Economists: lonely, misunderstood angels in shining armour

If you’re tempted by the shocking thought that economists end up as handmaidens to the rich and powerful – as I’m tempted – Dr Martin Parkinson wishes to remind us that’s not how it’s supposed to be. The first mission of economists is to make this world a better world, he says. But don’t expect it to make you popular.

Let me tell you about a talk he gave on Friday night. It was a pep talk to the first of what’s hoped to be a regular social gathering for young economists come to Canberra to study, teach or work in government or consulting.

Apparently, working in Canberra can be a tough gig if you don’t know many economist mates to be assortative with.

Parkinson’s own career has had its downs and ups. He was sacked as Treasury secretary by Tony Abbott – who feared he actually believed in the climate change policy the Rudd government had him designing – then resurrected by Malcolm Turnbull as secretary of the Department of Prime Minister and Cabinet, the Treasury secretary’s bureaucratic boss.

He began the pep talk with a story about the woman with only six months to live, who’s advised by her doctor to marry an economist so as to make it seem like a lifetime.

That may be because, as Parko says, economists are trained to be analytical. To be rigorously logical and rational in their thinking. (I define an economist as someone who thinks their partner is the only irrational person in the economy.)

“Economics gives you insights into the way the world works that other professions cannot,” he says. Economists see things that others can’t. Sometimes that’s because the others have incentives not to see them.

As Upton Sinclair famously put it, it’s difficult to get someone to understand something when their salary depends on them not understanding it.

Ain’t that the truth. The endless bickering between our politicians explained in a single quote. And the economists’ limited success in persuading people to take their advice.

Economists are trained to see “opportunity cost” which, according to Parko, is “the core tenet of the profession”. “This under underlies everything we do.

“This leads us to positions that are often counter-intuitive [the opposite of common sense] and unpopular – but are right.”

True. It may amaze you that so much of what economists bang on about boils down to no more than yet another application of opportunity cost: be careful how you spend your money, because you can only spend it once.

It’s a pathetically obvious insight, but it’s part of the human condition to always be forgetting it. So it’s the economist’s role to be the one who keeps reminding us of the obvious. If economists do no more than that, they’ll have made an invaluable contribution to society – to making this world a better world - and earned their keep.

But here’s the bit I found most inspiring in Parko’s pep talk. “Economists are not ‘for capital’ or ‘for labour’ . . . We do not see the world through constructs of power or identity, even though we see the importance of them.

“We are ‘for’ individual wellbeing regardless of race, gender, sexual orientation or capabilities. Because of this, we are often against entrenched interests and for those without a seat at the decision table.

“Economists view the past as ‘sunk’ [there’s nothing you can do to change it] and argue for decisions about the future to be made free of sentiment and in opposition to special interests. Now, this is in sharp contrast to the incentives in our political system, which favour producer interests over that of consumers.”

Ah, that’s the point. The ethic of neo-classical economics is that the customer is king (or queen). Consumer interests come first, whereas “producer interests” (which include unions as well as business) matter only because they are a means to the ultimate end of the consumers’ greater good.

Economists believe in exposing business to intense competition, to keep prices no higher than costs (including a reasonable rate of return on capital) and profits no higher than necessary. Competition should spur innovation and technological advance, while ensuring the benefits flow through to customers rather staying with business.

Business doesn’t see it that way, of course. Unlike some, my policy is to tell business what it needs to know, not what it wants to hear. Some people – suffering from a touch of the Upton Sinclairs – tell themselves this makes me anti-business. No, it makes me pro-consumer. That’s the ethic we so often fall short of.

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Politicians, economists will decide if bank misbehaviour stops

In the wake of the Hayne report on financial misconduct, many are asking whether the banks have really learned their lesson, whether their culture will change and how long it will take. Sorry, that’s just the smaller half of the problem.

You can’t answer those questions until you know whether the politicians and their economic advisers have learned their lesson and whether their culture will change.

Why? Because the game won’t change unless the banks believe it has changed, and that will depend on whether governments (of both colours) and their regulators keep saying and doing things that remind the banks and others on the financial-sector gravy train that the behaviour of the past will no longer go undetected and unpunished.

One of Commissioner Hayne’s most significant findings was that almost all the misbehaviour he uncovered was already illegal. Which raises an obvious query: in that case, why did so much of it happen?

Hayne’s answer was “greed”. That’s true enough, but doesn’t tell us much. Greed has been part of the human condition since before we descended from the trees. But greed has been channelled and held in check by other factors – particularly by social norms that disapprove of it and find ways to censure people who aggrandise themselves are the expense of others. In old times, social ostracism was enough.

So, since banks and other financial outfits haven’t always been willing to exploit their customers the way they have recent decades, the question is: what changed?

One explanation is that the economy’s become a bigger, more complex, more impersonal place, where the exploiter and the exploited don’t know each other. Where the exploitation is carried out by four of the biggest, most sprawling and intricate computer systems in the country.

Where I can spend my obscenely large pay cheque without seeing the faces of the people I’ve ripped off flashing before my eyes. Indeed, in my suburb, all of us get huge pay cheques. And I don’t feel guilty; some of them get much bigger cheques than me.

But another part of the explanation must surely be that things started changing after the triumph of “economic rationalism”, the introduction of microeconomic reform, and the deregulation of the financial sector in the second half of the 1980s.

In the highly regulated world, there was less scope and less incentive to mistreat customers. Competition was limited and there was little innovation. Deregulation was intended to spur competition between the banks and give customers a better deal.

I’m not saying bank deregulation was a bad idea. It did bring innovation (we forget that banking and bill-paying are infinitely more convenient than they were) and you no longer have to live in a good suburb to get a loan from a bank.

And the banks do compete far more fiercely than they used to. It's just that they compete not on price (as the reformers assumed they would) but on market share and which of the big four achieves the biggest profit increase.

In this they’ve behaved just as you’d expect oligopolists to behave.

In the meantime, economic rationalism sanctified greed (the “invisible hand” tells us the market leaves us better off because of the greed of the butcher and the baker) and economists invented euphemisms such as “self-interest” and “the profit motive”.

Then, after economists got the bright idea of using bonuses and share options to align management’s interests with shareholders’, big business elevated “shareholder value” to being companies' sole statutory obligation.

Now, however, when Hayne says the banks gave priority to sales and profits over their customers’ interests, everyone’s rolling around in horror.

And politicians and econocrats are feigning surprise that financial regulators, long given a nod and wink to dispense only “light” regulation of the players (and denied the funding to give them any hope of successful prosecutions), did just as they were told.

Unless the econocrats and their political masters are willing to accept the naivety that marred bank deregulation, the harm ultimately done to bank customers – ranging from petty theft to life-changing loss – and the system’s susceptibility to political corruption, the banks’ culture won’t change because the will to change it won't last.

The existing prohibitions on mistreatment of customers need to be made more effective, as proposed by Hayne but, above all, the law needs to be policed with vigour – including adequately resourced court proceedings – so the banks realise they have no choice but to change.

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The long run is now, and bills are arriving

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Who’s doing best in the rent-seeking business

Economists joke that, whereas they are taught that any barriers to new firms entering a market are bad, allowing profits to be too high, MBA students are taught that "barriers to entry" are good, and shown ways to raise them.

Economists have no quarrel with businesses making profits. The shareholder-owners who provide the financial capital needed to sustain those firms are entitled to a return on their investment, one that reflects not only the (opportunity) cost of their capital, but also the riskiness of the particular business they're in.

Economists call such a return on equity "normal profit". But sometimes the various barriers to new firms entering a market limit competition, allowing the incumbents to make profits in excess of those needed to induce them to stay in the industry.

These are called "super-normal" profits (super as in "above"). Now get this: the other name for super-normal profits is "rents" – economic rents, to be precise.

We're used to thinking of rent-seekers as businesses or industries that ask governments for special treatment. But it's common for rents to be sought in situations that have nothing to do with government favours.

One of the most informative pieces of economic research undertaken last year was conducted by Jim Minifie, of the Grattan Institute, who made detailed estimates of the economic rents being earned in particular industries – something no government agency would be game to do.

He focused on the two-thirds of the economy made up by the "non-tradable private sector", excluding export and import-competing industries and the public sector.

He found that the annual return on equity in the most competitive part of this sector averaged 10 per cent. That compares with returns exceeding 30 per cent in internet publishing, which includes online classified advertising of homes, jobs and cars.

Then came internet service providers on 25 per cent and wired telecom on a fraction less. Supermarkets were on about 23 per cent, sports betting on 22 per cent, liquor retailing on 19 per cent, and wireless telecom and (get this) private health insurance on about 18 per cent.

Delivery services and fuel retailing are on 15 per cent, with banking not far behind on 14 per cent, level pegging with electricity distribution and airport operations.

But the rate of an industry's super-normal profit or economic rent isn't the same as its absolute amount. Most industries with very high rates of profit are quite small.

Measured in dollar terms, the most rents are in banking, followed by supermarkets, electricity distribution (just the local poles and wires), wired and wireless telecom.

Minifie estimates that rents account for 20 per cent of the non-tradable private sector's total annual after-tax profits of $200 billion. This is equivalent to more than 2 per cent of gross domestic product.

Another way to judge the significance of super-normal profits is to express them as "mark-ups" – as proportions of total sales.

The average mark-up across the whole non-traded private sector is 2 per cent. So, if rents were eliminated, but costs didn't change, average prices would fall by 2 per cent.

Within that average, however, the mark-up in internet publishing is 26 per cent. Then come airport operations on 20 per cent, wired telecom on 19 per cent and electricity distribution on 12 per cent.

Further down the league table, electricity transmission – the high-voltage power lines, not the local poles and wires – has an estimated mark-up of 7 per cent.

But get this: the banks' mark-up is just 4 per cent and the supermarkets' is a bit over 3 per cent.

How come, when super-profits account for more than half the supermarkets' total profit? Because supermarkets are a high-volume, low-margin business (as are banks).

Minifie notes that Coles and Woolworths are so big they achieve huge economies of scale. And, as dairy farmers well know, they achieve further cost savings by using their market power to force down the prices they pay their suppliers.

Trick is, they pass much of these cost savings on to their customers, but keep enough of them to remain highly profitable.

Coles and Woolies have substantially higher profit margins than their smaller rival IGA, even though their average prices are lower than IGA's prices. So the big two's costs must be a lot lower than IGA's.

The list of industries with the highest super-profits reminds us how badly governments have stuffed-up the national electricity market, how much better they could be doing in controlling the prices of monopoly businesses such as Telstra, airports and port terminals, and in charging for liquor and gambling licences, not forgetting the indulgent treatment of private health funds.

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Who's ripping it off? Competition theory and reality

Puzzling over the rich economies' poor productivity improvement and weak wage growth (but healthy profits), American economists are pointing the finger at reduced competition between firms. But can this explain Australia's similar story?

Jim Minifie, of the Grattan Institute, set out to answer this in his report, Competition in Australia.

Economists regard strong competition between businesses as essential to ensuring market economies function well, to the benefit of consumers and workers.

Competition is what economic theory says stops us being ripped off by the capitalists. Firms that overcharge for their products lose business to firms that undercut them.

So competition pushes prices down towards costs (which economists – but not accountants – define as including the "cost of capital", or "normal profit", the minimum rate of profit needed to induce firms to stay in the market).

Competition helps ensure that economic resources - land, labour and (physical) capital – move to the uses most valued by consumers.

Competition also encourages firms to come up with new or better products – or less costly ways of producing a product – in the hope of higher profits. But those that succeed in this soon find their competitors copying their ideas, and bidding down the price to get a bigger slice of the action.

The innovations improve the economy's productivity (output per unit of input), but competition soon takes away the higher profits, delivering them into the hands of consumers, who often get better products for lower prices.

That's the theory. Question is, to what extent does it hold in practice? And does it hold less in recent years than it used to?

The simple theory assumes any market has a large number of sellers, each too small to be able to influence the market price. In practice, however, many of our markets are dominated by two, three or four big firms.

Why? Mainly because of the presence of economies of scale. It's very common that the more you produce of something – up to a point – the less each unit costs.

So, it makes great sense to have a small number of big firms doing much of the production – provided competition ensures most of the cost saving is passed on to customers in lower prices. Which, as a general rule, it has been over the decades.

Trouble is, big firms do have some degree of control over prices. And it's common for the few big firms in an industry to come to an unspoken agreement to compete using advertising or product differentiation, but not price.

Firms can increase their pricing power by taking over their competitors to get a bigger share of the market. It's the role of "competition policy" – run in our case by the Australian Competition and Consumer Commission – to prevent overt collusion between firms, and takeovers intended to increase market power. But how well is that working?

"Natural monopolies" – where it simply wouldn't make economic sense for more than one firm to serve a particular market, such as rival sets of power lines running down a street, or two service stations in a small town - are another common departure from the theoretical model.

So, what did Minifie find in his study of competition in practice? He found evidence it had lessened in the United States, but not here.

He found plenty of markets where a few firms did most of the business. But "the market shares of large firms in concentrated sectors are not much higher in Australia than in other countries [of comparable size], and they have not grown much lately," he says.

Nor have their revenues (sales) grown faster than gross domestic product. The profitability of firms – profits relative to funds invested - hasn't risen much since 2000.

Minifie identifies eight industries characterised by natural monopoly (in descending order of size): electricity transmission and distribution, wired telecom, rail freight, airports, toll roads, water transport terminals, ports and pipelines.

Then there are nine industries where large economies of scale mean they're dominated by a few firms: supermarkets, wireless telecom, domestic airlines, then (of roughly equal size) internet service providers, pathology services, newspapers, petrol retailing, liquor retailing and diagnostic imaging.

Next are eight industries subject to heavy regulation by government: banks, residential aged care, general insurance, life insurance, taxis, pharmacies, health insurance and casinos.

(Often, these industries are heavily regulated for sound public policy reasons, but the regulation often acts as a barrier to new firms entering the market, thus allowing them to be dominated by a few firms.)

But note this: by Minifie's calculations, natural monopolies account for only about 3 per cent of "gross value added" (a variant of GDP), while high scale-economies industries account for 5 per cent and heavily regulated industries for 7 per cent.

So that means the parts of the economy where "barriers to entry" limit competitive pressure make up about 15 per cent of the economy. Then there are 29 industries with low barriers to entry making up the rest of the "non-tradables" private sector, and about half the whole economy.

That leaves the tradables sector (export and import-competing industries) accounting for 14 per cent of the economy and the public sector making up the last 20 per cent.

Even so, Minifie confirms that, in industries dominated by a few firms, many firms make "super-normal" profits – those in excess of what's needed to keep them in the industry.

By his estimates, up to half the total profits in the supermarket industry are super-normal. In banking it's about 17 per cent.

Other companies and sectors with substantial super profits include Telstra, some big-city airports, liquor retailers, internet service providers, sports betting agencies and private health insurers.

Comparing this last list with the lists of natural monopolies and heavily regulated industries suggests governments could be doing a much better job of ensuring the regulators haven't been captured by the companies being regulated.

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Radical policy change may be needed to fix wages

It's too early to be sure, but not too early to suspect that, if we and the other developed economies keep travelling the way we are, conventional wisdom about what constitutes good economic policy may soon need to be turned on its head.

We're living through very strange times. Each developed economy has its own story, but there are strong similarities. One is exceptionally low inflation, which doesn't seem temporary.

Another is surprisingly weak rates of measured productivity improvement, although our rate of improvement in the productivity of labour isn't too bad.

My guess is a fair bit of this is mis-measurement arising from our quite radical shift to a digital economy.

But the other explanation may be a decline in price competition in many industries, thanks to several decades of both natural and government-facilitated rent-seeking by big businesses, in ever-more concentrated industries.

Next, wages. It's too soon to conclude that wage growth – which in Oz has been slowing since mid-2012 and been pathetically weak for three years – is down for the count.

We don't yet know how much of the weakness is merely cyclical and how much is due to deeper, longer-lasting, structural causes.

Even so, it's hard not to suspect that a fair bit of the wage weakness is structural. My guess is that while we've been busy decentralising wage-fixing and removing all provisions thought to favour unions, globalisation and technological change have conspired to rob the nation's employees of any collective bargaining power.

This may sound like a dream come true for business and its high-paid executives but, if it's true, it's deeply destabilising overkill.

Wages are a key variable in the economy. Allow them to be either too high or too low and the economy gets out of kilter.

Allow the profits share of national income to keep continually expanding at the expense of the wages share and expect to pay a price economically, socially and politically.

And that's before you remember that wages are the chief source of governments' tax revenue. Not only personal income tax, but all the indirect taxes – notably, the goods and services tax – that households pay when they spend their labour incomes.

Low nominal wage growth isn't necessarily a worry if, at the same time, the rise in consumer prices is low.

What matters to working households and the rest of the economy (but not governments) is what's happening to real wages.

In a healthily functioning economy, real wages should rise pretty much in line with the improvement in the productivity of labour.

That way, both labour and capital get their fair share of the fruits of economic progress.

Trouble is, in the US this relationship broke down maybe 30 years ago, explaining why the top few per cent of households have captured most of the growth in the nation's real income over that time.

This doesn't just widen the gap between rich and poor. By directing so much income growth away from the high spenders at the bottom and middle to the high savers at the top, it slows growth in consumption and thus production.

It also adds to the disillusionment of ordinary voters, making them more likely to lash out and vote for the cunning wacko celebrity-de-jour candidate, such as Clive Palmer, Pauline Hanson or Donald somebody​.

Get this: there are tentative signs the relationship between real wage growth and labour productivity may be breaking down in Oz.

The relevant indicator, the index of real labour costs per unit, should hover around 100. It fell by 3.3 per cent during 2016, reaching 98.1, equal lowest since the series began in 1985.

If this weakness persists, it will raise the question of whether the formerly healthy relationship was a product of market forces, or the industrial relations system's achievement of a fine balance between employer and union bargaining power.

If it does persist, how could we return to a healthy relationship? By reversing the dominant wisdom of many decades, that governments must never do anything that adds to the regulatory burden on employers. By acting (very carefully) to strengthen the hand of union collective bargainers.

Final point: governments of all colours secretly rely on bracket creep to help tax collections keep up with the inexorable growth in government spending.

But bracket creep depends on both reasonable inflation and real wage growth to work its barely noticed fiscal magic.

What happens if inflation stays low and real wages stop growing? You have to junk your rhetoric about smaller government and keep doing what Malcolm Turnbull did in this budget: justify explicit tax increases.

Either that, or get wages growing properly.

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The news is good, but not for the reason we've been told

Fabulous news on the economy this week. The recession that never was, didn't happen. Phew. That's a relief.

After going backwards by 0.5 per cent in the September quarter of last year, we learnt from the Bureau of Statistics' national accounts that the economy rebounded by 1.1 per cent in the December quarter - meaning, according to the overexcited children of economic reporting, that we've escaped "technical" recession.

Actually, anyone with sense knew three months ago we would. The detail of the national accounts showed the contraction was no more than a pothole on the economic road, the product of an unusual accumulation of negative one-offs.

But even if this week's figures had shown a second consecutive quarter of "negative growth", the recession the excitables would be shouting about would be technical rather than real.

Why? Because you can't have a real recession without falling employment and rising unemployment, and we've had neither. Oh. No one told me.

But back to reality. Just as the economy didn't really contract in the September quarter so, however, the economy didn't really take off like a rocket in the December quarter.

There's a lot of largely inexplicable "noise" in the initial estimates of the quarter-to-quarter change in real gross domestic product. That's why adult economists never take the figures too literally.

It's common for a literally unbelievably bad quarterly figure to be followed by an unbelievably good one.

That's partly because of catch-up – work that couldn't be done in the first quarter because of, say, bad weather, is caught up with in the second.

But also because of the laws of arithmetic. If we compare the December quarter with the weak September quarter, we get an increase of 1.1 per cent. But compare it with the quarter before that and the increase is only 0.6 per cent.

The rate of real GDP growth over the year to December – 2.4 per cent – is closer to the rate at which we're likely to actually be travelling, but even that may be on the light side.

One suspiciously strong aspect of the accounts in the December quarter was growth in consumer spending of 0.9 per cent.

With the rise in wages so small, and only modest growth in employment, household disposable (that is, after-tax) income grew by only 0.2 per cent in nominal terms.

So how could consumer spending have grown so strongly? Since, by definition, income equals consumption plus saving, the statisticians assume households must have reduced their rate of saving.

The national accounts show the household saving ratio peaking at almost 10 per cent of household disposable income at the end of 2011, then falling almost continuously since then, taking a big drop in the December quarter to reach a little over 5 per cent.

If that's really happened and isn't just the product of some misestimate of income or consumption (or both), it's probably explained by a "wealth effect" – people in Melbourne and Sydney, seeing the value of their homes shooting up, feel wealthier and so decide they don't need to save as much and can spend more.

The next bit of apparent good news is that new business investment spending grew by almost 2 per cent. This, believe it or not, included an increase in mining investment, plus a stronger-than-usual increase in non-mining investment.

The former is likely to be just a blip as mining investment continues to fall back to normal, post-boom levels; the latter is an encouraging sign that the rest of business is getting on with the rest of their lives.

The last bit of good news in the accounts is that our terms of trade – the prices we receive for our exports compared with the prices we pay for our imports – improved by 9 per cent during the quarter, taking the improvement for the year to almost 16 per cent.

This is mainly because, after falling sharply since their peak 2011, coal and iron ore prices rose over most of last year.

This is important for several reasons. An improvement in our terms of trade increases our real income – since the same quantity of our exports now buys an increased quantity of imports.

"Real net national disposable income per person" – a better measure of living standards than real GDP per person – increased  2.5 per cent in the quarter to be 5.3 per cent higher over the year.

Many people noticed that company profits (the profits share of GDP) leapt by 16.5 per cent in nominal terms during the quarter, whereas the nation's wages bill (the wages share of GDP) fell by a nominal 0.5 per cent.

Why the disparity? Mainly because of the huge boost to mining company profits from the jump in export prices.

Not to worry. If the economy works the way the textbook says, this gain to miners should flow through the economy, causing higher wages and higher tax payments.

This latter likelihood is shown in the fact that nominal (as opposed to real) GDP grew 3 per cent in the quarter to be 6.1 per cent higher through the year.

This is great news for the Treasurer because we pay taxes (and everything else) in nominal dollars, not real dollars.

Last word goes to Dr Shane Oliver, of AMP Capital, who says there are seven reasons to be upbeat about the outlook for the economy.

"Thanks to a more flexible economy, Australia is on track to take out the Netherlands for the longest period without a recession. South-east Australia is continuing to perform well.

"The great mining investment unwind is near the bottom. The surge in resource export volumes has more to go.

"National income is rising again. Public investment is strong and there are signs of life in non-mining investment. Growth is on track to return to near 3 per cent this year," Oliver concludes.

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