Real energy problem is our secret gas parity-pricing policy

Malcolm Turnbull wants us to believe he's an energy magician, able to pull off a "policy trifecta" of eliminating blackouts and greatly reducing our emissions, all without much increase in the price of electricity and gas.

The main trick magicians use is to direct the audience's attention away from the place where they're doing their sleight-of-hand. That's what Turnbull's up to.

He wants to shift the blame for blackouts away from the feds and onto the states, while doing exactly the same for the big jump in gas prices.

He wants to blame our problems on a too-fast shift to renewables, to justify a new subsidy for new coal-fired power stations.

But the main thing he – and the gas industry – desperately wants to stop us noticing is that the leap in gas prices is a consequence of long-standing federal government policy and has nothing to do with the states' reluctance to let the gas producers frack all over their farmlands.

The balance of supply and demand for natural gas on our eastern seaboard was fine – and would still be today, were it not for the feds' earlier decision to allow foreign investors to build (too many) liquefaction plants near Gladstone in Queensland.

As the feds understood full well, once you can liquefy natural gas you can ship it overseas. And once you do that you've taken the relatively tiny, closed eastern Australian gas market and opened it up to the huge East Asian gas market, where prices are much higher.

The inevitable consequence was a leap in the price of gas on the eastern seaboard – plus a huge windfall gain to our eastern gas producers.

Now do you see why the gas industry and federal politicians of both stripes keep repeating the economic lie that the problem has been caused by the states' bans on fracking, and could be solved by lifting them?

No amount of increased gas supply on our part would be sufficient to lower the East Asian price of gas, which means no new producer of coal seam gas would be prepared to sell it to local consumers and manufacturers for anything less than they could get by selling it to Japan or China.

Unless, of course, the federal government obliged them to.

I don't object to the policy of export-parity pricing but, like its predecessors, the Turnbull government wants to keep the policy a deep, dark secret because it's so much harder to defend a super-rational policy in these days of populist indulgence than it was when Malcolm Fraser did something similar to petrol prices.

Turnbull wants to keep the super-rational policy, but shift the blame for its economic and political consequences to others.

Had he the courage, he could oblige the gas industry to use its windfall profits to compensate the household and business losers for losses arising from an implicit government policy change.

Turnbull blames South Australia's blackouts on its excessive enthusiasm for renewable energy which, pending the development of storage arrangements, has a problem with intermittent production.

He doesn't admit his parity-pricing policy is contributing. It was expected that gas-fired power generation would ease the transition from coal-fired to renewable generation.

That's because gas-fired power stations emit far less carbon dioxide and can be turned on and off as required to counter renewable energy's intermittency.

Guess what? South Australia has a new and big gas-fired generator at Pelican Point, near Adelaide, but it's been mothballed.

Why? Because the operator had a long-term contract for the supply of gas at a price set at the pre-export-parity level, and decided it was more lucrative to sell the gas into the East Asian market.

Last week Turnbull had the effrontery to argue that now gas-fired power had become uneconomic, we needed to fill the gap by subsidising new-generation "clean" coal-fired power stations.

Small problem. They're hugely expensive, only a bit less emissions-intensive than existing coal-fired stations, can't easily be turned on and off, and would supposedly still be operating 60 years later.

If there's a case for subsidising any fossil fuel-powered generators the obvious candidate is the gas-fired plants the feds' export-parity pricing policy has rendered uneconomic.

So great is the coal industry's hold over the Coalition that, not content with subsidising increased supply of coal from Adani and others at a time when coal is a sunset industry, Turnbull is now making up excuses to subsidise increased demand for coal by local electricity producers.

Economists are always telling politicians not to try picking industry winners. In reality, the politicians are far more inclined to back known losers.

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Let's do our sums on mining's economic contribution

With Malcolm Turnbull desperate to keep burning coal for electricity, just how important is the mining industry to our economy? Short answer: not nearly as much as it wants us to believe, and has conned our politicians into believing.

Because people like me have spent so much time over the past decade and more banging on about the resources boom, we've probably left many people with an exaggerated impression of the sector's importance.

It's true that, thanks to a quadrupling in the value of its physical capital, mining now accounts for about 7 per cent of our total production of goods and services (gross domestic product), compared with less than 5 per cent in 2004, at the start of the boom.

But 7 per cent ain't all that much, and if you measure mining by how much of our workforce it employs, it's even less: 2 per cent.

That's just 230,000 people, about as many as are employed in the arts and recreation.

It compares with 300,000 workers in agriculture, 400,000 in financial services, 800,000 in accommodation and food services, 900,000 in manufacturing, almost a million in education, a million in construction, another million in professional services, 1.2 million in retailing and 1.5 million in healthcare.

Still think the economy revolves around mining?

How can an industry account for 7 per cent of our production but only 2 per cent of our jobs? Because it's so "capital intensive" - it uses a lot of expensive equipment, but not many humans.

Because it employs so few people directly, the industry is always paying "independent" economic consultants to estimate how many people it employs "indirectly" as dollars earned from mining are spent in other parts of the economy.

This is always a good way to impress judges - who know a lot about law, but little about economics - when you're trying to persuade them to let you despoil the environment.

It's true that money earned from mining has a "multiplier effect" when spent. But it's just as true of money earned from any other industry. Or money spent by the government.

Normally I'd be happy to defend an industry against the idea that it didn't contribute much because its capital intensity meant it directly employed few workers.

That's because what matters most is how much income the industry earns from its production. When that income is spent - by employees, suppliers, tax-receiving governments or profit-earning shareholders - jobs will be created somewhere in the economy.

In the case of mining, however, there's weakness in the argument. Our mining industry is about 80 per cent foreign-owned - mainly by BHP Billiton, Rio Tinto and Glencore - which, in econospeak, adds a huge "leakage" to the "circular flow of income" around our economy.

(Another leakage is that most of the heavy equipment the miners and natural gas producers use is imported.)

If most of the profits made by our (highly profitable) mining industry don't belong to us and end up being spent in some other economy, this greatly reduces the economic benefit we get.

Which makes it doubly important the mining companies are paying a fair rate of tax on their earnings in Oz.

Here, the industry often pays "independent" economic consultants to write reports showing what huge amounts of tax it pays.

But these usually rely on the legal fiction that the minerals royalties the miners pay to state governments are a tax. In economics, a tax is something you pay the government for nothing specific in return (if you are paying for something specific, it's a "user charge").

Royalties are a user charge. The miners are buying access to valuable mineral deposits owned by us. Royalties are levied on different bases but, overall, they're probably charging less than the minerals are worth.

So the miners shouldn't expect brownie points for paying for the minerals we hand over to them. The Rudd government did try to ensure we taxed their profits more fairly and adequately but, as you recall, the miners objected and so Tony Abbott abolished what was left of the tax.

But, whatever their profits, they're paying 30 per cent of them in company tax, right? Right in theory but, as we've realised, in practice not so much.

Our big foreign mining companies are heavily into minimising the tax they pay by moving profits offshore, claiming to do their "marketing" in Singapore, where the tax rate is lower.

All of which makes you wonder how well we do from our foreign-dominated mining industry, considering all the environmental and economic disruption we have to put up with.

But it's worse than that. Our politicians, state and federal, are so desperate to create the temporary appearance of progress and jobs that mining projects bring - and, no doubt, to say thanks for the generous political donations the miners make - that they often use the offer of hefty subsidies to attract them.

The subsidy comes in the form of governments building railways, ports and other infrastructure on the miners' behalf. (Not to mention the federal government's exemption of mining from paying the diesel fuel excise, worth billions a year.)

Take the Indian Adani company's proposed Carmichael coal mine in central Queensland, which is so huge it would lower the world price of coal, to the disadvantage all existing Australian coal miners.

Queensland's Newman government was so keen to use the project as proof of progress it offered Adani a "royalty holiday". Now the Turnbull government is offering a $1 billion-plus concessional loan in the name of developing Northern Australia.

Both the miners and the politicians indignantly deny the industry receives any subsidies. But that's not what the West Australian and Queensland treasuries say in their submissions to the Commonwealth Grants Commission, revealing how poor the mining companies keep them.

If the nation is ahead on the mining deal, it ain't by a lot.

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Mining makes pollies confused about demand and supply

Since almost all of us have lived in a market economy all our lives, you'd expect the effects of supply and demand on price would be well understood, particularly by anyone who managed to get themselves into Parliament.

In fact, however, our politicians on both sides have terrible trouble working out how supply works. Sometimes they tell us increasing supply will put downward pressure on price and sometimes they tell us it won't.

Turns out they're wrong on both counts.

When it comes to natural gas, Industry Minister Greg Hunt – like his predecessors Ian Macfarlane and Martin Ferguson who, purely by chance, have since gone on to jobs lobbying for the mining and gas industries – tells us the solution to the high price and looming "shortages" is for the Victorian and NSW governments to give gas companies free rein to do their fracking wherever they choose on the states' farmland.

Adding to the eastern states' production of coal seam gas would increase supply and thus put downward pressure on gas prices and avert the risk of shortages, they tell us.

This would be true if Australia – strictly, our eastern seaboard – had a closed market. If there was no international trade in gas.

But that's the trick the pollies and the business interests they want to help don't want to draw attention to.

There's been little change to the eastern states' demand for gas, nor decline in the supply of gas from Australian gasfields.

What's changed is the decision of our governments to allow foreign investors to set up several gas liquefaction plants near Gladstone in Queensland.

By doing so they opened a link between our closed gas market and the world market, where the world price of gas just happens to be a lot higher.

The inevitable result is our wholesale gas price has doubled to reflect the world price, our manufacturers are claiming to be "uncompetitive" at such a price and people are claiming to see shortages looming.

(As is typical in a resources boom, when our politicians see their job as complying with every demand coming from the miners in their greed-driven frenzy, we allowed too many liquefaction plants to be built and now none of them is making money. But that's a separate stuff-up.)

The point is, for as long as our governments allow local gas producers to charge us the world price (which I think they should), no amount of additional coal seam gas production would be sufficient to lower that world price.

Federal pollies of both colours bang on about reducing the restrictions on fracking because they're doing the bidding of their mates/generous party donors/future employers in the gas industry and because they want to draw attention away from the truth that they allowed domestic gas prices to rise and don't want to do anything to cut them.

There'll be no gas shortage as long as we pay the world price.

When it comes to the politicians' enthusiasm for constructing Adani's Carmichael coal mine in the Galilee Basin of central Queensland, however, they leave us with the impression its addition to world coal supply would have no effect on the world coal price (or global carbon emissions, for that matter).

But we're one of the world's biggest exporters of coal. And Carmichael would be one of the world's biggest mines.

So it couldn't help but push down the world price, relative to what it would otherwise be, to the detriment of all our existing coal producers and their employees, and government royalty and company tax collections.

The Queensland government is so keen to see the mine proceed ASAP it's willing to subsidise a rail line to a coastal port by $1 billion. Can you imagine what that would do to its net royalty revenues?

It claims the rail line isn't a subsidy because it's a loan (believe that if you like) and because the line will open up the Galilee Basin to other mines.

Should they emerge, however, the downward pressure on coal prices and tax receipts would be even greater.

All this says Australia has not much to gain and a lot to lose by pressing on with the development of one more coal mine.

At a time when the whole world needs to make the transition from fossil fuel to renewable energy as soon as we reasonably can, pushing down coal prices slows the process down by increasing the relative price disadvantage of renewables.

There seems to be something about political office in Australia that interferes with our pollies' economic reasoning powers. I can't think what it might be.

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Banning new coal mines wouldn't cost the earth

If you want to shock and appal a politician, just suggest Australia join the United States and China in limiting the building of new coal mines.

Think of all the growth we'd be giving up, they protest. All the jobs that wouldn't be created. Some even argue we have a moral duty to sell more coal to the world. How else will the poor countries be able to develop their economies so they become as rich as we are?

Short answer: by relying more on other, less carbon-emitting forms of energy.

Surely the sooner we arrest global warming the better off we'll all be, rich and poor.

The goal of the moratorium on new mines is to hasten the process of decarbonising economic activity.

It's clear the world's growing commitment to action against climate change will see a decline in the demand for coal - the most emissions-intensive way to make electricity - so that much of our huge deposits of coal will stay in the ground.

It's true there's a lot more coal to be burnt before world demand dries up, but total consumption actually fell in 2014-15. Within that, China's consumption fell by 3.7 per cent.

The big fall in coal prices in recent years tells us the supply of coal now exceeds demand. With Australia accounting for 27 per cent of seaborne trade in coal, what happens if we expand our production capacity and start exporting more?

We push the world price down even further. Since the average cost of electricity from renewable sources is, as yet, higher than for coal-based power, this would worsen the comparison further, slowing the shift away from fossil-based electricity.

It would also lower the prices being received by our existing coal exporters, threatening employment in their mines. So a moratorium would benefit our pockets as well as the environment.

But how much would we lose by not building any more coal mines nor extending existing ones?

The Australia Institute set out to answer this question with help from modelling by Professor Philip Adams, of the Centre of Policy Studies at Victoria University, Melbourne.

The study found that, even with a ban on new mines, Australia's coal production would decline only gradually as existing mines reached the end of their economic lives. Existing mines and those already approved could still produce tens of millions of tonnes of coal into the 2040s, assuming other countries still wanted to buy them.

The modelling suggests the nation's economic growth would be barely affected, with the level of gross domestic product being just 0.6 per cent less than otherwise by 2040. Whether we did or we didn't, nominal GDP would roughly have doubled to $3 trillion by then.

Because coal mining is so capital intensive, the effect on national employment would be even smaller. By 2030, the level of employment would be 0.04 per cent lower than otherwise, but by 2040 this difference would have gone away.

Similarly, the value of our total exports of goods and services is projected to be only 1 per cent lower than otherwise by the final years of the period.

But our coal production is concentrated in NSW and Queensland, so the adverse effect on those state economies would be greater. By 2040, the level of gross state product would be, respectively, 1.3 per cent and 3.8 per cent less than otherwise, while the other states' GSP would be a little higher than otherwise.

Now, I trust that by now you've learnt to be cautious about accepting the results of modelling exercises, especially when they've been sponsored by outfits using the results to advance their cause, as is the case here.

The simple truth is that no-one knows what the future holds, and that's just as true for the econometric models economists construct.

Their models of the economy are more comprehensive and logically consistent than the model we hold in our heads. But relative to the intricacy and complexity of the actual economy, models are still quite primitive (this one doesn't have the official data to let it distinguish between steaming coal and coking coal, for instance).

Models are built on a host of assumptions, some based on economic theories about how the economy works and some about what will happen in the future.

The strength of this particular modelling exercise is that it's a lot franker about the model's limitations and about the specific assumptions.

It uses a dynamic "computable general equilibrium" model designed to capture the interrelationships between 79 industries, divided into states and regions.

The model takes account of "resource constraints" - it acknowledges that land, labour and capital are scarce; that everything you do has an opportunity cost.

This means that, unlike much "modelling" produced for the mining lobby, it doesn't assume that the skilled workers needed for a new mine just appear from nowhere rather than having to be attracted from jobs elsewhere, nor that when a new mine isn't built, all the labour and materials that could have been used sit around idle.

As is normal, the modelling starts by establishing a business-as-usual "baseline" projection out to 2040. For instance, real GDP is assumed to grow at an average annual rate of 3 per cent for the first five years, then 2.6 per cent for the remaining 20 years.

Once this baseline or "reference case" is established, the modellers impose the policy change (no new coal mines) and run the model again to see how this changes the baseline results.

That is, it's not a forecast, just an attempt to get an idea of the consequences of banning new coal mines.

The model's modest results make sense. The effects would be small because the coal industry is just a small part of the economy, because the phase-out would be gradual, and because other industries would expand to fill the vacuum it left.

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Economy steams on for another quarter

Just about everyone who doesn't look at the numbers - which is most people - is convinced the economy is "slowing", suggesting disaster may be just around the corner.

How do they know it's slowing? Because almost all the economic news is bad. They don't notice that most of the bad news comes from somewhere else - Britain, Europe, Japan, China, even the US.

And people who warn that the economy is slowing always sound wiser and more knowing than people who say it seems to be going OK and will probably stay OK.

Of course, if you do look at the figures you find little sign the economy is slowing. Indeed, the national accounts we got from the Bureau of Statistics this week show that real gross domestic product grew by 3.3 per cent over the year to June.

Three months earlier, the figures tell us, real GDP grew by 3 per cent over the year to March. Before that we had growth of 2.8 per cent over the year to December and 2.6 per cent over the year to September 2015.

During all that time we've had people confidently telling us the economy is "slowing". What's more, within a week they'll have forgotten this week's good news from the national accounts - as they did all the other times - and be back telling us the economy is "slowing".

The good thing about the national accounts is you can always find something that's not looking too hot - provided you ignore all the things that are going OK.

This time you can say that, since the economy grew by 1 per cent in the March quarter, but by only 0.5 per cent in the June quarter, it must be "slowing".

But you have to be an amateur to believe the accounts can be taken so literally.

They're too subject to lumpiness (big transactions, such as the purchase of jumbo jets, which happen irregularly rather than smoothly from quarter to quarter), to error (such as a big transaction getting into the wrong quarter) and to frequent revision (there's a lot more statistical guesswork in the first estimate of growth during a quarter than people imagine, mainly because a lot of the figures needed are collected only yearly) for them to be treated as God's truth.

You could also say that growth in consumer spending of just 0.4 per cent in the quarter was surprisingly weak but, again, we shouldn't be too literal. Growth of 2.9 per cent over the year is pretty healthy.

Actually, if you're looking for something that really is "slowing" you'll find it not in the national accounts, but in the monthly job figures. They show that employment hasn't grown as strongly this year as it did in the last half of last year, meaning the rate of unemployment seems to have stopped falling and plateaued at 5.7 per cent.

This tells us there's been some instability in the normally fairly stable relationship between growth in the economy and growth in employment.

It would be more worrying if growth in the driver of that relationship - the economy - weren't holding up so well, and possibly increasing. This being so, employment should start behaving more normally in time.

The real growth in GDP over the year to June of 3.3 per cent was generated by, in descending order of contribution, growth in: the volume of exports of 9.6 per cent (with extra help from a 0.5 per cent fall in the volume of imports), consumer spending of 2.9 per cent, public consumption spending of 4.4 per cent, public infrastructure spending of 13.9 per cent, and home building of 8.3 per cent.

All of which was reduced by a negative contribution to growth of 2.2 percentage points from the 13.8 per cent fall in business investment spending, as the continuing fall in mining construction activity swamped still fairly flat growth in non-mining business investment.

If those figures make you think the public sector - federal, state and local - has been spending like crazy, don't be misled. Public sector spending is lumpy, and June quarter spending was overstated (and business investment spending correspondingly understated) by state governments buying prisons and other facilities previously built by the private sector.

Here's some indisputably good news: the productivity of labour in the market sector improved by 1.5 per cent during the quarter and by 2.9 per cent over the year.

There's an old rule that one quarter's figure doesn't equal the start of a new trend. Remembering this, there are some encouraging figures in the accounts we can hope will turn out to be improving trends.

The most significant is that, after deteriorating for nine quarters in a row, our terms of trade - export prices relative to import prices - improved by 2.3 per cent in the quarter.

This means stronger growth in real gross domestic income (real GDP adjusted for the terms of trade) of 1.9 per cent over the year. That is, the international purchasing power of the goods and services we produce wasn't cut back this quarter the way it has been.

When export prices fall far enough, nominal GDP grows more slowly than real GDP. This is a problem for the Treasurer because the taxes we pay are levied on our nominal income and spending.

But the improvement in the terms of trade helped nominal GDP to rise by 1.3 per cent in the quarter and 3.4 per cent over the year. This is the strongest result in more than two years.

The final good news is proof the economy is now well advanced in making the much ballyhooed transition from mining- to non-mining-led growth.

Over the year to June, the mining sector contributed about a quarter of the overall growth of 3.3 per cent, whereas the (much larger) non-mining sector contributed about three-quarters.

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Big change ahead for China and our export challenge

You don't need me to tell you we lucked out when we sited our island continent not too far from China. But will our luck hold?

Or, more pointedly, what do we have to do to ensure we stay lucky?

A major report, released this week, Partnership for Change, seeks to answer that question. It was prepared jointly by Professor Peter Drysdale, of the East Asian Bureau of Economic Research at the Australian National University, and Zhang Xiaoqiang, of the China Centre for International Economic Exchanges, with strong support from both governments.

Actually, our location on the edge of Asia is only half our good luck. The other half was discovering our island is rich in high quality, easily-won minerals and energy.

As a result, our economy has proved a fabulous fit with the re-emerging China. As the report explains, "Australia and China are deeply complementary trading partners".

Our "comparative advantage" is opposite to China's. A country has a comparative advantage in producing a particular item if it can do so at lower opportunity cost than other countries face.

"Australia has a large natural resource base relative to its population [so it] therefore specialises in the production of primary goods for export, and uses the proceeds to purchase labour-intensive and other manufactured goods," the report says.

"Conversely, China has a large labour supply, but relative to its population has smaller endowments of natural resources and accumulated capital. For this reason, China's industrial development was built on labour-intensive production, which it exchanges with Australia for imports of scarce resources."

And what a successful partnership it's been. In the space of not much more than a decade, China has become our biggest trading partner. It takes about 35 per cent of our exports of goods and services, and supplies almost 20 per cent of our imports of goods and services.

China is so big - its population is 56 times ours - and has been so successful in pursuing this growth strategy it's now the second biggest economy in the world (the biggest, if you allow for differences in purchasing power), the biggest trading nation and the world's biggest producer of manufactured goods.

But nothing stays the same. The resources boom that saw our trade with China grow so dramatically has reached its final stage. Prices for coal and iron ore have now fallen back.

The period of massive investment in new mines and natural gas facilities is ending, with construction spending falling sharply. The last stage is big growth in the quantity of our mining exports, with large increases in natural gas exports (mainly to China) still to come.

The boom was ended by big increases in the supply of commodities (from our competitors as well as us), but also by a slowing in China's demand as its need for more steel peaked.

So, after a period of huge expansion in our mining sector, our economy is making the adjustment back to normal, where most growth in production and employment comes from the ever-expanding services sector.

This is happening, with a few bumps. But, as part of its progress to full economic development, China is going through a much more dramatic "transition".

The report says China is "shifting its growth drivers from investment, exports and heavy industry to consumption, innovation and services".

"Chinese production is shifting from a model based on adaptation and imitation of goods, services and technologies developed elsewhere, to a model based on domestic innovation", it continues.

Part of this involves a shift from labour-intensive, low-tech, low-value manufacturing to more advanced, high-tech, high-value manufacturing.

This has already started.  Over the 20 years to 2015, low-tech manufacturing's share of China's total exports of goods has shrunk from almost half to less than 30 per cent.

So the big question is whether, now China is changing direction, it will still be the gold mine it's been for us so far.

China will still need to import a lot of our natural resources, even if its demand for those resources won't be growing as fast.

The report notes that, with prices so far down, our share of China's import market has increased markedly. Huh? It's because, compared with our competitors (including local Chinese mines), we're such an efficient, low-cost producer.

The report has modelled three scenarios for our trade with China over the next 10 years. Drysdale stresses the results aren't exact, but give us an idea.

The "baseline" scenario, where existing trends continue without much change, would see our exports to China grow by 72 per cent, while China's exports to us grew by 41 per cent. (All these figures are in real terms.)

The pessimistic scenario sees China's annual growth falling below 5 per cent during the decade. Even so, our exports to China would grow by 28 per cent, while their exports to us grew by 20 per cent.

The optimistic scenario, however, would see our exports to China grow by 120 per cent, while their exports to us grew by 44 per cent.

And the catch? Both countries would need to engage in supply-side (production) reforms to make it happen.

For China, this would involve reforming its banks and financial system, reforming its state-owned enterprises, and liberalising the capital account of its balance of payments by lifting restrictions on money flows and allowing a freer-floating exchange rate.

For us, it would involve increasing competition in sheltered industries, openness to foreign investment and skills, and facilitating investment in social and physical infrastructure.

These are what we'd have to do to make real our dream of getting our share of all the extra demand for fancy food and services coming from China's by-then massive middle class.

Here we'd be battling against a different and much bigger range of competitors than we face in the commodities market. You wonder if our spoilt business people are up to it.

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Where the jobs will come from

It's a question doubting customers have been asking me through the whole of my career: but where will all the jobs come from? We worry about jobs, convinced there's never enough of them.

Whenever we're in a recession, with unemployment high and rising, people simply can't see how we'll ever get it down again.

In the more recent resources boom, a lot of people got jobs in faraway places helping to build new mines and natural gas facilities, but we knew that wouldn't last.

Mining now accounts for about 10 per cent of the value of the nation's production – gross domestic product – but it still employs only about 2 per cent of the workforce.

When the three foreign car makers announced in 2013 that they'd be ending Australian production later this year or next, the familiar cry went up: where will the new jobs come from?

It was a question I used to find hard to answer, but now I don't. When I started in this job more than 40 years' ago, there were 5.8 million people in the workforce. By now it's more than doubled to 11.9 million.

So the jobs did come, despite 40 years of worrying that they wouldn't. Where did they come from? I could work out from the figures how many came in which particular industries, but I'll skip to the bottom line: virtually all the extra 6 million jobs came from the services sector.

Where will the jobs be coming from in the years ahead? Same place. Indeed, they already are.

Our most recent worry has been where our economic growth would come from now coal and iron ore prices are falling and no new mining construction projects are taking the place of completing projects.

But the evidence is coming in. We're experiencing strong expansion in parts of the vast services sector, which is generating lots of extra jobs.

Whereas mining – and farming and, these days, even manufacturing – are capital-intensive, and so provide few jobs, service industries are labour-intensive, and so provide lots of 'em.

From a job-creating perspective, the trouble with physical things – "goods" – is that it's been relatively easy to use machines to replace workers, whereas you still need a lot of people to provide services, even when those people are given better machines to help them.

The other trouble with goods industries is that there's a limit to how many things – clothes, cars, fridges, laptops – you want to own. Time has shown there's almost no limit to the number and kinds of services we'd like others to perform for us.

Did you know there's such an occupation as "lactation consultant"? There used not to be, but there is now.

These are the reasons why almost all the extra jobs being created are in the services sector.

Last year, total employment grew by a very healthy 300,000 jobs, more than half of them full-time.
Research by Professor Jeff Borland, of the University of Melbourne, has found that more than 90 per cent of these jobs occurred in the private sector.

This private sector growth was concentrated in NSW and Victoria, whereas the growth in public sector employment was concentrated in Queensland and South Australia.

But where did the additional jobs come from? Fully a third – 100,000 – were in (the mainly private sector parts of) healthcare. Then came 75,000 in businesses providing professional and technical services, almost 50,000 in retailing, more than 40,000 in financial services and more than 30,000 in administrative and support services.

The thing to note about that list is that while some of those jobs would have been low-skilled, many – particularly those in professional services and healthcare – would have been high-skilled, well-paid and intellectually satisfying. But even the lesser-paid jobs would have been clean and safe.

So don't turn up your nose at services sector jobs.

And get this: the extra jobs went disproportionately to older workers. Although people aged 45 and above account for only 31 per cent of the overall workforce, they accounted for 57 per cent of the growth in jobs.

But wait, there's more. Though we keep hearing about the growth in the quantity of our mineral exports as the new mines come on line, we've heard far less about the growth in the quantity of our exports of services, particularly education and tourism. (We "export" services when foreigners come to Oz to receive them.)

Our services exports have benefited greatly from the fall in our dollar, which has made them cheaper to foreigners.

Last year, spending by international students on course fees, accommodation, living expenses and recreation grew by 13 per cent to more than $19 billion. Spending by foreign tourists in Australia rose by 11 per cent to almost $16 billion.

What's more, our lower dollar has encouraged many Aussies to take their holidays at home rather than abroad. We now have more tourism money coming in than going out.

You well know it was exports to China that did most to fuel the resources boom. What nobody's bothered to tell you is that it's China and its growing middle class that's doing most to boost our exports of education and tourism services.

Don't underestimate the contribution services are making to "growth and jobs".

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Economy will look better when mining investment stops falling

Here's a little tip for the start of another working year: if you want to make much sense of the economy, you need a good feel for arithmetic.

Thanks to our obsession with economic growth, we're almost always focusing on the change in economic indicators like gross domestic product and its components, such as consumer spending, business investment, imports and exports. (And the figures we look at are usually "in real terms" – they've had the effect of inflation removed from them.)

So the big focus is on whether indicators have grown or shrunk since last quarter or last year and, if so, by how much. This means I often find myself writing a sentence such as "the growth in X – exports, say – accounted for more than all the growth in GDP".

Almost every time I do I get someone saying "what? how can that be true? How can the growth in a component of the total account for more than all the growth in the total?"

If that objection makes sense to you, you're showing your lack of arithmetic imagination. It's perfectly possible for one component to grow by more than the growth in the total provided some other component shrinks. Oh, of course.

Now consider this: we've been very unhappy with our "below trend" (below average) rate of economic growth in recent years, such as our growth of just 2.5 per cent over the year to September.

But everyone knows our problem is that we're having to make a transition from growth led by mining – in particular, by the massive surge in investment in the construction of new mines and natural gas facilities – to growth led by the rest of the economy.

And rough calculations suggest that the "non-mining economy" grew by about 3 per cent over the year to September.

Since we know the economy overall grew by 2.5 per cent, this means the "mining and mining-related economy" must have contracted over the year. This is hardly surprising: mining investment spending is dropping like a stone.

It's also good news. For a start, it says we've made a lot of progress in getting the rest of the economy growing strongly.

But there's another, arithmetic point. The collapse in mining investment can't go on forever. Eventually you hit bottom and can't fall any further. When that happens, the mining sector stops "subtracting from growth".

And when mining is neither subtracting from growth nor adding to it, the quite-strong growth in the non-mining economy will be all the growth we've got – and it, we can hope, will still be growing by 3 per cent a year.

In other words, the economy should speed up as soon as it loses the drag coming from the big contraction in mining investment. And that should happen by about the end of this year.

Next, have you noticed how popular it's become to measure the budget's performance by looking at the change in the level of government spending as a proportion of "nominal" (that is, before adjusting to remove the effect of inflation) GDP?

In principle, it makes sense to compare nominal government spending with the nominal size of the economy. It's saying that the size of the economy grows for various reasons – inflation, real growth, growth in the population – and it shouldn't worry us that government spending is growing for the same reasons.

It's only noteworthy when government spending is growing faster or slower than the economy.

But here's where it helps to have a feel for arithmetic. When you keep comparing an economic variable to a particular "denominator" (the number that goes on the bottom of the sum) over many years, you're implicitly assuming that the denominator (nominal GDP, in this case) moves in a reasonably steady, reliable way.

If so, any change in the ratio (the percentage) can be attributed to changes in the "numerator" (the number that goes on the top; in this case, government spending). If the denominator isn't moving in a stable fashion, then this instability could be contributing to the change in the percentage, making it hard to be sure what's going on with the numerator.

Trouble is, the resources boom has played havoc with the stability of nominal GDP. Why? Because GDP, being a measure of the nation's production of goods and services, naturally includes our production of exports.

But we know that the prices we were getting for our main mineral exports – coal and iron ore – shot up to unheard of levels in the early part of the boom, then from mid-2011 began falling back to earth.

To see how this has affected the stability of nominal GDP, consider these comparisons (for which I'm indebted to Michael Blythe, chief economist of the Commonwealth Bank). Over the nine years to 2001-02, it grew at an annual average rate of 6.1 per cent. (This would be inflation of 2.5 per cent plus real growth of about 3.5 per cent.)

We can think of that as nominal GDP's "normal" rate of growth. But then the prices boom starts and continues for the nine years to 2010-11, during which it grew at a rapid annual average rate of 7.2 per cent.

In the four years to 2014-15, however, the fallback in export prices caused nominal GDP to grow at a pathetic annual rate of 3.4 per cent – just a bit more than half what's "normal".

Get the point? The ups and downs of our mineral export prices shouldn't have any direct effect on the growth in government spending (though the boost to tax collections may have encouraged governments to be more generous on the spending side).

So the resources boom has had the effect of causing the government spending-to-GDP ratio to understate the extent of the growth in spending during the boom years, but now is overstating it.

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Why it shouldn't be a bad year for our economy

Thanks for asking. Yes, I enjoyed my holiday – read some good books I'll tell you about later – but, unfortunately, didn't get far enough away from the media to avoid hearing all the gloomy news about the economy.

The Americans raised interest rates, the Chinese sharemarket fell, oil prices fell, share prices fell around the world, our dollar fell, the Chinese announced their economy was growing quite strongly, which everyone refused to believe.

Anything I've missed? Rarely has a year got off to such bad start, we were told. Might be worse than the global financial crisis, according to some guru whose name I forget. Recession will be knocking on our door, we're told.

Sorry, I'm not convinced. My guess is this won't be such a bad year for us, and next year will be quite good. Why? Because we've got a lot going for us domestically and because the bad things happening overseas won't have as much effect on our fortunes as many people have come to imagine.

It's become fashionable, particularly among our big business people, to take all the foreign economic news terribly seriously, on the assumption it has big implications for us Down Under.

I'm old enough to remember a time when most people believed that what happened to our economy was always of our own making. The Whitlam government tried to blame the recession of the mid-1970s on overseas factors, but everyone knew it was lying.

Since those far off-days, the world economy has globalised, of course, with the Hawke-Keating government doing much to open our economy to the rest of the world, particularly by floating our dollar and dismantling our protection against imports.

Another thing that's globalised is the media. When something bad happens anywhere in the world, we're told about it within an hour or two. Good news takes longer to pass on, if it gets through at all.

In the just-ended summer silly season, all the bad economic news from abroad has been a godsend to the parched local media, and we've played it for all it's worth.

But I think that, in adjusting to the globalised, joined-up world economy, we've gone too far the other way, assuming everything that happens overseas will determine our fate, that our economy is just a cork tossed on a global sea.

It's true that China's economy now has more influence on our future than the American or European economies we know more about, but even this can be overdone.

As can the media's extraordinary preoccupation with the ups and down of local and foreign sharemarkets, about which they – and we – know little. Hardly a news bulletin passes without us being told of the latest movement in the Dow, Footsie​ and Hang Seng.

The advent of compulsory superannuation saving has made our retirements more dependent on the fortunes of the sharemarket and, more to the point, made us more conscious of that dependency.

But sharemarkets have always gone up for a period and then down for a period, gone down for a while and then gone back up. Even during the market's long periods of seemingly steady rise, it's down on at least as many days as it's up.

So people who think they can learn anything useful about their affairs by listening to the nightly news to hear what happened to the market today – and then cursing when it's down – are fools. They've allowed the media to find a new way of making them feel bad.

Almost every economic event has advantages and disadvantages, producing winners and losers. When we allow a panicked global sharemarket and disaster-loving media to interpret those events for us, they soon convince us a fall in oil prices is bad news, not good, and the lower Aussie dollar is more bad news, even though it's what our economists have been praying for.

Perhaps our excessive attention to foreign news is fed by the widespread belief that countries make their living by selling things to other countries. So if other countries' economies are weak, our economy will be too, because they won't be buying much from us.

Fortunately, it ain't true. Or, to be accurate, it's 20 per cent right and 80 per cent wrong. It's true that Australians, like everyone else, make their living by producing goods and services and selling them to other people.

What's not true is that the other people have to be foreigners. Aussies will do just as well. About 20 per cent of what we produce is sold to foreigners, leaving a mere 80 per cent sold to locals.

That's why it's easy to exaggerate the effect that weak foreign demand for our goods and services will have on our economy. And the fact is that although prospects for the biggest export-oriented part of our economy – mining – are poor, the prospects for domestically oriented industries are good.

Unofficial estimates show the mining-related part of the economy is going backwards, whereas the "non-mining economy" has been growing at the healthy annual rate of about 3 per cent.

You see this in our figures for employment. Over the year to December, employment grew by more than 300,000 workers, a strong 2.7 per cent increase. The official rate of unemployment fell from 6.2 per cent to 5.8 per cent.

I'll be surprised if this steady improvement doesn't continue this year.

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Banning new coal mines would leave us better off

With the success of the Paris agreement on climate change, it's clear Australia will have to lift its game if we're not to be seen as global bludgers. But with an early return to carbon pricing an embarrassment for the Coalition, what other approaches should we consider?

Take the campaign for a global moratorium on the construction of new coal mines. Is it just a misguided idea dreamt up by idealistic greenies who don't understand economics?

Jon Stanford, of Insight Economics, thinks so. He's a former senior econocrat and an avowed supporter of action to reduce carbon emissions. But in a long post on John Menadue's blog, Pearls and Irritations, he argues strongly against a moratorium.

He readily acknowledges that substantial "social costs" or "negative externalities" – such as the emission of climate-changing greenhouse gases – are imposed on the community by the use of coal.

"There is little doubt that the combustion of coal to produce electricity has made the greatest contribution to increasing carbon concentrations in the atmosphere," he says.

But the most economically efficient way to deal with climate change is to tax all carbon emissions by means of a carbon tax or an equivalent emissions trading scheme.

"Banning new coal mines would reflect an arbitrary approach to reducing emissions. On what basis should various fuels be permitted or banned? Why is coal to be singled out but other fuel with significant emissions such as oil and gas are not?"

So his first objection to a moratorium is that it seeks to reduce climate change in a way that doesn't minimise the resulting loss of efficiency in the allocation of resources.

His second objection is more practical: it wouldn't work, anyway. He says that, according to the International Energy Agency's latest World Energy Outlook, global demand for electricity will increase by 70 per cent between 2013 and 2040.

The agency's middle projection, based on the commitments to counter climate change that countries took to the Paris conference, sees coal's share of global power generation still at 30 per cent in 2040 (compared with 41 per cent in 2013), meaning growth of nearly 25 per cent in absolute terms.

Stanford says that "while the Australian coal industry is a very efficient producer it does not dominate the global market and could not be said to possess any significant market power".

Australia's coal reserves amount to less than 9 per cent of global reserves. As a producer of steaming (thermal) coal, we rank a distant sixth behind China, the US, India, Indonesia and South Africa, not far ahead of Russia and Kazakhstan.

These other countries are unlikely to agree to a global moratorium on new mines so, were Australia to impose a moratorium on itself, the investment in new mines displaced from Australia would merely take place in other countries. Malcolm Turnbull has used the same argument.

Sorry, but I'm not convinced. It's true that a global carbon price would be a more economically efficient solution than an arbitrary moratorium on new coal mines.

But with the problem worsening as each year passes, we don't have the luxury of waiting until a "first-best" solution can be agreed upon. In an emergency, second-best solutions are better than inaction.

As for the practicalities of a unilateral Australian moratorium, the facts are more complex than Stanford implies. The International Energy Agency's figure of a 70 per cent increase in global demand for electricity is an assumption, not an estimate.

All 25-year projections are just projections, and likely to be wrong, often because they're overtaken by events. The agency's projections don't take sufficient account of the fall in China's coal consumption over the past 18 months.

Projections that don't allow for further technological advances and price falls in renewables and energy storage, nor for countries to step up their efforts to reduce warming, over the next 25 years, are particularly unreliable.

Stanford's figures for global coal reserves and even global coal production aren't relevant. That's because not all coal is the same. Some is high quality – in terms of its ability to generate more electricity – some is low. Some can be extracted quite cheaply, some would be very expensive.

Coal is a low value commodity that's expensive to transport over long distances. This means a high proportion of coal deposits and domestic coal production is irrelevant in assessing Australia's market power and the likely effects of a unilateral moratorium.

What determines the world price is seaborne exports of thermal coal. A Reserve Bank analysis shows Indonesia's low-quality coal has 41 per cent of world exports, while we come second with 18 per cent.

Australia is a high quality, low-cost producer, which makes us a more powerful market player than the raw figures suggest.

World prices of steaming coal have fallen a long way since their peak in 2011, in response to a huge increase in supply (mainly by Indonesia and Australia) and flat world demand.

If our 52 proposals to build new coal mines or expand existing ones went ahead, this would eventually double our exports. Do you really think that would have no effect on the world price?

If it caused the world price to be lower than otherwise, this would hurt our existing coal mines, their lenders and their employees. It would also hurt existing and prospective renewable energy projects.

And it would cause the price to be even less reflective of the high social costs caused by carbon emissions, the adverse effect on miners' health and air pollution around coal-fired power stations (the latter a big part of China's reasons for turning against coal).

With the world coal price relatively low, it's not at all clear other, higher-cost producers would happily step in to take our place. If they could, why aren't they doing it already?

The future for coal is a lot more uncertain and less rosy than Stanford implies.

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Economy's transition grinds on, despite quarterly bumps

What an exciting week it's been for lovers of thrills and spills in the economy. This time three months ago they were telling us it was near to subsiding into recession in the June quarter, but now they're telling us it took off like a rocket in the September quarter.

Phew, what a miraculous escape. Or what a load of cods, brought to us by those who've learnt nothing from years of watching the national accounts' gyrations in real gross domestic product from one quarter to the next.

You can either take those gyrations literally, or you can "look through" them, hoping for a better idea of what's really happening in the economy. The advantage of the first approach is that it's a lot more exciting. The disadvantage is that it convinces the public that economists know nothing and aren't to be trusted.

Let's take the story back a further three months to the March quarter. The literalists told us the economy was growing strongly because the Bureau of Statistics announced a first stab at growth in the quarter of 0.9 per cent.

Then we get growth slumping to 0.2 per cent (since revised to 0.3 per cent) in the June quarter, and now we get it soaring by another 0.9 per cent last quarter.

If you had a better feel for arithmetic than the literalists, you might think that, since the March quarter increase was a lot bigger than could have been expected, it wasn't all that surprising the June quarter increase was a lot smaller than could have been expected.

And since the June quarter increase was a lot smaller than could have been expected, it wasn't all that surprising the September quarter increase was a lot bigger than could have been expected.

It's notable that the component of GDP that explained most of the weakness in the June quarter also did most to explain the strength in the September quarter: the volume of exports.

Export volumes grew by an unusually strong 3.7 per cent in the March quarter, then fell by 3.3 per cent in the June quarter, then grew by an unusually strong 4.6 per cent in the latest quarter.

This tells us little about what was happening in the wider economy. Rather, it tells us how climate change is playing havoc with the bureau's seasonal adjustment process.

Huh? Export volumes have been growing mainly because all our new coal and iron ore mines are coming into production. Seasonally adjusted exports of coal were up in the March quarter because there were fewer cyclones than usually happen at that time of year.

They were down in the June quarter because the weather was much worse than usual. And why did they rebound in the September quarter? You guessed it: the weather was better than normal.

So those economists warning that our strong GDP growth in the latest quarter is unlikely to represent the start of a better growth trajectory are no doubt right.

But those people arguing that, since the growth in exports last quarter accounts for more than all the growth in GDP in the quarter, the domestic economy obviously went backwards and so must be very weak, aren't making a sensible comparison.

It's not sensible to give the "domestic economy" no credit for all the export growth our miners are generating, while making it bear the full burden of the sharp fall in mining investment spending.

No, to get a better idea of how the great "transition" to broader-based growth is progressing, it makes more sense to divide the economy between the mining and mining-related sector, and the rest of the economy.

Doing this shows that, whereas the latest accounts say the overall economy grew by 2.5 per cent over the year to September – a quite believable figure – the non-mining economy grew by about 3 per cent.

That is, when you put all the elements of mining together – the growth in its production and exports, the fall in its investment spending and the associated fall in imports of mining equipment – you find that, rather than accounting for more than all of it, mining is actually subtracting from overall growth.

To get a better handle on what's happening inside the non-mining sector, the Reserve Bank reported in its latest statement on monetary policy an exercise where it set aside mining – and agriculture – and divided the rest of the economy into three sectors.

First was the "goods-related" sector, composed of manufacturing, construction, utilities and distribution (transport, wholesale and retail trade). Second was the "household services" sector, including health, education, hospitality and recreation.

Third was the "business services" sector, including professional and scientific services, finance and insurance, hiring and real estate, and information and telecommunications.

The rate of growth in the household services sector has increased considerably over the past few years. It has experienced increased employment and job vacancies over the past year or more.

The rate of growth in the business services sector has picked up a bit, to be about average. It has experienced a recovery in job vacancies and employment.

So the economy's huge services sector is doing reasonably well. It's the goods-related sector where output growth remains weak, little changed for more than two years. Vacancies and employment have been little changed for about three years.

Thus there's been an accelerated shift from goods to services. And since services are more labour-intensive, while the goods-related sector is more capital-intensive, this explains why non-mining business investment has yet to recover.

It also explains why, economy-wide, we've enjoyed above-average growth in employment in spite of below-average growth in GDP for the past year or more.

So the transition to broader-based growth is proceeding. And once the huge fall in mining investment spending has come to an end, our growth figures should look a lot better than they do now. That, too, is just arithmetic.

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Moratorium on new coal mines makes economic sense

What are we meant to do about coal? For some time now it's looked like Australians face a painful choice between doing the right, moral thing by the rest of the world and continuing to make a living from our rich endowment of natural resources.

The burning of coal is by far the biggest source of the greenhouse gas emissions that are causing climate change. Australia is one of the world's biggest producers of coal.

Greenies have been arguing for years that, although it's too much to ask that we just stop exporting the stuff, we should at least get in no deeper by ceasing to build any new mines or expand existing mines.

In August, Anote Tong, President of the Republic of Kiribati, called for an international moratorium on new coal mines as a way of underpinning the efforts to get increased commitment to reduce emissions at the Paris summit in December.

Not surprisingly, Tong's call for a moratorium has been supported by 11 other Pacific island nations worried about rising sea levels. But he's also winning support from such influential figures as the Nobel Prize-winning scientist Peter Doherty and the British economist Lord Nicholas Stern.

For such an international moratorium to be effective, we'd have to be part of it. At present, we have 52 proposals to build new coals mines or expand existing ones.

But isn't it too much to ask us to leave all that black gold in the ground? Mining and exporting coal is an important way this economy makes its living.

The developing countries – including China and India – have a lot more developing to do, meaning they'll need a lot more energy, much of which will be coal. What's so bad about them trying to get rich like us? And why shouldn't it be we who supply that coal?

We need more jobs, and think of all the jobs building more big mines would create.

So what's it to be? Conscience or self-interest? Well, how about both?

The Australia Institute think-tank has begun campaigning hard for a moratorium, and a forthcoming paper by its chief economist, Richard Denniss, argues that economic and political considerations actually say we should be joining the moratorium.

Why? In a nutshell, because coal's days are numbered. The rapidly falling price of renewable energy such as wind and solar, combined with the growing resolve of China, the US and others to reduce their emissions, put a dark cloud over the future of coal.

Coal mines are intended to have lives of 50 to 90 years. Will coal prices be high enough in 30 or 40 years to make continued production profitable? If not, investors in new coal mines won't get their money back, but will be lumbered with "stranded assets" – assets that no longer earn much of a return.

Denniss says it's now widely accepted by international agencies that meeting the goal of limiting global warming to 2 degrees requires keeping most fossil fuels unburnt and in the ground.

All this helps explain why the world's big banks, including our own, have become markedly less enthusiastic about financing new coal mines. That – plus the present flat state of the world coal market.

According to the BP company's energy outlook, global coal consumption grew by just 0.4 per cent last year, well below its 10-year average growth rate of 2.9 per cent.

Within that, China's consumption grew by just 0.1 per cent. And Professor Ross Garnaut, of the University of Melbourne, is predicting a significant decline in China's demand for coal for the foreseeable future.

Were we to build all our proposed new mines, we'd double our annual exports. According to Denniss, just proceeding with the five biggest projects in Queensland's Galilee Basin would increase the world's seaborne coal trade by 18 per cent.

What do you reckon that would do to world coal prices at a time when coal demand is weak?

See the point? In such circumstances, preventing further coal development – including by governments declining to subsidise new mine railways and ports – wouldn't just reduce future greenhouse gas emissions.

By avoiding causing further decline in coal prices, it would also benefit the owners of existing mines, the banks that have lent to them and those who work for them, as well as the owners of present and future renewable energy projects. Not to mention the governments dependent on revenue from price-based mining royalties and company tax collections.

On its face, by causing coal prices to be higher than otherwise, it would harm the users of coal and coal-fired electricity. But when you remember that, without something like a carbon tax, the price of coal fails to include the cost to the community of the environmental damage that coal-burning does (including the death and ill health caused by the particulate air pollution from power stations), that's not anything to feel bad about.

But what about all the jobs that building new mines would have created? They're temporary and often exaggerated by the projects' proponents. Once they're built, open-cut coal mines employ surprisingly few workers.

The construction workers not employed to build more mines than are good for us could be better employed building more useful infrastructure.

When you think it through, the case for a moratorium on new coal mines has a lot going for it.

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Two-speed economy has gone away

Remember the two-speed economy we used to hear so much about? Well, no one in the media has thought it worth mentioning, but it's gone away.

It's remarkable how the media can get so excited about some "problem" but then never mention it again.

The two-speed economy was caused by the first two stages of the resources boom, of course, with the high commodity prices and mining investment boom causing the resource-rich states to grow much faster than the other states. The others were held back partly by the boom-caused high dollar making life much harder for trade-exposed industries such as manufacturing and tourism.

According to an article by Sam Nicholls and Tom Rosewall in the latest Reserve Bank Bulletin, Western Australia's real gross state product grew at an average rate of almost 5 per cent a year after 2003-04, and Queensland's grew at 3.5 per cent, compared with 2.5 per cent or less in the other states.

But with commodity prices coming down (and state governments' mineral royalties falling) and construction projects winding up, the mining states' economies are now growing more slowly.

The boom is now in its increased production phase, but this is much less labour-intensive than building new mines and natural gas facilities, meaning less money stays in the state economy rather than going to foreign owners.

Meanwhile on the other side of the fence, the Reserve Bank's bargain-basement level of interest rates has helped consumption spending and home building to grow a bit more strongly in the other states, particularly NSW and Victoria.

With their tax receipts boosted by much higher conveyancing duty from their housing booms, the NSW and Victorian governments won't keep such a tight rein on budget spending.

The dollar has now fallen a long way (though its decline has been inhibited by the "quantitative easing" – money creation – in most of the major advanced economies) and this is starting to revive manufacturing and tourism.

Differences in each state's industrial composition, as well as differences in their rates of population growth, mean the states never grow in lock-step. Barring commodity booms, the nationwide growth rate is rarely far from the growth rates in NSW and Victoria, simply because these two states constitute more than half of national gross domestic product.

We're returning to that more usual state. Nicholls and Rosewall examine the "standard deviation" in GSP growth rates as a summary measure of the degree of variation in growth across the states. They find it has declined recently to be only a little above its long-run average.

Another way to compare the states' economic performance is to look at differences in their rates of employment growth and levels of unemployment, though you have to remember to allow for differing rates of population growth.

Doing this shows that "the variation in state unemployment rates has declined recently, to be well below its average level since 2000", the authors say.

Of course, although the states may now be growing at more similar rates, a decade of disparate growth can't help having a big effect on each state's share of the total Australian economy.

Are you sitting down? Over the 10 years to 2013-14, WA's share has increased from 11 per cent to 17 per cent. Amazing. And get this: WA now has by far the widest gap between its share of the economy and its share of the nation's population, just 11 per cent.

Queensland's economic share has increased by 1 percentage point to 19 per cent. (Mining accounts for a much smaller share of Queensland's economy than of WA's, and the Sunshine State is also more dependent on tourism, which was hard hit by the high dollar.)

The Northern Territory also benefited greatly from the mining boom, with its share of the national economy increasing by about a quarter. In absolute terms, however, it remains tiny.

But if the mining states' share has grown, the other states' shares must have shrunk. In round figures, NSW's share is down 4 points to 31 per cent and Victoria's is down 2 points to 22 per cent. South Australia's and Tasmania's shares are down a combined 1 point to 6 per cent and 2 per cent.

Now let's look at differences in the states' industrial structure. Although most industries' share of each state's economy is similar, there are some big differences, particularly in primary industry.

Mining accounts for a remarkable 30 per cent of WA's economy and 9 per cent of Queensland's, compared with about 2 per cent in the other states.

Agriculture accounts for 8 per cent of Tasmania's economy and 5 per cent of SA's, compared with a national average of 2 per cent.

Victorians see their state as heavily dependent on manufacturing but in truth it accounts for 7 per cent of their economy, the same as for NSW and not far from the national average of 6 per cent.

With NSW fancying itself as the nation's financial capital, it shouldn't surprise that "business services" – financial and insurance services; professional, scientific and technical services; media and telecommunications – make up 30 per cent of its economy.

What may surprise manufacturing-mesmerised Victorians is that they're not far behind at 27 per cent. This compares with shares ranging from 19 per cent down to 14 per cent in the other states.

A last startling statistic. Because our exports are dominated by minerals and energy, and because WA has such a large share of the nation's mining industry, the authors estimate that with just 17 per cent of the economy, WA supplies a stunning 43 per cent of our exports.

No wonder the Sandgropers like to imagine the rest of us are bludging off them.

But it's a mercantilist fallacy that nations make their living by selling things to other nations (and importing as little as possible). Selling goods and services to other Aussies is no less virtuous.

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Resources boom not done yet

If you think the resources boom is all over bar the shouting, someone who ought to know begs to differ. He thinks the last phase of the boom is just getting started. But even he thinks the boom leaves us with stuff to worry about.

In a speech this week, Mark Cully, the chief economist of the federal Department of Industry and Science, says the resources boom actually consisted of three booms.

The price boom lasted for about eight years and peaked in 2011. The overlapping investment boom lasted for about six years, with $400 billion worth of resources projects. Overall, business investment spending peaked in the last quarter of 2012 at an astonishing 19 per cent of gross domestic product.

By now we're in the early stages of the production boom, making the whole thing more of a "super-cycle" than a common or garden boom.

We're well aware that resource prices are still falling from their 2011 peak and that mining investment spending is rapidly coming to an end. But, according to Cully, the production boom is set to last far longer than the others did.

As always, it's a story of global prices being determined by the interaction of global demand with global supply. World prices shot up because demand grew faster than supply could keep up with.

Eventually, however, the world's producers of resources such as iron ore, coking and steaming coal, liquefied natural gas and petroleum responded to the high prices in textbook fashion, desperately expanding their production capacity so as to cash in on the bonanza.

It took a while for that extra capacity to come on line. But, as the textbook predicts, once supply started catching up with demand prices started falling back. And, adding to the pressure for lower prices, world demand started to fall off.

So, isn't that the same-old, same-old end to the story of the boom? And if we get to the point where world supply actually exceeds world demand, doesn't that mean prices could have a lot further to fall?

Not if it's turns out to be true – as I and others have believed – that this commodity cycle is being driven more by a longer-term change in the structure of the global economy than by the usual shorter-term cyclical mismatch between supply and demand.

Many people see the resources boom as caused by the rapid development of China, whose economy is now growing more slowly. But Cully sees China as just the first act, with other countries to follow.

"Economic growth in the highly populated emerging economies of Asia will continue to be a defining theme of this century," he says.

Per-person consumption of energy and materials in most countries in Asia lags the developed nations by a large margin and so is almost certain to grow. As incomes rise and they attract infrastructure and commercial investment, Asia's consumption of resources will grow by volumes that far outweigh whatever's happening in the rich countries.

Iron ore and coking coal are used to make steel, of course. Cully says China's steel production is estimated to have reached a record last year. He expects it to fall in the short term but, over the medium term, to reach a new peak almost 10 per cent higher by 2020.

"This will be required for China to continue expanding its infrastructure networks, especially rail, build more housing and grow its capital stock," he says.

Then there's India. Its Ministry of Steel wants present production to be four times higher by 2025. It may not achieve that target, but this still suggests rapid growth.

There've been highly publicised falls in the world price of iron ore in recent times, but Cully expects it to remain low this year and next before rebounding over the medium term as higher-cost producers exit the market and demand continues to grow. Australia has some high-cost producers, but most are in other countries, leaving Rio Tinto and BHP Billiton as the world's lowest-cost producers.

Turning to steaming coal, Cully questions the environmentalists' optimistic belief that world demand for it is on the way out. More than 300 gigawatt (one billion watts) of coal-fired electricity generation capacity is being constructed or has been approved in developing countries.

"Barring major policy adjustments," he expects coal-fired power to remain a primary source of generation in China and India. Japan, South Korea and Taiwan are increasing their use of steaming coal, while Indonesia, Malaysia, Vietnam and Thailand are increasing by even more.

Australia is likely to play an important role in meeting this increased demand because our coal's higher energy content makes it more suitable for use in advanced generators. Cully expects our exports to have increased by 15 per cent by 2020, making us the world's largest exporter of steaming coal.

Finally, natural gas. Cully's team projects that our exports of natural gas will increase more than threefold to about 75 million tonnes a year in 2019-20. By that time Australia would be the world's largest exporter of gas.

The increased volume of gas exports is likely to be the principal driver of growth in Australia's export revenue. Looking across all the mineral commodities, increases in the volume (quantity) of exports are expected to outweigh further decreases in prices, so that the value of these exports (price times quantity) increases by about a third through to 2019-20.

So what could there be to worry about? Well, it's worth remembering that, although we're exporting more thanks to the resources boom, our share of global exports is actually falling. Other countries' exports must be growing faster than ours.

More concerning, while we've been becoming global export leaders in iron ore, coal and natural gas, our range of exports has become even less diversified than it was before the boom.

Considering how dependent we are on exporting fossil fuels, that ought to worry us more than it does.

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Let's be more hard-nosed towards foreign miners

Joe Hockey and Competition and Consumer Commission boss Rod Sims must surely deserve a medal for their selfless devotion to the interests of foreigners, after their shocked reaction to Twiggy Forrest's suggestion that the world's big producers stop the plunge in iron ore prices by limiting their output.

And here was me thinking economics was about rational self-interest.

Hockey sniffed that the idea smacked of forming a cartel. Which was good of him when you remember the way the plunging price of iron ore is robbing his budget of company tax revenue and causing his deficits to be bigger than those Labor left.

We can't afford to give much money to the foreign poor, but if foreign-owned mining companies want to keep forcing down ore prices by expanding production at a time when world demand is weak, that's fine by Joe.

Sims proclaims that cartels are illegal and is investigating whether Twiggy should be prosecuted. It surely can't have escaped his notice that very little of Australia's iron ore production is used locally, meaning no Australian consumers or businesses would suffer from such an arrangement.

But that, apparently, is not the point. Cartels are morally wrong, even if they advance Australia's national interest. If big foreign-owned producers such as Rio Tinto and BHP Billiton want to use their lower costs per unit to keep expanding production, forcing down the world price and attempting to wipe out higher-cost Australian-owned producers such as Forrest's Fortescue Metals, good luck to them.

Fine by us. That's the way the global resources game has always been played – wild swings from excess demand and inadequate supply causing booms, to weak demand and excess supply causing busts – and so that's the way it must continue to be played.

No effort can or should be made to moderate this crazy game. That there is a lot of fallout on bystanding industries, workers and consumers in the countries where big mining chooses to play this contact sport, is just an unfortunate fact of economic life which it is our government's sacred duty to make us grin and bear.

But while we're being so noble and self-sacrificing, it's worth remembering it wasn't always thus. Consider the many decades in which our governments sought to stabilise the world price of wool, which ended badly only after misguided economic rationalists handed control of the scheme to the woolgrowers themselves.

And don't forget the old Australian Wheat Board's "single desk". We weren't big enough to control world wheat prices, but we did make sure our growers weren't bidding against each other.

While the punters talk xenophobic nonsense about Chinese state-owned corporations taking over NSW's electricity poles and wires, Australia's economists have a deeply ingrained ethic that it's a form of racism ever to acknowledge that a company is foreign-owned.

Now we're in the final throes of the decade-long mining resources boom, it's a good time to reflect on how much we got out of it (not all that much, remembering it's all our minerals) and how well we handled it.

We played it by letting the foreign mining companies do pretty much whatever they wanted, which was to build as many new mines and gas facilities as possible in minimum time. This insane rush came at the expense of all our other industries, but no one questioned its wisdom.

It was left to the Reserve Bank to ensure the miners' greedy stampede didn't cause a wages breakout and inflation surge, which it did by repressing the rest of the economy. To "make room" for the money-crazed miners, it held interest rates higher than they otherwise would have been, which may have caused the exchange rate to be even higher than otherwise.

Was any effort made to assess whether attempting to build 180 resource projects in three years was in the national interest? Yes, but the economists left it to the lawyers. Each of those projects would have been accompanied by an environmental assessment assuring some court that the project would create thousands of jobs and do wonders for the economy.

Evaluating each project separately, the lawyers bought it. You needed to be a macro-economist to see that, added together, those claims made no sense. There wasn't that much skilled labour available and, with the economy near full employment, it just isn't possible to create many extra jobs. All you'd do is move jobs around, bidding up wages and creating shortages in the process.

But the macro-economists were away at the time, probably busy explaining to politicians why it was our economic duty to allow foreign mining companies to use our economy as a doormat.

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More infrastructure spending would boost economy

It's good to see Joe Hockey finally making the transition to government and joining the economic optimists' party. This week he greeted the national accounts by saying the economy had grown by "a solid 0.5 per cent in the December quarter to be 2.5 per cent higher over the past year".

"Our income as a nation picked up in the quarter, with nominal gross domestic product rising by a solid 0.6 per cent," he continued. "Real gross national income also rose in the quarter."

A treasurer should never talk the economy down, just as the official forecasters should never be the first to predict imminent recession. Such negativity tends to be self-fulfilling.

So I'm sorry to rain on Hockey's parade by telling you that "solid" growth is the econocrats' euphemism for "not so hot".

Just so. Annual growth of 2.5 per cent is well below our trend (average) rate of 3 per cent, especially disappointing when you remember we've been well below trend for quite a few years.

But though the figures from the Bureau of Statistics were unsatisfactory, they don't support the earlier fears of some that the economy fell apart in the previous quarter. A sensible reading is that the economy continues to plug along at the rate of about 2.5 per cent a year.

This, of course, is insufficient to stop unemployment rising. But for some years the rate of worsening has been steady at about 0.1 percentage points a quarter – which fits with reasonably steady growth in real GDP of about 2.5 per cent a year.

One encouraging sign in the accounts is that consumer spending grew by 0.9 per cent in the quarter and 2.8 per cent over the year. This isn't too bad when you consider that, with weak growth in employment and wages, real household income is growing at an annual rate of only about 1 per cent, according to calculations by Kieran Davies of Barclays bank.

Clearly, households must be reducing their rate of saving. Over the past year it's edged down by about 1 percentage point to a still-high 9 per cent of household disposable income. From now on consumer spending should be boosted by the fall in petrol prices.

Another bright spot is home building, which grew by 2.5 per cent in the quarter and by more than 8 per cent over the year. This is one area where the Reserve Bank's exceptionally low interest rates are really working, with building approvals reaching an all-time high in January.

It's likely all the real estate activity is helping to boost consumer spending on durables. There's nothing like changing houses to make you think you need a new lounge suite.

The weakest part of the accounts was business investment spending, which fell by almost 1 per cent in the quarter. Within this, and according to Davies' figuring, mining investment fell by 5 per cent while non-mining investment grew by only 2 per cent.

This is where we need the economy to be making the transition from the mining investment boom to non-mining-led growth. It's happening, but not fast enough to get the economy heading back towards trend growth.

That's why the Reserve has reverted to cutting interest rates. Not so much because the economy was slowing as because it wasn't picking up the way it had expected. And it's early days yet: mining investment fell by about 13 per cent last year, it's expected to fall by about that much again this year and by a lesser amount in 2016.

Arithmetically, the big saviour was the rising volume of exports, up 1 per cent in the quarter and more than 7 per cent over the year. This was driven by mineral exports, of course.

Combine that with a 2.5 per cent fall in the volume of imports in the quarter and "net exports" (exports minus imports) contributed 0.7 percentage points to GDP growth in the quarter and 2 percentage points to growth over the year.

Why are imports falling? Mainly because less mining investment means fewer imports of heavy mining equipment, but also because the fall in the dollar seems to have discouraged imports of business services and Aussies from "importing" overseas holidays.

But I can't get too excited about the surge in mineral exports. Mining is so capital-intensive that far fewer jobs are created by higher mineral exports than you'd expect from a jump in other exports. If that's the best we've got going for us, it's not good enough.

One more point of interest: spending by the public sector rose by a mere 0.1 per cent in the quarter and actually fell by 1.1 per cent over year. So, no help from government spending in getting the economy moving.

But before you start muttering about "austerity" and blaming poor old Joe, note this: public consumption spending rose by 0.4 per cent in the quarter and by 2 per cent over the year, whereas public investment spending fell by 0.9 per cent in the quarter and by (an amazing) 11.9 per cent over the year.

The great bulk of spending on capital works – "infrastructure" if you prefer – is done by the state governments. So it seems that, between them, the state governments – unduly worried about retaining their high credit ratings – have been allowing their works programs to run down.

This at a time when so many mining construction projects are winding up and construction workers and other resources are becoming available. Sensible governments adjust their construction programs to fit with downturns in private sector activity and take advantage of lower construction costs, thereby doing themselves and the economy a favour.

With monetary policy (interest rates) now less effective in stimulating the economy, it would be better if fiscal policy (budgets) was doing more to help, not less.

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