Job prospects not as gloomy as you may think

I can always tell when people are getting anxious about unemployment - including their own. It's when a journalist thinks they'll be increasing the sum of human knowledge by adding up the number of redundancies announced in recent weeks.

The latest list is Qantas 5000, Holden 2900 (by 2017), Toyota 2500 (by 2017), Forge Group 1470, Alcoa 980, Sensis 800, WA hospitals 250 and BHP Billiton Mitsubishi Alliance 230.

That's more than 14,000, we're told, and doesn't count the expected job loss among the makers of car parts, which "experts" put at between 25,000 and 50,000. To this you can add declining job opportunities among public servants - though no one seems to worry much about them.

There are two tricks in exercises such as this. The first is that although 14,000 or even 64,000 may seem huge numbers, they're not. Most people have no feel for just how big our economy is. Those figures have to be seen in the context of a total workforce of 11.5 million people, which grows by 170,000 in an average year, or more that 14,000 a month.

Most people have no idea how much turnover there is in the jobs market. Every month tens of thousands of people leave their jobs and a similar or bigger number take up new jobs. The economy is in a continuous state of flux.

The second trick is that the media only ever show us the tip of the iceberg. We're told about only a fraction of the things that happen. Only a fraction of them are announced to the media, so most of what happens goes unreported. And among all the things that are announced, the media select just a few of the juicier items to tell us about.

The items they select tend to be the bigger and badder ones. News that a new business has just hired 100 workers may get reported somewhere - probably in the local rag - but it won't get the trumpeting Qantas' announcement did.

So we're told about the big job losses but not the small losses and almost nothing about the job gains, big or small - even though we know from the official statistics that the gains usually outnumber the losses.

When people hear news reports about redundancies at this factory and that, many conclude we must be heading for recession. This time it ain't that simple. After a record 21 years since the severe recession of the early 1990s, we're overdue for another one and, with the economy quite weak at present, it wouldn't be impossible for us to slide into recession this year.

But the explanation for the planned job losses we're hearing so much about isn't a downturn in the economy, it's continuing change in the structure of the economy - the size of some industries relative to others.

Much of the pressure for structural change is coming from advances in technology, particularly the digital revolution. It's this that's turning the newspaper industry inside out - no one seems to shed many tears over us - and is in the early stages of cutting a swath through retailing.

In Qantas' case, it's still making the painful adjustment to the deregulation of airlines initiated by Jimmy Carter in the 1970s, combined with management incompetence and union intransigence.

But the biggest source of structural change is the resources boom and the likely permanent rise in the dollar it has brought about. People tell you it's all behind us, but when the mining industry's share of the economy doubles to 10 per cent in the space of a decade, the adjustment this imposes on the rest of the economy is profound and protracted.

Clearly, these forces for structural change are beyond the control of any federal government, Labor or Coalition. The truth so many people find so hard to accept is that there isn't a lot we can do about them except ride them out.

In its impotence, the Abbott government is claiming its plans to remove the mining and carbon taxes will be a great help. Only the one-eyed would believe that. Labor has sunk to the depths of attacking the government for its failure to protect Australian jobs and demands to see its "jobs plan". What's Labor's jobs plan? Maintain the handouts to crumbling industries.

It's seeking to exploit the fears of people who are uncertain about where it's all going to end. Well, last week Dr David Gruen, of Treasury, published projections of the various industries' shares of total employment in 16 years' time, 2030.

I must warn you these figures come with zero guarantee. Just because you're smart enough to turn the handle of an incomprehensible econometric model doesn't mean you know any more about what the future holds than the rest of us.

Surprisingly, the projections suggest manufacturing's share of total employment will decline by only a further 1 percentage point. Similar declines are projected in transport and warehousing, construction and (thankfully) financial services. The biggest relative employment decline would be in wholesale and retail trade.

Utilities, media and telecommunications, and, surprisingly, mining are projected to experience minor declines in their shares of total employment. Agriculture's share may rise by a percentage point, while that of education and health may rise by more than 1.5 points, and professional and administrative services by almost 3 percentage points.

We won't all be dead.

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We’ve become a nation of rent-seekers

In political economist Mancur Olson's pathbreaking book, The Rise and Decline of Nations, published in 1982, he argued that a country's economic stability ultimately leads to decline as it becomes increasingly dominated by organised interest groups, each seeking to advance their interests at the expense of others.

By contrast, countries that have a collapse of the political regime, and the interest groups that have coalesced around it, can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. Examples are the rapid growth of postwar Germany and Japan, as Wikipedia reminds us.

Professor Ross Garnaut has argued that Australia is unlikely to see another era of extensive micro-economic reform because of the growth in rent-seeking behaviour since the days of the Hawke-Keating government.

What these days passes for the political debate seems to be dominated by ''distributional coalitions'', in Olson's phrase, arguing for ''reforms'' from which the chief beneficiaries would be their good selves, or desperately opposing government reforms that would impose even the most modest sacrifice on their members.

What gets me is how blatantly self-seeking our lobby groups have become. It is as if the era of economic rationalism - with its belief that the economy is driven by self-interest - has sanctified selfishness and refusal to co-operate for the common good.

Another explanation may be the growth of a lucrative rent-seeking industry. These days far more people make their living lobbying for interest groups than did so in the 1980s.

When your livelihood depends on convincing your clients their money is well spent, it's hardly surprising these ever-multiplying industry groups, corporate ''government relations managers'' and freelance lobbying firms make so much noise and are so untiring in their efforts to extract concessions from government.

The relationship between elected governments and bureaucrats, and the professional lobbyists, is unhealthy. In an ever more complex world, governments seek to consult ''stakeholders'' before implementing policy changes.

But some stakeholders - those that spend most on lobbyists - are more equal than others. And too many politicians, private-office advisers and bureaucrats retire as gamekeepers to become poachers. The fact that ex-Coalition lobbyists do better under Coalition governments, while ex-Labor people do better under Labor governments is a sign that this is not an innocent, arms-length, information-gathering exercise.

Meanwhile, the business of opposition has degenerated into automatic opposition to any and every unpopular government decision, even though this requires parties to turn their rhetoric on its head when they move from opposition to government.

Labor's attempt to exploit public anxiety over the Abbott government's inability to solve the deep-seated and long-running commercial challenges faced by hard-pressed manufacturers and airlines, while advancing not a shred of credible alternative policy, is despicable. Just as despicable as when Tony Abbott did it to Labor.

It's finally dawning on people that major and genuine reform requires a degree of bipartisanship at the political level and a spirit of give-and-take on the part of powerful interest groups. But these prerequisites are further away than ever.

Instead what we get is lowest-common-denominator politics from the pollies and rent-seeking posing as ''reform'' from the interest groups. This is particularly true of business lobby groups - the big miners, the financial services sector, the hotels and the registered clubs, for instance - because they have the most money to invest (and I do mean invest) in rent-seeking.

There does seem to be one spark of potential progress, however. Perhaps because of its organic links to big business, the Abbott government seems to have realised something Labor never did: giving in to rent-seekers doesn't make you any friends, it just makes things worse.

Yielding to my pressure for a concession never satisfies me, it just shows me you're an easy touch and prompts me to think of something else I want. Meanwhile, giving me a lolly just makes my rivals envious and prompts them to demand theirs. Bad inevitably leads to worse.

Joe Hockey and Abbott have been courageous in ignoring the begging bowl of the least competitive end of manufacturing and, it seems, Qantas. It's too early to say whether this constitutes a consistent attempt to turn back rent-seeking or just prejudice against certain industries but not others - though it would be idle to expect absolute consistency of principle from any flesh-and-blood government.

The way Arthur Sinodinos has been cutting back investor protections at the behest of the greediest industry of them all - financial services - under the guise of reducing ''red tape'' raises the possibility that rent-seeking via the budget is verboten, but not rent-seeking via regulation. We shall see.

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Who's paying the rent are are you getting any?

What is rent? You don't make it past the elementary economics class unless you know that's a trick question. In economics there are two kinds of rent: common or garden rent and "economic rent".

Obviously, ordinary rent is what you pay for the use of a building or land. By contrast, economic rent (also called quasi rent) is the amount paid for any "factor of production" - land, labour or capital - in excess of the amount it needs to be paid to keep it in its present use (which is its "opportunity cost").

If you think you've never heard of economic rent before, you're probably wrong - unless you haven't heard of the minerals resource rent tax or of "rent-seeking".

It doesn't get talked about a lot, but economic rent is widespread in every real-world economy, making it something worth talking about. You never know, you may be getting a bit yourself (I'm getting loads).

Economic rent isn't a cost of production that contributes to the selling price of the factor - the land, the physical capital or the labour. Rather, it's earnings to the owner of the factor determined by the selling price.

Economic rent is equivalent to "producer surplus" in the market for goods and services. When it's received by a business it's also known as "above-normal profits" or "super profits" (does that term ring a bell?).

Economists define profit differently to accountants. To an accountant, profit is sales revenue minus actual costs. To an economist, costs involve actual costs plus the opportunity cost of the financial capital invested in the business - that is, the most the capital would earn in a different industry with an equivalent degree of risk. (For unincorporated businesses, the opportunity cost also includes the highest wage the proprietor could earn in a different job.)

The opportunity cost of the capital invested in the business is what economists call "normal profit". Any actual profit in excess of actual costs plus normal profit is above-normal profit and likely to be the consequence of economic rents.

What is it that allows some factors of production to earn economic rent - higher returns than those needed to keep them in the business? Scarcity or, better, exclusivity. The factor possesses some highly desirable characteristic that means there's not enough of it to go around, so people fight over it and, in the process, bid up its price.

In a textbook economy such a situation wouldn't last long because the market would have an incentive to increase the supply of the desirable factor to meet the high demand. In real-world economies, economic rents can persist because they're not easily replicated. The supply of harbourside land, for instance, is fixed.

The exclusivity of factors may be natural or contrived. Governments often create economic rents by limiting the number of licences they're willing to issue to participants in particular industries - taxi plates, for example.

Patents and copyright are designed to allow creators to enjoy economic rents for a fixed time. This implies monopoly profits are a form of economic rent, although rents can be enjoyed by multiple firms in an industry.

And don't forget many workers benefit from rents. Unions may be able to limit the supply of a particular occupation and so force wages above what they would otherwise be. In this, however, trade unions are amateurs compared with the colleges of medical specialists.

But some rents aren't contrived. If I were prepared to do my job for $60,000 a year but my boss paid me $100,000, I'd be enjoying economic rent of $40,000 a year. Why would he pay me more than my "reservation wage"? Because if he didn't, a rival employer would.

Of course, the people who do best in the rent stakes are film stars, sports stars and the like. Such people have far more talent than the rest of us, but they also have a name - are a brand - that attracts more customers than other actors or players do.

The point of all this is that, from a social (community-wide) point of view, economic rent is a waste. It's a price customers pay that does nothing to increase the production of goods and services. If we could eliminate it - say by taxing it away - it wouldn't reduce production, just the incomes of the owners of scarce resources.

This, of course, is the justification for the minerals resource rent tax. There is a lot of economic rent associated with the exploitation of mineral deposits, particularly in Australia, because world reserves of certain minerals are relatively limited and because much of our supply is high quality and easily won.

Since these resources belong to us, not the mining companies we permit to extract them, we'd be mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.

I hope by now you understand why the Abbott government's talk of all the damage the mining tax is doing to the economy is tosh, intended to mislead the economically undereducated. (Which is not to say Labor's tax was well designed - it wasn't.)

It is rational for workers to be "rent-seekers" in the sense that they equip themselves with scarce skills and work hard at being the best in their field. Similarly, it is rational for firms to seek out niches where prices far exceed costs.

But that's not what the term "rent-seeker" - which comes from the libertarian "public choice theory" - is usually taken to mean. It refers to groups that lobby the government for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers, or their rivals.

As The Economist magazine puts it in its business dictionary, it means "cutting yourself a bigger slice of the cake rather than making the cake bigger".

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Pollies' bad behaviour & dishonesty worsening all over

We are witnessing history being made. Unfortunately, it s a history-making decline in standards of political behaviour. At least it proves we 're not merely imagining that things were better in the old days.

Tempting though it is, one of the things incoming governments don' t do is delve into the affairs of their predecessor. The papers of the old government aren 't made available to the new masters.

But all that is out the window with the Abbott government 's decision to establish a royal commission into the Rudd government' s handling of the home insulation program and provide it with Labor' s cabinet documents.

It takes innocence greater than I can muster to believe the motive for the inquiry is to bring justice to the program 's victims rather than to embarrass the Coalition 's political opponents by raking over one of their more celebrated stuff-ups.

Labor can take its lumps. The real pity is that a long standing convention seeking to limit political vindictiveness has been cast aside. One thing we can be sure of is that when next Labor returns to power it will lose no time in retaliating, as will that government 's eventual Coalition successor. Advantage-seeking retaliation will become a bigger part of the political debate.

The man who set new lows in negativity and obstructionism in opposition is now taking us to new lows in government. In a more godly world, Labor would resist the temptation to sink to the level of misbehaviour set by its opponents, thus giving substance to its repeated claims of moral superiority.

But so intense is the competition between the parties that this seems unlikely. Last week Bill Shorten promised to lead a constructive opposition and not oppose everything for the sake of it. It 's a wonderful resolve - one which, if lived up to, many voters would find attractive - but I fear it' s another take from Tony Abbott: almost tearful promises to sin no more, followed by an immediate resumption.

The great likelihood is that Labor in opposition will model its behaviour on Abbott in opposition, in conformity with that great moral precept: tit for tat. The sad truth is that, for politicians as for most of us, the moral compass that guides us asks: what' s everyone else doing?

We take our ethics from our perception of the behaviour of those around us, particularly our competitors.
We all see ourselves as more moral than the next person, but when challenged our defence is always: I' m no worse than he is. After all, he started it.
Thus are our politicians locked in a race to the bottom.

Rather than trying to counter our fear of foreigners, politicians have preferred to pander to it, vying to be the side whose mistreatment of asylum seekers goes so far it discourages any more from coming - all intended to dissuade them from risking their lives on a dangerous sea voyage, naturally.

So far have our standards sunk that we must now suffer the indignity of being lectured on human rights by the Chinese government.

Declining standards at federal level have been matched by bad behaviour at state level. For an example of state politicians willing to blatantly mislead their electorates, look no further than the Victorian and NSW governments' dishonest explanation for the looming jump of about 25 per cent in the price of household gas.

The true reason for the rise is that the building of natural gas liquefaction plants in Gladstone will soon allow gas producers on Australia' s east coast to export their gas and obtain the much higher prices paid on the world market. The east coast will go from being outside the world market to inside it.

The price rise is thus inevitable unless governments were to prohibit the companies from exporting their gas, forcing them to continue accepting below-world prices. There has been no suggestion of penalising the gas producers in this way.

Rather, state politicians have taken up the dishonest claim of the gas companies that permitting them to build new and controversial coal seam gas plants would somehow prevent gas prices from rising or force them back down.

But as any student of economics could tell you, there' s no way NSW and Victoria could ever produce enough natural gas to significantly affect the world price of gas.

The price of gas in NSW and Victoria would stay below the world price only if the new producers were compelled to sell their gas to local users at below the world price. Again, there s been no suggestion of this.

Last week the gas companies' illogical argument was taken up by the new NSW Minister for Energy and Resources, Anthony Roberts. I' m prepared to believe Roberts may be economically illiterate, but I don' t believe his advisers are - nor that they don t read the papers, where the scam has been exposed.

Although Roberts has replaced a minister who left the cabinet under a cloud, he seems uninhibited in his efforts to mislead the electorate.

It' s hard to know whether he is simply seeking to advance the gas industry' s vested interests or is setting up an alibi which allows the government to blame the inevitable jump in gas prices on those terrible people opposed to fracking.

Either way, his only crime is seeking to deceive voters. And these days that 's the way everyone plays the political game, isn 't it?

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Abbott's anti-union push not what it appears

If you were a conspiracy theorist it would be easy to see Tony Abbott's actions against unions as revealing his true dastardly intentions despite all his soothing statements before the election.

But I see it just as standard Coalition behaviour, motivated more by a search for political advantage than by a desire to free the economy from the scourge of unionism. Indeed, when the union movement finally expires - which can't be too many years off - I'd expect the Coalition to shed a private tear at the loss of such a useful whipping-boy.

When you contemplate the royal commission into union corruption, remember that, since the days of Malcolm Fraser, all Coalition governments set up such commissions. We know they sometimes backfire against the government or employers, and rarely lead to the conviction of many unionists. Royal commissions are about raising a hue and cry, not getting wrongdoers into jail.

As politicians on both sides well know, unions have long been on the nose with the public. This is partly because it's always easy for proprietors of the established order to portray unions as troublemakers and partly because of the public's race memory of the way the unions were always staging disruptive strikes in the decades up to the mid-1980s (yes, that long ago).

The Coalition wouldn't still be so keen to press the public's anti-union button, however, if the unions weren't still so closely associated with its political opponent, the Labor Party - a linkage that, if anything, strengthened as Julia Gillard sought to shore up her leadership against the ever-present threat from Kevin Rudd.

This is not to imply there's no corruption in the union movement. There is, just as there is among businesses - and politicians, for that matter. Just how widespread corruption is in the union movement is hard to know and the royal commission is unlikely to tell us, though you can be sure the relatively few instances it uncovers will be highly publicised.

A second ulterior motive is the Coalition's resentment of the way the unions channel big donations to Labor, but never to it. By contrast, business will donate to Labor rather that the Liberals whenever it thinks Labor's likely to win.

And, of late, we've seen signs of a third level of political prejudice against the unions. How is it the "end of entitlement" seems to apply far more to manufacturers than to farmers or formerly government-owned airlines?

Could it be because highly protected manufacturing tends to be highly unionised, with the unions playing a leading role in fighting for continued government assistance, particularly when Labor is in power?

It's worth remembering that manufacturing is the traditional base of the union movement. Manufacturing's declining share of total employment is part of the explanation for the movement's decline.

Manufacturing's further decline will hasten the eventual demise of the unions - or perhaps their relegation to the public sector. Just 13 per cent of private-sector workers are union members, compared with 43 per cent of public-sector workers, making 18 per cent overall. But note that only 19 per cent of manufacturing workers are members.

You may think the public's strong reaction against WorkChoices contradicts the idea that unions are on the nose. Not really. The unions' advertising at the time rightly alerted part-time and casual workers to the greater scope for unreasonable employer behaviour under WorkChoices, but while this made many anxious it led few to conclude the answer was to join a union. For many workers, unions are a relic from a bygone age.

Remember that the Coalition's attempt to extract political mileage from the unions, bad employers' attempt to blame the unions for their poor relations with their own staff (e.g. Qantas) and the national dailies' attempt to suck up to big business, all involve leaving the public with the impression the unions are a much bigger bogyman than they actually are.

What the people with the hidden agendas will never tell you is that more than 80 per cent of enterprises don't have a union presence. Only about 40 per cent of employees are covered by collective agreements, some of which have been drafted by employers without union involvement.

If the government really did stamp out union corruption, or prompt Labor to cut its ties with the unions (thus depriving many union leaders of an attractive career path), or shame union leaders into giving up their lucrative fees as trustees of industry super funds, it would get the union leadership back to its knitting, giving their movement a better chance of surviving.

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Why the success of the G20 matters

It's easy to be cynical about the G20. Will the meeting of finance ministers and central bank governors in Sydney this weekend, and the leaders' summit in Brisbane in November, amount to anything more than talkfests?

People say the Brisbane summit will be the largest and most important economic meeting ever held in Australia. That's true, but it just means it will be bigger than the Sydney APEC leaders' summit in 2007 - which is remembered mainly for The Chaser boys' Bin Laden stunt.

But though it's easy to be cynical, it's a mistake. It's possible the two meetings this year will prove no more than talkshops, but that would be a great pity. And, since Australia is this year's chair of the group, it's up to Joe Hockey and Tony Abbott to make sure they're worth more than that.

The G20 began in 1999 as a group for finance ministers and central bankers, in the aftermath of the Asian financial crisis, which revealed the need for greater co-operation and co-ordination between governments in responding to crises in the global financial system and, better, making changes to the global financial "architecture" (rules and institutions) that reduced the frequency and severity of financial crises.

The formation of the G20 was a recognition that the G7 (compromising only Europe, North America and Japan) wasn't truly global, particularly because it excluded the emerging BRICS economies - Brazil, Russia, India, China and South Africa.

For a decade or two most of the growth in the global economy has come from the BRICS, and the developing economies now account for more than half gross world product. For a better global spread, the G20 also adds Argentina, Indonesia, Mexico, Saudi Arabia, South Korea, Turkey, the European Union and, of course, Oz. With just these 20, it accounts for 85 per cent of gross world product.

In 2009, in the aftermath of the global financial crisis, the G20 was upgraded from just finance ministers to include summits of presidents and prime ministers, an acknowledgment of the way economic power had spread beyond the North Atlantic. But why do we need these get-togethers?

Because, as Christine Lagarde, boss of the International Monetary Fund, said recently: "The breakneck pattern of integration and interconnectedness defines our times."

It has become unfashionable for the media to talk about globalisation, but it's continuing apace. As Mike Callaghan of the Lowy Institute said last week: "If there is one lesson from the [global financial] crisis, it is the interconnectedness between financial markets. Events in US financial markets had worldwide consequences. We need co-operation to deal with globally operating financial institutions."

These days, global integration is being driven less by deregulation and more by advances in technology, particularly the information and communications revolution. One part of this is the way the internet has globalised the media.

News of an economic calamity in one country is now conveyed to the rest of the world almost instantly. Financial traders in New York or other centres can start moving money out of the affected country in no time. They can then take a set against neighbouring countries they merely fear may have a similar problem, giving rise to a big problem called "contagion", where trouble spreads like a communicable disease.

And TV news that a few banks are tottering in Europe can scare the pants off consumers and business people in countries around the world, prompting them to stop spending until their confidence returns.

But it's not just crises. As Callaghan reminds us, more and more businesses now operate globally. Goods are more likely to be "made in the world", with inputs from many countries rather than just one. So the trade policies agreed by the international community have to adapt to the new reality that such "value chains" are increasingly driving world trade.

Then there's tax. The more businesses that operate globally, the more businesses that are able to exploit loopholes between different countries' tax laws, shifting their profits to countries with low tax rates. This is eroding the tax base of many countries - including ours - so their taxes aren't raising as much revenue as they should be.

In other words, technology-driven globalisation - the ever-reducing barriers separating particular economies - is throwing up problems that can't be solved by individual countries acting individually.

So we need greater communication, co-operation and co-ordination between countries, first, to discourage countries from pursuing "beggar-thy-neighbour" policies - I attempt to fix my problems at your expense, which usually provokes retaliation, so we all suffer - and, second, to find group solutions to the various problems.

The first couple of G20 leaders' summits in 2009 were quite effective in ensuring the Great Recession wasn't as bad as it could have been. But the truth is the G20 has been running out of momentum, resorting to high-sounding rhetoric while getting bogged down in excessive detail.

Considering how crisis-prone the global economy has become, it's important merely for world leaders, treasurers and central bankers to know each other, have face-to-face meetings and phone each other.

But we also need more joint action, and if the G20 doesn't lift its game the big boys will stop coming to meetings and eventually shift their interest to a smaller, more cohesive group which includes China and a few others, but excludes Australia.

Clearly, it wouldn't be in our interests to lose our seat at the top table. That's why it's so important we use our position as this year's chair to get the G20 back on the rails. Many pre-meeting phone calls need to be made by Hockey and Abbott to their counterparts, to gather support on the directions to be taken.

Then they need to chair the meetings effectively, discouraging set-piece speeches and encouraging interchange that improves mutual understanding and makes progress on a limited range of key issues.

We have a lot to gain or lose.

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Drawing a line between the market and the social

The hard part of economics, politics and public policy is deciding where to draw the line. It's as easy as pie to take a position at one extreme or the other. To buy the whole Liberal or Labor package - which, after a change of government, will often involve supporting things you opposed six months ago. To oppose virtually all government regulation or to think more regulation is never enough. Doing it this way always feels good - so neat and tidy.

But though it's easy and neat, it's not satisfactory. It's pretending the world is either black or white when in fact it's a quite unsatisfying shade of grey. To say I agree with the Libs on this and that, but with Labor on that and the other. To accept that some regulation is good, but too much is bad. It takes more effort, leaves you under attack from both sides, and it's messy.

It involves doing your own thinking, which is hard work. I've been thinking lately that, while I want very much to live in a market economy, I definitely don't want to live in a market society.

In a market economy, you and I are pretty much free to make our own decisions about what we'll consume, what occupation we choose and where we'll work - all within the limits of what's available, of course - while the great majority of decisions about the goods and services - and jobs - we're offered are made by private businesses.

You and I are motivated by the desire to get the most satisfying deal we can - to buy what appeals to us and not buy what doesn't - while businesses big and small are motivated by a desire to make profits by successfully catering to our wants (which aren't necessarily our needs).

Their desire to make more profit than they did last year is what drives our economy on, making it ever bigger and creating more jobs, but also contributing to its continuously changing structure.

Fine. But it's not that simple. Anyone who didn't know before the global financial crisis must surely know now that if you let businesses do whatever they want in their search for greater profits, the system will run off the rails and cause horrific injuries.

So we do have to ensure profit-obsessed businesses work within government-imposed guardrails designed to protect them and us from their greedy excesses.

We also need to understand that, if we left it to profit-seeking business people - and their public-policy consultants, economists - they'd gradually turn every aspect of our lives into a marketplace, with everything commercialised. Everything changed into a profit-making opportunity.

Where there was some legal barrier preventing the market from spilling over into some part of our lives, businesses would pressure governments to remove it in the name of "reform". And because, in this hyper-materialist era, business is on top - and the unions are pariahs, subject to regular besmirching royal commissions - the politicians are usually keen to give business what it demands.

This is why I've been thinking I want to live in a market economy, but not a market society. I like the commercial to be commercial, but I don't want the non-commercial made commercial just because business people imagine it would increase their profits (and the economists' model tells them it would be more "efficient").

An example is penalty rates. Until relatively recently in our history, weekends and public holidays were social institutions largely outside the market economy. They were essentially commerce-free zones, where as few people as possible worked and we were free to socialise with our kids, other family and friends.

Fools that we were, we thought we worked five days a week so we could relax and enjoy the other two together.
Weekends were kept largely commerce-free by two legal institutions: restrictions on trading hours and industrial award provisions that sought to discourage employers from instructing staff to work at "unsociable" hours by requiring them to pay a penalty, which rose according to the degree of unsociability.

Most restrictions on trading hours were removed in the 1980s and '90s in the cause of "micro-economic reform". And now employers have renewed their attack on penalty payments, portraying them as some kind of hangover from the dark ages of socialism, which are preventing businesses creating more jobs (note they never mention profits).

Thus are we being pressured to shift the line separating the commercial from the non-commercial, the economic from the social. Already that line is blurred and the temptation to remove the last legal barrier is great.

It's tempting because, in this more materialist, less religious age, almost all of us like the idea of being able to shop and patronise commercial sport and entertainment on the weekend. Naturally, we'll take the kids and meet our friends there.

Trouble is, what we want is for us to be able to shop and be entertained, but not be required to work ourselves. We'd like to be part of the upper class that doesn't have to work, served by a lower class that can't afford not to.

When you turn a social institution over to market forces, those with money do well and those without don't. We'd raised our material standard of living, but do it by lowering our quality of life.

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Hockey risks scaring off consumers

You can never be sure what a fall in the measures of consumer confidence actually proves, but if I were Joe Hockey I'd be a bit worried. If he keeps on playing tough guy he may frighten people into clamping their purses shut.

We learnt last week that the Westpac-Melbourne Institute index of consumer sentiment fell by 3 per cent this month, down 9.5 per cent from its election-time high. Optimists now barely outnumber pessimists, the worst result since July.

I'm a great believer in the central role of business and consumer confidence - their alternating moods of optimism and pessimism - play in driving the ups and downs of the business cycle. As the Rudd government demonstrated with its remarkably deft response to the global financial crisis, managing psychology is probably more important that actual stimulus spending.

Trouble is, we don't seem able to measure consumer confidence with any accuracy. The index of consumer sentiment is an unreliable predictor of consumer spending. And there's reason to fear it tells us more about the state of politics than the state of the economy.

People who intend voting for the government of the day are invariably far more optimistic about the economy than people who intend voting for the opposition. This could mean people's views on how well the economy is being managed determine whether they intend to vote for government or opposition.

But Labor voters switched from pessimistic to optimistic and Coalition voters from optimistic to pessimistic the moment Kevin Rudd won the 2007 election, then the positions were reversed when Tony Abbott won in September. Seems clear it's people's political loyalties that drive their views about the state of the economy.

Even so, the fall in confidence since the election does seem to be explained by people's growing worries about losing their jobs. The related Westpac-Melbourne Institute unemployment expectations index worsened by 2.3 per cent this month, and by 9.2 per cent since September.

In a rational world people would judge their risk of unemployment from the monthly labour force figures, which, although they show unemployment worsening marginally to 6 per cent last month, aren't so frightening.

In the real world, however, the punters judge their risk of joblessness from the frequency of stories about factory layoffs on the TV news. All the fuss about the successive decisions of Ford, Holden and now Toyota to cease car-making in Australia, plus bad news about other manufacturers, Telstra and Qantas seems to have put the wind up a lot of people.

An Essential opinion poll shows respondents nominating unemployment as their greatest economic concern. Add all Hockey's efforts to soften us up for a tough budget and it's hardly surprising pessimism is spreading.

Note that, as part of this non-rational response, news that factories will close in three years' time is coded as jobs lost this week. Job losses in manufacturing get three times the publicity of jobs lost elsewhere, and jobs losses in the public sector worry no one in the private sector.

The Reserve Bank believes rising house prices are a helpful development, spurring people to get on with their housing plans before prices rise further, and also making home owners feel wealthier and so willing to lower their rate of saving and increase their rate of consumption spending.

This ''wealth effect'' would boost consumption even though incomes won't be rising strongly because growth in employment and wages will be weak.

But the proportion of consumer sentiment respondents believing it's a good time to buy a dwelling has fallen 10.8 per cent from its September peak. And Saul Eslake, of Bank of America Merrill Lynch, differs with the Reserve by believing house price rises are unhelpful.

He points out that renters are significantly less optimistic than mortgagers and outright home owners according to the consumer sentiment index, with tenants' confidence falling harder over the past year.

While it was true in the pre-GFC world that households responded to their rising (paper) wealth by slashing their rate of saving, Eslake doubts it will happen this time, mainly because household debt remains very high as a proportion of disposable income.

In the end, you can ''monetise'' rising paper wealth only by borrowing against it. And people with a lot of debt who are starting to worry about whether they'll keep their jobs are much less likely to resume borrowing.

This is something Hockey should remember when the econocrats tell him retail sales are growing more strongly since the election and that stronger home building approvals presage a rise in dwelling construction.

If Hockey's budget toughness - rhetorical and otherwise - adds to the punters' anxieties, his big political vindication could delay the return to strong employment growth.

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Why the jobs will come, though we can't say where

Take the news that Toyota is joining Holden and Ford in ceasing to make cars in Australia, then add the news that unemployment is now the highest it has been in a decade and you see why everyone's asking the obvious question: where will the new jobs be coming from?

Bill Shorten has joined others in demanding to see the Abbott government's ''jobs plan''. If the government has no plan to ensure there are new jobs to replace the thousands being lost, particularly in manufacturing, what hope is there?

Sorry to be snippy, but although all this may be the obvious question, it's actually a stupid question. Has everyone suddenly turned socialist? Do they imagine we live in a planned economy?

It amazes me that people who spend their entire lives living in a market economy don't have a clue about how market economies work.

Well, let me give you one: market economies are driven by market forces, not governments.

I'm no libertarian and, these days, I'm a poor apology for an economic rationalist. I don't believe there's such a thing as a ''free market''. I believe market economies are the creation of government and that any government with half a brain knows its job is to provide guidelines for the market and ensure it doesn't run off the rails - as happened in the global financial crisis.

But, by the same token, it ought to be obvious that the vast majority of decisions made in a market economy are made by private sector producers and consumers, each acting in what they imagine to be their own interests.

In other words, the greatest single factor driving the economy forward is self-interest: business people trying to make a buck (and make more bucks than last year) and households spending about 90 per cent of their income, trying to get maximum satisfaction for their money.

Those silly people demanding to see the government's ''jobs plan'' and concluding that, unless it successfully pursues such a plan, few if any future jobs will be created, seem to assume the economy works like a glove puppet: unless the government sticks its hand in the puppet and moves it, nothing happens.

If you want to know in which particular industries or occupations the government plans to ensure new jobs are created - which winners the government has picked - the answer is: none. It's leaving the market to determine all that.

But it does have a ''jobs plan'' of sorts. It's a two-step plan. Step one: leave the primary responsibility for ensuring the economy keeps growing and creating jobs to the Reserve Bank. Step two: get started on ensuring we don't end up destroying jobs the way the Europeans and Americans have been by getting the budget back under control, while ensuring this ''fiscal consolidation'' doesn't weaken demand and so discourage employment in the next few years.

So what's the Reserve's ''jobs plan''? You ought to know. It's to encourage borrowing and spending on consumption and investment - and, in the process, counter the employment-dampening effect of our still-too-high exchange rate - by keeping interest rates at near-record lows. With any luck, our dollar will fall further as the US Federal Reserve phases out its policy of ''quantitative easing'' (creating money).

What makes our Reserve so confident doing this will, before too many months have passed, create lots of additional jobs and get the unemployment rate heading back down towards 5 per cent? Well, apart from orthodox economic theory, decades of experience. It's worked every other time, why won't it work now?

As for the government itself, there is more it could be doing to enhance the economy's job-generating capacity. One is to borrow as much as necessary to provide our businesses with adequate public infrastructure and ensure existing infrastructure is used efficiently through such things as appropriate pricing.

Another is to ensure our education and training system - from early childhood to postgraduate - is doing enough, and is effective enough, in raising the skills of our labour force. As part of this, the Gonski reforms are a good start towards increasing the employability of kids at the bottom end.

And, recognising the market failure that leads to inadequate private investment in research and development, making sure economy-wide government incentives are adequate and effective.

There may be a role for ''industry policy'', though I've yet to see programs that aren't just disguised protection of favoured industries, amounting to propping up losers rather than picking winners. Most ''innovation'' programs have been a sham.

I've spent my career being asked where the jobs will come from. It's something people ask after every severe recession. It's a symptom of the pessimism that grips the public mood at the bottom of the business cycle (in reaction to the equally unreal mood of optimism that drives booms).

It's a question I've never been able to answer. But having lived through three severe recessions my answer is now: ask me again in five years' time and I'll look up the figures and tell you precisely where they came from.

I'm supremely confident they'll come because we've never yet had a downturn from which we failed to recover, with total employment ending much higher than before the downturn.

Since the last recession, total employment is now 3.6 million jobs above its peak in June 1990, an increase of 45 per cent, with full-time jobs accounting for almost half the increase.

In terms of occupations, the biggest growth has been among managers, professionals and associate professionals, with the weakest growth in semi-skilled occupations.

I don't know where the jobs will come from this time, but I'll give you a hint: virtually all of them will be in the services sector.

How can I be so sure? That's where virtually all additional jobs have come from for the past 50 years.

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Why the end of car-making isn't such a terrible thing

One advantage of getting old is meant to be a greater sense of perspective. You've seen a lot of change over your lifetime and seeing a bit more doesn't convince you the world is coming to an end. Unfortunately, getting old can also leave you convinced every change is for the worst as the world goes to the dogs.

A lot of people have been disturbed by the news that Toyota's closure as a car maker in 2017 will bring an end to the manufacture of cars in Australia, with the loss of many jobs also in the parts industry.

But my guess is the most disturbed observers will be the old, not the young. I doubt if many young people had been hoping for a career in the car industry. And I know that few people - young or old - buy Australian-made cars.

That's not a cause for guilt, but for being sensible. To regret the passing of an industry whose products few of us wanted is just sentimentality, making no economic sense.

A lot of the dire predictions we're hearing won't come to pass. However many jobs the vested interests are claiming will be lost, they're almost certainly exaggerating.

That's particularly true of the alleged flow-on effects, which are often calculated on the assumption that any money which would have been spent buying the product in question will now not be spent on anything.

I've never believed car making was of special strategic significance to advanced technology. Every industry claims to be special. And I've heard the claim that this spells "the end of manufacturing in Australia" too many times in the past to believe it.

You think 35,000 is a huge number of jobs to be lost? It isn't. It's 0.3 per cent of all jobs, equivalent to about two months' net job creation in a normal year. You think this could put the economy into recession? We're overdue for another recession but this isn't nearly big enough to be the main cause of one. Even if it was, it wouldn't happen until 2017.

It's true some of the workers who lose their jobs won't be able to find alternative jobs, and some that do won't find jobs as well paid. But far more will find jobs than many of us imagine. Naturally, it's important for governments to give affected workers a lot of help to retrain and relocate.

Some people assume an imported car creates no jobs. Far from it. Are you able to buy an imported car for anything like the price at which it crosses our docks? Of course not. Most of the gap between the landed price and the retail price goes on creating jobs for Australian workers in our extensive car-distribution industry.

The fact is the sale, fuelling, servicing and repair of cars has always involved far more jobs than the making of cars and car parts has.

I've been responding to people's fears about the decline in manufacturing for almost as long as I've been a journalist because manufacturing's share of total employment began declining well before I joined Fairfax in 1974.

The truth is the industrial structure of our economy has been changing slowly but continuously since the First Fleet. A lot of angst has been generated over that time but the fact remains we're infinitely more prosperous today than we were then - with a much higher proportion of the population in the paid workforce.

The changing mix of industries is actually a primary cause of our greater affluence. Countries that try to prevent their industry structure changing are the ones that stop getting richer.

To put the latest developments into context, let me show you the bigger picture of Australia's economic history, drawing on a Reserve Bank article. Throughout much of the 19th century, agriculture accounted for about a third of the nation's total production, with mining bigger than manufacturing.

By Federation, agriculture provided about 25 per cent of total employment, with manufacturing providing 15 per cent and mining about 8 per cent. By the 1950s, however, manufacturing had grown to 25 per cent, agriculture was falling towards 10 per cent and mining was down to 1 per cent.

So as the shares of agriculture and mining declined, manufacturing's rose. But from the 1960s, manufacturing's share of total employment started falling from its peak of about 25 per cent to be down to about 8 per cent today.

Remember, however, that an industry's declining share of the total doesn't necessarily mean it's getting smaller in absolute size. Although today agriculture accounts for only about 3 per cent of the total, the quantity of rural goods we produce has never been higher. And manufacturing's output began falling only in recent years.

So an industry's share falls mainly because other industries are growing faster. And, with the exception of mining, the sector that has provided virtually all the growth is services. It accounted for half our jobs even in the 19th century, but from the 1950s its share took off, rising sharply to about 85 per cent today. Most of the growth has been in health, education and a multitude of "business services".

Many older people find the relative decline of manufacturing disturbing but I can't see why. Services sector jobs tend to be cleaner, safer, more skilled, more value-adding, more satisfying and better paid.

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We need a wage problem, so let's imagine one

It's been two decades since we had reason to worry about excessive wage growth. This remains true despite cabinet ministers and some economists saying we have a problem.

The structural reason we don't have to worry is the continuing effect of the Hawke-Keating government's micro-economic reforms - particularly the floating of the dollar, the removal of protection against imports, deregulation of many industries and the move from central wage-fixing to bargaining at the enterprise level - in making the economy far less inflation prone, as well as more flexible in responding to economic shocks.

Micro reform failed to deliver the expected lasting rise in the rate of productivity improvement, but it did deliver the unheralded benefit of making the macro-economy much easier to manage. You would expect people who profess to care so much about reform to know this.

Starting with the cabinet ministers, it's understandable that a conservative government that made a solemn promise to make no significant changes to industrial relations law in its first term would want to camouflage its lack of pro-employer militancy by turning up the volume on its anti-union rhetoric.

That the union movement is a shadow of its former self is no impediment to the gratification it gives the Liberals (and the national dailies) to portray the unions as the economy's great bogeyman.

Trouble is, the ministers don't seem to have looked at the stats lately. As the Reserve Bank summarised the story on Friday: "Various measures of wage growth are now around the lowest they have been over the past decade or longer."

Since the economy has been growing at below trend, with slowly rising unemployment, for quite a few quarters, this is hardly surprising.

More worthy of serious discussion is the argument of Professor Ross Garnaut and others that, if the economy is to gain lasting stimulus from the belated fall in the dollar, it will need to be accompanied by a fall in real wages.

It is true that a fall in the dollar leads to a rise in the prices of internationally tradeable goods and services.
It is also true that the fall in the nominal exchange rate has to be accompanied by a fall in the real exchange rate (the nominal rate adjusted for our inflation rate relative to those of our trading partners) if it is to cause a lasting improvement in the price competitiveness of our trade-exposed industries.

What doesn't follow is that the real exchange rate can fall only if real wages fall. For a start, it doesn't require wages to grow no faster than the inflation rate for that rate to be unchanged.

All that's need is for wages to grow no faster than the inflation rate plus the trend rate of improvement in the productivity of labour (often taken to be 1.5 per cent a year).

Thus are the benefits of productivity improvement spread around the economy in the form of rising real wages (and, thanks to indexation, rising real pensions) without adding to inflation. As it loved reminding us, this is just what happened throughout the Howard government's term.

It follows that real wages would need to fall only to the extent that the increase in inflation caused by the fall in the dollar exceeded the trend rate of productivity improvement. (Of course, the need for slower wage growth would also be reduced to the extent that our trading partners' inflation rate happened to be higher than ours.)

Let's do some figuring. The Reserve's rule of thumb is that a 10 per cent fall in the dollar adds between 0.25 and 0.5 percentage points to the annual inflation rate over each of the following two years or so.

Since its peak last April, the Aussie has fallen by about 15 per cent against the US dollar. But it's misleading to focus on temporary peaks, so a more representative fall would be less than 14 per cent. And we really should use the fall against the more economy-wide trade-weighted index, which reduces the depreciation to about 11 per cent.

There may be a fair bit more to come, of course, but so far we don't have a lot to worry about. There's no sign we need a fall in real wages, just lower-than-normal real growth.

And if you take the danger level of economy-wide nominal wage growth to be 4 per cent (that is, the inflation-target mid-point of 2.5 per cent plus trend labour productivity improvement of 1.5 per cent), we're looking very restrained.

The wage-price index never got out of hand even at the height of the resources boom, and by September its annual rate of increase had slowed to a terrifying 2.7 per cent. Not.

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Top 10 economic reforms that transformed Australia

1. Floating the dollar
Letting the market set the value of the Aussie dollar after December 1983 allowed it to fluctuate between US48c and $US1.10 so far, making it an absorber of shocks from the rest of the world. This has made the economy more stable and stopped the resources boom causing an inflation blowout.

2. Deregulating the banks
Introducing foreign banks and allowing banks to set their own interest rates made it much easier to get a loan and increased competition between banks and other lenders, but led to excessive lending to businesses and caused the deep recession of the early 1990s.

3. New taxes on capital gains and fringe benefits
In October 1985 Paul Keating announced new taxes but cut the top income-tax rate from 60 per cent to 49 per cent. He also abolished negative gearing, but reversed this under pressure from estate agents.

4. Removing import protection
In May 1988 Keating announced the virtual phasing out of the import duties and quotas imposed on most manufactured goods. Predicted demise of manufacturing industry did not materialise.

5. Privatising government businesses
Sale of the Commonwealth Bank began in 1991 and Qantas in 1992. The Howard government sold Telstra in three tranches from 1997. State governments sold their banks, insurance companies and some power producers and distributors.

6. Enterprise bargaining
In 1993 the Keating government ended centralised wage-fixing through a "national wage case" and introduced collective bargaining at the enterprise level. In 2005, Work Choices sought to promote individual contracts by reducing worker protections, further encumber unions and end reliance on industrial rewards. The Rudd government reversed the most extreme parts of Work Choices, but left much of it in force.

7. National competition policy
In 1995 Keating sought to encourage deregulation and privatisation by state governments and tighten the Trade Practices Act's restrictions on anti-competitive behaviour. Premiers tended to drag their feet.

8. Central Bank independence
In 1996 Peter Costello allowed the Reserve Bank to make its decisions independent of the elected government, endorsing its target of holding inflation between 2 per cent and 3 per cent, on average. The Reserve has raised interest rates more than a politician would - including during the 2007 election campaign - but this has kept inflation under tighter control than when politicians were in charge.

9. Goods and services tax
The start of the GST in 2000 came 25 years after it had been proposed by a major inquiry. It replaced wholesale sales tax and various unconstitutional or inefficient state taxes. Much death and destruction were predicted; little eventuated. But now GST is showing signs of wear and needs renovation.

10. Taxes on mining and carbon
Wayne Swan planned to raise huge sums from taxing miners' high profits and use the proceeds to give tax cuts and concessions to business and individual savers. He also used a tax to impose a price on carbon dioxide emissions. Both reforms were badly mishandled and Tony Abbott has pledged to reverse these reforms.

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