Productivity problem? Start at the bottom, not the top

Whenever we’re told we’re not achieving much improvement in our productivity, a lot of people assume it must be something the government’s done – or more likely, failed to do. Such as? Isn’t it obvious? Failed to cut the tax on companies and high income-earners.

But though the national rate of productivity improvement is merely the sum of the performances of all the industries that make up the economy, no one ever imagines the problem might be something the nation’s businesses have been failing to do.

This, however, is where a lot of research is pointing, as summarised by the Labor shadow minister and former economics professor, Dr Andrew Leigh, in a recent speech. He starts by explaining that productivity measures how efficiently the economy turns labour and capital into goods and services.

"Last year, Treasury’s Megan Quinn revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving into fresh data about the dynamics of the Australian economy," he says.

"Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s 'productivity frontier' has slipped back by about one-third. The best of 'Made in Australia' hasn’t kept pace with the best of 'Made in Germany', 'Made in the Netherlands' or even 'Made in America'."

And then there’s the other 95 per cent. In the past two decades, their output per hour worked has barely risen. So 19 out of 20 Australian firms don’t produce much more per hour than they did when Sydney hosted the Olympics.

What’s going wrong? "Part of the problem is that many firms aren’t investing in new technologies," Leigh says. "Less than half have invested in data analytics or intelligent software systems. Only three in five have invested in cyber security, making them vulnerable to hacking and ransomware attacks.

"It’s not just that companies aren’t investing simply in technology – they’re not investing in anything at all." In the Productivity Commission’s regular report, it measures how the amount of capital equipment per worker has increased, a process known as "capital deepening".

The commission has had to invent a new term to describe what happened last financial year – "capital shallowing". For the first time ever, the amount of capital per worker went backwards. "Given that capital deepening has accounted for about three-quarters of labour productivity growth, this is frightening," Leigh says. (To which Scott Morrison might well respond: do I look frightened?)

Across the economy, businesses are cutting back on research and development and investing less in good management. Just 8 per cent of our firms say they produce innovations that are new to the world, down from 11 per cent in 2013.

A Productivity Commission study has found that half the slowdown in productivity improvement in the market economy in recent years is accounted for by manufacturing. A separate survey of management practices in manufacturing firms found that Australia’s managers rank below those in Canada, Sweden, Japan, Germany and the US.

Leigh argues that newborn firms are as critical to an economy as newborn babies are to a society’s demography, bringing fresh approaches, shaking up existing industries, and offering new opportunities to workers.

Yet our new-business creation rate isn’t accelerating, it seems to be stopping. Defining new businesses as those that employ at least one worker, Treasury estimates that the new-business formation rate in the early 2000s was 14 per cent a year. Now it’s down to 11 per cent a year.

"Another sign that the economy may be stagnating comes from figures on job-switching," Leigh says. "Workers who switch jobs typically experience a significant pay increase. In the early 2000s the rate of job switching was 11 per cent of employees a year. Now it’s down to 8 per cent. And "Treasury’s analysis finds that a drop of one percentage point in the job-switching rate is associated with a 0.5 percentage point drop in wage growth across the economy".

The drop we’ve experienced is "not the fault of employees: there are simply fewer good opportunities available. According to Treasury’s analysis, much of the drop in job-switching is because workers are less likely to transition from mature firms to young firms. With fewer start-up firms, it stands to reason that there are fewer start-up jobs."

It’s all pretty dismal – and, of course, all the fault of the government. But I know just the reform we need to fix the problem. Morrison should offer chief executives of ASX200 companies a cut in their tax rate, provided they can show they were too busy during the financial year sticking to their knitting to attend any meetings of the Australian Business Council called to discuss lobbying the government for favours.

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Lucky Country has lost its dynamism and can't find where it is

Do you know what economists mean when they talk about the nation’s “economic fundamentals”? I thought I did until I heard what Reserve Bank governor Dr Philip Lowe said they were.

When Lowe had a meeting with Treasurer Josh Frydenberg after last year’s election, I was puzzled by him saying that the economy’s fundamentals were “sound”. How could he say that when the economy had grown by an exceptionally weak 1.8 per cent over the year to March?

But at his appearance before the House of Reps economics committee last week, he had to respond to a challenging description of the state of the economy by Labor’s Dr Andrew Leigh, a former economics professor.

“We have seen declines in labour productivity for the first time on record, the slowest wage growth on record, declining household spending per capita, record household debt, record government debt, below average consumer confidence, retail suffering its worst downturn since 1990 and construction shrinking at its fastest rate since 1999,” Leigh said.

“The economy is in a pretty bad way at the moment, isn’t it?” he asked.

“That wouldn’t be my characterisation,” Lowe responded. “One thing you left out of that list is that a higher share of Australians has jobs than ever before in our history ... ultimately what matters is that people have jobs and employment and security.”

What’s more, “our fundamentals are fantastic”, Lowe went on – but this time he spelt out what he meant.

“We enjoy a standard of living in this country that very few countries in the world enjoy. More of us have jobs than ever before. We live in a fantastic, prosperous wealthy country, and I think we should remember that.”

Well, if that’s what he thinks our fundamentals mean, who could argue? Even if Leigh thought the weaknesses he was outlining were a description of our fundamentals. Maybe Lowe’s fundamentals are more fundamental fundamentals than other people’s are.

Under further questioning from Leigh, however, Lowe said he didn’t want to deny that “we have very significant issues, and the one that worries me most is weak productivity growth ... We’ve had four or five years now where productivity growth has been very weak ... in my own view it’s linked to very low levels of investment relative to gross domestic product.”

This is an important point. As former top econocrat Dr Mike Keating has been saying for some years, you can take a neo-classical, supply-side view that weak productivity improvement explains why the economy’s growth has been so weak (a view that assumes productivity improvement is “exogenous” – it drops on the economy from outside), or you can take a more Keynesian, demand-side view that weak economic growth explains why productivity improvement has been so weak (that is, productivity is “endogenous” – it’s produced inside the economy).

Keating keeps saying that it’s when businesses upgrade their equipment and processes by replacing the old models with the latest, whiz-bang models that improving innovations are diffused throughout the economy, making our industries more productive.

Why is it that our businesses (particularly those other than mining) haven’t been investing much in expanding and improving their businesses? The simple, demand-side answer is that they haven’t been seeing much growth in the demand for their products.

But Lowe sees something deeper. “I fear that our economy is becoming less dynamic [continuously changing and developing],” he told the economics committee. “We’re seeing lower rates of investment, lower rates of business formation, lower rates of people switching jobs, and in some areas lower rates of research-and-development expenditure.

“So right across those metrics it feels like we’re becoming a bit less dynamic. I worry about that for the longer term.

“Public investment is not particularly low at the moment. What is low is private investment. Firms don’t seem to be investing at the same rate that they used to, and I think this is adding to the sense I have that the economy is just less dynamic ...

“There’s something deeper going on, and it’s not just in Australia: it’s everywhere. At the meetings I go to with other central bank governors, this is the kind of thing we talk about. Something’s going on in our economies that means the same dynamism that used to be there isn’t there.”

Asked later by another MP what was causing this loss of dynamism, Low replied, “I wish I knew the answer to that ... My sense is, as an Australian and looking at what’s going on in our economy, that we’re becoming very risk-averse.” (A sentiment I know other top econocrats share.)

“It’s a global thing that happens – I think it probably happens partly when you’re a wealthy country. The standard of living here is fantastic. It’s hardly matched anywhere in the world, so we’ve got something important to protect,” he said.

“But I think in that environment you become more risk-averse. Probably with the ageing of the population, we become more risk-averse. When people have a lot of debt, they’re probably more risk-averse.

Risk-aversion seems to help explain the slow wage growth we’ve had “for six or seven years” now. “It’s the sense of uncertainty and competition that people have, and this is kind of global. Most businesses are worried about competition from globalisation and from technology, and many workers feel that same pressure.

“There are many white-collar jobs in Sydney and Melbourne and Canberra that can be done somewhere else in the world at a lower rate of pay, and many people understand that ...,"Lowe said.

“So the bargaining dynamics ... for workers is less than it used to be. And firms are less inclined to bid up wages to attract workers because they’re worried about their cost base and competition,” he said.

Doesn’t sound too wonderful to me. But not to worry. Just remember, our fundamentals are fabulous.

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It's official: too much banking is bad for you

When the newish boss of the International Monetary Fund, Bulgarian economist Kristalina Georgieva, contemplates the challenges of the new decade, she thinks of many things: increasing uncertainty, climate change and increasing inequality – particularly the role the financial sector in making it worse.

Georgieva foresees increasing uncertainty over geopolitical tensions, uncertainty that the trade truce between the US and China will last, and uncertainty that governments can fix the frustrations and growing populist unrest in many countries. "We know this uncertainty harms business confidence, investment and growth," she said in a recent speech.

On climate change, after observing that the "brush fires" blazing across Australia are a reminder of the toll on life that climate change exacts, she avoids saying that we are possibly the most vulnerable among the rich countries (something that might have surprised the she’ll-be-right Scott Morrison).

But she did note that it’s often the poorest and most vulnerable countries that bear the brunt of "this unfolding existential challenge". "The World Bank estimates that unless we alter the current climate path an additional 100 million people may be living in extreme poverty by 2030," she says.

The previous decade saw the rich world’s economists become much more conscious of the economic importance of inequality, with the IMF’s economists at the forefront of this realisation. "We know that excessive inequality hinders growth and hollows out a country’s foundations. It erodes trust within society and institutions. It can fuel populism and political upheaval," she says.

Many people think of using the budget to reduce inequality, which they should, "but too often we overlook the role of the financial sector, which can also have a profound and long-lasting positive or negative effect on inequality," she says.

"Our new staff research shows how a well-functioning financial sector can create new opportunities for all in the decade ahead. But it also shows how a poorly managed financial sector can amplify inequality."

"Financial deepening" refers to the size of a country’s financial services sector relative to its entire economy. Georgieva notes that, on one hand, developing countries benefit from the growth of their undeveloped financial sectors as small businesses and ordinary households gain access to credit and saving and insurance products.

The sustained growth in the financial sectors of China and India during the 1990s, for instance, paved the way for enormous economic gains in the 2000s. This, in turn, helped in lifting a billion people out of poverty.

On the other hand, the IMF’s latest research shows there’s a point at which financial deepening is associated with exacerbated inequality and less-inclusive growth. Many factors contribute to inequality, but the connection between excessive financial deepening holds across countries, she says.

Why is too much "financialisation" of an economy a bad thing? "Our thinking is that while poorer individuals benefit in the early stages of deepening, over time the growing size and complexity of the financial sector end up primarily helping the wealthy.

"The negative impact is especially visible where financial sectors are already very deep. Here, complicated financial instruments, influential lobbyists, and excessive compensation in the banking industry lead to a system that serves itself as much as it serves others."

The US has one of the most diversified economies in the world (it has a lot of everything). And yet, in 2006, financial services firms comprised nearly a quarter of the S&P500 share index and generated almost 40 per cent of all profits. (Read that again if it doesn’t amaze you.) Obviously, this made the financial sector the single biggest and most profitable part of the whole sharemarket.

Does that strike you as out of whack? What happened next – the global financial crisis and the Great Recession – tells us that excessive financial sectors increase the risk of financial instability and collapse.

The painfully slow recovery from that episode of financial crisis was the defining issue of the past decade. Research shows that, on average, a country’s financial crisis leads to a permanent loss of output (gross domestic product) of 10 per cent. This can cause a lasting change in the country’s direction and leave many people behind (as the Americans, with their opioid and middle-aged male suicide crises, know only too well).

The IMF’s latest research shows that inequality tends to increase before a financial crisis, suggesting a strong link between inequality and financial instability. But also, of course, the subsequent recession usually leads to a long-term worsening in inequality.

Much effort has been made since the global financial crisis to make the banks more stable and better regulated. But no one imagines this guarantees there couldn’t be another major crisis.

Georgieva says financial stability will remain a challenge in the decade ahead – for all the usual reasons, but also for "climate-related shocks". "Think of how stranded assets [such as now-unviable coal-fired power stations or coal mines] can trigger unexpected loss," she says. "Some estimates suggest the potential costs of devaluing these assets range from $US4 trillion to $US20 trillion."

The private sector and the banking industry, not just governments, have a critical role to play in making the financial system more stable, she says. That’s certainly the case when it comes to the climate’s effect on financial stability.

"The financial sector can play a critical role in moving the world to net zero carbon emissions and reaching the targets of the Paris agreement. To get there, firms will need to better price climate change impacts in their loans.

"Last year, climate change claimed its first bankruptcy of an S&P500 company. It is clear investors are looking for ways to adapt. If the price of a loan for an at-risk project increases, companies may simply decide the money for the project could be better spent elsewhere."

What has stopping climate change got to do with inequality? If we don’t, the consequences will fall hardest on the world’s poor (and Australians).

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RBA should stop pretending there's any more it can usefully do

Every institution – even, as we’ve learnt to our sorrow, the Christian church – is tempted to put its own interests ahead of its duty to the greater good. Now it’s time for the Reserve Bank to examine its own conscience. If it cuts interest rates again in a fortnight’s time, in whose interests will it be acting?

Many of the Reserve’s immediate customers in the financial markets expect it to cut the official interest rate at its meeting early next month and then again a few months later, at which point the rate will be down to its "effective lower bound" – 0.25 per cent – and it will be time for it to move to using purchases of government bonds to lower the risk-free rate of interest more widely in a program of "quantitative easing".

That’s what its market customers expect of it and it will be tempted to comply, showing it’s still at the wheel, in charge of steering the economy, doing all it can to get things moving and keeping itself at the centre of the macro-economic action.

What could be wrong with that? Just that it’s unlikely to do any good, and could do more harm than good. It’s hard to see that yet another tiny interest-rate cut will do anything of consequence to stimulate spending.

Rates are already so exceptionally low it’s clear that it’s not the cost of capital that’s making businesses reluctant to invest in expanding their production capacity. Whatever their reasons for hesitating, cutting rates further won’t change anything.

Moving to households, the record level of household debt does much to discourage them from borrowing to buy goods and services and so boost economic activity. Interest-rate movements mainly affect discretionary spending on household durables (cars, white goods, lounge suites etc), but sales of these are in the doldrums despite already super-low rates. So, again, another cut is unlikely to change that.

In justifying recent rate cuts, the Reserve has relied heavily on the expected consequent fall in our exchange rate, which should stimulate the economy by making our export and import-competing industries more price competitive internationally.

And the reverse is also true: if we leave our rates well above the low levels of the big advanced economies, the dollar will appreciate and make our industries less price competitive. However, that argument’s of little relevance by now, and we shouldn’t be encouraging a beggar-thy-neighbour game of competitive devaluations.

But even if further rate cuts, and quantitative easing after that, will do little to boost demand, surely they couldn’t do any harm? Don’t be too sure of that. They’d hurt those who rely on interest income from financial investments – though bank interest rates could hardly fall any further.

Speaking of banks, the closer interest rates get to the floorboards, the more their profits are squeezed. If you don’t see that as a worry, you should: when lending becomes unprofitable banks become reluctant to lend. Sound good to you?

There may also be some truth in the argument that whereas in normal times news of an interest-rate cut boosts the confidence of consumers and businesses, at times like this they’re a sign the economy isn’t travelling well and new commitments should be delayed.

But here’s the biggest reason further rate cuts would do more harm than good: the clear evidence that, since the cuts began and prudential supervision was relaxed, house prices in Melbourne and Sydney have resumed their upward climb.

This is an appalling development. Getting our households even more heavily indebted is a cheap price to pay for scraping the last bit of monetary stimulus off the bottom of the barrel? Making first-home ownership even more unaffordable for our young people is just something we have to live with?

The one thing we know is that while "monetary policy" has lost its ability to stimulate demand for goods and services, its ability to stimulate demand for assets - such as houses, commercial property and shares - most of it fuelled by rising debt, continues unabated.

When in the 1970s we switched from using the budget to using interest rates to manage demand, we little realised that the serious side-effect of monetary stimulus was rising asset prices and rising debt.

Essentially, Australians buy and sell our houses among ourselves, bidding up the price of that little-changing stock of houses. Then we tell ourselves we’re all getting richer. Why is this anything other than damaging self-delusion? Why should the Reserve Bank be one of its chief promoters?

It’s time for Reserve governor Dr Philip Lowe to stop doing more harm than good and turn the management of demand back to the people we elected to run the economy.

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Your antidote to Frydenberg’s budget-update talking points

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Our leaders slowly come to grips with a different economy

The beginning of economic wisdom is to understand that the advanced economies – including ours – have stopped working the way they used to and won’t be returning to the old normal.

Second in the getting of wisdom is to understand that economists are still debating why the economy is behaving so differently – so poorly - and what we can do about it.

Last week Reserve Bank governor Dr Philip Lowe gave a speech to a conference of central bankers in Wyoming revealing his acceptance that, as he put it, the economic managers are having to “navigate when the stars are shifting”.

And Treasurer Josh Frydenberg gave a speech on Australia’s productivity challenge, which offered the Morrison government’s first acknowledgement that maybe not everything in Australia’s economic garden is rosy.

The shifting “stars” to which Lowe alluded were economists' estimates of the rate of full employment and the equilibrium real interest rate – both of which have moved downwards. He said that economists have become very good at developing explanations for why this has happened.

“Even so, the reality is that our understanding is still far from complete about what constitutes full employment in our economies and how the equilibrium interest rate is going to move in the future,” he said.

He offered two likely explanations for why the stars had moved. First, major changes around the world in the appetite to save and to invest. People were saving more despite low interest rates, and were borrowing less to fund physical investment despite low interest rates.

On the saving side, these changes were linked to demographics (the ageing population), the rise of Asia (which saves a lot) and the legacy of too much borrowing in the past.

On the investment side, the links were to slower productivity improvement and “importantly, increased uncertainty and a lack of confidence about the future”.

The second major change was an increased perception of competition as a result of globalisation and advances in technology. “More competition means less pricing power, for both firms and workers,” he said.

In all this he gave the lie to the latest line that our economy is going fine, it’s just the threat from abroad that’s the problem. Nonsense. Our economy is slowing to a crawl because of weak real wage growth. The external threat just makes it worse.

After giving a learned account of our slower rate of productivity improvement (and acknowledging that it’s happening throughout the developed world), Frydenberg admitted that business investment spending was not as strong as it ought to be.

But then he stepped into the lions’ den. Rather than returning capital to shareholders, business needed to back itself – make its own luck – by using its strong balance sheet (and exceptionally low interest rates) to “invest and grow”.

The fury of the righteous descended upon him, with the business media in full cry. It really is amazing the way business people boast about the centrality of the private sector to the economy and its success, but refuse to accept any responsibility for its outcomes.

Any weaknesses in the economy are solely the government’s fault, and feel free to criticise it uphill and down dale – not to mention using problems in the economy as a pretext for rent-seeking. Don’t even think that the performance of business could be less than blameless. Who do you think invented the term “all care but not responsibility”?

Even so, I fear business is right in protesting that the reason it’s not investing is that, with demand so weak, it can’t see how expanding its production capacity could be profitable.

This problem began long before Trump started playing his crazy trade-war games, but there’s little doubt that the uncertainty he has created is adding to firms’ reluctance to commit to major investment projects. And the more people delay their investment plans until the future is clearer, the greater the risk that conditions deteriorate and the investment never gets done.

Dr Mike Keating, a former top econocrat, argues that productivity improvement is weak because business investment spending is weak. It’s when businesses install the latest and best machines and systems that new technology is diffused through the economy, lifting productivity.

So when weak wage growth leads to weak growth in consumption, you don’t get enough business investment and, hence, slower productivity improvement.

Government intervention to improve workers’ bargaining power may help speed up the flow of income through the system, but Keating believes a lasting improvement will come mainly by making education and training more effective in helping workers adapt to and adopt new technologies.

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If you think surpluses are always good, prepare for great news

Don’t look now, but Australians’ economic dealings with the rest of the world have transformed while our attention has been elsewhere. Business economists are predicting that, on Tuesday, we’ll learn that the usual deficit on the current account of the balance of payments has become a surplus.

If so, it will be the first quarterly surplus in 44 years. If not, we’ll come damn close.

You have to be old to appreciate what a remarkable transformation that is. Back in the 1980s we were so worried about the rise in the current account deficit and the foreign debt that it was a regular subject for radio shock jocks’ outrage. They knew nothing about what it meant, but they did know that “deficit” and “debt” were very bad words.

By the 1990s, Professor John Pitchford, of the Australian National University, had convinced the nation’s economists that the rises were a product of the globalisation of financial markets and the move to floating exchange rates, and weren’t a big deal.

By now, economists have become so relaxed about the “balance of payments” that it’s rarely mentioned. So news of the disappearing deficit will be a surprise to many.

To begin at the beginning, the balance of payments is a summary record of all the monetary transactions during a period that have an Australian business, government or individual on one end and a foreign business, government or individual on the other.

The record is divided into two accounts, the current account and the capital and financial account.  The balance on the current account is always exactly offset by the balance on the capital account. If one has a deficit of $X billion, the other must have a surplus of $X billion, so that the balance of (international) payments is in balance at all times.

As a Reserve Bank explainer says, the current account captures the net flow of money resulting from our international trade. The capital account captures the net flows of financial capital needed to make all the exporting, importing and income payments possible. These flows during the period change the amounts of Australia’s stocks of assets and liabilities at the end of the period.

To work out the balance on the current account, first you take the value of all our exports of goods and services and subtract the value of all our imports of goods and services, to get the balance of trade.

Then you take all the interest income and dividends we earnt from our investments in foreign countries and subtract all the interest and dividend payments we make to foreigners who’ve lent us money or invested in our companies.

The result is the “net income deficit” which, after you’ve added it to the trade balance, gives you the balance on the current account. As Michael Blythe, chief economist at the Commonwealth Bank, noted this week, that balance has been a deficit for 133 of the past 159 years.

Why do we almost always run a deficit? Because our land abounds in nature’s gifts, and there’s great opportunity to exploit those gifts and earn wealth for toil. What we’ve always been short of, however, is the financial capital needed to take advantage of all the opportunities.

Moving from poetry to econospeak, for pretty much all of our modern history Australia has been a net importer of (financial) capital, as Reserve deputy Dr Guy Debelle said in a revealing speech this week.

Because we don’t save enough to allow us to fully exploit all our opportunities for economic development, we’ve always drawn on the savings of foreigners – either by borrowing from them or letting them buy into Australian businesses.

Blythe says “the shortfall reflects high investment rather than low saving. By running current account deficits, we have been able to sustain a higher [physical] investment rate than we could fund ourselves. Economic growth rates and living standards have been higher than otherwise as result.”

True. And Debelle agrees, noting that Australia’s rate of saving is on par with many other advanced economies. (So don’t let any silly pollies or shock jocks tell you a current account deficit means we’re “living beyond our means”.)

Be sure you understand this: a current account deficit is fully funded by the corresponding surplus on the capital account, which represents the amount by which we needed to call on the savings of foreigners because the nation’s physical investment in new housing, business plant and structures, and public infrastructure during the period exceeded the nation’s saving (by households, companies and governments) during the period.

But if all that’s true, how come we’re expecting a current account surplus in the June quarter? It’s a combination of long-term changes in the structure of our economy that have been working to reduce the deficit, and temporary factors that may push us over the line.

Debelle says that between the early 1980s and the end of the noughties, the deficit averaged the equivalent of about 4 per cent of gross domestic product. But it’s narrowed since 2015 and is now about 1 per cent of GDP.

Most of this change is explained by the trade balance. It averaged a deficit of about 1.25 per cent of GDP over the three decades to 2015, but since then has moved into surplus. It hit record highs during the three months to June, totalling a surplus of $19.7 billion for the quarter.

The resources boom has hugely increased the quantity of our minerals and energy exports, and there’s been a temporary surge in the price we’re getting for our iron ore. At the same time, the end of the investment phase of the resources boom has greatly reduce our imports of mining and gas equipment.

The rise of China and east Asia also means protracted strong growth in our exports of education and tourism.

At the same time, the net income deficit has widened a little in recent years but, at 3.4 per cent of GDP, is in the middle of its range since the late 1980s.

The marked reduction in the current account deficit overall means that Australia’s stock of net foreign liabilities (debt plus equity in businesses) peaked at 60 per cent of GDP in 2009 and has now declined to 50 per cent. But that’s a story for another day.

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We're edging towards admitting we're in secular stagnation

At least since 2012, Treasury, the Reserve Bank and successive governments have assured us a return to the old normal of strong economic growth, high wages and low unemployment wasn’t far off. But last week big cracks emerged in governor Philip Lowe’s optimistic facade.

In all the years since then, our estimated time of arrival at the promised land has been repeatedly pushed out a year or so. On the face of it, that’s what the Reserve did yet again in its quarterly statement on monetary policy.

Forecast growth in real gross domestic product over the year to December was cut again, to 2.5 per cent (down from a predicted 3.25 per cent last November), but not to worry. By June next year it will have bounced back to trend growth of 2.75 per cent. Happy days.

But that hardly fits with Lowe’s rhetoric during his appearance before the Parliament’s economics committee on Friday. He devoted a surprising amount of time to discussing the Reserve’s possible response in the "unlikely" event that the economy stayed weak.

His own forecasts imply the need for two further rate cuts, taking the official interest rate to just 0.5 per cent.

And if it got to 0.5 per cent, the Reserve would consider some form of "quantitative easing", he said, probably lowering the longer-term risk-free rate of interest by buying government bonds and paying for them simply by crediting the sellers’ accounts at the Reserve (the modern equivalent of "printing money").

What a long way we’ve come from Lowe’s line at the first official rate cut in June. The outlook for the economy was fine, he said then, it was just that the Reserve had redone its sums and realised that, with a bit of extra monetary stimulus, it could get the unemployment rate down to 4.5 per cent without causing any problem with inflation.

Actually, when your look deeper than the latest headline forecast of an early return to trend growth in the economy, you find that, by the end of 2021, wages still wouldn’t be growing any faster than they are now. Happy days?

Larry Summers, eminent academic economist and a former US Treasury secretary, began arguing that the American and other advanced economies were caught in "secular stagnation" – a protracted period of weak growth – in 2013. Since then, many economists have agreed, though they still debate its causes.

So far, however, those naughty, negative SS-words have never crossed the lips of any Treasury or Reserve official, let alone any politician. But on Friday Lowe gave us a detailed account of the phenomenon that’s both the key explanation for, and the main evidence of the existence of, secular stagnation: the amazingly low level of world real interest rates.

"There is a structural thing going on as well, and I think it is really important we understand this. At the moment, right around the world, there is an elevated desire to save and a depressed desire to invest," Lowe said.

"You see a lot of global savings because of demographic factors [population ageing]. There is a lot of saving in Asia [because they don’t have a social security system]. Many people borrowed too much in previous times and now they’re having to repair their balance sheets, so they want to save a bit more [paying off debt is a form of saving].

"There is a lot of desire to save and, right at the moment, not many firms want to invest. The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new [physical] capital, savers are going to get low returns.

"The way the financial system works is that the central banks are the ones who set the interest rates, but we’re really responding to this deep structural shift in the balance between saving and investment right around the world and there’s not much we [central bankers] can do about that."

Just so. Two points. First, the "deep structural shift" began even before the global financial crisis. It’s not just the product of recent worry about a trade war – although that does provide econocrats and politicians with a convenient excuse to shift from their she’ll-be-right rhetoric.

Second, unprecedented low interest rates are a symptom of a deeper problem: aggregate (total) demand is insufficient to take up aggregate supply. That’s why growth is weak and will stay weak until a solution is found.

Where’s the additional demand to come from? Not from lower interest rates, obviously. Which leaves the budget. Now’s the time to rebuild public infrastructure and do other useful things we thought we couldn’t afford.

Anyone who still thinks now’s a good time to run budget surpluses just doesn’t get it. It’s now neither sensible nor possible. Wake up, Josh.

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Election hype about strong growth now back to grim reality

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Election competition over infrastructure is too costly

The popular view of infrastructure is that we don’t have nearly enough of the stuff, so the more we spend the better for the economy. The sad reality is that every year huge amounts of taxpayers’ money are wasted on infrastructure – and much of the damage is begun in election campaigns.

This is not to deny that well-chosen and executed infrastructure projects contribute significantly to improving the productivity of the economy – its ability to produce more goods and services per unit of inputs of economic resources.

It may even be true that we have a backlog of projects we should be getting on with. But that doesn’t mean we’re not wasting a shedload of money – mainly by building the wrong things in the wrong places.

Sadly, in our messy world, shortages of infrastructure can exist side by side with waste and extravagance. The more money we waste, the bigger the shortages.

Why does this happen? Often because good economics gets trumped by expedient politics. Often what’s good economics lacks sex appeal – spending enough each year to ensure roads and rail lines are well maintained, for instance – whereas politicians are irresistibly attracted to projects that are new, flashy and appeal to the unthinking (radio shock jocks, for example) as just what they think we need.

And because political parties mostly want to use the announcement of new spending projects to win voters’ approval in those electorates they might lose or could win.

That’s why election campaigns are when the seeds of later waste are sown. You think of something that will sound nice, pick a price tag that sounds big but not too big, travel to the right town, don hi-vis jacket and hard hat, wait till the media cameras arrive, make the grand promise – and then wait till you’re elected or re-elected to get the bureaucrats to "do the paperwork" – estimate how much it really will cost and work up some sort of "business case" showing the project’s benefits will exceed its costs.

This, of course, is just the opposite of how you’d go about ensuring every dollar spent was well-spent. Someone suggests a project, you put it to the test. What exactly is the problem you’re trying to solve? How does it rank in importance against all our other problems?

The particular project you’re examining is probably just one way of solving the nominated problem. What are the other options? You compare the various options by making the best measurement you can of each one’s costs and expected benefits to the community, then pick the option where the benefits most exceed the costs. (There may well be some unquantifiable considerations that also need to be taken into account.)

By this point you ought to have a well-informed estimate of the chosen project’s monetary cost. That estimate should allow for the likelihood that not everything will run according to plan.

According to Hugh Batrouney, then of the Grattan Institute, last year the federal government proposed rail links to the (future) Western Sydney airport and to Tullamarine airport. (Note the symmetry. If Sydney’s getting something, better have something similar for Melbourne.)

At the time of announcement, neither project had a developed business case. But the opposition was quick to support the government’s proposal.

Trouble is, a government study found that Western Sydney won’t need a rail link until 2036 at the earliest. In the case of Melbourne’s rail link, the project’s route hasn’t been resolved, let alone its costs, ticket pricing structure or potential benefits.

And Infrastructure Victoria said upgrading airport bus services should be investigated before spending on a rail link – which, in any case, would be much more expensive and couldn’t be delivered for at least 15 years.

Grattan’s healthcare expert, Dr Stephen Duckett, says that when federal politicians promise to build new hospitals in particular places – as both sides have done in this campaign – they interfere with the state governments’ responsibility to plan where the next hospital development should be, so as to ensure access to public hospitals is adequate throughout the state.

Next, take the plan announced in this year’s budget for a national “commuter car park fund” costing $500 million over 10 years, intended to make it easier for people in the suburbs to drive to their local train station.

A group of transport and urban planning experts from the University of Melbourne has written on The Conversation website that half a bil may sound like a lot, but it probably buys only about 30,000 new parking spaces, serving maybe 45,000 extra commuters. That’s just 4 per cent of the Australians who travel to work by public transport.

And, they note, there’s no guarantee the extra parkers would be people who’d no longer go to work by car. Studies suggest a lot of them would be people who formerly walked, cycled or bussed to a different station (where the parking spots are always taken).

The experts suggest it might be better to spend the $500 million on more frequent bus services to stations, and use the car parks for more valuable purposes.

Marion Terrill, Grattan’s transport infrastructure expert, says Labor’s most important promises aren’t the sexy stuff about electric vehicles, but one to ensure Infrastructure Australia assesses projects before the decision to invest in them, and to make the assessed business cases public. Doesn’t quite fit with some of Labor’s latest project promises, however.

"It would be a significant improvement if whichever party wins government next month were to commit to, and follow through on, careful assessment of transport gaps and problems, consideration of the various feasible solutions, and rigorous evaluation of the preferred approach," she concludes.

"And it’s not enough just to do this; it should be done in public." Amen to that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The question comes from a reader.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Weak competition may be key to economy's problems

If you think there isn’t enough competition between the big four banks, the big three power companies, the big two airlines, the big two supermarkets and in a lot of other industries, Andrew Leigh agrees with you.

He has evidence the “concentration” within our industries is increasing. What’s more, he thinks it could be part of the reason we – and the rest of the developed world - are suffering from slower economic growth and productivity improvement.

Dr Leigh is a Harvard-trained former economics professor at the Australian National University and now the federal opposition’s spokesman on competition.

In a speech this week, he said it’s hard to think of many Australian industries these days that aren’t dominated by just a few behemoths.

“Whether it’s Coles or Woolworths, Lion or Carlton, Caltex or BP, Medibank Private or BUPA, Qantas or Virgin – it seems consumers don’t have a great deal of choice where they get their goods and services from,” he says.

A standard measure of concentration judges an industry to be concentrated if the top four players control more than a third of the market.

With the ANU’s Dr Adam Triggs, Leigh calculated this measure for 481 Australian industries, finding that half of them were concentrated.

“In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and beer, the biggest four firms comprise more than 80 per cent of the market,” Leigh says.

(Of course, concentration isn’t a foolproof way of measuring the degree of competition. For instance, the two big newspaper companies – one of which owns this august organ – face competition from a huge number of digital news providers. And competition from more specialised retailers makes it seem department stores’ days are numbered.)

Economies of scale mean our small market is more concentrated than big economies. Leigh says our commercial banks, petrol retailers and liquor retailers are more than three times as concentrated as those in the US.

Our department stores, airlines, soft drink manufacturers and cardboard box makers are all significantly more concentrated.

As a general rule, greater market concentration gives the small number of big firms increased “market power” – ability to influence the prices they charge. It may also give them power to extract lower-than-reasonable prices from their suppliers.

Leigh notes American evidence that big companies in concentrated markets were almost 20 per cent slower in paying their suppliers than small companies were.

As to anti-competitive behaviour more generally, Rod Sims, boss of the Australian Competition and Consumer Commission, said recently that “many well-known and respected major Australian companies have admitted, or been found, to have breached our competition and consumer laws. These same companies regularly [claim] to put their customers first”.

In reaction to the growing market power of our big firms, Leigh says, governments have added civil fines for unconscionable conduct, criminalised the forming of cartels, and increased penalties for breaches of consumer protection laws.

Another problem is poor regulation of monopoly businesses that have been privatised. “Whether it is a port or an airport [or, he could have added, an electricity transmitter], it is important that governments ensure that the gains to taxpayers from selling an asset aren’t offset by the losses to consumers from higher prices,” Leigh says.

He notes that, in 2008, the ACCC received about 34,000 complaints by consumers. By 2016, it was closer to 60,000.

But why are Australian markets so heavily concentrated, and probably becoming more so? Partly because of a decline in the rate at which new businesses are being created: from an average annual rate of 16 per cent before 2010, to 13 per cent since then.

But also because of a big increase in company mergers and acquisitions. Between 1992 and 2017, their number increased almost five-fold from 394 a year to 1960 a year.

An international study has found that, in Oz, the average prices charged by large, stock exchange-listed firms were close to their marginal cost of production in 1980, and stayed there until the late ‘90s.

By the early 2000s, however, they’d risen to 40 per cent above the marginal cost. By 2010, they were 50 per cent above and by 2016 they were 60 per cent above.

In the US, there’s growing evidence that market concentration may be suppressing business investment. One study found that 80 per cent of the decline in US investment since 2000 can be explained by less competitive markets and increased ownership of shares by institutional investors.

As top US economists Paul Krugman and Larry Summers have said, the odd combination of high company profits but weak investment (at a time of low interest rates and high share prices) is just what you’d expect to see if market power was increasing.

Leigh says weak competition may help explain why wage growth is weak here and in other developed countries. “Wages are fundamentally driven by the competition between firms for workers. Less competition means lower wages,” he says.

A British study by Professor Stephen Nickell, of Oxford, found that a 25 per cent increase in market concentration leads to a 1 per cent fall in productivity.

An American study of detailed data at the firm level for all US manufacturing industries, found that mergers were associated with increased price mark-ups, but there was little evidence they boosted productivity.

Leigh concludes that “Australia has a competition problem: there is not enough of it. Our industries are concentrated. Anti-competitive conduct is rife. Our consumers are treated poorly.

Our markets show the signs of weak competition. "There has been a massive increase in mark-ups among large listed firms over the past two decades.”

What to do about it? We shouldn’t adopt an "overly permissive" approach to company mergers. We should take “a more circumspect approach to claims of [greater] efficiency when considering anti-competitive conduct”.

We should give the ACCC the investigatory powers it needs. We should ensure that penalties aren’t so small they can be treated as just a cost of doing business.

We should consider the impact of anti-competitive conduct on innovation, and recognise that unchecked market power can harm workers as well as consumers.

Sounds to me like an election manifesto.

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The long run is now, and bills are arriving

It’s easy to take Keynes’ dictum that “in the long run we’re all dead” out of context. When you do, you can come badly unstuck - as the banks and insurance companies are discovering.

In case you’ve ever wondered, economists see the short term as being for a year or two, the medium term as about the next 10 years, and the long term as everything further away than that.

See the point? If the long run is only 10, 15, 20 years from now, you won’t be dead. Nor will most of the people around you at work. The economy will still be alive and kicking in 20 years’ time and, in all probability, so will your company.

In which case, spending too many years making short-sighted decisions could leave you looking pretty bad if you haven’t had the foresight to skip town.

For many years people have bemoaned “short-termism” – the tendency to favour quick results over longer-term consequences. To go for the flashy at the expense of patient investment in future performance. To do things where the benefits are upfront, and the costs much later, even when the initial appearance of success actually worsens the likely outcomes down the track.

Short-termism seems particularly to have infected big business. Listed companies are under considerable pressure to ensure every half-year profit is bigger than the last.

This pressure comes from the sharemarket, from “analysts”, but more particularly from institutional investors – the super funds, banks and insurance companies that manage the savings of ordinary people, invested mainly in company shares.

Although the “instos” don’t actually own many of the shares they control, they represent the shares’ ultimate owners (you and me) by continuously pressuring companies to get higher and higher profits – which will lead to ever-higher share prices.

It’s long been alleged that the short-termism the sharemarket forces on big business – to which companies have responded by trying to align executive pay with profits and the share price – has led firms to underinvest in projects with high risks or long payback periods.

If so, this fits with former senior econocrat Dr Mike Keating’s thesis that the advanced economies’ weak growth in activity, productivity and real wages is explained mainly by a protracted period of weak investment.

But the banking royal commission is a stark reminder to a lot of companies, the sharemarket and shareholders that after years of short-sighted, corner-cutting, even illegal behaviour, the long run has arrived, we’re all still alive and there are bills to be paid.

Those bills will take many forms. It’s likely some of the borderline customer-harming behaviour will become illegal, and so won’t be available to keep profits heading onward and upward every half-year.

Banks and insurance companies found to have mistreated their customers in ways that are outright illegal, will face big bills for restitution.

But probably the biggest bill comes under the heading of “reputational damage”. As Australian Competition and Consumer Commission boss Rod Sims reminded us in a speech, most companies spend much time and money promoting and protecting their “brand”.

A highly-regarded brand is money in the bank to the firm that owns it – as you see just by comparing the prices of branded and unbranded goods on a supermarket shelf. Brands engender trust – that the product is of consistently good quality and will do what it promises to do – and often social status.

But, as Sims says mildly, “bad behaviour by a company can undermine its brand reputation”.

“A key value of the royal commission has been to expose the poor behaviour of financial institutions to public scrutiny. The evidence about the conduct of AMP was particularly damning. The resulting damage to AMP’s brand reputation has been substantial.”

Sure has. And that damage to AMP’s reputation and likely future profitability has seen its share price fall by 35 per cent since its first day in the witness box in April.

Sims says one way to discourage misbehaviour by companies is to “identify and shine a light on bad behaviour”.

“The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours,” he says.

Get it? The regulators are wising up, and in future will do more to name and shame offenders – to diminish brand reputation – so as to discourage short-sighted, take-no-thought-for-the-morrow behaviour. To move firms from the short run to the long run.

So far, the big four banks’ share prices have fallen only a per cent or two since the release of the commission’s interim report. But my guess is they have a lot further to fall once we see the full price they’ll be paying for past short-run profit-maximising behaviour, and how much less scope there’ll be for such behaviour “going forward”.

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A beautiful set of numbers gets you only so far

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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“Lags”: one reason economists keep getting it wrong

I’m compiling a short-list of the main things economics teaches us. One is: economic developments take longer to affect the economy than you’d expect. Economists call these delays “lags”. That there are so many of them – and their lengths keep changing – does a lot to explain why economists’ forecasts are so often wrong.

Last week Dr Luci Ellis, an assistant governor of the Reserve Bank, gave a prestigious lecture at the Australian National University devoted solely to the problem of lags.

Ellis says a lag occurs in any instance where time passes between when an activity is initiated and when it has its impact. “Almost all economic phenomena involve lags,” she says. And she’s divided them into three types.

The first is “process lags” – the time it takes for any production process to be finished. The time it takes to build a house, for instance.

This includes the time it takes to make a decision (say, about whether to build the house). Particularly where decisions are made by governments or big businesses, this can take some time. You may have to gather information, do analysis, prepare documents, convene meetings and complete review processes before you’ve decided.

Economists often compare the strengths and weaknesses of the two main instruments they use to manage the macro economy: monetary policy (the manipulation of interest rates) and fiscal policy (the manipulation of government spending and taxation in the budget).

An important difference between the two is that decisions to change interest rates can be made quickly and easily. The Reserve Bank board meets monthly, decides, has lunch and then announces its decision.

By contrast, decisions to change taxes or government spending require a lot more preparation and debate by the cabinet. Then there can be a delay of weeks or months before legislation is passed by parliament and put into effect. Sometimes the firms affected have to be given notice to prepare for the change.

The trick is, once decisions have taken effect, changes to taxes and government spending usually affect the economy more quickly than do changes in interest rates, for which the lags are “long and variable”. The full effect of a rate change could take up to three years.

Another example of decision lags is the local government approval process for building projects, which can take months.

An important case of process lag is known as the “hog cycle”. A farmer takes his pigs to market, discovers prices are high, so decides to grow more pigs.

Trouble is, this takes a few years. And pork prices have fallen back long before the pigs are ready. But when they are, the farmer still has to sell them – which depresses prices even further.

Hog cycles occur in many industries where the long delay between deciding to produce something and getting it finished means demand and supply for the product are never in sync. This causes prices to boom when demand exceeds supply, then bust when supply exceeds demand.

It’s happening now with new apartments. Demand has fallen off, but buildings begun a year or two ago are still adding to supply, putting downward pressure on prices.

The hog cycle – the long lag between rising mineral commodity prices on world markets and our new mines and gas plants finally coming on line – does much to explain the wringer the resources boom and bust has put our economy through over the past decade and a half.

Ellis’s second category is “stock-flow lags”. A stock is the amount of something at a particular point in time – say, the money in a bank account at June 30. A flow is the amounts flowing in and out of the account during a period of time. The difference between the stock at the start of a year and the stock at the end of the year will be the flows in and out.

This is important in housing, where the number of newly built homes in a year is a small fraction of the stock of all existing homes (especially after you allow for the homes that were knocked down during the year).

So if the stock of homes has fallen far short of the number of homes needed, it can take longer than you’d expect to make up the gap.

Historically, macro-economics has tended to focus on flows and ignore stock levels. But Ellis says “if you aren’t taking stocks and flows seriously you probably don’t have a realistic model of the economy”.

Her third category is “learning lags”. This is the time it takes individuals – or the whole economy – to realise economic relationships have changed and to change their behaviour accordingly.

These lags can vary because some people are quicker on the uptake than others. But also because how long it takes before you can conclude a change has occurred depends on many factors: the “noisiness of the data” (the way monthly or quarterly statistics jump around for no apparent reason) and how open you are to changing your views about how things work.

This takes us to the common case of economists having to decide whether some problem is “cyclical” (temporary) or “structural” (lasting).

Ellis says our knowledge that lags often vary in length should make us slow to conclude that the economy’s structure has changed, but human nature seems to push us the other way. It’s too easy to convince ourselves “this time is different” when usually it isn’t.

The big debate between economists at present fits this pattern: is the weakness in wage growth just the product of longer lags than we’re used to in the recovery phase, or has there been some change in workers’ bargaining power that needs correcting?

Whatever the answer, you see how ubiquitous lags are in the economy, how their length can change, how they contribute to the ups and downs of the business cycle, and how hard they make it to be sure where we are now, let alone where we’re headed.

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It's weak investment that’s crimping productivity and prospects

US President Donald Trump said his big cut in company tax would do wonders for the economy. It’s certainly done wonders for company share buybacks. Which may be a clue to why America’s rate of improvement in productivity is so pathetic.

The continuing puzzle for the rich world’s economists is explaining the unusually weak rate of productivity improvement throughout the advanced economies. In Oz we’re not doing so badly, though we used to do a lot better.

Productivity measures the quantity of the economy’s (or just a particular business’s) output of goods and services relative to its inputs of raw materials, labour and capital equipment.

Productivity improves when a given quantity of inputs to the production process is able to produce a greater quantity of goods and services than before. It’s most commonly measured by reference to just one of the inputs, labour. So it’s output per unit of labour, usually per hour worked.

You still see people assuming that some politician or business person saying we need to increase our productivity is really saying we should work harder.

Wrong. The main way to make workers more productive is to give them more or better machines and structures to work with. That is, to invest in more physical capital.

Increasing workers’ education and training – “human capital” – also makes them more productive: better able to work with more sophisticated machines, to think of ways to make machines do better tricks, and think of more efficient ways to organise the work that’s done in a mine, farm, factory, office or shop.

Often, what the better machines and ways of organising things are intended to do is further exploit economies of scale.

Point is, it’s the almost continuous improvement in productivity, year after year, that does most to explain why we are so much more prosperous than our ancestors.

Hence economists’ consternation over the rich world’s unusually weak rate of productivity improvement for the past decade or so, and their search for explanations.

The most popular explanation among them, advanced by Professor Bob Gordon, of Northwestern University in Illinois, is one the rest of us would find hard to credit.

It’s that the present information and communication technology revolution isn’t transforming the economy to the extent that earlier general-purpose technologies – such as electricity, the internal combustion engine, the automated production line, and even running water and indoor toilets – did.

A different, but probably only partial, explanation is that much of the benefits coming from the digital revolution are going unrecognised by a system of national accounts (gross domestic product) designed to measure the industrial economy.

A month ago, I argued that another partial explanation was that the innovations of too many of our brightest and best brains were being used for nothing more productive than finding new ways to get around inconvenient laws and taxes.

Then there’s the notion of “secular stagnation” from Professor Lawrence Summers, of Harvard. Among other things, it says that the ageing of the population and very slow population growth in the rich countries (though not in Australia) means they face a future of weaker growth in consumer spending, thus diminishing the incentive for firms to invest in expansion.

Which links to the much more straightforward – and thus persuasive – explanation offered by former senior econocrat Dr Michael Keating and Professor Stephen Bell, of the University of Queensland, in their book Fair Share.

They argue that the key to productivity improvement is investment – particularly investment by businesses – and the spur to business investment is economic growth and the expectation it will continue.

Innovation is fine, but the main way some new technology is “diffused” throughout the economy is by firms replacing their old machines and structures with new ones that incorporate the latest advances.

Investment is also an essential part of the continuous process of change in the industry structure of the economy, where changes in consumers’ preferences and other developments cause some industries to contract while others expand and new industries emerge.

If firms are reluctant to invest, you don’t get enough expansion to offset the contraction.

What is businesses’ main motive for investing? Their expectations of increased demand for whatever they’re selling, Keating and Bell say.

But this is where the global financial crisis and the Great Recession come in. It was by far the deepest recession the developed world has suffered since the 1930s. The crisis was 10 years ago next month, and the recovery has been particularly weak.

Things in America may look pretty good today – unemployment is very low, profits are high and the economy grew at an annualised rate of 4.1 per cent in the June quarter.

But all is not as it seems. The latest amazing growth is the product of fiscal stimulus from Trump's income tax cuts and won’t last.

Low unemployment conceals a marked fall in the proportion of the population (particularly less-skilled middle-aged men) participating in the labour force.

Many people who lost their job during the recession have given up looking for another one. Their skills have “atrophied” – wasted away – and are a loss of human capital to the US economy.

Keating and Bell show that business investment fell more in this recession than previous ones and has been remarkably slow to recover.

Seeing no great reason to expand, US businesses have been using their profits not to reinvest but to pay big dividends and to buy back their shares on the stockmarket, hoping to boost their price. Trump’s company tax cut has pushed buybacks to record levels.

Get it? Weak economic growth in the advanced economies is discouraging businesses from investing. Weak investment means weak productivity improvement and skills atrophy. But weak productivity means more weak growth.

The authors note that business investment in physical capital, and growth in human capital, are key drivers of the economy’s “potential” growth rate in future years. Neglect them and the economy loses its ability to speed up.

The Organisation for Economic Co-operation and Development calls this a “low-growth trap”. Not an encouraging thought.

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