We need less fancy financial footwork, not more

Attention conspiracy theorists: see if you can detect a pattern in this. Tony Abbott wants to review the renewable energy target, so he appoints self-professed climate change "sceptic" Dick Warburton, who feels qualified to explain to the scientists where they're going wrong.

Abbott wants to review the financial system, so he appoints a former boss of a big four bank, David Murray, who feels qualified to explain to economists where they're going wrong.

So, which industry sector stands the better chance of getting what it wants from its review?

Can you imagine how many proposals Murray's committee will receive aimed at making the financial system bigger and better - and all in return for just a little more help from taxpayers?

I read that the Australian Bankers Association's submission proposes abolition of interest withholding tax, so as to support offshore fund-raising by local banks and to encourage overseas banks to lend more in Australia. It also calls for the removal of "tax disincentives" on bank deposits. All to increase this financial sector's contribution to economic growth and jobs, naturally.

The government's terms of reference say "the inquiry is charged with examining how the financial system could be positioned to best meet Australia's evolving needs and support Australia's economic growth".

Fine. But if it's to be more than just an industry sales pitch, the inquiry needs rigorously to examine the industry's convenient assumption that the bigger it gets the more it benefits the rest of us.

In a brief submission that deserves more attention than it's likely to get, Professor Ron Bird and Dr Jack Gray, of the Paul Woolley centre at the University of Technology, Sydney, summarise the growing evidence that the developed economies' much expanded financial systems have been a bad investment from the perspective of the wider economy. (Both are former fund managers.)

The growth in America's financial sector has been amazing, with its share of gross domestic product rising from less than 3 per cent in 1950 to about 5 per cent in 1980 and more than 8 per cent in 2006. Its share of total corporate profits grew from 14 per cent in 1980 to almost 40 per cent by 2003.

Salaries in US financial services were similar to other industries until 1980, but are now on average 70 per cent higher than those elsewhere. This remarkable growth is referred to as the "financialisation" of the economy. One test of the inquiry's thoroughness will be whether it works out comparable figures for Oz.

The first warning that this growth might be making economies more risky came from Professor Raghuram Rajan, of the University of Chicago, at a central bankers' conference in 2005. They told him not to worry. He has since argued that the financial system's big rewards for risk-taking (with other people's money) result in the economy proceeding from bubble to bubble.

Since the mid-2000s, an increasing amount of analysis has questioned whether the growth of the financial system has worked to the betterment of anybody other than those working in the industry, Bird and Gray say.

One study for the Bank for International Settlements concludes that "big and fast-growing financial sectors can be very costly for the rest of the economy ... drawing essential resources in a way that is detrimental to growth at the aggregate level". A British minister has said: "We need more real engineers and fewer financial engineers."

Other research has found that real (physical) investment is being crowded out by the increasing size and profitability of financial investment. Even our Reserve Bank governor, Glenn Stevens, has questioned "whether all this growth [in finance] was actually a good idea; maybe finance had become too big (and too risky)".

The huge advances in information technology could have been expected to result in lower costs for financial services, but unit costs have actually increased over the past 30 years.

All the trading on financial markets is supposed to lead to better "price discovery" and thus improved efficiency in the allocation of resources, but a study found no evidence of financial market prices becoming more "informationally efficient".

Adair Turner, former chairman of Britain's Financial Services Authority, sees "no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 or 30 years has driven increased growth or stability".

Bird and Grey conclude that the starting point of the Murray inquiry's analysis should be to assess the financial system's effectiveness and highlight where it is falling short and why.

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Your guide to business entitlement

With the Abbott government's close relations with big business, we're still to see whether its reign will be one of greater or less rent-seeking by particular industries. So far we have evidence going both ways.

We've seen knockbacks for the car makers, fruit canners and Qantas, but wins for farmers opposing the foreign takeover of GrainCorp and seeking more drought assistance, as well as a stay on the big banks' attempt to water down consumer protection on financial advice.

The next test will be the budget. Will the end of the Age of Entitlement apply just to welfare recipients (especially the politically weak, e.g. the unemployed and sole parents, rather than politically powerful age pensioners) or will it extend to "business welfare"?

With Joe Hockey searching for all the budget savings he can find, there's a lot of business welfare or, euphemistically, "industry assistance" to look at. The Productivity Commission measures it every year in its Trade and Assistance Review.

Government assistance to industry is provided in four main ways: through tariffs (restrictions on imports), government spending, tax concessions and regulatory restrictions on competition. Although much rent-seeking takes the form of persuading governments to regulate markets in ways that advantage your industry, the benefit you gain is hard to measure, so it's not included in the commission's figuring.

Assistance through tariffs is far less than in the bad old days before micro-economic reform, but there's still some left. However, its cost is borne directly by consumers in the form of higher prices. So it's not relevant to Hockey's search for budget savings. Even so, I'll give you a quick tour.

The commission estimates that, in 2011-12, tariffs allowed manufacturing industries (plus the odd rural industry) to sell their goods for $7.9 billion a year more than they otherwise would have.

In the process, however, this forced up the cost of goods used by manufacturers and other industries as inputs to their production of goods and services by $6.8 billion a year. About 30 per cent of this cost to inputs was borne by the manufacturers themselves, leaving about 70 per cent borne by other industries, largely the service industries.

(This, by the way, shows why import protection doesn't help employment as non-economists imagine it does. It may prop up manufacturing jobs, but it's at the expense of jobs everywhere else in the economy.)

So now we get to budgetary assistance to industry. On the spending side of the budget it can take the form of direct subsidies, grants, bounties, loans at concessional interest rates, loan guarantees, insurance arrangements or even equity (capital) injections.

On the revenue side of the budget it can take the form of concessional tax deductions, rebates or exemptions, preferential tax rates or the deferral of taxation. In 2011-12, the total value of budgetary assistance was $9.4 billion, with just over half that coming from spending and the rest from tax concessions.

Often people will virtuously assure you their outfit doesn't receive a cent of subsidy from the government, but omit to mention the special tax breaks they're entitled to. Think-tanks that rail against government intervention and the Nanny State, hate admitting they're sucking at the teat because the donations they receive are tax deductible (causing them to be higher than otherwise, but at a cost to other taxpayers).

This is why economists call tax concessions "tax expenditures" - to recognise that, from the perspective of the budget balance and of other taxpayers, it doesn't matter much whether the assistance comes via a cheque from the government or via the right to pay less tax than you otherwise would.

Of the total budgetary assistance in 2011-12 of $9.4 billion, 15 per cent went to agriculture, 7 per cent to mining, 19 per cent to manufacturing and 45 per cent to the services sector (leaving 14 per cent that can't be allocated to particular industries).

To put that in context, remember that agriculture's share of gross domestic product (value-added) is about 3 per cent, mining's is 10 per cent and manufacturing's is 8 per cent, leaving services contributing about 79 per cent.

Within manufacturing, the recipients of the most business welfare are motor vehicles and parts, $620 million, metal and metal fabrication, $270 million, petroleum and chemicals, $220 million, and food and beverage processors, $110 million.

Within services, the big ones are finance and insurance, $910 million, property and professional services, $610 million, and arts and recreation, $350 million.

But if you combine tariff and budgetary assistance, then compare it with the industry's value-added (share of GDP), you get a different perspective on which industries' snouts are deepest in the trough. The "effective rate of combined assistance" is 9.4 per cent for motor vehicles and parts, 7.3 per cent for textiles, clothing and footwear, and 4.7 per cent for metal and metal fabrication.

Get this: outside manufacturing, the most heavily assisted goods industry relative to the size of its contribution to the economy is forestry and logging on 7.2 per cent. We pay a huge price to destroy our native forests.

Within services, the most heavily assisted industry is the one where incomes are so much higher than anywhere else: financial services. Virtually all the assistance picked up in the commission's calculations comes via special tax breaks, such as the tax concession for offshore banking units and the reduced withholding tax on foreigners receiving distributions from managed investment trusts.

But that ain't the half of it. These calculations don't pick up two big free kicks: the benefit to the industry because the government forces almost all workers to hand over 9.25 per cent of their pay to be "managed" by it, and the benefit it gains from having one of its main products, superannuation, so heavily subsidised by other taxpayers.

Cut these fat cats? Naah, screwing people on the dole would be much easier.

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How we can do better on Aboriginal imprisonment

You don't need me to tell you that in a country such as America, with all its history of racial conflict, the rate of imprisonment for African-Americans is far higher than the rate for whites. Twelve times higher, in fact. But you may need me to tell you we make the Yanks look good. Our rate of indigenous imprisonment is 18 times that for the rest of us.

Aborigines make up 2.5 per cent of the Australian adult population, but account for 26 per cent of all adult Australian prisoners.

If you want me to give you some economic reasons we should care about this, it's not hard. On average it costs $275 a day to keep an adult in jail. So it's costing taxpayers about $800 million a year just to keep that many Aborigines in prison. And this takes no account of the cost of juvenile detention centres, police costs in responding to offending, the cost of investigating and prosecuting suspected offenders and the health costs in responding to and treating victims.

Obviously, for every Aborigine who was in a job and paying tax rather than in jail and costing money, there'd be a double benefit to taxpayers, as well as a gain to the economy.

But the far more important reason for caring about the high rate of indigenous imprisonment is moral. As the criminologist Dr Don Weatherburn argues in his new book Arresting Incarceration, the consequences of European settlement have been truly calamitous for Aboriginal Australians.

"The harm might not have always been deliberate and it may not have been inflicted by anyone alive today, but it is no less real for that," Weatherburn says. "An apology for past wrongs would be meaningless without a determined attempt to remedy the damage done."

The trouble is, particularly in the case of Aboriginal imprisonment, we've been making such an attempt, but getting nowhere. If not before, the problem was brought to our attention by the 1991 findings of the Royal Commission on Aboriginal Deaths in Custody.

The commission found that Aborigines were no more likely to die in jail than other prisoners. The reason so many died was that they constituted such a high proportion of the prison population.

The Keating government accepted all but one of the commission's recommendations and allocated the present-day equivalent of almost $700 million to put them into effect. State and territory governments committed themselves to a comprehensive reform program.

But get this: rather than declining since then, the rate of Aboriginal imprisonment has got worse.
"It is hard to imagine a more spectacular policy failure," Weatherburn says.

It would be easy to blame the problem on racism in the justice system but, though there may be some truth in this, it's not the real reason. Similarly, Weatherburn argues it's not good enough to blame it on "indigenous disadvantage".

If that were the case, virtually all Aborigines would be actively involved in crime and they aren't. Most are never arrested or imprisoned.

The plain fact is that more Aborigines are in jail because more Aborigines commit crimes, particularly violent crimes. In NSW, for example, the indigenous rate of arrest for assault is 12 times higher than the non-indigenous rate. The rate of indigenous arrest for break and enter is 17 times higher.

Measures taken after the royal commission failed to reduce crime because they assumed this would be achieved if indigenous Australians were "empowered". Much of the money and effort was devoted to legal aid and land acquisition.

Weatherburn argues that if you want to understand indigenous offending, you need to look at the factors likely to get anyone involved in crime, regardless of race.

"The four most important of these are poor parenting (particularly child neglect and abuse), poor school performance, unemployment and substance abuse," he says. "Indigenous Australians experience far higher rates of drug and alcohol abuse, child neglect and abuse, poor school performance and unemployment than their non-indigenous counterparts."

The first and most important thing we need to do, he says, is reduce the level of Aboriginal drug and alcohol abuse. This is key, not just because drug and alcohol abuse have direct effects on violence and crime, but also because they have such a corrosive effect on the quality of parenting children receive, which greatly increases the children's risk of involvement in crime.

Weatherburn's second priority is putting more resources into improving indigenous education and training. As the mining boom in the Pilbara has shown, it's much easier to find jobs for Aborigines when they have the degree of education and skill employers are looking for.

His third priority is investing in better offender rehabilitation programs. Efforts to divert serious and repeat offenders from prison have been a dismal failure. But small changes in the rate of indigenous return to jail have the potential to produce large and rapid effects on the rate of Aboriginal imprisonment.

Much existing spending on Aboriginal affairs is ineffective. Were it not for Tony Abbott's special affinity with Aborigines in the Top End, we could expect the coming federal budget to really put the knife through it.
But this would save money without reducing the problem.

It will be a great day when the advocates of smaller government abandon the false economy of not wasting money on the routine, rigorous and independent evaluation of the effectiveness of government spending programs. Then we might make some progress.

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Abbott's red tape play-acting hides rent-seeking

The world of politicians gets deeper and deeper into spin, and so far no production of the Abbott government rates higher on the spin cycle than last week's Repeal Day.

Hands up if you believe in red tape? No, I thought not. So how about we package up a huge pile of window dressing with some worthwhile but minor measures, slip in a few favours for our big business supporters and generous donors, and call it the most vigorous attack on red tape ever? This will give a veneer of credibility to our claim it will do wonders for the economy.

In the process, of course, we'll have changed the meaning of "red tape". It's meant to mean bureaucratic requirements that waste people's time without delivering any public benefit. In the hands of the spin doctors, however, it's being used to encompass everything from removing dead statutes to the supposed deregulation of industries.

Repealing redundant laws and regulations dating back as far as 1900 is mere window dressing. By definition they don't waste anyone's time - if they did they'd have been repealed long ago. Their primary purpose is to allow Tony Abbott to quote huge numbers: today I announce the abolition of more than 1000 acts of Parliament and the repeal of more than 9500 regulations. A trick you can pull only once.

Somewhere in there is some genuine, time-wasting red tape we're better off without, but it doesn't add up to much - hence the need for so much padding. Governments of both colours are always promising to roll back red tape, mainly because it gives people such an emotional charge.

But while it's true there are examples of mindless, unreasonable bureaucratic rules and requirements that could be eliminated or greatly simplified at no loss to anyone, much alleged red tape is in the mind of the beholder: it's red tape if you don't like it and good governance if you do.

There are plenty of small business people who'd try telling you supplying information to the Bureau of Statistics was "pointless red tape", maybe even filling out tax returns. In an era when big business is going overboard on "metrics", it's whingeing about the "reporting burden" the government imposes so it - and the rest of us - can know what's going on in the economy.

When business isn't complaining about "compliance costs" it's demanding greater transparency and accountability from governments. Guess what? They're opposite sides of the same coin. The world is and always will be full of compliance costs. The sensible questions are whether they're higher than they need to be and whether the benefits of compliance outweigh the costs.

The notion that all so-called red tape comes from power-crazed bureaucrats is a delusion. Most excessive regulation comes from politicians. Sometimes they act at the behest of lobbyists for particular industries, sometimes they're merely trying to create the appearance of action (an old favourite is laws to make illegal something that's already against the law) and sometimes they pass an act to impress the punters while carefully leaving loopholes and escape hatches for the industry pros.

But the most objectionable feature of the whole red tape Repeal Day charade is the way it has been used as cover for rent-seeking by the Coalition's industry backers. It's an open secret the protections for investors provided by the Future of Financial Advice legislation are being watered down at the behest of the big banks, which want to be freer to incentivise unqualified sales people to sell inappropriate investment products to mug punters.

Then there's the strange case of the Charity Commission,which was set up only recently to reduce inefficient regulation and red tape. It's to be abolished despite the objections of most charities, presumably because the Catholic Church doesn't like it.

It's being claimed all these dubious doings will "drive productivity, innovation and employment opportunities", not to mention "creating the right environment for businesses of all sizes to thrive and prosper and to drive investment and jobs growth".

Yeah sure. The claimed savings of $700 million a year (don't ask how that figure was arrived at) are equivalent to 0.04 per cent of GDP, and yet they'll work wonders. Must be an incredible multiplier effect.

We're told we'll be getting at least two Repeal Days a year, with the goal of achieving savings worth $1 billion a year. Really, a minimum of six Repeal Days in Abbott's first term? What's the bet that promise will be quietly buried?

But for as long as this pseudo reform lasts it seems it's intended as a substitute for genuine deregulation.

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We own as much of their farm as they own of ours

Did you know that, at the end of last year, the value of Australians' equity investments abroad exceeded the value of foreigners' equity investments in Australia by more than $23 billion?

It's the first time we've owned more of their businesses, shares and real estate ($891 billion worth) than they've owned of ours ($868 billion).

These days in economics there's an easy way to an exclusive: write about something no one else thinks is worth mentioning, the balance of payments. We'll start at the beginning and get to equity investment at the end.

Before our economists decided the current account deficit, the foreign debt and our overall foreign liability weren't worth worrying about, we established that, when measured as a percentage of national income (gross domestic product), the current account deficit moved through a cycle with a peak of about 6 per cent, a trough of about 3 per cent and a long-term average of about 4.5 per cent.

Those dimensions were a lot higher in the global era of floating exchange rates than they'd been in the era of fixed exchange rates (which ended by the early '80s). This worried a lot of people, until eventually economists decided the new currency regime meant there was less reason to worry.

This explains why economists haven't bothered to note that for four of the past five financial years, the figure for the current account deficit as a percentage of GDP has started with a 3. And, as we learnt earlier this month, the figure for the year to December was 2.9 per cent.

So it seems clear that recent years have seen a significant change in Australia's financial dealings with the rest of the world. And the consequence has been to lower the average level of the current account deficit.

The conventional way to account for this shift is to look for changes in exports, imports and the "net income deficit" - the amount by which our payments of interest and dividends to foreigners exceed their payments of interest and dividends to us.

The first part of the explanation is obvious: over the past decade, the world's been paying much higher prices for our exports of minerals and energy. This remains true even though those prices reached a peak in 2011 and have fallen since then.

On the other hand, the prices we've been paying for our imports have changed little over the period. So, taken in isolation, this improvement in our "terms of trade" is working to lower our trade deficit and, hence, the deficit on the current account.

Next, however, come changes in the quantity (volume) of our exports and imports. Here, over the full decade, the volume of imports has grown roughly twice as fast as growth in the volume of exports. Until the global financial crisis, we were living it up and buying lots of imported stuff. And maybe as much as half of all the money spent on expanding our mines and gas facilities went on imported equipment.

The more recent development, however, is that the completion of mines and gas facilities means enormous growth in the volume of our mineral exports - with a lot more to come. At the same time, as projects reach completion there's a big fall in imports of mining equipment. That's a double benefit to the trade balance and the current account deficit.

Turning to the net income deficit, it's been increased by the huge rise in mining companies' after-tax profits, about 80 per cent of which are owned by foreigners. Going the other way, world interest rates are now very low and likely to stay low.

Put all that together and it's not hard to see why current account deficits have been lower in the years since the financial crisis, nor hard to see they're likely to stay low and maybe go lower in the years ahead.

The current account deficit has to be funded either by net borrowing from foreigners or by net foreign "equity" investment in Australian businesses, shares or real estate. This means the current account deficit is the main contributor to growth in the levels of the national economy's net foreign debt, net foreign equity investment and their sum, our net foreign liabilities.

Historically, our high annual current account deficits worried people because they were leading to rapid growth in the levels of our net foreign debt and net total liabilities.

But looking back over the past decade, and measuring these two levels relative to the growing size of our economy (nominal GDP), there's no longer a clear upward trajectory. Indeed, it's possible to say our net foreign debt seems to have stabilised at about 50 per cent of GDP, with net total liabilities stabilising a little higher.

Over the decades, the level of net foreign equity investment in Australia has tended to fall as big Aussie firms become multinational by buying businesses abroad and Aussie super funds buy shares in foreign companies, thus helping to offset two centuries of mainly British, American, Japanese and now Chinese investment in Aussie businesses.

But the net total of such equity investment is surprisingly volatile from one quarter to the next, being affected not just by new equity investments in each direction, but also by "valuation effects" - the ups and downs of various sharemarkets around the world as well as the ups and downs in the Aussie dollar.

Between the end of September and the end of December, net foreign equity investment swung from a net liability of $27 billion to a net asset of $23 billion. This was mainly because of valuation effects rather than transactions, so I wouldn't get too excited.

What it proves is that, these days, the value our equity investments in the rest of the world isn't very different from the value of their equity investments in Oz.

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More to infrastructure problem than spending money

We get bombarded with economic and political news. Some of it is worth knowing, some isn't. Some gets much attention, some gets little. Sometimes we give too much attention to things that aren't worth knowing and too little attention to things that are. The Productivity Commission's draft report on public infrastructure is one of the latter.

Ostensibly, it's a report advising Tony Abbott on how to achieve his dream of becoming the "infrastructure prime minister". In fact, it's an urgent warning to Australia's voters and taxpayers: we've wasted a lot of money on infrastructure and, if we're not careful, we could waste a lot more.

The point is not that all infrastructure is a waste of money, but that we tend to get too emotional about the topic and not sufficiently hard-headed. We need to think a lot more carefully, demand that our politicians - on both sides - lift their games, and insist on a lot more information being made public.

Almost all of us believe the country is suffering a serious infrastructure deficit, that there's a huge backlog of essential public infrastructure waiting to be built and our top priority must be to get on with clearing it as soon as possible.

I believe there's some truth to this perception. There most certainly are categories where we have an infrastructure problem. Big-city traffic congestion is a glaring example.

But to say we have an infrastructure problem is not to say we have an infrastructure deficit. To say we have a backlog is to presuppose the answer to the problem: just get out there and build a lot more ASAP.

It never occurs to us that, when we jump to that conclusion, we are, first, rewarding the lobbying efforts of the infrastructure industry and, second, making life too easy for our political leaders. We're doing just what the radio shock-jocks make their not-inconsiderable living encouraging us to do: use our hearts not our heads, react emotionally rather than intelligently.

Remember, we live in the age of rent-seeking - of big business interests using public opinion to extract favours from governments. Favours that, one way or another, you and I end up paying for.

It has suited the pockets of the infrastructure lobby - big developers, engineering construction companies and associations of engineers - to give us the impression we have an infrastructure crisis that's getting bigger by the minute and needs fixing by yesterday.

Much less effort has gone into checking out the existence of this backlog and its precise whereabouts than into spending like fury. Although these figures probably understate the full extent of spending on public infrastructure, it's true that, measured as a proportion of national income, spending on engineering construction work for the public sector fell to a low of just more than 1 per cent in 2003.

By 2012, however, it had doubled to more than 2 per cent. In present-day dollars, that's more than $30 billion a year being spent on new infrastructure.

Ever seen a headline screaming we've more than doubled our infrastructure spending in a decade? No, didn't think so. It suits too many people to have us go on thinking the backlog's getting bigger by the day.

One problem with the not-spending-enough approach to the infrastructure question is that it rewards politicians - particularly state politicians - merely for spending more of our money which, as we've seen, they've been doing like crazy for up to a decade.

Another problem is we have too little assurance the money is being well spent. In our concern about the backlog, we seem to have forgotten how prone politicians are to pork-barrelling - spending money disproportionately in marginal or National Party electorates - and how tempting it is to spend on those projects that happen to be the forte of generous corporate donors to party funds.

And not just that. Politicians of all stripes are terribly prone to favouring big-ticket, showy, popular projects over smaller, technical, hidden, boring projects that would actually do more good. They almost invariably favour projects where there's a ribbon they can cut.

They tend to underspend on boring repairs and maintenance then, when the infrastructure has gone to wrack and ruin, make heroes of themselves by building a brand new replacement.

For reasons I don't understand, the present crop of Coalition governments - federal and state - seem biased against public transport as the answer to traffic congestion and have reverted to the 1960s notion that more tollways will fix everything.

As the Productivity Commission has outlined, the answer to this is much more rigorous evaluation of the costs and benefits of projects - taking account of social factors, not just financial ones - by genuinely independent infrastructure authorities, with all their findings made public and no exceptions for bright ideas such as the national broadband network.

As well, the commission makes the obvious but easily forgotten point that we should make sure existing infrastructure is being used efficiently before we rush off and build more. Often this will involve smarter charging for infrastructure. This failing explains much of the rise in electricity prices being blamed on the carbon tax.

In infrastructure, as in everything, there's no free lunch. One way or another you and I end up paying for it. That's an argument for thinking it through.

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Ending the mining tax will hurt jobs

Don't be misled by last week's better-than-expected figures for employment in February. If you peer through the statistical haze you see the problem is the reverse: employment is weaker than you'd expect. Follow that through and it takes you to - of all things - the mining tax.


The job figures were better than expected for two quite silly reasons. First, because economists are hopeless at predicting month-to-month changes in employment and unemployment. Their guesses are wrong most months.

Second, because it suits the vested interests of the financial markets and the media to ignore the Bureau of Statistics' advice and focus on the volatile seasonally adjusted estimates rather than the more reliable trend estimates.The markets like volatility because it makes for better betting; the media like it because it makes for sexier stories.

If we put understanding ahead of thrills and spills and use the trend estimates, they show total employment grew by a paltry 58,000 over the year to February, an increase of just 0.5 per cent. Worse, within that, full-time employment actually fell by 24,000.

This doesn't fit with the news we got the previous week that real gross domestic product grew by a not-so-bad 2.8 per cent over the year to December. (Comparing employment to February with economic growth to December isn't a problem because employment responds with a lag.)

Economic growth of 2.8 per cent is only a bit shy of our medium-term trend growth rate of 3 per cent, which Treasury estimates is consistent with annual employment growth of 1.5 per cent, or 170,000 extra jobs.
So the real question we should be asking is why employment has been weaker than you'd expect.

The answer isn't hard to find: it's because "net exports" (exports minus imports) account for 2.4 percentage points of the overall growth of 2.8 per cent. And most of that is explained by the resources boom's shift from its investment phase to its production and export phase.

On one hand, construction workers are losing jobs as the building of new mines and natural gas facilities winds up while, on the other, few extra jobs are required to permit a huge increase in mining production. All this is fine for growth in production (real GDP), but bad for growth in employment.

Fact is, mining's so hugely capital-intensive that though it now accounts for an amazing 10 per cent of GDP, it still accounts for a mere 2.4 per cent of total employment.

Now, I've never had any sympathy for those who argue an expansion in mining isn't worth having because it generates so few extra jobs. This reveals a fundamental misunderstanding of how economies work (via the "circular flow of income").

The size of an industry's economic contribution is determined not by the number of jobs it creates directly, but by the amount of income it generates. And even with falling coal and iron ore prices, our miners are still highly profitable because their efficiency, plus the quality and accessibility of our mineral deposits, mean their marginal cost of production is far lower than that faced by miners in most other countries.

In other words, our miners earn huge economic rents.

What the mining bashers miss is that when all the income generated by an industry is spent, it generates jobs throughout the economy. This includes the income the industry pays in tax, which generates jobs when it's spent by governments.

In the case of mining, however, there's a weakness in this argument. For the income earned by an industry to generate jobs in Australia, it has to be spent in Australia. And our mining industry is about 80 per cent foreign-owned.

Got the message yet? For our economy and our workers to benefit adequately from the exploitation of our natural endowment by mainly foreign companies, our government has to ensure it gets a fair whack of the economic rents those foreigners generate.

This, of course, is the justification for the minerals resource rent tax. And the fact that, so far, the tax has raised tiny amounts of revenue doesn't mean mining is no longer highly profitable, nor that the tax isn't worth bothering with.

Because Labor so foolishly allowed the big three foreign miners to redesign the tax, they chose to get all their deductions up-front. Once those deductions are used up, the tax will become a big earner. Long before then, however, Tony Abbott will have rewarded the Liberal Party's foreign donors by abolishing the tax.

This will be an act of major fiscal vandalism, of little or no benefit to the economy and at great cost to job creation.

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Many economists don't get the labour market

The world is full of economists who, though they know little of the specifics of labour economics, confidently propose policies for managing the labour market based on their general knowledge of the neo-classical model. All markets are much the same, aren't they?

I fear this is the best we'll get from the Productivity Commission's inquiry into regulation of the labour market. So a test of the commission's report will be whether it displays knowledge of advanced thinking on how labour markets actually work or is just another neo-liberal rant about free markets.

In their efforts to bone up on the topic, the commissioners could do worse than start with a quick read of Nobel laureate Robert Solow's 90-page classic, The Labor Market as a Social Institution.

Since the book was published in 1990, it should be old hat to economists, but I doubt it is. If so, it shows how little effort most economists - even academic economists - have put into studying the labour market.

Solow starts by reminding economists of a glaring problem they prefer not to think about: if the market for labour is just a market like any other market, and so is capable of being adequately analysed by the economists' standard tool kit of demand and supply - prices adjust until demand and supply are equal and the market "clears" - how come the labour market never clears?

How come we always have high unemployment, which shoots up during downturns and stays very high for years before falling only slowly?

To put the puzzle another way, if the labour market works like any other market, making wages just a price like any other price, why don't wages fall and keep falling as long as the supply of labour exceeds the demand for it?

Why do nominal wages almost never fall? Why is it the closest we ever get is nominal wages not rising as fast as ordinary prices, so wages fall a bit in "real terms"?

In a country with Australia's history of many minimum wages, carefully specified in awards and agreements, it's easy for economists to claim wages can't fall because they're being held up by legal minimums. But this doesn't wash. In reality, many if not most wages are well above the legal minimum, meaning the minimum isn't "binding" and so isn't stopping actual nominal wages from falling back to the minimum. But they don't - and nor do they in the US, where the minimum wage is kept so low it's almost never binding.

Overseas, some extreme neo-classical economists have tried to escape this problem by arguing most unemployment is voluntary rather than involuntary. It just so happens that, when economies turn down, a lot of people decide now's the time to take unpaid holidays and stay on them for many months. Yeah, right.

Solow says a more credible line of explanation is to admit the obvious: there must be something about labour markets that makes them different from other markets (such as the market for cars, or the market for bank loans) and so renders economists' usual analytical tools inadequate.

And it's not hard to think of what that something could be. Other markets are for the purchase and sale of inanimate objects, whereas every unit of labour bought or sold comes with a real live human attached. Every human is different - some are smart, some aren't; some work hard, some don't; some are co-operative, some aren't - and bosses turn out to be humans, too.

The thing about humans is they have egos and feelings and moods. One apple doesn't care about the other apples in the barrel, but a human cares about how they're being treated by their human boss, as well about how they're being treated relative to all the other humans working for the boss.

Hence the title of Solow's book. Unlike other markets, the labour market is also a social institution. Only an economist could imagine you could analyse the labour market successfully without taking account of the human factor.

So maybe it's the social dimension of labour that explains why wages are inflexible and the labour market doesn't clear. Solow uses the work of some woman whose name seems vaguely familiar, a Janet Yellen, and her Noble-prize-winning husband, George Akerlof to outline one possible explanation of the conundrum, "the fair-wage-effort hypothesis".

The "efficiency-wage theory" says that in the modern economy workers often have some control over their own productivity. They produce more when they are strongly motivated to do so. "One way for an employer to provide more motivation is by paying more than other employers do; another is to threaten to fire the excessively unproductive if and when they are detected," Solow says.

If that sounds obvious, note the radical implication: a firm's physical productivity depends not just on how much labour (and capital) it uses, but also on how well the labour is paid. If so, wages won't fall just because unemployment rises.

Yellen and Akerlof's version of efficient-wage theory says workers who believe they're being paid "a fair day's wage" feel a social obligation to deliver "a fair day's work" in return.

A different approach is "insider-outsider theory". This says the people already working for a firm (the insiders) are likely to be more productive than those who aren't (the outsiders) because they understand how the firm works. If so, the insiders are helping to generate "economic rent" for the firm and thus are able to share this rent by negotiating higher wages.

An outsider may be prepared to work for the firm for a smaller wage, but the boss won't want to risk reducing his productivity by switching from insiders to outsiders.

Whichever of those theories you find more persuasive, the point is the workings of real-world labour markets are far more complicated than most economists realise. Let's hope the Productivity Commission does.

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Compulsory super without protections is a rip off

A few weeks ago, when I offered my list of our top 10 economic reforms of the past 40 years, I was surprised by the number of people arguing I should have included compulsory employee superannuation in the list. Really? I can't agree.

It is, after all, merely a way of compelling people to save for their retirement. That's probably no bad thing in principle, countering our all too human tendency to worry excessively about the here and now and too little about adequate provision for our old age.

But compulsory saving hardly counts as a major reform. I suspect some of my correspondents see it as a boon for workers because it extracts a benefit from employers over and above the wages they're paid.

If so, they've been misled by appearances. Economists are in no doubt it all comes out in the wash: that when the government obliges employers to contribute to workers' retirement savings, the employers eventually make up for it by granting smaller wage rises than they otherwise would have.

It's true that compulsory super contributions - and the subsequent earnings on them - attract tax concessions, being taxed at a flat rate of just 15 cents in the dollar. But while upper income-earners do disgracefully well out of these concessions, people on incomes around the average gain little advantage, and those earning less than $37,000 a year gain nothing. Hardly sounds fair to me.

My other reservation about compulsory super is the way it compels employees to become the victims of the most shamelessly grasping, overpaid industry of them all: financial services. These are the people who made top executives and medical specialists feel they were underpaid.

Compulsory super delivers a huge captive market for the providers of investment services to make an easy living from and for the less scrupulous among them to prey upon. The pot of money the government compels us to give these people to manage on our behalf has now reached $1.6 trillion.

Most of us have little idea how much these people appropriate from our life savings each year to reward themselves for the services we're compelled to let them provide to us - and little desire to find out.

We should be less complacent. For many workers it's more than we pay for electricity each year. Think of it: we put so much energy and passion into carrying on about the rising price of power - and Tony Abbott used our resentment to get himself elected - while the men in flash suits dip into our savings without most of us knowing or caring.

To be fair, industry super funds dip into our savings far more sparingly than the profit-driven "retail" funds backed by the big banks, insurance companies and firms of actuaries. Since most workers do have a choice, you'd need a very good reason not to have your money with an industry fund.

But even this worries me. It means the union movement - the people whose job is to protect workers by being full bottle on the tricks the finance industry gets up to - has divided loyalties. Those who should be holding the industry to account are also part of it.

For years the industry campaigned for an increase in the super levy of 9 per cent of salary, arguing it was insufficient to provide people with an adequate income in retirement. This is a dubious argument, rejected by the Henry taxation review.

But look at it another way: here is a hugely profitable industry arguing the government should increase the proportion of all employees' wages diverted to the industry for it to take annual bites out of before giving us access to our money at age 60 or later.

This is classic rent-seeking. The Howard government was never tempted to yield, but as part of the Labor government's mining-tax reform package, it agreed to boost compulsory super contributions to 12 per cent by 2019. Why? I don't doubt Labor was got at by the union end of the financial services industry.

Contributions increased to 9.25 per cent last July, but the Abbott government came to power promising to defer the phase-up for two years. I'd lay a small bet this deferral will become permanent - though probably not before contributions rise to 9.5 per cent on July 1.

I wouldn't be sorry to see the phase-up abandoned. The Henry report recommended against it, arguing that action to reduce the industry's fees could produce a similar increase in ultimate super payouts. And it's doubtful that low income earners are better off being compelled to save rather than spend their meagre earnings.

The government's policy of compelling workers to hand so much of their wages over to the finance industry surely leaves the government with a greater-than-normal obligation to ensure the industry doesn't exploit this monopoly by misadvising and overcharging its often uninformed customers.

This - along with the millions lost by investors in Storm Financial and other dodgy outfits - prompted Labor's Future of Financial Advice reforms, which focused on prohibiting or highlighting hidden commissions and requiring advisers to put their clients' interests ahead of their own.

But now Senator Arthur Sinodinos is seeking to water down these consumer protections in the name of reducing "red tape". The financial fat cats live to rip us off another day.

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More privatisation will help fix the economy

I have no sympathy for those who take an ideological approach to the privatisation of government-owned businesses, whether they support all selloffs because governments are always inefficient or oppose all selloffs because the private sector can never be trusted.

No, each proposal should be judged on its merits - with a lot of boxes to be ticked before privatisation is justified.

Even so, it seems likely we'll see a fair bit of privatisation in coming days - particularly at the state level - as part of Joe Hockey's efforts to get his budget back in the black while avoiding having a contractionary effect on economic activity and, indeed, while ensuring the economy accelerates to the point where we get unemployment down again.

What squares this circle is staggered savings in the recurrent budget combined with increased spending on public infrastructure. Though it's getting late, a surge in infrastructure investment would also be a good counter to a possible collapse in mining investment over coming years.

While only Hockey's former scaremongering about supposedly soaring federal debt stands in the way of the feds stepping up their own infrastructure spending, they prefer it to be done by the states.

Trouble is, those state governments that haven't already lost their triple-A credit ratings are on the edge of doing so should their debt grow. In an ideal world, the (discredited) ratings agencies could be ignored and told to do their worst. But in our imperfect world it's probably not such a bad thing that politicians worry so much about their ratings.

So how can the states do a lot more infrastructure investment without increasing their debt levels? By privatising existing businesses and reinvesting the proceeds in new infrastructure. This is what Hockey hopes to encourage.

One disincentive the states face is that, as well as paying them dividends, the businesses the states own in effect pay company tax to their state owners, whereas privatised businesses pay company tax to the feds.

Although he's yet to spell out the details, Hockey has signalled his willingness to overcome this disincentive by passing that tax revenue back to the states.

On the face of it, the prospect of more state privatisations suffered a setback last week when the ACCC effectively vetoed the NSW government's plan to sell Macquarie Generation, the state's largest power producer, to AGL, one of the state's three largest power retailers. The commission judged that the deal would have resulted in a substantial lessening of competition in the electricity market.

This brings us to the first test of whether a proposed privatisation is in the public interest: it ought to involve an increase in competition within the relevant market and certainly shouldn't lessen competition.

Governments should resist the temptation to enhance the sale price of a business by adding to its pricing power, or sell off a natural monopoly without adequate regulation of its prices.

So it's a good thing the commission put its foot down. But, equally, it's a good thing NSW Treasurer Mike Baird expressed his intention to press on with plans to build up his privatisation recycling fund, and do so without selling any asset for less than its "retention value" to state taxpayers.

This raises the second test to be passed. The stream of dividends governments receive from the businesses they own (and are about to forgo) could easily exceed the saving in interest payments to be made from using the sale proceeds to repay government debt, unless the sale price is sufficiently high.

This is the main factor determining the business's retention value. To sell assets for less than that value is to put ideology ahead of the public interest.

Polling shows privatisation is greatly disapproved of by voters. But this is the punters wanting to have their cake and eat it. They demand better infrastructure, but don't want to pay higher taxes for the privilege, nor give up government services, nor see government deficits and debt build up.

Well, they can't have it both ways. And an obvious compromise is for governments to sell businesses for which there's no good reason for continued public ownership and use the proceeds to get on with meeting new needs.

It's notable that polling suggests such recycling deals attract significantly less voter disapproval. Note to diehard rationalists: hypothecation is the key to escaping the budget impasse.

But there's one last test to be passed to make such deals good economics: the new infrastructure's social benefits have to exceed its social costs. And public transport projects are more likely to do that than yet more motorways.

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Clear signs the economy is picking up

At last some good news on the economy. This week's national accounts for the December quarter show the economy speeding up and, in the process, starting its fabled "transition" away from being driven largely by mining investment.

The economy's medium-term "trend" rate of growth in real gross domestic product - the rate that holds unemployment constant - is thought to be 3 per cent a year. For much of last year the economy was seen to be travelling at only about 2.5 per cent, thus leading to a slow but steady rise in unemployment.

But this week's accounts from the Bureau of Statistics show real GDP growing by 0.8 per cent in the December quarter and by 2.8 per cent over last year. Applying a bit of judgment, we can say the economy is probably now growing at an annualised rate of about 2.8 per cent.

This isn't enough to stop unemployment rising - and we really need a period of growth well above 3 per cent to get the jobless rate heading back down to its own trend level of about 5 per cent - but it beats 2.5 per cent.

And, as I say, the accounts show reasonably convincing evidence the "rebalancing" of the economy - away from mining investment and towards the other sectors of the economy and sources of growth - is finally under way.

After quite a few quarters of weakness, consumer spending grew by 0.8 per cent in the quarter and by 2.6 per cent over the year. This strengthening is a bit of a surprise when you remember household disposable income is only crawling ahead, with no growth in employment and very low rises in wages.

Arithmetically, the explanation is a fall in the household saving rate from 10.6 per cent of disposable income to 9.7 per cent. But this ratio is volatile, so I wouldn't take it too literally. It's possible households have shaved their rate of saving - say, from the high 10s to the low 10s - but I doubt it signals a return to the low saving rates we saw in the couple of decades before the global financial crisis.

The second sign of rebalancing was long-awaited real growth of 1 per cent in spending on home building, including renovations. This is not unexpected considering the rises in established house prices and in the issue of local government building permits.

More recent "partial indicators" for the month of January confirm that consumption and home building have picked up. Nominal retail sales grew by a strong 1.2 in the month to be up 6.2 per cent on a year earlier. And residential building approvals rose strongly in the month to be up 34 per cent on a year earlier.

Public sector spending rose by 1.1 per cent in the quarter, contributing 0.3 percentage points to the overall growth of 0.8 per cent in real GDP. Most of this came from public infrastructure spending.

But now we get to the bad news. Most of the growth I've outlined so far was offset by a sharp fall in business investment spending, which dropped by 3.6 per cent.

Most of this decline is explained by a drop in mining investment as the investment phase of the resources boom comes to an end. It's now clear mining investment peaked about a year ago.

It was our knowledge that mining investment was about to fall back from the dizzying heights it reached that caused us to see the need for "transition" or "rebalancing" in the economy (plus a few other buzzwords I've forgotten).

But this brings us to the weak part in the transition so far. Although most of the fall in total business investment is explained by mining, it's clear investment spending in the non-mining sector also fell - which is not what the doctor ordered. Rough estimates by Kieran Davies, of Barclays bank, suggest it fell by 1.2 per cent in the quarter and by 7 per cent over the year.

So if most of the growth in domestic demand in the quarter was cancelled out by the fall in business investment, where did the overall growth in aggregate demand of 0.8 per cent come from? From the one place left: net external demand, otherwise known as "net exports" - exports minus imports.

The volume (quantity) of exports grew by 2.4 per cent in the quarter and by 6.5 per cent in the year, whereas the volume of imports fell by 0.6 per cent in the quarter and by 4.6 per cent in the year.
Put the two together and net exports made a positive contribution to overall growth of 0.6 percentage points in the quarter and 2.4 points over the year.

Why are exports growing so strongly? Mainly because of rapid growth in our exports of minerals and energy as new mines come on stream. Why are imports so weak? Partly because domestic demand has been weak, but particularly because of the fall off in mining investment, which involves a lot of imported equipment.

So the investment phase of the resources boom is coming to an end and leaving a hole in the economy, but the production and export phase of the boom is helping to fill the hole - helping to tide us over while the non-mining economy is getting back on its feet (to mix a few metaphors).

The resources boom's now favourable effect on net exports translates into a much lower current account deficit on our balance of payments. Whereas it used to get as high as 6 per cent of GDP in the old days, and averaged about 4.5 per cent, for the December quarter it was just 2.6 per cent.

Maybe the economy has a future after all.

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Job prospects not as gloomy as you may think

I can always tell when people are getting anxious about unemployment - including their own. It's when a journalist thinks they'll be increasing the sum of human knowledge by adding up the number of redundancies announced in recent weeks.

The latest list is Qantas 5000, Holden 2900 (by 2017), Toyota 2500 (by 2017), Forge Group 1470, Alcoa 980, Sensis 800, WA hospitals 250 and BHP Billiton Mitsubishi Alliance 230.

That's more than 14,000, we're told, and doesn't count the expected job loss among the makers of car parts, which "experts" put at between 25,000 and 50,000. To this you can add declining job opportunities among public servants - though no one seems to worry much about them.

There are two tricks in exercises such as this. The first is that although 14,000 or even 64,000 may seem huge numbers, they're not. Most people have no feel for just how big our economy is. Those figures have to be seen in the context of a total workforce of 11.5 million people, which grows by 170,000 in an average year, or more that 14,000 a month.

Most people have no idea how much turnover there is in the jobs market. Every month tens of thousands of people leave their jobs and a similar or bigger number take up new jobs. The economy is in a continuous state of flux.

The second trick is that the media only ever show us the tip of the iceberg. We're told about only a fraction of the things that happen. Only a fraction of them are announced to the media, so most of what happens goes unreported. And among all the things that are announced, the media select just a few of the juicier items to tell us about.

The items they select tend to be the bigger and badder ones. News that a new business has just hired 100 workers may get reported somewhere - probably in the local rag - but it won't get the trumpeting Qantas' announcement did.

So we're told about the big job losses but not the small losses and almost nothing about the job gains, big or small - even though we know from the official statistics that the gains usually outnumber the losses.

When people hear news reports about redundancies at this factory and that, many conclude we must be heading for recession. This time it ain't that simple. After a record 21 years since the severe recession of the early 1990s, we're overdue for another one and, with the economy quite weak at present, it wouldn't be impossible for us to slide into recession this year.

But the explanation for the planned job losses we're hearing so much about isn't a downturn in the economy, it's continuing change in the structure of the economy - the size of some industries relative to others.

Much of the pressure for structural change is coming from advances in technology, particularly the digital revolution. It's this that's turning the newspaper industry inside out - no one seems to shed many tears over us - and is in the early stages of cutting a swath through retailing.

In Qantas' case, it's still making the painful adjustment to the deregulation of airlines initiated by Jimmy Carter in the 1970s, combined with management incompetence and union intransigence.

But the biggest source of structural change is the resources boom and the likely permanent rise in the dollar it has brought about. People tell you it's all behind us, but when the mining industry's share of the economy doubles to 10 per cent in the space of a decade, the adjustment this imposes on the rest of the economy is profound and protracted.

Clearly, these forces for structural change are beyond the control of any federal government, Labor or Coalition. The truth so many people find so hard to accept is that there isn't a lot we can do about them except ride them out.

In its impotence, the Abbott government is claiming its plans to remove the mining and carbon taxes will be a great help. Only the one-eyed would believe that. Labor has sunk to the depths of attacking the government for its failure to protect Australian jobs and demands to see its "jobs plan". What's Labor's jobs plan? Maintain the handouts to crumbling industries.

It's seeking to exploit the fears of people who are uncertain about where it's all going to end. Well, last week Dr David Gruen, of Treasury, published projections of the various industries' shares of total employment in 16 years' time, 2030.

I must warn you these figures come with zero guarantee. Just because you're smart enough to turn the handle of an incomprehensible econometric model doesn't mean you know any more about what the future holds than the rest of us.

Surprisingly, the projections suggest manufacturing's share of total employment will decline by only a further 1 percentage point. Similar declines are projected in transport and warehousing, construction and (thankfully) financial services. The biggest relative employment decline would be in wholesale and retail trade.

Utilities, media and telecommunications, and, surprisingly, mining are projected to experience minor declines in their shares of total employment. Agriculture's share may rise by a percentage point, while that of education and health may rise by more than 1.5 points, and professional and administrative services by almost 3 percentage points.

We won't all be dead.

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We’ve become a nation of rent-seekers

In political economist Mancur Olson's pathbreaking book, The Rise and Decline of Nations, published in 1982, he argued that a country's economic stability ultimately leads to decline as it becomes increasingly dominated by organised interest groups, each seeking to advance their interests at the expense of others.

By contrast, countries that have a collapse of the political regime, and the interest groups that have coalesced around it, can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. Examples are the rapid growth of postwar Germany and Japan, as Wikipedia reminds us.

Professor Ross Garnaut has argued that Australia is unlikely to see another era of extensive micro-economic reform because of the growth in rent-seeking behaviour since the days of the Hawke-Keating government.

What these days passes for the political debate seems to be dominated by ''distributional coalitions'', in Olson's phrase, arguing for ''reforms'' from which the chief beneficiaries would be their good selves, or desperately opposing government reforms that would impose even the most modest sacrifice on their members.

What gets me is how blatantly self-seeking our lobby groups have become. It is as if the era of economic rationalism - with its belief that the economy is driven by self-interest - has sanctified selfishness and refusal to co-operate for the common good.

Another explanation may be the growth of a lucrative rent-seeking industry. These days far more people make their living lobbying for interest groups than did so in the 1980s.

When your livelihood depends on convincing your clients their money is well spent, it's hardly surprising these ever-multiplying industry groups, corporate ''government relations managers'' and freelance lobbying firms make so much noise and are so untiring in their efforts to extract concessions from government.

The relationship between elected governments and bureaucrats, and the professional lobbyists, is unhealthy. In an ever more complex world, governments seek to consult ''stakeholders'' before implementing policy changes.

But some stakeholders - those that spend most on lobbyists - are more equal than others. And too many politicians, private-office advisers and bureaucrats retire as gamekeepers to become poachers. The fact that ex-Coalition lobbyists do better under Coalition governments, while ex-Labor people do better under Labor governments is a sign that this is not an innocent, arms-length, information-gathering exercise.

Meanwhile, the business of opposition has degenerated into automatic opposition to any and every unpopular government decision, even though this requires parties to turn their rhetoric on its head when they move from opposition to government.

Labor's attempt to exploit public anxiety over the Abbott government's inability to solve the deep-seated and long-running commercial challenges faced by hard-pressed manufacturers and airlines, while advancing not a shred of credible alternative policy, is despicable. Just as despicable as when Tony Abbott did it to Labor.

It's finally dawning on people that major and genuine reform requires a degree of bipartisanship at the political level and a spirit of give-and-take on the part of powerful interest groups. But these prerequisites are further away than ever.

Instead what we get is lowest-common-denominator politics from the pollies and rent-seeking posing as ''reform'' from the interest groups. This is particularly true of business lobby groups - the big miners, the financial services sector, the hotels and the registered clubs, for instance - because they have the most money to invest (and I do mean invest) in rent-seeking.

There does seem to be one spark of potential progress, however. Perhaps because of its organic links to big business, the Abbott government seems to have realised something Labor never did: giving in to rent-seekers doesn't make you any friends, it just makes things worse.

Yielding to my pressure for a concession never satisfies me, it just shows me you're an easy touch and prompts me to think of something else I want. Meanwhile, giving me a lolly just makes my rivals envious and prompts them to demand theirs. Bad inevitably leads to worse.

Joe Hockey and Abbott have been courageous in ignoring the begging bowl of the least competitive end of manufacturing and, it seems, Qantas. It's too early to say whether this constitutes a consistent attempt to turn back rent-seeking or just prejudice against certain industries but not others - though it would be idle to expect absolute consistency of principle from any flesh-and-blood government.

The way Arthur Sinodinos has been cutting back investor protections at the behest of the greediest industry of them all - financial services - under the guise of reducing ''red tape'' raises the possibility that rent-seeking via the budget is verboten, but not rent-seeking via regulation. We shall see.

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Who's paying the rent are are you getting any?

What is rent? You don't make it past the elementary economics class unless you know that's a trick question. In economics there are two kinds of rent: common or garden rent and "economic rent".

Obviously, ordinary rent is what you pay for the use of a building or land. By contrast, economic rent (also called quasi rent) is the amount paid for any "factor of production" - land, labour or capital - in excess of the amount it needs to be paid to keep it in its present use (which is its "opportunity cost").

If you think you've never heard of economic rent before, you're probably wrong - unless you haven't heard of the minerals resource rent tax or of "rent-seeking".

It doesn't get talked about a lot, but economic rent is widespread in every real-world economy, making it something worth talking about. You never know, you may be getting a bit yourself (I'm getting loads).

Economic rent isn't a cost of production that contributes to the selling price of the factor - the land, the physical capital or the labour. Rather, it's earnings to the owner of the factor determined by the selling price.

Economic rent is equivalent to "producer surplus" in the market for goods and services. When it's received by a business it's also known as "above-normal profits" or "super profits" (does that term ring a bell?).

Economists define profit differently to accountants. To an accountant, profit is sales revenue minus actual costs. To an economist, costs involve actual costs plus the opportunity cost of the financial capital invested in the business - that is, the most the capital would earn in a different industry with an equivalent degree of risk. (For unincorporated businesses, the opportunity cost also includes the highest wage the proprietor could earn in a different job.)

The opportunity cost of the capital invested in the business is what economists call "normal profit". Any actual profit in excess of actual costs plus normal profit is above-normal profit and likely to be the consequence of economic rents.

What is it that allows some factors of production to earn economic rent - higher returns than those needed to keep them in the business? Scarcity or, better, exclusivity. The factor possesses some highly desirable characteristic that means there's not enough of it to go around, so people fight over it and, in the process, bid up its price.

In a textbook economy such a situation wouldn't last long because the market would have an incentive to increase the supply of the desirable factor to meet the high demand. In real-world economies, economic rents can persist because they're not easily replicated. The supply of harbourside land, for instance, is fixed.

The exclusivity of factors may be natural or contrived. Governments often create economic rents by limiting the number of licences they're willing to issue to participants in particular industries - taxi plates, for example.

Patents and copyright are designed to allow creators to enjoy economic rents for a fixed time. This implies monopoly profits are a form of economic rent, although rents can be enjoyed by multiple firms in an industry.

And don't forget many workers benefit from rents. Unions may be able to limit the supply of a particular occupation and so force wages above what they would otherwise be. In this, however, trade unions are amateurs compared with the colleges of medical specialists.

But some rents aren't contrived. If I were prepared to do my job for $60,000 a year but my boss paid me $100,000, I'd be enjoying economic rent of $40,000 a year. Why would he pay me more than my "reservation wage"? Because if he didn't, a rival employer would.

Of course, the people who do best in the rent stakes are film stars, sports stars and the like. Such people have far more talent than the rest of us, but they also have a name - are a brand - that attracts more customers than other actors or players do.

The point of all this is that, from a social (community-wide) point of view, economic rent is a waste. It's a price customers pay that does nothing to increase the production of goods and services. If we could eliminate it - say by taxing it away - it wouldn't reduce production, just the incomes of the owners of scarce resources.

This, of course, is the justification for the minerals resource rent tax. There is a lot of economic rent associated with the exploitation of mineral deposits, particularly in Australia, because world reserves of certain minerals are relatively limited and because much of our supply is high quality and easily won.

Since these resources belong to us, not the mining companies we permit to extract them, we'd be mugs not to tax much of that rent rather than letting largely foreign companies walk away with most of it.

I hope by now you understand why the Abbott government's talk of all the damage the mining tax is doing to the economy is tosh, intended to mislead the economically undereducated. (Which is not to say Labor's tax was well designed - it wasn't.)

It is rational for workers to be "rent-seekers" in the sense that they equip themselves with scarce skills and work hard at being the best in their field. Similarly, it is rational for firms to seek out niches where prices far exceed costs.

But that's not what the term "rent-seeker" - which comes from the libertarian "public choice theory" - is usually taken to mean. It refers to groups that lobby the government for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers, or their rivals.

As The Economist magazine puts it in its business dictionary, it means "cutting yourself a bigger slice of the cake rather than making the cake bigger".

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Pollies' bad behaviour & dishonesty worsening all over

We are witnessing history being made. Unfortunately, it s a history-making decline in standards of political behaviour. At least it proves we 're not merely imagining that things were better in the old days.

Tempting though it is, one of the things incoming governments don' t do is delve into the affairs of their predecessor. The papers of the old government aren 't made available to the new masters.

But all that is out the window with the Abbott government 's decision to establish a royal commission into the Rudd government' s handling of the home insulation program and provide it with Labor' s cabinet documents.

It takes innocence greater than I can muster to believe the motive for the inquiry is to bring justice to the program 's victims rather than to embarrass the Coalition 's political opponents by raking over one of their more celebrated stuff-ups.

Labor can take its lumps. The real pity is that a long standing convention seeking to limit political vindictiveness has been cast aside. One thing we can be sure of is that when next Labor returns to power it will lose no time in retaliating, as will that government 's eventual Coalition successor. Advantage-seeking retaliation will become a bigger part of the political debate.

The man who set new lows in negativity and obstructionism in opposition is now taking us to new lows in government. In a more godly world, Labor would resist the temptation to sink to the level of misbehaviour set by its opponents, thus giving substance to its repeated claims of moral superiority.

But so intense is the competition between the parties that this seems unlikely. Last week Bill Shorten promised to lead a constructive opposition and not oppose everything for the sake of it. It 's a wonderful resolve - one which, if lived up to, many voters would find attractive - but I fear it' s another take from Tony Abbott: almost tearful promises to sin no more, followed by an immediate resumption.

The great likelihood is that Labor in opposition will model its behaviour on Abbott in opposition, in conformity with that great moral precept: tit for tat. The sad truth is that, for politicians as for most of us, the moral compass that guides us asks: what' s everyone else doing?

We take our ethics from our perception of the behaviour of those around us, particularly our competitors.
We all see ourselves as more moral than the next person, but when challenged our defence is always: I' m no worse than he is. After all, he started it.
Thus are our politicians locked in a race to the bottom.

Rather than trying to counter our fear of foreigners, politicians have preferred to pander to it, vying to be the side whose mistreatment of asylum seekers goes so far it discourages any more from coming - all intended to dissuade them from risking their lives on a dangerous sea voyage, naturally.

So far have our standards sunk that we must now suffer the indignity of being lectured on human rights by the Chinese government.

Declining standards at federal level have been matched by bad behaviour at state level. For an example of state politicians willing to blatantly mislead their electorates, look no further than the Victorian and NSW governments' dishonest explanation for the looming jump of about 25 per cent in the price of household gas.

The true reason for the rise is that the building of natural gas liquefaction plants in Gladstone will soon allow gas producers on Australia' s east coast to export their gas and obtain the much higher prices paid on the world market. The east coast will go from being outside the world market to inside it.

The price rise is thus inevitable unless governments were to prohibit the companies from exporting their gas, forcing them to continue accepting below-world prices. There has been no suggestion of penalising the gas producers in this way.

Rather, state politicians have taken up the dishonest claim of the gas companies that permitting them to build new and controversial coal seam gas plants would somehow prevent gas prices from rising or force them back down.

But as any student of economics could tell you, there' s no way NSW and Victoria could ever produce enough natural gas to significantly affect the world price of gas.

The price of gas in NSW and Victoria would stay below the world price only if the new producers were compelled to sell their gas to local users at below the world price. Again, there s been no suggestion of this.

Last week the gas companies' illogical argument was taken up by the new NSW Minister for Energy and Resources, Anthony Roberts. I' m prepared to believe Roberts may be economically illiterate, but I don' t believe his advisers are - nor that they don t read the papers, where the scam has been exposed.

Although Roberts has replaced a minister who left the cabinet under a cloud, he seems uninhibited in his efforts to mislead the electorate.

It' s hard to know whether he is simply seeking to advance the gas industry' s vested interests or is setting up an alibi which allows the government to blame the inevitable jump in gas prices on those terrible people opposed to fracking.

Either way, his only crime is seeking to deceive voters. And these days that 's the way everyone plays the political game, isn 't it?

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Abbott's anti-union push not what it appears

If you were a conspiracy theorist it would be easy to see Tony Abbott's actions against unions as revealing his true dastardly intentions despite all his soothing statements before the election.

But I see it just as standard Coalition behaviour, motivated more by a search for political advantage than by a desire to free the economy from the scourge of unionism. Indeed, when the union movement finally expires - which can't be too many years off - I'd expect the Coalition to shed a private tear at the loss of such a useful whipping-boy.

When you contemplate the royal commission into union corruption, remember that, since the days of Malcolm Fraser, all Coalition governments set up such commissions. We know they sometimes backfire against the government or employers, and rarely lead to the conviction of many unionists. Royal commissions are about raising a hue and cry, not getting wrongdoers into jail.

As politicians on both sides well know, unions have long been on the nose with the public. This is partly because it's always easy for proprietors of the established order to portray unions as troublemakers and partly because of the public's race memory of the way the unions were always staging disruptive strikes in the decades up to the mid-1980s (yes, that long ago).

The Coalition wouldn't still be so keen to press the public's anti-union button, however, if the unions weren't still so closely associated with its political opponent, the Labor Party - a linkage that, if anything, strengthened as Julia Gillard sought to shore up her leadership against the ever-present threat from Kevin Rudd.

This is not to imply there's no corruption in the union movement. There is, just as there is among businesses - and politicians, for that matter. Just how widespread corruption is in the union movement is hard to know and the royal commission is unlikely to tell us, though you can be sure the relatively few instances it uncovers will be highly publicised.

A second ulterior motive is the Coalition's resentment of the way the unions channel big donations to Labor, but never to it. By contrast, business will donate to Labor rather that the Liberals whenever it thinks Labor's likely to win.

And, of late, we've seen signs of a third level of political prejudice against the unions. How is it the "end of entitlement" seems to apply far more to manufacturers than to farmers or formerly government-owned airlines?

Could it be because highly protected manufacturing tends to be highly unionised, with the unions playing a leading role in fighting for continued government assistance, particularly when Labor is in power?

It's worth remembering that manufacturing is the traditional base of the union movement. Manufacturing's declining share of total employment is part of the explanation for the movement's decline.

Manufacturing's further decline will hasten the eventual demise of the unions - or perhaps their relegation to the public sector. Just 13 per cent of private-sector workers are union members, compared with 43 per cent of public-sector workers, making 18 per cent overall. But note that only 19 per cent of manufacturing workers are members.

You may think the public's strong reaction against WorkChoices contradicts the idea that unions are on the nose. Not really. The unions' advertising at the time rightly alerted part-time and casual workers to the greater scope for unreasonable employer behaviour under WorkChoices, but while this made many anxious it led few to conclude the answer was to join a union. For many workers, unions are a relic from a bygone age.

Remember that the Coalition's attempt to extract political mileage from the unions, bad employers' attempt to blame the unions for their poor relations with their own staff (e.g. Qantas) and the national dailies' attempt to suck up to big business, all involve leaving the public with the impression the unions are a much bigger bogyman than they actually are.

What the people with the hidden agendas will never tell you is that more than 80 per cent of enterprises don't have a union presence. Only about 40 per cent of employees are covered by collective agreements, some of which have been drafted by employers without union involvement.

If the government really did stamp out union corruption, or prompt Labor to cut its ties with the unions (thus depriving many union leaders of an attractive career path), or shame union leaders into giving up their lucrative fees as trustees of industry super funds, it would get the union leadership back to its knitting, giving their movement a better chance of surviving.

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Why the success of the G20 matters

It's easy to be cynical about the G20. Will the meeting of finance ministers and central bank governors in Sydney this weekend, and the leaders' summit in Brisbane in November, amount to anything more than talkfests?

People say the Brisbane summit will be the largest and most important economic meeting ever held in Australia. That's true, but it just means it will be bigger than the Sydney APEC leaders' summit in 2007 - which is remembered mainly for The Chaser boys' Bin Laden stunt.

But though it's easy to be cynical, it's a mistake. It's possible the two meetings this year will prove no more than talkshops, but that would be a great pity. And, since Australia is this year's chair of the group, it's up to Joe Hockey and Tony Abbott to make sure they're worth more than that.

The G20 began in 1999 as a group for finance ministers and central bankers, in the aftermath of the Asian financial crisis, which revealed the need for greater co-operation and co-ordination between governments in responding to crises in the global financial system and, better, making changes to the global financial "architecture" (rules and institutions) that reduced the frequency and severity of financial crises.

The formation of the G20 was a recognition that the G7 (compromising only Europe, North America and Japan) wasn't truly global, particularly because it excluded the emerging BRICS economies - Brazil, Russia, India, China and South Africa.

For a decade or two most of the growth in the global economy has come from the BRICS, and the developing economies now account for more than half gross world product. For a better global spread, the G20 also adds Argentina, Indonesia, Mexico, Saudi Arabia, South Korea, Turkey, the European Union and, of course, Oz. With just these 20, it accounts for 85 per cent of gross world product.

In 2009, in the aftermath of the global financial crisis, the G20 was upgraded from just finance ministers to include summits of presidents and prime ministers, an acknowledgment of the way economic power had spread beyond the North Atlantic. But why do we need these get-togethers?

Because, as Christine Lagarde, boss of the International Monetary Fund, said recently: "The breakneck pattern of integration and interconnectedness defines our times."

It has become unfashionable for the media to talk about globalisation, but it's continuing apace. As Mike Callaghan of the Lowy Institute said last week: "If there is one lesson from the [global financial] crisis, it is the interconnectedness between financial markets. Events in US financial markets had worldwide consequences. We need co-operation to deal with globally operating financial institutions."

These days, global integration is being driven less by deregulation and more by advances in technology, particularly the information and communications revolution. One part of this is the way the internet has globalised the media.

News of an economic calamity in one country is now conveyed to the rest of the world almost instantly. Financial traders in New York or other centres can start moving money out of the affected country in no time. They can then take a set against neighbouring countries they merely fear may have a similar problem, giving rise to a big problem called "contagion", where trouble spreads like a communicable disease.

And TV news that a few banks are tottering in Europe can scare the pants off consumers and business people in countries around the world, prompting them to stop spending until their confidence returns.

But it's not just crises. As Callaghan reminds us, more and more businesses now operate globally. Goods are more likely to be "made in the world", with inputs from many countries rather than just one. So the trade policies agreed by the international community have to adapt to the new reality that such "value chains" are increasingly driving world trade.

Then there's tax. The more businesses that operate globally, the more businesses that are able to exploit loopholes between different countries' tax laws, shifting their profits to countries with low tax rates. This is eroding the tax base of many countries - including ours - so their taxes aren't raising as much revenue as they should be.

In other words, technology-driven globalisation - the ever-reducing barriers separating particular economies - is throwing up problems that can't be solved by individual countries acting individually.

So we need greater communication, co-operation and co-ordination between countries, first, to discourage countries from pursuing "beggar-thy-neighbour" policies - I attempt to fix my problems at your expense, which usually provokes retaliation, so we all suffer - and, second, to find group solutions to the various problems.

The first couple of G20 leaders' summits in 2009 were quite effective in ensuring the Great Recession wasn't as bad as it could have been. But the truth is the G20 has been running out of momentum, resorting to high-sounding rhetoric while getting bogged down in excessive detail.

Considering how crisis-prone the global economy has become, it's important merely for world leaders, treasurers and central bankers to know each other, have face-to-face meetings and phone each other.

But we also need more joint action, and if the G20 doesn't lift its game the big boys will stop coming to meetings and eventually shift their interest to a smaller, more cohesive group which includes China and a few others, but excludes Australia.

Clearly, it wouldn't be in our interests to lose our seat at the top table. That's why it's so important we use our position as this year's chair to get the G20 back on the rails. Many pre-meeting phone calls need to be made by Hockey and Abbott to their counterparts, to gather support on the directions to be taken.

Then they need to chair the meetings effectively, discouraging set-piece speeches and encouraging interchange that improves mutual understanding and makes progress on a limited range of key issues.

We have a lot to gain or lose.

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Drawing a line between the market and the social

The hard part of economics, politics and public policy is deciding where to draw the line. It's as easy as pie to take a position at one extreme or the other. To buy the whole Liberal or Labor package - which, after a change of government, will often involve supporting things you opposed six months ago. To oppose virtually all government regulation or to think more regulation is never enough. Doing it this way always feels good - so neat and tidy.

But though it's easy and neat, it's not satisfactory. It's pretending the world is either black or white when in fact it's a quite unsatisfying shade of grey. To say I agree with the Libs on this and that, but with Labor on that and the other. To accept that some regulation is good, but too much is bad. It takes more effort, leaves you under attack from both sides, and it's messy.

It involves doing your own thinking, which is hard work. I've been thinking lately that, while I want very much to live in a market economy, I definitely don't want to live in a market society.

In a market economy, you and I are pretty much free to make our own decisions about what we'll consume, what occupation we choose and where we'll work - all within the limits of what's available, of course - while the great majority of decisions about the goods and services - and jobs - we're offered are made by private businesses.

You and I are motivated by the desire to get the most satisfying deal we can - to buy what appeals to us and not buy what doesn't - while businesses big and small are motivated by a desire to make profits by successfully catering to our wants (which aren't necessarily our needs).

Their desire to make more profit than they did last year is what drives our economy on, making it ever bigger and creating more jobs, but also contributing to its continuously changing structure.

Fine. But it's not that simple. Anyone who didn't know before the global financial crisis must surely know now that if you let businesses do whatever they want in their search for greater profits, the system will run off the rails and cause horrific injuries.

So we do have to ensure profit-obsessed businesses work within government-imposed guardrails designed to protect them and us from their greedy excesses.

We also need to understand that, if we left it to profit-seeking business people - and their public-policy consultants, economists - they'd gradually turn every aspect of our lives into a marketplace, with everything commercialised. Everything changed into a profit-making opportunity.

Where there was some legal barrier preventing the market from spilling over into some part of our lives, businesses would pressure governments to remove it in the name of "reform". And because, in this hyper-materialist era, business is on top - and the unions are pariahs, subject to regular besmirching royal commissions - the politicians are usually keen to give business what it demands.

This is why I've been thinking I want to live in a market economy, but not a market society. I like the commercial to be commercial, but I don't want the non-commercial made commercial just because business people imagine it would increase their profits (and the economists' model tells them it would be more "efficient").

An example is penalty rates. Until relatively recently in our history, weekends and public holidays were social institutions largely outside the market economy. They were essentially commerce-free zones, where as few people as possible worked and we were free to socialise with our kids, other family and friends.

Fools that we were, we thought we worked five days a week so we could relax and enjoy the other two together.
Weekends were kept largely commerce-free by two legal institutions: restrictions on trading hours and industrial award provisions that sought to discourage employers from instructing staff to work at "unsociable" hours by requiring them to pay a penalty, which rose according to the degree of unsociability.

Most restrictions on trading hours were removed in the 1980s and '90s in the cause of "micro-economic reform". And now employers have renewed their attack on penalty payments, portraying them as some kind of hangover from the dark ages of socialism, which are preventing businesses creating more jobs (note they never mention profits).

Thus are we being pressured to shift the line separating the commercial from the non-commercial, the economic from the social. Already that line is blurred and the temptation to remove the last legal barrier is great.

It's tempting because, in this more materialist, less religious age, almost all of us like the idea of being able to shop and patronise commercial sport and entertainment on the weekend. Naturally, we'll take the kids and meet our friends there.

Trouble is, what we want is for us to be able to shop and be entertained, but not be required to work ourselves. We'd like to be part of the upper class that doesn't have to work, served by a lower class that can't afford not to.

When you turn a social institution over to market forces, those with money do well and those without don't. We'd raised our material standard of living, but do it by lowering our quality of life.

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