A dose of reality for people who profit from doom

It's good news week - rumours of the impending death of the economy turn out to be greatly exaggerated. The national accounts for the June quarter provide a salutary lesson on how far popular perceptions can drift from reality.

Three months ago we were told real gross domestic product contracted by 1.2 per cent in the March quarter. This week we're told the contraction was a quarter less than that: 0.9 per cent.

That contraction was fully explained by the temporary effect of floods and cyclones. This week the temporary nature of that setback was confirmed - the economy rebounded to grow by 1.2 per cent in the June quarter.

Note that part of this rebound is purely arithmetic: had the economy not gone down in the March quarter it wouldn't have come back up as much in the following quarter. So it would be mistaken to imagine the economy was travelling at the annualised rate of 4.9 per cent (roughly, 1.2 x 4) in the quarter.

Despite the clearly temporary nature of the contraction, it fed into an increasingly negative mood about the state of the economy. The retailers were doing it tough because consumers were worried about so many things - the carbon tax, interest rates, uncertainty about the North Atlantic economies - and so were saving rather than spending.

You could see this from the way the indicators of consumer confidence kept falling. As part of this consumer caution, not many people were buying new homes.

Then there were the manufacturers doing it tough and laying off workers because of the very high dollar.

In short, the miners and the mining states might be coining it, but all the rest of us in the ''non-mining economy'' were just about stuffed. Turns out most of that was nonsense. Some of it was true - the retailers and manufacturers are doing it tough and housing activity is weak - but those three sectors account for less than 20 per cent of the economy, not the 90 per cent that is the so-called non-mining economy.

The rest we imagined. The media did its usual thing of trumpeting the bad news and playing down the good news but this fell on unusually fertile ground, to mix a few metaphors. The Gillard government's doing a terrible job, therefore the economy's stuffed. That's logical, isn't it?

This week we got a bulletin from the real world. Turns out that though real retail sales grew by just 0.3 per cent in the quarter and 0.6 per cent over the year to June, real consumer spending grew by a healthy 1 per cent in the quarter and a bang-on-trend 3.2 per cent over the year.

Huh? How did we get it so wrong? Well, we took too much notice of the retail sales figures simply because they come monthly, forgetting they account for only about 35 per cent of total consumer spending.

Retail sales cover mainly goods - what they don't cover is mainly services. In recent times our spending preferences have shifted away from goods and towards services. When that happens, the retail sales figures give you a bum steer.

Our other mistake was to take too much notice of the fall in consumer sentiment. It proved a dodgy guide to actual consumer spending. Both these things have tricked us many times before.

The punters know no better and, though it pains me to admit it, the media have a vested interest in not querying a bad-news story. But there's no excuse for the business economists - for them it's professional incompetence. Proof they're not as rational as their model assumes all of us are and not impervious to the popular perceptions around them, as their model also assumes.

This week's figures also reveal a tiny fall in the rate of household saving to 10.5 per cent of household disposable income. Though the ratio is notoriously volatile, this raises the possibility that households have got their rate of saving up to where they want it.

This, in turn, raises another point of arithmetic - it's not a high rate of saving that causes weak growth in consumer spending, it's an increasing rate of saving. Once the rate has stabilised, consumption must grow as fast as household disposable income is growing.

And despite all the phoney I-know-you're-doing-it-tough rhetoric coming as both sides of politics feed back the whinges they hear from their focus groups, the accounts confirm household income is growing particularly strongly - by a nominal 7.5 per cent over the year, way ahead of inflation.

That strong growth comes from a combination of healthy growth in employment (more household members with jobs) and somewhat excessive growth in real wages given our weak rate of productivity improvement.

Both factors are evidence most of us aren't doing it tough.

Part of the narrative of the resources boom is that growth will come more from business investment spending (as we build a lot more mines) than from consumer spending. That wasn't true this quarter. Why not? Not because business investment was weak - it wasn't - but because consumer spending was both strong and accounts for a much bigger share of GDP than investment does.

The other side of the non-mining-economy-is-stuffed proposition is that pretty much all the growth in the economy is coming from the mining sector. As a general proposition, there's no doubt the mining, mining-related and heavy construction industries are growing strongly. But, according to the accounts, that wasn't true in the June quarter. As Kieran Davies, of the Royal Bank of Scotland, has pointed out, with the output of mining proper going backwards during the quarter, the output of the so-called non-mining economy grew by 1.3 per cent, more than accounting for the growth of 1.2 per cent overall.

That's the bit people have convinced themselves is stuffed.

Why isn't mining growing? Because a lot of the flooded Queensland coalmines are still not back to production. But this, of course, is temporary. As they come back on line in the second half of this year they'll give GDP a one-off boost.

You have to be careful not to read too much into the quarterly national accounts, which are subject to frequent revision.

But you have to be even more careful not to be misled by those who cry loud and long about how tough things are. They're probably exaggerating (or being exaggerated by a bad-news obsessed media) while those who are doing fine say nothing.

Read more >>

Trust makes the world go around, honestly

What does Britain's phone hacking scandal have in common with its earlier scandal over parliamentary expenses and with the failure of several of its banks during the global financial crisis? As Jonathan Tame, of Britain's Relationships Global, has observed, all three events shake the trust the Brits can have in key institutions of their democracy. The latest scandal raises questions about the trustworthiness of the press, the government and the police.

Sometimes you don't appreciate the importance of things until you're threatened with their loss. Of nothing is that truer than trust.

''Every society is built on trust, and every person needs to be trustworthy,'' Tame says. ''Yet greater integrity is expected from politicians, the police and the media, which is why their failure to meet the public's ethical standards is so distressing.''

Why is trust so important? It's what prevents us from having to do everything ourselves. Trust is believing someone else will act correctly. It enables us to hand our children over to teachers, give our vote to a politician, relax while the pilot flies the plane, put our money in a bank account and share the roads with other motorists.

''We do these things without anxiety because we believe that the others involved share our values, will act responsibly and look after our interests,'' Tame says.

''With any loss of trust, relational capital diminishes. Society becomes poorer as more time is taken drawing up detailed contracts and regulations, more funds are spent on security, surveillance and policing, and health declines because people grow more anxious.''

Mark Scholefield prepared a study on trust for the Relationships Foundation. He says trust allows us to share information and responsibilities for our mutual benefit, while giving us the freedom to get on with our own work and life without worrying too much about the part others play.

''We probably cannot live without some degree of trust,'' Scholefield says. ''Our lives and relationships are too complex to monitor and control completely.''

Trust involves reciprocity. If I trust you, you're more likely to trust me. If you trust me, I'm more likely to live up to that trust. Assume I'm untrustworthy and I'm more likely to conform to your expectations.

But to abuse another's trust is often to end your relationship with them. You can cheat someone with impunity if you're never expecting to see them again. If you're planning to stick around, however, the best strategy is to behave in a trustworthy manner. It's intolerable not to be trusted and equally intolerable not to be able to trust the people around you.

Trust is closely linked to reputation. Whether you're a business, an employee or just a friend, it pays to build a reputation for trustworthiness and reliability. In the modern world we deal with so many people and organisations we don't know that we're often forced to rely on their reputations.

Richard Bronk, of the London School of Economics, has written that trust is crucial to the success of economic relationships such as those between managers and workers or between companies and their suppliers. And honesty is the essential lubricant to a system of exchange.

''If trust and honesty mean anything it is that these individuals will be motivated by them to suspend the continual quest for personal advantage in certain key situations,'' Bronk says.

If ever there was a case where the quest for personal, commercial and party advantage is damaging our trust in politicians and the media it's the unending brawling over the carbon tax.

It seems the public's trust in Julia Gillard will forever be tainted by the manner in which she came to power. She's not the first or the last politician to break a promise - in this case her promise not to introduce a carbon tax during the present term - but her failure to apologise and adequately explain her reasons for doing so is undoubtedly compounding the loss of trust in her.

Nor will it be helped by her use of taxpayers' money to pay for an advertising campaign to sell the carbon tax before it has become law. In opposition, Labor bitterly attacked the Howard government's abuse of public funds for such purposes; now it's doing the same. In the heat of battle, the possibility of short-term benefit outweighs the risk to the reputation of politicians in general and Labor in particular.

Scare campaigns - where politicians prey on the fears of insecure and ill-informed voters by greatly exaggerating the likely consequences of the other side's policies - are accepted by both sides of politics and the media as a legitimate tactic.

It's always a lot harder to explain a complex policy than it is to put the frighteners on the punters but Tony Abbott's gross misrepresentation of the carbon tax's effect on prices, employment and whole industries exceeds all records in effectiveness and dishonesty.

I would never have believed one politician could, by all his reckless claims, stop retail sales in their tracks as frightened punters close their purses in fear for their futures. Why the retailers aren't tearing him apart I don't know.

Do his fellow Liberals and their supporters imagine there will be no backlash when voters eventually realise just how much they were wound up?

But is the media working to help their perplexed customers discern the truth of all the claims and counterclaims? Too many of them are playing the controversy for all it's worth, trumpeting the claims of interest groups that are undocumented and untested. Some are motivated by partisanship, almost all by commercial advantage.

Do they, too, imagine this abuse of the public's trust will go unpunished? What's happening in Britain says otherwise.

Read more >>

Claims of stimulus waste were greatly exaggerated

Media reporting and opposition politicking have left many people with the impression much, if not most, and maybe even all of the billions spent on school buildings under the Rudd government's stimulus package has been wasted.

It's an impression based on the piling up of unproved anecdotes about waste or rorting of particular school building projects. Which means it's an impression that's not genuinely "evidence-based".

Enough anecdotes have been produced to demonstrate that some degree of waste has occurred. But that's hardly surprising: there's a degree of waste involved in most spending, public or private.

The real question is how significant that waste has been. And no amount of piling up of unproved allegations can satisfactorily answer that question. Only a thorough investigation of the complaints can determine the extent of the waste and the reasons for it.

It's important to understand - as most people don't - that news reporting practices aren't intended to give us a representative picture of what's happening. Indeed, what's "newsworthy" is often quite unrepresentative.

News focuses on the unusual not the usual, the bad news not the good, the contentious not the widely accepted. (That's why climate change-denying scientists get a degree of media publicity out of proportion to the relevance of their qualifications or how representative they are of scientific opinion.)

This is why you wouldn't expect the media to do justice to the reassuring conclusions of the independent taskforce established to investigate complaints about the Building the Education Revolution spending.

For one thing, reassurance isn't very newsworthy. For another, any critical comments will be given more prominence than generally approving comments.

But there's more to the school building issue than just the limitations of news reporting. The complaints have been seized upon and played up by elements of the media and others with either partisan or ideological motives for seeking to discredit the use of budgetary stimulus in response to the downturn in our economy prompted by the global financial crisis and the world recession.

These people want us to conclude there was never any threat to the economy, thus making the stimulus spending unnecessary and, as it turned out, quite wasteful. Those with an ideological opposition to fiscal stimulus want us to conclude it NEVER works.

That's why I've read for myself the interim report of the taskforce, chaired by Brad Orgill, and want to give you a balanced account of its findings.

The taskforce was established to receive and investigate complaints about the school building program and to determine whether schools are achieving value for money. So far it has received complaints affecting 254 schools, representing only 2.7 per cent of all schools involved in the program.

Almost all the complaints relate to the part of the program that promised to build and upgrade infrastructure in all the nation's primary schools. The $14 billion cost of this element accounts for almost 90 per cent of the total cost of the program.

It will have delivered more than 10,500 construction projects to more than 7900 primary schools by late next year. About a third of the money is going on multi-purpose halls, almost 30 per cent on classrooms and a quarter on libraries, with the remainder going on covered outdoor learning areas and other things.

Spending of the money is being administered by 22 state government, Catholic and independent school authorities. Although the NSW government accounts for 22 per cent of the projects, it attracted 56 per cent of the complaints. The Victorian government, with a 12 per cent share of projects, attracted 20 per cent of the complaints.

More than half the complaints relate to value for money. "From our investigations to date, the majority of complaints raise very valid concerns, particularly about value for money and the approach to school-level involvement in decision making," the report says.

The report acknowledges - as many of the critics don't - that the primary reason for spending the money was to help counter the downturn in the economy by providing employment for building and construction workers throughout the country. It was also hoped the new buildings would improve the quality of our kids' education.

The report finds the stimulus "prevented many construction organisations from reducing staff or the size of their operations to match an otherwise decreasing workload resulting from the global financial crisis".

But the stimulus motive meant it was important to get the money spent quickly and this involved a trade-off. It meant less time for consultation with individual schools and less choice and customising of projects. That meant a degree of waste and, certainly, dissatisfaction on the part of some schools.

Cost per square metre was very much higher in NSW government projects, mainly because of big project management fees, which were 5 percentage points higher than normal. But these fees are partly explained by the high priority the NSW government gave to getting its projects completed quickly. Those states in less of a hurry incurred lower costs per metre.

The report says that, overall, delivering the projects within the short time-frame to achieve the economic-stimulus objective may have added a premium to normal costs of 5 to 6 per cent.

"Notwithstanding the validity of issues raised in the complaints, our overall observation is that this Australia-wide program is delivering much-needed infrastructure to school communities while achieving the primary goal of economic activity across the nation," the report concludes.

So the impression of widespread waste the media and people with axes to grind have left us with is greatly exaggerated.

Read more >>

Our media roasts old chestnuts

If a genie appeared from a bottle and offered me one wish, I'd choose to be a columnist on a major newspaper. So I guess you could say I love my job. But there are times when I feel compelled to warn people to be careful about what they read, hear and see in the media.

Many people assume the media give them a representative picture of what's going on in the world beyond their own experience. But this is a misunderstanding of the role of the news media and the nature of "news".

The media select from all the things happening in the world only those things they consider "newsworthy" and thus worth drawing to our attention. What is newsworthy? Anything the media believe their audience will find interesting and nothing they fear the audience will find boring.

What's interesting? Anything unusual. But also anything threatening. It's perfectly clear that people find bad news more interesting than good news, which is why the media give prominence to things that are going wrong and say little about things that are going well.

Most of what's happening in the world is highly predictable and terribly ordinary. This means much news is selected because it's unrepresentative. So there's a high risk it will leave people with a mistaken impression of what's happening in the world.

Journalists like to believe everything they report is new. In truth, it's often just a new example of a familiar story, one the journos know the audience loves to hear again. Sometimes a new, offbeat angle is ignored so the story can be forced to fit a tried-and-true formula.

A lot of news is selected because it will appeal to the audience's prejudices or stir people's emotions in the way they like to be stirred. Consider some recent examples from my field of economic news.

There has been much indignation over the Keneally government's decision to change the tax on poker machines in hotels, with suggestions of undue influence by the Australian Hotels Association. About 60 per cent of hotels with pokies - those that don't make much out of them - will now pay less tax or even no tax.

You have to read the reports carefully to discover the changes are actually "revenue neutral", meaning the savings to the 60 per cent of hotels will be exactly offset by the higher tax paid by the remaining 40 per cent, leaving the government's total revenue unaffected.

Rather deflating of the righteous indignation, don't you think?

The media make no pretence of being bound by the scientific method. Economists are always being reminded not to draw general conclusions from anecdotal evidence rather than economy-wide statistics.

But the media are tellers of stories. They're the industrialised equivalent of cavemen sitting around the fire at night swapping yarns. The telling of stories about other people meets one of our most primitive human needs.

What it doesn't do, however, is give us an accurate picture of what's happening in the world. Take all the stories we're hearing about waste in the Rudd government's program to stimulate the economy by constructing a new building at every primary school.

News gathering is selective. People with complaints of waste - justified or otherwise - have had no trouble getting publicity. People without complaints don't bother approaching the media. And where reporters have encountered people saying everything was fine, these facts would have been ignored as "not news".

There have been enough anecdotes to convince me waste has been a significant problem. The real question is: how significant? What proportion of schools has experienced wastefulness? What proportion of the government's spending has been wasted?

No number of examples of alleged waste can answer these questions. What they can do is cause people who don't understand the biases involved in news gathering to gain the impression "the waste has been huge" or even "all that money has been wasted".

The one thorough report we've seen so far came from the federal Auditor-General. It was critical, but far from damning. One of his findings was that 95 per cent of school principals agreed they were confident the funds "will provide an improvement to my school, which will be of ongoing value to my school and school community".

Every year since 1997 the Reserve Bank has published an annual survey of the fees banks charge to their business and household customers. And every year the media turn the survey results into the same much-loved story: huge increase in the fees banks rip from you and me.

This year, however, the story tended to be relegated to the business section, though the same formula was used: huge increase in the fees banks charge businesses.

You had to read the reports carefully to get the real story: last financial year the fees the banks charged households grew by 3 per cent (the lowest increase since the survey began and far less than the 8 per cent increases in the two previous years), whereas fees charged to business leapt by 13 per cent (far more than in the two previous years).

Most of the growth in fees collected from households came from charges paid by the greater number of people choosing to break their fixed-rate mortgage contracts, but this was largely offset by a fall in banks' income from transaction and account-keeping fees. Much of this was explained by the banks' offers to waive fees to people who made regular deposits, part of their greatly increased competition to attract deposits.

By contrast, most of the huge growth in fees collected from business came from higher fees to existing customers now considered to be more risky and higher fees on undrawn overdrafts.

The story no one thinks worth writing is that since the global financial crisis, the banks have gone easier on their household customers but harder on their business customers.

Read more >>