Showing posts with label intergenerational report. Show all posts
Showing posts with label intergenerational report. Show all posts

Friday, July 2, 2021

Business lobbies use the productivity slump for rent-seeking

It’s encouraging to see the scepticism with which this week’s intergenerational report from Treasurer Josh Frydenberg has been greeted. Any attempt to peer 40 years into the economy’s future will prove close to the mark only by happy accident.

But it’s discouraging to see the way the usual suspects have seized on the report’s most glaring weakness to do no more than push their vested interests in the name of “reform”.

This fifth version of the five-yearly intergenerational report allows us to see how far astray the report’s earlier projections have been, even though we’re only halfway towards the first report’s picture of the economy in 2041.

In their projections of growth in the population, its authors have repeatedly overestimated the fertility rate (expected number of births per woman) and underestimated the growth in net overseas migration (foreigners arriving minus locals leaving).

They predicted that the retirement of the Baby Boomers would see a fall in the rate at which people of working age participate in the labour force, but this “participation rate” has recently been at record highs.

It would be nice to think that, since the object of all these projections has been to alert us to looming pressures on the budget – caused, in particular, by the ageing of the population – governments have responded accordingly, thus making the reports’ prophecies self-defeating. Nice, but not likely.

The pandemic, and the expected four years of weak net overseas migration in particular, is rightly blamed for our population “growing slower and ageing faster” than previously expected. And slower growth in the size of the population means slower growth in the size of the economy.

We’re told that, whereas real GDP grew at the average rate of 3 per cent a year over the past 40 years, it’s now projected to slow to an average rate of 2.6 per cent over the coming 40.

But the justification for our obsession with economic growth is our desire for faster improvement in our material standard of living. And here’s a point Frydenberg hasn’t highlighted: according to the report’s calculations, the projected marked slowing in the economy’s overall rate of growth is expected to affect growth in GDP per person – a crude measure of living standards - only a little.

GDP per person’s average annual growth is projected to fall only from 1.6 per cent over the past 40 years to 1.5 per cent over the coming 40.

It’s here, however, that business and its media cheer squad have read the fine print and are deeply sceptical: that projection of GDP growth per person rests heavily on the mere assumption that the productivity of labour (output of goods and services per hour worked) will improve at the same average annual rate in the coming 40 years as it did over the past 30 years.

And they’re right. Of all the many assumptions on which the report’s mechanical projections depend, this assumption is far the most critical. As Frydenberg rightly says, improving productivity is what explains almost all the improvement in our standard of living over the decades.

And the sceptics are right to doubt that productivity will improve over the next 40 years at anything like the rate of 1.5 per cent a year. For a start, that 30-year average includes the 1990s, a decade when productivity improved at a rate far higher than experienced before or since.

For another thing, productivity improvement in recent years has been much weaker than usual.

So, purely by omission, the latest intergenerational report reminds us of the second biggest threat to our living standards: a continuing slump in productivity. (The biggest threat is the world’s inadequate response to climate change – another thing the report omits to take into account.)

What’s discouraging, however, is the way the business lobby groups have used this inadvertent reminder to bang the same old self-serving drum. The productivity slump has been caused by this government and its predecessors’ failure to continue the economic reform program begun by Hawke, Keating and Howard, we’re assured.

And what reforms do they have in mind? A cut in the rate of company tax for big business and changes in the wage-fixing rules to make the labour market more flexible for employers.

This lobbying is objectionable on three grounds. First, it implies that productivity improvement depends on an unending stream of changes in government policies, which is absurd. The day “reform” stops, productivity stops.

Second, it shifts the blame for weak productivity improvement from the actions of the private sector – in whose farms, mines, factories, offices and shops productivity either gets better or worse – to the politicians in Canberra.

Third, it seeks to disguise blatant rent-seeking as economic “reform”. Productivity would improve if business owners and high income-earners paid less tax, leaving the punters to pay more, and if the balance of bargaining power between bosses and workers shifted further in favour of bosses.

What this self-serving bulldust ignores is that productivity improvement has slumped in all the rich countries, not just in Australia because our pollies are so defective.

Michael Brennan, chair of the Productivity Commission, says the world’s economists are still debating the causes of the productivity slowdown.

They’ve pointed to “mismeasurement issues, a shift towards lower productivity industries, population ageing, a slowdown in the pace of technological discovery, a slowdown in the pace of technological diffusion, a plateauing of improvements in human capital, reduced rates of firm entry and exit, increased concentration and market power, lower capital investment, a shift to intangible capital and the slowing growth in global trade”.

As Melinda Cilento of CEDA, the Committee for Economic Development of Australia, has noted, “research by federal Treasury . . . showed leading Australian firms were not keeping up with leading global firms on productivity”.

Treasury would be much better employed continuing to research the causes of our productivity slump than doing literally unbelievable projections of what’s unlikely to happen over the next 40 years.

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Wednesday, August 19, 2020

We've been electing governments that damage our kids' future

One of the most dismal ideas for our youth to entertain is that their lives won't be as comfortable as their parents'. Everyone in the older generation knows how much their lives have improved over the decades, and how much better off we are than our parents were.

We've come to regard continuous improvement in living standards and quality of life over the generations as part of the natural order. Our pay-off for living in a capitalist economy.

So how can our kids have become so pessimistic about the future? How can they imagine their parents would allow such an appalling prospect to befall their offspring? Isn't improving their kids' chances in life a big part of the reason parents work so hard?

Isn't it why so many parents pay so much to send their kids to private schools? Isn't preserving their kids' inheritance the reason the well-off retired fought so hard against Labor's plan to take away their dividend franking credits?

How could any government that presided over a significant deterioration in our children's prospects hope to survive?

Trouble is, the kids are right to be so pessimistic. We can't know what the future holds, but we do know that various trends in that direction are well-established.

And the plain truth is that one way governments have got themselves elected and re-elected in recent decades has been to pursue policies that favour the old and don't worry about the young.

Politicians have been tempting us to put our immediate interests ahead of our offspring's future – and it's worked a treat.

This week the Actuaries Institute of Australia published a new index of intergenerational equity, which compares the "wealth and wellbeing" of people aged 65 to 74 with that of people aged 25 to 34 between 2000 and 2018.

Note that this is before any effect of the coronacession. And remember that the faces in these two aged groups keep changing as people age. No one who was between 65 and 74 in 2000 is still in that group now.

Since the Baby Boomers were born between 1946 and 1964, probably more than half of them were in the 65 to 74 age range by 2018. And the Millennials were joining the 25 to 34-year-olds.

The actuaries have divided "wealth and wellbeing" into six "domains": economic and fiscal (allocated a subjective weighting of 30 per cent in the index), health and disability (20 per cent), social (including rates of homelessness, incarceration and being a victim of robbery; 15 per cent), environment (15 per cent), education (10 per cent) and housing (10 per cent).

The scores for people aged 65 to 74 in 2000 were given an index value of 100. In the same year, the scores of people aged 25 to 34 amounted to 70. It's hardly surprising that people 40 years younger have significantly lower scores. They've had much less time to gain promotion, earn, save and pay off a home (or even receive an inheritance).

No, what matters more is how the two groups' scores have changed over time. Over the 18 years, the older group's score has risen to 115, whereas the younger group's score has fallen to 69.

Turning to the size of the young's deficit relative to the old, it improved from minus 30 to minus 11 between 2000 and 2006 – presumably mainly because the young did well in the resources-boom-driven labour market – but then deteriorated to minus 20 by 2012.


That year, 2012, was when the resources boom started winding down. And it was when the Baby Boomers started reaching 65. Over just the six years to 2018, the young's deficit relative to the old worsened dramatically to minus 46.

But why has the position of the young relative to the old deteriorated so badly since 2006? Well, they've benefited from improving health, as life expectancy has increased and rates of disability have decreased.

They've benefited also from increasing levels of educational attainment and, socially, from modest reductions in the gender pay gap and falling rates of robbery (which affect the young more than the old).

But these gains have been more than countered by losses in other domains. In ascending order of loss, young people have suffered economically as, since the global financial crisis, education-leavers have taken much longer to find full-time jobs; government spending has been skewed towards older generations (higher spending on health, pensions and aged care, but less on the rate of unemployment benefits) and public debt has risen.

The young have suffered in housing, as the rate of home ownership for their age group has dropped from 51 per cent to 37 per cent over the past two decades. But their greatest loss (sure to grow in coming years) is from the deterioration in the natural environment: rising carbon emissions and temperatures, the drying Murray-Darling Basin and declining biodiversity.

And all these trends before the likely weak and prolonged recovery from the coronacession scars the careers and lives of another generation of education-leavers, without governments or voters being too worried about it.
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Friday, March 6, 2015

Intergenerational report a disappointment

The five-yearly intergenerational report ought to be highly informative, leading to serious debate about the economic choices we face. In the hands of Joe Hockey, however, it has become little more than a crude propaganda exercise.
As such it will be quickly cast aside, like last year's report of the Commission of Audit. Within a few days all that will remain is the taxpayer-funded advertising campaign. It, too, will be more about spin than brain-food.
Hockey has shifted the report's focus from the next 40 years to the government's present struggles with the budget. The message he wants us to take away is that it's all Labor fault, but the government has worked hard to greatly reduce the problem. And were not for those crazies in the Senate - who seem to think our spending cuts were unfair - last year's budget would have set us up for budget surpluses right through to 2055.
The message we should take away from it, as with its three predecessors, is one no politician on either side is prepared to admit: as our demands on the government for more and better services continue to grow, we will have pay for them with higher taxes. Since our real incomes are projected to rise by almost 80 per cent, this won't be so terrible.
Instead, the message from all these reports is that there is no alternative to sweeping cuts in government spending, unfair or not.
They come to this conclusion by quietly assuming that before long we will return to annual tax cuts, even as the budget deficit and debt get bigger every year. Sure.
If you wonder how anyone could have any idea of how things will play out over the next 40 years, you are right. No one can. The one thing we can be sure of is that, whatever the budget and the economy end up looking like in 2055, it won't be what this report says they will.
The mechanical projections in this report are based on a host of assumptions about an unknowable future. Some of those assumptions are spelt out in the fine print, some aren't. Some are honest guesses, some have been chosen to lead us to the conclusions the government wants us to reach.
One demonstration that projecting what will happen over the next 40 years is unavoidably dodgy is that the four successive reports have each come up with widely differing figures for where the budget will end up.
One demonstration of the report's lack of genuine concern about our future is its dismissive treatment of climate change. The biggest risk we face in 40 years' time is the budget deficit?
One demonstration of the report's inadequacy is its failure to take account of what may be happening to the state governments' budgets. This allows it to claim last year's budget measures would have restored the feds to eternal surplus, while ignore the consequences of Hockey's proposal for ever-growing cuts in grants to the states for hospitals and schools. Really?
To be fair, before Hockey got into the act Treasury would use the intergenerational report for its own propaganda. Its message was aimed at its political masters: the budget may look OK now, but there is a lot extra spending coming in a few years' time, so keep running a tight ship.
It was spectacularly unsuccessful. The Howard government went mad with tax cuts and middle-class welfare and Rudd and Gillard were a fraction worse with their unfunded schemes to help disadvantaged school kids and the disabled.

And these guys think it's all our fault?
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Saturday, August 27, 2011

Sustainable well-being

What does federal Treasury believe? What are the values that underlie the strong line it takes in its advice to governments? A lot of people think they know, but this week its newish boss, Dr Martin Parkinson, spelt it out in an important speech.

And some of the people who think they know all about the ''Treasury line'' may be surprised. Parkinson's title was ''Sustainable well-being'' .

What does he mean by well-being? It's ''what we in the Treasury think of primarily as a person's substantive freedom to lead a life they have reason to value'', he says.

What does he mean by sustainability? ''Sustainable well-being requires that at least the current level of well-being be maintained for future generations.

''In this regard, we can consider sustainability as requiring, relative to their populations, that each generation bequeath a stock of capital - the productive base for well-being - that is at least as large as the stock it inherited.''

But because well-being is a multi-dimensional concept, he says, going well beyond material living standards - and even the environment - we can see that the stock of capital should include all forms of capital, of which there are four.

First, physical and financial capital: the value of fixed assets such as plant and equipment and financial assets and liabilities.

Second, human capital: the productive wealth embodied in our labour, skills and knowledge, and in an individual's health.

Third, environmental capital: our natural resources and the ecosystems, which include water, productive soil, forest cover, the atmosphere, minerals, ores and fossil fuels.

Fourth, social capital: which includes factors such as the openness and competitiveness of the economy, institutional arrangements, secure property rights, honesty, interpersonal networks and the sense of community, as well as individual rights and freedoms.

Running down the stock of capital in aggregate diminishes the opportunities for future generations, Parkinson says. In one way or another, eroding the productive base will lead to lower future well-being. ''Note, though,'' he adds, ''that drawing down any one part of the capital base may be reasonable as long as the economy's aggregate productive base is not eroded.

''For example, reducing our natural resource base and using the proceeds to build human capital or infrastructure may offer prospects of higher future well-being.

''A necessary, but not sufficient, condition for this to be the case is that those resources are priced appropriately and that the returns are invested sensibly.''

When you think about well-being rather than gross domestic product, he says, it quickly becomes apparent that society doesn't get an adequate return on many environmental goods. For example, water and carbon are not yet priced appropriately.

In the case of minerals and energy, arguably society is not sharing sufficiently in the returns from their exploitation, with the vast bulk of the benefits accruing to the shareholders of the firms doing the mining. As such, society is not getting the resources it would need to build up other parts of its capital stock.

''Unsustainable growth cannot continue indefinitely - if we reduce the aggregate capital stock in the long run, future generations will be made worse off. The problem is that we can be on an unsustainable path for a long period - and by the time we recognise and change, it could be too late.''

Our economy faces a number of pressures on environmental sustainability, including: climate change, salinity and resource depletion, in addition to water availability and pressures on biodiversity. Climate change policy - both in relation to reducing emissions and adapting to climate changes - is not just an environmental issue, Parkinson says. ''It is more fundamentally an economic and social challenge.''

The impact of decisions today will be felt in decades to come, and the progression of climate change impacts is unlikely to be linear (occurring at a steady rate of change). ''There are significant risks and uncertainties arising from our imperfect knowledge of the climate system. It is possible that climate impacts could suddenly accelerate. In fact, certain impacts to the climate system may lead to a tipping point where sudden, irreversible changes arise.''

Parkinson says Treasury, to do its job, needs ''an understanding of well-being that recognises that well-being is broader than just GDP, that sustainability is more than an environmental issue''.

''A focus on well-being and sustainability continue to be important parts of Treasury's culture and identity: they assist in providing context and high level direction for our policy advice; and they facilitate internal and external engagement and communication.

''Almost a decade ago we attempted to put more structure around the issue by writing down a well-being framework to provide greater guidance to staff on our mission.'' The framework is based on five dimensions.

First, the set of opportunities available to people. This includes not only the level of goods and services that can be consumed, but good health and environmental amenity, leisure and intangibles such as personal and social activities, community participation and political rights and freedoms.

Second, the distribution of those opportunities across the Australian people. In particular, that all Australians have the opportunity to lead a fulfilling life and participate meaningfully in society.

Third, the sustainability of those opportunities available over time. In particular, consideration of whether the aforementioned productive capital base needed to generate opportunities is maintained or enhanced for current and future generations.

Fourth, the overall level and allocation of risk borne by individuals and the community. This includes a concern for the ability, and inability, of individuals to manage the level and nature of the risks they face.

Fifth, the complexity of the choices facing individuals and the community. Treasury's concerns include the costs of dealing with unwanted complexity, the transparency of government and the ability of individuals and the community to make choices and trade-offs that better match their preferences.

These five dimensions ''reinforce our convictions that trade-offs matter deeply - trade-offs both between and within dimensions'', Parkinson says.

Well, that's what he thinks.

What do I think? I think Treasury has come a long way and is at its point of greatest enlightenment. But it has further to go - in principle as well as in practice.

In particular, I doubt how much trading off is possible when it comes to the environment.

Ensuring our kids are richer than we are, while destroying the natural environment because we refuse to accept the physical limits to economic growth, doesn't sound sustainable to me.

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