encourage recycling, repair and renovation, and economising in the use of materials.

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Economic growth doesn't have to wreck environment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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