Too many school leavers are off to uni

If you had a youngster leaving school, what would you encourage them to do? Get a job, go to university, or see if there was some trade that might interest them? For a growing number of parents, that's a no-brainer: off to uni with you. But maybe there should be more engaging of brains.

It's widely assumed that, these days, any reasonably secure, decently paid career must start with a university degree.

Don't be so sure. The latest projections by the federal Department of Employment (since renamed by Malcolm Turnbull's spin doctors as the Department of Jobs and Small Business) are for total employment to grow by 950,000 over the five years to 2022.

The department projects that fewer than 100,000 of those extra jobs – less than 10 per cent – will be for people with no post-school qualifications.

More than 410,000 of the jobs – 43 per cent – will be for people with a bachelor degree or higher qualification.

But that leaves more than 440,000 of the jobs – 47 per cent – for people with the diplomas or certificates (particularly the "cert III" going to trades people) that come from TAFE.

Now, even the Department of Jobs possesses no crystal ball. But these educated guesses should be enough to disabuse you of the notion there'll be no decent jobs for people who haven't gone to uni.

But graduate jobs are better paid, right? Yes, but not by as much as you may think.

Figures issued by the Australian Bureau of Statistics on Monday show that, in August last year, the median (middle) pre-tax earnings of employees with a bachelor degree were $1280 a week, whereas for employees with a cert III or IV trade qualification it was $1035 a week.

And my guess is, if we keep stuffing things up the way we have been – taking in too many uni entrants and too few TAFE entrants – that gap will narrow, with certificate-holders' wages growing faster than graduates' wages.

While we were engrossed watching the Barnaby show, Labor's shadow education minister, Tanya Plibersek, was announcing its election policy to conduct a "once-in-a-generation" review of post-school education, with a view to establishing a single, integrated tertiary education system, putting universities and TAFE on an equal footing.

Her announcement was welcomed by the ACTU and the Business Council. Both sides know well how badly we've stuffed up young people's choice between uni and TAFE.

Plibersek was hardly going to admit it, but the problem goes back to missteps by the sainted Julia Gillard when education minister, made worse by state governments of both colours.

In 2010 she replaced the system where the feds set the number of new undergraduate places they were prepared to fund, and the numbers in the various degree categories, introducing a system where uni entry numbers were "demand-driven".

After decades in which their federal funding had been squeezed, the vice-chancellors couldn't believe their luck.

Particularly those at regional and outer suburban unis went crazy, lowering their admission standards and admitting hugely increased numbers. Did they employ a lot more academics to teach this influx of less-qualified students? Not so much.

It's likely many of these extra students will struggle to reach university standards – unless, of course, exams have been made easier to accommodate them.

Those who abandon their studies may find themselves lumbered with HECS-HELP debt without much to show for it. Many would have done better going to TAFE.

Meanwhile, TAFE was being hit by sharp cuts in federal funding (no doubt to help cover the extra money for unis) and subjected to the disastrous VET experiment.

The problem was that parts of the states' union-dominated TAFE systems had become outdated and inflexible, tending to teach what it suited the staff to teach rather than the newer skills employers required and students needed to be attractive to potential employers.

Rather than reform TAFE directly, however, someone who'd read no further than chapter one of an economics textbook got the bright idea of forcing TAFE to shape up by exposing it to cleansing competition from private providers of "vocational education and training".

To attract and accommodate the new, more entrepreneurial for-profit training providers, the feds extended to the VET sector a version of the uni system of deferred loans to cover tuition fees. State governments happily played their part in this cost-saving magic answer to their TAFE problem.

The result was to attract a host of fly-by-night rip-off merchants, tricking naive youngsters into signing up for courses of dubious relevance or even existence, so the supposed trainers could get paid upfront by a federal bureaucracy that took an age to realise it was being done over.

Eventually, however, having finally woken up, the present government overreacted. Now it's much harder to get federal help with TAFE fees than uni fees.

Far too little is being done to get TAFE training properly back in business after most of the for-profit providers have faded into the night.

The Turnbull government surely knows more must be done to ensure all those who should be training for technical careers are able to do so. In last year's budget it established an (inadequate) Skilling Australians Fund, and more recently suspended the demand-driven uni funding system.

It would be better if it joined Labor in supporting a thorough-going review of our malfunctioning post-school education arrangements.

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Not even the IMF is worried by our huge foreign debt

In its latest report on Australia, the International Monetary Fund says it isn't worried by our net foreign debt, now just a squeak short of $1 trillion. Just as well, since none of us ever worries about it either.

Still, it's nice to have the fund's judgment that "the external position of Australia in 2017 was assessed to be broadly consistent with medium-term fundamentals and desirable policies".

Australia's negative "net international investment position" – consisting of our net foreign debt plus net foreign equity investment – has varied between 40 and 60 per cent of gross domestic product since 1988, it says. At the end of 2016, it was equivalent to 58 per cent.

That's high. So why's the fund so relaxed? Because, it says, both the level and the trajectory of our net international investment position are "sustainable".

It has calculated that a current account deficit between 2.5 and 3 per cent of GDP, which is larger than the deficit of 1.9 per cent it expects for 2017, would allow our total net foreign liabilities to be stabilised at about 55 per cent of GDP.

Note that, for some years now, our net foreign debt actually exceeds our total foreign liabilities (debt plus equity). That's because the value of our equity investments abroad (mainly foreign businesses owned by Australian multinationals and our super funds' holdings of foreign shares) now exceeds the value of foreigners' equity investments in Australia, to the tune of about $30 billion.

The fund derives much comfort from the knowledge that our foreign liabilities (both debt and equity) are largely denominated in Australia dollars, whereas our foreign assets (debt and equity) are denominated in foreign currencies.

Get it? In a globalised world of floating currencies and free capital flows between countries, the big risk for an economy heavily indebted to the rest of the world is a sudden loss of confidence by its foreign creditors, which would be manifest in a sudden drop in its exchange rate (as we experienced at the turn of the century, when the Aussie briefly fell below US50¢).

But when our foreign liabilities are expressed in Australian dollars, the depreciation doesn't increase their Australian-dollar value, whereas it does increase the Australian-dollar value of our foreign assets, leaving our net foreign liabilities reduced.

The broader conclusion is that an indebted country able to borrow abroad in its own currency has a lot less to worry about. And the fact that foreigners are willing to lend to us in our own currency is a sign of their confidence in our good economic management.

And, of course, a big drop in our dollar does improve the international price competitiveness of our export and import-competing industries.

Speaking of which, the fund estimates that, after the heights it reached in 2011 when prices for our coal and iron ore exports were at their peak, our "real effective exchange rate" (that is, the Aussie's average value against all our major trading partners' currencies, adjusted for the difference between our inflation rate and their's) depreciated by 17 per cent between 2012 and 2015.

Since then it's appreciated by about 5 per cent, up to September last year. The fund calculates that, by then, it was about 17 per cent above its 30-year average, leaving it between zero and 10 per cent higher than it probably should be, making it "somewhat overvalued".

The fund says our gross foreign liabilities (debt plus equity) break down into about a quarter as "foreign direct investment" (foreign control of Australian businesses, starting with our mining companies), about half as "portfolio investment" (mainly our banks' borrowings abroad, plus foreigners' holdings of Australian government bonds) and a quarter of odds and sods.

So the mining investment boom was mainly funded directly by the foreign mining companies themselves, including by ploughing back much of the huge profits they made while export prices were sky high.

But this was happening when, after the global financial crisis, our banks were increasing the stability of their funding by borrowing more from local depositors and less from overseas financial markets.

What most people don't know is that most of our net foreign debt is owed by our banks, though that's less true than it was, particularly because recent years have seen more central banks buying Australian government bonds from their original Aussie holders.

Though the central bankers like our higher interest rates, it's another indication that the rest of the world isn't too worried about our financial stability.

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Current account deficit improves without us noticing

They say a watched pot never boils, so maybe it's a good thing we now spend so little time worrying about the current account deficit. While our attention's been elsewhere, it's got a lot smaller.

This news comes courtesy of the International Monetary Fund's latest country report on Australia, issued this week.

Settle back. The nation's "balance of payments" is a statement summarising all the transactions between Australians (whether businesses, governments, or individuals) and the rest of the world.

It's divided into two main accounts. First is the "current account", which summarises exports and imports of goods and services, plus inflows and outflows of income, particularly payments of dividends and interest on loans.

Then there's the "capital and financial account" which, as its name implies, summarises the inflows and outflows arising from the financial-capital dimension of the transactions included in the current account.

Because the balance of payments is calculated using the accountants' double-entry bookkeeping system of debits and credits, the balance of payments is always in balance. So if the current account sums to a deficit, the capital account must sum to a surplus of the same size.

The fund's report acknowledges that Australia almost always runs a deficit on the current account, with an offsetting surplus (net capital inflow) on the capital account.

This is because we've always invested a lot more each year (in new business equipment and structures, homes and public infrastructure) than we (businesses, households and governments) have saved each year, so we've always needed to call on the savings of foreigners to make up the gap.

Foreigners' savings come as either loans (known as "debt capital") or the purchase of shares in our businesses or real estate ("equity capital").

Worries about the size of the deficit on the current account go back to the days before 1983, when the Australian dollar's rate of exchange with other currencies was fixed at a certain level by the government.

It was the government's job to defend that fixed rate by making sure the current account deficit and the capital account surplus were never too far apart.

This "balance of payments constraint" meant that if the current deficit got too big relative to the capital surplus, the government would have to crunch the economy so as to get imports down and thus help it keep the dollar's value unchanged.

If this didn't happen, the government would suffer the ignominy of devaluing our dollar and hoping this would get the current deficit and capital surplus back together.

When, in 1983, we decided to allow the value of the dollar to "float", however, this allowed it to move up or down automatically and continuously by however much was needed to keep the current deficit and the capital surplus exactly equal at all times.

It took until some years after the float for economists to realise that, in the new, more globalised world of floating currencies and unrestricted flows of financial capital between countries, there was much less reason to worry about the excessive size of the current deficit.

The necessary "devaluation" of the exchange rate would be brought about by the foreign exchange market, not the government.

The fund's report notes that, in the 1960s and '70s, the current account deficit fluctuated around 1 and 2 per cent of gross domestic product.

During the 35 years since the float, however, the current deficit blew out, averaging about 4 per cent of GDP. In consequence, there was a huge increase in our foreign liabilities, particularly our net foreign debt – to a mere $990 billion at last count.

This is what worried many people – until the economists and politicians decided to stop talking about it and focus on something different, the federal government's budget deficit and net government debt.

But here, at last, is the news: the fund reports that, since the global financial crisis in late 2008, the current account deficit has been a lot smaller. It's expected to have been only 2 per cent in 2017.

Why the improvement? Since the current deficit and the capital surplus are two sides of the same coin, you can explain changes by looking at either side – or both. The report offers two reasons for the smaller current deficit and three for the smaller capital surplus.

On the current account, it says we suffered a larger slowdown in growth in domestic demand (spending on consumption and investment goods) following the crisis than did our major trading partners (which, remember, are mainly fast-growing Asian economies).

So our imports from them weakened by more than our exports to them.

As well, the current deficit has been reduced by a lower "net income deficit" – gone from 3 per cent of GDP before the crisis to 1.5 per cent since – because world interest rates are so much lower, and our interest payments to foreigners far exceed their interest payments to us.

On the capital account surplus – representing the amount by which national investment exceeds national saving - the report notes that households have been saving a higher proportion of their incomes since the crisis than before it (even though they're saving less now than they were a few years back).

Second, since the crisis, our companies have saved more by retaining more of their profits rather than paying them out in dividends and, despite the surge in investment spending by mining companies that's only now ending, other companies haven't been investing much until recently.

Finally, the tightening up of international capital adequacy requirements in reaction to the crisis has obliged our banks to increase their saving by retaining more of their profits.

The report foresees the current account deficit stabilising at about 2.5 per cent of GDP in the next few years – which would be almost back to its modest levels when our exchange rate was still fixed.

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Governments only pretending to fix Murray-Darling

Genelle Haldane, my desk calendar tells me, has said that "only until all of mankind lives in harmony with nature can we truly decree ourselves to be an intelligent species". I've no idea who Haldane is or was, but she's right.

And you don't need to be terribly intelligent to realise it. Even most economists get it. It's blindingly obvious that the economy – that is, human production and consumption of goods and services - exists within the natural environment.

The economy is sustained by the natural resources the environment supplies to it and by the natural processes that are part of the human production process. We rely on the ecosystem also to deal with the mountains of waste and emissions we generate.

It's equally clear that economic activity can damage the environment and its ability to function. We're exploiting the environment in ways that are literally unsustainable, and must stop doing so before the damage becomes irreparable.

But if it's all so obvious, why are we having trouble doing what we know we should? Why, for instance, has more fighting broken out over our use and abuse of the Murray-Darling river system, a problem we've been told our governments – state and federal – are busy fixing?

One reason is that some people – not many of us – earn their living in ways that damage the environment, and don't want their businesses and lives disrupted by being obliged to stop.

Often, they don't bear the cost of the damage they're doing. It's borne by farmers downstream, or by the wider community, or the next generation.

Those bearing the direct and immediate cost of stopping invariably fight harder to keep going than those affected only indirectly and to a small extent.

In the case of the Murray-Darling, it's only the costs being born by downstream irrigators – and downstream water drinkers in Adelaide – that keep the fight alive.

Since it's hard to be sure when damage to the environment has reached the point of no return, there's a great temptation to say doing a bit more won't hurt. I'll be right, and the future can look after itself. Business people think that; politicians even more so.

Democracy has degenerated into a battle between vested interests. Get in there to fight for your own interests, and don't worry about whether it all adds up or what happens to those who lose out.

The political parties have succumbed to this approach. They're too busy keeping themselves in power by oiling enough of the squeakiest wheels to worry about showing leadership, about the wider community interest or about any future beyond the next election.

I don't trust any of them, nor the Murray-Darling Basin Authority they appointed, which seems to see its job as assuring us everything's fine, when clearly it isn't.

Just how bad things are – how little progress has been made, how little has been done and how much spent on subsidies to irrigators – is made clear in a declaration issued this month by a dozen academics - scientists and economists - led by professors Quentin Grafton and John Williams, of the Australian National University, who've devoted their careers to studying water systems and water policy.

The decades of degradation of the Murray-Darling Basin, exacerbated by the Millennium drought, finally led John Howard to announce a $10 billion national plan for water security (since increased to $13 billion) in the months leading up to the 2007 election. Its intention was to return levels of water extraction for irrigation to environmentally sustainable levels.

It took until late 2012 for federal and state governments to agree on a basin plan to reduce water diversion by 2,750 gigalitres a year by July 2019, even though this was known to be inadequate to meet South Australia's water needs.

So far $6 billion has been spent on "water recovery", with $4 billion going not on buying back water rights but on subsidies to irrigators to upgrade to more efficient systems which lose less water.

Trouble is, those loses were finding their way back into the system, but now they don't. This has left the irrigators better off, but it's not clear there's much benefit in greater flows down the river. And no one has checked.

Federal figures show that buying water from willing sellers is 60 per cent cheaper than building questionable engineering works.

But little money has been spent helping communities adjust to the effects of adverse changes.

There's little evidence of much environmental improvement as a result of all the money spent, and river flows have been declining since 2011.

Until the ABC's 4 Corners program in July last year, many Australians were unaware of alleged water theft, nor of grossly deficient compliance along the Darling River.

State governments don't seem to be trying hard to fulfil their commitments under the 2012 agreement. Nor did the feds seem to take much interest when Barnaby Joyce was the minister.

The blow-up over the Senate's refusal to go along with a new round of reductions in the amount by which water extraction from the river is to be reduced – supposedly to be offset by increased spending on dubious engineering projects – is just the latest in the various governments' pretence of fixing the environmental problem, while quietly looking after their irrigator mates.

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Unions play their cards wrong in hopes for higher pay

You don't need to read much between the lines to suspect that Reserve Bank governor Dr Philip Lowe and his offsiders think the workers and their unions should be pushing harder for a decent pay rise.

Why else would he volunteer the opinion, in his testimony to a parliamentary committee on Friday, that average wage growth of 3.5 per cent a year would be no threat to the Reserve's inflation target?

This while employers are crying poor and Scott Morrison makes the extraordinary claim that big business needs a cut in company tax so it can afford to pay higher wages.

Why should Lowe care about how well the workers are doing? Because, as one of his assistant governors, Dr Luci Ellis, pointed out last week, our economic worries are shared by most of the other rich economies, except in one vital respect: they have reasonably strong growth in consumer spending, but we don't.

What's making our households especially parsimonious? No prize for remembering our world-beating level of household debt. Trouble is, consumer spending accounts for well over half the demand that drives economic growth.

Our economy won't be sparking on all four cylinders until consumption spending recovers, and that's not likely until our households return to annual wage growth that's a percent or more higher than inflation. That's why Lowe's encouraging workers to think bigger in their wage demands.

Even so, his proposed pay norm of 3.5 per cent, errs on the cautious side. That figure comes from 2.5 percentage points for the mid-point of the inflation target, plus 1 percentage point for the medium-term trend rate of improvement in the productivity of labour.

But 4 per cent a year would be nearer the mark because the trend rate of productivity improvement is nearer 1.5 per cent a year.

Even so, Lowe is acknowledging a point employers and conservative politicians have obfuscated for decades: national productivity improvement justifies pay rises above inflation, not just nominal increases to compensate for inflation (as is happening at present).

Lowe's concern that the present annual wage growth of about 2 per cent not be accepted as "the new norm" is an important point from behavioural economics: rather than calculate the appropriate size of pay rises based on the specific circumstances of the particular enterprise, as textbooks assume, there's a strong tendency for bargainers to settle for whatever rise most other people are getting.

That is, there's more psychology – more "animal spirits", as Lowe likes to say; more herd behaviour – and less objective assessment, in wage fixing than it suits many employers and mainstream economists to admit.

Which implies that, if the unions would prefer a wage norm closer to 4 per cent than 2 per cent, they should be doing a better job of managing their troops' fears and expectations.

In the Reserve's search for explanations of the four-year period of weak wage growth, it puts much emphasis on increased competitive pressure, present or prospective.

But in her speech last week, Ellis qualified her reference to the more challenging "competitive landscape" by adding ". . . or at least how it is perceived". Just so. It's about perceptions of reality.

It's easier for firms worried about a future of more intense competition to take the precaution of awarding minimal wage rises if they can play on their employees' own fears about losing their jobs to Asian sweatshops or robots or the internet.

There's little sign in the figures for business profitability that most firms couldn't afford much bigger pay rises than they're granting. But it's no skin off the employers' nose if their fears of future adversity prove exaggerated. Only their workers had to pay for the excessive fearfulness.

Workers - particularly those in industries with enterprise bargaining – are meekly accepting smaller pay rises than their employers' circumstances could sustain because the union movement has done too little to counter the alarmists telling their members they've lost the power to ask for more.

They've played along with the nonsense about 40 per cent of jobs being lost to robots, and that there's nothing to stop greedy businesses from making us all members of some imaginary "gig economy".

Worse, they've exaggerated the spread of "precarious employment" and encouraged the still-speculative belief that weak wage growth is explained almost exclusively by anti-union industrial relations "reform", which has stripped workers' bargaining power to the point where the right to strike has been lost.

Presumably, their game is to advantage their Labor mates by heightening disaffection with the Turnbull government, but this is coming at the expense of the economy's recovery, not to mention workers' pay packets.

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