Showing posts with label gdp. Show all posts
Showing posts with label gdp. Show all posts

Friday, September 8, 2023

Jury still out on how much hip pocket pain still coming our way

It’s not yet clear whether the Reserve Bank’s efforts to limit inflation will end up pushing the economy into recession. But it is clear that workers and their households will continue having to pay the price for problems they didn’t cause.

Prime Minister Anthony Albanese didn’t cause them either. But he and his government are likely to cop much voter anger should the squeeze on households’ incomes reach the point where many workers lose their jobs.

And he’ll have contributed to his fate should he continue with his apparent intention to leave the stage-three income tax cuts in their present, grossly unfair form.

The good news is that we’re due to get huge hip pocket relief via the tax cuts due next July. The bad news is that the savings will be small for most workers, but huge – $170 a week – for high-income earners who’ve suffered little from the squeeze on living costs.

Should Albanese fail to rejig the tax cuts to make them fairer, you can bet Peter Dutton will be the first to point this out. But he’ll need to be quick to beat the Greens to saying it.

Those possibilities are for next year, however. What we learnt this week is how the economy fared over the three months to the end of June. The Australian Bureau of Statistics’ “national accounts” show it continuing just to limp along.

Real gross domestic product – the value of the nation’s production of goods and services – grew by only 0.4 per cent – the same as it grew in the previous, March quarter. Looking back, this means annual growth slowed from 2.4 per cent to 2.1 per cent.

If you know that annual growth usually averages about 2.5 per cent, that doesn’t sound too bad. But if you take a more up-to-date view, the economy’s been growing at an annualised (made annual) rate of about 1.6 per cent for the past six months. That’s just limping along.

And it’s not as good as it looks. More than all the 0.4 per cent growth in GDP during the June quarter was explained by the 0.7 per cent growth in the population as immigration recovers.

So when you allow for population growth, you find that GDP per person actually fell by 0.3 per cent. The same was true in the previous quarter – hence all the people saying we’re suffering a “per capita recession”.

As my colleague Shane Wright so aptly puts it, the economic pie is still growing but, with more people to share it, the slices are thinner.

It’s possible that continuing population growth will stop GDP from actually contracting, helping conceal from the headline writers how tough so many households are faring.

But the media’s notion that we’re not in recession unless GDP falls for two quarters in a row has always been silly. What makes recessions such terrible things is not what happens to GDP, but what happens to workers’ jobs.

It’s when unemployment starts shooting up – because workers are being laid off and because young people finishing their education can’t find their first proper job – that you know you’re in recession.

In the month of July, the rate of unemployment ticked up from 3.5 per cent to 3.7 per cent, leaving an extra 35,000 people out of a job. If we see a lot more of that, there will be no doubt we’re in recession.

But why has the economy’s growth become so weak? Because households account for about half the total spending in the economy, and they’ve slashed how much they spend.

Although consumer spending grew by 0.8 per cent in the September quarter of last year, in each of the following two quarters it grew by just 0.3 per cent, and in the June quarter it slowed to a mere 0.1 per cent.

Households’ disposable (after-tax) income rose by 1.1 per during the latest quarter but, after allowing for inflation, it actually fell by 0.2 per cent – by no means the first quarter it’s done so.

What’s more, it fell even though more people were working more hours than ever before. People worked 6.8 per cent more hours than a year earlier.

So why did real disposable income fall? Because consumer prices rose faster than wage rates did. Over the year to June, prices rose by 6 per cent, whereas wage rates rose by 3.6 per cent.

Understandably, people make a big fuss over the way households with big mortgages have been squeezed by the huge rise in interest rates. But they say a lot less about the way those same households plus the far greater number of working households without mortgages have been squeezed a second way: by their wage rates failing to rise in line with prices.​

This is why I say the nation’s households are paying the price for fixing an inflation problem they didn’t cause. It’s the nation’s businesses that put up their prices by a lot more than they’ve been prepared to raise their wage rates.

Businesses have acted to protect their profits and – in more than a few cases – actually increase their rate of profitability. In the process, they risk maiming the golden geese (aka customers) that lay the golden eggs they so greatly covet.

If you think that’s unfair, you’re right – it is. But that’s the way governments and central banks have long gone about controlling inflation once it’s got away. It was easier for them to justify in the olden days – late last century – when it was often the unions that caused the problem by extracting excessive wage rises.

But those days are long gone. These days, evidence is accumulating that the underlying problem is the increased pricing power so many of our big businesses have acquired as they’ve been allowed to take over their competitors and prevent new businesses from entering their industry.

The name Qantas springs to mind for some reason, but I’m sure I could think of others.

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Monday, July 31, 2023

Wellbeing? Measure what matters, then start fixing it

In this rushing world, it’s easy for the new, the exciting, the entertaining or the worrying to crowd out the merely important. But that’s one reason mastheads have columnists. To say, hey, don’t overlook this, it’s important.

If, like all sensible people, you think there’s more to life than gross domestic product – more than “the economy”, narrowly defined – you need to take more notice of Treasurer Jim Chalmers’ long-promised Measuring What Matters wellbeing framework, released on Friday.

Taken as just another news story, it was a remarkably unremarkable document. It gathered 50 statistical indicators of Australians’ wellbeing, only a few of which were the standard economic indicators.

Of these, 20 show an improvement since the early 2000s, 12 have deteriorated, while the rest have shown little change or mixed outcomes. Our headline shouted the astonishing news: “We’re living longer, but cuddly animals are on the decline.”

Meanwhile, the government’s unceasing critics had much sneering fun pointing out how outdated some figures were. Did you see they say home owners are finding it easier to repay their mortgages?

Hopeless. It’s obviously just Labor’s “pitch to progressives living in Green and teal colonies”.

Actually, it’s a genuine effort to acknowledge and pay more attention to all the aspects of our lives that matter in addition to how many of us have jobs, how much we earn and what we’re spending it on.

The people who know a lot and care a lot about our wellbeing, in all its dimensions – such as Warwick Smith, director of the Centre for Policy Development’s Wellbeing Initiative – were much less critical. They said it was a good start, and could be improved and built upon, with the ultimate objective of having our greater consciousness of these other priority areas doing more to influence what the government was spending its time trying to improve.

Few economists would disagree with the frequent claim that GDP isn’t a good measure of wellbeing or progress. Indeed, the first person to say it was the bloke who invented GDP in the 1930s, Simon Kuznets.

It’s just that, economists being economists, they’ve continued to focus on GDP – economic growth – and left the better measures of wellbeing to others. Politicians have continued to focus on economic growth because that’s what the rich and powerful care most about. They’re hoping it will make them richer and more powerful.

It’s precisely because our leaders have been so focused on GDP as a measure of economic growth that our economic statistics are comprehensive and up to date, but our measurements of other things aren’t.

So, getting fair dinkum about “measuring what matters” involves giving the Australian Bureau of Statistics more money to measure the other things that matter more fully and more frequently.

Having been a bean counter in both my careers, I know the boring, pettifogging importance of measurement. As they say, what gets measured gets managed. You want to get your map sorted before you take off into the jungle.

But what are the other, non-standard things that matter most to our wellbeing? This is what we got on Friday: the government’s decision about the key components of wellbeing. This is the wellbeing “framework”.

It nominates five dimensions of wellbeing. First, health. “A society in which people feel well and are in good physical and mental health, can access services when they need, and have the information they require to take action to improve their health,” the framework says.

Second, security. “A society where people live peacefully, feel safe, have financial security and access to housing.”

Third, sustainability. “A society that sustainably uses natural and financial resources, protects and repairs the environment and builds resilience to combat challenges.”

Fourth, cohesion. “A society that supports connections with family, friends and the community, values diversity, promotes belonging and culture.”

And finally, prosperity. “A society that has a dynamic, strong economy, invests in people’s skills and education, and provides broad opportunities for employment and well-paid, secure jobs.”

Each of these five “themes” (dimensions is a better word) are “underpinned” by the need for “inclusion, equity and fairness” (but if there’s a difference between equity and fairness, I don’t know it).

I think that covers the bases. Sounds a nice place to live. It puts the economy into a broader, more balanced context. The economy is vitally important – it’s our bread and butter, after all – but so are many other things.

If we nail it on prosperity but go backward on the others, why would that be good? The rich could survey the ruins around them and say, I won!

And there’s a lot of interdependence. Good luck with your economy once you’ve irreparably damaged the natural environment on which it depends.

On many of these dimensions, what we need to know is not so much how well we’re doing on average, but who’s missing out and needs help. Not who’s included, but who’s excluded. (Something a Voice would make it harder to forget.)

But measurement is just a means to an end. Until what we know affects what our governments do, it’s just box-ticking.


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Monday, July 3, 2023

Economics and wellbeing: beyond GPD

Economic Society, Sydney, Tuesday, December 11, 2012

We had been hoping to have a speaker willing to argue that GDP was good enough to guide our policy decisions without need for modification or supplementation, but he’s unable to attend - which is a pity because I would have been interested to hear his arguments. In the absence of someone in the audience willing to argue that position, I think there’s a lot we can agree on. Where we’re likely to differ is in our degree of enthusiasm for the beyond-GDP project and how exactly we should go about developing a supplementary measure or range of measures.

Starting with the ‘agreed facts’, as the lawyers say, I doubt there are many if any economists who need to be lectured by greenies or lefties on the various reasons why GDP is an inappropriate measure of wellbeing or social progress. We all know about defensive expenditures and so forth. Further, we all know GDP was never intended or designed to be such a measure.

And I think all of us here tonight can agree that GDP is a reasonable measure of what it was designed to measure - production and income - and that the continued calculation of GDP is vitally important as an aid to the management of the macro economy. So no one here wants to abolish GDP.

It’s worth noting, however, that the 2009 report of President Sarkozy’s Commission on Economic Performance and Social Progress - the Stiglitz, Sen, Fitoussi report - did offer some significant criticisms of GDP just from a quite conventional, narrow, material wellbeing perspective. It noted that GDP had given Americans in particular an exaggerated impression of how well they were doing in the years leading up to the GFC, with company profits overstated because they were based on asset values inflated by a bubble and with a lot of the growth built on consumers and governments spending money they’d borrowed rather than earnt. It argued that in measuring material wellbeing, the focus should be shifted from production (GDP) to real household income and consumption, since household income can grow at a different rate to GDP. It further argued that income and consumption should be judged in conjunction with households’ net wealth, and that focusing on median income rather than average income is a better, easy way to take at least some account of the distribution of income.

A lot of the report’s criticisms can be met merely by switching from GDP to another aggregate published each quarter in the national accounts (but given almost no attention): real net national disposable income - ‘rinndi’. This measure switches from production to disposable income, takes account of the depreciation of manmade capital, the effect of movements in our terms of trade and the truth that, particularly for an economy with a huge net income deficit like ours, national product is a more appropriate measure than domestic product.

As you may know, I’ve been banging on about the limitations of GDP, and the need for it to be supplemented by a better, broader measure of wellbeing for some time. I was greatly reinforced in this view by the report of such luminaries as Stiglitz and Sen. For more than a year now, Fairfax Media has commissioned Nicholas Gruen to prepare such a broader measure, the Herald-Age Lateral Economics wellbeing index, for publication a few days after the quarterly national accounts.

The HALE index starts by turning GDP into real net national disposable income - rinndi - but then it adds adjustments for as many wider aspects of wellbeing as Nicholas could find decent measures of: the value of the net depletion of natural resources (after allowing for new discoveries), the estimated cost of future climate change, the gain in human capital from all levels of education and training, changes in income inequality, the gain or loss from various measures of the nation’s health and the state of employment-related satisfaction.

If you’re interested in getting your teeth into what a beyond-GDP measure of wellbeing might look like, we’re happy to explain and defend the HALE index. I asked Nicholas to come up from Melbourne tonight for that purpose. We don’t make any claim the index is a complete measure of every dimension of wellbeing, we don’t claim there’s nothing about its methodology that’s open to debate, but we do claim it’s an honest attempt to measure broader wellbeing - welfare, if you like - not some lefty attempt to think of as many negatives as possible to subtract from GDP.

The most obviously debatable part of the methodology is the decision to produce a single, modified-GDP figure for wellbeing. We know Stiglitz and Sen opted for the ‘dashboard’ approach - produce a range of relevant indicators of the various dimensions of wellbeing - rather than a single magic number. And we know the Bureau of Statistics, with all the effort it has put into its MAP project - Measures of Australia’s Progress - is also very much in the dashboard, they-can’t-be-added-up camp. So what are the reasons to prefer a single measure and, once you’ve decided to go down that track, how on earth do you add them together?

These are questions Nicholas, as the designer of the index, is far better qualified to respond to than I am. But I do want to say something from a more psychological, behavioural economics, political economy perspective. Why is it so many people have fallen into the habit of treating GDP as though it was a measure of social progress, even though it isn’t? The first part of my explanation is that economists, by their behaviour rather than their conceptual understanding, have led the uninitiated - politicians, business people, the media - into assuming GDP is the only indicator that matters because they get so excited about it so often, and don’t get so excited about anything else.

They say that what gets measured gets managed, and what doesn’t get measured doesn’t get managed, so if you accept there’s more to our wellbeing that just GDP (or even rinndi) that’s the first reason for wanting to publish something to sit beside GDP. In terms of human psychology, part of the reason for the great attention GDP gets is that new figures are published so frequently and that they’re always changing to an interesting extent.

Finally, we know from the findings of neuroscience that, contrary to our assumption of rationality, humans have surprisingly limited mental processing power and can’t weight up more than one or two dimensions of a problem at the same time, which - among many other implications - means humans are irresistibly attracted to bottom lines - to ‘net net’, as they say in the markets. People want a bottom line, will probably pick one by default, and GDP looks likes it is one. Dashboards may be more methodologically pure, but in a world of human frailty and limited attention, they just don’t cut it.
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Wednesday, June 14, 2023

Economy close to stalling, as Reserve hits the brakes yet again

It’s been a puzzling week, as we learnt the economy had slowed almost to stalling speed, just a day after the Reserve Bank raised interest rates for the 12th time, and warned there may be more.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by just 0.2 per cent over the three months to the end of March.

That took growth over the year to March down to 2.3 per cent, which sounds better than it is because the economy has slowed so rapidly. If it continued growing by 0.2 per cent a quarter, that would be annual growth of 0.8 per cent.

And the resumption of immigration means the population is now growing faster than the economy. Allow for population growth and GDP per person actually fell by 0.2 per cent. Over the year to March, it grew by only 0.3 per cent.

While a growing population is good for businesses – they have more potential customers – to everyone else, economic growth has been sold to us as raising our material standard of living. Not much chance of that if GDP per person is falling.

The Reserve Bank has been trying to slow the economy down because demand for goods and services has been growing faster than the economy’s ability to supply them, thus allowing businesses to increase their prices.

With additional help from the rising prices of imported goods and services, the rate of inflation has shot up. It’s started falling back from its peak of 7.8 per cent at the end of last year, but is still way above the Reserve’s 2 per cent to 3 per cent target range.

The Reserve’s been raising the interest rates paid by the third of households with mortgages, to reduce their ability to spend on other things. But, at this stage, probably the biggest dampener on consumer spending is coming from the failure of wages to keep up with rising prices.

“Demand” means spending, so if households find it harder to spend on goods and services, that makes it harder for businesses to raise their prices, thus bringing the inflation rate back down.

And remember that the full effect of all the interest rate rises we’ve seen is still to be felt. The pain will increase over the rest of this year.

But if I were Reserve Bank governor Dr Philip Lowe, I wouldn’t be too worried that the plan wasn’t working. The biggest single factor driving GDP is consumer spending, which accounts for more than half of all spending. In the June quarter last year, it grew by 2.2 per cent.

The following quarter its growth fell to 0.8 per cent, then 0.3 per cent, and now 0.2 per cent. Wow. I think the squeeze is working.

Although more people have been working more hours, real household disposable income fell by 0.3 per cent in the quarter, and by 4 per cent over the year to March.

It was hit by the failure of wages to rise in line with prices, by the doubling in households’ interest payments, and by the bigger bite that income tax took out of pay rises, caused by bracket creep.

How did households manage to keep their consumption spending growing despite their falling real income? By cutting the proportion of their income that they were saving from more than 11 per cent in March quarter last year to less than 4 per cent this March quarter – the lowest it’s been in about 15 years.

Household investment spending on newly built homes and alterations fell by 1.2 per cent, its sixth fall in seven quarters.

One bright spot was growth in business spending during the quarter of 2.9 per cent, led by spending on machinery and equipment, and non-dwelling construction – particularly on renewables and electricity infrastructure.

Unfortunately, much of the machinery investment was on imported equipment that had been delayed by the pandemic, so it’s not a sign of continuing strength. The volume of spending on imports was a super-strong 3.2 per cent, but imports subtract from GDP, of course.

Treasurer Jim Chalmers always blames the economy’s slowdown on higher interest rates (blame the Reserve, not me), high inflation (not me either) and “a slowing global economy” (blame the rest of the world).

A slowing global economy? Yes, of course. Everyone’s heard about that. Trouble is, the main way the rest of the world affects us is by buying – or not buying – our exports. And the volume of our exports grew by 1.8 per cent in the March quarter, and 10.8 per cent over the year to March. That’s because our miners have done so well (and our fossil-fuel-using households and businesses so badly) out of the higher world coal and gas prices caused by the Ukraine war.

Even so, this quarter’s growth in export volumes of 1.8 per cent has been swamped by the 3.2 per cent growth in import volumes, meaning that “net exports” – exports minus imports – subtracted 0.2 percentage points from the overall growth in real GDP during the quarter.

After Lowe’s decision on Tuesday to raise rates yet again, Chalmers wasn’t mincing his words. “I do expect that there will be a lot of Australians who find this decision difficult to understand and difficult to cop – ordinary working Australians are already bearing the brunt of these interest rate rises, they shouldn’t bear the blame too,” he said.

“The Reserve Bank’s job is to quash inflation without crashing the economy, and they will have a lot of time and opportunities to explain and defend the decision that they’ve taken today.”

Lowe has said repeatedly that he’s seeking the “narrow path” where “inflation returns to target within a reasonable timeframe, while the economy continues to grow, and we hold on to as many of the gains in the labour market [our return to full employment] as we can”.

After seeing the next day’s GDP figures, Paul Bloxham of HSBC bank observed that the narrow path “is looking extremely narrow indeed”. True.

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Friday, March 10, 2023

Can the critics prove higher profit margins are fuelling inflation?

There’s a big risk we’ll fail to learn a vital lesson from our worst inflation outbreak in decades. If inflation is such a scourge that we must pay a terrible price to get it back under control, why do we do so little to stop big companies from acquiring the power to raise their prices by more than needed to cover their rising costs?

Economists are far more comfortable thinking about inflation at the top, macro level than the bottom, micro level. At the top, inflation is caused by aggregate (total) demand for goods and services growing faster that aggregate supply – the economy’s ability to produce those goods and services.

We know from Reserve Bank figuring that more than half the price rise we’ve seen has come from temporary disruptions to the supply of production inputs, caused by the pandemic and the Ukraine war.

But, the Reserve insists, prices have also risen because demand’s been stronger than it should have been. Why? Because in our efforts to hold the economy together during the pandemic, we applied far more economic stimulus than was needed.

Economists – even those who stuffed up the stimulus – are comfortable with this explanation because it puts the blame on government. The model of the economy they carry in their heads tells them the market usually works fine, whereas it’s government intervention in the market that usually causes the problems.

So, you can see why economists were so discombobulated when one of the world’s top macroeconomists, Olivier Blanchard, tweeted about “a point which is often lost in discussions of inflation”. “Inflation,” he wrote, “is fundamentally the outcome of the distributional conflict between firms, workers and taxpayers.”

He’s saying economists need to look at the more fundamental, bottom-up factors driving inflation. Is worsening inflation caused by workers and their unions successfully demanding real wage rises higher than the increasing productivity of their labour justifies?

Or is the strength of competition insufficient to do what the mental model promises: prevent firms from raising their prices beyond what’s needed to cover their higher costs (including a “normal” return – profit – on the capital invested by their owners)?

The strange fact is that economists and econocrats have a long history of lecturing workers and unions on the need for wage restraint. Reserve Bank governor Dr Philip Lowe has been saying workers must be “flexible” and accept wage rises far less than the rise in consumer prices. That is, take a big pay cut in real terms.

But economists are infinitely more reticent in urging businesses to go easy with their price rises. I suspect this is partly because of the biases hidden in their mental model, but mainly because they know their employer, or the big-business lobby, or its media cheer squad, or all the business people on the Reserve’s board, would tear into them for daring to say such a thing.

Similarly, economists have insisted the Australian Bureau of Statistics publish any number of different measures of wage growth, but few measures of profit growth.

Last month, Dr Jim Stanford, of the Australia Institute, sought to even things up a bit by publishing figures that broke the inflation rate up into the bit caused by rising wages and the bit caused by rising profits.

He found that “excess corporate profits account for 69 per cent of additional inflation beyond the Reserve Bank’s target”, whereas rising labour costs per unit of production (that is, after adjusting for the productivity of labour) account for just 18 per cent.

What? Huh? Never seen an exercise like that before. How’d he cook that up? The business lobby went on the attack and the business press consulted a few economists who lazily dismissed it as nonsense.

But though it’s unfamiliar, it’s not as weird as you may think. Stanford was copying the method used by some crowd called the European Central Bank. What would they know?

Well, OK. But how can you take the rise in the prices of products over a period and “decompose” it (break it down) into the bit caused by rising wage costs and the bit caused by rising profits?

By taking advantage of the fact that, every time we measure the growth in gross domestic product in the “national accounts”, we measure it three different ways.

First, the growth in the nation’s expenditure on goods and services. Second, the growth in the nation’s income from wages, profits and other odds and sods. Third, the growth in the production of goods or services by each of our 19 different private and public sector industries.

In principle, each way you measure it gives you the same figure for GDP. Then you use a “deflator” to divide the growth in nominal GDP between the bit caused by higher prices and the bit caused by higher quantities – the “real” bit.

So, it’s quite legitimate to take this measure of inflation and break it up between higher wages and higher profits (leaving the bit caused by changes in taxes and subsidies).

Actually, the stats bureau’s been doing this exercise for wages (“nominal unit labour costs”) for decades, but not doing it for profits (because no one’s been keen to know the results).

Note that the “GDP deflator” is a quite different measure of inflation to the one we usually focus on: the index of consumer prices.

Note, too, that the Ukraine war has caused a huge jump in the profits of our energy producers. This windfall hasn’t been caused by businesses sneaking up their profit margins (“mark-ups”, as economists say). But the growth in mining industry profits accounts for only about half the rise in total profits over the three years to December 2022.

I’m not comfortable relying on a think tank for these figures. But if the economists who champion big business don’t like it, they should take this exercise seriously and join the debate. The government should ask the stats bureau to finish doing the numbers itself.

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Friday, March 3, 2023

Now the hard part for the RBA: when to stop braking

In economics, almost everything that happens has both an upside and a downside. The bad news this week is that the economy’s growth is slowing rapidly. The good news – particularly for people with mortgages and people hoping to keep their job for the next year or two – is that the slowdown is happening by design, as the Reserve Bank struggles to slow inflation, and this sign that its efforts are working may lead it to go easier on its intended further rises in interest rates.

But though it’s now clear the economy has begun a sharp slowdown, what’s not yet clear is whether the slowdown will keep going until it turns into a recession, with sharply rising unemployment.

As the Commonwealth Bank’s Gareth Aird has said, since the Reserve Bank board’s meeting early last month, when it suddenly signalled more rate rises to come, all the numbers we’ve seen – on economic growth, wages, employment, unemployment and the consumer price index – have all come in weaker than the money market was expecting.

What’s more, he says, only part of the Reserve’s 3.25 percentage-point rate increase so far had hit the cash flow of households with mortgages by the end of last year.

“There is a key risk now that the Reserve Bank will continue to tighten policy into an economy that is already showing sufficient signs of softening,” Aird said.

That’s no certainty, just a big risk of overdoing it. So while everyone’s making the Reserve’s governor, Dr Philip Lowe, Public Enemy No. 1, let me say that the strongest emotion I have about him is: I’m glad it’s you having to make the call, not me.

Don’t let all the jargon, statistics and mathematical models fool you. At times like this, managing the economy involves highly subjective judgments – having a good “feel” for what’s actually happening in the economy and about to happen. And it always helps to be lucky.

This week, the Australian Bureau of Statistics’ “national accounts” for the three months to the end of December showed real gross domestic product – the economy’s production of goods and services – growing by 0.5 per cent during the quarter, and by 2.7 per cent over the calendar year.

If you think 2.7 per cent doesn’t sound too bad, you’re right. But look at the run of quarterly growth: 0.9 per cent in the June quarter of last year, then 0.7 per cent, and now 0.5 per cent. See any pattern?

Let’s take a closer look at what produced that 0.5 per cent. For a start, the public sector’s spending on consumption (mainly the wage costs of public sector workers) and capital works made a negative contribution to real GDP growth during the quarter, thanks to a fall in spending on new infrastructure.

Home building activity fell by 0.9 per cent because a fall in renovations more than countered a rise in new home building.

Business investment spending fell by 1.4 per cent, pulled down by reduced non-residential construction and engineering construction. A slower rate of growth in business inventories subtracted 0.5 percentage points from overall growth in GDP.

So, what was left to make a positive contribution to growth in the quarter? Well, the volume (quantity) of our exports contributed 0.2 percentage points. Mining was up and so were our “exports” of services to visiting tourists and overseas students.

But get this: a 4.3 per cent fall in the volume of our imports of goods and services made a positive contribution to overall growth of 0.9 percentage points.

Huh? That’s because our imports make a negative contribution to GDP, since we didn’t make them. (And, in case you’ve forgotten, two negatives make a positive – a negative contribution was reduced.)

So, the amazing news is that the main thing causing the economy to grow in the December quarter was a big fall in imports – which is just what you’d expect to see in an economy in which spending was slowing.

I’ve left the most important to last: what happened to consumer spending by the nation’s 10 million-odd households? It’s the most important because it accounts for about half of total spending, because it’s consumer spending that the Reserve Bank most wants to slow – and also because the economy exists to serve the needs of people, almost all of whom live in households.

So, what happened? Consumer spending grew by a super-weak 0.3 per cent, despite growing by 1 per cent in the previous quarter. But what happened to households and their income that prompted them to slow their spending to a trickle?

Household disposable income – which is income from wages and all other sources, less interest paid and income tax paid by households – fell 0.7 per cent, despite a solid 2.1 per cent increase in wage income – which reflected pay rises, higher employment, higher hours worked, bonuses and retention payments.

But that was more than countered by higher income tax payments (as wages rose, with some workers pushed into higher tax brackets) and, of course, higher interest payments.

All that’s before you allow for inflation. Real household disposable income fell by 2.4 per cent in the quarter – the fifth consecutive quarterly decline.

That’s mainly because consumer prices have been rising a lot faster than wages. So, falling real wages are a big reason real household disposable income has been falling, not just rising interest rates.

Real disposable income has now fallen by 5.4 per cent since its peak in September quarter, 2021.

But hang on. If real income fell in the latest quarter, how were households able to increase their consumption spending, even by as little as 0.3 per cent? They cut the proportion of household income they saved rather than spent from 7.1 per cent to an unusually low 4.5 per cent.

If I were running the Reserve, I wouldn’t be too worried about strong consumer spending stopping inflation from coming down.

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Friday, December 9, 2022

Weak starting point for next year’s threats to the economy

It’s clear the economy’s started slowing, with the strong bounceback from the lockdowns nearing its end. That’s before we’ve felt much drag from the big rise in interest rates. Or the bigger economies pulling us lower, which is in store for next year.

To be sure, the economy’s closer to full employment than we’ve been half a century. But limiting the decline from here on will be a tricky task for Anthony Albanese and, more particularly, Reserve Bank governor Philip Lowe.

The Australian Bureau of Statistics’ “national accounts” for the three months to the end of September, published this week, showed real gross domestic product – the nation’s total production of goods and services – growing by just 0.6 per cent during the quarter, and by 5.9 per cent over the year to September.

Focus on the 0.6 per cent, not the 5.9 per cent – it’s ancient history. Most of it comes from huge growth of 3.8 per cent in the December quarter of last year, which was the biggest part of the bounceback following the end of the second lockdown of NSW, the ACT and Victoria.

Since then, we’ve had quarterly growth of 0.4 per cent, 0.9 per cent and now 0.6 per cent. That’s the slowing. Quarterly growth of 0.6 per cent equals annualised growth of about 2.5 per cent. That’s about the speed the economy was growing at before the pandemic, which we knew was on the weak side.

Dig deeper into the figures, and you see more evidence of slowing. Strong spending by consumers was pretty much the only thing keeping the economy expanding last quarter. Consumption grew by a seemingly healthy 1.1 per cent, which accounted for all the growth in GDP overall of 0.6 per cent. The various other potential contributors to growth – business investment spending, new home building, exports and so forth – cancelled each other out.

But get this: that growth of 1.1 per cent was half what it was in the previous quarter. And what were the main categories of strong spending by consumers? Spending in hotels, cafes and restaurants was up by 5.5 per cent in the quarter.

Spending on “transport services” – mainly domestic and overseas travel – was up almost 14 per cent. And purchase of cars was up 10 per cent.

Anything strike you about that list? It’s consumers still catching up after the end of the lockdowns, when most people were still earning income, but were prevented from spending it. We couldn’t go out to hotels, cafes and restaurants, interstate travel was restricted, and overseas holidays were verboten.

As for buying a new car, an earlier global shortage of silicon chips and container shipping mean few were coming into the country.

Get it? Much of the strong consumer spending that kept the economy moving last quarter was driven by life getting back to normal after the lockdowns and the easing of pandemic-caused supply shortages. It’s a temporary catch-up, that won’t continue for long.

Now let’s look at what the quarterly accounts tell us about the state of households’ finances. Despite their strong consumer spending, their real disposable income actually fell a fraction during the quarter, taking the total fall over the year to September to 2.6 per cent.

Why did households’ income fall? Because prices rose faster than wages did. How did households increase their spending while their income was falling? By cutting the proportion of their incomes they’d been saving rather than spending.

After the first lockdown in 2020, the household saving rate leapt to more than 19 per cent of disposable income. Why? Because people had lots of income they simply couldn’t spend.

But the rate of saving has fallen sharply since then. And in the September quarter it fell from 8.3 per cent of income to 6.9 per cent – almost back to where it was before the pandemic.

As Callam Pickering, of the Indeed jobs site, explains, “households have been relying on their savings, accrued during the pandemic, to maintain their spending in recent quarters”. Lately, however, they’ve “been hit from all angles, with high inflation, falling [house] prices and mortgage repayments all weighing heavily on household budgets”.

“As household saving continues to ease, the ability of households to absorb the impact of higher prices and rising interest rates will also diminish,” he says.

By the end of September, the hit from higher interest rates was just getting started. Of the 3 percentage-point increase in the official interest rate we know has happened, only 0.75 percentage points had yet reached home borrowers.

So, the hit to growth from government monetary policy is only starting. As for the other policy arm, fiscal policy, we know from the October budget it won’t be helping push the economy along. And in the September quarter, falling spending on infrastructure caused total public sector spending to subtract a little from overall growth in GDP.

A similar subtraction came from net exports. Although the volume of exports rose by 2.7 per cent during the quarter, the volume of imports rose by more – 3.9 per cent. A big part of this net subtraction came from the reopening of our international borders. Our earnings from incoming travellers rose by 18.6 per cent, whereas the cost of our own overseas travel jumped by 58 per cent.

Finally, self-righteous business people are always telling us that if we want to real wages to rise rather than fall, there’s an obvious answer: we’ll have to raise our productivity.

Sorry, not so simple, preacher-man. The accounts show that real labour costs to employers per unit of output fell by 2.6 per cent over the year to September.

Meaning that after allowing for the productivity improvement the nation’s employers gained, the increase in wages and other labour costs were a lot less than the increase in the prices they charged.

This suggests business profits are much better placed to weather next year’s hard times than their workers’ and customers’ pockets are. Not a good omen.

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Wednesday, November 9, 2022

One small step for the wellbeing budget, giant leap yet to come

Hey, wasn’t this budget supposed to be Australia’s first “wellbeing” budget? Whatever happened to that? Well, it happened – sort of – but it turned out to be ... underwhelming. Didn’t arouse much interest from the media.

It met the expectations of neither the sceptics nor the true believers. Treasurer Jim Chalmers began talking it up long before he got the job. The treasurer at the time, Josh Frydenberg, thought it was a great joke.

He pictured Chalmers “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, wellbeing budget in the other”.

No robes on budget night. But nor did we see Chalmers make a ringing denunciation of the great god GDP.

No quoting of Bobby Kennedy’s famous words that such measures count “air pollution and cigarette advertising, and ambulances to clear our highways of carnage ... special locks for our doors and the jails for the people who break them [and] the destruction of the redwood and the loss of our natural wonder in chaotic sprawl”.

In short, Kennedy said, “It measures everything except that which makes life worthwhile.”

No, none of that. Nor any condemnation of economic growth or attack on the materialism of our age.

What we got was what Chalmers promised on the day he became treasurer: “It is really important that we measure what matters in our economy in addition to all of the traditional measures. Not instead of, but in addition to. I do want to have better ways to measure progress, and to measure the intergenerational consequences of our policies.”

What we got on budget night was a start to just that. Not a wellbeing budget, but a normal budget with a chapter headed Measuring What Matters.

It kicked off with some stirring rhetoric about how traditional macroeconomic indicators don’t provide a “complete or holistic view of the community’s wellbeing. A broader range of social and environmental factors need to be considered to broaden the conversation about quality of life.”

Then followed a lot of earnest discussion of “frameworks” and other high-level stuff that’s deeply meaningful to bureaucrats, but not the rest of us. It’s not a long chapter, but I had trouble keeping awake – though I may just have been tired at the time.

But don’t get me wrong. Though none of this stuff gets the blood racing, Chalmers is on the right track. It’s just that he’s got a lot further to go before we see anything likely to make much difference.

Let’s start with GDP – gross domestic product. Everything Kennedy said about it is true. Those who say it’s a bad measure of progress or prosperity or wellbeing are right.

But, as every economist will tell you, it was never intended to be. It’s a measure of the value of all the goods and services produced and consumed in Australia over a period, which means it’s also a measure of the total income Australians earn from producing those goods and services.

It counts the cost of the ambulances and tow trucks that attend road accidents, not because accidents are a good thing, but because all the workers involved earn their income by turning up and helping.

If you’d like everyone who wants a job to be able to get one – meaning unemployment is kept low – the managers of the economy need to know what’s happening to GDP to help them achieve that goal.

GDP doesn’t count “the health of our children or the joy of their play” because, apart from the doctors and nurses, the income we earn from that is “psychic”, not something you can bank or spend.

What economists are more reluctant to admit is that their obsession with the ups and downs of GDP – with the purely material aspect of our lives; with getting and spending – has led them to revere GDP as though it measured our wellbeing.

The rest of us have caught the bug from them. This suits the rich and powerful, whose main objective is to get richer and more powerful. They are focused on the purely material, and it makes it easier for them if the rest of us are too.

It doesn’t suit them to have us asking awkward questions about what economic activity is doing to the natural environment – or the climate – why it’s better for so many jobs to be insecure and badly paid, and whether the pace of economic life is extracting an (unmeasured) price from us in stress, anxiety and depression.

So, Chalmers is right. There’s much more to life – to our wellbeing - than just working and spending. If that’s all governments are doing for us, they’re not doing nearly enough.

We put much effort into measuring and thinking about GDP, but need to put a lot more effort into measuring all the other things that affect our lives and how much joy we’re getting.

Business people say that what gets measured gets managed. True – provided politicians take account of those numbers in the decisions they make. Chalmers’ wellbeing budget is still a long way off.

Read more >>

Friday, September 9, 2022

Consumers and Russians keep the economy roaring - but it can't last

They say never judge a book by its cover. Seems the same goes for GDP. This week’s figures showed super-strong growth in the three months to the end of June. But look under the bonnet and you find the economy’s engine was firing on only two cylinders.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by 0.9 per cent in the June quarter, and by 3.6 per cent over the year to June.

If that doesn’t impress you, it should. Over the past decade, growth has averaged only 2.3 per cent a year.

The main thing driving that growth was consumer spending. It grew by 2.2 per cent in the quarter and by 6 per cent over the year, as the nation’s households – previously cashed up by government handouts, and by most people keeping their jobs and others finding one, but prevented from spending the cash by intermittent lockdowns and closed state and national borders – kept desperately trying to catch up with all they’d been missing.

The other big contribution to growth during the quarter came from a 5.5 per cent jump in the “volume” (quantity) of our exports. Most of the credit for this goes to that wonderful man Vladimir Putin, whose bloody invasion of Ukraine has greatly disrupted world fossil fuel markets, thus greatly increasing our sales of coal and gas.

(It has also greatly increased the world prices of coal and gas and grains, causing our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – to improve by 4.6 per cent during the quarter, to an all-time high.)

But that’s where the good news stops. The other cylinders driving the economy’s engine have been on the blink. A marked slowdown in the rate at which businesses were building up their inventories of raw materials and finished goods led to a sharp slowdown in goods production.

Government spending took a breather, and an increase in business investment in new plant and equipment was offset by a fall in business investment in buildings and other construction.

And then there’s what happened to home building. Despite a big pipeline of homes waiting to be built, building activity actually declined by 2.9 per cent in the quarter and 4.6 per cent over the year.

Huh? How could that happen? Well, the builders say they couldn’t find enough building materials and tradies. Which hasn’t stopped them using the opportunity to whack up their prices. (I believe this is called “capitalism”.)

So, while we listen to lectures from the economic managers about the evil of inflation and how it leaves them with no choice but to slow everything down by jacking up interest rates, let’s not forget that the big jump in the cost of new homes and renovations has been caused by... them.

They’re the ones who, at the start of the pandemic and the lockdowns, decided it would be a great idea to rev up the housing industry, by offering incentives to people buying new houses, and by cutting the official interest rate to near zero. Well done, guys.

Speaking of higher interest rates being used to slow down the growth in demand for goods and services, the first two of the five rises we’ve had so far would have had little influence on what happened in the economy over the three months to June.

But don’t worry, they’ll have their expected effect in due course. Which is the first reason the strong, consumer-led growth we saw last quarter won’t last, even if we see more of it in the present quarter.

Another reason is that households are running on what a cook would call stored heat. During the first, national lockdown, the proportion of household disposable (after-tax) income that we saved rather than spent leapt to almost 24 per cent.

We’ve been cutting our rate of saving since then, and it’s now down to 8.7 per cent. This isn’t a lot higher than it was before the pandemic. And with the gathering fall in house prices making people feel less wealthy, it wouldn’t surprise me to see people feeling they shouldn’t cut their rate of saving too much further.

And that, of course, is before we get to the other great source of pressure on households’ budgets: consumer prices are rising faster than workers’ wages. This no doubt explains why our households’ real disposable income has actually fallen for three quarters in a row.

With businesses putting up their prices, but not adequately compensating their workers for the higher cost of living, it’s not surprising so many people are taking more interest in what the national accounts tell us about how the nation’s income is being divided between capital and labour, profits and wages.

ACTU boss Sally McManus complains that workers now have the lowest share of GDP on record. It follows that the profits share of national income is the highest on record.

What doesn’t follow, however, is that any increase in profits must have come at the expense of workers and their wages. Profits are up this quarter mainly because, as we’ve seen, our miners’ export prices are way up, and so are their profits.

No, the better way to judge whether workers are getting their fair share is to look at what’s happened to “real unit labour costs” – employers’ labour costs, after allowing for inflation and the productivity of labour (that’s the per-unit bit).

Turns out that, since the end of 2019, employers’ real unit labour costs have fallen by 8.5 per cent. If workers were getting their fair share, this would have been little changed.

Short-changing households in this way is not how you keep consumer spending – and businesses’ turnover – ever onward and upward.

Read more >>

Friday, June 3, 2022

An economy with falling real wages can’t be “strong”

The main message from this week’s “national accounts” is that the economy isn’t nearly as Strong – Strong with a capital S – as Scott Morrison and Josh Frydenberg unceasingly claimed it was during the election campaign. In truth, it’s coming down to Earth.

According to the Australian Bureau of Statistics, real gross domestic product – the nation’s total production of goods and services – grew by 0.8 per cent during the three months to the end of March, to be up 3.3 per cent over the year.

Almost to a person, the business economists said – and the media echoed - this was “higher than expected”. But that just meant it was a fraction higher than they’d forecast a day or two before the announcement, once most of the building blocks for the figure had been revealed.

But as new Treasurer Dr Jim Chalmers has revealed, when Treasury was preparing its forecasts for the March 29 budget, it forecast growth of not 0.8 per cent for the quarter, but 1.8 per cent. Now that would have been strong.

True, if you compound 0.8 per cent, you get an annualised rate of 3.3 per cent. And that’s a lot higher than our average annual growth rate over the past decade of about 2.3 per cent.

But it’s high because the economy’s still completing its bounce-back from the two pandemic lockdowns when most people gained more income than they were allowed to go out and spend.

In other words, it’s a catch-up following highly unusual circumstances, which will stop once everyone’s caught up. It’s not an indication of what we can expect “going forward” as businesspeople love saying.

If you delve into what produced that 0.8 per cent result, you see we’re probably only a quarter or two away from returning to a much less Strong quarterly growth rate. Indeed, until we’ve fixed our problem of chronic weak wage growth, it’s likely to be quite Weak growth.

Growth during the quarter was led by a 1.5 per cent rise in consumer spending, which contributed 0.8 percentage points to the overall growth in real GDP. Pretty good, eh? Well, not really. Turns out real household disposable income actually fell by 0.9 per cent.

So the growth in consumer spending came from a 2 percentage-point fall in the rate of household saving during the quarter, to 11.4 per cent. Household saving leapt during the two lockdowns, from its pre-pandemic level of about 7 per cent.

This suggests it won’t be long before this honey pot’s been licked out. Note too, that consumer spending was very strong in the states still rebounding from last year’s lockdown – Victoria, NSW and the ACT – and particularly weak in the other states.

Why did real household disposable income fall during the quarter? Because real wages fell. The more they continue falling – as seems likely – the more continued growth in consumer spending will depend on households continuing to cut their saving. Sound sustainable to you?

The other big contributor to growth, of 1 percentage point, came from an increase in the inventories held by retailers and other businesses, caused by an easing of pandemic-related shortages of certain imported goods, including cars.

This is a sign of the economy returning to normal, but it’s a once-only adjustment, not a growth contribution that will continue quarter after quarter.

The third growth factor was a huge 2.7 per cent increase in government consumption spending, contributing 0.6 percentage points to overall growth.

Where did it come from? From increased health spending required by the Omicron variant and spending to help people affected by the floods in NSW and Queensland. Again, not something that will be happening every quarter – we hope.

With those three positive contributions adding up to a lot more than the final 0.8 per cent, there must have been some big negative contributions. Just one, actually. Net exports – exports minus imports – subtracted 1.7 percentage points.

The volume (quantity) of exports fell by 0.9 per cent, thus subtracting 0.2 percentage points from growth – mainly because the floods disrupted mineral exports.

The volume of imports jumped by 8.1 per cent, subtracting 1.5 percentage points from overall growth. Another sign of the economy returning to normal, with pandemic disruption easing and imports of cars (and their chips) resuming. Another once-off.

So, what else happened in the quarter? New home building activity fell by 1 per cent. The pipeline of new homes built up by lockdown-related government stimulus still contains homes yet to emerge, but the output has faltered because the industry’s at full capacity, with shortages of labour and materials.

Even so, with interest rates rising and house prices falling, you wouldn’t expect too many new building projects to be entering the pipeline. Housing won’t be a big part of the growth story “going forward”.

Business investment spending – mainly on plant and equipment – grew by 1.4 per cent during the quarter and by 3.6 per cent over the year. It will need to grow a lot faster than that if it’s to be a big part of the growth story.

The quarter saw the share of national income going to wages continuing to fall, while the share going to profits rose to a record high of 31.1 per cent.

On the face of it, that says the workers are being robbed. But the factors moving the respective shares are more complicated than that. For instance, all the growth in company profits during the quarter was from the mining industry. Coal, gas and iron ore commodity prices have jumped.

But a much less debatable indication that businesses are doing well at the expense of their employees comes from the 2 per cent fall in “real unit labour costs” – real labour costs per unit of production – during the quarter, and by 6 per cent since the start of the pandemic.

An economy whose strength comes from cutting its workers’ wages won’t stay Strong for long.

Read more >>

Friday, April 8, 2022

Wars, floods and pestilence: these horrors have an economic upside

By profession, economists are hard-nosed and cold-blooded. The pictures we’re seeing of the death and destruction wreaked by Russia in its invasion of Ukraine are heart-wrenching. At home, seeing people perched on their roofs as floodwaters surge, or piling up the ruined contents of their homes on the footpath, makes your heart go out. But what economists see is that every disaster has its upside.

Once they’ve put on their professional’s hat, economists don’t see evil, or pain or any emotion. Feelings must be suppressed when what they need is objectivity.

They simply size up wars and natural disasters for the effect they’ll have on the economy, measured by inflation, unemployment and, above all, gross domestic product. And since GDP often ignores the destruction of buildings and other assets, but plays close attention to the building of new assets, it tends to paint an overly favourable view of events we see as disastrous.

This doesn’t make GDP an instrument of evil that should be banished. It’s simply mono-dimensional. It focuses on a vital, but narrow aspect of our lives – how much we produce, how much income we generate – while studiously ignoring all the other aspects.

When someone’s house has been declared uninhabitable, you and I see how painful and disorienting that must be for them. What an economist sees is all the jobs that will be created and income generated to build them a new one.

But until then, the family will be homeless! That’s OK. Those who provide them with somewhere to live will be earning income and employing people – provided they don’t just stay with family or neighbours. It’s not counted in GDP if no money changes hands.

GDP doesn’t measure wellbeing – and was never designed to. This is only a problem when people fall into the trap of thinking GDP is all that matters – an occupational hazard for economists.

Last week’s budget papers discussed the economic consequence of the war in Ukraine and the floods in NSW and Queensland. For such terrible events, the tone was surprisingly upbeat.

Combined, “the Russian and Ukrainian economies comprise less than 3 per cent of global GDP and less than 2.5 per cent of global trade.

“Foreign financial exposures to Russia are small, and the International Monetary Fund has assessed that sovereign [government] or bank default is not a systemic risk to global financial stability.”

Russia is, however, an important global supplier of rural, mineral and energy commodities. So the invasion has caused substantial disruption in global commodity markets, the papers say, and has the potential to significantly raise inflation and lower global growth.

“Russia produces 18 per cent of the world’s gas and 12 per cent of the world’s oil supply and, together with Ukraine, accounts for around 25 per cent of world wheat exports.” The invasion has increased the risk of supply disruptions, pushing up energy, agricultural and metals prices.

“Global supply chains are also reliant on Russian metals exports, especially palladium [a rare metal used in catalytic converters of exhaust fumes, and fuel cells], so significant supply disruption could have flow-on effects for global manufacturing supply chains.”

All economies will be affected by the rise in global commodity prices. Among the worst affected will be Europe, Japan and South Korea, which are highly dependent on imports of energy. These and other countries will suffer what economists call a “negative terms-of-trade shock” – that is, the prices of their energy imports will rise relative to the prices they get for their exports.

But, the papers say, a smaller set of countries will benefit from a “positive terms-of-trade shock” – because they are net exporters of the higher-priced energy commodities. Their consumers and businesses will pay the higher world price for the petrol and other fuels they use, but this will be greatly offset by the higher prices their producers of energy exports will be receiving.

Among this small group is one lucky country whose net energy exports are twice as great as its domestic energy use. It’s Austria. Sorry, make that Australia. As the economist Chris Richardson might say, you may be paying a lot more for your petrol, but the economy’s been kicked in the backside by a rainbow.

Turning to our floods, although it’s still raining and too soon for final figures, last week’s budget papers say that, under an arrangement where the federal government funds up to 75 per cent of the assistance provided by the state governments, the feds expect to pay more than $2 billion for income support to households, temporary accommodation and social services, about $600 million for community clean-up and recovery, and almost $700 million to businesses and farmers for repairs, new equipment and support services.

As well, the budget makes provision for $3 billion in further federal spending over the coming four years.

Moving from the budget to the economy, we’re told that the “direct economic cost” – that is, those purely monetary costs that show up in GDP – are expected to subtract about 0.5 percentage points from the growth in the nation’s real GDP during the March quarter.

What are the costs that show up in GDP? They’re mainly reduced production in the mining, agriculture, accommodation and food services, retail trade and construction industries.

You’ll be relieved to hear, however, that this 0.5 per cent overstates the net impact of the floods on real GDP over the longer term.

Why? Because “this direct cost will be partially offset by increased investment to replace and rebuild damaged housing, infrastructure and household goods”.

And here’s some good news: the reduced exports of coal caused by rain in the March quarter aren’t expected to be as bad as previous weather events, such as the floods and Cyclone Yasi in 2011.

If you find all this mercenary and distasteful, it’s not new. The arrival of World War II helped end the Great Depression. And rebuilding bombed out Europe and Japan after the war helped the rich countries grow faster than ever before – or since.

Read more >>

Friday, December 17, 2021

Like election promises, many budget forecasts never materialise

You’d think after the fiasco of Back in Black, Josh Frydenberg would have learnt not to count his budgets before they’re hatched. But no, he’s a politician facing an election and nothing else matters.

His message in this week’s mid-year budget update is: the virus is in the past and the economy is fixed – as you’d expect of such great economic managers as our good selves.

Well, it’s not certain the pandemic has finished messing with the economy. Unmessed with, we can be confident the economy will bounce back the way it did after last year’s national lockdown. But there’s no guarantee it will be soaring high into the sky.

The main thing to remember is that a budget forecast is just a forecast. Under all governments – but particularly this one – a lot of forecasts never come to pass.

It was the unexpected pandemic, of course, whose arrival stopped the budget deficit ever turning into a surplus, despite Morrison and Frydenberg’s repeated claim in the last election campaign that we already were Back in Black. They even produced coffee mugs to prove it.

Frydenberg’s big word this week for the economy under his management is “strong”. He is sticking to the government’s “plan to secure Australia’s strong recovery from the greatest economic shock since the Great Depression”.

“Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for strong growth” in real gross domestic product of 4.5 per cent this calendar year and 4.25 per cent next year, his budget outlook says.

This reflects “strong and broad-based momentum in the economy”. “Income-tax cuts and a strong recovery in the labour market are seeing household consumption increase at its fastest pace in more than two decades” while “temporary tax incentives will drive the strongest increase in business investment since the mining boom, with non-mining investment expected to reach record levels”.

Consistent with the “strong economic recovery”, the rate of unemployment is forecast to reach 4.25 per cent in the June quarter of 2023 which, apart from a brief period before the global financial crisis in 2008, would be the first time we’ve had a sustained unemployment rate below 5 per cent since the early 1970s.

This, should it actually come to pass, really would be something to crow about. But the return to a goal of achieving genuine full employment has been made necessary by this government’s chronic inability to achieve decent growth in real wages.

Without such growth you don’t get sustained strong growth in consumer spending and, hence, adequate growth in the economy overall. Thus the economic managers have become so desperate they’re trying to create a shortage of labour, as the only way of forcing employers to resume awarding decent pay rises.

Trouble is, this could become a vicious circle: you won’t get employment growing strongly and unemployment falling without sustained strong growth in consumer spending, but you won’t get that until real wages are growing strongly.

Frydenberg’s advance advertising for the budget update said that, under his revised forecasts, the rate of increase in wages will get greater each year for the next four years. According to his modelling, he said, on average a person working full time could see an increase of $2500 a year till 2024-25.

But, assuming it happens, that makes it sound a lot better than it is. Comparing the rise in the wage price index with the rise in the consumer price index, real wages fell by 2.1 per cent last financial year, 2020-21.

Since that’s in the past, we know it actually happened. Turning to the budget’s revised forecasts, real wages are expected to fall by a further 0.5 per cent this financial year, before rising by 0.25 per cent in the following year, then by 0.5 per cent the next year and by 0.75 per cent in 2024-25.

Doesn’t sound like a lot to boast about. If it actually happens, Frydenberg’s “plan to secure the recovery and set Australia up for the future” will have taken another three or four years before it’s delivering for wage earners.

To be fair, this week we did get impressive evidence that the economy is rebounding strongly from the lockdowns in Sydney, Canberra and Melbourne. In just one month – November – employment grew by a remarkable 366,000, while the unemployment rate fell from 5.2 per cent to 4.6 per cent. And there was a big fall in the rate of underemployment.

It’s a matter of history that the economy did bounce back strongly from the initial, nationwide lockdown last year. (This, by the way, shows the pandemic bears no comparison with the Great Depression.)

It’s noteworthy that, whereas the update’s fine print says the economy is “rebounding” strongly, Frydenberg says the economy is “recovering” strongly. The two aren’t the same. This week’s wonderful employment figures say we can be confident the economy is rebounding after the latest lockdowns just as strongly as in did the first time.

But a rebound gets you quickly back to square one. It doesn’t necessarily mean that, having rebounded, you’ll go on growing at a faster rate than the anemic rate at which we were growing before the pandemic.

That remains to be seen. And that’s where Frydenberg is being presumptuous with all his confident inference that a strong recovery’s already in the bag.

Lots of things could confound his happy forecasts. The obvious one is more trouble from the virus. Less obvious is this. You may think that getting unemployment down to 4.6 per cent in November means we’ll have no trouble achieving the forecast of getting it down to 4.25 per cent by June 2023.

But you’ve forgotten something. One important reason we’ve had so much success getting unemployment down to amazing levels is because we’ve done it with closed borders. When the borders reopen, it will become a lot harder.

Read more >>

Friday, December 3, 2021

A quick economic rebound seems assured - but then what?

The good news in this week’s “national accounts” for the three months to end-September is that the Delta-induced contraction in the economy was a lot less than feared – not just by the financial market economists (whose guesses are usually wrong) but by the far more high-powered econocrats in Treasury and the Reserve Bank. So now it’s onward and upward.

According to figures from the Australian Bureau of Statistics, real gross domestic product – the economy’s total production of goods and services – fell by 1.9 per cent in September quarter, thanks to the lockdowns in Sydney, Melbourne and Canberra.

This contraction of 1.9 per cent compares with the fall of 6.8 per cent in the June quarter of last year, caused by the initial, nationwide lockdown. We know that, as soon as that lockdown ended, the economy rebounded strongly in the second half of last year, and kept growing in the first half of this year – until the Delta variant came along and upset our plans.

So we have every reason to be confident the economy will rebound just as strongly in the present December quarter now the latest lockdowns have ended. We’ve yet to assess and respond to the latest, Omicron variant but, now so many of us are vaccinated, it shouldn’t require anything as drastic as further lockdowns.

We can be confident of another rebound not just because we now understand that the contractions caused by temporary, government-ordered, health-related lockdowns bear little relationship to ordinary recessions, but also because the early indicators we’ve seen for October and November – including those for what matters most, jobs – tell us the rebound’s already started.

In ordinary recessions, it can take the government months to realise there is a recession and start trying to pump the economy back up. With a government-ordered lockdown, the government knows what this will do to reduce economic activity so, from the outset, it acts to make up for the loss of income to workers and businesses.

As with all contractions, most people keep their jobs and their incomes and so keep spending. In a lockdown, however, they’re prevented from doing much spending by being told to stay at home.

This means everyone has plenty they could spend – even people whose employment has been disrupted. So their savings and bank balances build up, waiting until they’re allowed to start consuming again. When the lockdown ends, the floodgates open and they spend big.

After last year’s lockdown, the proportion of their income being saved by the nation’s households leapt to more than 23 per cent, up from less than 10 per cent. Over the following four quarters, it fell to less than 12 per cent.

What we learnt this week is that, following the latest lockdown, the household saving ratio jumped back to almost 20 per cent. So there’s no doubt households are cashed up and ready to spend.

The main drop during the September quarter was in consumer spending (down 4.8 per cent), with business investment spending down 1.1 per cent, and housing investment treading water. Even so, earlier government support measures mean the outlook for business and housing investment spending remains good.

Why was the blow from the latest lockdown so much smaller than that from last year’s? Mainly because it only applied to about half the economy. The other states grew by a very healthy 1.6 per cent during the quarter.

But the main reason this year’s contraction proved smaller than economists were expecting seems to be that businesses and households have “learnt to live with” lockdowns. We now know they’re temporary and we’ve found ways to get on with things as much as possible.

Businesses have thought twice about parting with staff, only to have trouble getting them back. Businesses have become better at using the internet to keep selling stuff and consumers better at using the net to keep buying.

The volume (quantity) of our exports rose during the quarter and the volume of our imports fell sharply, meaning that “net exports” (exports minus imports) made a positive contribution to growth during the quarter of 1 percentage point.

However, this was more than countered by a fall in the level of business inventories, which subtracted 1.3 percentage points from growth. The two seem connected.

The fall in imports seems mainly explained by temporary pandemic-related constraints in supply. And inventory levels are down mainly for the same reason. Seems cars are the chief offender.

Our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – improved a little during the quarter to give a 23 per cent improvement since September last year.

Both the improvement in our terms of trade and the improvement in net exports help explain some news we got earlier in the week: the current account on our balance of payments (a summary record of all the financial transactions between Australia and the rest of the world) rose by $1 billion to a record $23.9 billion surplus during the quarter.


The surplus on our trade in goods and services rose to almost $39 billion and, while our “net income deficit” (the interest and dividends we paid to foreigners minus the interest and dividends they paid us) rose to more than $14 billion, that was a lot less than it used to be.

If you think that sounds like good news, you have more economics to learn. We’ve run current account deficits for almost all the years since white settlement because, until recent years, we’ve been a “capital-importing country”.

The sad truth is, in recent years we’ve been saving more than we’ve needed to fund investment in the expansion of our economy, so we’ve been investing more in other people’s economies than they’ve been investing in ours.

But that’s because we haven’t had much investment of our own. The rebound to a growing economy seems assured, but returning to the old normal isn’t looking like being all that flash.

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Friday, September 3, 2021

When judging recessions, depth matters more than length

With the publication this week of the latest “national accounts”, our situation is now clear: we’re not in recession, yet we are – but, in a sense, not really.

Confused? It’s simple when you know. One thing we do know is that the economy – as measured by real gross domestic product – will have contracted significantly in the present quarter, covering the three months to the end of September.

At this stage, the smart money is predicting a contraction – a fall in the production and purchase of goods and services – of “two-point-something” per cent, although there are business economists who think the fall could be as much as 4 per cent.

Recessions are periods when people cut their spending sharply, causing businesses to cut their production of goods and services and lay off workers. It’s mainly because so many people lose their jobs that recessions are something to be feared. But also, a lot of businesses go broke.

This means no one should need economists to tell them if we are or aren’t in recession. If you can’t tell it from all the newly closed shops as you walk down the main street, you should know from what’s happening to the employment of yourself, your family and friends. Failing that, you should know it from all the gloomy stories you see and hear on the media.

Have you heard, by chance, that NSW, Victoria and now Canberra are back in lockdown, leaving some workers with no work to do, and the rest of us unable to spend nearly as much as usual because we’re confined to our homes? You have? Then you know we’re in recession.

When the first, national lockdown began in late March last year, real GDP contracted by 7 per cent in the June quarter. That was the deepest recession we’ve had since the Great Depression of the 1930s.

But it was also the shortest recession we’ve had because, once the lockdown was lifted, the economy – both consumer spending and employment - immediately began bouncing back. As the Australian Bureau of Statistics revealed this week, the bounce-back continued in the June quarter of this year, which saw real GDP growing by a strong 0.7 per cent, leaving the level of GDP up 1.6 per cent on its pre-pandemic level.

All clear so far? The confusion arises only in the minds of those people silly enough to let the media convince them that, despite all the walking and looking and quacking they see before their eyes, a recession’s not a recession unless you have two consecutive quarters of contraction in GDP.

The size of the contraction is of no consequence, apparently, nor would be two or more quarters of contraction that weren’t consecutive. This is nonsense.

As my colleague Jessica Irvine has explained, this “rule” is repeated ad nauseam by the media, but has no status in economics. It’s a crude rule of thumb that’s frequently misleading. It’s in no way the “official” definition of recession.

But the consecutive-quarter rule is so deeply ingrained that it causes needless debate and uncertainty. Some business economists convinced themselves that this week’s figure for growth in the June quarter could be a small negative.

Oh, gosh! Since we know the present quarter will be a negative, that means we could be in another recession. Quick, get out the R-word posters.

But no. June quarter growth proved stronger than expected. Treasurer Josh Frydenberg couldn’t resist the temptation to declare there’d been no “double-dip recession”. Thank God!

But wait. The lockdowns could easily continue beyond the end of this month and into the December quarter. So we could have a second negative quarter on the way. Quick, bring back the posters and start writing the double-dip speech.

Sorry, this is not only silly, it’s got the arithmetic wrong. When the economy goes from growth to lockdown, you get a negative. But when, in the follow quarter, the economy merely stays in lockdown you get zero growth, not another fall.

The present lockdowns apply to a bit over half the economy. So, if the other half continues to grow, we will get a positive change in GDP during the quarter.

What’s more, if the lockdowns end sometime before the end of December, we’ll get a bounce-back in growth in that half of the economy, as everyone rushes out to start buying the things they were prevented from buying during the lockdown.

That’s what happened last time the lockdown ended; it’s safe to happen this time too. So it’s hard to see how we could get a second quarter of “negative growth” in the three months to New Year’s Eve.

We’ll learn what the figure was in early March, in good time for the federal election. Stand by for Frydenberg’s triumphant declaration that we’ve avoided a double-dip recession for a second time. He’ll turn the media’s consecutive-quarters bulldust back on them, and spin a story of great success.

But this will literally be non-sense. He’ll take a contraction in the September quarter of, say, 2 to 4 per cent – as big as the contractions that caused the recessions of the mid-1970s, the early 1980s and the early 1990s – and pretend it doesn’t count, simply because that massive contraction was concentrated in one quarter rather than spread over two.

He’ll con us into accepting that the depth of a slump doesn’t matter, just its length. More nonsense.

But there remains a respect in which, like the first dip, the second isn’t really a recession. What we had last year and are in the middle of right now aren’t recessions in the normal sense.

They’re artificial recessions deliberately brought about by governments to minimise the loss of life from the pandemic. They thus involve a degree of monetary assistance to workers and businesses unknown to normal recessions. This means they don’t take years to go away, but disappear in six months or so because of the speed with which the economy bounces back when the lockdown ends.

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Wednesday, July 28, 2021

Don’t be surprised if the economy surprises on the downside

The economy has been on a roller-coaster since the virus arrived early last year, dipping one minute, soaring the next. Now, with the Delta variant putting Sydney and Melbourne back in lockdown, we’re in the middle of another dip. But as you hang on, remember this: what goes down must come up.

When governments order many businesses to close their doors, and us to leave our homes as little as possible, it’s hardly surprising that economic activity takes a dive. What did surprise us was the way the economy bounced back up the moment the lockdown was eased.

We rushed out of our houses and started spending like mad. Not that we weren’t spending whatever we could while locked down. Another surprise was the way the presence of the internet changed what would otherwise have happened.

Apart from allowing most people with desk jobs to work from home, and talk face to face to people in other cities without getting on a plane, it allowed us to keep spending: ordering groceries and takeaways online, consulting doctors over the phone – I thought receptionists were there to stop you getting through to the great personage – buying exercise equipment and stuff to get on with fixing up the back bedroom.

As I keep having to remind myself, only God knows what the future holds – and He’s not letting on. But it’s part of the human condition to be insatiably desperate to know what happens next. We keep searching the world for the one person who might be able to tell us.

Since even the experts can’t be sure what will happen, they base their predictions on the hope that what happens this time will be much the same as what usually happens. Experts are people who remember last time better than we do.

But that way of predicting the future hasn’t worked this time. The epidemiologists – and all the related -ologists we hardly knew existed – know a lot about viruses but, at the start, little about the particular characteristics of this one. Their predictions have kept changing as they’ve had more to go on.

Last year’s recession was the fifth of my career (counting the global financial crisis, which I do). I thought that knowledge put me so far ahead of the game I was an expert expert. Wrong.

Ordinary recessions happen because the people managing the economy stuff up. The economy takes well over a year to unravel, then three or four years to wind back up. But this recession was completely different, having been knowingly brought about by governments, for health reasons. When at last they let us go back to business, however, that’s just what we did.

The initial, nationwide lockdown caused the economy’s production of goods and services (gross domestic product) to dive by an unprecedented 7 per cent in just the three months to the end of June last year. But then the economy bounced back by 3.5 per cent in the September quarter and a further 3.2 per cent in the December quarter after Victoria’s delayed release from lockdown.

In the period before the Delta strain sent Sydney back into humbling lockdown, GDP was ahead of what it was at the end of 2019. Total employment was also ahead, while the rate of unemployment was actually a little lower.

Since the present September quarter has two months left to run, and Sydney’s lockdown rolls on even though Melbourne’s has ended, it’s too early to be confident by how much GDP will fall but, depending on how long Sydney’s drags on, it’s likely to be a fall of less than 1 per cent or somewhat more than 1 per cent. However bad, a lot less than last time.

As for the December quarter – and barring some new outbreak, say a new letter in the Greek alphabet – it’s likely to show expansion rather than contraction. Victoria will be growing, NSW will be in bounce-back mode as soon as the lockdown ends, and the rest of Australia will be doing its normal thing.

So all those silly people desperate for a chance to repeat the R-word aren’t likely to get the excuse they imagine they need.

Another major respect in which coronacessions differ from normal recessions is that politicians can’t consciously decide to stop the economy without at the same time providing generous assistance to all the workers and businesses this will harm. Normally, the assistance comes much later and is less generous.

Despite cries for the return of JobKeeper, the arrangements Scott Morrison has hammered out with Gladys Berejiklian and Dan Andrews are, by and large, a good substitute for the measures used the first time around.

The other thing to remember is that the economy is in much better shape now than at the end of 2019. Households have more money in the bank, the housing market is booming, profits are up and businesses are complaining about staff shortages.

Not such a bad time to cope with a setback. It won’t be the end of the world.

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Friday, March 5, 2021

Coronacession: great initial rebound, but recovery yet to come

If you’re not careful, you could get the impression from this week’s national accounts that, after huge budgetary stimulus, the economy is recovering strongly and, at this rate, it won’t be long before our troubles are behind us.

The Australian Bureau of Statistics issued figures on Wednesday showing that the economy – real gross domestic product – grew by 3.1 per cent over just the last three months of 2020. This followed growth of 3.4 per cent in the September quarter.

When you remember that, before the virus arrived, the economy’s average rate of growth was only a bit more than 2 per cent a year, that makes it look as though the economy’s taken off like a stimulus-fuelled rocket.

Even the weather is helping. The drought has broken and we’ve had a big wheat harvest. We keep hearing about the Chinese blocking some of our exports, but much less about them going back to paying top dollar for our iron ore. This represents a massive transfer of income from China to our mining companies and the federal and West Australian governments.

So much so that our “terms of trade” – the prices we get for our exports compared with the prices we pay for our imports – improved by 4.7 per cent in the December quarter, and by 7.4 per cent over the year.

Sorry. It certainly is good, but it's not as good as it looks. The trick is that you can’t judge what’s happening as though this is just another recession. It’s called the coronacession because it’s unique – sui generis; one of a kind.

Normal recessions happen because the economy overheats and the central bank hits the interest-rate brakes to slow things down. But it overdoes it, so households and businesses get frightened and go back into their shell. The fear and gloom feed on each other and unemployment shoots up. (If you’ve heard of poets’ license, economists have a licence to mangle metaphors.)

This time, the economy was chugging along slowly, with the Reserve Bank using low interest rates to try to speed things up, when a pandemic arrived. Some people were so worried they stopped going to restaurants and pubs. But to stop the virus spreading, the government ordered many businesses to close and the whole nation to stay at home.

(To translate this into econospeak: normal recessions are caused by “deficient demand”; this one was caused by “deficient supply” - on government orders.)

Knowing this would cause much loss and hardship, governments spent huge sums to support individuals and firms, including the JobKeeper wage subsidy (intended to discourage idle firms from sacking their workers), the temporary JobSeeker supplement (to help those workers who were sacked), help business cash flows and much else.

The politicians and their econocrats assured us this would be sufficient to hold most of the economy intact until they’d be able to lift the lockdown. Despite much scepticism (including from me), this week’s figures offer further proof they were right.

The national lockdown was imposed in March, and caused GDP to contract by a previously unimaginable 7 per cent in just the June quarter. The national lockdown was lifted early in the September quarter, when most of that 7 per cent should have returned.

If it had, it would have been easier to see what it was: not the start of a “recovery”, but just the rebound when businesses are allowed to reopen and consumers to go out and shop.

But the need of our second biggest state, Victoria, to impose a second lockdown – which wasn’t lifted until November - has seen the rebound spread over two quarters, with a bit more to come in the present, March quarter.

When you study the figures, you see that most of the collapse in growth and rebound in the following two quarters is explained by just the thing you’d expect: the downs and ups in consumer spending. It dived by 12.3 per cent in the June quarter, then rebounded by 7.9 per cent in the following quarter and a further 4.3 per cent in the latest quarter.

Consumer spending grew strongly in the December quarter, even though the wind-back of federal support measures caused household disposable income to fall by 3.1 per cent. How could this be? It was possible because households cut their outsized rate of saving.

At the end of 2019, households were saving only 5 per cent of their disposable income. By the end of June, however, they were saving a massive 22 per cent. But by the end of last year this had fallen back to 12 per cent. This suggests people were saving less because they were worried about their future employment and more because they just couldn’t get out to shop.

Note that, by the end of December, the level of real GDP was still 1.1 per cent below what it was a year earlier. Economists figure we’ve rebounded to about 85 per cent of where we were. But what happens when, after the present quarter or next, we’re back to 100 per cent?

Will we keep growing at the rate of 3 per cent a quarter? Hardly. The easy part – the rebound – will be over, most of the budgetary stimulus will have been spent, and it will be back to the economy growing for all the usual reasons it grows.

Will it be back to growing at the 10-year average rate of 2.1 per cent a year recorded before the virus interrupted? If so, we’ll still have high unemployment – and no reason to fear rising inflation or higher interest rates.

But it’s hard to be sure we’ll be growing even that fast. On the Morrison government’s present intentions, there’ll be no more stimulus, little growth in the population, a weak world economy, an uncompetitive exchange rate thanks to our high export prices and, worst of all, yet more years of weak real growth in income from wages. The “recovery” could take an eternity.

Read more >>

Wednesday, January 27, 2021

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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Saturday, October 3, 2020

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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