Recycling is all about being taken for a ride

Another day, another crisis. The crisis in kerbside recycling has been building since China effectively refused to take any more of our rubbish about 18 months ago. Then we sent it to other Asian countries, but now they’re jacking up, too.

The disruption to the local recycling industry has caused one company that accepted recycled material from local councils in Victoria and South Australia to collapse, leaving five big warehouses stuffed with baled paper and plastic that no one wants.

But then Scott Morrison took charge. At a meeting with the premiers, they agreed to establish a timetable to ban the export of waste plastic, paper, glass and tyres. In the meantime, he committed $20 million for “innovative projects to grow our domestic recycling industry”.

Morrison said Australia needed to take responsibility for its own waste, but this moral act should be seen as a money-making opportunity rather than a new economic burden. The changes should “not have to cost us more – in fact, hopefully, it’ll cost us less”.

Minister for Industry Karen Andrews said: “Boosting our onshore recycling industry has the potential to create over three times as many jobs as exporting our plastic waste, ensuring a more sustainable and prosperous future.”

Really? Sounds delusional to me. The truth is that most of what we put out each week is of little value to business – especially after you’ve had to move it, sort it, move it again, clean it up, melt it down or whatever.

It’s not clear that the cost of making our waste attractive to local businesses would be less than they were prepared to pay for it. If not, we’d pay through higher taxes. Of course, governments could compel businesses to use recycled materials, but if this increased their costs we’d pay through higher prices.

This is why, until now, so much of our waste – and that of the Americans, Japanese and Europeans – has been shipped around the world to Asian countries. That’s where wages are low enough to make feasible all the work involved in recovering waste materials.

But even they are now deciding it’s not worth all the air pollution, chemical emissions, discharge of untreated water and damage to workers’ health involved. A fair bit of the plastic can’t be recycled and gets burnt.

So we could spend a lot more than we do at present ensuring that we recycle a high proportion of our own household waste, but before we do we ought to ask ourselves how we’ve come to believe that recycling most of the stuff we discard is absolutely central to our efforts to reduce the damage we’re doing to the natural environment.

Why are we putting recycling on a higher pedestal than reducing carbon emissions? Because it’s easier? We’re learning it’s not as easy as it seems.

If the amount of household waste is such a problem, why are we emphasising recycling rather than reduced packaging? Because governments don’t like telling big business what it can and can’t do?

It amazes me that we’ve put recycling up there with motherhood and never stop to question whether it’s the best use of our time and money in the “environmental space”.

I think recycling involves a high degree of self-delusion (and don’t worry, I’ve been known to completely repack our bin so as to fit more in). It’s more about feeling good than doing good.

We’ve taken to recycling because, with just a small effort on our part, we’re able to convince ourselves we’re doing our bit to save the planet. (I remember shopping at a supermarket in California, with all its indulgences and absurd degree of choice. At the checkout, you were asked whether you wanted your stuff packed in “paper or plastic”. All you had to do was say “paper” and you emerged with a clear conscience.)

With kerbside recycling, it’s out of sight, out of mind. I played my part, what happens after that is up to the government. Turns out, we’ve been sweeping our dust under the carpet and only now are noticing the bulge.

Governments have found it easier to play along with our delusions – see above – than tell us the disillusioning truth. Green groups and ecologists also play along because they think it gives us something to do and keeps us engaged with their issue.

Nobody actually wants the stuff, so the authorities have been shipping it off to Asia on the q.t. Much of the stuff that doesn’t get shipped away ends up in landfill anyway.

What do we imagine recycling achieves? How much further use of fossil fuel, water, chemicals and other damage to the environment is justified to ensure the last bit of paper or bottle cap is recycled?

Recycling’s total effect on the environment is a far more complicated sum than it suits governments and experts to tell us.

For instance, we know how bad single-use plastic bags are. What we’re not told is that, according to a British government study, you have to use a paper bag three times – or a cotton bag 131 times – to be sure that, once the effect of producing the bag is taken into account, you’ve contributed to fewer carbon emissions.

We need to be sure we’re directing our effort and expense towards the most environmentally beneficial ends.

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We’re relying on a government that spurns economic advice

I’m starting to wonder if the trouble with our politicians is that they’ve evolved to do politics but not economics, making them unfit to cope with the economic threats we now face.

On the one hand, they’ve been able to leave the management of the economy to the independent Reserve Bank, whose tinkering with interest rates – up a bit, down a bit – has successfully kept the economy growing for 28 years.

On the other hand, the pollies have been locked in a decade of unprecedented political instability where, since the demise of the Howard government in 2007, no prime minister has been safe from attack – from their own side.

In such an environment, with monetary policy (interest rates) so successfully managing the economy, the budget ceases to be “fiscal policy” and becomes just an instrument of politics.

Because you’re eternally looking over your shoulder trying to spot the next colleague holding a dagger behind his back, you use the budget primarily to shore up your support within the party, rewarding the base and punishing its designated enemies.

Be slavish in feeding the 24-hour news cycle. Keep up the pressure for ministers and their departments to provide a continuous flow of minor “announceables”. Remember, any vacuum you leave will be filled by your enemies (external or internal). If you run out announceables, just slag off your (official) opponents.

Of course, if the punters understood what you were up to, they wouldn’t be impressed. So when you’re trying to shore up the support of big business by cutting the rate of company tax, you keep claiming it’s a “plan for jobs and growth”.

When you’re using an income tax tax cut to buy some popularity at the election, you pretend that economic growth is driven by lower taxes.

The worst of it is, since the things your side really cares about – cutting taxes, preserving tax breaks favouring high income-earners, cracking down on the leaners and loafers on social welfare – are economic measures, you convince yourself you’re really into economics.

And running a budget surplus – that’s economic isn’t it? (No, not when your forecasts of a strong economy have proved way too optimistic and you’re counting on a freak improvement in iron ore prices to get you over the line. Then, it becomes an indulgent stretch for political kudos.)

You don’t actually know enough economics to realise economics is about rolling back rent-seeking and increasing the efficiency with which resources are allocated, at the micro level, and managing the economy through the ups and downs of the business cycle, at the macro level. All the rest is politics.

We’ve come to expect that if the person taking the treasurer’s job doesn’t know much about economics, Treasury will give them a crash course and get ’em up to speed. But former senior Treasury officer Paul Tilley’s new book, Changing Fortunes, leads me to think this no longer happens.

These days, treasurers are so preoccupied by the daily battle for political survival they have little time or interest in economics tutorials. Treasury has got out of the habit of giving the treasurer any advice his staff doubts he’d want to hear. Treasury’s job is largely to supply facts and figures when demanded by the treasurer’s staff.

In which case, you have to worry about how much professional rigour goes into producing the budget forecasts. How much they’re designed to avoid giving the treasurer news he doesn’t want to hear.

The Reserve Bank’s latest forecasts for wage growth are laughing at the optimistic forecasts of the budget in April. Where the budget has wages growing by 3.25 per cent a year by June 2021, the Reserve has the growth rate rising only a fraction to 2.4 per cent.

But here’s the surprising thing. Despite the central importance of wages in driving consumer spending and overall economic growth, the Reserve’s year-average forecasts for real GDP differ little from those in the budget.

I find this suspicious. And worrying. If the central bank feels constrained by the forecasts of a Treasury anxious to avoid displeasing its political masters, we’ve got a problem.

Last week, while worries about how much damage Trump’s trade war might do to the world economy were causing share markets to plunge, Treasurer Josh Frydenberg – who was 20 at the time of our last big recession – emerged from his bunker to assure us the government would “take the necessary actions to ensure our economy continues to grow”.

Great. But who’ll be advising him on which actions are necessary? The young punks in his office?

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Worried Lowe flouts convention to push for wage rises - now

The most important piece of local economic news this week was no news: the wage price index remained stuck at an annual growth rate of 2.3 per cent for yet another quarter. I’ve said it before but I’ll keep saying it until it’s sunk into the skull of every last politician: we won’t get back to healthy growth in the economy until we get back to healthy growth in wages.

That’s because economies are circular: all of us standing in a circle, buying and selling to everyone else. What’s the main thing people in the circle sell? Their labour. What do they do with the wages they earn? Buy stuff from the rest of the economy.

Business people (and Coalition politicians) are very conscience of the truth that wages are a cost to business. They’ve thus long had the attitude that wages should be kept as low as possible.

But equally, wages are income to wage-earners, and by far the biggest source of income for the nation’s nine million households. So the less wages grow, the less growth there is in the income households use to buy the goods and services produced by the nation’s businesses. Not good.

Get it? In the end, business has as much to lose from weak wage growth as workers do. This is the bit that many businesspeople and politicians don’t get. They’re so used to seeing the economy as my lot versus the other lot, they can’t see that, as the Salvos say, "we’re all in this together".

People – even the media – keep saying wages are flat. That’s not true. What’s true is that, according to the Australian Bureau of Statistics, the rate at which wages are rising has been flat, at 2.3 per cent a year, for the fourth quarter in a row.

In fact, wage growth has been surprisingly low since the end of 2013 – five and a half years ago.

Another point to be clear on is that it’s not low wage growth, as such, that’s the problem. If consumer prices weren’t growing, annual wage growth of 2.3 per cent wouldn’t be bad. It would be fantastic.

So it’s the rate at which wages are growing relative to the growth in consumer prices that matters. Real wages, in other words.

Standard economic theory says that, provided their real growth is no faster than the rate of improvement in the productivity of labour (that is, output per hour worked), wages can grow faster than prices without causing increased inflation.

What’s more, if wage-earners are to get their fair share of the benefit from improved productivity, real wages should be growing in line with the medium-term trend (average) rate of growth in labour productivity, which is about 1.1 per cent a year.

And because wages are the greatest single factor driving household income, household income is the greatest single factor driving consumer spending, and consumer spending accounts for about 60 per cent of gross domestic product, the economy won’t be back to a healthy rate of growth until real wages are back to growing pretty much in line with average productivity improvement.

Which, it turns out, is a bit of a worry. Why? Because it isn’t happening and doesn’t look like happening any time soon.

In the April budget, the government confidently predicted that wage growth would return to something approaching the old normal, accelerating to 2.5 per cent over the year to June this year, then 2.75 per cent by next June, and 3.25 per cent by June the year after.

We learnt this week that, as measured by the wage price index, wages fell short of the first hurdle, coming in at 2.3 per cent rather 2.5 per cent.

Worse, last week we learnt that even the Reserve Bank doesn’t share the government’s optimism.

The Reserve’s revised forecasts now see no advance on 2.3 per cent by June next year, and only the tiniest improvement to 2.4 per cent in two years’ time.

Admittedly, contrary to my contention that we won’t get to decent growth in the economy until we get decent growth in wages, the Reserve is predicting that real GDP will have strengthened to a healthy 2.7 per cent by June next year, and an even healthier 3 per cent by June 2021.

With wage growth forecast to continue weak, the Reserve is expected this improvement to happen with out much help from stronger consumer spending.

So how? Mainly through strong growth in business investment spending, exports and public sector spending on infrastructure.

Consumer spending would be helped a bit by the latest tax cuts and the cuts in interest rates. Other help would come from the falling dollar’s improvement to the price competitiveness of our export and import-competing industries, the brighter outlook for mining investment, and some stabilisation of the housing market.

Maybe. I remain sceptical. And if his behaviour last week is any guide, Reserve governor Dr Philip Lowe is pretty worried about the continuing weakness in wage growth.

It is simply not done for leading econocrats to tell employers they should be paying higher wages. But that’s just what Lowe did in his appearance before the House economics committee.

"At the aggregate [overall] level," he said, "my view is that a further pick-up in wages growth is both affordable and desirable."

Not after we’ve achieved greater productivity improvement, please note, but now. By how much does he think wages should be growing? By about 3 per cent a year, as he’s said on various occasions.

What’s more, federal and state governments – Labor as well as Coalition - should be setting the private sector a better example – or "norm" in Lowe's words – by raising the 2 to 2.5 per cent caps they’ve imposed on their own employees’ wage rises.

Thank goodness somebody’s minding the shop.

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We need more helicopter pollies caring for our kids

Sometimes I think that if our politicians spent as much time trying to fix the country as they do playing political games – slagging each other off and finding ways to “wedge” their opponents – we’d be in much better shape.

The world becomes ever more complicated and right now our future is looking, as a pollie might say, “challenging”. Not least among our challenges is ensuring our children have better lives than ours.

So far, you wouldn’t be sure we were making much progress on that project. Leaving aside the way we’ve shifted the tax system in favour of the old at the expense of the young, there’s the less-than-wonderful state of our education and training.

Our schools aren’t winning many prizes on speech day, and though our universities have become much bigger, you wouldn’t be sure all the extra youngsters going in are emerging with valuable degrees. You get the feeling some of them would have been better off going to TAFE.

Speaking of TAFE – sorry, “vocational education and training” - why is it still being treated as the poor relation in the education system? Has it recovered from the disastrous attempt to save money by making vocational training “contestable”?

You may not have noticed but, with Parliament not sitting last week, Scott Morrison and his minister thought they’d better get on with some work in the “education space”.

It was, to be polite, a week of modest accomplishment.

After decades of squeezing the universities – and turning the vice-chancellors into funding-hungry ringmasters who’re no longer sure what the circus is meant to prove – Julia Gillard introduced “demand-driven” funding of undergraduate places.

Predictably, the universities – particularly regional unis - went crazy, cutting entry standards and signing up everyone they could.

Gillard’s view that a much higher proportion of young people should go on to further education was sound, but did that mean everyone was off to uni now?

Enter the Coalition government, which decided demand-driven funding was costing too much. Why not deregulate the setting of uni fees? When that was shot down, it took some years for the government to decide simply to freeze the number of funded places.

Last year it relented, promising to increase places in line with the growth in the working-age population – but on condition of improved performance. Ah yes, performance indicators. That’s what we need.

But which? A committee of five vice-chancellors was commissioned to ponder the question. Last week Education Minister Dan Tehan released their report and accepted their recommendations. From next year the unis will get an extra $80 million, provided they demonstrate success on graduate employment, dropout rates, student satisfaction, and adequate participation rates for Indigenous, low socio-economic status and regional-and-remote students.

I have great sympathy for the government’s desire to stop the vice-chancellors using students as cash cows and get back to their main job of giving our kids a high-quality education.

But I doubt KPIs are the way to do it. Monetary incentives are a poor way to encourage better behaviour, partly because they’re too easily gamed. And nobody knows more about gaming performance indicators than our vice-chancellors, who devote much time to thinking of easy ways to boost their uni’s rank on the various international league tables of universities (because this attracts more overseas students and you can charge ’em more).

Moving on to VET, last week saw the release of a “Vision for Vocational Education and Training” following a meeting of federal and state ministers as part of the Council of Australian Governments.

As a collection of motherhood statements, it’s first rate. A sample: “VET and higher education [unis] are equal and integral parts of a joined-up and accessible post-secondary education system with pathways between VET, higher education and the school system.”

This seems to be an assertion that we already have just the thing we don’t have, but desperately need. How are we to achieve it? Not to worry. The ministers are working on it. (They say that COAG is where good ideas go to die.)

Meanwhile, Andrew Norton, of the Grattan Institute, has used the long-running Longitudinal Survey of Australian Youth to conclude that not too many of the less-academic students going to university – among the 40,000 students a year with ATARs (tertiary admission ranks) of 50 to 70 – would have done better for themselves in VET.

Low-ATAR uni students are more likely to fail subjects and get low marks, and when they graduate are less likely to find professional jobs or earn high salaries.

Less-academic men doing humanities or science degrees might have earned higher lifetime incomes had they done vocational diplomas in construction, engineering or commerce.

But less-academic women often do teaching and nursing degrees. These “deliver good employment outcomes to students across the ATAR range,” Norton says. “These students are unlikely to do better in a vocational education course.”

Hmm. Teaching may be good for less-academic students, but I’m not sure how good less-academic teachers are for teaching.

I think that if universities are willing to admit – and take big fees from – less-able students, they have an obligation to give them more help.

Norton says “a good tertiary education system steers prospective students towards courses that increase their opportunities and minimise their risks. Australia’s post-school system does not always achieve this goal”.

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We're edging towards admitting we're in secular stagnation

At least since 2012, Treasury, the Reserve Bank and successive governments have assured us a return to the old normal of strong economic growth, high wages and low unemployment wasn’t far off. But last week big cracks emerged in governor Philip Lowe’s optimistic facade.

In all the years since then, our estimated time of arrival at the promised land has been repeatedly pushed out a year or so. On the face of it, that’s what the Reserve did yet again in its quarterly statement on monetary policy.

Forecast growth in real gross domestic product over the year to December was cut again, to 2.5 per cent (down from a predicted 3.25 per cent last November), but not to worry. By June next year it will have bounced back to trend growth of 2.75 per cent. Happy days.

But that hardly fits with Lowe’s rhetoric during his appearance before the Parliament’s economics committee on Friday. He devoted a surprising amount of time to discussing the Reserve’s possible response in the "unlikely" event that the economy stayed weak.

His own forecasts imply the need for two further rate cuts, taking the official interest rate to just 0.5 per cent.

And if it got to 0.5 per cent, the Reserve would consider some form of "quantitative easing", he said, probably lowering the longer-term risk-free rate of interest by buying government bonds and paying for them simply by crediting the sellers’ accounts at the Reserve (the modern equivalent of "printing money").

What a long way we’ve come from Lowe’s line at the first official rate cut in June. The outlook for the economy was fine, he said then, it was just that the Reserve had redone its sums and realised that, with a bit of extra monetary stimulus, it could get the unemployment rate down to 4.5 per cent without causing any problem with inflation.

Actually, when your look deeper than the latest headline forecast of an early return to trend growth in the economy, you find that, by the end of 2021, wages still wouldn’t be growing any faster than they are now. Happy days?

Larry Summers, eminent academic economist and a former US Treasury secretary, began arguing that the American and other advanced economies were caught in "secular stagnation" – a protracted period of weak growth – in 2013. Since then, many economists have agreed, though they still debate its causes.

So far, however, those naughty, negative SS-words have never crossed the lips of any Treasury or Reserve official, let alone any politician. But on Friday Lowe gave us a detailed account of the phenomenon that’s both the key explanation for, and the main evidence of the existence of, secular stagnation: the amazingly low level of world real interest rates.

"There is a structural thing going on as well, and I think it is really important we understand this. At the moment, right around the world, there is an elevated desire to save and a depressed desire to invest," Lowe said.

"You see a lot of global savings because of demographic factors [population ageing]. There is a lot of saving in Asia [because they don’t have a social security system]. Many people borrowed too much in previous times and now they’re having to repair their balance sheets, so they want to save a bit more [paying off debt is a form of saving].

"There is a lot of desire to save and, right at the moment, not many firms want to invest. The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new [physical] capital, savers are going to get low returns.

"The way the financial system works is that the central banks are the ones who set the interest rates, but we’re really responding to this deep structural shift in the balance between saving and investment right around the world and there’s not much we [central bankers] can do about that."

Just so. Two points. First, the "deep structural shift" began even before the global financial crisis. It’s not just the product of recent worry about a trade war – although that does provide econocrats and politicians with a convenient excuse to shift from their she’ll-be-right rhetoric.

Second, unprecedented low interest rates are a symptom of a deeper problem: aggregate (total) demand is insufficient to take up aggregate supply. That’s why growth is weak and will stay weak until a solution is found.

Where’s the additional demand to come from? Not from lower interest rates, obviously. Which leaves the budget. Now’s the time to rebuild public infrastructure and do other useful things we thought we couldn’t afford.

Anyone who still thinks now’s a good time to run budget surpluses just doesn’t get it. It’s now neither sensible nor possible. Wake up, Josh.

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