Working from home takes us back to the future

If there’s one good thing to come from this horrible year, surely it’s the breakthrough on WFH – working from home. This wonderful new idea – made possible only by the wonders of the internet – may have come by force, but for many of us it may be here to stay.

If so, it will require a lot of changes around the place, and not just in the attitudes and practices of bosses and workers. With a marked decline in commuting – surely the greatest benefit from the revolution – transport planning authorities will have to rethink their plans for more expressways and metro transport systems.

If we’re talking about fewer people coming into the central business district and more staying at home in the suburbs, over time this will mean a big shift in the relative prices of real estate. For both businesses and families, CBD land prices and rents will decline relative to prices and rents in the suburbs.

In big cities like Melbourne and Sydney, as so many jobs have moved from the suburbs to office towers in the CBD and nearby areas, the dominant trend in real estate has gone from position, position, position to proximity, proximity, proximity. Everyone would prefer to live closer to the centre.

If you measure the rise in house prices over the years, you find the closer homes are to the GPO, the more they’ve risen, with prices in outer suburbs having risen least.

But if WFH becomes lasting and widespread, that decades-long trend could be reversed. If you don’t have to spend so much time commuting, why not live further out, where bigger and better homes are more affordable and there’s more open space?

Maybe apartment living will become less attractive compared to living in a detached house with a garden, with a corresponding shift in relative prices. And if we’re going to be working at home as a regular thing, maybe we need an extra bedroom to use as a study.

It’s interesting to contemplate. But before we get too carried away, let’s remember one thing: in human history, there’s nothing new about working from home. Indeed, when you think about it you realise humans have spent far more centuries working at home than not.

We’ve been working from home – not having a factory or office to go to – since we were hunters and gatherers. That was all the millennia before the beginning of farming about 10,000 years ago.

In all the years before the start of the Industrial Revolution in Britain in the 1760s, most people earned their living from farming, and farming was done next to – and sometimes inside – the hovels of peasant workers or, in less feudal times, the homesteads of farmers.

You know that in Europe and other cold climes, families lived with their farm animals during winter. Much work would have been done in nearby sheds.

In the Middle Ages, most tradespeople worked at home. Blacksmiths, carpenters, leather workers, bakers, seamstresses, shoemakers, potters, weavers and ale brewers made their goods in their homes and sold them from their homes.

This was work suitable for women as well as men, and it could be combined with childcare and other, income-earning farm work.

In the early days of capitalism, from the 1600s to until well into the Industrial Revolution, much use was made of the “putting-out” system, as The Economist magazine describes in a recent issue.

“Workers would collect raw materials, and sometimes equipment, from a central depot. They would return home and make the goods for a few days, before giving back the finished articles and getting paid,” it says.

“Workers were independent contractors: they were paid by the piece, not by the hour, and they had little if any guarantee of work week to week.”

Is this ringing any bells?

Being economists, the magazine notes that when Adam Smith wrote The Wealth of Nations, in 1776, it was perfectly common to work from home. Smith famously described the operation of the division of labour in pin-making – not in a dark satanic mill but a “small manufactory” of perhaps 10 people, which could well have been attached to someone’s house.

Eventually, however, the putting-out system gave way to full-on manufacturing in factories – despite the resistance of the machine-smashing Luddites who preferred the old ways.

The move to factories was an inevitable consequence of the development of bigger and better machines in the unending pursuit of economies of scale. Workers moved from the farm to the factory and then, as technological advance continued, from highly automated factories to city offices and, eventually, sitting at a desk staring at a screen.

It’s economic development and the pursuit of ever-greater material prosperity that opened the geographic divide between home and work. Which is not to say that further technological change – including the advent of Slack and Zoom – can’t make it possible to bring them back together for many, though obviously not all, workers. Provided, of course, that’s what workers and, more significantly, bosses see as being to their advantage.

Here, too, it’s worth remembering a bit of history. The Economist notes that, according to some economic historians, workers were exploited under the putting-out system. Those who owned the machines and raw materials enjoyed enormous power over those whose labour they used.

It was difficult for workers spread across the countryside to team up against the bosses and their take-it-or-leave-it offers. Crammed into a big factory, however, workers could more easily join together to ask for higher wages. Trade unions started to grow from the 1850s onwards.

Happy speculation aside, there’s no certainty how much working from home will take on. If it does, there’s a risk that will be because bosses see it as a new way to cut costs. That really would be turning the clock back.

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Experts work overtime to take the fun out of Christmas

Feeling bad about the way the pandemic is disrupting your Christmas arrangements? Cheer up, I have good news – of a sort. Keep reading and I’ll convince you Christmas has become so “problematic” you’re probably better off not bothering this year.

A bad-to-non-existent festive season is the perfect way to top off this horrible year, leaving us confident 2021 couldn’t possibly be worse. After this, it’s all upside.

With nowhere to go and nothing better to do, I’ve been searching the internet for ways of improving on the Joy of Christmas. Having consulted the earnest academic experts, I’ve realised Christmas is a minefield of impossible dreams, dashed expectations, overspending, overindulgence and waste, all of it threatened by the risk of a family fight.

And that’s before you remember the damage to the planet – the minimisation of which so many academics seem to see as the whole point of Christmas. (I warned you they were earnest.)

But first, a consumer warning: none of the facts and figures the academics toss around so confidently comes with a money-back guarantee. Read them, be impressed, do not commit to memory.

I must start by acknowledging the seminal contribution of economists to the Yuletide Killjoy movement. One economist who shall remain nameless made his name with a journal article and then book titled The Deadweight Loss of Christmas.

His point was that, in the frequent cases where the gifter of a gift paid more for it than the giftee valued it, the difference was a “deadweight loss” – money spent that yielded no benefit to either party.

His solution was that if you must keep giving presents, stick to cash. Great. Remember, the goal of all Christmas advice is to be admonitory rather than helpful. I’m smart; you're not so.

But the purveyors of the dismal science have no monopoly over the academy’s efforts to increase the dismality of Christmas. The charge is now being led by, of all people, the marketing experts, themselves led by Dr Adrian Camilleri of the University of Technology Sydney, and Professor Gary Mortimer of the Queensland University of Technology.

Camilleri’s research into the psychology of gift-giving finds there are two potentially conflicting goals. First is to make the recipient happy, which mostly depends on whether the gift is something they want.

Second is to strengthen the relationship between giver and recipient. This is achieved by giving a thoughtful and memorable gift – one that shows the giver really knows the recipient. “Usually this means figuring out what someone wants without directly asking,” Camilleri says.

See the problem? Asking them what they want is the way to achieve high marks on desirability, but yields a fail on communicating thoughtfulness.

But now we step up the analysis (stop me if I’m going too fast). Camilleri sets up a matrix, showing the four quadrants made when you account for degrees of thoughtfulness and then degrees of desirability.

In the top left-hand quadrant – unthoughtful and undesired – would be a gift of, say, a pair of socks. The top right-hand quadrant – unthoughtful and desired – would be, say, a gift of money. In the bottom left-hand quadrant – undesired but thoughtful – would be a present you’d never imagined getting, but quite liked. In the bottom right-hand box is a gift that’s both desired and thoughtful.

See how high are the chances of giving a present that misses the mark? “This is why buying a gift can be so anxiety-inducing,” he says. “There is a ‘social risk’ involved.”

But isn’t it the thought that counts? Not as much as you think. Research shows gift-givers tend to overestimate how well unsolicited gifts will be received. Research also shows people tend to overestimate their ability to discern what a recipient will like.

As well, gift-givers tend to overestimate the extent to which more expensive gifts will be received as being more thoughtful. Turns out recipients appreciate expensive and inexpensive gifts similarly.

And they actually feel closer to those who give convenient gifts such as a gift certificate for a nearby, ordinary restaurant, rather than a distant, flash restaurant.

Mortimer and colleagues warn against the evil of giving for giving’s sake. They report that $400 million unwanted presents were given in Christmas 2018, comprising about 10 million items, many of which probably went to landfill. Topping the unwanted list were (in order) novelty items, candles, pamper products, pyjamas or slippers and underwear or socks.

“The shopping frenzy is not good for the planet. It generates a mountain of waste, including plastics, decorations, wrapping paper and party paraphernalia only used once. It also involves thousands of air and road miles to transport goods, which creates up to 650kg of carbon dioxide per person," we're told.

Which brings us to overeating. Under the heading of “How not to give the gift of food guilt this holiday season”, Dr Kelly McGonigal, a psychologist at California’s Stanford University, asks: “Are you overloading your loved ones with indulgent treats they’ll regret?”

I tell you, we’re much better out of the whole thing.

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Year of wonders: Coronacession not as bad as feared

This year has been one steep learning curve for the nation’s medicos, economists and politicians. And you can bet there’ll be more “learnings” to learn in 2021.

Just as the epidemiologists learnt that the virus they assumed in their initial worst-case modelling of the effects of the pandemic wasn’t the virus we got, economists have learnt as they continually revised down their dire forecasts of the economic damage the pandemic and its lockdown would cause.

It reminds me of the “anchor and adjust” heuristic – mental shortcut – that behavioural economists have borrowed from the psychologists. Not only do humans not know what the future holds, they’re surprisingly bad at estimating the size of things.

They frequently estimate the absolute size of something by thinking of something else of known size – the anchor – and then asking themselves by how much the unknown thing is likely to be bigger or smaller than that known thing.

(Trick is, we often fail to ensure the anchor we use for comparison is relevant to the unknown thing. Experiments have shown that psychologists can influence the answers subjects give to a question such as “how many African countries are members of the United Nations?” by first putting some completely unrelated number into the subjects’ minds.)

The econocrats have been furiously anchoring-and-adjusting the likely depth and length of the coronacession all year.

Their initial forecasts of the size of the contraction in gross domestic product and rise in unemployment – which were anchored on the epidemiologists’ original modelling results – soon proved way too high. (Treasury’s first estimate of the cost of the JobKeeper wage subsidy scheme was way too high for the same reason.)

When Prime Minister Scott Morrison started assuring us the economy would “snap back” once the lockdown was over, many people (including me) expressed scepticism.

An economy couldn’t simply “hibernate” the way bears can. Businesses would collapse, some jobs would be lost permanently, and business and consumer confidence would take a lasting hit. There’d be some kind of bounce-back, but it would be way smaller and slower than Morrison was implying.

Wrong. The first reason we overestimated the hit from the pandemic was our much-greater-than-expected success in suppressing the virus. Early expectations were for total hours worked to fall by 20 per cent and the rate of unemployment to rise to 10 per cent.

Morrison’s impressive handling of the pandemic – being so quick to close Australia’s borders, acting on the medicos’ advice, setting up the national cabinet, conjuring up personal protective equipment, and encouraging the states to build up their testing and tracing capability – gets much of the credit for this part of our overestimation.

But the main reason things haven’t turned out as badly as feared is that the economy has rebounded much more in line with Morrison’s assurance than with the doubters’ fears. Victoria’s second wave made this harder for some to see, but last week’s labour force figures for November make it very clear.

Total employment fell by 870,000 between March and May, but by November it had increased by 730,000, an 84 per cent recovery. Victoria accounted for most of the jobs growth in November and now has pretty much caught up with the other states – the more remarkable because its lockdown was so much longer and painful.

Admittedly, more than all the missing 140,000 jobs are full-time, suggesting that some formerly full-time jobs may have become part-time.

By the time of the delayed budget 10 weeks ago, the forecast peak in the unemployment rate had been cut to 8 per cent, but in last week’s budget update it was cut to 7.5 per cent by the first quarter of next year.

If this is achieved it will show that the coronacession isn’t nearly as severe as the recession of the early 1990s – in which unemployment reached a plateau rather than a peak of 11 per cent – or the recession of the early 1980s, with its plateau of 10 per cent.

Similarly, Treasurer Josh Frydenberg now expects the unemployment rate to return to its pre-pandemic level (of 5 per cent or so) in about four years, in contrast to the six years it took following the 1980s recession and the 10 years it took following the ‘90s recession.

Question is, why has the rebound been so much stronger than even the government’s forecasts predicted? Two reasons – but I’ll save them for next Monday.

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Job insecurity is about shifting risks, not being flexible

One thing we’ve learnt from the pandemic is that, for those who rely on evidence rather than anecdotes, what we believe to be The Truth keeps changing as we learn more. Take the way the medicos changed their tune on mask-wearing as more evidence came in.

It’s the same with the truth about job insecurity. The unions have gone for years claiming that work has become less secure, and in recent years the rise of the “gig economy” – where people get bits of paid work via a digital platform such as Uber or Deliveroo – means many people have found that claim a lot easier to believe.

But the training of economists says you should base conclusions about the economy on statistical evidence, not anecdotes or even personal experience. And the trouble is, a quick look at the Australian Bureau of Statistics’ figures for the labour force shows little sign of growing job insecurity.

The bureau doesn’t measure insecurity as such. Nor, since there’s no legal definition yet, does it even measure casual employment directly. But, since casual workers aren’t paid annual and sick leave, the bureau’s figures for those workers who say they aren’t eligible for paid leave are taken to be a measure of casual employment.

By this measure, although casual employment grew strongly to about a quarter of all workers in the 20 years to the turn of the century, that’s hardly changed in the 20 years since then. So where is all the growing insecurity?

Of course, since the big companies running the gig platforms on the internet have gone to great lengths to ensure the people getting work from them aren’t classed as their employees, they aren’t included among the casual employees.

No, they’d be counted as “self-employed”. But the figures show no great change in the proportion of workers who are self-employed over the past 20 years.

So where’s all this growing job insecurity we hear about? Short answer: buried much deeper in the figures.

Before we get to that, one thing we can say with confidence, however, is that though the gig economy is highly visible and gets much publicity in the media, it isn’t all that big relative to a labour force of more than 13 million people.

And, contrary to what some young people who spend too much time on their phones imagine, it’s highly unlikely that most work is in the process of moving to some internet platform. No, the issue of insecure employment is much bigger and wider than what happens to the gig economy.

One labour market expert who’s been working to explain why job insecurity is real despite its seeming absence from the stats is Professor David Peetz, of Griffith University.

In a piece he wrote for my second-favourite website, the universities’ The Conversation, in 2018, Peetz argued that the real causes of job insecurity aren’t the type of contract people are on – casual or permanent – but the way businesses are being structured these days.

These new organisational structures are designed to minimise costs, transfer risk from corporations to employees, and shift power away from employees, Peetz says.

Another part of his explanation is that the statisticians’ nationwide totals conceal changes in some industries but not others. (Other academics, from Curtin University, have used their own index of precarious employment to show that insecure employment is above average in the accommodation and food services, agriculture, and arts and recreation industries, but below average in the utilities, financial services, and public administration industries.)

Peetz says that “large corporations want to minimise their costs and risks, avoid accountability when things go wrong, and ensure products have the features they want.”

One instance of changing organisational arrangements is the dramatic increase in franchised businesses – where what looks like the local branch of some national chain is actually owned by a local small business person.

“The franchisee bears responsibility for scandals such as underpaying workers,” he says.

“Other corporations call in labour hire companies to take on responsibility for their workers. This cuts costs and transfers risk down the chain – which means jobs are more insecure.

“Most people working for franchises, spin-off companies, subsidiaries and labour hire firms are still employees. It’s more efficient for capital to control workers through the employment relationship than to pay them piece rates as contractors. That would run the risk of worker desertion or of shortcuts affecting quality.” (One powerful reason most of us won’t end up in the gig economy.)

In research published this month, Peetz drills into previously unpublished statistics from the bureau on casual workers to discover more of the elusive truth about “precarity” (my nomination for ugliest new word of the year).

He found that about a third of workers classed as “casual” because of their lack of leave entitlements worked full-time hours. More than half had the same working hours from week to week. More than half could not choose the days on which they worked.

Almost 60 per cent had been with their employer for more than a year, and about 80 per cent expected to be with the same employer in a year’s time.

Does any of that fit your mental image of what it means to be a casual worker? Get this: Peetz found that as few as 6 per cent of those we class as “casuals” work varying hours or are on standby, have been with their employer for a short time, and expect to be there for a short time.

Note that employers can usually dispense with the services of casual employees without giving them any notice, nor any redundancy payout.

“Overall,” Peetz concludes, “what I’ve found suggests the ‘casual’ employment relationship is not about doing work for which employers need flexibility. It’s not about workers doing things that need doing at varying times for short periods.

“The flexibility is really in employers’ ability to hire and fire, thereby increasing their power. For many casual employees there’s no real flexibility, only permanent insecurity.”

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Mistreating workers isn’t a smart path to prosperity

Sometimes I think that, when it comes to industrial relations, we’ve gone from one extreme to the other. We used to be pushed around – and frequently inconvenienced – by overly powerful unions, but now the employers are on top and want it all their own way.

We’ve gone from often inflexible and unreasonable unions to “workplace flexibility” that’s all about making life easier – and more hugely remunerated – for bosses, while making work unpleasant and unrewarding – emotionally and monetarily – for far too many of our workers.

I guess what it proves is that when one side or the other acquires too much power, the temptation to abuse it is irresistible.

The push to “reform” Australia’s highly centralised wage fixing began with the Hawke-Keating government and its accord with the union movement. It was taken a lot further – and became a lot more overtly anti-union – under the Howard government.

At the time, many of these “reforms” seemed sensible. What we didn’t realise then was the way globalisation (“Why don’t I move my factory to Asia where wages are lower?”) and the digital revolution (“Why employ a worker when you can farm stuff out to some unknown slave on the internet?”) would undercut the unions without any help from reforming legislators.

The result is, unions are now a shadow of their former selves, clinging to their role in industry super funds to keep themselves relevant. The proportion of workers who belong to unions has gone from half to 15 per cent and falling.

On the other hand, one unintended consequence of the now-ended era of neoliberalism has been to convince our manager class they have a divine right to be given whatever they think necessary to their greater success.

Which brings us to the latest batch of “reforms” being proposed by Scott Morrison and his Attorney-General, the misleadingly advertised Christian Porter, of Robodebt fame. With Parliament now off on Christmas holidays, the much-debated bill has gone to a parliamentary committee, and won’t resurface until March.

If you listen to some people, the proposed reforms are nothing more than an employers’ wish list. Fortunately, they’re not that bad. With one notable exception, the changes are the product of Porter’s extensive joint discussions with the unions and employer groups.

No Liberal government is capable of doing other than making changes that lean in favour of the employers, but the measures are the result of those discussions – so no surprise to the unions – and include some wins for the union side.

The big, undiscussed surprise is the plan to suspend – temporarily, of course; take my word for it – the requirement that enterprise agreements leave workers “better off overall” despite any reduction in particular benefits.

The unions aren’t buying that one. But, in any case, Porter has already signalled his willingness to drop it. This is no WorkChoices 2.0. The Libs are still smarting over the real WorkChoices’ role in the Howard government’s defeat in 2007. Whatever else he may be, Morrison is no crazy brave when it comes to pushing through controversial economic reforms.

No, the other changes are more modest and less objectionable. One is to include in the legislation the first-ever (weak) definition of what it means to be a “casual”. Another is a sunset provision to kill off enterprise agreements that are decades old and out of date.

Truth is, the changes we need to our labour laws are much more sweeping. Although you need to dig deep into the official statistics to find evidence, the unions and labour economists are right to say we have a growing problem with precarious employment, of which the “gig economy” is just the tip.

Outfits such as Uber are a strange combination of highly beneficial innovation (a more efficient way of bringing riders and drivers together) and an arrogant attempt to sidestep the labour laws that give much-needed protection to employees (and the taxman).

Then there’s the proliferation of franchising and labour hire companies. And the epidemic of wage theft – prompted by business people’s belief that, whatever some law may say, as God’s gift to the economy they are protected from prosecution.

I think we’re getting muddled between means and ends. The business proposition is: if only you’ll let me give my workers a hard time, my business will be more successful and everyone will benefit. If only you’ll accept an insecure job with hours that change from one week to the next according to my needs, the economy will be much better off.

But if you take the workers and their dependents out of the economy, you don’t have much left. People rightly crave job security. Make their working lives a misery and a pay rise is poor consolation. (And right now, of course, we can’t afford the pay rise either.)

We’re getting the cart before the horse, turning the people who are supposed to be the chief beneficiaries of a good economy into the people who, we’re told, must suffer to bring the good economy about. That’s what needs reform.

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Start of the end for ratings agencies' dubious influence

Walt Secord, Labor’s Treasury spokesman in NSW, and Michael O’Brien, Liberal Opposition Leader in Victoria, should be condemned for their attempts to score cheap political points when Standard & Poor’s downgraded its AAA credit ratings of both state governments last week. Fortunately, the politicians’ unprincipled carping fell flat.

Both men wanted to have their cake and eat it. Neither was prepared to criticise their government’s big spending to alleviate the state’s pandemic-driven high unemployment – nor admit that, had their party been in power, it would have done the same – but both wanted to portray the consequent downgrade as proof positive of their political opponents’ financial incompetence.

But the deeper truth is that the financial markets and economists have stopped caring about the august pronouncements of the three big American ratings agencies.

Their decline has three causes. First was their loss of credibility following their role in the global financial crisis of 2008. Not only did these supposed paragons of financial precaution fail to foresee the looming collapse, but they actually contributed to it by selling triple-A ratings to the promoters of private-sector securities subsequently discovered to be “toxic debt”.

Just as the scandal surrounding the collapse of Enron in 2001 led to the demise of its auditor, Arthur Andersen, formerly the big public accounting firm with its nose highest in the air, so the financial crisis showed the world that when one for-profit business is paid to report on the affairs of another for-profit business, only an innocent would expect the audit or prospectus report or modelling exercise or credit rating to be genuinely independent.

The second development contributing to the decline of the ratings agencies is the emergence of what the Americans call "secular stagnation" and others call being caught in a "low-growth trap" – where aggregate demand can’t keep up with aggregate supply, and the supply of "loanable funds" exceeds the demand for borrowed funds.

Two side effects of this long-term structural shift of particular relevance to the credit-rating industry are the fall of inflation rates to negligible levels, and the fall of the global real "neutral" official interest rate to a level somewhere near zero.

Especially with the rich world’s central banks – these days, including our Reserve Bank – so heavily into "quantitative easing" (that is, buying government bonds so as to force down their interest-rate "yields"), all this means super-low interest rates, increased private investor demand for government bonds (because there's so little else to invest in), and central banks doing all they can to stop the interest rates on government bonds (including state government bonds) from being driven up by investors.

Third, it’s hard to see how a national government with a floating currency, which borrows only in that currency, could ever default on its debt. (Nor is it easy to see our federal government standing by while one of our state governments defaults on its debt.)

Now do you see why – at least as applies to government securities – events have overtaken the ratings agencies? They’re doing a job that no longer needs to be done, and making assessments of the supposed risk of default on state government bonds that won’t be defaulted on.

This is why our top econocrats have stopped caring about the actions of the rating agencies.

Reserve Bank deputy governor Dr Guy Debelle said recently: "There is the possibility of a ratings downgrade from higher debt, but that really only has a political dimension not a financial dimension, as government bond rates would likely be little changed.

"In any case, a ratings agency should not be the determinant of [budgetary] policy. Fiscal policy should be set to be the most beneficial for the Australian economy and people."

Treasury Secretary Dr Steven Kennedy said recently: "I don’t think there is any significant implications for Australia from a ratings agency downgrade. It is an important tick of confidence to have the rating agencies’ assessment … but frankly the actual impact on the economy I think would be negligible."

Reserve Bank governor Dr Philip Lowe said in August: "I think preserving the credit ratings is not particularly important; what’s important is that we use the public balance sheet in a time of crisis to create jobs for people."

And more recently: "A downgrade of credit ratings doesn’t concern me. The AAA credit rating had more political symbolism than economic importance."

Just so. Although the ratings agencies have lost their economic credibility and usefulness, state governments remained fearful of the fuss their political opponents would make over a downgrade. But their opponents’ failure to gain traction last week spells the beginning of the end for the agencies’ unhealthy influence over government spending and borrowing.

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Productivity is magical, but don't forget the side effects

Something we’ve had to relearn in this annus horribilis is that the state governments still play a big part in the daily working of the economy. Another thing we’ve realised is that the Productivity Commission is so important that some of the states are setting up their own versions.

When you put the word “productivity” into the name of a government agency, you guarantee it will spend a lot of its time explaining what productivity is – a lot of people think it’s a high-sounding word for production; others that it means we need to work harder – and why it’s the closest economics comes to magic.

Earlier this year the NSW Productivity Commission issued a green paper that began with the best sales job for the concept I’ve seen. Its title said it all: Productivity drives prosperity.

Its simple definition of productivity is that it “measures how well we do with what we have. Productivity is the most important tool we have for improving our economic [I’d prefer to say our material] wellbeing,” it says.

“Our productivity grows as we learn how to produce more and better goods and services using less effort and resources. It is the main driver of improvements in welfare and overall [material] living standards.

“From decade to decade, productivity growth arguably matters more than any other number in an economy . . . Growth in productivity is the very essence of economic progress. It has given us the rich-world living standards we so enjoy.”

Productivity improvement itself is driven by increases in our stock of knowledge and expertise (or “human capital stock”) and by investment in physical capital (“physical capital stock”).

But by far the biggest long-term driver of productivity is the stock of advances known as “technological innovation” – a term that covers everything from new medicines to industrial machinery to global positioning systems.

Technology’s contribution to overall productivity growth has been estimated at 80 per cent, the paper says.

“Our future prosperity depends upon how well we do at growing more productive – how smart we are in organising ourselves, investing in people and technology, getting more out of both our physical and human potential.”

The (real) Productivity Commission has pointed out that on average it takes five days for an Australian worker to produce what a US worker can produce in four. (That’s not necessarily because the Yanks work harder than we do, but because they have fancier equipment to work with, and better organised offices and factories – not to mention greater economies of scale.)

The paper notes that productivity improvement hinges on people’s ability to change. “Unwelcome as it has been, the COVID-19 episode has shown that when we need to, we can change more rapidly than we thought. There is no reason we can’t do the same to achieve greater productivity and raise our future incomes.”

Technological innovation is the process of creating something valuable through a new idea. You may think that new technology destroys jobs – as the move to renewable energy is threatening the prospects of jobs in coal mining – but, if you take a wider view, you see that it actually moves jobs from one part of the economy to another and, because this makes our production more valuable, increases our real income and spending and so ends up increasing total employment.

“All through history,” the report adds, “[technological innovation] has been a huge source of new jobs, from medical technology to web design to solar panel installation. And as these new roles are created and filled, they in turn create new spending power that boosts demand for everything from buildings to home-delivered food.

But the thing I liked best about the NSW Productivity Commission’s sales pitch was the examples it quoted of how technology-driven productivity has improved our living standards.

Take, medicine. “The French king Louis XV was perhaps the world’s richest human being in 1774 – yet the healthcare of the day could not save him from smallpox. Today’s healthcare saves us from far worse conditions every day at affordable cost.”

Or farming. “In 1789, former burglar James Ruse produced [Australia’s] first successful grain harvest on a 12-hectare farm at Rose Hill. Today, the average NSW broadacre property is 2700 hectares and produced far more on every hectare, often with no more people.”

Or (pre-pandemic) travel. About “67 years after the invention of powered flight, in 1970, a Sydney-to-London return flight cost $4600, equivalent to more than $50,000 in today’s terms. Today, we can purchase that flight for less than $1400 – less than one-30th of its 1970 price.”

Or communications. “Australia’s first hand-held mobile call was made at the Sydney Opera House in February 1987 on a brick-like device costing $4000 ($10,000 in today’s terms). Today we can buy a new smartphone for just $150, and it has capabilities barely dreamt of a third of a century ago.”

There are just two points I need add. The first is that there’s a reason we’re getting so many glowing testimonials to the great benefits of productivity improvement: for the past decade, neither we nor the other rich countries have been seeing nearly as much improvement as we’ve been used to.

Second, economists, econocrats and business people have been used to talking about the economy in isolation from the natural environment in which it exists and upon which it depends, and defining “economic wellbeing” as though it’s unaffected by all the damage our economic activity does to the environment.

As each month passes, this not-my-department categorisation of “the economy” is becoming increasingly incongruous, misleading and “what planet are you guys living on?”.

What’s more, the growing evidence that all this year’s “social distancing” is having significant adverse effects on people’s mental health is a reminder we should stop assuming that ever-faster and more complicated economic life is causing no “negative externalities” for our mental wellbeing.

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We're having trouble learning to live without inflation

When I became an economic journalist in the early 1970s, the big economic problem was high and rising inflation. The rate of increase in consumer prices briefly touched 17 per cent a year under the Whitlam government, and averaged about 10 per cent a year throughout the decade.

It never crossed my mind then that one day the rise in prices would slow to a trickle – they rose by 0.7 per cent over the year to September – and I certainly never imagined that, if it ever did happen, people would have so much trouble living in a largely inflation-free world.

What? Why would anyone ever object to prices rising at a snail’s pace? Well, of course, no one does. Nor do you see many borrowers objecting to a fall in interest rates.

For savers, however, it’s a different story. Last month, when Reserve Bank governor Dr Philip Lowe announced what’s likely to be the last of many cuts in the official interest rate – it’s a bit hard to go lower than 0.1 per cent – there were bitter complaints from the retired.

“How do you expect us to live when you keep cutting the interest we get on our investments? How long are you going to keep screwing us down like this? When will you take the pressure off and start putting rates back up where they should be?”

Short answer to that last question: unless you’re only newly retired, probably not in your lifetime.

There’s something I need to explain. People like me may have given you the impression that our Reserve Bank moves interest rates up and down as it sees fit, cutting rates when the economy’s weak and it wants to encourage people to borrow and spend, or raising rates when the economy’s “overheating” and it wants to discourage borrowing and spending.

That’s true, but it’s not the whole truth. The deeper truth is that interest rates are closely related to the inflation rate. That’s because much of the rate of interest lenders require borrowers to pay them represents the compensation the lender needs to be paid just for the loss of purchasing power their money will suffer before it’s repaid.

(And when I talk about the lender, I mean the ultimate lender – ordinary savers – not the bank, which is just an intermediary standing between the ultimate lender and the ultimate borrower, probably someone with a home loan.)

So when the expected inflation rate is high, interest rates are high; when the expected inflation rate is low, so are interest rates. The other component of the interest payment lenders receive – the “real” interest rate – represents the actual fee the borrower pays for the temporary use of the lender’s money.

It’s only this much smaller real interest rate that the Reserve Bank is free to adjust up and down. So the main reason interest rates are so low and getting lower is that the inflation rate is low and getting lower.

And that’s not because of the pandemic and the recession it induced, so it won’t be going away when the economy recovers. It’s because, after rising steadily for about 30 years after World War II, the inflation rate in Australia – and all other advanced economies – has spent the past 30 years steadily going back down.

So inflation has gone away as a problem – leaving unemployment and underemployment as our dominant worry – and, as far as anyone can tell, it won’t be coming back for a long, long time.

If so, interest rates will be staying low, and it’s pointless to rail against the Reserve Bank. Rather, people reliant on their retirement savings will just have to adjust to a changed world.

If they want the safety of a bank term deposit, they’ll have to accept the tiny interest payment that goes with it. If that’s not enough, they’ll have to accept the greater risk and volatility that goes with share and other investments.

But let’s not exaggerate their predicament. If interest rates are low because inflation is low, that means their cost of living is low.

Indeed, the Australian Bureau of Statistics’ living cost index designed to measure the special circumstances of self-funded retirees shows their cost of living rose by just 0.7 per cent over the year to September.

Many self-described self-funded retirees take the view that their annual earnings from their superannuation should be sufficient for them to live on, thus leaving what they regard as the “principal” to cover future contingencies or be left to their children.

But, particularly for super payouts large enough to put retirees beyond being eligible for the age pension, it’s wrong to think of that payout as consisting of all your contributions (principal) plus interest. Well over half that sum consists not of your hard-earned, but of the government’s munificence in granting you 30 or 40 years of compounded tax concessions on both your contributions and your annual earnings.

Its generosity was intended to leave you with a sum sufficient to let you live comfortably in retirement, not to set up your kids’ inheritance. Trying to live without dipping into your payout isn’t a sign you’re doing it tough, it’s a lifestyle choice.

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The secret sauce is missing from our recovery recipe

According to Reserve Bank deputy governor Dr Guy Debelle, a big lesson from the global financial crisis was “be careful of removing the stimulus too early”. Good point, and one that could yet bring Scott Morrison and his nascent economic recovery unstuck. But there’s something that’s even more likely to be his – and our – undoing.

Debelle was referring to the way the British and other Europeans, having borrowed heavily to bail out their banks and stimulate a recovery in the real economy, took fright at their mountain of debt and, before the recovery had got established, undercut it by slashing government spending. The consequences – contributing to more than a decade of weak growth - are hardly to be recommended.

The Yanks have been doing something similar this time round, with the Republican-controlled Senate agreeing to a huge initial stimulus package but, with the nation caught in a ferocious second round of the pandemic, having so far steadfastly refused a second package.

It almost seems a design flaw of conservative governments always to be tempted to pull the plug too early.

So premature withdrawal of stimulus is certainly a significant risk to the strength of our recovery. But I doubt it’s the biggest one. We should be giving much more thought than we have been to the sources of growth that will keep the economy heading onward and upward once the stimulus peters out.

The basic idea of managing the macro economy is that, when it’s flat, you use budgetary and interest-rate stimulus to give it a kick start, but then all the usual, natural drivers of growth take over.

Such as? We can talk about population growth, but it could well take more than a year or two to return to its accustomed annual rate of 1.5 per cent. And, in any case, it does far less to increase gross domestic product per person than it suits its promoters to admit.

We can talk about business investment spending but, though it does add to demand for goods and services, it’s essentially derived demand. That is, it doesn’t spring up spontaneously so much as grow in response to the growth in consumers’ demand for the goods and services businesses produce.

This being so, the government’s various tax incentives intended to get businesses investing in advance of the surge in consumer demand are unlikely to get far.

Up to 60 per cent of aggregate demand comes from household consumption. But the strong growth in consumer spending in the September quarter – with more to come this quarter – isn’t a sign that healthy growth in consumption has resumed. It’s just the semi-automatic rebound in spending following the lifting of the lockdown.

The leap in the household saving rate to a remarkable 18.9 per cent of disposable income is some combination of greater “precautionary” saving – “Who knows whether I’ll yet lose my job?” – and pent-up demand caused by the lockdown.

As things return to something reminiscent of normal, we can expect people to run down this excess saving to keep their spending returning to normal despite higher unemployment and widespread wage freezes.

But this is a once-only catch-up, spread over several quarters, not a return to on-going healthy real growth in consumer spending. For this, the occasional tax cut can help – though not by much if its prime beneficiaries are the top 20 per cent of income-earners, as scheduled for July 2024 – but there’s simply no substitute for healthy real growth in the dominant source household income: wages.

Real wage growth is the secret sauce missing from the hoped-for recovery. The Reserve Bank’s latest forecasts are for real wage growth of a mere 0.25 percentage points in each of calendar 2020, 2021 and 2022.

The econocrats don’t want to dampen spirits by admitting what they surely know: that without decent growth in real wages there’s little hope of a sustained recovery. Reserve governor Dr Philip Lowe’s recent remarks say we’re unlikely to see much growth in real wages until a rate of unemployment down to 4.5 per cent means employers must bid up wages in their competition to attract all the skilled labour they need.

This implies that, even if we were to achieve healthy rates of improvement in the productivity of labour – a big if – it’s no longer certain that organised labour retains the bargaining power to ensure ordinary households get their fair share of the spoils; that real wages still grow in line with productivity.

The government and its advisers ought to be grappling with the question of how we can get real wages up – but I doubt that’s what we’ll see this week when it reveals its plans for yet more “reform” of industrial relations.

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Economy's rebound goes well, but now for the hard part

Does the economy’s strong growth last quarter mean the recession is over? Only to those silly enough to believe in "technical" recessions. Since few economists are that silly, it’s probably more accurate to call it a "journalists’ recession". Makes for great headlines; doesn’t make sense.

It’s probably true – though not guaranteed - we’ll suffer no more quarters where the economy gets smaller rather than bigger. But people fear recessions not because they deliver growth rates with a minus sign in front of them, but because they destroy businesses and jobs.

You’ll know from walking down the main street that some businesses have closed and not been replaced. You’ll probably also know of family or friends who’ve lost their jobs or now aren’t getting as much casual work as they need and were used to.

By any sensible measure, this recession won’t be over until the rates of unemployment and underemployment are at least back down to where they were at the end of last year, before the virus struck. And Reserve Bank governor Dr Philip Lowe said this week that wasn’t likely for more than two years.

On a brighter note, the increase of 3.3 per cent in real gross domestic product during the September quarter, revealed by the Australian Bureau of Statistics in this week’s "national accounts", does mean the recovery from recession is off to a good start.

So far, however, what we’ve had is not so much a recovery as a rebound. Remember, this unique recession was caused not by an economic threat, as normal, but by a health threat.

The contraction in GDP of a record 7 per cent in the June quarter was caused primarily by a sudden collapse in consumer spending of 12.5 per cent. Why? Because, to halt the spread of the virus, governments ordered many retail businesses and venues to close, employees to work from home if possible, and everyone to stay in their homes and leave them as little as possible.

As a result, people who’d kept their jobs had plenty of money to spend, but greatly reduced opportunity to spend it. Even people who’d lost their jobs had their income protected by the JobKeeper wage subsidy scheme and the temporary supplement to the JobSeeker unemployment benefit.

Turns out that, despite the loss of jobs, those two big support measures actually caused a jump in the disposable incomes of the nation’s households in the June quarter. But, since it was impossible to keep spending, the proportion of households’ income that was saved rather than spent leapt from 7.6 per cent to 22.1 per cent.

The worst-hit parts of the economy were hotels, cafes and restaurants, recreation and culture, and transport (public transport, motoring, domestic and overseas air travel).

But this initial lockdown lasted only about six weeks before it was gradually lifted in all states bar Victoria. In consequence, consumer spending jumped by 7.9 per cent in the September quarter, more than enough to account for the 3.3 per cent jump in overall GDP.

Guess what? The strongest categories of increased spending were hotels, cafes and restaurants, recreation and culture, and transport services. Spending on healthcare rebounded as deferred elective surgery and visits to GPs resumed.

The quarter saw the rate of household saving fall only to 18.9 per cent – meaning people still have plenty of money to spend in coming quarters, even if pay rises will be very thin on the ground. And, since Victoria makes up a quarter of the national economy, its delayed removal of the lockdown ensures the rebound will continue in the present, December quarter.

See the point I’m making? When the greatest part of the collapse in economic activity was caused by a government-ordered lockdown, it’s not surprising most of that activity quickly returns as the lockdown is unwound.

But this is just a rebound to something not quite normal, not a conventional recovery as the usual drivers of economic growth recover and resume their upward impetus.

Thanks to the massive support from JobKeeper and JobSeeker, the rebound is the easy, almost automatic bit. But even the rebound is far from complete. The lockdown will leave plenty of lasting damage to businesses and careers – and the psychological and physical recovery is much harder matter to get moving.

Treasurer Josh Frydenberg boasts that, of the 1.3 million Australians who either lost their jobs or saw their working hours reduced to zero at the start of the pandemic, 80 per cent are now back at work.

Which is great news. But 80 per cent is still a long way short of 100 per cent. And even when 100 per cent is finally attained, that only gets us back to square one. It doesn’t provide additional jobs for those young people who’ll be needing employment in coming years.

Note, too, that most of the rebound in employment has been in part-time jobs. So far, less than 40 per cent of the 360,000 full-time jobs lost between March and June this year have returned.

In March, the rate of unemployment was 5.2 per cent; now it’s 7 per cent. The rate of underemployment was 8.8 per cent; now it’s 10.4 per cent.

And, returning to this week’s figures for GDP in the September quarter, once you look past the rebound in consumer spending, you don’t see much strength in the rest of the economy. Output in mining fell by 1.7 per cent, while production in agriculture was down 0.6 per cent.

One bright spot was home building, which ended a run of eight quarters of decline to grow by 0.6 per cent. Many new building approvals say this growth will continue.

But non-mining business investment in new equipment, buildings and structures incurred its sixth consecutive quarterly fall, with subdued investment intentions suggesting the government’s investment incentives will have limited success.

Little wonder the Reserve’s Lowe has warned the recovery will be "uneven, bumpy and drawn out". Don’t pop the champagne just yet.

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