Indigenous small business is on the rise

It’s the season of good cheer, so let me give you some good news: we’re not making the progress we should be in Closing the Gap between Indigenous and non-Indigenous Australians, but when it comes to increasing the ranks of Indigenous small-business people we’re doing surprisingly well.

The number of Indigenous owner-managers is conservatively estimated to have increased by 32 per cent between 2006 and 2011, and by 30 per cent between 2011 and 2016.

That’s coming off a low base but, even so, the number increased from 10,400 to 17,900 over the decade to 2016. This took the proportion of Indigenous owner-managers in the over-15 population from 3.2 per cent to 3.4 per cent.

This may not seem much, but it occurred while the proportion of non-Indigenous owner-managers actually decreased from 10 per cent to 8.6 per cent – a fall that probably reflects the difficulties affecting the economy since the global financial crisis in 2008.

It says Indigenous small businesses are making headway in the economy despite its relatively low growth over the past decade.

The figures have been derived from census data in a paper by Siddharth Shirodkar and Dr Boyd Hunter, of the Centre for Aboriginal Economic Policy Research at the Australian National University, and Professor Dennis Foley, of the University of Canberra.

The authors note that the historical exclusion of Indigenous Australians from mainstream economic life has led to low accumulation of wealth across many Indigenous communities. Only a relative few gained formal business experience before the past decade.

The result is that the vast bulk of entrepreneurially inclined Indigenous Australians probably lack the key preconditions to start a business and prosper in our capitalist economy, they say.

Today, however, things are improving – to some extent as a result of government policy. In 2015, the Indigenous Procurement Policy established targets for federal government departments to buy what they needed from Indigenous suppliers.

The value of successful tenders by Indigenous business owners has grown from about $6 million in 2012-13 to more than $1 billion in the policy’s first two and a half years to the end of 2017. Today, more than 1000 indigenous businesses are contracting with the feds.

This year the government also announced the Indigenous Business Sector Strategy, which includes measures to provide greater business support, improved access to finance, stronger connections to business networks and better sharing of information about commercial opportunities.

But all of that is insufficient to explain the rise in Indigenous enterprise over the past decade. And get this: official analysis of the register of Indigenous businesses suggests that Indigenous-owned firms are between 40 and 50 times more likely to hire Indigenous employees than are non-Indigenous firms.

So the establishment of Indigenous businesses is an important mechanism to deliver economic development and increased Indigenous participation in the workforce. And this, the government tells us, is shifting the narrative from welfare and dependence to aspiration, empowerment and independence. (A lovely thought – if only it had more substance.)

Certainly, “Indigenous entrepreneurs offer their community an avenue for greater and long-overdue economic self-determination, create positive role models within families and communities, and can serve as mentors to young, entrepreneurial Indigenous Australians,” as the authors say.

The businesses these owner-managers run are spread across Australia, but the vast majority of owner-managers are located on the east coast, particularly in greater Sydney and the rest of NSW. Large numbers also live in Brisbane, the rest of Queensland and in Melbourne.

The growth in capital cities over the past decade has occurred at double-digit rates except in Darwin, where the number of Indigenous businesses fell over the five years to 2016.

But the pattern in the regions was mixed. In regional parts of NSW, Queensland and Victoria there was double-digit growth over the decade, with the number in regional NSW doubling to more than 2700.

In regional South Australia, Western Australia and Tasmania, however, numbers remained flat between the censuses of 2011 and 2016. And they actually fell by 44 per cent in regional Northern Territory.

This could partly reflect the reduction in business opportunities following the end of the resources boom, though the same effect isn’t apparent in regional Queensland, probably because its business activities are more diverse.

But mining doesn’t fully explain the falls in the NT. Here the feds’ NT “intervention” may be to blame.

The largest declines in the number of owner-managers were in remote regions of the NT and very remote parts of WA. This reinforces the story that remote areas, where about 20 per cent of the Indigenous population lives, are underdeveloped in terms of access to markets. Clearly, it’s getting worse.

Abolition of the Community Development Employment Projects scheme may be another part of the explanation. These involved local community-run organisations creating work experience for participants and opportunities to work in communities and meet community needs through small-scale activities not otherwise funded.

Funding provided for the scheme was used to support the on-costs for these community organisations. Its abolition led to the closure of many of them. Even if they were unlikely to have owner-managers associated with them in the census, they may have supported other local enterprises by providing them with low-cost or subsidised labour.

You can argue that, by giving people subsidised jobs and solutions to community needs, the scheme robbed them of the incentive to find real, better-paid jobs and start unsubsidised businesses but, as the decline in owner-managers suggests, that doesn’t justify simply pulling the plug without providing a better substitute.

Smacks to me of controlling the growth in government spending at the expense of the most disadvantaged people in the most remote parts of the country, where opportunities to lift yourself up by your bootstraps are even rarer than in comfortable middle-class electorates.

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Does gift-giving make sense? Silly question

It’s the season of the year when the bylaws of the economists’ union require me to issue the stern admonition that the medieval practice of gift-giving should cease and desist forthwith. And the fact that I’m a bit late won’t stop me.

Perhaps more people - recipients of socks and handkerchiefs and other wondrous surprises - will be receptive to the profession’s utterly disinterested (look it up) advice and see the wisdom of my words.

Gift-giving is an irrational act, one where sentiment and emotion triumph over good sense. Since it’s hardly possible for the giftor better to know what the giftee would like to be given than the giftee themself, the success rate of the practice is abysmally low.

So low, in fact, as to justify economists using one of their worst pejoratives to brand the practice as involving a “deadweight loss” – one where the benefit to the giver and the benefit to the receiver are insufficient to justify the cost of the transaction, thereby creating a loss to the community.

(And please, please don’t ruin my Boxing Day by arguing that the commercialisation of Christmas at least creates jobs. The economists’ union’s Christmastide message is that any mug can create jobs, all you have to do is spend money – your own or someone else’s. The whole point of economics is to help the community spend money in ways that yield it greater benefit than other ways.)

But fear not. Go back to eating your leftovers in peace (and goodwill). I’m not actually a member of the economists’ union, but an adherent to a dissident sect known as behavioural economists (people who, too late in life, realised psychology made more sense than economics).

This bunch of heretics delights in pointing to the glaring weaknesses in the oversimplified model conventional economists carry in their heads.

But you need only to have gone to Sunday school to see the weakness in all the nonsense about the deadweight loss of Christmas. I think it was the little chap himself who said it was more blessed to give than receive.

And there is, in fact, plenty of what a deranged economist would call “giver’s surplus”. How do I know? Because psychological experiments have demonstrated it – many of them conducted by Professor Elizabeth Dunn, a psychologist at the University of British Columbia.

But just last week came new research by Ed O’Brien, of the University of Chicago Booth School of Business, and Samantha Kassirer, of Northwestern University Kellogg School of Management, showing that “the joy of giving lasts longer than the joy of getting”.

One of the great limitations of human nature is “hedonic adaptation”. The happiness we feel after a particular activity or event diminishes each time it’s repeated. It’s likely this phenomenon is “adaptive” – we’ve evolved to react that way because it increases our ability to survive and reproduce; it keeps us striving.

But the researchers find that giving to others may be an exception to the rule. In two studies they found that participants’ happiness did not decline, or declined more slowly, if they repeatedly bestowed gifts on others versus repeatedly receiving those same gifts themselves.

Separate research by Dr Vera te Velde, a lecturer in economics at the University of Queensland, has found evidence for the existence of “beliefs-based altruism” – concern about other people’s emotions and other psychological experiences, beyond any material measure of their wellbeing.

This means “we don’t give gifts only because we want people to have something that they want; we also give gifts because we want them to feel cared about, experience joy or a pleasant surprise when receiving it. Or to prevent them from feeling disappointed if we fail to give anything,” she says.

This kind of altruism can apply in many other situations. “When girl guides come to our doors to sell cookies, we buy them not only to support the group and because we like cookies, but also because we want the girls to feel successful and valued,” she says.

But how can we be sure that a pure concern for others’ feelings is the motivation for these behaviours, instead of – or maybe, as well as – concern about our own reputations? After all, I may not only want girl guides to feel good, I may also want to be known as someone who supports them.

To help answer this question Velde experimented with a sharing game. One person is asked to share $10 with another person. But the bank handling the transfer occasionally makes a mistake and transfers exactly $1 to the other person. So if that person receives $1, they don’t know if it’s a bank mistake or the first person’s selfishness.

Asked whether they thought the recipients would prefer to know about giver’s true intentions, many participants thought they would. Even so, when they played the game themselves, the participants were more likely to give either exactly $1 (thereby hiding their selfishness) or exactly $5 (thereby revealing themselves to be perfectly fair).

But get this: even the people who tried to hide their selfishness were demonstrating their concern about the emotions of the other person. Economics makes a lot more sense with a bit of psychology thrown in.

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How to get more bang from your bucks

They say people who think money doesn’t buy happiness just don’t know where to shop. Sorry to have left it so late in your preparations for Christmas and summer, but on this score I have breaking news.

It’s a funny thing that, though economists hold consumption to be the “sole end and purpose” of all economic activity, it’s not a subject that greatly interests them. They’ll help you maximise how much you’ve got to spend, but they’ll give you no help in deciding how to spend it in a way that yields the most happiness – or, as they prefer to say, “satisfaction”.

No, for advice on how to get the biggest bang from your bucks, the experts are social psychologists.

For the past 15 years, their prevailing wisdom has been that spending on experiences – from an overseas holiday to a trip to the movies – yields more happiness than buying more stuff.

The pleasure you get from buying a new CD or pair of shoes or car or even a new home falls off surprisingly quickly, whereas the enjoyment you get from what the US psychologist Tom Gilovich has dubbed “experiential consumption” tends to be longer-lasting.

Subsequent research has found three reasons why experiences provide greater happiness. First, experiential purchases enhance our social relationships more readily and effectively than do material goods.

That is, a lot of the enjoyment comes from our interaction with the people we share the experience with. (This, BTW, gets closer to what I really believe about all this: deep satisfaction comes from our human relationships, not from what we buy.)

Second, experiential purchases form a bigger part of a person’s identity. We are the sum of our life’s experiences – pleasant and otherwise – much more than the sum of our material possessions.

Third, experiential purchases are evaluated more on their own terms and evoke fewer social comparisons than material purchases.

Good point. A lot of our spending goes on keeping up with the Joneses or on buying “positional goods” – goods that demonstrate to the world how well we’re doing in the battle for social status. Trouble is, my delight in my new Volvo is punctured when the chap next door arrives home with his new Beemer.

We make sure our house is as well-appointed as the others in the street, the lawn’s always mown, the car in our driveway is late-model European, and the kids go to private schools. But the one thing the neighbours can never see is how your total debt compares with everyone else’s.

If keeping up with the neighbours has required you to rack up a crippling debt, you’re unlikely to be enjoying a care-free life. Ditto if your financial commitments keep you chained to a well-paying job you hate.

But, as the researchers say, when you’re spending money on experiences, you do it much more for your enjoyment of that experience than to impress the neighbours – unless, of course, you’re into matching their skiing trip to the Snowies with yours to Aspen.

Actually, I think there’s more to it even than those three points. Major experiences such as overseas touring holidays yield pleasure in expectation of them, pleasure while you’re doing it, and pleasure while you’re reliving them and recounting your adventures to family and friends.

And the great beauty of thinking about past holidays is that you remember the highlights, laugh about the bad bits, and forget the boring bits – such as the trouble you had trying to find a public toilet.

Sorry, I promised you breaking news on the experiential front. Research out this year, by Lee, Hall and Wood, finds it’s not as simple as experiences good, stuff bad.

Turns out, which of the two yields the higher happiness count depends on your social class, with class being measured according to income, education or self-assessment.

Dividing people into two categories – higher or lower – the researchers found that “experiential advantage” held for the top half, whereas the bottom half either rated experiences and material purchases equally or rated goods more highly than experiences.

It seems people of higher social class have an abundance of resources, meaning they can afford to focus more on their internal growth and self-development.

In contrast, people who have fewer resources are likely to be more concerned about making wise purchases of the stuff they still needed.

I think it’s probably a gradient: as your material affluence rises you pass through the point where experiences and things deliver roughly equal satisfaction, until eventually your material needs are pretty much satisfied and its experiences that do most to make you happy.

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How we killed off Australia's inflation problem

Before we let 2018 go, do you realise it’s the 25th anniversary of the introduction of the Reserve Bank’s target to achieve an inflation rate of between 2 and 3 per cent? It’s a milestone worth celebrating.

Why? Because it’s worked so well. For the past quarter century, we’ve had inflation that has fallen within the target range “on average, over time” and hence been low and stable.

This week the Reserve Bank issued a volume of papers from its conference to discuss inflation targeting, and whether it needed to change. (Conclusion: it didn’t.)

In that 25 years we haven’t had a serious worry about inflation – which certainly can’t be said of the 20 years before the target was unveiled in 1993.

In those earlier years we were continually worried about high inflation. It reached a peak of 17 per cent in the mid-1970s, averaged about 10 per cent for that decade and 8 per cent during the 1980s.

All the other advanced economies had high inflation rates at the time, but ours was higher and took longer to fix.

Our problem was usually linked with excessive growth in wages, and the “wage explosions” of the mid-1970s and early 1980s prompted the authorities to jam on the brakes, leading inevitably to severe recessions.

Even though inflation remained high, a third and more severe recession in the early 1990s was more the consequence of the authorities’ overdone attempt to end a boom in commercial property prices.

It’s not by chance that this year we reached 27 years of continuous growth since that recession. Before it, we had recessions about every seven years, all of them caused by the authorities jamming on the brakes – and then, when we crashed into recession, stepping on the accelerator, a “stop/go policy”.

The first reason we haven’t needed to worry much about inflation since then is that, as part of the adoption of the inflation target, responsibility for setting interest rates was moved from the politicians to the econocrats running an independent central bank.

They’ve been a much steadier hand on the interest-rate lever, moving rates up or down according to the needs of the business cycle, not the political cycle.

Another reason we’ve stopped worrying about inflation is that this year is also the 35th anniversary of the floating of our dollar in 1983. A floating exchange rate – which, remarkably, has almost always floated in the direction needed to keep the economy on an even keel – has made it a lot easier for the Reserve to keep inflation low and stable.

A third reason is the extensive program of “micro-economic reform” begun by the Hawke-Keating government in the 1980s – including the deregulation of many industries and the decentralisation of wage-fixing – which has made our economy much less inflation-prone than it used to be.

Yet another factor was the realisation at the time the inflation target was adopted – informally by the Reserve in 1993, and then formally by the incoming Howard government in 1996 – that the key to lower inflation was to get “inflation expectations” down to a reasonable level.

Why? Because there’s a strong tendency for the expected inflation rate in the minds of shopkeepers and union officials to become a self-fulfilling prophecy. If they expect prices to keep rising rapidly, they get in first with their own big price or wage rises.

We’ve spent the past 25 years demonstrating that if you can get everybody expecting inflation to stay low, you have a lot less trouble ensuring it actually does.

The hard part was how to get from the high expectations of the late-1980s to the low expectations we’ve had for most of the past 25 years.

Bernie Fraser, Treasury secretary turned Reserve Bank governor, the man who introduced the target, knew what to do: define what was an acceptably low inflation rate – between 2 and 3 per cent, on average - and keep the economy comatose until you actually achieved the target, then keep it low until everyone had been convinced that “about 2.5 per cent” was what today we’d call “the new normal”.

How did Fraser achieve this? He did the opposite of what his predecessors did whenever they realised they’d hit the economy harder than they’d intended to. Despite knowing we were in for a bad recession, he let the interest-rate brakes off only slowly, and didn’t hit the accelerator.

In other words, he made the recession of the early ‘90s longer and harder than it could have been. I think he decided that, since we were in for a terrible belting anyway, he’d make sure we at least emerged from the carnage with something of value: a cure for our inflation problem that wasn’t just temporary, but lasting.

And that’s what he delivered. With low inflation expectations embedded, he was able to stimulate the economy to grow faster and get unemployment down. It went from 11 per cent after the recession to 5 per cent today.

At the time the inflation target was adopted, some people worried it meant the Reserve didn’t care about unemployment. As events have demonstrated, that was wrong. To Fraser, low inflation was just a means to the ultimate end of low unemployment.

I rate him the best top econocrat we’ve had in 50 years. He was wise and caring, with the best feel for how the economy worked. Peter Costello gets the credit for formally adopting Fraser’s inflation target, pursued by an independent Reserve Bank.

But another person also deserves credit – Dr John Hewson. It was Hewson who, as Coalition shadow treasurer, made the most noise about the need for an independent central bank with an inflation target.

Fraser decided he’d better get on with specifying his own target before “some dickhead minister” tried to impose a crazy one on him.

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How to keep the news coming

If you thought the Australian Competition and Consumer Commission’s latest report on “digital platforms” was about the debatable ways Google and Facebook treat their users, you’re a victim of the news media’s reluctance to bother their audience with the worrying state of their own finances.

The report was really about the effect of digital disruption on what it calls “news and journalistic content”. So great has the disruption been that the day may come when most newspapers cease to exist.

That wouldn’t be quite so terrible if their companies continued to publish news on the internet. But unless they can find a way to make their digital products adequately profitable, it’s possible even this could cease.

At present we get news from two sources almost wholly funded directly by the federal government, the ABC and SBS. But most of the rest of our news comes from commercial businesses: free-to-air radio and television, plus two or three big former newspaper chains, now producers of what the report calls “print/online news”.

We’re so used to this we don’t see how anomalous it is. At one level, the commercial news media are just selling news to make a profit for their shareholders (who, these days, turn out to be mainly everyone with superannuation).

At another level, however, the news they sell us isn’t an ordinary product like soap or cornflakes. We consume news because we find it interesting – even entertaining – but we also need it to keep us informed about what’s going on in the world: what’s happening overseas, what’s happening in the economy, what’s happening about schools, universities, hospitals, law and order, roads, transport and 100 other areas of government responsibility, and what’s happening in the community.

Knowing about all this is of private benefit to you and me, but the fact that we know it is also of social or public benefit to the community as a whole. Each of us would suffer if we were surrounded by people who knew nothing about what was going on.

And imagine how well governments would perform, and elections would work, if we didn’t have the media telling us what the politicians were up to and holding them to account.

I like to say the commercial media also have a “higher purpose”. Journalism academics speak of “public interest journalism”. Fortunately, such anomalies are well understood by economists, including those at the ACCC. They see that news and journalism have the characteristics of a “public good”.

Another strange thing about commercial journalism is that, historically, its customers paid for it mainly indirectly, via the advertising costs built into the prices of the things they buy. That’s obviously true of free-to-air radio and TV, but it’s been almost as true of newspapers, with subscriptions and the cover price covering only a fraction of production costs.

This, however, is what’s disrupted the production of news. First classified advertising moved online, then display advertising and many former newspaper readers. Now about half of all Australian advertising spending has moved online, with Google and Facebook capturing more than half of it and the news media getting just some.

The legacy media used to sell their news in packages, called newspapers or bulletins. But the internet has “atomised” news, with most people searching for news story by story. About half the people coming to news sites do so via Google and Facebook.

The report says news has the two characteristics of a public good: it’s “non-excludable” (you can’t stop people who don’t pay from getting it) and “non-rivalrous” (me knowing about the budget doesn’t stop you knowing about it, in the way me eating an apple stops you eating it).

Public goods are an instance of “market failure”, in that they’re susceptible to “freeriders” (people who leave it to others to pay) and – significantly, in the commission’s mind – because private providers can’t capture enough profit, there’s a high risk they won’t produce as much of the product as would be in the public’s interest.

Sometimes this means governments take over the production of public goods (as they do with public schools and hospitals) or they subsidise the cost of privately produced public goods (as they do with visits to doctors).

The report explores the possible ways the federal government could subsidise news and journalism to ensure its supply is optimal. One way would be a tax incentive scheme, as is done to support local content for film and television.

Or the government could make grants for journalism projects it wished to encourage. But newspaper companies have long rejected any offer of government assistance that could threaten their independence by being withdrawn should they publish news that offended a government.

A better idea would be for private subscriptions to news services to be made tax deductible, just as are donations to charities and even to politically aligned think tanks.

Canada has already taken up the idea. Since deductibility would go to all news outlets that had signed up to industry codes of journalistic standards, and would go directly to customers rather than businesses, it would be hard for politicians to punish individual news organisations.

It’s an idea that could help secure the future of news and journalism.

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