Can we believe the great news on unemployment? Yes and no

Scott Morrison has a great re-election pitch: forget the problems with the pandemic, just look at how well the economy’s going. The rate of unemployment is already down to 4.2 per cent, and his goal is to get it below 4 per cent, the lowest it’s been in 50 years. Wow. What fabulous economic managers the Libs must be. But can you believe unemployment’s that low? Didn’t they fiddle with the figures some time back?

It’s good to be sceptical about the claims politicians make on the economy. Government politicians tend to tell us about the good bits and fail to mention the not-so-good parts of the story. Opposition politicians tend to do the opposite.

But not everything we think we know about the tricks politicians play is true. For instance, many people think they remember that, some years ago, a government changed the definition of unemployment to make the figures look better. They made it so that someone who worked just one hour a week was classed as employed.

This week I’ve had people asking me about this. In my experience, when a Labor government’s boasting about good unemployment figures, Liberal supporters remember Labor fiddled the figures. When, as now, it’s a Liberal government doing the boasting, it’s Labor supporters who remember a Liberal government doing the fiddling.

Which hints at the truth: actually, no government has changed the definition of unemployment. It’s an urban myth which, I suspect, has arisen because people get confused between who’s getting unemployment benefits and who’s unemployed.

The two are related, obviously, but they’re not the same. For instance, you can be unemployed and not get the dole because your spouse is working. On the other hand, single people working a few hours a week wouldn’t be earning enough to make them ineligible for the dole.

Governments can, and do, change the rules about who does or doesn’t get unemployment benefits. But who’s unemployed is measured by a huge monthly sample survey conducted by the independent Australian Bureau of Statistics.

It doesn’t let politicians decide who’s counted as unemployed and who ain’t. Rather, its definitions come from international conventions set by the UN’s International Labour Organisation in Geneva.

So it was the ILO that decided, decades ago, to define anyone doing as little as an hour’s work a week as employed. (I remember talking to an official of the Australian Council of Trade Unions who was an Australian delegate on the sub-committee that, a few years ago, decided to leave that definition unchanged. He vigorously defended the decision.)

Remember, you have to draw the line between being employed or unemployed somewhere – where would you draw it? Five hours work a week? Fifteen? Thirty-five? – and it was set so low ages ago when part-time work was much less common than it is today.

What’s true is not that the unemployment figures have been fudged, but that classing everyone working an hour or more as employed defines unemployment too narrowly. So narrowly as to understate the extent of the problem.

In fact, few people work as little an hour a week. But, though it’s wrong to imagine the only satisfactory jobs are full-time – it suits many students, parents of young children and retirees to work only a few days a week – it’s also true that many people working part-time would prefer more hours.

So for several decades, the bureau has supplemented the official unemployment figures by also publishing the number of people underemployed – those part-timers who’d prefer working work more hours. The latest figures show an unemployment rate of 4.2 per cent, plus an underemployment rate of 6.6 per cent.

Thus it is true the official unemployment rate of 4.2 per cent isn’t as good as it looks. It does understate the proportion of people who aren’t able to find as much work as they want.

And, since we know the proportion of underemployed workers is much higher today that it was 50 years ago, it’s also true that getting back to the lowest unemployment rate in 50 years isn’t likely to be as good as it was 50 years ago.

Even so, it’s quite realistic to expect that, since unemployment is already down to 4.2 per cent, and regardless of who wins the federal election, it won’t be too hard to get the rate down below 4 per cent sometime this year or next.

And whether you hate Morrison – or hate Anthony Albanese – don’t let any smarty pants tell you that will be anything other than a great achievement. If it’s not the best we’ve had the jobs market in 50 years, add in underemployment and it would be the best in maybe 40 years. Unemployment isn’t something you should wish on anyone.

No, the main reason for having reservations is the uncertainty about how long we’ll be able to keep unemployment that low.

We’ve had great success in creating extra jobs in the past year – most of which have been full-time – mainly because the government has responded to the pandemic with massively increased government spending. But the economy may slow if, as all that “fiscal stimulus” runs out, the private sector doesn’t take up the running.

The jobs market has also had a lot of help from an unprecedented (and temporary) source: for two years our borders have been closed to incoming workers. Skilled workers on temporary visas, and overseas students and backpackers doing unskilled and casual jobs.

You’ve heard employers complaining they can’t get workers and that job vacancies are at a far higher level than usual. The consequence is that many older workers who might have been pensioned off, haven’t been. And some of the jobs that haven’t been filled by overseas students and backpackers have gone to local young people.

But now our borders are re-opening to immigrant labour, we’ll see how tight the jobs market stays. I reckon it’ll be a fair while before we get back to the high levels of immigration pre-pandemic.

Read more >>

Aged care crisis a clue we’ll be paying higher, not lower taxes

Do you like paying tax? No, I thought not. With so many other calls on our pockets, it’s easy to tell ourselves we’re already paying enough tax – probably more than enough.

Trouble is, our reluctance to put more into government coffers doesn’t stop us demanding the government spends more on additional and better services.

This presents a problem for politicians on both sides. They solve it by ensuring that, particularly in election campaigns, they tell us what we want to hear, not the unvarnished truth.

They’re often promising a tax cut sometime after the election, but also telling us their plans to spend more on this and more on that. What they don’t mention is what might have to happen after the election to ensure the tax cuts and spending increases don’t add too much to government debt.

But we’ve become so distrusting of our politicians that, in more recent years, they spend less time telling us how wonderful their own policies are and more time telling us how terrible the other side’s policies would be. Fear works better than persuasion.

Scott Morrison won the last federal election partly by claiming the Liberals are the party of lower taxes, whereas Labor is the party of “tax and spend”. It worked so well he’s bound to say it in this year’s election campaign.

So, it’s worth examining the truth of the claim. It strikes a chord because it fits voters’ stereotypical view that the party of the bosses must surely be better at running the economy and managing the government’s budget than the party of the workers.

But just because it fits our preconceived notions doesn’t make it true. It’s true that Labor’s record shows it to be a party that spends more on public services, and so has to tax more. What’s not true is that the Liberals are very different.

The record simply doesn’t support their claim to be the lower taxing party. If you look at total federal tax collections as a proportion of national income (gross domestic product) – thus allowing for both inflation and population growth – over the past 30 years, taxes have been highest under the Howard government and the present government.

Most of this has happened without explicit increases in taxes and despite governments usually having tax cuts to wave in our faces as proof of their commitment to lower taxes.

So, what’s the trick? An old one that all of us know about but few of us notice: bracket creep. It works away behind the scenes slowly but steadily increasing the proportion of our incomes paid in income tax. This usually ends up increasing tax collections by more than governments ever give back in highly publicised tax cuts.

Now, however, the aged care sector’s inability to cope with the additional pressures from the pandemic – where they’re so desperate for workers they even want help from the Army’s clodhoppers – offers a big clue about the tax we’ll be paying in the coming three years: more not less.

Ever since the public rejected Tony Abbott’s plans for sweeping spending cuts in 2014, the government has been trying to keep a lid on government spending in areas where there wouldn’t be much pushback.

By this means the Libs have had remarkable success in limiting the growth in government spending overall but, as the Parliamentary Budget Office has warned, they’re holding back a dam of spending. They can’t keep it up forever.

Eventually, problems and pressures from the public get so great, the government has to relent and start catching up. You can see that in this week’s election-related decision to reverse some of the cuts in grants to the ABC.

But a more significant area where the government’s been trying to limit the money flow is aged care.

It’s clear the sector’s problems getting everyone vaccinated and coping with COVID-caused staff shortages have just piled on top of all its existing problems.

The longstanding attempt to limit costs by moving the sector to for-profit providers has failed, with businesses making room for their profit margin by cutting quality. The aged care workforce is understaffed, underqualified, underpaid and overworked.

Most jobs are part-time and casual; staff turnover is high. When a work-value case before the Fair Work Commission is decided, hourly wage rates may be a lot higher.

After the royal commission’s shocking revelations, the government had no choice but to ease the purse strings, spending an additional $17 billion in last year’s budget. But it’s already clear a lot more will need to be spent to get the care of our parents and grandparents up to acceptable standards.

Turn to the national disability insurance scheme and its problems, and it’s clear we’ll end up having to spend a lot more here, too.

And that’s before you get to the failure of the job network – “employment services” – and the chaotic understaffing of Centrelink.

We have a lot of repressed government spending to catch up with. Don’t let any pollie tell you they’ll be putting taxes down.

Read more >>

Interest rate rises will be a good thing - provided they're not too soon

Sometimes I think you can divide the nation’s economy-watchers into those desperate to see the Reserve Bank start raising interest rates and those desperately hoping it won’t. As usual, the sensible position is somewhere between them.

To some, interest rate rises are always a bad thing. They’re either speaking from self-interest or they’re victims of a media that unfailingly assumes all its customers are borrowers and none are savers. Tell that to your grandma.

What gets missed in all the angst is that the need to raise rates is always a good sign. A sign the economy’s growing strongly – perhaps too strongly. Trust the media to see the glass as always half empty.

In the present debate, however, the financial-market urgers fear we have a burgeoning problem with inflation, which must be stamped out quickly if it’s not to become a raging bushfire.

On the other side, the econocrats and others not wanting to start raising rates any earlier than necessary see how close we are to achieving a “historic milestone” in getting the rate of unemployment below 4 per cent for the first time in 50 years.

They’re determined to see that goal achieved and put new meaning into the words “full employment” because they see it as key to avoiding a return to the low-growth trap in which we were caught before the pandemic.

And they want to ensure the return to low unemployment is more than fleeting by making sure we play our monetary policy (interest rates) and fiscal policy (the budget) cards right. As Reserve Bank governor Dr Philip Lowe said last week, “low unemployment brings with it very real economic and social benefits”.

In a way, we’re back to the great monetarists-versus-Keynesians debate of the mid-1970s: which is more important, low inflation or low unemployment? But, to use a phrase of Scott Morrison’s, it’s not binary choice. We need both; the trick is to pursue them in the right order.

Right now, the risk is that, by conning central banks into anti-inflation overkill, the markets will weaken the recovery from the pandemic, sending the rich economies back to the slow-growth trap.

But the debate about whether or when our Reserve should start raising interest rates has overshadowed an important development last week: its decision to end QE – quantitative easing; the Reserve buying second-hand government bonds with money it has created with a few computer key-strokes – by ceasing to buy $4 billion worth of bonds each week.

Lowe announced that, in total, the various elements of the Reserve’s QE program involved buying more than $350 billion in bonds. (He didn’t say that this means the Reserve has, in effect, financed more that all the government’s pandemic stimulus spending with created money. It’s all a book entry between the government and the central bank it owns.)

Among the various benefits of the QE program claimed by Lowe was that it led to Australia having “a lower exchange rate than would otherwise have been the case”. He noted, too, that the US Federal Reserve and other central banks were ending their QE programs.

And there you have the real reason why, with us having avoided QE after the global financial crisis, Lowe felt he had little choice but to join in the second, pandemic-related round.

The least doubted “benefit” of QE is that it puts downward pressure on the country’s exchange rate, at the expense of its trading partners’ price competitiveness.

So, when the mighty Fed indulges in QE, most other central banks feel they have to defend their own exchange rates by joining in. Any country that doesn’t join the game becomes the bunny whose exports suffer.

Lowe reminded us that ending the bond-buying program doesn’t constitute a tightening of monetary policy, but rather a cessation of further easing. True. The tightening – quantitative tightening, or QT – will come if, when the bonds it has bought reach maturity, the Reserve decides not to replace them with new bonds. It hasn’t yet decided what it will do.

The financial markets, the media and ordinary citizens are far more interested in what happens to interest rates than in the arcania of unconventional monetary policy. But this ending of QE is a reminder that it would hardly make sense to keep boring on with QE with one hand while putting up interest rates with the other.

It’s important to ensure we don’t risk cutting off our return to a sustained recovery by lifting interest rates too soon – that is, before our business people have been forced to abandon their perverse notion that it’s best to keep wage rates low forever – or raise interest rates too high.

We do want to emerge from the pandemic with more than just a once-only bounce-back from the lockdowns. We need ongoing growth, which requires a return to real growth in wages.

But remember this: the present “stance” monetary policy is highly stimulatory. That can’t go on for ever. With no sign whatever of wage growth becoming excessive, it’s obvious we don’t need to flip to the opposite extreme of interest rates so high they’re contractionary. We’re not trying to put the clamps on demand.

No, the next move, when it comes, will be from a stimulatory stance simply towards a neutral stance – one that’s neither stimulatory nor contractionary. That time will come when we’re confident the economy’s growth will be sustained. That’s when getting interest rates back to more normal levels will be a good sign, a sign of success.

And remember this: thanks to the world’s dubious experiment with unconventional monetary policy for more than a decade – with almost all the rich world’s central banks printing money like it’s going out of style – the monetary side of the world economy (including ours) is way out of whack.

For too long, borrowers have been paying interest rates that, after allowing for inflation, are negative, with savers receiving little or nothing to compensate them for their money’s lost purchasing power, let alone reward them for letting others use their money.

This is perverse. It’s the opposite of the way the economy’s supposed to work. It’s neither fair nor sensible. It’s the way to encourage investment that’s not genuinely productive. We won’t be back to anything like normal until, ultimately, interest rates are much higher.

Don’t forget that. Your grandma hasn’t.

Read more >>

The news on the economy is better than we're being told

From the way the financial markets – and an easily-led media – are telling the story, our troubles have multiplied. Along with all our other worries, Australia now has a big new problem: inflation is back with a bang. But that’s not the way Reserve Bank governor Dr Philip Lowe told the story this week. He thinks we’re going great guns.

According to the markets, recent figures show we’ve caught America’s disease and inflation has taken off. Something must be done urgently to stop the rot and, just as the US Federal Reserve is about to start raising interest rates to get prices back under control, we’ll have no choice but to follow within a month or two.

The bets the financial markets are making about imminent rate rises imply that most of us will be getting big pay rises this year – which I’ll believe when I see it. But if that did happen it would be the first decent pay rise most workers had received in almost a decade. This, apparently, would be very bad news. Really?

In marked contrast, Lowe thinks everything in the economy’s got better, not worse. Right now, he said in a speech this week, “we are closer to full employment and achieving the inflation target than we had anticipated”. Gosh. That bad, eh?

This time last year, the Reserve was expecting the economy - real gross domestic product - to grow by 3.5 per cent last year. Now it’s expected to have grown by 5 per cent. The rate of unemployment was expected to be 6 per cent. Turned out to be 4.2 per cent. Wages were expected to grow by only 1.5 per cent. Now it’s likely to have been 2.25 per cent.

The story in the jobs market does much to explain Lowe’s high spirits. “Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent” for the first time since the early 1970s.

“This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities. Full employment is one of the Reserve Bank’s legislated objectives and [its] board is committed to playing its role in achieving that objective, consistent with also achieving the inflation target,” Lowe said.

Already, our unemployment rate is at its lowest in 13 years, along with our rate of underemployment.

Unemployment has also fallen in America and Britain, but whereas in their cases this is partly because a lot of workers have stopped looking for jobs and left the labour force, in our case labour force “participation” is almost as high as it’s ever been.

So why all the market and media gloom and doom? Because the rate of inflation was expected to be a below-target 1.5 per cent by the end of last year, but has jumped to 3.5 per cent.

The market thinks that higher inflation leads immediately to higher interest rates, and the media think higher rates are bad news because all their customers are borrowers and none are savers.

But the news on inflation – and the prospects for more of it – ain’t as bad as they sound, for several reasons.

First, if we really do have an inflation problem, it’s not nearly as great as America’s. The Yanks’ rate is 7 per cent, the Brits’ is 5.4 per cent and the Kiwis’ 5.9 per cent. Even in a globalised world, each economy’s story is different.

Second, it’s not as though most prices in Australia have grown by 3.5 per cent. Much of the jump to 3.5 per cent is explained by big rises in the prices of petrol and home-building. The world price of oil goes up and down over the years. Nothing we did in Australia caused the latest increase, and nothing we could do would have any influence on whether it keeps going up or goes back down a bit.

Other price increases are explained by the effect of the on-again, off-again waves of the virus in causing mismatches between the supply and demand for various goods – mismatches which are unlikely to last very long.

This explains why the Reserve uses a less volatile measure of “underlying” inflation to judge how inflation is going relative to the target of keeping annual inflation between 2 and 3 per cent, on average over time.

Its preferred measure of underlying inflation is running at 2.6 per cent, not the “headline” rate of 3.5 per cent, and 2.6 per cent is close to the middle of the target. So, no cause for concern - unless you have strong reasons to believe it’s rapidly heading up out of the target range.

Third, with this being the first time in six years that underlying inflation’s been high enough to reach the target zone, Lowe’s made it clear he won’t start raising the official interest rate until he’s convinced the return to target is “sustained”.

He made the obvious (but often forgotten) arithmetic point that, for inflation to be sustained at current rates, the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels.

When we’re talking about petrol prices and virus-caused mismatches between supply and demand, this seems unlikely. That is, there’s a good chance we’ll see a fall rather than a rise in the quarterly inflation rate.

Another basic point. One-off price increases only become part of the ongoing rate of inflation if they flow on to wages – that is, if they add to the “wage-price spiral”.

In the days when we really did have a serious inflation problem, that flow-through could be taken for granted. But over the past seven years, the link between rising prices and rising wages has become much less certain.

That’s why I’ll believe we’re all in for 3 per cent pay rises when I see it. And the man with his hand on the interest-rate lever is saying the same thing.

Read more >>

We should make the economy less unequal - and we can

Since the working year doesn’t really get started until after Australia Day, it’s not too late to tell you my New Year’s resolutions. Actually, they’re more in the nature of re-affirming my guiding principles as an economic commentator. Why are we playing the economic game? Who are the people it’s supposed to benefit? And would all the policies I write in support of lead us towards or away from these ultimate objectives?

My first principle is that “the economy” – all the daily effort we put into producing and consuming goods and services – should be managed to benefit the many, not the few.

But it’s hard to believe this has been our overriding objective, particularly in recent decades. Although most of the activity in the economy is undertaken by the private sector – households and businesses – this activity is regulated by the public sector, governments.

Since our governments are democratically elected, this ought to mean that governments govern in the interests of all voters, not just some. But, as we all know, sometimes it doesn’t work out that way.

Sometimes governments pander to the majority when it gangs up against an unpopular minority – asylum seekers, for instance. Other times, governments act in the interests of powerful individuals, businesses and interest groups.

Since the two main political parties have become locked in a hugely expensive contest to influence voters at election time, they seem to have become more receptive to the interests of businesses able to donate generously to party coffers.

The notion that the economy will work best when governments manage it in ways that best suit the interests of business was hugely reinforced by the 30-year reign of a fad called “neoliberalism” – a movement started by naïve econocrats and economists (and supported by yours truly) that was soon hijacked by businesses and politicians who saw an opportunity to advance their own interests.

The neoliberal era is over – the proof of which you see every time Scott Morrison announces another government subsidy to a new gas-fired power station, oil refinery or Snowy Mountains scheme.

But our new project, to redress the balance of benefit in favour of ordinary workers and consumers, has a long way to go. It will make more progress when more voters understand the need to give ordinary players in the economic game a bigger share of the prizes.

Business invariably justifies its demand for favourable treatment by the jobs it creates. But increasingly, those jobs are of a lower quality than we have come to expect.

Many are casual, part-time and insecure. They come with fewer safeguards: sick and holiday pay, workers compensation coverage, super contributions. Pay rises are fewer and meaner. Wage theft has become common.

Voters need to realise the rise of crappy jobs in the “gig economy” is not some inescapable consequence of technological progress. It’s a policy choice that governments have made using the power we give them.

Were voters to tell politicians more forcefully that such a deterioration in the quality of the working life of the rising generation is unacceptable, they would act to stop less-scrupulous businesses finding ways to avoid or evade the labour laws that protect the rest of us.

All this is happening while the share of national income going to profits has risen strongly, at the expense of the share going to wages. And the share of income collected by the top 1 per cent of Australia’s income earners has risen to about 9 per cent of total income.

A capitalist economy wouldn’t work as well as it does were entrepreneurs not always trying new ways to increase their profits. The trouble is that not all the ways they try are of benefit to the rest of us, not just themselves and their shareholders.

In such cases, governments should not shirk their responsibility to act in the interests of the many not the few. Nor should we fear that, unless we give businesses free rein in their pursuit of higher profits, our business people will lose all interest in running businesses.

So, a longstanding view of mine is that we’d all be better off if business executives focused less on maximising profits (and their related bonuses) and more on giving their customers value for money and ensuring all their employees had rewarding jobs.

Not just jobs that were better paid and more secure, but more emotionally satisfying because they gave workers more autonomy – more freedom to choose the best ways of doing their job – and jobs better fitted to a worker’s particular strengths and preferences.

Easier said than done? True. Particularly because, though governments can prohibit certain undesirable practices in the treatment of workers, they can’t legislate to force bad bosses to be good ones.

Not easy, but not impossible to reshape the economy to improve it for ordinary people, not just bosses. And we won’t get any improvement until we accept that it is possible, and that we should measure the politicians we vote for according to their willingness and ability to spread the benefits of economic life less unequally.

Read more >>

It's the holidays, so let's have some fun with economic puzzles

So it’s holiday season, when (almost) everyone takes a break, chills out and tries not to think about workaday worries. So let’s have some fun. Let’s do a few economic puzzles.

There’s an old joke in economics that says, “it may work in practice, but does it work in theory?” If you take that to mean economists care more about getting their theory right than about its usefulness then, yes, too many of them do.

But an empirical revolution is happening in economics, where economists test their standard theory to see how well it explains the real world. A big part of this is the rise of “behavioural economics” which, rather than simply making the conventional assumption that everyone acts “rationally” – with carefully considered self-interest – in the economic decisions they make, studies the many reasons people often make decisions that aren’t rational.

So, first puzzle. When, in 2012, prime minister Julia Gillard introduced what she called a “price on carbon” and opposition leader Tony Abbott correctly labelled a “carbon tax”, which increased the price of electricity, she took care to cut income tax and increase pensions in a way designed to leave households on average incomes no worse off.

Among Abbott’s many criticisms, he claimed the move would fail to reduce electricity consumption because people would simply use their tax cut to allow them to keep buying the same amount of power. Puzzle: conventional economics says Abbott was wrong, but behavioural economics suggests he may have had a point.

In compensating most people for the cost of her carbon tax, Gillard was doing just as economists advised. They were confident people would still reduce their electricity use because theory says a change in the price of some item has two, conflicting effects: the income effect and the substitution effect.

The income effect reduces the consumer’s real (after-inflation) income, whereas the higher price relative to the prices of similar items encourages the consumer to substitute other items for the now-dearer item, at least to some extent.

So even though Gillard’s compensating tax cut eliminated the income effect, economists were confident the remaining substitution effect would still encourage people to use less electricity and use what was left of their tax cut on something else they wanted more of.

But behavioural economics says maybe it’s not that simple. One of its early and major findings is that many people are “loss averse” – they hate losing money from the increase in the price of electricity more than they like getting the money back as a tax cut.

So, contrary to theory, many people wouldn’t have felt the tax cut left them no worse off. If so, they may well have chosen to use all their tax cut to keep buying the same amount of electricity.

For the record – and for whatever reason or reasons (remember, this wasn’t an experiment where all else was held equal) – electricity sales and emissions of carbon dioxide fell sharply during the two years before the Abbott government abolished the “carbon pricing mechanism”.

Then they rose again. History will not be kind to that man.

Second puzzle. An ABC series called How to Live Younger presented scientific evidence showing that regular exercise throughout life can rewind the clock on cognitive (mental) decline, fight cancer, prevent disease, beat depression and even enhance our lives by making us smarter and more creative.

So people who’ve exercised throughout their lives generally do much better in old age. It’s also true that people who aren’t used to exercising find it harder to start working out and so don’t get as much “utility” - enjoyment and benefit – from exercising.

The economists’ convention model of “rational decision-making” predicts that knowledge of all this will lead parents to encourage their children to exercise and lead kids to keep it up as young adults and in middle age, thus setting themselves up for a healthy, happy old age.

Doesn’t always happen that way, you say? True. By why not?

Because, as behavioural economists recognise, many people, even those who fully understand how keeping fit will benefit them in old age, still have trouble making themselves exercise regularly. If they get out of the habit, it’s hard to get back into it.

A finding of behavioural economics is that this is partly explained by the “projection bias” that affects the thinking of many people. They mistakenly believe that the benefit they enjoy from exercise at this stage of their life will be the same in later stages. Actually, they’ll benefit more in later stages if they keep exercising now; if they give up exercise now they’ll find it harder to take it up again later.

So, whereas conventional economics can’t see there’s a problem – also with adverse consequences for the health system and the taxpayer – behavioural economics can see it. It can see the case for a government education campaign to help people overcome their projection bias, for instance.

And there are techniques individuals use to overcome their projection bias, short-sightedness and lack of willpower. Psychologists call such techniques "commitment devices". I did little exercise until, in my late 40s, a diabetes doctor ordered me to start.

I’ve been able to keep going to the gym two or three times a week since then, and I enjoy it. The tricks I’ve used to keep it up are to have a highly qualified trainer and go at set times with a bunch of gym buddies who’ve become good friends.

A couple of times last year I criticised academic economists for not doing enough to make their theories more realistic – and more useful to the students they teach.

The two “puzzles” we’ve just looked at are derived from a university exam paper in behavioural economics, sent to me in response to my criticisms by Professor Simon Grant, of the Australian National University.

It seems that, at least at our better universities, economists don’t just bang on with conventional theory oblivious to its limitations.

Read more >>

There are many ways to stuff up productivity

A good New Year’s resolution for readers of the business pages would be to read more widely and think more broadly, so their thinking about economic problems and their solutions doesn’t get into a rut, returning repeatedly to the same old solutions to the same problems.

No reader of these pages needs to be told that the key to higher material living standards is improved productivity – the ability to create more outputs from the same quantity of inputs of land (raw materials), labour and physical and intangible capital.

Almost continuous productivity improvement over the past two centuries is the outstanding achievement of capitalist, market economies, the proof of capitalism’s superiority as a system of organising production and consumption.

It’s what’s made us so much more prosperous than our forebears were, with much of that prosperity spilling over from the owners of capital to the middle class and people near the bottom.

But, as I’m sure you know, over the past decade or so the rate of productivity improvement in Australia and all advanced economies has slowed to a snail’s pace. Hence, all the talk about productivity and what we can do improve its rate of improvement.

So far, a decade of hand-wringing hasn’t got us anywhere. We need to think more broadly about the problem.

One new thought is to wonder if there is – or should be – more to the good life than economic growth and a higher material standard of living. If there are ways we could improve the quality of our lives even if they didn’t lead to us owning more and better toys.

A negative way to express the same thought is to wonder if being able to afford better houses and cars will be much consolation if we succeed in stuffing up our climate, with more heat waves, rainy summers, droughts, bushfires, floods, cyclones and a rising sea level.

But we’ll return to those thoughts another day, and descend now to the more prosaic. One rut we’ve got into is thinking it’s up to the government to lift our productivity by “reforming” this or that intervention in the economy.

This is model-blind thinking on the part of econocrats, hijacked by rent-seeking businesses and high income-earners wanting more power to limit the earnings of their employees and more of the tax burden shifted to other people in the name of improving “incentives”.

The same people show little interest in reforms that really would increase economic growth by increasing women’s participation in paid work, such as free childcare.

Another rut we’re in is thinking that we won’t get faster economic growth until we get back to faster productivity improvement.

This has much truth, but it misses the deeper truth that the relationship between economic growth and productivity can also run the other way: maybe we’re not getting faster productivity improvement because we’re not getting enough economic growth.

In practice, what does much to increase the productivity of labour is businesses – in mining, farming and manufacturing, but also the service industries – replacing old machines with the latest, most improved models.

But business investment has long been at historically low levels, making our weak productivity performance hardly surprising. And the dearth of new investment spending is also hardly surprising considering consumer spending has been so weak for so long.

Nor is weak consumer spending surprising when you remember how weak the growth in real wages has been. One reason wage growth has been so weak, as Reserve Bank governor Dr Philip Lowe has pointed out, is the present fashion of businesses using any and every means – legal or otherwise – to limit labour costs and so increase profits. There are other paths to profitability.

While we’re thinking unfamiliar thoughts on the possible causes of our productivity plateau, remember this one: when businesses have been investing strongly in new equipment in the past, it’s often been a time when labour costs have been rising rapidly, giving them a strong incentive to invest in labour-saving machines.

(Note, it’s precisely because this increases the productivity of labour, and thus increases real national income, that the pursuit of labour saving simply shifts the demand for labour from goods-producing industries to services-producing industries, leaving no decline in the demand for labour overall.)

Last year some economists at the International Monetary Fund wrote a blog post on yet another contributor to weak productivity improvement, which will certainly come as a surprise to “Brother Stu,” federal Education Minister Stuart Robert, who late last month sent a “letter of expectations” to the government’s Australian Research Council outlining the Morrison government’s desire to prioritise short-term research jobs that service the interests of commercial manufacturers.

It’s possible he and Scott Morrison merely wish to swing one for the Coalition’s generous business backers, but my guess is they imagined they were striking a blow for higher productivity. If so, they’ve been badly advised.

Research by the IMF economists finds that productivity improvement in the advanced economies has been declining despite steady increases in research and development, the best indicator we have on “innovation” effort, the thing so many business people give so many speeches about.

But get this: they find that what matters for economic growth is the composition of spending on R&D, with basic scientific research affecting more sectors for a longer time than applied research (commercially oriented R&D by companies).

“While applied research is important to bring innovations to market, basic research expands the knowledge base needed for breakthrough scientific progress,” they say.

“A striking example is the development of COVID-19 vaccines which, in addition to saving millions of lives, has helped bring forward the reopening of many economies . . . Like other major innovations, scientists drew on decades of accumulated knowledge in different fields to develop the mRNA vaccines.”

Which suggests the Morrison government has just jumped the wrong way in its latest intervention into the affairs of our universities. Should have done more R&D of their own before jumping.

Read more >>

Prep for the new year: what I've learnt about happiness

Let me wish you a happy new year. And not just a happy New Year’s Eve, a whole year of happiness. But the thing about happiness is to be sure you know what you’re wishing for. It’s something that’s surprisingly easy to get wrong.

Normal economic journalists don’t waste time thinking about such a touchy-feely topic, but I went astray. I spent a lot of time reading and thinking about it. Even wrote a book about it.

I blame Bob Hawke, who once hit the headlines for saying that economics was about happiness. Though many economists today may deny it, he was right. He meant that economics was about helping people maximise their “utility” – the satisfaction they derive from their consumption.

“Happiness” is a word used by ordinary people, so journalists use it freely. Although some economists study it, most would never use such a frivolous word. “Welfare” is the closest they come. They’ve stopped talking about “utility” because they can’t measure it.

It’s psychologists who take most interest in happiness, but even they prefer to call it “subjective wellbeing”. Sounds more scientific.

A recent article from the British Psychological Society says that “people who are happy – who enjoy ‘hedonistic wellbeing’ - experience plenty of positive emotions and are generally pretty satisfied with life”.

But that’s just a psychologist’s way of saying that happy people have been shown to be ... happy. It doesn’t tell you how to become happy – nor whether happiness is what we should be shooting for.

The article does go on to quote the finding of a review of many studies that, while some strategies recommended for boosting happiness – such as taking time in the day to reflect on what you are grateful for – are far from bad in themselves, if you expect them to make you feel noticeably happier, you’re likely to be disappointed.

The social commentator Hugh Mackay – a man from whom I’ve learnt much – is very critical of the modern preoccupation with happiness. It’s that word “hedonistic” that offends him. It implies that it’s OK to make the pursuit of pleasure our primary goal. Seek out positive emotions and avoid negative emotions as much as possible.

As usual, he’s right. A life of pleasure seeking and avoiding all pain is unlikely to be satisfying. Pain and sadness are part of the human condition, and without our measure of them we aren’t fully human. It’s inhuman not to feel sad over the death of someone we love or the breakup of a relationship.

We’ve evolved to feel pain as well as pleasure, negative as well as positive emotions, for good reason. Pain, for instance, can be a signal to keep our fingers away from hot stoves, or to go to the doctor’s.

The sadness we feel over our own misfortunes should leave us with empathy towards the misfortunes of others, that we should renew our efforts to live up to the Golden Rule.

The British article offers a better kind of happiness: what Socrates called “eudaimonia” – the feeling that your life has meaning, and that you are reaching your potential.

It quotes a study finding that people who felt more strongly that the things they did in their lives were more worthwhile – in other words, that their life had meaning – were better off in all kinds of ways: socially, physically and emotionally.

So, how do we add meaning to our lives? One way could be through our jobs – paid or unpaid. The goal of helping to make the world a better place is easier seen in some jobs than others. But I remember reading of a hospital cleaner who saw her job as vital to speeding the recovery of the patient and the convenience of their visiting families.

The more fundamental way to add meaning is via our relationships with family, friends and workmates. We are, first and foremost, social animals.

Harvard psychologist Daniel Gilbert says “social relationships are a powerful predictor of happiness – much more so than money. Happy people have extensive social networks and good relationships with people in those networks”.

The other thing I’ve learnt is not to be misled by the US constitution and think you can pursue happiness. The founding fathers meant people should be free to run their lives as they see fit. True. But it’s a mistake to have being happy as your primary goal – and even worse to think you can make yourself happy by treating yourself to all the things you enjoy doing (chocolate, for instance).

People who keep asking themselves “am I happy?” or “what can I do to make myself happy?” aren’t happy – and probably never will be. Happy people rarely think about being happy.

Happiness pursuers have got it the wrong way round. Happiness is a side effect of being too busy leading a fulfilling life to think about it.

The way to be happy is to forget your own happiness and concentrate on making other people happy.

Read more >>

This isn't America, so please stop acting like a Yank

If there’s one thing that annoyed me about 2021, it’s the way people have been aping all things American. Our financial markets copped a bad dose of it, the media got carried away, we looked to the Yanks – the smart ones and the crazies - to know what we should think and do about the coronavirus, and many on the Right of politics took their lead from Trump’s Republicans.

One on one, I like the Americans I know. But put them together as a nation, and they seem to have lost their way. We’ve long imagined the US to be the wellspring of everything new and better, but these days it seems to be racing headlong towards dystopia.

Who’d want to be an American? Who’d want to live there?

There’s nothing new, of course, about American cultural imperialism. You’ve long been able to buy a Coke in almost any country. Or, these days, a Big Mac or KFC.

But globalisation has hugely increased America’s influence in the world. Wall Street dominates the world’s now highly integrated financial markets. What’s less well appreciated is the way advances in telecommunications and information processing have globalised the news media. Call it the internet.

These days, news of a major occurrence in any part of the world spreads almost in real time. One thing this means is that you can read the latest from The Age or The Sydney Morning Herald in almost any country.

But another thing is that we get saturation coverage of all things America. These days, America’s greatest export is “intellectual property” – patents and copyright covering machines, medicines and software, but also books, films, TV shows, videos and recorded music, and news and commentary from all of America’s great “mastheads”.

Of course, the little sister syndrome applies. Just as Kiwis know more about us than we know about them, so we and people in every other country know more about the Americans than they know about us. Just ask John Fraser, Malcolm Trumble and “that fella from Down Under”.

And remember this: when you’re as big and as rich as America, you’re the best in the world at most things – but also the worst in the world. These guys win the Nobel Prize in economics almost every year but, no doubt, have the biggest and best Flat Earth Society. They have loads of the super-smart, but even more of the really dumb.

Back to this year’s Yankophile annoyances, as soon as Wall Street decided America had an inflation problem and would soon be putting up interest rates, our local geniuses decided we’d soon be doing the same.

Small problem – we don’t have a problem with inflation. Our money market dealers know more about the US economy than they know about their own. To them, we’re just a smaller, carbon copy of America. If you’ve seen America, you’ve seen ’em all.

The Americans have a lot of people withdrawing from the workforce – leaving jobs and not looking for another – which they’re calling the Great Resignation. Wow. Great new story. So, some people in our media are seizing any example they can find to show we have our own Great Resignation.

Small problem. Ain’t true. Following the rebound from the first, nationwide lockdown in 2020, our “participation rate” – the proportion of the working-age population participating in the labour force by having a job or actively looking for one – hit a record high. With the rebound from this year’s lockdowns well under way, the rate’s almost back to the peak.

A lot of America’s problems arise from the “hyperpolarisation” of its politics. Its two political tribes have become more tribal, more us-versus-them, more you’re-for-us-or-against-us. The two have come to hate each other, are less willing to compromise for the greater good, and more willing to damage the nation rather than give the other side a win. More willing to throw aside long-held conventions; more winner-takes-all.

The people who see themselves as the world’s great beacon of democracy are realising they are in the process of destroying their democracy, brick by brick – fiddling with electoral boundaries and voting arrangements, and stacking the Supreme Court with social conservatives.

Donald Trump continues to claim the presidential election was rigged, and many Republicans are still supporting him.

It’s not nearly that bad in Australia, but there are some on the Right trying to learn from the Republicans’ authoritarian populism playbook.

When your Prime Minister starts wearing a baseball cap it’s not hard to guess where the idea came from. Or when the government wants to require people to show ID before they can vote, or starts stacking the Fair Work Commission with people from the employers’ side only. Enough.

Read more >>

Have a good break – this time you’ve more than earned it

Looking forward to some time off over the summer holidays? I am. Long time since I’ve been in more need of a decent break. Few more columns to go, and I’m off for four weeks.

This will surprise and shock you, but regular polling by the Roy Morgan outfit has found that, by September, the total annual leave owing to Australian employees had reached a record 185 million days, up almost a quarter on a year earlier.

No need to tell you it was all the lockdowns and lockouts – not just from other countries and other states, but even 100 kms down the coast. We’ve had little ability to take leave. Nor much desire to either, if it meant holidaying at home.

The proportion of workers owed less than two weeks is down and the proportion owed more than seven weeks (including me) is up past 10 per cent. Of course, the almost 40 per cent people working as casuals don’t get annual leave.

Whether they actually get the 15 to 25 per cent pay loading they’re supposed to instead is something you wouldn’t be sure of – but we’ll leave that unpleasant thought ’til we’re back next year.

I’m a great believer in the benefits of annual leave. When I used to worry about burning out, I decided to follow two rules: always take the leave you’re given and always get a change of scenery.

Sometime back there was a fad of employers allowing people to “cash out” their leave. It was a terrible idea and fortunately seems to have died out. When, decades ago, state governments did what today would be unthinkable and simply passed a law compelling employers to provide paid annual leave, they did so for good reason.

Workers who never get a decent break in which to rest and recuperate – to re-create – do eventually burn out. At the least, the quality of their work falls off. Allowing them to use their leave money to buy a new car does both the worker and the boss an injury. It’s self-harm for capitalists.

The festive season carries risks of family fights and overindulgence as well as pleasures, but a great advantage of living Down Under is that it leads seamlessly to the summer holidays. I’ve been boning up on what advice the psychologists and others on the universities’ The Conversation website give on making sure we get the most from our holidays.

Dr Freya Higgins-Desbiolles, of the University of South Australia, offers several good tips. One is: don’t go into debt. I doubt if many people feel pressure to help the economy by spending big, setting themselves up with huge credit card bills in the new year, but if they do, they shouldn’t.

The economy exists to serve us; we don’t serve it.

Another suggestion: go back to nature. I’ve long believed that humans have an evolutionary affinity with nature – trees, greenery, water, views – which those of us who live in big cities must regularly propitiate. Go bush, do some walks. A holiday cottage backing onto a national park is perfect.

In the same vein: do simple things. In my day, parents on holiday left kids to their own devices. No one ran around spending money to keep kids entertained. Dr Monica Thielking, of Swinburne University of Technology, says “your children may complain they’re dying of boredom, but they are not. It may even be good for them”.

A growing body of research suggests boredom in children can make them more creative. Many use daydreaming to regulate boredom-induced tension. Daydreaming is good, shifting attention to thinking about “situations, memories, pictures, unresolved things, scenarios or future goals”.

Adults need to relax, de-stress, forget our jobs completely for a few weeks. But many people (including me) find this very hard, if not impossible. I like to catch up with professional reading. Many of us are still checking work emails and taking work calls.

Drs Dan Caprar, of Sydney University, and Ben Walker, of Victoria University, Wellington, say the problem for many of us is that we derive a strong sense of self from our work. “Whether we work by choice, necessity, or a bit of both, many of us find work inevitably becomes a source of our identity,” they say.

We develop professional identities (“I’m a lawyer”) organisational identities (“I’m a Google employee”) or performance-based identities (“I’m a top performer”). This can be beneficial. It’s been linked with increased motivation and work performance, and even better health, they say.

But it does prevent us from switching off. And, though I suppose I should be turning my attention to post-retirement interests, I can’t make myself read some famous person’s biography. Pop psychology is the furthest I stray from economics.

My retired mates seem heavily into streaming video, and that does tempt me – I’ll watch all the various fictional accounts of the struggles of the Murdochs – or the Windsors - and Vienna Blood on SBS On Demand even beats Vera.

Sorry. Serious suggestion: try a digital detox.

Read more >>