EMPLOYMENT IS STRONG, WAGES ARE WEAK, GROWTH IS SO-SO. WHAT’S GOING ON IN THE ECONOMY?

Wollongong

I’m sure you’ve heard people talking about “the new normal”. It means that things have changed from the way they used to work, and the change isn’t temporary, it’s permanent. What’s normal has changed. Often it’s implied that the new normal isn’t as good as the old normal. If you translate that from the way ordinary people talk to the way economists speak, it’s saying that the way the economy is working at present isn’t a passing period of “disequilibrium”, it’s the new and lasting “equilibrium”. The change we’ve seen isn’t “cyclical” (temporary) it’s “structural” (lasting).

In the 10 years since the global financial crisis of 2008, which precipitated the Great Recession – the worse recession since the Great Depression of the 1930s – the economies of the developed world, including ours, have been behaving very differently to the way they behaved in earlier decades. The question is: is the world economy still recovering from the financial crisis and the deep recession - is the problem essentially cyclical - so it’s just a matter of waiting until the old normal is restored, or have deeper, longer-lasting, changes in the structure of the economy been at work, meaning the economy will stay the way it is and won’t be returning to the way it used to work?

Now, get this: No one knows the answer to that question. Economists are still arguing about it because it’s too soon to tell. My guess, for what it’s worth, is that it will turn out to have been a bit of both. Some of what we’re seeing at present will turn out to have been temporary – just the recovery from the Great Recession taking a lot longer than we expected – but also that the world we get back to will, to some extent, be different from what we were used to.

But what are these changes we’re seeing in all the developed economies? The first is slower rates of growth in the economy. Part of this slowdown is explained by slower rates of improvement in productivity – the annual improvement in the economy’s efficiency that allows output to grow faster than inputs. Then there’s less inflation pressure, meaning lower rates of inflation, lower nominal interest rates (because the nominal interest rate reflects the real interest rate plus the expected inflation rate) and lower nominal wage increases (because of lower inflation).

The story for Australia is similar to, but somewhat different from, the stories for the US, Canada, Britain, Europe and Japan. So it’s likely that what’s happening in Australia is explained partly by local factors and partly by international factors.

Australia’s story is that, unlike almost all the other developed economies, we escaped a severe recession after the GFC. Not, as many people believe, because of the resources boom, but because of the immediate and liberal application of fiscal and monetary stimulus by the Rudd government and the Reserve Bank. But though we escaped a recession, it remains true that, in only one financial year (2011-12) of the 10 since then has our rate of growth exceeded our long-term average rate of 3.25 pc. All the others have been well below that – most recently about 2.5 pc.

Like the other rich countries, Australia has also experienced a protracted period of low inflation, with the inflation rate being below the Reserve Bank’s inflation target of 2 to 3 pc since the end of 2014. For the past year it’s been just below 2 pc.

The wage price index has been slowing since the end of 2014 and has been about the same as the inflation rate for most of that time. So wages have been keeping up with inflation, but there’s been little or no growth in real wages for about four years. This is so, even though Australia’s rate of improvement in the productivity of labour has been reasonably healthy during the period. Wages used to grow by between 3 and 4 pc a year. There’s no precedent for such a long period of weak wage growth. The consequence of this absence of growth in real wages is, of course, weak growth in household income, and therefor weak growth in consumer spending, which accounts for more than half of GDP. This is true even though households have been reducing their rate of saving, so as to keep their consumption growing.

In recent years, total employment (full-time plus part-time) has been growing by about 200,000 workers a year, but in the last calendar year, 2017, it grew by almost 400,000, or 3.3 pc, with about three-quarters of those jobs being full-time. This is a wonderful performance, which has given a boost to household income and to the budget’s collections of income tax. But how did it happen, when the economy’s growth has been below par?

And there’s another question: this rate of jobs growth is a record for calendar years, so why did it cause the unemployment rate to fall only from 5.7 pc to 5.5 pc? Mainly because the participation rate rose by 0.8 to 65.5 pc – a near record rate – as many of the new jobs were taken by people (“discouraged workers”) re-joining the labour force. But the size of the labour force grew strongly also because of a high rate of immigration. So a big increase in the supply of labour was met by a big increase in the demand for labour, meaning only a small fall in unemployment.

But where did that strong demand come from if the growth in the economy wasn’t particularly strong?  More than half the growth in jobs came from just two industries: “health and social assistance” in particular, but also construction. This suggests that a lot of the growth may have come from public sector spending, particularly the continuing roll-out of the national disability insurance scheme and from state government spending on infrastructure. A disproportionate share of the jobs went to women, which fits with the disability roll-out.

But how can the weak wage growth be explained? This is one area where we need to remember wages are weak across the developed world, though they are at last strengthening in the US. Another thing to remember is that lower nominal wage growth isn’t a problem to the extent that it’s a product of lower inflation. That is, what matters is the growth rate of real wages. But it’s here that Australian economists have divided between those seeing the weakness as cyclical and temporary and those seeing it as structural and lasting.

The econocrats in the Reserve Bank and Treasury see the problem as temporary; it’s taking a long time, but be patient and wage growth will get back to normal. They note that while our economy escaped the worst of the global financial crisis, the resources boom was a huge shock to the economy (even if a favourable one), so it’s not surprising we – and particularly the WA and Queensland economies – are taking a long time to recover from its ending and the sharp and protracted fall in mining construction activity. The officials say it’s clear that the demand for labour is strengthening, so it can’t be long before this higher demand starts pushing up the price (wages).

On the other side of the debate, some economists argue that globalisation (the greater freedom with which firms can move their businesses to countries were labour in cheaper), digitisation (which is reducing the need for semi-skilled workers) and the deregulation of wage-fixing arrangements have weakened the ability of workers to bargain collectively with employers (via unions) and allowed employers to pay wages lower than otherwise and make higher profits than otherwise.

Budget forecasts for the economy

Although the debate about the causes of the weakness in wage growth is unresolved, the economic forecasts contained in the 2018 budget brought down by Scott Morrison on May 8 make the optimistic assumption that wage growth has already begun to accelerate and will reach the “old normal” of 3.5 pc a year with in three years, 2020-21. Largely as a consequence of this, the economy is expected to accelerate to its medium-term “trend” (“potential”) growth rate of 2.75 pc in last financial year, 2017-18, then reach an above-trend 3 pc this year, 2018-19, and stay there for at least another three years. This will bring unemployment down very slowly to reach the NAIRU (non-accelerating-inflation rate of unemployment) of 5 pc by June 2022. The inflation rate will soon return to 2.5 pc, the centre of the target. Let’s hope this optimism proves justified, but I wouldn’t count on it.

Now let’s turn to how the two arms of macroeconomic management – monetary policy and fiscal policy - have been responding to this story of so-far disappointingly weak growth in wages and GDP.

The monetary policy “framework”

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. It is the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over time. The primary instrument of MP is the overnight cash rate, which the RBA controls via market operations.

Recent developments in monetary policy

Because of the five consecutive years of below-trend growth since 2011-12, the Reserve Bank cut its cash rate from 4.25 pc to 1.5 pc between the end of 2011 and August 2016. In the two years since then, it has left the rate unchanged – a record period of stability. It’s not hard to see why it has left the official interest rate so low for so long: the inflation rate has been below its target range; wage growth has been weak, suggesting no likelihood of rising inflation pressure; the economy has yet to accelerate and has plenty of unused production capacity, and the rate of unemployment shows no sign of falling below its estimated NAIRU of 5 pc. The RBA governor, Dr Philip Lowe, has said that, though the next move in the cash rate, when it comes, is likely to up, with the economy in its present weak state the Reserve is in no hurry to make that move.

Fiscal policy “framework”

Fiscal policy - the manipulation of government spending and taxation in the budget - is conducted according to the Turnbull government’s medium-term fiscal strategy: “to achieve budget surpluses, on average, over the course of the economic cycle”. This means the primary role of discretionary fiscal policy is to achieve “fiscal sustainability” - that is, to ensure we don’t build up an unsustainable level of public debt. However, the strategy leaves room for the budget’s automatic stabilisers to be unrestrained in assisting monetary policy in pursuing internal balance. It also leaves room for discretionary fiscal policy to be used to stimulate the economy and thus help monetary policy manage demand, in exceptional circumstances - such as the GFC - provided the stimulus measures are temporary.

Recent developments in fiscal policy

Until last financial year, 2017-18, the Coalition government (and the Labor government before it) has seen the growth in the economy being repeatedly less than forecast, meaning the government has made slow progress in returning the budget to surplus and halting the rise in its net debt. Even so, it has focused on the medium-term objective of fiscal sustainability, not the secondary objective of helping monetary policy to get the economy growing faster. The long period of policy stimulus has come almost wholly from lower official interest rates.

In the year to June 30, 2018, however, the underlying cash budget deficit is now expected to be lower than expected this time last year – $18.2 billion, rather than $29.4 billion - thanks mainly to the strong growth in employment (more people earning wages and paying taxes), an improvement in export commodity prices and higher company tax collections for other reasons. Combined with the forecast that the economy will now return to above-trend growth, this means the deficit for this year will be $14.5 billion (0.8 pc of GDP), $7 billion less than expected a year ago. In the following year, 2019-20, a tiny surplus is expected, with ever-larger surpluses in the following two years to 2021-22.

This forecast improvement in the budget balance means that, when expressed as a proportion of GDP, the federal government’s net debt is now expected to peak at 18.6 pc in June 2018, and then fall back to less than 5 pc by June 2029. Again, it will be a great thing if it happens. It also means the budget balance is expect to continue improving despite the budget’s centrepiece, a plan for tax cuts in three stages (July 2018, July 2022 and July 2024) over seven years, with a cumulative cost to the budget of $144 billion over 10 years. This is possible because of plan’s slow start, with its cumulative cost in the first four years being just $14 billion.

Whichever way you measure it, the “stance of fiscal policy” adopted in the budget is too small to be either expansionary or contractionary, and so is neutral. This is true even though the immediate tax cuts could be expected to increase consumer spending.

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Inequality not as great as claimed, worse than others admit

This week the Productivity Commission issued a “stocktake of the evidence” on inequality in Australia. Its findings will surprise you. But it wasn’t as even-handed as it should have been.

Its report forcefully dispels the myths of the Left – that inequality is great and rapidly worsening – but is much more sotto voce in telling the Right there’s still a problem and that the reason it’s not as bad as some think is that governments have taken corrective actions the Right usually disapproves of.

This has allowed the conservative commentators of the national press to greet the report with great glee. One in the eye for their ideological opponents. Inequality? Nothing to see here.

The report looks at three different measures of economic inequality – the distribution of income, consumption and wealth – over a long period: the 27 years from 1988-89 to 2015-16. It focuses on the experience of households rather than individuals, and eliminates the effect of inflation.

The report concludes that inequality has risen only slightly over the period. Measured by the Gini coefficient – where zero means perfect equality and 1 means one household has everything – the distributions of both income and consumption have risen slightly.

The distribution of household wealth (mainly owner-occupied housing and superannuation savings) is most unequal of the three. It, too, has become a bit more unequal over the period.

But, particularly for income, inequality increased during the resources boom of the mid-noughties, then decreased in the years following the global financial crisis of 2008.

Over the 27 years, the disposable income of all households rose at an average rate of about 2.2 per cent a year in real terms.

The annual incomes of households in every decile (10 per cent group), from the bottom to the top, increased. It won’t surprise you that average incomes in the top two deciles rose by more than the economy-wide average. The top decile’s average income rose by more than 2.5 per cent a year.

It will surprise you that average incomes in the bottom decile rose at the same rate as the economy-wide average. So it was households between the bottom 10 per cent and the top 30 per cent whose incomes rose by less than the national average.

Many people would be surprised by all this. Why? Because they hear what’s happened in America and assume it must be pretty similar here. Wrong.

The report notes that our progressive income tax and highly means-tested welfare payments do a lot to equalise household incomes (as I’ve written recently in this column).

Our income inequality in 2015 was about average for the rich countries. In 2017, our wealth inequality was eighth lowest among 28 rich countries.

Australians’ chances of moving between higher and lower income groups – a rough measure of equality of opportunity – “compare favourably with many other developed countries”, the report says.

It tells us that, at 9 per cent of Australians – 2.2 million people – our rate of poverty (measured as people with incomes below half the median income) is no higher than it was 27 years ago.

But if all these truths tell you we don’t have much to worry about, you’ve been misled. The report is much less up-front in reminding us of the qualifications to its findings.

It leaves the strong impression that, if inequality hasn’t increased much, and isn’t as great as in some other countries, there’s no great problem. This implies the inequality we started with was fine.

As Professor Peter Whiteford, of the Australian National University, has noted, the report does too little to remind us that all the averaging involved in Gini coefficients and decile groups rolls households who’ve gained together with households who’ve lost and tells us little has changed.

For instance, the report downplays the issue of the huge increase in the incomes of the top 1 per cent of households. Their extreme gains are averaged with the more modest gains of the next 9 per cent to give a rise in the incomes of the top decile that’s high compared with the rest of us, but not greatly so.

Since the increase in inequality occurred during the resources boom, the report notes quietly that, contrary to what conservative politicians keep telling us, “[economic] growth alone is no guarantee against widening disparity between rich and poor”.

True. Then we’re reminded that this increase in inequality went away in the long period of weak growth following the financial crisis.

So what does the Productivity Commission want us to conclude? Let nature take its course? Don’t worry about increasing inequality because the next recession will fix it?

The report’s fine print acknowledges the truth that a country’s degree of inequality is greatly influenced by its economic institutions (such as its tax system and the rules of its welfare system), by government policy changes, and by the public’s attitudes to inequality.

I happen to agree with the commission’s value judgement that the growing gap between the top 1 per cent of incomes and middle incomes isn’t of as great concern as the gap between the bottom and the middle.

But I don’t accept another implicit value judgement that not much more could be done to reduce income and wealth inequality (presumably, for fear the rich would stop wanting to get richer) and that, at the bottom end, the government should limit its intervention to assisting those poor people whose disadvantage has become “entrenched”.

In other words, don’t acknowledge that poverty is being kept high by successive governments’ refusal to lift the freeze on real unemployment benefits.

The report proudly informs us that the bottom decile’s income has kept pace with the economy-wide average, but does little to explain how this amazing truth came about.

The chief suspect is the Rudd government’s increase in the base-rate of the age pension, a boost so big it seems to have more than offset the adverse effects of the real dole freeze and the bipartisan policy of moving disabled and sole-parent pensioners onto the much lower dole.

Still think there’s nothing to see here?

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Digital disruption is stopping retail prices from rising

I’ve heard of the gap between perception and reality, but this is ridiculous. According to the experts, increased competition among supermarkets, department stores and other retailers is holding down prices in a way we’ve rarely seen before.

This fits with the consumer price index, which showed prices rising by just 2.1 per cent over the year to June. Over the past three years, the annual increase has averaged even less: 1.8 per cent.

What it doesn’t fit with are the complaints we keep hearing about the high cost of living. I read it’s got so bad parents are raiding their kids’ piggy banks to help make ends meet.

How can the experts’ reality be reconciled with the people’s perceptions? It’s simple. With a few glaring exceptions – electricity prices, for instance – the cost of living isn’t rising much.

No, the reason many people are having trouble making ends meet is because their wages aren’t growing much either. We’re used to wages rising a bit faster than prices, but that hasn’t been happening for the past four years.

Modern politicians seek popularity by reinforcing our perceptions, whether they’re right or wrong. If you doubt that, just listen to the soothing noises Prime Minister Scott Morrison will be making between now and the election.

Unfortunately, our tiresome econocrats remain committed to determining the reality and correcting misperceptions. Last week Reserve Bank deputy governor Dr Guy Debelle gave a speech which departed from the official talking points and revealed a truth which must not be spoken: the digital revolution is squeezing many retailers’ profit margins and forcing them to cut costs so rising prices don’t cost them customers.

Debelle says that, since 2015, the price of the typical food basket (excluding fruit and veg, and meals out and takeaway) has actually fallen a fraction. Fruit and vegetable prices have risen, but by only a third of their average rate over the past 25 years.

The prices of alcoholic drinks have risen more slowly since 2015, and non-alcoholic drink prices have fallen a bit.

The prices of consumer durable items, including fridges and furniture, have been falling since 2015, meaning they’ve hardly increased over the past 25 years.

The prices of audio-visual equipment – including TVs, computers and phones – have fallen significantly over the past 25 years and particularly the past three.

If you’re finding this hard to believe, there are two main explanations. The first is that, because bad news interests us more than good news, big price rises stick in our minds, but small price falls don’t. Nor do we notice when prices stay unchanged for long periods.

The second is that every new TV, computer or phone does better tricks than the previous model. The new model may cost more than old one, but when the official statisticians allow for the value of the improvement in quality, they almost always find that the underlying price has fallen. Again, this is something we should notice, but usually don’t. Our perceptions play us false.

If we’re having trouble affording the new whiz-bang, big-screen, digital, internet-connected TV, that’s not the higher cost of living, it’s us straining for a higher standard of living.

When we confuse the two we’re deluding ourselves. We’re not getting better off, we’re just having to pay more.

Debelle says changes in the cost of imported goods used to be passed straight on by wholesalers and retailers. But over the past decade or so retailers have become reluctant to pass on higher import prices.

This is only partly because consumer spending hasn’t been growing as strongly as it used to. Debelle finds evidence that net retail margins have been declining.

Cost-cutting means the productivity of labour in retail is rising faster than in other industries, with the savings used to keep prices down rather than fatten profits.

What’s been happening in recent years is intensifying competition between retailers. One cause is the advent of “category killers” such as Bunnings, Officeworks and JB Hi-Fi. These are giving department stores and smaller retailers a hard time.

The buying-power of the many chains of liquor stores now owned by Coles and Woolworths is keeping prices down and putting great pressure on independent stores.

We’ve also seen large foreign retailers setting up bricks-and-mortar operations in Australia. In clothing, these include H&M, Zara, Topshop and Uniqlo.

The biggest bricks-and-mortar disrupter, of course, is Aldi supermarkets. Aldi seems to have taken market share from independent IGA stores, while forcing Coles and Woolies to avoid losing customers by lowering their prices.

Then there’s online shopping, which exposes our retailers not just to competition from big overseas businesses but between themselves.

Online sales still make up only about 5 per cent of total retail trade, but they’re growing rapidly, increasing by 50 per cent over the year to June.

Last year local retailers trembled over the impending arrival of Amazon, but so far it hasn’t had a big impact. Not directly, anyway. Maybe the locals have taken evasive action by keeping their prices low.

Smart phones have made it easier for people to comparison shop – even while in someone else’s store.

And I believe the internet increases the emphasis on price competition, rather than the emotive advertising and marketing big business prefers.

Digital disruption is bad news for the workers in disrupted industries – including journos – but don’t let anyone delude you: it’s almost always good news for consumers.

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Weakening dollar looks a lot worse than it is

Oh dear. While the pollies have been playing their games, the dollar has been falling and there’s even talk in the market of it going below US70¢. Is this a worry? Short answer: naah.

At the local close on Friday the Aussie was at US72.8¢. That’s down from a recent peak in January of almost US81¢. Is that a bad thing?

Depends who you ask. You can find plenty of people who’ll tell you a low dollar is bad and a high dollar is good. But most manufacturers, farmers and miners will tell you the opposite. The lower the better, they say.

Truth is, a fall in the dollar has some advantages and some disadvantages; a rise in the dollar has the opposite set.

A lower dollar has the disadvantage of making imported goods – and overseas holidays – more expensive. It will add to inflation. But it has the advantage of making our export and import-competing industries more internationally competitive on price.

An Australian item priced in Aussie dollars will be cheaper for foreigners to buy; an Australian item priced in US dollars will now bring more Aussie dollars to an Australian exporter. And overseas-produced goods and services will be more pricey relative to locally produced.

Since our inflation rate is unusually low, and our economy should be growing faster, that doesn’t sound like a bad deal to me.

But that’s just the first part of the story. Because a fall sounds bad and a rise sounds good, many people assume a falling dollar must be happening because we’ve stuffed up.

As we’ve seen, wrong on the first count. And most likely wrong on the second. The exchange rate is a relative price – the value of our currency relative to the value of another country’s currency. In this instance, the Yankee dollar.

Any change in that rate of exchange could be explained by happenings on either side of the Pacific – or a bit of both.

At present, however, all the action’s on the American side. The US economy is growing strongly, with President Trump stimulating an economy already close to full employment by cutting company and personal taxes.

So higher inflation is a significant risk. The US Federal Reserve has already raised the US official interest rate from about zero to about 2 per cent (significantly, higher than our 1.5 per cent), and may well raise it further if it gets more concerned about inflation.

A strongly growing economy, with rising interest rates attracting more capital inflow, is an economy with an appreciating currency. In recent times the greenback has been rising in value not just against the Aussie but almost all currencies.

A fact too few people realise is that, though the Aussie has fallen against the greenback (and the currencies of a few developing countries that shadow the greenback), it hasn’t changed much against most other currencies.

We don’t realise that because we’ve long had the bad habit of regarding the Aussie’s value against the greenback as the exchange rate rather than just one of many.

Economists, however – and particularly those at the Reserve Bank – know not to take such short-cuts. They focus on our “effective” exchange rate – the rate against a basket of our trading partners’ currencies, with each country’s currency weighted according to its share of our two-way trade (exports plus imports).

This is the trade-weighted index, or TWI (pronounced “twy”). Since our trade with the US is less than most people assume, the US dollar’s direct weight in the basket is just a bit over 10 per cent.

So whereas since January the Aussie has fallen by almost 10 per cent against the greenback, it’s fall against the TWI has been a more modest 4.4 per cent.

Which is why the country’s economic managers are neither greatly worried nor greatly excited by the dollar’s movements in recent times.

They see the TWI as simply as being around the bottom of the band in which it’s been moving for the past few years. No biggie.

For someone planning an overseas holiday, it’s not good news if you’re off to the States. But doesn’t make much difference if you’re going to Britain, Europe, N’Zillund or Bali.

But could the Aussie fall a lot further against the greenback? It could, and that’s what economic theory would lead you to expect. But I don’t recommend making currency bets on the basis of economic theory.

As a Reserve Bank assistant governor admitted recently, if she knew how to forecast the exchange rate with any accuracy she wouldn’t be here, she’d be on her private island.

Even so, should the dollar end up falling below US70¢ in coming months, I can’t see the Reserve getting too worried. As I say, a bit more inflation would do little harm and a boost to our export industries would be handy.

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“Lags”: one reason economists keep getting it wrong

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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THE DISRUPTED ECONOMY

Uni of Newcastle Boardroom Lunch, Sydney Business Chamber, Thursday, August 23, 2018

I’m pleased to be invited back with fellow alumni of the university to talk about the disrupted economy. But though, as someone working for a newspaper, I’m only too well aware of just how disruptive digital disruption can be to whole industries and the people working in them - with, no doubt, much more disruption to come – if you’ve come today hoping for confident, detailed, spine-tingling predictions about which industries are next and how many thousands of jobs will be lost, I’m sorry to disappoint you.

Rather, I’m going to do roughly the opposite and give you the antidote to all the frighting predictions about how our world will be turned upside down and how disastrous it’s going to be. I’ll give you seven things to beware of.

First is, beware of futurists – supposed experts who speak with great confidence and specificity about what the future holds. Their forecasting record is even worse than economists’. Humans have an insatiable desire to know what the future holds, which gives us an unquenchable appetite for the output of all manner of soothsayers and witchdoctors. We keep forgetting the simple truth: no one, but no one, knows what the future holds. It follows that people who claim to know should be viewed with scepticism. If they’re genuine experts – scientific experts - their predictions will be hedged about with qualifications. Practitioners of futurology, however, are part of the entertainment industry. There’s great demand for their product and they know that the more confident they sound about their predictions, the more they’ll please their audience.

Second, beware of believing that “this time is different”. It’s always possible that this time really will be different, but just remember that people say that every time – during every boom in the economy or the sharemarket or the property market – and it almost never is. This is relevant to the proposition that digital disruption will be bigger and faster and more devastating to employment than we’ve ever seen, because the installation of labour-saving technology has been occurring continuously since the start of the Industrial Revolution more than 200 years ago, and in all that time we are yet experienced technology-caused mass unemployment. This time it may be different, but a betting man or woman would say the greatest likelihood is it won’t be.

Third, beware of believing urban myths. Futurology teems with confidently asserted, seemingly scientific predictions that are so widely repeated they take on the status of accepted facts. In the 1980s, when I first joined the debate about the employment effects of computerisation and the future of work, one of the assumed facts was that each word-processor that firms installed would replace the jobs of, I think it was, 12 typists. But where did this factoid come from? A Harvard study? A presidential report? Few of the people who repeated it ever knew – or bothered to inquire. But someone traced it back to an advertising claim made by a firm selling word-processors.

One current widely quoted factoid is that 40 per cent of Australian jobs are at high risk of automation in the next 10 to 15 years. Hear that one before? The origins of this one have been traced. CEDA commissioned some engineers to take the figures in a study of the American job market and simply modify them for Australia. The American study was made by some entrepreneurial academics at Oxford. But when economists examined the Oxford study – as some Australian and OECD economists did – they found the methodology rough and unconvincing. The OECD study said a more believable estimate for Oz was not 40 per cent but 13 per cent.

Another widely quoted factoid is that “today’s 15 year-olds will likely navigate 17 changes in employer across five different careers”. Heard that one before? I’ve seen it quoted in formal reports and footnoted, without being able to trace its supposedly academic origins. People who tell us how dramatically the world of work is going to change and how much education and training need to change in anticipation of that change say our youngsters need to be taught, among other things, the skill of “critical thinking”. I agree. So let’s apply a little critical thinking to that factoid. Did you note how remarkably numerically specific it is? That’s suspicious. Next, ask yourself how easy it is to believe those remarkable numbers? 17 different employers; five different careers. But the key question we should always ask of futurology is: how would you know? Do you have a time machine? I find it impossible to imagine how you could take all the children born 15 years ago, peer into each of their working lives over the next 55 years and decide how many jobs and careers they’ll have. And do it with such accuracy it could be summarised in two numbers, 17 and five. It’s literally in-credible. The one thing to say for it is that cramming that many employers and careers into just 45 years wouldn’t leave much time for unemployment.

Fourth, beware of assuming that whatever machines can do for us, we’ll want them to do for us. Futurists make themselves expert on what’s coming next from such things as artificial intelligence. What they don’t know much about is human nature. But leave out the human factor and your predictions about how our world will change stand a high chance of being off-beam. Take the confident predictions a decade or two back that, by now, we’d all be working from home. It’s certainly technologically possible, even cheap and easy to organise. But it’s happened to only a limited extent. Why? Because it doesn’t suit many bosses, and it doesn’t suit many workers.

Or, take the long-established move to online financial markets for shares, bonds and currencies. In principle, this means financial traders could be spread around all the cities and towns of Australia with decent internet links. In practice, almost all the traders remain crammed into two or three streets of the Sydney CBD. One of the unexpected features of the knowledge economy is that more and more of the nation’s GDP is being produced in the CBDs of Sydney, Melbourne, Brisbane and maybe Perth. Why? Because knowledge transfers better when people are face-to-face.

To take a more prosaic example, it will soon be technologically possible for cafes and restaurants to be manned by robots rather than people. But I don’t see much of it happening. Why not? Because few people would enjoy eating in such impersonal circumstances. Let me make my own futurist prediction. I think it won’t be long before many firms bring their overseas call centres back on shore. Why? Because so many of their customers hate it.

Fifth, beware of assuming that what you see is all you get. What everyone sees with computerisation, automation, digitisation and the rise of AI (artificial insemination) is all the jobs being destroyed. Non-economists assume that’s the end of the story. Economists earn their living by knowing that it’s not. You have first to remember that some new jobs – not all that many - are created by the workers needed to sell, distribute, maintain, replace and modify all the robots. Much more significantly – but much harder to see – is the realisation that the instillation of labour-saving equipment – including robots – doesn’t destroy value, it increases it. That’s why it happens. It doesn’t reduce productivity, it increases it. And increased productivity equals increased income. Ideally, that increased income is manifest in higher wages for those who remain in the industry and lower prices for the industry’s customers. Failing that, the extra income stays in the hands of the owners of the firms in the industry. But wherever the gains from higher productivity end up, when they are spent somewhere in the economy they create new jobs. This is why economists say that new technology doesn’t destroy jobs, it “displaces” them. It reduces employment in the industry applying the new labour-saving technology, but increases employment in many other, often utterly unrelated industries – usually in the services sector and, if our experience over the past 30 years is any guide, particularly jobs suitable for women. This is why 200 years of labour-saving investment have yet to create significant levels of technological unemployment and why overall employment has continued to grow almost every year.

Sixth, beware of forgetting what economists, in their pompous way, call the “policy reaction function”. This is just a fancy way of saying there’s what the market does, and then there’s what the government does in response to what the market’s done. If it doesn’t like the outcomes the market has produced – or, more likely, if too many voters don’t like those outcomes - it will intervene to correct those outcomes.

Finally, beware of assuming from all I’ve said to put future technological disruption into a more realistic context that I think nothing much will change, or that there’s nothing to worry about. I think a lot will change and there’s a fair bit to worry about.  But these are things you can ask me about now.

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Our concern about the drought isn’t fair dinkum

It’s taken him too long, but public concern and the looming election have finally obliged Malcolm Turnbull to do the right thing by our farmers struggling with severe drought.

In Forbes on Sunday, Turnbull announced a further $250 million in assistance to farmers and communities, including initial grants of $1 million each to 60 drought-affected councils in NSW, Queensland and Victoria, bringing Canberra’s direct handouts to $826 million.

Add a further $1 billion in concessional loans and the total outlay comes to $1.8 billion.

Well, about time.

Is that what you think? I don’t.

I think most of it will be a waste of taxpayers’ money. You’ve heard of being cruel to be kind, but the way we carry on every time there’s a drought is being kind to be cruel. Our sympathy, donations and taxpayer assistance just prolong the agony of farmers unable or unwilling to face the harsh reality of farming in a country with one of the most variable climates in the world.

We may not be able to predict their timing or their length, but we can be certain that, before too long, this drought will be followed by another. And the scientists tell us climate change is making it worse.

And yet we keep pretending no one could have predicted or prepared for the next drought. Nonsense.

Our attitude to drought is all soft heart and soft head. I have two objections. The first is the way our collective concern about drought and its consequences is always media-driven.

When I visited the country in mid-May, my host complained that no one in the city seemed to know or care about the drought that was ravaging the countryside.

But when, a few months later, the first media outlet got the message, it started the usual flood of heart-rending drought stories.

The media love drought stories because they know how much they stir their customers’ emotions. Most people like having the media give their heart-strings a regular workout. I don’t.

And the trouble is, our concern about the drought – or the tsunami or earthquake or bushfire – lasts only as long as it takes the media’s attention to shift to some newer source of concern.

It’s already happening. Turnbull’s big announcement in Forbes got little media coverage because the threat to his leadership was far more exciting.

My more substantial objection to the recurring carry-on about drought is that it makes the problem worse rather than better. We give the bush a fish to feed it for a day when we should be helping it learn better fishing techniques.

In their efforts to tug our emotions, the media invariably leave us with an exaggerated impression of the severity of the drought and the proportion of farmers who are suffering badly. They show us the very worst farms and the worst-off farmers.

To be blunt, they show us the bad managers, not the good ones. I can’t remember ever seeing a story where someone whose farm was in much better shape than his neighbours’ was asked how he did it.

The exception that proves the rule? Don’t be so sure. On average over the six years to 2007-08 – the Millennium drought – nearly 70 per cent of Australia’s broadacre and dairy farms in drought-declared areas managed without government assistance.

Many, maybe most, farmers prepare for drought. Some don’t. They’re the ones the media want us to feel sorry for. The ones who’ve overstocked their now badly degraded properties hoping it will rain before long or, failing that, the government and guilt-ridden city-slickers will give them a handout.

The trouble with our emergency assistance approach to drought is that it encourages farmers not to bother preparing for the inevitable. It encourages farmers whose farms are too small, or who lack the skills or spare capital to survive, to keep struggling on when they should give up.

And it does all that to the chagrin of the wise and careful farmers who’ve made expensive preparation for the next drought with little help from other taxpayers.

Australians have been leaving the farm and moving to the city for more than a century. They’ve done so because continuous advances in labour-saving technology have made small farms uneconomic and decimated the demand for rural labour. All while the nation’s agricultural production keeps growing.

This is my own family’s story. I was raised mainly in cities, but my father grew up on a dairy farm near Toowoomba and my mother on a cane farm in North Queensland.

Meaning that, were it not for my brush with economics, I too would share the city-slickers’ sense of guilt at having deserted the true Australian’s post on the land for a cushy life in the city. Would $50 be enough, do you think?

We are perpetrators of what Americans have dubbed the “hydro-illogical cycle”. As Dr Jacki Schirmer and others at the University of Canberra describe it, this occurs when “a severe drought triggers short-term concern and assistance, followed by a return to apathy and complacency once the rains return.

“When drought drops off the public and media radar, communities are often left with little or no support to invest in preparing for the next inevitable drought.”

Every government report on drought concludes the best response is for farmers to improve their self-reliance, preparedness and climate-change management. We could help them with their preparations, but we get a bigger emotional kick from giving them handouts when droughts are at their worst.

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We could increase bank competition if we wanted to

Would you like to put your savings in a super scheme presently reserved for public servants? Would you like your bank account or mortgage to be with the Reserve Bank?

Impossible to imagine such a crazy idea? Well, that’s what the Productivity Commission thinks, but it’s neither as impossible nor as crazy as it may sound.

Everyone says they believe in innovation, but when we’re used to thinking and doing things one way and some bright spark argues we should be doing it the opposite way, they’re more likely to be dismissed than grappled with.

And our econocrats are no more receptive to innovative ideas than the rest of us, it seems.

The bright spark in question is Dr Nicholas Gruen, principal of consulting firm Lateral Economics. The Bank of England and Martin Wolf, of the Financial Times, think he’s worth taking seriously, but in the Productivity Commission’s final report on competition in the financial system his ideas are brushed off as though he’s a nut job.

So let’s have a look at them. In his submission to the commission’s inquiry, Gruen argued we needed to give a twist to a widely accepted principle of micro-economic reform, established in 1996, called “competitive neutrality”.

In those days there were a lot of (mainly state) government-owned businesses. Sometimes they had a natural monopoly over some network, sometimes it was an “unnatural” monopoly granted by legislation, sometimes it was a bit of both.

The reformers’ concern was that, being monopolies, these government businesses weren’t terribly efficient. They tended to be overstaffed and do “sweetheart” pay deals with their unions because they knew they could pass the cost straight on to their customers.

Clearly, it would be much better for customers if these outfits could be exposed to competition from private firms, to force their prices down. But this competition would emerge only if the public businesses were robbed of any special advantage arising from their government ownership.

Fine. Almost a quarter-century later, most of those businesses have been privatised – many of them with their anti-competitive advantages intact or restored, so as to boost their sale price.

Today, of course, the big problem is the lack of competition in, say, the oligopolised national electricity market or, as the commission’s inquiry acknowledged, in oligopolised banking. With super, the big problem is workers’ reluctance to engage with all those boring comparisons.

This is where Gruen’s twist on competitive neutrality comes in. If what we needed back then was to increase private competition with government businesses, surely an answer to our present problem of inadequate competition between private players is increased competition from public businesses.

In the case of banking, he asks why, in these days of online banking, the significant benefits of being able to bank with the central bank should be restricted to producers (the commercial banks) and denied to consumers (households and other businesses). What’s competitively neutral about that?

In the case of superannuation, why should savers be prevented from giving their money to funds managing the super savings of public servants? Surveys show public sector funds achieve returns to members even higher than the non-profit industry funds, let alone the for-profit “retail” funds run by banks and insurance companies.

Gruen notes that public sector funds would offer only modern, defined-contribution super and involve no subsidies – that is, they’d be competitively neural. (More radical reformers would say, so what if public providers had a government-related advantage they could pass on to customers? If the government can give the public a better deal, why shouldn’t it?)

Sometimes public providers would have an advantage because they were so big. But that’s not an unfair advantage. It’s exploitation of economies of scale that mean so many private industries are dominated by only a few firms. Only problem is insufficient price competition between them to ensure the cost savings are passed to customers, not owners.

In response to Gruen’s idea of opening up access to central banks, the commission raised practical objections that could be solved if you really wanted to.

In brushing off the idea of public super providers, the commission quoted the case of the Swedes doing something similar. Bad idea, apparently. More than two-thirds of new contributors defaulted into the public fund – perhaps because it earned better returns than the private sector funds.

Of course, you wouldn’t expect privately own banks or super funds to welcome reform that could cost them customers or force down their profit margins. Perhaps this explains the commission’s lack of interest in the idea – it knew the proposal wouldn’t appeal to a Coalition government.

But it's more likely the econocrats are just stuck in an ideological rut. Economic reform was always about reducing public and increasing private. Going the other way is so obviously wrong it doesn’t need thinking about.

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Immigration is sharply slowing the ageing of our population

Reserve Bank governor Dr Philip Lowe thinks Australia’s strong population growth in recent years is a wonderful thing, and he sings its praises in a speech this week.

I’m not sure he’s right. Like most economists and business people, Lowe is a lot more conscious of the economic benefits of population growth than the economic costs. As for the social and environmental costs, they’re for someone else to worry about.

But whatever your views, you’ll be heaps better informed after you’ve seen what he says about our changing “population dynamics” and absorbed his tutorial on demography.

Over the past decade, our population has grown at an average rate of about 1.6 per cent a year. This is faster than in previous decades. It’s also faster than every advanced economy bar Singapore.

Most other rich countries – including the US and Britain – grew by well under 1 per cent a year over the period. The populations of Italy, Russia and Germany were stagnant, and fell in Japan and Greece. China’s annual growth averaged only 0.5 per cent.

What’s driving our growth is increased immigration, of course. Over recent times, net overseas migration has added about 1 per cent a year to the population, with “natural increase” (births minus deaths) adding only about 0.7 per cent.

Our rate of natural increase is pretty steady. It perked up a bit a decade ago, but quickly resumed its slow decline, as more couples have smaller families and some have none.

Net migration, by contrast, goes through a lot of peaks and troughs – which, not by chance, correlate well with the ups and downs of the business cycle.

We think of the government controlling immigration with a big lever (making it “exogenous” or coming from outside the system, as economists say, pinching the word from medicos) but many demographers see immigration as “endogenous” or determined within the system.

This has become truer as permanent migration becomes dominated by workers with skills we need, rather than by family reunion, and there’s more temporary migration by overseas students and skilled workers brought in by employers to fill a temporary shortage.

The resources boom showed temporary skilled migration was great at helping us control (wage-driven) inflation, one of Lowe’s primary concerns as boss of the central bank.

But I worry our young people are paying the price for this greater macro-economic flexibility. We’re schooling our employers not to bother training plenty of apprentices ready for the next shortage because it’s easier to wait until the shortage emerges and then pull in a tradesperson or three from overseas.

Sorry, back to Lowe’s speech. He notes that growth in the number of people here on temporary visas adds to the size of our population. For instance, there are now more than half a million overseas students studying in Australia.

Here’s a stat you probably didn’t know: about a sixth of foreign students are permitted to stay and work here after finishing their studies. This boosts our population. Always a man to look on the bright side, Lowe reminds us it also boosts the nation’s “human capital”.

Plus, he’s too polite to say, it does so free of charge. It’s a neat trick: we charge foreign parents in developing countries full freight to educate their children, then allow the best of 'em to stay on.

But wait, there’s more: we also benefit from our stronger overseas connections when foreign students return home, Lowe says.

Now for his big reveal. Particularly because of our emphasis on skilled workers and students (as opposed to bringing out nonna and nonno), the median age of new migrants is between 20 and 25, more that 10 years younger than the median age of the rest of us.

At the time of Treasury’s first intergenerational report in 2002, our present median age of 37 was expected to rise rapidly to more than 45 by 2040. But after the past decade of increased immigration of young people, the latest estimate is that the median age will be only about 40 by then.

“This is a big change in a relatively short period of time, and reminds us that demographic trends are not set in stone,” Lowe says.

This means that, on the question of population ageing, and looking at the latest projections over the next quarter of a century, we compare well with other advanced economies, he says.

First, our median age of 37 makes Australia one of the youngest countries. We are ageing more slowly than most of the others, meaning we’re projected to stay relatively young. This is better than earlier projections suggesting we’d move to the middle of the pack.

Second, we have a higher fertility rate than most rich countries. Australians tend to have larger families than those in many other countries. (Note, not large, but larger than the others.)

Third, our average life expectancy is at the higher end of the range, and is expected to keep rising.

Fourth, our old-age dependency ratio – people 65 and older, compared to people of working age, 15 to 64 – is rising, but less quickly than in most other countries.

And our relative youth and higher fertility rate means our dependency ratio is expect to stay lower than other countries’ for the next 25 years or so. Only then is it projected to rise rapidly.

The first intergenerational report expected that the disproportionate bulge of baby boomers reaching normal retirement age would lead to a steady decline in the proportion of people participating in the labour force.

It hasn’t happened. The reverse, in fact – for fascinating reasons I’ll save for another day.

To economists, this slower rate of population ageing – that is, slower rise in the old-age dependency ratio – is great news. It means the economy’s growth in coming years won’t slow as much as they were expecting (see point above about the participation rate).

It also means ageing will put less pressure on future federal and state budgets. But let me give you a tip: there are so many other pressures we probably won’t notice its absence.

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This country is run for home owners, by home owners

Name a group that accounts for about a third of the population and rising, is much more likely to suffer stress in affording their housing than other groups, and yet has never had much sympathy from politicians, voters or the media.

Ironically, the bit of sympathy they’ve had in recent days hasn’t been warranted.

They’re the forgotten minority – more forgotten than the forgotten people we keep being reminded about. They’re renters.

They get forgotten because we live in a land where home ownership is the only recognised real estate religion. This country is run for home owners, by home owners.

Now, it may have occurred to you that a supposedly sacred group known as “first home buyers” – actually, would-be home buyers - are renters. Surely a fair bit of sympathy exists for them?

Well, not really. We profess to be sympathetic, but we aren’t. That’s because, as economists get tired of pointing out, all the things we do in the name of helping would-be home owners – first home buyer grants or stamp duty concessions, capital gains tax exemptions for owner-occupiers, even negative gearing – actually benefit existing home owners at the expense of aspiring home owners.

These things add to the demand for homes, relative to supply, and thus push up their prices, making them harder to afford.

Politicians are almost always unwilling to help aspiring home owners by reversing these concessions because they know how angry existing owners would be if they did.

But getting back to renters generally, why do we take so little interest in them and their problems?

Partly because, in a world that values home ownership above all else, renting is assumed to be just a brief transitional state while young people get together the money for a deposit.

Unfortunately, that assumption gets less true as each year passes. When I became a journo in the mid-1970s, we were particularly proud of Australia’s 70 per cent rate of home ownership. It’s been declining, slowly but inexorably, ever since.

Meaning the proportion of renters has been growing ever since. A lot of people still attain home ownership, of course, but it takes them many years longer.

The other reason we take so little interest in renters is that, since almost all of us aspire to own our home, those who never make it – those who stay renting all their lives – are those never able to afford it. And who spends much time worrying about the poor?

But this, too, is becoming less true as the years pass, with a lot more middle-income earners spending a lot more of their lives in rented accommodation.

In the day, we used to rely on “the housing commission” to take the poor off our conscience. In the years since then, the enthusiasm of governments, federal and state, for what we now euphemistically call “social housing”, including “affordable housing”, has steadily diminished – further demonstrating our lack of interest in renters.

The latest report from HILDA – the long-running, government-funded survey of Household, Income and Labour Dynamics in Australia – includes a most informative chapter on renters, by Professor Roger Wilkins, of the Melbourne Institute at Melbourne University.

Wilkins confirms that renters of social housing are 10 percentage points more likely to experience financial hardship than people who own their homes outright. But renters of private housing are 15 percentage points more likely.

HILDA defines “housing stress” as households in the bottom 40 per cent of the distribution of household incomes who spend more than 30 per cent of their income on mortgage payments or rent. (Plenty of high-income households spend more than 30 per cent, but that’s a choice they can afford.)

The proportion of private renters suffering housing stress rose from almost 18 per cent after the turn of the century to 20 per cent by the end of the decade, but hasn’t increased since then.

Of late, some sympathy has been expressed for renters, who must be suffering huge increases in their rent as house prices in Sydney and Melbourne have soared.

Sorry, I’ve looked up the consumer price figures and they don’t compute. In Sydney, over the four years to June this year, the prices of newly built dwellings bought by owner-occupiers rose by almost 20 per cent, whereas rents rose by less than 10 per cent – not a lot higher than the rise in all consumer prices of 7.5 per cent.

In Melbourne, new home prices rose by more than 16 per cent, whereas rents rose by less than half that – only a fraction more than consumer prices generally.

But if soaring rents don’t explain renters’ high rates of financial and housing stress, what does? Their generally low and lower-middle incomes, which have probably worsened somewhat, relative to the rest of us, so far this century.

Note that housing stress is surprisingly low among people of retirement age. That’s because this is the group with by far the highest rate of outright home ownership. The modest level of the age pension takes this fact into account.

But that means those relatively few pensioners who rent privately do suffer much hardship. When a spate of complaints about the inadequacy of the single age pension prompted an investigation, it found that only single pensioners in private rental were doing it tough.

Kevin Rudd responded with a big one-off increase for all single pensioners, plus an increase for married pensioners so they wouldn’t feel left out. As I say, renters don’t count.

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How to lift our schools’ performance

We’re at it again. Every time education or healthcare pops up in the news, it’s almost always people arguing about money and how much of it they’re getting. Rarely is it people discussing how the billions we’re already spending could be used more effectively.

There’s nothing the media love more than a fight. And when it comes to government spending, there’s never a shortage of interest groups demanding more or predicting death and destruction if their funding’s cut.

Now “Gonski” is back in the news, but it’s people still arguing the toss about David Gonski's first report on needs-based funding, not Gonski 2.0 on how we can improve a school system that’s failing far too many of its students.

Inevitably, the latest fight is sectarian. The Catholics are trying to extract special deals from both Labor and the Coalition before the election, while the largely Protestant “independent” sector is threatening to arc up if the Catholics succeed.

Hope Jesus is pleased with the example you’re setting your students, guys.

The Melbourne-based Grattan Institute takes pride in focusing on more substantive policy issues. And it got through a public discussion of Gonski 2.0 in Sydney last week without once mentioning funding.

Gonski’s second bite at the education cherry confirmed that, since 2000, Australian student outcomes have declined in key areas such as reading, science and maths. There’s a wide gap between our best and worst performers.

It’s a gap that won’t be magically removed by needs-based funding. So what does Gonski suggest?

The first of his three priorities is to “deliver at least one year’s growth in learning for every student every year”. Our achievement gap shows that many of our kids get through a year without learning all the curriculum assumes they have.

Gonski says we still have a 20th century industrial-style model of schooling where students are grouped by grade and age, learn or don’t learnt what they’re supposed to, then move in lockstep to the next grade.

At the end of the half-year or year they’re tested to see how much they’ve learnt, mainly so they can be ranked according to how well they performed in the competition.

Gonski wants to move to a model that focuses on measuring “growth” – the progress each individual student is making along a defined “learning progression”, which is an empirically determined list of the sequence in which most students learn the steps to acquiring, say, literacy or numeracy.

Teachers make regular assessments of each individual’s progress, so they know what the kid’s ready to learn next. This helps prevent the slower students falling hopelessly behind, but also makes sure the brighter students are stretched.

These regular assessments are diagnostic rather than how you’re going in the comp. Students are applauded for their growth, not for coming top. As Paul Cahill, of the Catholic Schools system, said to the Sydney gathering, we need more growth in learning and less ranking and sorting.

Just as well, because all those diagnostic assessments will be time-consuming. Gonski says education authorities should develop an online and on-demand student learning assessment tool for teachers and also “limit the burden of non-core activities such as administrative tasks”.

This move to “targeted teaching” is being practiced in some schools and is endorsed by much research. It just needs to be used much more widely.

Gonski’s second priority is to “equip every child to be a creative, connected and engaged learner in a rapidly changing world”.

“As routine manual and administrative activities are increasingly automated, more jobs will require a higher level of skill, and more school-leavers will need skills that are not easily replicated by machines, such as problem-solving, interactive and social skills, and critical and creative thinking,” his report says.

People call these “soft skills” or “21st century skills”, but the educationists’ term is “general capabilities”. There’s wide agreement that these things warrant greater attention, and has been for a decade. What’s missing is the will to get on with it.

But some worry that more emphasis on soft skills means dumbing down the syllabus. More touchy-feely means less knowledge of facts and concepts.

At last week’s gathering, however, Leslie Loble, of the NSW Education Department, insisted there need be no conflict. General capabilities and hard knowledge must always go together; you gain your general capabilities while learning the traditional subjects.

Grattan’s highly influential school education expert, Dr Peter Goss, noted that Gonski 2.0’s greatest strength – it wasn’t urging the Feds to impose its priorities on the states and territories – is also its great weakness. As I’d put it, now we have to wait for Brown’s cows to get their acts together.

The longer it takes, the more of our young people get off to a bad start in life.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Young people bearing the brunt of a weak economy

Without wanting to be branded a class traitor, I have to admit that we Baby Boomers have enjoyed a rails-run in the race of life.

Most of us had little trouble getting ourselves set up in the jobs market and then the housing market. I look at today’s bright and bushy-tailed youngsters, just starting out in both markets, and don’t envy them one bit (except, of course, their instinctive understanding of the right place to click on a webpage).

(Just to protect my back: those Baby Boomers who were conscripted, or ended up in Vietnam, didn’t have it easy. Nor should those who’ve come after us imagine all Baby Boomers are rolling in it, have never been unemployed, never paid uni fees nor suffered bad luck.)

In the decade since the global financial crisis and the recession we supposedly didn’t have, the supply of people wanting to work has been stronger than employers’ demand for work to be done.

That’s true even though the rate of unemployment never got very high and isn’t all that high today. But a study by Zoya Dhillon and Natasha Cassidy, of the Reserve Bank, confirms what I’ve long suspected: the reason the position overall hasn’t looked so bad is the brunt of the weakness in employers’ demand for labour has been borne by young people leaving school and university.

Whatever you’ve heard in the media, not a lot of workers have been laid off since the shock in September 2008. Employer behaviour has changed, the study confirms. Firms have been less inclined to get rid of people and more inclined to reduce the total amount of hours they’re paying for.

This has become easier for them to do because of their greater ability to employ people on a part-time or casual basis.

On balance, and from an economy-wide perspective, this change of behaviour is an improvement, a shift to a lesser evil. It’s a terrible blow to suddenly lose your job. Better to have some paid work than none.

But the price for this marginal improvement has been paid mainly by the young. Established workers have tended to keep their jobs, but employers haven’t recruited as many people at entry-level. And more of the jobs they’ve offered young people have been part-time.

A new twist on last in, first out.

The result is that education-leavers have had greater trouble – and suffered longer delays – in finding a full-time job suited to their education.

“Over the past decade,” the study says, “increases in the unemployment and underemployment rates for younger people have been twice as large as for the overall labour market. The share of 20 to 24 year-olds that have become disengaged from either study or work has also increased.”

“Younger people” means those aged 15 to 24, though remember that those aged 15 to 19 will mainly be still at school, while many of those aged 20 to 24 will be at university or TAFE.

Some younger people have part-time jobs while still at school, and most higher education students in full-time study also work part-time.

Nothing new or worrying about that. But “in recent years there has been a pronounced increase in the share of 20 to 24 year-olds working part-time who are not studying full-time”.

You’ve heard, no doubt, that while the official unemployment rate has been edging down, the rate of underemployment – people working part-time who want to work more hours – has been edging up (until lately, as we’ll see).

What’s less well known is that underemployment is dominated by younger workers, and it’s they who’ve done most to drive the rate up over recent years. A lot of this would be people finishing uni but having trouble finding a full-time job and taking a part-time job while they keep searching.

In the mid-1990s, about 80 per cent of all bachelor-degree graduates found a full-time job within four months of graduating. By last year, that had fallen to just over 70 per cent – about the same as it got down to during our last severe recession in the early 1990s.

Remember, it’s like a traffic jam. It takes a lot longer than it should, but you do get through eventually.

The most worrying thing is the “NEET rate” – the proportion of younger people who are “not in education, employment or training”. The NEET rate has fallen over the decades as we’ve done better at getting more of our young people into education and training.

But the rate for 20 to 24 year-olds has increased in recent years and is back to where it was in 2005.

The study says prolonged spells of disengagement from the labour market are known to have lasting ill-effects. “Poor labour market outcomes early on not only affect an individual’s future employability, but also have persistent negative effects on lifetime earnings.”

All this says the difficulties younger people are encountering in finding decent full-time jobs are better explained by the economy’s prolonged period of below-par growth since the financial crisis than by the sexier and more frightening explanation that it’s caused by the rise of the “gig economy”.

Which brings me to a little good news. The trend rate of underemployment for all ages has fallen a little to 8.4 per cent over the past year. And the rate of unemployment for younger people has fallen from 12.4 per cent to 11.6 per cent in just the past four months.

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Why so much spending on infrastructure is misspent

It’s the great conundrum of government policy: we have a big shortage of infrastructure, but also waste billions on it.

This seeming contradiction is easily explained: particularly in recent years, and at both state and federal levels, much money is being spent on infrastructure projects.

Trouble is, a lot of the dough’s being spent on flashy or low-priority projects, at the expense of more important but less sexy projects, particularly in the overcrowded outer suburbs.

I suspect we spend more than we should building expressways and too little on public transport – and within the latter, some argue, too much on rail and not enough on busses.

Why? Well, I’m sure it wouldn’t be because the big heavy engineering companies are better at lobbying politicians than public transport providers.

There aren’t many aspects of government spending – many contributors to debt and deficit – more in need of reform than spending on public infrastructure, or with more scope for making a bigger contribution to national productivity and a smaller contribution to budget pressures.

But you’d never know that from the way our politicians, the business lobby and Treasury obsess about tax reform for decade after decade. We’ve had lots of tax reform over the years, but it’s never been enough to satisfy their appetite.

So why is infrastructure spending so rife with wastefulness? Mainly because it’s one of the few areas of policy left where the pollies themselves have much scope for playing Santa Claus in particular states and even particular electorates, at times of their own choosing. Byelections, for instance.

It’s often too tempting for pollies to pick projects according to the votes their announcement is intended to bring, rather than the extent to which the public benefits they bring exceed their costs.

Last week the boss of Infrastructure Australia, Philip Davies, who leaves the job next month, made his last contribution by unveiling a list of 11 principles governments should follow in making decisions about infrastructure, so as to lift the quality of those decisions.

“Businesses and households across the country rightly want to know that governments are investing limited public funds in infrastructure that will bring strong productivity benefits to the economy, support our quality of life, and help to deliver a collective vision of a strong, fair and prosperous Australia for many years to come,” the document states.

It nominates some respects in which governments’ decisions on infrastructure still leave “room for improvement” – to coin a bureaucratic euphemism.

One is that there should be more transparency – that is, information about the stages of the decision process and the public release of analysis – in making decisions about projects.

This includes reviews on the completion of projects, showing the lessons learnt and application to future investments. Everyone agrees they’re a good idea, but such reviews are rarely done and rarely made public.

Taxpayers pay a high price for the political and public service predilection for never admitting anything they’ve done was less than perfect, for fear of what the opposition and the media would say. Much better to always be up-front about failings, so critics stop getting overexcited but lessons are learnt.

Further room for improvement arises because “projects are often developed without fully considering all available options to solve an identified problem, including potential solutions that make better use of existing infrastructure through technology and data”.

Too true. This happens because pollies love announcing that they’re spending big bucks to build something new and wonderful – then come back five years later to cut the ribbon.

They don’t get as much media attention when they merely upgrade existing infrastructure – and none when they spend money every year ensuring existing assets are well maintained.

And they’d get adverse media attention if they did what the bureaucrats were hinting at with their reference to making better use of existing infrastructure “through technology and data” – charging motorists directly for their measured use of roads and the time of day they made that use.

Yet more “room for improvement” arises because “too often, we see projects being committed to before a business case has been prepared, a full set of options have been considered, and rigorous analysis of a potential project’s benefits and costs has been undertaken”.

Why such travesties of good management? Because spending on what we used to call “capital works” is so closely associated with politicians using the first announcement of projects to win votes at elections.

All this expediency and lack of courage is another reason we should be slow to believe politicians promising to fix budget deficits (or pay for tax cuts) by cutting government spending.

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